Full Judgment Text
NEUTRAL CITATION NUMBER: 2023/DHC/000048
$~78
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of Decision:15.12.2022
+ ITA 530/2022
THE COMMISSIONER OF INCOME TAX - INTERNATIONAL
TAXATION -1 ..... Appellant
Through: Mr Shlok Chandra, Standing Counsel.
versus
FUJITSU AMERICA INC. ..... Respondent
Through: Nemo.
CORAM:
HON'BLE MR. JUSTICE RAJIV SHAKDHER
HON'BLE MS. JUSTICE TARA VITASTA GANJU
[Physical Hearing/Hybrid Hearing (as per request)]
RAJIV SHAKDHER, J. (Oral):
1. This appeal is directed against the order of the Income Tax Appellate
Tribunal [in short, “the Tribunal”] dated 09.06.2022.
2. In order to adjudicate the appeal, the following broad facts are
required to be noted:
2.1. The respondent/assessee, which is a company incorporated under the
laws of United States of America, rendered branding and management
services to an Indian entity going by the name Fujitsu Consulting India Pvt.
Ltd. [in short, “FCI”]. In respect of the services offered by the
respondent/assessee, it received an amount equivalent to Rs.9,87,11,121/-
during the Assessment Year (AY) in issue, i.e., A.Y. 2015-16.
3. The Assessing Officer [in short, “AO”], however, sought to tax the
said receipts @ 25%, albeit, on a gross basis. Thereby, the AO denied the
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respondent/assessee the benefit it had sought to take by resorting to Article
12 of the India-USA Double Taxation Avoidance Agreement [in short,
“DTAA”].
3.1 The respondent/assessee, in terms of Article 12 of the DTAA, had
offered the aforementioned amount for taxation @ 15% of gross receipts.
3.2. The main plank on which the AO’s order is founded is that the
respondent/assessee had a back-to-back arrangement of passing on the fee
received to its holding company, i.e., Fujitsu Limited, Japan [in short, FL].
4. The respondent/assessee, being aggrieved by the assessment order
dated 19.12.2018 passed under Section 143(3) of the Income Tax Act, 1961
[in short, “the Act”], preferred an appeal with the Commissioner of Income
Tax (Appeals) [in short, “CIT(A)”].
4.1 The CIT (A), after a detailed hearing and examination of the record,
via order dated 13.12.2019, ruled in favour of the respondent/assessee.
5. Since the appellant/revenue was aggrieved by the order of the CIT(A),
an appeal was preferred before the Tribunal, which met with same fate i.e.,
the appeal of the appellant/revenue was dismissed, and the order of CIT(A)
was sustained.
6. It is in this backdrop that the appellant/revenue has preferred the
instant appeal under Section 260A of the Act.
7. Mr Shlok Chandra, learned standing counsel for the
appellant/revenue, has submitted that the orders passed by the Tribunal and
CIT(A) deserve to be set aside as there is clearly a back-to-back
arrangement between the respondent/assessee and its holding company i.e.,
FL.
7.1 In support of this plea, Mr Chandra has relied upon the order passed
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by the AO. In particular, our attention has been drawn to the following parts
of the order:
“5. During the course of assessment, it came to light that the assessee has
an agreement with its sister concern named Fujitsu Limited, Japan (FJ) (a
company based in Japan) under which the branding and management fee
received by the assessee from FCI is transferred to FJ on a back- to- back
basis. Vide questionnaire dated 27.11.2018 the following query was made:
"Furnish a copy of your agreement with Fujitsu Consulting
India under which branding and management fee is charged.
Also, furnish a copy of your agreement with Fujitsu Japan
under which Fujitsu Japan charges branding and
management fee from you. What is the difference between
the branding and management fee received by you from
Fujitsu Consulting India and branding and management fee
paid by you to Fujitsu Japan. Did you pass on the entire
branding and management fee received from Fujitsu
Consulting India to Fujitsu Japan or you did you charge a
mark-up or commission thereon ?"
