McKINSEY & COMPANY (THAILAND) CO. LTD, MUMBAI v. DDIT (IT) 4(1), MUMBAI

ITA 7624/MUM/2010 | 2007-2008
Pronouncement Date: 10-07-2013 | Result: Allowed

Appeal Details

RSA Number 762419914 RSA 2010
Assessee PAN AAECM7443C
Bench Mumbai
Appeal Number ITA 7624/MUM/2010
Duration Of Justice 2 year(s) 8 month(s) 7 day(s)
Appellant McKINSEY & COMPANY (THAILAND) CO. LTD, MUMBAI
Respondent DDIT (IT) 4(1), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 10-07-2013
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted B
Tribunal Order Date 10-07-2013
Date Of Final Hearing 19-02-2013
Next Hearing Date 19-02-2013
Assessment Year 2007-2008
Appeal Filed On 03-11-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES L MUMBAI .. ! ' # ! $ BEFORE SHRI R.S.SYAL AM AND SHRI VIVEK VARMA JM ITA NO.7624/MUM/2010 : ASST.YEAR 2007-2008 M/S.MCKINSEY & COMPANY (THAILAND) CO. LIMITED C/O.S.R.BATLIBOI & CO. 18 TH FLOOR EXPRESS TOWARS NARIMAN POINT MUMBAI 400 021. PAN : AAECM7443C. THE DY.DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) 4(1) MUMBAI. ( %& / // / APPELLANT) ( ( ( ( / VS. ( )*%&/ RESPONDENT) %& + ++ + / APPELLANT BY : S/SHRI PORUS KAKA & DIVESH CHAWLA )*%& + + + + / RESPONDENT BY : MS. NEERAJA PRADHAN ( + - / / / / DATE OF HEARING : 08.07.2013 ./0 + - / DATE OF PRONOUNCEMENT : 10.07.2013 !1 !1 !1 !1 / / / / O R D E R PER R.S.SYAL ( AM) : THIS APPEAL BY THE ASSESSEE ARISES OUT OF THE ORDER PASSED BY THE ASSESSING OFFICER (AO) ON 01.09.2010 U/S 143(3) RE AD WITH SECTION 144C(13) OF THE INCOME-TAX ACT 1961 (HEREINAFTER A LSO CALLED `THE ACT) IN RELATION TO THE ASSESSMENT YEAR 2007-2008. 2. THE ONLY ISSUE ASSAILED IN THIS APPEAL IS AGAINS T THE TREATMENT GIVEN TO INCOME FROM BORROWED SERVICES RENDERED AS `ROYALTIES UNDER ARTICLE 12 OF THE DOUBLE TAXATION AVOIDANCE A GREEMENT BETWEEN INDIA AND THAILAND (HEREINAFTER CALLED `THE DTAA) AS AGAINST THE ASSESSEES CLAIM OF `BUSINESS PROFITS. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A FOREIG N COMPANY ITA NO.7624/MUM/2010. M/S.MCKINSEY & COMPANY (THAILAND) CO.LTD. 2 INCORPORATED IN AND RESIDENT OF THAILAND. THE ASSES SEE IS PART OF MCKINSEY GROUP OF ENTITIES THE PRIMARY BUSINESS OF WHICH IS TO RENDER STRATEGIC CONSULTANCY SERVICES TO THEIR CLIE NTS WHICH INTER ALIA INCLUDE THE ANALYSIS OF PERFORMANCE DEVELOPMENTS STRENGTHS AND WEAKNESSES OF THEIR CLIENTS IMPROVING THEIR PR OFITABILITY AND PRODUCTIVITY AND SIMILAR OTHER PARAMETERS. IN ORDER TO ANALYZE THESE PARAMETERS THE ENTITIES IN VARIOUS COUNTRIES MAKE USE OF CERTAIN DATA INFORMATION