International Management Group (UK) Ltd vs. ACIT (ITAT Delhi)

(Oct 18, 2016)

Article 7: There is a difference between “effectively connected” with the permanent establishment and “legally connected” with it. Only those activities necessary for the functioning of the PE are “effectively connected” with the PE. Article 13: Concept of “make available” technical knowledge etc explained.

i) The assessee received Rs. 33 crores as remuneration in terms of a contract entered into with Board of control for Cricket in India (BCCI). Out of which assessee has contended that gross receipt of Rs. 9,22,49,819 has already been offered for taxation claiming it attributable to its permanent establishment in India with respect to functions and activities carried out by its permanent establishment in India. Accordingly appellant offered resultant income as business income of Rs 3,28,04,660 after deducting expenses there from. However the dispute between the appellant and revenue is that whether the sum of the balance receipt from that contract amounting to Rs. 23,77,50,181 shall be chargeable to tax in India at all. If the same is chargeable to tax it would be considered as the business income of the appellant and subsequently whether the proportionate expenditure would be allowable from that or not. The further controversy thereto is that whether such sum is chargeable to tax as fees for technical services or not with respect to Indian tax laws as well as Double Taxation Avoidance Agreement entered into between India and UK. The stand of the assessee is that income arising from that contract is chargeable to tax as fees for technical services as per Indian tax laws as well as per the Double Taxation Avoidance Agreement as per article 13 of that agreement. Further as appellant is carrying on business in India through its’ permanent establishment therefore by virtue of the provisions of the article 13 (6) the income, which is effectively connected with the permanent establishment, shall be governed by article 7 i.e. Business profits of the Double Taxation Avoidance Agreement. According to assessee gross receipt of Rs. 922,49,819 is income attributable to the permanent establishment in India and therefore shall be governed by the provisions of article 7 of the Double Taxation Avoidance Agreement and expenses there from would be granted as deduction and the balance amount shall be chargeable to tax in India. It is the contention of the assessee that the balance amount being difference between Rs. 33 crores and Rs. 9.22 crores shall not be chargeable to tax in India because the Indian permanent establishment has been appropriately remunerated and the transactions between the Indian PE and the appellants are considered to be an arms length by the Ld. transfer pricing officer therefore now nothing is required to be offered by the appellant for taxation thereby saying that the balance amount of Rs. 23775 0181/- is not chargeable to tax.

(ii) Further it is also the contention of the assessee that according to article 13 of the Double Taxation Avoidance Agreement which provides for the “make available” clause for taxation of fees for technical services which in the present case according to the appellant is not satisfied the balance amount shall not be chargeable to tax in India as fees for technical services. Against this the claim of the revenue is that such amount shall be chargeable to tax as fees for technical services as under the article 7 only Rs. 9.22 crores have been held to be attributable to the activities of the permanent establishment and balance sum of Rs. 23.77 crores still remains the fees for technical services and it is further submitted that it satisfies “make available” test and hence same is chargeable to tax under article 13 of the Double Taxation Avoidance Agreement.

(iii) The basic edifice of the controversy is based on 2 documents entered into between the board of control for Cricket in India as well as the appellant. The 1st is the memorandum of understanding between the 2 parties dated 13/09/2007 and service agreement dated 24/09/2009. According to the memorandum of understanding it has been agreed between the parties that appellant shall provide services by conducting research in respect of the appropriate structure for the IPL and make cut recommendations to BCCI. Further the appellant shall provide appropriate presentation documentation in the research on various presentations to be made based upon which the BCCI will decide upon the most appropriate structure for the IPL under advice from the appellant. The BCCI has required the appellant to prepare the documentation being the Constitution of the IPL, authority of the governing Council of the IPL, structure of the tournament, IPL tournament rules and regulations, the franchisee tender document, the franchisee agreement and any necessary franchisee regulations and IPL implementation budget. In addition to that the appellant was also required to develop right management process in respect of commercial rights and assets of any kind arising out of the IPL which are owned by the BCCI, it was in respect of those rights, repression and execution of marketing strategies, the management of the franchisee tender process, the management of the sale process in respect of those rights and preparation and negotiation of contracts with various parties. It was further required to prepare television production specifications and development of best practice match Day guidelines for media and franchisee and further advice and assistance in connection with the development of any will relevant stadium and the Finance which may be necessary in connection therewith.