The assessee's reply dated 03.12.2018 to the above query is reproduced
below:
"A copy of agreement with Fujitsu Japan (for charging
branding and management fee), is attached. Please note that
Fujitsu Consulting India was also incorporated as a
purchasing entity in the aforesaid mentioned agreement by
way of an amendment. The amendment agreement is also
attached for your kind perusal.
There is no difference between branding and management
fee paid by us to Fujitsu Japan and the branding and
management fee cross charged to Fujitsu Consulting India.
The fee is cross charged to our subsidiaries including Fujitsu
Consulting India mostly based upon sales turnover.”
5.1. From the above it is cleared und undisputed that the assessee is only a
recipient and not the beneficial owner of the said receipts, as the receipts
transferred to a separate entity an [sic-on] a back-to-back basis. In other
words, the assessee merely serves as a conduit or channel for the said
income and the beneficial owner of the FIS is actually Fujitsu Japan. In
these circumstances, the rate that shall apply to the said FIS under the
DTAA shall be rate applicable for a recipient who is not a beneficial
owner. This rate is determined by a reading of first sentence of para 2 of
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Article 12, which states that such FIS may be taxed in the source State and
according to the law of that State. In the present context, it means the said
receipts will be taxable in accordance with the provisions of the Income
tax act, 1961.
5.2 Vide notice u/s 142(1) dated 9.12.2018, the assessee was asked "Since
the entire branding fee and management fee received from Fujitsu India is
transferred to Fujitsu Japan through a back-to back-agreement, why
should you not be treated as a pass-through entity or conduit with respect
to this receipt and not beneficial owner? Therefore, why should the rate
given in India US DTAA for beneficial owner not be denied to you, and
you be taxed as per Indian domestic law rates on this income?" The
questionnaire was duly delivered to the assessee via e-assessment portal,
as is evidenced by the delivery confirmation received by the undersigned.
No reply was received on due date. Another opportunity was then provided
to the assessee. Vide its reply dated 17.1.2018, the assessee responded as
follows:
"There is no transfer of branding fee and management fee
received from Fujitsu Consulting India to Fujitsu Japan
through a back to back arrangement. The fee for these
services had been received by us in consideration for
services provided to Fujitsu Consulting India. We have full
and unconditional right to use and enjoy the fee received
from Fujitsu Consulting India and there exists no obligation
on us to pass it on to Fujitsu Japan. We are therefore not in
agreement with your observation that Fujitsu America, Inc.
could be treated as a pass through entity or conduit in
relation to these charges. We confirm that we are the
beneficial owner of all these service charges and have the
fall and unconditional right to use and enjoy these
payments."
The assessee's position is clearly contrary to the facts. When the assessee
has a binding obligation to forward the entire fee receipts under
consideration to another entity, how can it claim to have an
"unconditional right to use and enjoy the fee received"? For reasons
explained in the above paragraphs, the claim that the assessee is not a
pass-through entity with respect to these particular receipts is without any
foundation. This claim is therefore rejected.”
8. We have heard the learned counsel for the appellant/revenue and
examined the record.
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9. According to us, findings of fact have been returned, as noticed
above, by the CIT(A). For the sake of convenience, the relevant part of the
order passed by the CIT(A) is extracted hereafter, which discloses that the
CIT(A) concluded that there was no back-to-back arrangement between the
respondent/assessee and its holding company i.e., FL:
“5.13 Further, during the appellant proceedings, the appellant was asked
to submit email communication between the appellant and Indian entity
FCI (recipient of the service) in order to ascertain the fact of actual
involvement of the appellant in rendering of management services to the
Indian entity and to decide the issue of beneficial ownership. Accordingly,
the appellant submitted relevant e-mail communications with FCI
evidencing dissemination of services to FCI vide submission dated July 29,
2019. The detailed explanation of the emails was also submitted vide
submission dated August 21, 2019. The appellant has submitted 7 emails
as sample evidence in this regard which are discussed as under:
A. Email dated May 15, 2014 from Your IT Desk@.in.Fujitsu.com (India)
to FC.IN.Entireoffice@in.Fujitsu.com (Central ID)
This email is regarding logging of high priority ticket with FAI for
resolution. It is raised by Fujitsu Consulting India at the central e-
mail id to report downtime of Virtual Private Network ('VPN')
primary and secondary links with the Appellant which were not
accessible. In the given email, downtime notification mentions
about FAI support engagement. The response received by the
Indian AE was that the alternate SSL VPN link provided by FAI
Service Desk can be logged in during the intervening period when
the primary and secondary VPN are not accessible. By way of this
communication, the network service requirements of the Indian AE
had been resolved through the ticket raised by the Indian AE to the
Appellant.