AND OTHER SUPPORT THAT IS PROVIDED BY T HE ASSESSEE. THE RECEIPTS AMOUNTING TO ` 79 99 272 IN THE INSTANT YEAR FOR SUCH SERVICES RENDERED BY THE ASSESSEE TO ITS INDIAN COUNTERPART WERE CLAIMED AS HAVING BEEN PERFORMED OUTSIDE INDIA AND SINCE THESE WERE RENDERED IN THE ORDINARY COURSE OF BUSINESS THE SAME QUALIFIED TO BE A `BUSINESS RECEIPT. IN THE ABSENCE OF THE ASSESSEE HAVING ANY PERMANENT ESTABLISHMENT (PE) IN INDIA IT WAS ARGUED THAT NO INCIDENCE OF TAX AROSE IN INDIA ON THIS ACCOUNT. IN THE DRAFT ORDER U/S 143(3) READ WITH SECTION 144C(1) THE ASSESSING OFFICER DID NOT DISP UTE ABOUT THE NATURE OF RECEIPTS AND THE ASSESSEE HAVING NO PE IN INDIA. HOWEVER HE TREATED THIS AMOUNT AS `FEES FOR TECHNICAL SERVI CES AND HENCE CHARGEABLE TO TAX UNDER ARTICLE 12 OF THE DTAA. THE DISPUTE RESOLUTION PANEL (DRP) VIDE ITS DIRECTION DATED 28 .07.2010 ECHOED THE A.O.S ACTION IN TREATING THE RECEIPTS AS `FEES FOR TECHNICAL SERVICES INCLUDIBLE UNDER ARTICLE 12 OF THE DTAA. IN ITS ORDER THE DRP ALSO REFERRED TO ARTICLE 22 OF THE DTAA. THE AS SESSING OFFICER VIDE THE IMPUGNED ORDER U/S 143(3) READ WITH SECTIO N 144C(13) TREATED THE AMOUNT OF ` 79.99 LAKH AS `FEES FOR TECHNICAL SERVICES UNDER ARTICLE 12 OF THE DTAA AND INCLUDED IT IN THE ASSESSEES TOTAL ITA NO.7624/MUM/2010. M/S.MCKINSEY & COMPANY (THAILAND) CO.LTD. 3 INCOME. THE ASSESSEE IS AGGRIEVED AGAINST THE ABOVE VIEW OF THE AUTHORITIES BELOW. 3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED T HE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE ON THE FACT THAT THE ASSESSEE RECEIVED ` 79.99 LAKH FROM ITS GROUP ENTITY IN INDIA. IT IS FU RTHER NOT DISPUTED THAT THE ASSESSEE HAS NO PE IN INDIA. IT I S CLEARLY BORNE OUT FROM THE FACTS RECORDED IN THE ASSESSMENT ORDER THA T THE ASSESSEE IS IN THE BUSINESS OF RENDERING STRATEGIC CONSULTANCY SER VICES TO THEIR CLIENTS. UNDER SUCH CIRCUMSTANCES THE QUESTION ARI SES AS TO WHETHER THE SAID RECEIPT OF ` 79.99 LAKH IS COVERED UNDER ARTICLE 22 OF THE DTAA AS HELD BY THE DRP OR UNDER ARTICLE 12 OF THE DTAA AS HELD BY THE ASSESSING OFFICER IN THE FINAL ORDER OR UNDE R ARTICLE 7 AS CLAIMED BY THE ASSESSEE. 4. PARA 1 OF ARTICLE 12 OF THE DTAA PROVIDES T HAT :`ROYALTIES ARISING IN A CONTRACTING STATE AND PAID TO A RESIDE NT OF THE OTHER CONTACTING STATE MAY BE TAXED IN THAT OTHER STATE. THE USE OF THE EXPRESSION ` MAY BE TAXED IN THAT OTHER STATE HERE SHOWS THAT THE AMOUNT OF ROYALTIES IS TAXABLE NOT ONLY IN THAILAND BUT ALSO IN INDIA. OTHER PARAS OF THIS ARTICLE DEAL WITH THE MEANING O F THE TERM `ROYALTIES AND THE RATE AT WHICH SUCH INCOME IS TO BE TAXED. OBVIOUSLY THERE IS NO REFERENCE TO THE FEES FOR T ECHNICAL SERVICES IN ARTICLE 12 OF THE DTAA. THUS IT IS EVIDENT THAT THE FEE FOR TECHNICAL SERVICES DOES NOT FALL WITHIN THE PURVIEW OF ARTICLE 12. ITA NO.7624/MUM/2010. M/S.MCKINSEY & COMPANY (THAILAND) CO.LTD. 4 5. AS THE BUSINESS OF THE ASSESSEE IS ADMITTEDL Y OF RENDERING SUCH SERVICES AND THE PRESENT RECEIPT ARISES ON ACCOUNT OF PROVIDING SUCH SERVICES TO THE INDIAN BRANCH THE INCOME WOULD INI TIALLY FALL UNDER ARTICLE 7 BEING THE `BUSINESS PROFITS. PARA 1 OF ARTICLE 7 OF THE DTAA MAKES IT CLEAR THAT : THE INCOME OR PROFITS O F AN ENTERPRISE OF A CONTRACTING STATE SHALL BE TAXABLE ONLY IN THAT S TATE UNLESS THE ENTERPRISE CARRIES ON BUSINESS IN THE OTHER CONTRAC TING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN. IF THE EN TERPRISE CARRIES ON BUSINESS AS AFORESAID THE INCOME OR PROFITS OF THE ENTERPRISE MAY BE TAXED IN THE OTHER STATE BUT ONLY SO MUCH OF THEM A S IS ATTRIBUTABLE TO : (A) THAT PERMANENT ESTABLISHMENT. PARA 7 OF ART ICLE 7 PROVIDES THAT : WHERE INCOME OR PROFITS INCLUDE IT EMS OF INCOME WHICH ARE DEALT WITH SEPARATELY IN OTHER ARTICLES O F THIS CONVENTION THEN THE PROVISIONS OF THOSE ARTICLES SHALL NOT BE AFFECTED BY THE PROVISIONS OF THIS ARTICLE. THE EFFECT OF PARA 7 O F ARTICLE 7 IS THAT IF THERE IS A `BUSINESS INCOME WHICH IS OF THE NATURE AS COVERED UNDER SEPARATE ARTICLES SUCH AS `SHIPPING AND AIR TRANSPO RT UNDER ARTICLE 8 OR `ROYALTIES UNDER ARTICLE 12 THEN SUCH INCOME WOULD MOVE OUT OF ARTICLE 7 AND BE CONSIDERED ONLY UNDER THE SPEC IFIC ARTICLES. THE POSITION WHICH CONVERSELY FOLLOWS IS THAT IF THERE IS AN INCOME FROM THE CARRYING ON OF THE BUSINESS BY THE ASSESSEE WH ICH DOES NOT FALL INTO ANY OF THE SPECIFIC ARTICLES THEN IT WOULD RE MAIN INCLUDED UNDER ARTICLE 7. 6. ARTICLE 22 WHICH HAS BEEN TAKEN NOTE OF BY THE DRP PROVIDES THAT : ITEMS OF INCOME OF A RESIDENT OF A CONTRACT ING STATE WHEREVER ITA NO.7624/MUM/2010. M/S.MCKINSEY & COMPANY (THAILAND) CO.LTD. 5 ARISING NOT EXPRESSLY DEALT WITH IN THE FOREGOING ARTICLES MAY BE TAXED IN THAT STATE. SUCH ITEMS OF INCOME MAY ALSO BE TAXED IN THE CONTRACTING STATE WHERE THE INCOME ARISES. A BARE PERUSAL OF ARTICLE 22 MAKES IT ABUNDANTLY CLEAR THAT IT DEALS WITH RES IDUAL ITEMS OF INCOME WHICH ARE NOT COVERED IN ANY OF THE EARLIER ARTICLES OF THE TREATY. TO PUT IT DIFFERENTLY IF AN INCOME IS COVE RED UNDER ONE OF THE ARTICLES THEN APPLICATION OF ARTICLE 22 IS OUSTED O N SUCH INCOME. 