(iv) Based on the above FAR analysis of the Indian permanent establishment of the assessee, the Ld. TPO passed order under section 92CA (3) on 31/12/2013 wherein he has examined the transfer pricing documentation of the assessee with respect to fees for technical services amounting to Rs. 92249819/- , event management expenses of Rs. 11909828/- and reimbursement of expenses of Rs. 53430529/- totaling in all to Rs. 157590176/- pertaining to the transaction entered into with its associated enterprise i.e. IMG, United Kingdom and IMG USA applying the transactional net margin method for determining the arm”s length price and has held that as stated in the prior year order, article 13 of the India UK Treaty read with article 7 of the treaty states that if assessee constitutes a service PE, the profits are attributable to the PE are to be taxed in the other contracting states that is in India. This implies that profits of the PE are rightly attributable to it should be taxed in India. He further held that after going through the facts and information submitted by the assessee during the course of the assessment proceedings, it is noted that the facts and circumstances of the IPL 2009 event are different from IPL 2008 event since IPL 2009 took place in South Africa unlike the previous IPL event 2008 which was hosted in India during April to June 2008. On the basis of the above facts no adverse inference was drawn towards the amount of revenue of Rs. 92249819/- attributable to the Indian permanent establishment. Therefore, on reading the transfer-pricing officer”s order it is apparent that according to him no further profit is required to be attributed to the permanent establishment of the assessee. However these attribution of the profit is undisputedly based on the functions performed by the permanent establishment of the assessee, assets employed by the permanent establishment in performing those functions and risk assumed by it while performing those functions. However it is to be noted that over and above those functions performed by the permanent establishment of the appellant in India there are certain functions which have been performed from its head office from outside India by the appellant which are not at all connected with the permanent establishment of the appellant in India. Appellant has submitted that it has a permanent establishment of India as it is deputed some of its employees and also appointed third-party freelancers for undertaking the on- ground implementation and related event management and supervision activities in India which has created a permanent establishment as the threshold limit of 90 days has exceeded and therefore it constitutes a service permanent establishment in India according to the Indo UK Double Taxation Avoidance Agreement. Based on this premises which has been accepted by the revenue has resulted into the exercise of attribution of profit to the permanent establishment and taxation of income of the appellant to that extent on net basis after deduction of the expenses. It is interesting to note that in the present case there is only a service PE which has come into existence only because of the on- ground implementation and related event management and supervision activities in India by deputation of staff and appointing third parties. It does not talk about the services which have been rendered by the IMG UK directly from the head office to the board of control for Cricket in India. On specific query by the bench that how the services rendered by the United Kingdom company to BCCI were effectively connected with the permanent establishment in India the appellant has given an answer stating that the contract is in all circumstances is effectively connected with the permanent establishment and therefore the conclusion that the instant case only article 7 will apply. The Ld. appellant further stated that the effective connection has to be read in relation to the contract and not in relation to the services rendered and during the year assessee has only one contract entered into by the appellant with the BCCI for IPL 2009 event and due to that contract only the service PE is coming into existence and therefore the whole contract has been “effectively connected” with the permanent establishment. The appellant has further submitted that in case if the bench is of the view that the balance consideration is not attributable to the permanent establishment for the services rendered by the appellant and it is in the nature of the fees for technical services as per the provisions of article 13 (4) (c), then also because of the PE the receipts would be taxed as business income under article 7 of the Tax treaty.

(v) Admittedly appellant is a UK resident and without any doubt the provisions of the Income Tax Act or the provisions of the Double Taxation Avoidance Agreement whichever is more beneficial to the assessee shall be applied for determining the tax liability of the assessee in India. In view of this undoubtedly the appellant is entitled to the benefit of Indo UK Double Taxation Avoidance Agreement. Therefore To examine this argument of the Ld. appellant we would like to examine the provisions of article 13 of the Indo UK DTAA. On perusing Article 13 of the Double Taxation Avoidance Agreement it is apparent that if the fees for technical services are “effectively connected” with the permanent establishment of the appellant in India then provisions of article 13 (6) shall be applicable to the assessee. In that case provisions of article 7 of the Double Taxation Avoidance Agreement shall apply to that income.

