Calcutta High Court rules on advisory services fees under India-US DTAA

Calcutta High Court rules on advisory services fees under India-US DTAA

Upholds the order of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal

The Calcutta High Court has reiterated that consideration for the advisory services cannot be treated as 'Fees for Included Services' (FIS) under the India-US Double Taxation Avoidance Agreement (DTAA).

The bench of Justice TS Sivagnanam and Justice Hiranmay Bhattacharyya upheld the order of the Income Tax Appellate Tribunal (ITAT) setting aside the additions made to the foreign assessee company's income for the compensation received by it for rendering advisory services to its Indian subsidiary.

The court was deliberating on the Timken India Limited vs the Deputy Commissioner of Income Tax case. It ruled that the advance ruling sought by the Indian subsidiary on its tax obligations (while remitting payment to its foreign holding company under an agreement), was not binding on the foreign company.

The assessee, a US company, The Timken Company, entered an agreement with Timken India Limited (TIL), its Indian subsidiary, for providing certain services.

The assessing officer (AO) opined that the compensation payable by the recipient/TIL to the assessee was FIS, taxable under the Indo-US DTAA. The AO ruled that the compensation was liable to tax in India and made additions to the income of the assessee.

Disappointed with it, the assessee appealed before the Commissioner of Income Tax (Appeals).

The CIT(A) concluded that the agreement between the parties was purely for rendering advisory services. These could not be treated as FIS, since there was no technology made available to the recipient. It ruled that only commercial information was transferred through the agreement.

Aggrieved by the CIT(A) order, the revenue department appealed before ITAT.

The tribunal upheld the findings of CIT(A). It held that advisory services could not be treated as FIS. It further stated that since the assessee did not have any permanent establishment in India, the income arising in India could also not be taxed under DTAA as 'business profits.'

Thereafter, challenging ITAT's order, the revenue department filed an appeal before the Calcutta High Court.

The revenue department submitted that the ITAT committed a substantial error by deleting the additions made by the AO. It had not taken note of the Authority of Advance Ruling (AAR), which held that consideration for various services was taxable in the hands of the US assessee under the Income Tax Act, 1961 as 'Fees for Technical Services' (FTS) and under the Indo-US DTAA as FIS.

The court examined the binding nature of the ruling given by the AAR. TIL had sought a ruling regarding its tax obligation while remitting payment under the agreement to the assessee foreign company. The court thus held that under the IT Act, the advance ruling pronounced by the AAR was binding on TIL, since it had sought such a ruling. Simultaneously, the ruling was binding on all the relevant income tax authorities.

However, it held that the AAR ruling was not binding on the foreign company and was confined to the Indian subsidiary. The contention raised by the assessee foreign company that it was entitled to claim deductions from the payments received for technical services, was not covered by AAR.

The bench noted that the decision of the court attained finality, as the revenue department had not challenged it in the appeal. As per the agreement, TIL was to compensate the assessee for the costs incurred in providing such services. The assessee was to issue invoices covering only the costs without any markup.

While dismissing the appeal, the court added, "The agreement between the parties was properly interpreted by the CIT(A). On re-examination, the tribunal also concurred with the CIT(A). Thus, we find no different view is possible than the interpretation given by the CIT(A) as approved by the tribunal."