7. PRESENTLY WE ARE DEALING WITH A SITUATION IN WHICH THE ASSESSEE EARNED INCOME BY RENDERING THE SERVICES WHICH ARE I N THE COURSE OF ITS BUSINESS. ORDINARILY SUCH INCOME WOULD REMAIN UNDE R ARTICLE 7 UNLESS SPECIFICALLY DEALT BY OTHER ARTICLES. THE CA SE OF THE AO IS THAT ARTICLE 12 IS APPLICABLE. WE HAVE NOTICED THAT SUCH ARTICLE DEALS ONLY WITH `ROYALTIES AND NOT `FEES FOR INCLUDED SERVICE S. OBVIOUSLY THE APPLICATION OF ARTICLE 12 IS RULED OUT. IN THAT VI EW OF THE MATTER SUCH INCOME WOULD REMAIN INCLUDED UNDER ARTICLE 7 AND WI LL NOT MOVE IN THE LAP OF ARTICLE 22 WHICH DEALS WITH ITEMS OF IN COME NOT EXPRESSLY DEALT WITH IN THE OTHER ARTICLES OF THE DTAA. AS T HE NATURE OF THE EXTANT INCOME IS SUCH WHICH IS OTHERWISE SPECIFICAL LY COVERED UNDER ARTICLE 7 IT CANNOT BE CONSIDERED IN THE RESIDUAL PROVISION OF ARTICLE 22. 8. ONCE THERE IS AN INCOME IN THE NATURE OF ` B USINESS PROFITS ITS TAXABILITY CAN BE CONSIDERED ONLY WITHIN THE AMBIT OF ARTICLE 7 OF THE DTAA. AS THE ASSESSEE IS A TAX RESIDENT OF THAILAND THE BUSINESS PROFITS CAN BE TAXED IN INDIA ONLY IF THE ENTERPRIS E CARRIES ON BUSINESS ITA NO.7624/MUM/2010. M/S.MCKINSEY & COMPANY (THAILAND) CO.LTD. 6 IN INDIA THROUGH A PERMANENT ESTABLISHMENT (PE) SIT UATED IN INDIA. AS IT IS NOT THE CASE OF THE A.O. THAT THE ASSESSEE HA S A PE IN INDIA THE AMOUNT OF INCOME WOULD FALL UNDER ARTICLE 7 BUT CEA SE TO BE TAXABLE IN INDIA BECAUSE OF THE ABSENCE OF THE PE. 9. WHICHEVER WAY WE MAY VIEW THE INCOME THE OP INION OF THE AUTHORITIES BELOW OF INCLUDING IT UNDER ARTICLE 12 OR UNDER ARTICLE 22 IS NOT SUSTAINABLE. THE AMOUNT FALLS UNDER ARTICLE 7 AS `BUSINESS PROFITS AND IS HENCE NOT CHARGEABLE TO TAX BECAUSE OF THE ABSENCE OF ANY PE IN INDIA. WE THEREFORE HOLD THAT THE AMOUN T OF ` 79.99 LAKH FALLS UNDER ARTICLE 7 AND NOT UNDER ARTICLE 12 OR A RTICLE 22 OF THE DTAA. 10. SECTION 90 DEALS WITH THE CONSEQUENCES OF A GREEMENT WITH FOREIGN COUNTRIES OR SPECIFIED TERRITORIES. SUB-SEC TION (1) PROVIDES THAT THE CENTRAL GOVERNMENT MAY ENTER INTO AN AGREE MENT WITH THE GOVERNMENT OF ANY COUNTRY OUTSIDE INDIA OR SPECIFIE D TERRITORY OUTSIDE INDIA INTER ALIA FOR GRANTING OF RELIEF IN RESPECT OF INCOME ON WHICH TAX IS PAYABLE BOTH IN INDIA AND THE OTHER COUNTRY. SUB- SECTION (2) OF SECTION 90 PROVIDES THAT WHERE THE C ENTRAL GOVERNMENT HAS ENTERED INTO AN AGREEMENT WITH THE GOVERNMENT O F ANY COUNTRY OUTSIDE INDIA OR A SPECIFIED TERRITORY OUTSIDE INDI A AS THE CASE MAY BE UNDER SUB-SECTION (1) FOR GRANTING RELIEF OF TA X OR AS THE CASE MAY BE AVOIDANCE OF DOUBLE