(vi) Now the issue arises is whether the whole contract is “effectively connected” with the permanent establishment or part of the services are “effectively connected” with the permanent establishment. On reading of the above two agreements and the transfer pricing study report submitted by the assessee, more specifically at para number 4.4.2 are the functions performed by the permanent establishment of the appellant in India and para number 4.4.1 shows what are the functions performed by the IMG UK. It is further mentioned in the transfer pricing study report that certain routine services relating to on ground implementation and running of the event was subcontracted to the IMC India branch. The IMG India PE was involved in/responsible for overseeing and managing the liasonsing and implementation support activities undertake taken by the IMC India branch. It is also important to note that how this functions were performed it was stated in the transfer pricing study report of the appellant that IMG UK employees came to India from time to time for short-term visits. Further few freelancers were appointed/engaged by IMG UK for undertaking the on- ground implementation and related supervision activities in India. As these functions performed, assessee has claimed that it has created a service PE in India and therefore the income should be chargeable to tax according to the article 7 of the Double Taxation Avoidance Agreement. Therefore according to us the above agreements and memorandum of understanding has two limb one with respect to the performance of the activities performed by the permanent establishment in India and another limb deals with respect to the performance of the services by the IMG UK directly for which the India PE has nothing to do. Admittedly the issue is concerned with respect to the fees for technical services. It is also admitted position that while the effective connection of royalties with a permanent establishment has to be evaluated by applying the “assets test” , and for the purpose of fees for technical services the “activity test” or “functional test” should be applied as held in case of Nippon Kaiji Kyokoi V ITO 47 SOT 41 (Mum). Therefore to “effectively connect” the whole income with the PE, contending party i.e. assessee, should establish that PE is engaged in the performance of all those services or should be involved in actual rendering of such services, or (2) it should arise as a result of the activities of the PE, or (3) The PE should, at least, facilitate, assist or aid in performance of such services irrespective of the other activities PE performs.

(vii) Therefore according to article 7, for attribution of the profits to the permanent establishment the activity carried out by the permanent establishment is important and to that extent only the profits can be attributed to that particular permanent establishment. However if there are other activities, which are also incorporated in the agreement, which are not at all carried on with the help of, or through, or by, or under the control, or under the supervision of the permanent establishment such activities and income arising there from cannot be said to be “effectively connected” with the permanent establishment and article 7 cannot be applied to those services. In the present case certain activities are carried out by the appellant which are not even concerned with the functioning of the permanent establishment therefore in our view only the activities which are performed by the permanent establishment are effectively connected with the permanent establishment and activities which are not carried on by the permanent establishment but are carried out by the head office of the appellant are not “effectively connected” with the permanent establishment. We are also of the view that the term “effectively connected” should not be understood to mean the opposite of “legally connected” but rather something in the sense of “really connected”. Therefore the activities mentioned in the contract should be connected to the permanent establishment not only in the form but also in substance. It is also interesting to note that the permanent establishment of the assessee has been admitted by the appellant only because of the reason that some of the employees of the appellant came to India from time to time for short visit and further certain freelancers were appointed for undertaking the own ground implementation related supervision activities in India. Therefore according to us there are minimum activities performed by the PE of appellant in India. Hence just performing such minimum activities it cannot be said that whole of the revenue of Rs. 33 crores involved in the contract is “effectively connected” with the activities of the permanent establishment in India. Hence we reject the contention of the assessee that the whole of the revenue involved in the contract should be considered as effectively connected with the permanent establishment of the appellant.

(viii) We also give one more reason may be a hypothetical one which supports our view. Supposedly a contract of Rs. 100 crore is awarded to an overseas entity for rendering of the management services and if such overseas entity establishes a permanent establishment by just deputing its staff for more than 90 days, it creates a service permanent establishment of that for an entity in India. On the basis of the minimum activities performed by that particular staff which is deputed in India 10% of the gross receipt say 10 crores is attributed to permanent establishment and after claiming deduction of expenses there from of say 60% of the income attributed , assessee offered balance amount as profit of the permanent establishment for taxation. In transfer pricing study report, based on FAR analysis such attribution of the profit is considered to be at arm’s length by the assessee and as well as by the transfer pricing officer, it cannot be said that the balance sum of Rs. 90 crores cannot be taxed in India as the whole contract was “effectively connected” with the permanent establishment created by the petitioner of some staff for performing some of the activities and crossing the threshold duration. We do not subscribe to such a view and we are also of the view that such is the case of the assessee before us.

(ix) Further now coming to the interplay between article 7 and article 13 of the Double Taxation Avoidance Agreement gives an insight that first there has to be an existence of the permanent establishment through which the business is carried out and further existence of “effective connection” between such PE and the rights properties and contracts in respect of which the fees for technical services are paid. That would mean that only such fees for technical services are excluded from the scope of article 13 (6) as are “attributable” to the permanent establishment of the assessee through which the business is carried on by the appellant. Therefore according to us the taxability under article 13 shifts to the taxability of article 7 only in respect of fees for technical services which are “attributable” to the PE in question. Therefore the article 13 (6) of the Double Taxation Avoidance Agreement shall apply only to the extent of the activities carried on by the appellant through its permanent establishment. In view of this we are of the view that activities carried out by the appellant which are not at all connected with the activities of the permanent establishment are not covered by article 7 or 15 of the Double Taxation Avoidance Agreement between India and United Kingdom and same shall remain as fees for technical services under article 13 only. Therefore natural corollary that follows is that whatever is income excluded by the applicability of article 13 (6) and goes back to article 7 is the same amount.

