TMI Blog2011 (5) TMI 573X X X X Extracts X X X X X X X X Extracts X X X X ..... ott standards - going into definition of included services in Indo US treaty so as to find out whether the services rendered by Marriott fit into the definition of included services in Articles 12(4)(a) and 12(4)(b) of the Treaty unless the services are technical in nature, there cannot be any question of 'technology' being contained therein which the person acquiring the services can be enabled to apply In the present case, what was made available to the assessee company was advisory services and opinion for improvement of the existing facilities - the fees paid to Marriott International will not fall within the ambit of fees for included services. As such, a provision of section 195 is not applicable - Accordingly, there is no question of application of provisions of section 201(1) and 201(1)(A) of the IT Act Regarding fees for technical services - the service rendered by Anthony Corbett & Associates, UK & Bensly Design Group, Thailand is of similar nature as rendered by Marriott International Design & Construction Services, USA - Similarly, in the case of services rendered by Anthony Corbett Associates, UK, is in the nature of advisory services and not of technical servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he International Licensing Company SARL (Marriot USA). To meet the standard for Marriot group the assessee embarked upon an expansion programme by way of adding new blocks in the hotel and also upgradation by way of bringing about interior and exterior changes, landscaping etc. And for this purpose the assessee has entered into four separate and independent agreement with : 1. Anthony Corbett Associates UK 2. Marriot International Design Constructions USA 3. Bensly Design Group international Construction Company Ltd., Thailand 4. Lim Hong Lian Singapore 4. During the course of survey operation u/s 133A of the Act, conducted on the business premises of the assessee it was found that the assessee had made payments to the above non resident consultants without deducting tax at source u/s 195 of the Act. Accordingly, the assessee was called upon to show cause as to why it should not be treated as an assessee in default within the meaning of section 201(1) of the IT Act for its default to deduct tax at source. The assessee has furnished detailed explanation containing inter alia that the services rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied in treating the assessee as an assessee in default. As for the payments made to Marriot International, USA, the CIT(A) following his order for the assessment year 2003-04 dated 26-12-2006 held that the services rendered by M/s Marriot International do not come within the ambit of 'fees for included services'. As for the payments made to M/s Lim Hong Lian, Singapore, he concluded that the services are in the nature of independent personal services and for these reasons and in view of the DTAA between India and Singapore, according to which the payment made by the assessee is taxable in the other contracting state i.e., Singapore and not in India, TDS provisions are not applicable. The CIT(A) however, upheld the action of the Assessing Officer in treating the assessee as an assessee in default with regard to payments made by it to M/s Anthony Corbett Associates, UK. As per the payments made to M/s Bensley Design Group, Thailand the CIT(A) after a detailed discussion in Paras 2.3.4 and 2.3.4A, 4B, 4C ultimately concluded as follows : "Thus, in the agreements itself the payment in respect of each segment of the scope of work has been clearly defined and allocated. After going ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on-resident consultant, M/s. Marriott International Design Construction Services, a company incorporated in USA, for rendering technical services in various fields. The company is in the business of design and construction consultancy. As no explanation was furnished by the assessee for non-deduction of tax from the payment made the Assessing Officer concluded that the assessee deductor had conceded the default. The Assessing Officer has referred to the DTAA between India and USA wherein technical services is covered under "fees for included services" which can be taxed both in the contracting state and the other contracting state. The Assessing Officer concluded that the services provided by Marriot fall under the definition of "included services" as per Articles 12(4) and 12(4)(b) of the DTAA. The Assessing Officer observed that the decision relied upon by the assessee is not applicable to the facts of the case. Accordingly, the Assessing Officer held that the payment made by the assessee was liable to be taxed in India and since the assessee had failed to discharge its statutory obligation, it should be treated as an "assessee in default" u/s 201(1) r.w.s. 195 of the Act. Sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny without giving opportunity to the Assessing Officer to examine this evidence in terms of Rule 46A of Income-tax Rules, 1962. For the assessment years 2004-05 and 2005-06 the Revenue is also in appeal before us with regard to finding of CIT(A) that the condition of making available of technical knowledge etc., is not satisfied in respect of US$ 30,000 payable to Bensley Design Group International Consulting Company, Thailand, though the CIT(A) having accepted that there is no specific article dealing with 'fee for technical services' in Indo-Thailand DTAA. 15. The learned DR submitted that the assessee company runs a five star hotel in the name of 'Hotel Viceroy'. This hotel was converted into a 'Marriott Chain Hotel' under a franchise granted by International Licensing Company SARL (Marriott), USA. In order to meet the standards set by Marriott Group the assessee company spent substantial amounts on civil works, interior decoration, furnishings, landscaping etc. To this effect the assessee company made payments to the following 4 parties. 