ADIT v WNS North America Inc [ITA No 2944/Mum/2012 (Mum ITAT) dated 31.07.2013]

Background:

The assessee is a foreign company and tax resident of United State of America. The assessee is inter alia engaged in the business of rendering marketing and management services to WNS Global Services Pvt. Ltd. which is its associated enterprise in India. The assessee has entered into marketing and management services agreementwith WNS India. During the year under consideration the assessee has received an amount of Rs.68,15,11,339 towards marketing and management services rendered by it to WNS India. Since the assessee’s employees visited India for providing managerial services, therefore WNS India constitutes service PE under Article 5(2)(1) of Indo-USA DTAA. Accordingly an amount of Rs.6,52,13,074/- has been attributable to such service PE for managerial service rendered in India and which has been declared by the assessee in its return of income for the year under consideration. 

The AO held that the assessee renders expertise and technical knowledge for conduct of business of the Indian concern viz. WNS India. The AO accordingly held that the marketing and management services rendered by the assessee to WNS India is ‘Fees for Included Services’ (FIS) under Article 12(4)(b) of Indo-US DTAA and taxed the same as FIS under Article 12 of Indo-US DTAA. On appeal, The CIT(A) has decided the issue in favour of the assessee by following the decision of this Tribunal is assessee’s own case for the earlier assessment year.

HELD:

• Reliance is placed on the Mumbai ITAT in assessee’s own case for AY 2006-07 wherein it was held that:

The amount is not taxable as FIS under Article 12(4)(b). There is absolutely no difference in the facts and legal position prevailing in the earlier year vis-a-vis the current year.

In order to rope in any amount within the purview of FIS under the Article 12(4)(b) of DTAA, which has been invoked by the AO, it is essential that the payment should be to make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.’ On the contrary, there is no such requirement of ‘making available’ any managerial, technical or consultancy services’ under the Act. Simple rendition of such services is sufficient under the Act. It is not the case of the Revenue that the assessee made available some managerial, technical or consultancy service to WNS India. Even if we consider for a moment that the marketing and management services rendered by the assessee were in the nature of technical services as per section 9(1)(vii), the same would not become FIS as per the DTA because of the language of Article 12(4)(b) which mandates that such services must he made available to the payer of the consideration.

• On the Force of Attraction Rule: The plain reading of Article 7(1) makes it clear that only in case when enterprise of Contracting State carries on business in the other Contracting State through its PE as well as otherwise and both the activities are of same or similar kind then the business activities carried on not through PE shall also be treated as attributable to the PE and the profit of the enterprise may be taxed in the other State so much of them as its is attributable to PE. 
• There is no scope of any ambiguity as the Article 7(1) gives a clear understanding that the force of attraction Rule applied only in respect of the business carried on by an enterprise of Contracting State in the other Contracting State through PE as well as without involvement of PE. 
• Therefore, the two essential conditions emerge for applying the force of attraction rule are
  (i) the business activity carried on should be in the other State where the PE is situated
  (ii) the business activity carried on must be of the same or similar kind as those effected through PE. 
• In the case in hand the condition of business activity carried on in the other State where the PE is situated is not satisfied because the marketing and management services in question are provided by the assessee outside India. 
• Since the said issue of providing the services outside India has been decided time and again by this Tribunal as well as by the Hon’ble High Court in assessee’s own case therefore in view of the finding on the ground no. 1 to 3 there is no need for further deliberation/discussion on the same. 
• Having held that the marketing and management services in question were rendered outside India and income of such services cannot be said to have accrued or arisen to the assessee or deemed to have accrued or arisen to assessee in India, the existence of service PE in India would not make it taxable under Article 7 of Indo-US DTAA.