TMI Blog2011 (1) TMI 911X X X X Extracts X X X X X X X X Extracts X X X X ..... in agreement with the ld. CIT(A)'s finding - Decided in favour of assessee. Payments made under section 40(a)(ia) to Filtrex International Pte. Ltd., Singapore - With regard to FIPL also, find that the ld. CIT(A) had analyzed the issue in a well judged manner and found fault with the Assessing Officers in the sense that when the Assessing Officers have held that the services made available by FIPL were for promoting their businesses and, thus, fell within the ambit of 'managerial services' as defined in the Income-tax Act, but, they have miserably failed to come up with any clinching proof to strengthen their half-baked conclusions - Thus, the revenue had failed to nail the assessee with any corroborative evidence that the services rendered actually were within the sphere of either managerial or consultancy services - Decided in favour of assessee. - 654, 655, 658 AND 659 (BANG.) OF 2009 - - - Dated:- 28-1-2011 - GEORGE GEORGE K., A. MOHAN ALANKAMONY, JJ. T. Banusekar for the Appellant. Smt. Meera Srivastava for the Respondent. ORDER A. Mohan Alankamony, Accountant Member. - These four appeals instituted by - (i) Filtrex Technologies (P.) Ltd. in ITA Nos. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the effect that- "the CIT(A) erred in upholding the disallowance of fees for technical services paid to M/s. Filtrex Holding Pvt. Ltd., Singapore of Rs. 79.98 lakhs under section 40(a)(ia) of the Act." ITA Nos. 658 659/09 (by the revenue): (i) For the assessment year 2005-06, the revenue had raised nine grounds, out of which, ground Nos. 1, 8 and 9 being general with no specific issues involved, they have become non-consequential. In the remaining grounds, the substance of the issue was that - "the CIT(A) was not justified in deleting the addition of Rs. 26.47 lakhs made under section 40(a)(i) being disallowance of expenditure concerning the payment to M/s. Final Touch Grafix of Singapore as payments were not made for technical/managerial or consultancy services." (ii) For the assessment year 2006-07, it had raised thirteen grounds in an illustrative manner, in which, ground Nos. 1, 12 and 13 being general in nature with no specific issues involved, they do not survive for adjudication. In the remaining grounds, the issues raised were two-fold, namely - (i) the CIT(A) was not justified in deleting the addition of Rs. 24.34 lakhs made under section 40(a)(i) b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laid down by the Hon'ble ITAT, Mumbai Bench in the case of Raymond Ltd. v. Dy. CIT [2003] 86 ITD 791, the ld. CIT(A) had observed thus: "3.6 In the instant case, it is evident that the appellant manufactures carbon blocks used in water purifiers and the technology transfer by M/s. Filtrex Holdings Pte. Ltd., Singapore, the technology provider was with regard to the three stage gravity water purification for home use in its entirety which was inclusive of sediment filtration, organic inorganic removal, removal of microbiological contaminates, cartridge designs, information relating to testing and laboratory assistance. It is also crystal clear that though the agreement entered into on 1-4-2004 was for one year, it continued to be in effect in the subsequent years as well. In other words, though the agreement was technically in place for one year, this was obviously merely a formality in view of its renewal year after year. Hence, the appellant's claim that no technology was 'made available' by the Technology Provider since the knowledge could be used by the appellant only during the currency of the agreement with Filtrex Holdings Pte. Ltd. is completely misleading and a blatant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e technology being provided) is safeguarded and not made available in any shape or form either by the technology receiver or its employees to external third parties so that the pecuniary and associated benefits of the technology accrue only to Group entities. By implication, in fact, the insertion of the clause points to the technology having been made available to the appellant thus requiring legal protection to ensure that the technology does not go beyond the appellant or its employees. 3.10 Finally, a perusal of the termination clause contained in Article 5 of the Agreement between the parties referred to supra, also points to the conclusion that the technology has in fact been made available to the appellant. The termination clause merely states that the agreement may be terminated in the event of either party not fulfilling its end of the bargain. The consequences of termination are only to the extent of the appellant having to pay the technology fee up-to the termination date. There is no mention of return of any information or documents relating to the technology made available or any conditionality that the appellant, post-termination, is not entitled to use the technolo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ai)(SB) 641 (e) GE India Technology Centre Pvt. Ltd. v. CIT in Civil Appl. Nos. 7541/7542 of 2010 (ii) where there was no requirement to deduct tax at source under section 195, a disallowance under section 40(a)(i) could not be made; relies on the case laws: (a) CIT v. India Pistons Ltd. [2006] 282 ITR 632 (Mad.) (b) Cairn Energy India Pvt. Ltd. v. ACIT 2009-TIOL-220-ITAT-Mad. (c) DCIT v. Venkat Shoes Pvt. Ltd. 2009-TIOL-2421-ITAT-Mad. Filtrex Holdings Pte. Ltd: (iii) the assessee manufactures carbon blocks used in water purifiers and one of the main operations was mixing of the raw material being carbon and spraying which mixing will have to be done depending on the requirements of the client which may include removal of impurities and/or removal of iron or lead content and/or removal of chlorine and/or removal of invisible eggs of frogs/fish etc. and/or removal of bacteria and virus and/or removal of residual taste or odour from water; - the mixing and spraying has to be done in a particular proportion depending on the purity level of water where the filter is to be used as also the requirements of manufacturers of the water purifier; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - that the payments to Filtrex Holdings Pte. Ltd. and Final Touch Grafix, Singapore were not in the nature of fees for technical services as contemplated by Article 12(4) of the treaty between India and Singapore and since both the companies do not have a PE in India, these payments were not taxable in India and, therefore, there was no requirement to deduct tax at source under section 195 and, consequently, there could be no disallowance made under section 40(a)(i) in respect of these payments. 