B. Email dated Oct 24, 2014 from ReqTrack.Support@in.Fujitsu.com to
FC.IN.EntireOffice@in.fujitsu.com
This email is regarding Ticket raised by Fujitsu Consulting India
at the central e-mail id to report downtime of ReqTrack and Trioka
with the Appellant which were not accessible. In the given email,
downtime notification mentions that FAI networking team is
working on high priority.
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C. Email dated March 21, 2015 from erpprod@us.fuiitsu.com (email ID of
FAI) to Sachin.amonkar@in.Fujitsu .com (employee of Indian AE)
This email is by the central email id maintained by the FAI to
remind the approver at Indian AE to approve/reject the time card
entries submitted by the employees of the Indian AE in relation to a
project.
D. Email dated April 5, 2014 from far.hvperiomsupport@fuiitsu.com
(email id of FAI) to Ashutosh.Prabhucles@ai(a)in.fuiitsut.com (employee
of Indian AE)
This is an email from Hyperion financial system, which is
maintained by FAI and used by Indian AE wherein a regular
FAICONS application update was provided.
E. Email dated January 16, 2015 from offshore
Appsupport@in.Fujitsu.com FC.IN.Entireoffice@in.Fijitsu.com
There was a downtime due to technical issue with the FAI for
which a notification was sent to Indian users by FAI. The email
shows the resolution regarding an update that the Oracle
application working normally.
F. Email dated September 9, 2014 to September 29, 2014 from
(Johanne.clouatre(d)ca.fuiitsu.com) (email ID of FAI) to
Ashutosh.Prabhudesai(d)in.fuiitsu.com (employee of Indian AE)
It is a chain of emails where the appellant entity's (FAI) resource
Mr. Wen Zhu highlighted that as per JSOX requirement, there is a
need to perform financial access review to make sure users have
the correct financial access in Oracle. In this regard, FAI released
list of active oracle users with their finance responsibilities and
was forwarded to the Indian Team for confirmation and
modifications if any. The email is for review of names of users to
provide access of financial data of Fujitsu Consulting India in
Oracle and requires confirmation from the employees of Fujitsu
Consulting India. The access was granted to the users requiring
the financial access by FAI.
G. Email dated May 18, 2016 from (Sachin.amonkar@in.Fujitsu.com)
(employee of - Indian AE to Arthur Nussbaum and Ken Fuse (FAI)
It is a chain of emails regarding communication between Fujitsu
Consulting India team (Sachin Amonkar) and FAI (Arthur
Nussbaum and Ken Fuse) wherein the Indian entity informed the
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appellant (FAI) regarding site visit of TP authorities to the Rune
Office to review the detailed working of FNA(Finance & Accounts)
and in this regard requested the appellant to share the detailed
calculations of the allocation charge.
5.14 It may be added that sample email submission was not the
additional evidence but the material called for during the appellate
proceedings as per the provisions of section 250(4) of the act. On perusal
of email communications, I find that the FCI (Indian Entity) used to
contact the appellant in respect of procurement of services. The
appellant has played active and meaningful intervention in delivery of
services. Thus, the appellant was playing the role of service provider
after procuring it from other group companies. Moreover, it is a case of
cost pooling where various group companies are delivering services of
different nature of mutual benefit to each other in the group. The group
has allocated the cost based on allocation key and region wise entities
have been made responsible to ensure smooth delivery of services as well
as of clearing mechanism of payments within the group.
