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2022 (4) TMI 1279 - AT - Income TaxIncome accrued in India - Amount received for providing ‘Support Service’ treated as Fees for Included Services (FIS) - addition to income the amount of support services as per ‘Services Agreement" and reimbursement of expenses as per ‘Cost Reimbursement Agreement" as Fees for Included Services (‘FIS’) under Article 12(4)(b) of India-USA DTAA - whether such services meet the condition of “make available” of technical knowledge, experience, skill, knowhow, etc.? - Reimbursement of ‘Training Expenses’ treated as FIS - HELD THAT:- There is no categorical finding of the Ld.FAA that the support services were in the nature of consultancy or technical services. Rather it observed in Para 5.5.3 “ In fact the receipts from services clearly indicate that the same cover a large spectrum of area and would necessarily qualify as managerial services.”. As managerial services are not mentioned in Article 12 of the Treaty, so certainly by classifying the receipts to be from managerial services and then to include them in FTS, on basis of sub-clause 4(a) of Article 12, the Ld. FAA has committed the error. On perusal of licensing agreement effective from 1st January, 2012 submitted by the assessee it can be observed that the ‘intangible’ referred to in Article 1 means “the intellectual property set forth on appendix (i) hereto, which may be amended from time to time”. Appendix I shows that it is a trade mark for use of which the licensing agreement was executed. There is no recital in the agreement which would indicate that the use of tangible by Indian Associate was in any way necessary for the effective application or enjoyment of right, property or information, for which the royalty was agreed to be paid. The services rendered were not customarily provided and it is also not so otherwise established by the Revenue on the basis of any cogent evidence that such services are customarily provided in cases of licensing agreements for the use of Trade Mark. The consideration for these services cannot be considered to be insubstantial portion, rather the matter of fact is that for assessment year 2013-14, the assessee received in respect of support services and royalty income. The most important factor being that there are separate agreements for the licensing of the intangible and the service agreement. The copy of service agreement on record for the assessment year 2014-15, show that this agreement was effective from 1st January, 2011 while the licensing agreement was later in time in terms of being effective from 1st January, 2012. Thus, FAA has fallen in error in squaring up the case of assessee in terms of memorandum to the Treaty and giving a finding that the predominant factor is the grant of license to use the name which gives rise to royalty and all other payments and agreement flow from principal licensor – licensee agreement. Thus the finding of Ld FAA, that the five determining factors for the classification of the consideration under paragraph 4(a) are clearly satisfied in the appellant's case is not sustainable. Thus, the findings of the learned FAA deserve to be reversed. The ground is sustained. Coverage of training fees by 'make available' clause in the definition of technical services - HELD THAT:- FAA had failed to appreciate that this training was not part of the main contract of licensing agreement for royalty and there was no corresponding recital in the licensing agreement, which required the Indian Associates and the assessee to enter into any agreement for providing the training. The appellant provided relevant training and workshops to newly recruited consultants who joined the Indian Associate and the purpose of this training was not to provide any specific technical training or share any technical knowledge, expenses, skills, know how or processes neither by way of training, there was any transfer of any technical plan or technical design. The findings of Ld. FAA “skill is being imported to the receipt and at the same time to the Indian entity the service is being rendered” are not sustainable. The trainees were only sansitised to understand their job responsibility, the business model, policies and procedures, under which the new recruits were expected to work. The training cannot strictly be even called managerial or leadership training so as to enhance any productivity or profits, but were more of a orientation program at the time of induction of the new recruit. Merely because the training program was of boarding nature, that cannot change the nature of program to fall in the purview of services, for which consideration should be FIS. Rather the consideration was in the form of reimbursement of expenses on actual basis of constituents like travelling, food, boarding and lodging of consultants employed by Indian Counterpart. The cost of training recovered from the Indian Associate was due to these expenditures on the trainees. Thus, in regard to the additions the findings of the learned FAA deserve to be reversed.
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