5.1 Buttress his view points, the ld. A.R had furnished voluminous paper books which consist of [copies of] (i) case laws [in three parts] ; (ii) agreements between the assessee and Filtrex Holdings Pte. Limited and also between the assessee and Filtrex Intl. Pte. Limited. 5.2 On the other hand, the ld. D.R. equally came up with vigorous and close knitted arguments, the essence of which, are extracted as under: In this case there were certain basic issues for consideration: - Whether the payments made for services rendered in pursuance of an agreement between Filtrex International Private Ltd. and Filtrex Holding Pvt. Ltd. qualify as fee for technical services as per the DTA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... knowledge being parted with pertains to the other aspects of the product as per the agreement; - It was highlighted in this case that the skill, information, technical excellence that make up technology for that limited portion of the product that has been defined in the agreement was being passed on which constitutes FTS even if it pertained to the smallest component of the product in question which remains with the recipient. It was the un-divulged technical information which had a non-disclosure clause embedded which was necessary for commercial output which was the most relevant fact. Further, know-how represents what a manufacture cannot know from mere examination of the product and merely knowledge to the places of technique. Therefore, know-how transfers were generally viewed as involving transfer of pre-existing knowledge where such knowledge or experience remains confidential; - That it was also relevant to note that since both the companies were in same line of business, the information provided was relevant to the extent as much as was the requirement of the recipient, if it does not want the product design there was no requirement for it to make payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nicated to this particular party by the other party or which may have been brought to the awareness of this party on the occasion of agreement implementation, and will also undertake to have this obligation respected by its management and employees' It is the appellant's contention that where there is a confidentiality clause, technology cannot be said to be made available. I am unable to agree with this interpretation. The insertion of the confidentiality clause is clearly meant to ensure that valuable information (and this is obviously mainly directed at the technology being provided) is safeguarded and not made available in any shape or form either by the technology receiver or its employees to external third parties so that the pecuniary and associated benefits of the technology accrue only to Group entities. By implication, in fact, the insertion of the clause points to the technology having been made available to the appellant thus requiring legal protection to ensure that the technology does not go beyond the appellant or its employees. 3.10 Finally, a perusal of the termination clause contained in Article 5 of the Agreement between the parties referred to supra, also po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that has been defined in the agreement was being passed on which constitutes FTS even if it pertained to the smallest component of the product in question which remains with the recipient. It was the un-divulged technical information which had a non-disclosure clause embedded which was necessary for commercial output which was the most relevant fact. Further, know-how represents what a manufacture cannot know from mere examination of the product and merely knowledge to the places of technique. Therefore, know-how transfers were generally viewed as involving transfer of pre-existing knowledge where such knowledge or experience remains confidential; (ii) That since both the companies were in same line of business, the information provided was relevant to the extent as much as was the requirement of the recipient, if it does not want the product design there was no requirement for it to make payment for it which was happening in the present case. It cannot, therefore, be the assessee's case that since no product design was being passed on and that there was no transfer of technology. By doing so, the assessee was negating its own legally signed agreement and contents therein and, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein..." merely make it explicit what is meant by "make available" while Mr. Kapila contended that these words being absent in the DTA with UK, it indicates that the assessee-company need not be in a position to apply the technology for its own use in future without recourse to the person rendering the services. On a careful consideration of the matter, we are of opinion that the addition of these words in the Singapore DTA merely make it explicit what is embedded in the words "make available" appearing in the DTA with UK and USA. The MOU under the US DTA and the examples given thereunder, to which we have already referred, make it clear. The meaning of those words was expressly incorporated in the Singapore agreement by adding the necessary words. What would be the use of coining the words "make available" if it is not intended, as contended by Mr. Kapila, that the person utilizing the services should be in a position to apply the technology for his own use in his business in future without recourse to the person rendering the services? Would it not be a contrad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -By making available the