(x) Our this view is also supported by the provision of article 13 (6) of the DTAA. On reading of the above article it is apparent that the provisions of paragraph 1 and 2 of this article shall not apply if the beneficial owner of the royalty fees for technical service, being a resident of a contracting state, carries on business in other contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, and the right property or contract in respect of which the royalty fees for technical services are paid is effectively connected with that permanent establishment or fixed base. Then only the provisions of article 7 related to business profit shall apply. Therefore the above article provides for twin conditions, (1) that the royalty or fees for technical services should arise through a permanent establishment situated in the other State and (2) the right property or contract in respect of the royalty or fees for technical services are paid is effectively connected with the such permanent establishment or fixed base. In the present case the benches raised a specific query that how the activities carried on by the UK office of the appellant are arise through the permanent establishment and how the contract is effectively connected with such permanent establishment. The Ld. authorized representative responded by submitting that it is with respect to the contract which should be effectively connected to the permanent establishment or fixed base. However with respect to the evidence of activities carried on by the overseas head office of the appellant and how they are connected or arising through the permanent establishment has not been responded to. Despite this we have pursued the relevant activities performed by the foreign office of the appellant as well as the permanent establishment of the appellant. We are of the view that activities carried on by the foreign office of the assessee are not at all arising through the permanent establishment of the appellant in India. Therefore one of the condition of the about twin conditions also failed in case of the appellant.

(xi) Once again we would like to reiterate that for the purpose of applicability of article 13 (6) with respect to the fees for technical services one has to apply the activity test of the permanent establishment in the source country is held by the coordinate bench in case of the Nippon Kaiji Koyokoi V ITO ( supra).

(xii) Therefore we reject the contention of the assessee that out of 33 crores Rs. 9 crores are effectively connected with the permanent establishment of the appellant, the balance 22 crores cannot be taxed in India under article 13 as fees for technical services. Our one more reasons for holding such a view is that according to us there is no distinction between the two phrases used into two different articles of the Double Taxation Avoidance Agreement. These two phrases are (1) “attributable to” in article 7 of the Double Taxation Avoidance Agreement, and (2) “effectively connected with” in article 13 (6) the Double Taxation Avoidance Agreement, because Indo US DTAA uses the same term “attributable to” in place of “effectively connected” with in article 12(6) of that agreement.

(xiii) Therefore, in the present case, according to us, out of the total receipt of Rs. 33 crores the receipt of Rs. 92249819/- which is attributable to the permanent establishment in India and the balance sum of Rs. 237750181/- shall be chargeable as fees for technical services under article 13 of the DTAA.

(xiv) Now the next contention raised by the appellant is that as there is no “make available” test satisfied in case of the services provided by the appellant, hence, according to article 13 (4) which defines the fees for technical services means payments of any kind of any person in consideration for the rendering of any technical or consultancy services which make available technical knowledge, experience, skill know-how or processes, or consist of development and transfer of a technical plan technical design. According to the assessee as clause C of article 13 (4) is not satisfied the balance cannot be charged to tax as fees for technical services. In the present case the services are already described in the previous paragraphs and there cannot be two opinion about that that mere provision of services or technical services is not sufficient, it is essential that services should be “make Available” technical knowledge, experience, skill, know-how or process. The expression make available has far-reaching significance since it limits the scope of technical and consultancy services. Generally this expression “make available” is used in the sense of one person supplying or transferring or imparting technical knowledge or skill or technology to another and technology is considered “made available” only when the services receiver is enabled to absorb and apply the technology contained therein. If the services do not have any technical knowledge the fees paid for it do not fall within the meaning of fees for technical services as per the article 13 of the India UK DTAA.. The services receiver is able to make use of the technical knowledge etc by himself in his business or for his own benefit and without recourse to the service provider in future and for this purpose the transmission of the technical knowledge, experience, skill, etc from the service provider to the services CP is necessary. In other words the technical knowledge, experience, skill etc must remain with the service recipient even after the rendering of the services has come to an end and the services receiver is at liberty to use the technical knowledge skill know-how and processes in his own right. In the present case the assessee has hired for conducting research in respect of the appropriate structure for the IPL and makes recommendation to BCCI accordingly. It is required to provide the Constitution of the IPL, the authority of the governing Council , the structure of IPL, tournament rules and regulation ,the franchisee tender document ,the franchisee agreement, necessary franchisee regulation and the IPL implementation budget. According to the para No. 9 of the agreement that intellectual property rights remains with the board of control for Cricket in India. Even before us Ld. authorized representative could not point out that why “make available test” has not been satisfied in this even by providing all the rules and regulations of IPL, standard operating procedures of matches, copies of the franchisee agreement, various documentation/ contracts etc which shall remain with the BCCI. Therefore in the present case according to us the BCCI is enabled to absorb and apply the information and the advice provided by the appellant to it for conducting such sporting events. According to us when all this documentation and material is provided to the BCCI it is able to use such know-how and documentation generated from provision of the services of the appellant independent of the services of the appellant in future. It is too naïve to say that in absence of IMG services BCCI on its own IPL tournament cannot hold. Merely because the BCCI has entered into a contract for conducting further 9 events does not lead to the conclusion that the information documentation, agreements, contracts etc cannot be said to be “made available” to the appellant. In fact according to us it is. In view of this we reject the contention of the appellant that the sum of Rs. 237750181/-cannot be taxed as fees for technical services as it does not satisfy “make available” condition provided in article 13(4) 9c ) of the DTAA.