5.15 The agreement provides that the supplying company will provide
the Services through Correspondence. Telephone and other means
agreed on from time to time with the Purchasing company. As per the
agreement, the appellant in this case is a "supplying company”
responsibilities which are set out in the description of the services set out
in Schedule 1 Description of Services.
5.16 It may be relevant to note that beneficial owner is someone who
besides being a legal owner has "dominion and control" over the
property I.e. an owner of property who holds it for his own benefit and
not as an agent, trustee or nominee for some other person, one who has
right to deal with the property as is own. Based on judicial precedents,
following principles emerge in order to consider the attribution of
beneficial ownership:
• Possession - Whether the recipient of income exercises dominion over
income received;
• Risk and control - Whether the recipient of income is its bearing the
risks associated with such income and exercises power or influence over
such income received
• Assesses is not an agent/nominee - Whether the recipient is acting on its
own account and neither an agent/nominee of its holding company nor
acting as funnel of flowing incomes to other entity.
xxx xxx xxx
5.18 It flows from the above that the beneficial owner status can be denied
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only to agents and/or conduit companies. The concept of beneficial
ownership is akin to adopting principle of substance over form. In this
case, I find that the appellant has place of management in USA and it is
one of group companies, which is providing Global HQ services. It is a
separate legal entity within the group with a particular set of roles and
responsibilities. The right to collect the service charges is with the
appellant, being in the capacity of Supplying Company for its region as
per the agreement. Further, the sample email communication does
portray the meaningful role played by the appellant in delivery of
services to Indian entity. Thus, [sic]
5.19 I find that the facts of the case strongly support the contention of
the appellant that it being beneficial owner of the fee for technical
services is entitled for treaty benefit. It is not a case where the appellant
company is acting as a Conduit Company. Hence, in the backdrop of the
above discussion, I hold that the tax rate of 25% applied by the AO does
not hold good in this case.”
[Emphasis is ours.]
10. A perusal of the above extract would show that there are two
important aspects that the CIT(A) touched upon. First, there was no back-to-
back arrangement, according to him, between the respondent/assessee, as
noticed above, and its holding company, FL. Second, in order to deny the
respondent/assessee the status of a beneficial owner, the AO had to find that
the assessee was either an agent or conduit for the holding company i.e.,
Fujitsu Limited, Japan.
10.1. The second proposition, as a matter of fact, flows from the findings of
fact returned by the CIT(A). The CIT (A) has found as a matter of fact that
the appellant was playing the role of a service provider after procuring the
same from other group companies and that it had dominion over the fees
received by it.
11. We have also put to Mr Chandra as to whether there was any ground
raised in the appeal preferred before the Tribunal that the finding returned
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by the CIT(A) was perverse.
11.1. Mr Chandra says that no specific ground in those terms was framed.
It is Mr Chandra’s submission though that the ground raised was that the
CIT(A) had erred in concluding that the respondent/assessee was entitled to
the status of a beneficial owner.
12. To our minds, once it is held that there was no back-to-back
arrangement and the respondent/assessee had dominion and control over the
fees received by it and thus entitled to status of a beneficial owner, then,
even according to the appellant/revenue, the provisions of Article 12 of the
DTAA will kick in.
13. The Tribunal, as noted above, has sustained the orders passed by the
CIT(A).
14. According to us, no substantial question of law arises in the above-
captioned appeal. Thus, for the foregoing reasons, we see no reason to
interfere with the impugned order. The appeal is, accordingly, dismissed.
15. The Registry will dispatch a copy of the judgement passed today to the
respondent at the address given in the appeal as well via email.
RAJIV SHAKDHER
(JUDGE)
TARA VITASTA GANJU
(JUDGE)
DECEMBER 15, 2022 /pmc
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