Western India Regional Council of
The Institute of Chartered Accountants of India

(Setup by an Act of Parliament)

August 1, 2019

CA. Hinesh Doshi, CA. Ronak Soni

Gemological Institute of America, Inc vs. Addl. Commissioner of IT (IT), Range -2(3) [ TS- 356-ITAT-2019(Mum)] dated 21st June, 2019

The assessee company, resident of USA, was engaged in the business of diamond grading and preparation of diamond dossiers.

The assessee had set-up a subsidiary in India ‘GIA India Laboratory Private Limited’ (‘GIA India’) which sent stones for grading through service agreement to other entities of the GIA Group across the globe, including the assessee.

The assessee declared income as ‘Instructor Fee’ earned from GIA India and filed its return with the plea to be taxed in accordance with the provisions of India-USA DTAA.

AO added 50% of the gem grading fees and considered GIA India as assessee’s PE, to the total income of the assessee, which was held to be taxable in India.

Aggrieved, the assessee appealed before Mumbai ITAT.


Whether the subsidiary of the assessee i.e., GIA India be construed as its PE in India?


ITAT noted that there was no joint venture arrangement between the assessee and GIA India as it entered into agreements with clients, bearing all risks including credit risk, client facing risks, risk of damage during transit and also during the time when the articles were at assessee’s facilities.

Relying on the Delhi HC ruling in case of E-funds IT Solutions, ITAT held that a subsidiary could not be regarded as a ‘fixed place PE’ of the parent company on the ground of a close association between the Indian subsidiary and the foreign taxpayer.

ITAT further noted that in case of the assessee, since the ‘grading services’ were rendered outside India and none of the employees/ personnel of the assessee had visited India, service PE was not triggered.

ITAT held that GIA India could not be regarded as ‘agency PE’ of the assessee in India, as it was not acting on behalf of the assessee but was an independent/ separate legal entity, engaged in rendering grading services and did not have any authority to conclude contracts on behalf of the assessee.

ITAT opined that AO erred in invoking section 9 and Article 5 of DTAA to establish that assessee had PE in India.

ITAT thus ruled in favour of the assessee.

Rackspace US Inc vs. Dy. Commissioner of IT (IT), 4 (1) (1) [TS- 398-ITAT 2019 (Mum)] dated 29th May, 2019

The assessee company, tax resident in USA, having no PE in India, was engaged in provision of public cloud hosting and dedicated/ managed hosting of services to Indian customers and claimed it to be business income not taxable in India.

AO held that income from such services was taxable in India as royalty and fee for technical services.

Assessee filed its objections before the DRP, however the same was quashed.

Aggrieved, the assessee appealed before Mumbai ITAT.


Whether the income earned by the assessee for rendering cloud hosting services to Indian customers, constitute Royalty or FTS under Article 12 of India – USA DTAA ?


ITAT noted that as per section 9(1) (vi), royalty is taxable in India if the payer is an Indian resident, except where the royalty is payable in respect of a right, property, information or service used for the payer’s business outside India or for earning income outside India.

ITAT further noted that the assessee’s customers only availed hosting services and did not use, possess or control the equipment used for providing hosting services.

ITAT noted that there was no PE of the assessee in India and hence, no income could be taxed in India in term of Indo-US DTAA.

Relying on ruling in case of American Chemical Society, ITAT held that the retrospective amendment in the royalty definition under the Act did not impact the definition of ‘royalties’ in the India-USA Tax Treaty.

ITAT concluded that since the income from cloud hosting was erroneously held as royalty, the income from cloud hosting services could not be taxed as fee for technical services ITAT thus ruled in favour of the assessee

The Nielsen Company (US) LLC vs. DCIT (IT), 4(2), Mumbai [TS-304-ITAT-2019 (MUM)] dated 22th May, 2019

The assessee company, USA based entity, engaged in one of the world leading Business & Information in Media & Information, Directories & Consumer Information.

The assessee received a sum from its Indian entity under service agreement for administrative and management support services and claimed as not taxable in India under Article 12 of DTAA.

