TMI Blog2013 (8) TMI 446X X X X Extracts X X X X X X X X Extracts X X X X ..... stigation at the level of the assessment. The A.O. shall therefore examine the bills and vouchers prepared by the assessee in support of the claim of expenditure to ascertain the nature of services rendered and then find out that whether could have been made available for the business purpose of those parties. Taxing the reimbursement of expenses as 'Fees for technical services' under Article 12 of the India-Netherlands Tax Treaty – Held that:- In the written submission, the learned A.R., MR. Dhinal Shah has submitted that the appellant has received ₹ 95,10,671/- as reimbursement of expenditure from SHGPL in the course of rendering services. The assessee has, therefore, required to establish that those expenditures were first incurred out of pocket expenses then only the question of reimbursement can be decided. The assessee is, therefore, required to furnish the details of the bills through which the reimbursement was claimed since all those facts were not earlier examined by the Revenue Authorities, therefore, the natural justice demands to restore this issue back to the stage of the AO to be decided de novo as per law. Higher of the amounts mentioned in the transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company, registered in Netherland, and in the nature of business , stated to be, to perform accomplishment for the use of carrying on one or more branches of the Petroleum , Natural Gas , Coal and Chemical Industry . It has also been noted by the A.O. that ' Nil ' income return was filed. There is a reference of TDS certificate in which the total receipts were shown at ₹ 6,16,72,380/- and the purpose to mention is that one of the ground is about the correct quantum of the receipts. The A.O. had collected information U/s 133(6) from: (i) Hazira LNG Pvt. Ltd.( in short HLPL) (ii) Hazira Port Pvt. Ltd. ( in short HPPL ) (iii) Shell Hazira Gas Pvt. Ltd. ( in short SHGPL ) 2.1) On the basis of the information collected the details of the payment received was as under:- 2.2) Some reconciliation was furnished by the assessee but that was not acceptable to the A.O.,therefore finally the withholding tax @ 10% was imposed on the figure of ₹ 11,68,49,305/-. 2.3) The main controversy as emerged from Ground No. 1 is due to the reason that the assessee has denied the liability of tax as per the return of income. A note annexed to the return was repro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s decided the issue in revenue's favour. According to him the assessee had entered into an agreement with certain entities at Hazira for providing various types of support service, salient features were reproduced in the order, as under:- (a) Assistance in establishment in Gas Transportation Agreement ( GTA ) SIBV has assisted in finalization of the GTA by apprising SHG of the typical terms of such contracts globally, liabilities and commitments shared by the party, the typical tariffs that may be payable etc.] (b) Evaluation of potential customers. The customer evaluation comprises demand appraisal, credit worthiness, track record, financial capabilities etc to honour a long term take or pay contract. SIBV has assisted by communicating parameters, appraisal processes etc. (c) Assistant in establishment of the Gas Sales Agreement (GSA) TTMS is me most significant contract, with complex terms to incorporate the take or pay commitments, lay down the non- compliance penalities, damages commensurate with the investments etc. SIBV has apprised SHG of these complex terms and need to be incorporated in such agreements. (d) Risk management in negotiations This asp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is regard if he is able to substantiate this claim. It has been claimed that the balance amount of ₹ 4629322/- is on account of difference in exchange rates being applied by the appellant. But again there is no working as to how this huge difference has arisen. From the information gathered by the Assessing Officer u/s. 133(6) from the payer, amount paid in Indian currency is clearly known. Therefore, I fail to understand how such a difference has arisen and if there was nay difference it was for the assessee to file a working of the same so that it could be verified. As the assessee has not explained the difference, I find no reason to interfere with the Assessing Officer's working in this regard and Assessing Officer's action is upheld. 3.6) As far as the issue of existence of PE in India, there was no final verdict of Ld. CIT(A) although it was touched in the Remand Report. It was also a fact that there was no discussion on this issue of P.E. either by the A.O. in the impugned assessment order. 