5. Anthony Corbett UK 6. Marriot International Design Constructions USA 7. Bensley Design Gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot appreciating that the scope of services rendered by Marriott International would fit into the definition of fees for included services as per Article 12 of DTAA. From the extracts of the agreement between the assessee company and Marriott International it can be noticed that the scope of work is not just review as sought to be made out by the CIT(A). The scope of work as extracted in the CIT(A) order includes technical review services including the following : 1. Determination of the condition, specification and status of FF E, fixex assets supplies and inventories 2. Engineering, fee and life safety and environmental review by MIMCO, its affiliates and consultants 3. Specification of all signage changes 4. Advising VHL on the standards, aesthetics and systems necessary for the hotel to be operated as MHRS International Hotel 20. He submitted that the CIT(A) himself has mentioned that the consultant company has reviewed the present condition of the hotel and made number of suggestions in the form of a report which reads as follows : "A number of suggestions have been given in that report relating to improvements in the property perimeter, hotel main r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent was available with the Assessing Officer. However, the agreement relied upon by the CIT(A) is titled as pre-conversion technical service agreement entered into between the assessee company and Marriott International Management Company BV (MIMCO) and was executed on 9-9-2003. This agreement was not made available to the Assessing Officer and as such the CIT(A) ought not to have considered this agreement without giving an opportunity to the Assessing Officer to examine the same. Therefore, the provisions of Rule 46A(3) are not satisfied. This agreement by the Assessing Officer subsequent to finalisation of appeal would show that the services rendered by MIMCO would definitely fit into the scope of 'fee for included services' defined in article 12(4) of Indo - US DTAA. The scope of services which are titled as 'Technical Review Services' in para 2.2. of CIT(A) have already been discussed in paras 5 and 6 above. He submitted that as per para 2.3 (iii) CIT(A)'s under Article 2 of this agreement, the MIMCO will 'make provisions to provide a task force of technical personnel on the conversion date to supervise and assist the pre-conversion and conversion operations. This clause proves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on Marriott standards on the aesthetics and systems necessary for the hotel to be operated as a Marriott Hotel, and reviewing the design documents prepared by owner and owner's consultant to verify compliance with Marriott standards. The services were provided from outside the country and in view of the above; the assessee was not liable for tax deduction at source for the amount paid for such services. He relied on the judgment of Supreme Court in the case of Carborandum Co. (supra) and Toshuku Ltd. (supra) wherein it was held that if under an agreement between a non-resident and a resident, all the services are rendered by the non-resident outside India (as an agent of the resident) no part of the payment for such services would be deemed to accrue in India u/s 9(1)(i), even if the agreement gives right to a business connection. 25. He submitted that the payment made to M/s Marriott will not come within the purview of including services as defined in Article 12(4) of the India US Treaty. He drew our attention to the Memorandum of Understanding between India and USA in connection with the DTAA, he stated that the American Company is not making available its technical knowledge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. (b) in the case of non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export. (c) In the case of non-resident, being a person engaged in the business of running a new agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India (d) In the case of non-resident being (1) an individual who is not a citizen of India or (2) a firm which does not have any partner who is a citizen of India or who is resident in India or (3) a company which does not have any shareholder who is a citizen of India or who is resident in India no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations, which are confined to the shooting of any cinematograph film in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effective date, however representatives of MIMCO and its affiliates have the right to conduct further inspections of the hotel at reasonable times upon prior notice to VHL in order to ascertain additional requirements, if any, to convert the hotel in accordance with Marriott Systems standards. Such technical review services may include without limitation, the following : (1) Determination of the condition, specification and status of FF E, fixed assets supplies and inventories (2) Engineering, fire and life safety and environmental review by MIMCO, its affiliates and consultants (3) Specification of all signage changes (4) Advising VHL on the standards, aesthetics and systems necessary for the hotel to be operated as MHRS international hotel 28. Regarding pre conversion activities, it has been stated in Article 2.3. of the Agreement that MIMCO will review and approve existing concession contracts and leases for retail and lobby space within the hotel, review and consult with VHL on VHL's proposed pre-conversion promotion and related activities etc. Even in the scope of work, attached to the agreement, a copy of the survey conducted in March 2003, by the Marriott T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces' means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services; (a) Are ancillary and subsidiary to the application and enjoyment of the right, property or information for which a payment described in paragraph 3 is received or (b) Make available technical knowledge, experience, skill, knowhow or processes or consist of the development and transfer of a technical plan or technical design. 31. Thus Article 12(4) emphasises on rendering any technical or consultancy services which are ancillary and subsidiary to the application or enjoyment of any right, property or information for which a payment is received or make available technical knowledge, experience, skill, know how or processes or consist of development and transfer of technical plan or technical design. The services rendered by Marriott do not fit into either of the categories defined in 12(4)(a) or 12(4)(b) since the services do not involve technical expertise nor does it make available any technical know-how plan, design etc. What is being done by Marriott is b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y technology, are required to be treated as outside the scope of 'fees for technical services". Rendering technical or consultant services or services make available means that technical or consultant services rendered should be of such nature that 'makes available' to the recipient technical knowledge, know-how and the like. The service should aimed at and result in transmitting the technical knowledge, etc. so that the payer of services could derive an enduring benefit and utilise the knowledge or know-how in future