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2005 (3) TMI 708 - ITAT MUMBAITaxability of the training fees - Double taxation relief - sale of know-how in fact constitutes sale of property within meanings of that expression under article 12(5)(a) of the India US tax treaty - Whether or not the training fees paid to a US based company, which is said to be integral to the purchase of know-how from that company, is taxable in India - Principles of interpretation of tax treaties - HELD THAT:- There is no dispute that Article 12(5) is an exclusion clause which restricts the scope of applicability of Article 12(4) regarding taxability of certain receipts in the nature of ‘fees for included services’ in the source country. As we have noted earlier as well, it is not even assessee’s case that the receipts in the nature of trading fees are not covered by the normal scope of Article 12(4). In any event, ‘Memorandum of Understanding concerning fees for included services in Article 12’ dated 12th September, 1989, attached to and forming part of the India US tax treaty, specifically mentions that scope of Article 12(4b) may extend to, inter alia, ‘technical training’. Example (6) given in the MoU States that the fees for training the employees of the Indian company constitutes ‘fees for included services’ and is, therefore, taxable in the source country as well. The reasoning for this conclusion, as given in the said MoU, is that ‘the services are technical, and the technical knowledge is made available to the Indian company’. The assessee’s defence against taxability of these receipts in the source country primarily consists of reliance on the scope of exclusion clause set out in Article 12(5)(a) of the Indo US tax treaty. The exclusion clause, relied upon by the assessee, provides that the services which are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of a property, are not to be treated as ‘fees for included services’ exigible to tax in the source country. The only rider is that the exclusion clause will not extend to the sale of property referred to in Article 12(3)(a) of the treaty. It is thus clear that when the principal sale itself is subjected to tax in the source country, the services which are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of a property, are also subjected to tax in the source country. The said principle is also implicit in Article 12(4)(a) which provides that consideration for rendering any technical or consultancy services, where such services are ancillary and subsidiary to the application or enjoyment of the right, property or information which is covered by the definition of ‘royalty’ in Article 12(3), is also includible in the ‘fees for technical services’ and accordingly liable to be taxed in the source country. During the course of hearing before us, we put it to the assessee that the principle elaborated above could, in our understanding, perhaps be the only explanation for the exclusion clauses in article 12(5)(a) and 12(5)(b). We also requested the assessee to let us know in case there could be any other intent and scheme of things underlying these clauses. However, learned counsel for the assessee could not enlighten us on this issue. The issue regarding connotations of expression ‘property’ was heard at considerable length for over two sessions but yet the learned counsel could not come up with any arguments in assessee’s defence on the question of intent and scheme of treaty as put to him by the bench. In due deference to the order passed by the co-ordinate bench, we restore the matter to the file of the CIT(A) for examination de novo. While doing so, the CIT(A) shall examine (i) whether or not the training is ancillary and subsidiary, as well as inextricably and essentially linked to the sale of know-how, and (ii) whether or not the sale of know-how constitutes sale of property. The CIT(A) shall give due and fair opportunity of hearing to the assessee, bear in mind our findings above and shall objectively deal with, by way of a speaking and reasoned order, whatever submissions the assessee prefers to make. The only issue raised in regarding non taxability of training fees in India. Thus, these appeals are allowed for statistical purposes in the terms indicated above. In the result, Appeals are hereby allowed for statistical purposes.
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