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TMI Blog2010 (4) TMI 867X X X X Extracts X X X X X X X X Extracts X X X X ..... Grounds of appeal raised by the revenue in all these appeals are common and which reads as follows :- (1)On the facts and circumstances of the case and in law, learned CIT(A) erred in holding that the consideration received by the assessee for rendering strategic consulting services to Stock Traders Pvt. Ltd. is not in the nature of royalty, without appreciating the fact that the services rendered by the assessee company to Stock Traders (P.) Ltd. are in the nature of scientific experience and therefore, covered under Article 12(3)(a) of the India Swiss Treaty and accordingly, taxable in India. (2)On the facts and circumstances of the case and in law, learned CIT(A) erred in holding that the consideration received by the assessee for rendering strategic consulting services to Stock Traders (P.) Ltd. is not in the nature of fees for included services on the ground that while rendering strategic consulting services, the assessee does not make available its technical skills, knowledge, experience etc. to Stock Traders (P.) Ltd. ignoring the fact that the assessee has made available its technical knowledge, experience, skill know-how as defined in Article 12(4)(b)( ii) of India Swiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o-ordinate with existing and new joint venture partners for technology transfers, equity participation etc. and secure them support for an approvals of new business strategic and policies provided however that the payment of fees for the services rendered by assessee shall be determined in accordance with the compensation clause of this agreement and shall not in any manner be affected either by the success of failure of a project, strategy or business approach recommended by assessee. 5. The assessee received following amounts for the services rendered to STPL :- Assessment year Amount in US$ Amount in Indian Rupees 1996-97 2,80,000 97,66,727 1997-98 - 1,21,42,600 1998-99 - 1,59,32,700 1999-2000 4,26,322 1,80,24,894 2001-2002 3,93,970 1,82,92,027 The assessee claimed that the aforesaid fees were not taxable in India for the following reasons :- u The assessee is a company incorporated in Switzerland and qualifies as a tax resident of Switzerland. The provisions of the agreement for avoidance of double taxation between Switzerland and India (IS treaty) are more beneficial and accordingly, as per section 90(2) of the Income-tax Act, 1961, the same have been appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the meaning of Article 12(3) or 12(4)(b)( ii) of DTAA between India and Switzerland. Learned CIT(A) also held that the assessee does not have PE in India; and therefore, business income cannot be taxed in India. It has to be mentioned here that the main order of learned CIT(A) in the case of the assessee giving reasons for his conclusions were passed in the appeal of the assessee for assessment year 1997-98 and the same was followed by CIT(A) in the other assessment years. 8. Aggrieved by the orders of learned CIT(A), revenue has preferred the present appeal before the Tribunal raising grounds of appeal which we have already set out in the earlier part of the order. 9. This Tribunal heard these appeals and by order dated 27-10-2008 set aside the order of learned CIT(A) and remanded the matter to the Assessing Officer for fresh consideration. The Tribunal was of the opinion that there was no material available before the Tribunal to ascertain exact nature of service rendered by the assessee to STPL; and therefore, the assessee was directed to file relevant evidence before the Assessing Officer in support of its stand and the Assessing Officer was directed to consider the issue afr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n at the meeting were recorded in the minutes. Preroy succeeded persuading ISS to initiate the process of the name registration, in order to protect the ISS name in India. Moreover, further steps were discussed and it was agreed to conduct a market study, which should provide the necessary results to devise an entry strategy for STPL and ISS. Recommendation : Preroy recommends that the Board of STPL may consider going ahead with this project as outlined in the minutes of the meeting dated 31st October, 2000 in the opinion of the Preroy, if ISS decide to move ahead with the project for India, STPL will clearly be the partner of choice. Preroy would be pleased to provide further assistance to STPL in this regard." 14. There are several minutes of meetings in connection with ISS. Value added services. There are similar invoice raised by the assessee on STPL in respect of road marketing and possible joint venture with R.S. Clare & Co., UK. Corresponding reports in this regard have also been filed by the assessee. Similar joint venture proposal with OKS India, subsidiary of STPL in connection with joint venture between the OKS India and CORTEC (non-resident) have also been explored. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services (i)are ancillary and subsidiary to the enjoyment of the right, property or information for which a payment described in sub-paragraph (b) of Paragraph 3 is received; or (ii)make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design." 