TMI Blog2014 (9) TMI 256X X X X Extracts X X X X X X X X Extracts X X X X ..... icle 12 of the DTAA between India and USA - in view of section 90(2) of the Income-tax Act, 1961, the assessee is entitled to take the benefit out of the DTAA between India and USA. Article 12 Indo-US DTAA - Which are the services included in clause 4 of Article 12 of the DTAA between India and USA – Held that:- The assessee has received the above services from the USA company in terms of management service agreement between the assessee and the USA company - the USA company provides highly technical services which are used by the assessee for taking managerial decision, financial decision, risk management decision, etc. - Therefore, it is obvious that the USA company provides highly technical services which are used by the assessee for taking managerial decision, financial decision, risk management decision, etc. Nature of services - Fees for technical services u/s 9(1)(vii) - Whether the services provided by the USA company are technical in nature or not – Held that:- The USA company facilitated the assessee company for making decision in the managerial, financial and risk management system by providing their knowledge, expertise, experimentation to the assessee company - T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year under consideration, the assessee company claimed deduction of payment to the extent of ₹ 85,22,743 made to US Technologies LLC, a non resident company and tax resident of USA towards management services rendered by it. According to the ld. counsel, in accordance with the provisions of management service agreement which was entered into between the assessee company and the US resident company on 01-04-2006, the US resident company would provide assistance, advice and support to the assessee company in management, decision making, sales and business development, financial decision making, legal matters and public relations activities, treasury service, risk management service and any other management support as may be mutually agreed between the parties. According to the ld. counsel, the assessing officer disallowed the payment of ₹ 85,22,743 on the presumption that the payment made by the assessee company to US resident company would come within the ambit of consultancy fees and, therefore, the assessee is liable to deduct tax u/s 195 of the Act. The ld. counsel further submitted that the assessing officer obviously has not considered the relevant tax treaty betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and USA seeks to exclude consideration paid for managerial service from the purview of fees for included services. 6. The ld. counsel further submitted that USA resident does not make available any technical knowledge, expertise, etc. to the assessee company. Referring to the term "make available" as found in clause 4 of Article 12 of India USA DTAA, the ld. counsel submitted that the technology will be considered as made available only when the person acquiring the service is enabled to apply the technology. The service provided by US resident company to the assessee company may require technical inputs but does not per se means that technical knowledge, skills, etc. are made available to the assessee company while receiving service from the US resident company. According to the ld. counsel, the assistance, advice and support provided by US resident company to the assessee company shall not per se be considered to make the technology available. The ld. counsel further submitted that the term "make available" has to be considered when the technical knowledge, skill, etc. would be made available to the assessee company only when the recipient of service is enabled to apply the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India. 8. According to the ld. counsel, the nature of transaction between the assessee company before this Tribunal and US resident company are not in the nature of "fees for included service" under DTAA between India and USA. Therefore, the payment made by the assessee would assume the character of business profit to US resident company under Article 7 of India USA DTAA which would be taxable in India only if the same is attributable to permanent establishment of the US resident company in India. In the absence of any permanent establishment of the US resident company in India, the amount paid by the assessee would not be taxable in India as business profit. 9. According to the ld. counsel, the management fees paid by the assessee would not be chargeable to tax in India in the hands of US resident company in the light of the provisions of DTAA r.w.s. 90(2) of the Act. Therefore, the management fee paid by the assessee to US resident company is not subjected to deduction / withholding tax u/s 195 of the Act. 10. The ld. counsel further submitted that as per the agreement between the assessee and the US resident company, the US resident company shall provide assistance, advi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 taxmann.com 208 (mum), the ld. counsel submitted that the managerial services are outside the ambit of definition of "fees for technical services" under India USA DTAA. Referring to another Mumbai Bench of this Tribunal in Dy. CIT v. Boston Consulting Group (P.) Ltd. [2005] 94 ITD 31, the ld. counsel submitted that the Mumbai Bench of this Tribunal, after considering the DTAA between India and Singapore found that for strategy, consultancy services such as marketing and sales strategy, business strategy and portfolio strategy, etc. are not technical in nature and, therefore, not taxable as fees for technical services under DTAA between India and Singapore. According to the ld. counsel, the DTAA between India and Singapore has a similar clause for fees for included service as that of DTAA between India and USA. 12. Referring to the decision of the Authority for Advanced Ruling in Intertek Testing Services India (P.) Ltd., In re [2008] 175 Taxman 375 (AAR-New Delhi), the ld. counsel submitted that the term "make available" was subject matter of discussion in detail in the context of India and UK DTAA wherein a similar clause for fees for included service similar to India US DTAA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered by the non resident USA company to the assessee, the same would not equip the assessee company with skill, knowledge or expertise. The assessee company would not be able to make use of such assistance in future independent