(xv) We would also like to state that appellant has relied on the decision of Hon”ble Delhi High Court in case of Guy Carpenter V DIT 346 ITR 504. According to us that decision does not support the case of the assessee as it was related to an intermediary.

(xvi) Appellant has further relied upon the decision of the Nippon kaiji Koyokoi V ITO ( supra) of coordinate bench. We have perused that decision and we found that in that particular case the permanent establishment of the appellant was providing some services with respect to the earning of the head office and therefore facts of that case are different. In the present case the services of the head office which are directly provided from the United Kingdom are no way related to the services of the permanent establishment of the appellant. In view of this we reject the contention of the assessee that issue is covered by the above decision of the coordinate bench. In view of this we also disagree with the direction of the Ld. Dispute resolution panel to the Ld. assessing officer to assess fees for technical services as business income on substantive basis by applying the formula of gross receipts with respect to the expenditure.

(xvii) Further with respect to ground of appeal of the appellant saying that receipt of Rs 237750181/-fall under the exception provided under section 9(1) (vii) (b) of the Income tax act as the services have been rendered outside India and the income is generated in the hands of the BCCI outside India. According to provisions of section 9 (1) of the Income tax Act the income by way of fees for technical services payable by a person who is resident to a non-resident shall be deemed to accrue or arise in India and shall be chargeable to tax u/s 5 of the Income Tax Act in the hands of a non-resident. The claim of the appellant is that receipt of Rs. 237750181/- falls within the exception provided under clause (b) of the above section which says that where the fees for technical services are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India, it shall not be considered as fees for technical services as income deemed to accrue or arise in India in terms of the provisions of section 9(1) (vii) (b) of the Income Tax Act. The main reason to say so by the appellant is that the IPL 2009 event has been held outside India and therefore the BCCI has utilized those services outside India and therefore they fall into the exception and cannot be taxed in India. We have carefully considered the rival contentions and reject the contention of the appellant for the reason that to fall within the exception the assessee must be carrying out business outside India and such services must be utilized in that business by a person who is a resident in India and who pays income by way of fees for technical services to a non-resident. It is an established fact that BCCI is carrying on business in India and not outside India. Further the source of income of the BCCI is in India and not outside India. Merely because the event is performed outside India it cannot be said that source of income of the BCCI is not in India. Therefore according to us the income of the appellant of Rs. 237055181/-is chargeable to tax as fees for technical services under section 9 (1) (vii) of the Income Tax Act as Fees for technical services.

(xviii) In view of above facts and circumstances we adjudicate the appeal of the assessee as under:
a. with respect to ground No. 2, 3,4,5 and 6 of the appeal of the assessee we hold that that (a) the receipts from the services rendered outside India of Rs. 237750181/- are chargeable to tax as Fees for Technical Services in terms of Article 13(4) (c) as it makes available the technology to the recipient of services and further the provisions of article 13(6) of the Indo UK Double Taxation Avoidance Agreement does not apply to this sum, as it does not “arise through” and also not “effectively corrected” with the permanent establishment of the appellant.

(b) With respect to the ground No. 7 and 8 of the appeal we hold that income of Rs 237750181/-is chargeable to tax under section 9 (1) (vii) (b) of the Income Tax Act as fees for technical services and it does not fall into the exception thereof.

(c) With respect to ground No. 9 of the appeal we hold that receipt of the appellant satisfies the “make available” test as provided under article 13 (4) ( c) of the India UK DTAA as fees for technical services.

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