17. Article 12(4)(b ) of the treaty is the same as Article 12(4)(b) of DTAA between India and USA. In the Memorandum of understanding to the DTAA between India and USA, a description concerning fees for included services in Article 12 and paragraph 4 (in general) have been given Examples of services intended to be covered within the definition of included services and those intended to be excluded have been given. The Memorandum explains how Paragraph 4(b) of Article 12 has to be understood. The Memorandum explains that Article 12(4)(b) refers to technical or consultancy services that make available to the person acquiring the services, technical knowledge, experience, skill, know-how, or processes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end experts to India to show engineers in the Indian company how to produce the extra-strong wallboard. The U.S. contractors work with the technicians in the Indian firm for a few months. Are the payments to the U.S. firm considered to be payments for included services ? Analysis : The payments would be fees for included services. The services are of a technical or consultancy nature; in the example, they have elements of both types of services. The services make available to the Indian company technical knowledge, skill and processes. Example 4 Facts : A U.S. manufacturer operates a wallboard fabrication plant outside India. An Indian builder hires the U.S. company to produce wallboard at that plant for a fee. The Indian company provides the raw materials, and the U.S. manufacturer fabricates the wallboard in its plant, using advanced technology. Are the fees in this example payments for included services? Analysis : The fees would not be for included services. Although the U.S. company is clearly performing a technical service, no technical knowledge, skill, etc., are made available to the Indian company, nor is there any development and transfer of a technical plant or de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the service contract is commercial information. The fact that technical skills were required by the performer of the service in order to perform the commercial information service does not make the service a technical service within the meaning of paragraph 4(b). Paragraph 5 Paragraph 5 of Article 12 describes several categories of services which are not intended to be treated as included services even if they satisfy the tests of paragraph 4. Set forth below are examples of cases where fees would be included under paragraph 4, but are excluded because of the conditions of paragraph 5." 18. The Memorandum of understanding is a tool to understand as to what meaning was intended to be conveyed in the DTAA between countries. Since the wording of Article 12(4)(b) of the treaty and Article 12(4)(b) of the DTAA between India and US are identical, the MOU to the Indo-US treaty can be looked into to see what meaning India and Switzerland would have contemplated in the treaty. The law is settled that a DTAA with one country can be compared with the DTA with another country in case of ambiguity and in order to understand the true scope and meaning of the concerned DTA. The Karnataka High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to STPL. It is clear from the nature of service that nothing is made available to STPL by the assessee. Technical knowledge, experience, skill continues to remain with the assessee even after conclusion of the agreement to render services between the assessee and STPL. Services are not made available to STPL by the assessee for its future use or utilization on reasonably permanent basis. It is also significant to mention that with effect from 1-4-2001, definition of term 'fees for included services' have undergone a change and it is wide enough to cover to technical managerial or consultancy services. Thereafter, the assessee has offered for the purpose of taxation the receipts from STPL. View expressed by the Mumbai Bench of the Tribunal in the case of Raymond Ltd. (supra) has been consistently followed by various Bench of the Tribunal in the following decisions :- u Dy. CIT v. Boston Consulting Group Pte. Ltd. [2005] 94 ITD 31 (Mum.) u Taxation Department, ICICI Bank Ltd. v. Dy. CIT (IT) [2008] 20 SOT 453 (Mum.) u Maharashtra State Electricity Board v. Dy. CIT [2004] 83 TTJ (Mum.) 325 u National Organic Chemical Industries Ltd. v. Dy. CIT [2006] 5 SOT 317 (Mum.) u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow'. Various specialist bodies and authors have formulated definitions of know-how which do not differ intrinsically. One such definition, given by the 'Association des Bureaux Pour la Protection de la Propriete Industrielle (ANBPP)' states that 'know-how is all the undivulged technical information, whether capable of being patented or not, that is necessary for the industrial reproduction of a product or process, directly and under the same conditions, inasmuch as it is derived from experience, know-how represents what a manufacturer cannot know from ere examination of the product and mere knowledge of the progress of technique'. In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public.... This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party. Thus, payments obtained as consideration for after sales service, for services rendered by a seller to the purchaser under a guarantee, for pure technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regards 'consideration for information concerning industrial, commercial or scientific experience'. The relevant extract of the commentary is reproduced below :- "The term 'industrial' commercial or scientific experience (sometimes referred to as know-how) has the meaning ascribed to it in paragraph 11 of the commentary to Article 12 of the OECD Model Convention. Consistent with that meaning, the term may include information that is ancillary to a right otherwise giving rise to the royalties, such as a patent or secret process.... Thus, as provided in paragraph 11 of the commentaries to Article 12 of the OECD Model, the term 'royalties; does not include payments received as consideration for after sales service for services rendered by a seller to a purchaser under a guarantee or pure technical assistance. The term 'royalties' also does not include payments for professional services (such as architectural) engineering, legal, managerial, medical, software development services). For example, income from design of a refinery by an engineer (even if the engineer employed know-how in the process of rendering the deign) or the production of a legal brief by a lawyer is not income fro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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