of USA resident company. Hence, there is no technology that is made available to the assessee company by the USA resident company in pursuance of management service agreement. Therefore, the services provided by the USA resident company to the assessee would not fall within the ambit of Article 12 of DTAA between India and USA. 14. On the contrary, Shri M Anil Kumar, the ld. DR submitted that admittedly, the assessee company entered into a management service agreement with a USA resident company for providing assistance, advice and support in management decision making, sales and business development, financial decision making, legal matters and public relations activity, treasury service, risk management service and any other management support as may be mutually agreed upon between the assessee and the USA company. Referring to the judgment of the Andhra Pradesh High Court in G.V.K. Industries Ltd. v. ITO [1997] 228 ITR 564 (AP), the ld. DR submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding to the ld. DR, the assessee would very much fall within the ambit of Article 12 of DTAA between India and USA. Therefore, the ld. DR submitted that the CIT(A) has rightly confirmed the order of the assessing officer. 16. We have considered the rival submissions on either side and also perused the material available on record. Admittedly, the assessee, a resident company, entered into management service agreement with a company, viz. US Technology Resources LLC, a company incorporated in USA and a tax resident in USA. As per this management service agreement, the USA company agreed to provide assistance, advice and support to assessee company in management decision making, sales and business development, financial decision making, legal matters and public relation activities, treasury service, risk management service and any other management support as may be mutually agreed between the parties. In pursuance of this agreement, the USA company provided its assistance, advice and support and the assessee company paid a sum of ₹ 85,22,743 in consideration of the services rendered by the USA company. Thus, the question arises for consideration is whether the payment made b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date." Explanation 2 to section 9(1)(vii) which was introduced by Finance Act, 1977 with effect from 01-04-1977 clearly says that fees for technical service means any consideration for rendering any managerial, technical or consultancy services. 18. We have also carefully gone through the provisions of DTAA between India and USA as notified by the Government of India in Notification No.GSR 990(E), dated 20-12-1990. Article 12 of DTAA between India and USA deals with royalties and fees for included service. Fee for included service is defined in clause 4 of Article 12 of DTAA. For the purpose of convenience, we are reproducing below clause 4 of Article 12 of the DTAA between India and USA: 4. For the purposes of this Article, "fees for included services" 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 or enjoym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnical plan or technical design. Thus, under paragraph 4(b), consultancy services which are not of a technical nature cannot be included services." 21. From this Memorandum of Understanding, it is obvious that as provided in clause 4(b) of Article 12 of the DTAA between India and USA, if the technical or consultancy services made available are technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design are considered to be technical or consultancy services. It is also clarified that consultancy services not of technical nature cannot fall under "included services". In view of this Memorandrum of Understanding between two sovereign countries, the consultancy services which are technical in nature alone are to be included as technical and consultancy services for the purpose of fees for included services as per sub clause 4(b) of Article 12 of DTAA between India and USA. 22. With this background, let us now examine whether the service provided by USA company to the assessee company would be of service of technical nature as provided in clause 4(b) of Article 12 of DTAA between India and USA. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ace between USTR and USTRPL. He will ensure that USTRPL's personnel co-ordinates and interfaces with USTR's personnel in a manner satisfactory to USTR. 2. Depending upon the requirements, USTRPL will send its personnel from time to time to USTR office in US or Overseas to study and analyse the requirements. USTRPL will bear all the expenses including travel, lodging, training expenses associated either directly or indirectly with the said assignments." 23. It is not in dispute that the assessee has received the above services from the USA company in terms of management service agreement between the assessee and the USA company. Therefore, it is obvious that the USA company provides highly technical services which are used by the assessee for taking managerial decision, financial decision, risk management decision, etc. 24. The next question arises for consideration is whether the above services could be considered as "technical and consultancy services" as provided in clause 4 of Article 12 of DTAA? As already discussed, only the services which are technical in nature, alone could be considered for included services. Therefore, This Tribunal has to examine whether the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mation, the information / experience gathered by US resident company relating to financial risk management of business is technical knowledge. 26. We now move on to see what is meant by 'decision making'. The term 'decision making' is not defined either in the Income-tax Act or in the DTAA. Therefore, one has to go by the meaning understood in the management. Shri Harold Koontez and Keinz Weihrach, experts in the management define 'decision making' as follows: "Decision making is a selection of a course of action from amongst the alternatives, it is the core planning." Another expert by name, R Terry defines 'decision making' as follows: "Decision making is a selection of an alternative form from two or more alternative to determine a course of action." Yet another expert, Kenneth R Andrews defines decision making as follows: "Decision making is a process involving information, choice of alternative options, implementation and evolution that is directed towards achievement of certain selected goals." 