on its own without the aid of the service provider. By making available 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 in future, independent of the service provider. In other words, to fit into the terminology 'fees for included services', the technical knowledge and skills etc., must remain with the person receiving the services even after the particular contract comes to an end. The services offered may be the product of intense technological effort and a lot of technical knowledge and experience of the service provider would have into it. But that is not enough to fall withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erations. The foreign company was to be paid a retainer's fee at the rate of $7,000 per annum in London. The Income Tax Officer treated the assessee company as the agent of the foreign company within the meaning of section 163 of the income tax act and treated $7,000 payable by the assessee company to the foreign company as its income accruing in the hands of the assessee company. On appeal, the Appellate Assistant Commissioner held that even if the assessee company was to be treated as an agent within the meaning of section 163(1), there was no business connection within the meaning of section 9(1) of the Act so the income accruing to the non resident foreign company could not be assessed through as agent. That order was affirmed by the Tribunal. On a reference to the High Court of Patna, it was held that the sum of $7,000 was not the income with the foreign company had received in India or an income which had accrued to the foreign company within the meaning of section 5(2) of the Act and that the sum paid to the foreign company at London for technical advice given from London could not be attributed to the operation carried on in India. It was further held that there was no cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it is not in the nature of 'fees for technical services' because as per the agreement this part of the job required the contractor only to attend and inspect as well as review periodically work-in-progress. This part of job does not envisage making available any technical knowledge or design, drawings, documents, etc. Being so, as held in earlier para, we do not find any infirmity in the order of the CIT(A) on this issue also and confirm the order of the CIT(A) on this issue. 35. Further, the grievance of the revenue is that the CIT(A) admitted the crucial evidence in the form of agreement dated 9-9-2003 titled 'Pre conversion technical service agreement' between Marriott International Management Company B.V. (MIMCO) and the see company without giving an opportunity to the assessing officer to examine this evidence in terms of 46A(3) of the IT Rules. The DR submitted that the assessee had produced only 'interim advisory services agreement' dated 29-1-2003 which is entered between the assessee company and Marriott International Design Construction Services, Inc (MIDCS) which has been duly considered by the assessing officer in his order. 36. We have also carefully considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and the British company, it was specifically stated that the consultant is engaged in the business of providing professional and consultancy services in architectural lighting design for the proposed renovation and rebuilding of the hotel, as defined in appendix 'A' attached to this contract. As per section 10(6A)(a) where in the case of a foreign company deriving income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31st day of March, 1976 (but before the 1st day of June, 2002) and in any other case where the agreement relates to a matter included in the industrial policy, for the time being in force of the Government of India, such agreement is in accordance with that policy, then the tax on such income is payable, under the terms if the agreement, by an Indian concern to the Central Govt. According to the AR, there is no transfer of any technology from UK company to the assessee company and the service rendered by the UK company does not fit into the scope of Article 13(4)/13(4)(c) of DTAA between India and UK. 40. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessing officer invoked provision of section 9(1) r.w.s. 115A(1)(b)(B) of the IT Act and treated the entire fees as income chargeable to tax in India since all the expenses of the non resident were reimbursed by the assessee deductor. The assessing officer further stated that the agreement under which the technical services are rendered is neither approved by the Central Government nor does it relate to a matter included in the industrial policy and hence the deductor should have deducted tax at source at the rate of 40% surcharge as prescribed in the relevant finance Act for any other income arising to a non resident company in India and since the deductor had failed to discharge its statutory obligation, the assessee was treated as an assessee in default. 41. The learned AR submitted that, the nature of services rendered by M/s Bensly Design, Thailand is for landscape architectural consultancy. 42. According to him, the CIT(A) erred while passing the order, as there is no permanent establishment for M/s Bensly Design, Thailand in India, and no foreign employee stayed in India for more than 90 days should have exempted the business profit of the companies from taxation in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included in the total income, at the rate of thirty per cent if such fees for technical services are received in pursuance of an agreement on or before the 31st day of May 1997 and twenty per cent where such fees for technical services are received in pursuance of an agreement made after the 31st day of May, 1997. Since the assessee being the industry and providing the advisory services the same cannot be covered for the purpose of taxation at the rate of 20% and the same should not be applied to the income which has been received by foreign company. 43. Finally, the learned AR relied on the following judgments : 1. Tekniskil (Sendirian) Berhard v. CIT [1996] 222 ITR 551/88 Taxman 439 (AAR-New Delhi) 2. Horizontal Drilling International v. CIT [1999] 237 ITR 142/103 Taxman 447 (AAR-New Delhi) 3. Software Technology Parks of India v. ITO [2005] 3 SOT 529 (Bang.) 4. Royal Airways Ltd. v. Addl. DIT [2006] 98 ITD 259 (Delhi) 5. Skycell Communications Ltd. v. Dy. CIT [2001] 251 ITR 53/119 Taxman 496 (Mad.) 6. CIT v. Neyveli Lignite Corpn. Ltd. [2000] 243 ITR 459/109 Taxman 369 (Mad.) 44. He also relied on the following circulars, wherein the CBDT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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