TAXATION THEN IN RELATION TO THE ASSESSEE TO WHOM SUCH AGREEMENT APPLIES THE PROVISIONS OF THIS ACT SHALL APPLY TO THE EXTENT THEY ARE MORE BENEFICIAL TO THAT ASSE SSEE. IN OTHER WORDS ITA NO.7624/MUM/2010. M/S.MCKINSEY & COMPANY (THAILAND) CO.LTD. 7 IF A PARTICULAR ITEM OF INCOME IS TAXABLE UNDER THE INCOME-TAX ACT 1961 THEN IT SHALL CEASE TO BE TAXABLE IN INDIA I F THE DTAA PROVIDES EXEMPTION IN RESPECT OF SUCH INCOME. THE CORE OF T HE MATTER IS THAT THE DTAA OVERRIDES THE REGULAR PROVISIONS OF THE AC T IN SO FAR AS IT IS MORE BENEFICIAL TO THE ASSESSEE. IF THE DTA PROV IDES FOR A MORE LIBERAL MODE OF COMPUTATION OF INCOME THEN IT IS T HIS MODE OF COMPUTATION WHICH NEEDS TO BE FOLLOWED NOTWITHSTAN DING ANY CONTRARY PROVISION CONTAINED IN THE ACT. HOWEVER IF THERE IS NO SPECIFIC PROVISION IN THE DTA CONCERNING A PARTICUL AR ASPECT THEN IT IS THE BASIC LAW THAT IS THE ACT WHICH APPLIES. AS WE ARE DEALING WITH A SITUATION IN WHICH INDIA HAS ENTERED INTO A DTAA WITH THAILAND AND THE NATURE OF RECEIPT IS COVERED UNDER ARTICLE 7 BUT IN THE PRESENT CIRCUMSTANCES IT IS NOT CHARGEABLE TO T AX IN INDIA PATENTLY THE CONSIDERATION OF THE PROVISIONS OF THE ACT IS R ULED OUT. WE THEREFORE OVERTURN THE IMPUGNED ORDER ON THIS ISSU E AND HOLD THAT THE AMOUNT IN QUESTION IS NOT INCLUDIBLE IN THE TOTAL I NCOME OF THE ASSESSEE. 11. LAST GROUND ABOUT THE CHARGING OF INTEREST U/S 234B OF THE ACT HAS NOW BECOME CONSEQUENTIAL IN VIEW OF OUR DECISIO N ON THE MAIN GROUND. RESULTANTLY THIS GROUND IS ALLOWED. EVEN O THERWISE THE ISSUE OF CHARGING OF INTEREST U/S 234B IS NO MORE RES INTEGRA IN VIEW OF THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COU RT IN THE CASE OF DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) V. NGC NETWORK ASIA LLC [(2009) 313 ITR 187 (BOM.)] DECIDING THE ISSUE IN FAVOUR OF THE ASSESSEE. ITA NO.7624/MUM/2010. M/S.MCKINSEY & COMPANY (THAILAND) CO.LTD. 8 12. 2 -3 4 - + 5- 67 8 IN THE RESULT THE APPEAL IS ALLOWED. ORDER PRONOUNCED ON THIS 10 TH DAY OF JULY 2013. !1 + ./0 9!(3 / + : SD/- SD/- (VIVEK VARMA) (R.S.SYAL) # ! # ! # ! # ! / JUDICIAL MEMBER ! ! ! ! / ACCOUNTANT MEMBER MUMBAI ; 9!( DATED : 10 TH JULY 2013. DEVDAS* !1 + )#-;' <'0- !1 + )#-;' <'0- !1 + )#-;' <'0- !1 + )#-;' <'0-/ COPY OF THE ORDER FORWARDED TO : 1. %& / THE APPELLANT 2. )*%& / THE RESPONDENT. 3. = () / THE CIT MUMBAI. 4. = / DRP II MUMBAI 5. '@: )#-#( / DR ITAT MUMBAI 6. :A B / GUARD FILE. !1( !1( !1( !1( / BY ORDER *'- )#- //TRUE COPY// C C C C/ // /6 5 6 5 6 5 6 5 ( DY./ASSTT. REGISTRAR) / ITAT MUMBAI