Case nº A.A.R. No. 1508 of 2013 of AAR Cases, September 28, 2015 (case In Re: Guangzhou Usha International Ltd. Vs)
| Judge | For Appellant: V.P. Gupta, Advocate and Anunav Kumar |
| President | V.S. Sirpurkar, J. (Chairman) and A.K. Tewary, Member (Revenue) |
| Resolution Date | September 28, 2015 |
| Issuing Organization | AAR Cases |
Judgment:
A.K. Tewary, Member (Revenue)
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The applicant is a company registered under the laws of People's Republic of China. The share capital of the applicant company is held by M/s. Usha International Limited (UIL) having its registered office at New Delhi and accordingly it is a wholly owned subsidiary of the Indian company. The applicant company has been set up to carry on the business of import and export and also to provide services relating to business of household electrical appliances and equipments, household goods and accessories etc to the Indian company.
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The applicant has raised the following questions for advance rulings before the Authority:--
(1) Whether in the stated facts and circumstances of the case and the relevant provisions of Income Tax Act read with Double Taxation Avoidance Agreement between Government of India and People's Republic of China, the amount of service fee received/receivable by the applicant from Usha International Limited in terms of Agreement dated 16.11.2012 for providing services in connection with procurement of goods by Usha International Limited from vendors in China and other related services provided in China is taxable in India and the applicant is liable to pay tax thereon in India?
(2) Without prejudice to Question No. 1 hereinabove in case in view of Hon'ble Authority for Advance Ruling, service fee received by the applicant is chargeable to tax in India, whether same is chargeable to the extent of full amount received by it or only to the extent of mark up received @ 10% over and above the actual cost incurred by it in providing services in China?
(3) In case the amount of service fee whether wholly or in part is chargeable to tax in India in the case of the applicant, what would be the nature of the same for the purpose of taxability and what rate of income tax same will be chargeable?
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The applicant company had entered into a MOU dated 1.7.2012 with UIL for providing services in connection with procurement of goods by UIL from vendors in China. The MOU dated 1.7.2012 was later converted into a service agreement dated 16.11.2012. The services being rendered by the applicant to UIL are described in Appendix A to the service agreement which is reproduced as under:--
Details of Services to be performed by
GZUIL GZUIL shall perform its obligations as follows:--• New suppliers development - Identify Products/Manufacturers requested by UIL. Evaluate the credit, organization, finance, production facility etc of the identified manufacturer.
• New Products development - Generate New Products/new Ideas for UIL and Market research for different products. Identify Products according to request indent from UIL.
• Market research - on product for customer preference/new technology to improve efficiency of products.
• Price, Payment term - Coordinating with UIL for resolution of pricing issues, other commercial terms and questions raised by the vendors.
• Safety/performance/endurance test- of new products identified by sourcing team for introduction to the market/customers.
• Review of quality system - of potential new supplier and make the recommendation for improvement for ensuring high quality standards.
• Quality system- monitoring of vendors.
• Inspection through SGS - to co-ordinate to ensure product being shipped is meeting product specification.
• Interaction with vendors - on customer feedback received from UIL for product improvement.
• Information sharing with UIL - on the new development in China regards to technology/product/process upgrade.
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Appendix B to the service agreement describes the Service Fee chargeable by the applicant from UIL as under:--
"For the purpose of this agreement, "Cost" shall mean all expenses incurred by SERVICE PROVIDER in providing services under this agreement to UIL inter alia including all general and administrative overheads, rent, depreciation, human resource cost, etc, but excluding any one of items like write offs, losses on sale of fixed assets etc.
The Mark-Up Rate shall be ten percent (10.00%).
The Services Fees for a month shall be based on the budgeted costs to be incurred by SERVICE PROVIDER plus a mark up as stated above. At the end of each calendar year, SERVICE PROVIDER shall issue a final invoice or a credit note in the case where the amount of the actual costs incurred will be different from the budgeted amount already invoiced to UIL during the relevant calendar year and the Services Fees shall be computed as follows:
Service Fees = Actual Services Costs + (Actual Services Costs x Mark-Up Rate)"
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The UIL while making the payment of service fee to the applicant company has already deducted tax at source at the rate of 10% considering the payment in the nature of fees for technical services in terms of Article 12 of Double Taxation Avoidance Agreement (DTAA) between Government of India and China.
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The applicant's counsel submitted that the applicant is carrying on its business operations in China and its activities are being fully carried on in China only. According to him the income of the applicant company on account of rendering services to UIL is not taxable in India as per provisions of section 5 of the Income-tax Act because the same is neither accruing nor arising in India and cannot be deemed to have accrued or arisen in India. He also pointed out that the income is neither being received nor deemed to have been received in India. He further mentioned that in terms of Article 7 of DTAA between India and China the income of the applicant company is chargeable to tax in China as it is a company registered/incorporated under the laws of China and is also carrying on business activities wholly in China.
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The applicant's counsel further contended that the payment received by the applicant is not covered under the definition of fees for technical services under clause 4 of Article 12 of DTAA since no services are being rendered in India. Clause 4 of Article 12 of DTAA between India and China defines the term 'fees for technical services' as under:--
"The term "fees for technical services" as used in this Article means any payment for the provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State, but does not include payment for activities mentioned in paragraph 2(k) of Article 5 and Article 15 of the Agreement".
According to the applicant the payment will be covered under Article 12 (4) as fees for technical services in case the payment is for:--
A. provisions of services of managerial, technical or consultancy in nature; and
B. services are provided by a resident of a contracting state in other contracting state.
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The applicant's counsel argued that since no services are being rendered in India, i.e. the other contracting state, payment received by the applicant is not covered under the definition of fees for technical services under Article 12 (4) of DTAA.
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The applicant's counsel further argued that payment received by the applicant is also not for services rendered in the nature of managerial, technical or consultancy. According to him, these services are in connection with procurement of goods as per instructions and requirements of UIL and are of commercial nature. In his support he cited the following case laws.
- In Re: Spahi Projects (P) Ltd. AAR No. 802 of 2009
- DIT (Intl. Tax) v. Panalfa Autoelektrik Ltd. (2014) 272 CTR (Del) 117
- CIT v. Group ISM P. Ltd., ITA No. 325/2014 decided on 29.05.2015 Delhi High Court
- Adidas Sourcing Limited v. ADI(IT)(2013) 211 ITR (Trib.) 697
As regards taxability of fees received when services are rendered outside India he cited the following cases:
- CIT v. Toshoku Ltd. (1980) 125 ITR 525 (SC)
- Carborundum Co. v. CIT (1977) 108 ITR 335 (SC)
- M/s. Voest Alpine A.G. ITA No. 79 & 80/2001 (Delhi H.C.)
- Ishikawajima Harima Heavy Industries Ltd. v DIT (2007) 208 ITR 408 (S.C.)
- Clifford Chance v. DCIT (2009) 318 ITR 237 (Bom.)
The applicant's counsel strongly relied on the decision of the Hon'ble Supreme Court in the case of Carborundum Company v. CIT (supra) wherein the services rendered by the American Company were...
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