AO made addition considering the income in the nature of Fees for Included Services (FIS).

The assessee also received an amount from its Indian entity for reimbursement of expenses.

AO made addition considering it as Royalty. Both the additions of AO was confirmed by CIT (A).

Aggrieved, the assessee appealed before Mumbai ITAT.


Whether sum received as administrative and management support services from its Indian entity is taxable as Fees for Included Services (FIS)?
Whether reimbursement of tax consulting fees from Indian entity taxable under treaty?


ITAT noted that the assessee had not executed any contract to make available any technical expertise so as to use the services independently by the licensee.

ITAT stated that all the services undertaken by the assessee were either support services, IT enabled services, coordination or tax services was not such which required transfer of technology, skill to the receipt company.

Relying on the Karnataka HC ruling in case of De Beers India Minerals (P) Ltd, ITAT held that AO erred in taxing the service agreement receipt as FIS in absence of make available clause in service agreement.

ITAT noted that with respect to reimbursement of expenses taxed as royalty, assessee had made payment to PWC consulting for handling the taxation of the entire Asia- Pacific Region and these services were allocated to the group company on the basis of number of expat employees in the entity on prorate basis.

ITAT noted that assessee had not charged any mark-up over the cost incurred by it and merely charged proportionate amount of invoice raised by PWC and it did not involve any element of income.

ITAT ruled that since the consideration under the service agreement cannot be taxed as FIS and on the same principle, the receipt cannot be treated as royalty as there is no transfer of process or formula.

ITAT, thus allowed assessee’s appeal and ruled in favour of the assessee.

Sun Pharmaceuticals Industries Ltd vs. ACIT Central Circle –1 [TS-395-ITAT-2019 (Ahd] dated 20th June, 2019

The assessee company, a tax resident of India, has several subsidiaries in and outside India. One of the subsidiary, namely SUN BVI transferred certain technologies to CARACO, USA over a certain period.

SUN BVI acquired these technologies from Unimed Technologies Ltd (UTL) and UTL acquired these technologies from the assessee.
The cost of the technologies in the hand of SUN BVI was nominal as compared to value at which it was transferred to CARACO. Accordingly, huge profits was earned by SUN BVI which was exempt from tax owing to its tax haven location.

AO made addition of profit earned by SUN BVI on transfer of technologies in hands of the assessee considering all these arrangements between SUN BVI, UTL and CARACO were made to evade taxes in India.

Aggrieved, the asssessee appealed before Ahmedabad ITAT.


Whether there was diversion of profits by assessee on transfer of technology to a group entity based in USA (CARACO) through assessee’s subsidiary based in British Virgin Islands (SUN BVI)?


ITAT noted that the SUN BVI cannot be treated as paper company merely on the fact that it doesn’t own any factory, fixed assets and infrastructure facility.

ITAT refers to the technology transfer agreement whereby the UTL developed the technology using assessee’s R&D premises [for which the rent agreement was in place] and transferred it to Sun BVI for onward transfer to CARACO.

ITAT noted that all aspects of relevant transactions were duly disclosed by the assessee such as involvement of UTL, BVI entity, sale price of technologies, use of premises by UTL, and no illegality was observed in the transactions.

Relying on the SC ruling in Azadi Bachao Andolan and McDowell & Co Ltd, ITAT remarked that the impugned transaction cannot be regarded as colorable device merely on the reasoning that there is no tax liability arising in the hands of the assessee. ITAT accepts the same to be a normal business practice and nothing contrary to human probabilities.

ITAT stated that increase in price of the shares cannot be held as colorable device in the hands of the Sun BVI. As such there was no role of the assessee in the market price of the shares of CARACO USA which was regulated by the stock exchange.

ITAT noted that assessee had shown rental income received from UTL which has been duly accepted by the revenue as income of the assessee.

ITAT thus held that revenue has taken contradictory stand while holding the transaction between the assessee, UTL & sun BVI as colorable device.

ITAT deleted the addition made by AO and thus ruled in the favour of the assessee.

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