27. From the above definitions given by various experts, we may come to a simple and comprehensive meaning as follows: - Decision making is an act o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with regard to financial and risk management was made available in the form of advice or service which was made use by the assessee company in the decision making process not only in management but also in financial matters. Another aspect is risk management service. Risk management service is a highly complicated one in the financial sector. Unless, the technical expertise and knowledge gained by the USA company is made available to the assessee company, they may not be able to analyse the situation to avoid risk in the business. It is also necessary to note that apart from providing the input, service and advice, the USA company is also providing training to the employees of the assessee company. Therefore, this Tribunal is of the considered opinion that the service of technical input, advice, expertise, etc. rendered by the USA company are technical in nature as provided in clause 4(b) of Article 12 of the DTAA. 30. We have carefully gone through the judgment of the Andhra Pradesh High Court in the case of GVK Industries Ltd. (supra). In the case before the Andhra Pradesh High Court, the assessee company constructed and erected power generating station designed to operate usi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not be treated as the place of business of the non-resident company. In those facts and circumstances, the Andhra Pradesh High Court found that the business connection between the assessee company and non resident company had not been established. However, it was found that the "success fee" would fall within the definition of 9(1)(vii)(b) of the Act. The Andhra Pradesh High Court found that advice given to procure loan to strengthen finances would be as much a technical or consultancy service, as it would be with regard to management, generation of power or plant and machinery. The "success fee" was chargeable under the provisions of the Income-tax Act, and therefore, the assessee was not entitled to no objection certificate. 31. During the course of hearing, the ld. counsel for the assessee was called upon to comment on the applicability of this judgment of the Andhra Pradesh High Court. The ld. counsel submitted that the Andhra Pradesh High Court had no occasion to consider the DTAA between India and USA. Therefore, the judgment of the Andhra Pradesh High Court is not applicable. No doubt, DTAA agreement between India and USA was not considered by the Andhra Pradesh High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erlands company performed the service using the technical knowledge and expertise, but such technical expertise, skill and knowledge has not been made available to the assessee. On those facts, the Karnataka High Court found that the assessee was not being possessed with technical know how to conduct the prospecting operation. The maps and photographs which were made available to the assessee cannot be considered as technology made available. Therefore, the question of Netherlands company transferring any technical plan or technical design does not arise in the facts of the case. 33. As observed by the Karnataka High Court, the Netherlands company surveyed the area, prepared plan and photographs which are made available to the assessee company locating the exact area for mining. In fact, the Netherlands company located the exact area where diamonds were available after analyzing the photograph and the assessee company has nothing to do except mining the earmarked area for excavating diamonds. In fact, the technology of locating the diamond by aerial survey was not given to the assessee company. Only, the result of the survey was furnished by the Netherland company. Therefore, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, skill, know how or process, etc. was made available to the assessee company by the non resident managers to the Global Depository Receipts. However, considering the services rendered by the UK company, the Mumbai bench of this Tribunal found that the arrangement between the assessee and the managers of the Global Depository Receipt issued was for the purpose of engaging the service of the managers under the subscription agreement. The subscription agreement contained detailed clauses as to rights and liabilities of the assessee company and the managers. The Tribunal found that as per the agreement, the managers had undertaken to render service in connection with the issue of Global Depository Receipts for which they are entitled for remuneration. The Tribunal found that the services of the managers for issue of Global Depository Receipt were utilized outside India for the purpose of carrying on its business in India. Since the arrangement is only for marketing the Global Depository Receipt outside India, the Tribunal found that the commission paid to UK company cannot be considered to be fee for technical service, therefore, there is no obligation on the part of the assessee to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that the presentation made by the professional was essential in the nature of sharing management, experience and business strategy. Therefore, the Tribunal found that the services rendered by US company could not be termed as technical services in nature. In the case before us, it is not a case of sharing of experience and business strategy. It is a case of providing technical information for taking managerial and financial decision. The assessee also used that technology, information and expertise of USA company in management risk analysis. The information and expertise made available to the assessee company was very much available with them and it can be used in future whenever the occasion arises. Apart from the employees of the assessee company was also trained by USA company. Therefore, this Tribunal is of the considered opinion that the decision of the Mumbai Bench of this Tribunal in the case of Wokhardt Ltd (supra) also may not be of any help to the assessee. 37. We have also carefully gone through the decision of the Authority for Advance Ruling in Intertek Testing Services India (P) Ltd (supra). The Authority for Advance Ruling considered the DTAA between India and U ..... X X X X Extracts X X X X X X X X Extracts X X X X
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