The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that payments received by a Chinese tax resident for rendering managerial and technical services from outside India to its Indian group company would not qualify as “Fees for Technical Services” (FTS) under Article 12(4) of the India-China Double Taxation Avoidance Agreement (DTAA).
The bench of Vikas Awsthy (Judicial Member) and Naveen Chandra (Accountant Member) has examined the language of Article 12 of the India-China DTAA, particularly Article 12(4), which defines FTS as payments for the provision of managerial, technical or consultancy services by a resident of one contracting state in the other contracting state, subject to the exclusions specified in the provision.
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The Tribunal noted that the wording of the provision requires the services to be rendered by a resident of one contracting state in the other contracting state.
The appellant/assessee is a wholly foreign-owned company established in Shanghai and a tax resident of China, is part of the Benteler Group, which is engaged in the manufacture of automotive components.
The Chinese company provided various services to its group entities in the Asia-Pacific region, including its Indian group company, Benteler Automotive India Pvt. Ltd. These services included engineering, forensic, IT, sales, finance, human resources, quality, procurement, management and consultancy-related services.
For the relevant assessment year, the assessee received ₹2,83,04,041 as management and consultancy service fees from Benteler Automotive India Pvt. Ltd. under a service agreement.
The central question before the Tribunal was whether such payments could be treated as FTS taxable in India under Article 12(4) of the India-China DTAA, even though the services were provided by the Chinese company entirely from China.
The assessee submitted that there was no dispute regarding the fact that the services were provided from China and that no part of the services was physically rendered in India.
It was also undisputed that the assessee did not have a Permanent Establishment (PE) in India.
According to the assessee, Article 12(4) of the India-China DTAA requires managerial, technical or consultancy services to be provided by a resident of one contracting state in the other contracting state before the payment can fall within the definition of FTS.
Since the services were rendered from China, the assessee argued that the management and technical service fees did not satisfy the conditions prescribed under Article 12(4).
The tax department took a different position.
The department argued that the services were admittedly managerial and technical in nature and therefore fell within the definition of FTS under Article 12(4) of the DTAA.
According to the Department, the location from which the services were rendered was not decisive. Instead, the relevant factor was the place where the services were utilised. Since the services were provided to the Indian company and utilised in India, the Department contended that the receipts were taxable in India.
The Assessing Officer had also relied upon the decision in Ashapura Minichem Ltd. v. ADIT while treating the management service fees as taxable in India.
The tribunal noted that the assessee was a resident of China, while the Indian group company was located in India. However, the services were rendered by the assessee from outside India, and the assessee did not have a PE in India.
The Tribunal therefore concluded that the essential conditions under Article 12(4) were not fulfilled.
A significant factor in the Tribunal’s decision was the earlier judgment of the Bombay High Court in the assessee’s own case, Benteler Automative (China) Investment Ltd. v. ACIT, 185 taxmann.com 54 (Bombay).
The Tribunal noted that the Bombay High Court had considered substantially the same issue and had rejected the Revenue’s contention that services provided from China through electronic means could be treated as having been physically rendered in India.
The services in that case were provided through emails, conference calls and video conferencing. The Revenue had argued that because the services were virtually delivered to the Indian company, they should be regarded as having been rendered in India.
The Bombay High Court did not accept this proposition.
The High Court’s reasoning, as reproduced by the ITAT, was that merely because services were provided virtually to an Indian entity, it could not automatically be concluded that the services were physically rendered in India.
The Court observed that, in the absence of a specific provision in the law or DTAA, virtual delivery of services could not be equated with physical rendition of services in India.
The ITAT relied on this principle while deciding the appeals before it.
The Tribunal specifically noted that the Department’s contention that services provided through video conferencing and other virtual modes should be treated as services rendered in India had already been rejected by the Bombay High Court in the assessee’s own case.
After considering the DTAA provisions, the service agreement, the submissions of both sides and the Bombay High Court’s judgment, the ITAT found merit in the assessee’s case.
The Tribunal held that the payments received by the Chinese company for rendering managerial and technical services from outside India to an Indian company do not fall within the definition of FTS under Article 12(4) of the India-China DTAA.
Thus, the Tribunal rejected the approach of treating the receipts as FTS merely because the services were provided to, or utilised by, an Indian group company.
The assessee had filed three appeals before the ITAT relating to assessment years 2015-16, 2016-17 and 2017-18.
The Tribunal treated AY 2015-16 as the lead case because it was the first year of the dispute. For AYs 2016-17 and 2017-18, both sides agreed that the facts and the primary issue were identical to those in AY 2015-16.
Consequently, the Tribunal applied its findings for AY 2015-16 mutatis mutandis to the subsequent years and set aside the corresponding orders of the CIT(A).
The assessee had also filed an application dated April 29, 2024, seeking admission of an additional ground challenging the validity of the assessment orders on the ground of limitation.
However, the assessee subsequently filed an application dated April 22, 2026, seeking withdrawal of those additional grounds.
Accordingly, the Tribunal dismissed the application relating to the additional grounds.
The ITAT allowed all three appeals filed by Benteler Automative (China) Investment Limited.
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