technical skills or know-how, the recipient of service will get equipped with that knowledge or expertise and be able to make use of it future, independent of the service provider-Definition of FTS in India-UK DTAA is similar to the one contained in India-USA DTAA-Para 4(b) to article 12 is similar to article 13.4(c) of Indo-UK Treaty-When a similar expression found in another treaty is interpreted and explained in a particular manner consistent with one shade of meaning that can be atributed to it, there is no reason why that interpretation shall be eschewed-As the assessee has not given the details of services provided by ITM, there is practical difficulty in actual application of the principle-There are some services which can be brought within the ambit of 'make available 'But, most or many of them do not 'make available' to the applicant the technical knowledge, experience skill, know-how etc., possessed by the provider of services-As regards managerial' services, which were omitted in the new DTAA from the company of 'technical' and 'consultancy' services, no endeavour was made either in the application or during arguments to demonstrate that particul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause (c) is relevant for the present consideration. This clause requires that the technical service in question should make available technical knowledge experience skill, know-how or process or consist of the development and transfer of a technical plan or technical design. From the description of service presented the requirements of clause (c) are not fulfilled here. First no technical service is rendered and secondly, there is no transfer of technology." As far as the present case is concerned, the case law cited by the ld. AR has no relevance and clearly distinguishable in the sense that in the referred case there was neither technical service rendered or the transfer of technology. (v) Anapharm Inc., In re [2008] 305 ITR 394/174 Taxman 124 (AAR - New Delhi) In this case, the applicant, a tax resident of Canada, providing only final results to its clients by using highly sophisticated bio-analytical know-how without providing any access whatsoever to the client to such know-how and that the handing over tested samples and test compounds to the Indian clients cannot be equated with making available the technology, know-how etc., to them and, therefore, it was concluded af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue. Briefly, on a further verification of details furnished by the assessee during the course of assessment proceedings for the assessment years under challenge, the Assessing Officers have noticed that the assessee had made payments of (i) Rs. 26,47,700 and Rs. 24,34,400 to M/s. Final Touch Grafix, Singapore for the assessment years 2005-06 2006-07 respectively and (ii) Rs. 91,27,959 to M/s. Filtrex International, Singapore for the assessment year 2006-07. 8.1 The assessee had entered into agreement with Final Touch Grafix [FTG] with effect from 1-4-2004, according to which, FTG had to provide the following services: 1. to do all public relation activities to promote Filtrex in the Asian region; 2. to liaison with ad-agencies to finalise all print media advertisements for Filtrex in water magazines and journals in USA; 3. to liaison and co-ordinate filtrex participation to international trade shows, particularly aqua world and WQA; 4. preparation of all power point presentation material for their directors to present filtrex with overseas companies; 5. to develop cost effective communications media, to promote filtrex capabilities; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A), after due consideration of the assessees contentions as well as the reasoning of the Assessing Officers in their impugned orders, had conceded to the arguments of the assessee for the reasons that I. Final Touch Grafix: "4 .A perusal of the invoice revealed that a payment of SGD 100000 was made to the service provider for 'development of concept drawings animation and page layouts of the web home page' 'concept development for the carbon block advertisement' resulting in the Assessing Officer forming an opinion that services were made available by M/s Final Touch for promoting their business and that the same was covered under 'managerial services' as defined in the Income-tax Act. 4.1 however, it is apparent from the nature of services rendered being public relations activities liaison co-ordination and design of advertising material such as power-point presentation materials and leaflets etc. that they do not even remotely constitute rendering of any managerial, technical or consultancy services. Apart from resorting to sheer conjecture that administrative support services constitute managerial services, there is not even a shred of documentary evidence br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... later requirement. In my view, the Assessing Officer has failed to establish either of the requirements, I am, therefore, inclined to uphold the appellant's stand on this issue." 9. Aggrieved, the revenue has come up with the present appeals. During the course of hearing, the ld. D.R. had Vehemently argued, the substances of which are summarized as under: Issue of FTS on service agreement between FIPL and FTG: - the agreement so stated is a service agreement which inter alia contains article 6 relating to non-disclosure clause 'Each of the parties will be bound to a non-disclosure obligation towards external third parties regarding all information which may have been communicated to this particular party by the other party or which may have been brought to the awareness of this party on the occasion of agreement implementation and will also undertake to have this obligation respected by its management and employees'. - enlisting the scope of the assessee had entered into service agreement with FTG, Singapore for the services, reliance was placed on the case laws : (a) International Hotel Licencing Co. 288 ITR 534 (AAR) (b) Bovis Lend Lease (I) Pvt. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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