4) From the side of the assessee Ld. A.R. Mr. Dhinal Shah appeared. He has furnished submissions as also argued the case in the light of the compilation filed. Some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after referred to as the 'learned Assessing Officer' or 'learned AO'] passed the assessment order holding that the revenues received under the said SSAs are in nature of FTS and hence, taxable at 10% under the provisions of the Article 12 of the India- Netherlands tax treaty. While finalizing the assessment, the learned AO failed to provide any cogent reasons as to why and how the amounts received under the SSAs constituted FTS and merely relied on the 195(2) certificate issued by the Asst. Director of Income-tax, Circle 2(2), International Taxation, New Delhi on SHGPL's application which held that the service under the SSA were taxable as FJS under the India- Netherlands tax treaty. In arriving at the conclusion, the learned AO also ignored the 195(2) orders passed by the same office in case of HLPL and HPPL which allowed HLPL and HPPL to remit the fees to SIBV for services rendered the SSAs without deducting any tax at source. Further, for computing the total revenues in the hands of the Appellant, the learned AO has considered the amounts disclosed by HPPL, HLPL and SHGPL collectively in their respective Form SCEBs and not the amounts received and discl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es: (a)..... (b) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. Accordingly, unlike the definition under the Act, the definition under the tax treaty is restrictive and for any service to be considered as FTS under the India-Netherland tax treaty, the following conditions needs to be fulfilled: 1. The services rendered needs to be technical or consultancy in nature; and 2. Such service should 'make available' technical knowledge, experience, skill, know-how or processes or should consist of development and transfer of technical plan or design. Reliance on the MOU to the India - US tax treaty as aids to the construction The terms 'technical' or 'make available' are not defined under the India-Netherlands tax treaty. However, the same are explained in the MOU to the India-USA tax treaty. Accordingly, reliance may be placed on the said MOU for interpreting the said terms. In this regard, reference may be made to the Notification No. 11050/F.No.501/2/83-FTD which specifies that the MOU to the India-USA tax treaty may be used for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration Ltd. vs. JCIT - 14 SOT 307 (Mum. ITAT) 3. Wockhardt Limited vs ACIT (Mum. ITAT) Accordingly, as the services rendered by the Appellant are in nature of rendering commercial information/ knowledge and related support services to HLPL/ HPPL/ SHGPL, the same cannot be held to be technical in nature Restrictive definition under the India - Netherlands tax treaty- use of the term 'make available' Without prejudice to the above and even for sake of argument it is assumed that the services rendered are technical in nature, they would still not qualify as FTS as per Article 12 of the India - Netherlands tax treaty as they do not make available any technical knowledge, experience, skill, etc as per the definition in the India - Netherlands tax treaty. With regard to making available technical knowledge etc, the MOD explains that 'technology will be considered 'made available' when the person acquiring the service in enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skill, etc., are made available to the person purchasing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice provider would have gone into it. But, that is not enough to fall within the description of services which make available the technical knowledge, etc. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that there receiver can deploy similar technology or techniques in future without depending on the provider. In this regard, further reference may be drawn to the example 4 given under the MOD to the India-USA tax treaty which explains the concept of 'make available'. The said example is reproduced below. 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 devel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) ........... (b) Make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design which enables the person acquiring the services to apply the technology contained therein. The above clause explicitly mentions that payment would be considered as fees for included/ technical services only where rendering of such technical or consultancy services make available technical knowledge, experience, skill etc which enables the service recipient to apply the technology imbibed in such services by himself. The Mumbai ITAT in the case of Raymond Ltd. vs DCIT (supra) has acknowledged this explicit explanation of the term 'make available' in the context of the India-Singapore Tax Treaty which also contains similar wordings. Given the same, the narrower provisions of the India-Portugal Tax Treaty can also be applied in the instant case. Prayer In the present case, under the terms of the SSAs, the Appellant was con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se D'Etudes Et De Construction v. Inspecting Assistant Commissioner (8 ITD 215) 5. CIT v. Dunlop Rubber Co Ltd (142 ITR 493)(Cal) 6. CIT Vs SG Pgnatale (124 ITR 391)(Guj.) In view of the above, it is submitted that the reimbursement of expenditure received by the Appellant would not constitute income in the hands of the Appellant as contemplated under section 2(24) of the Act and therefore, not taxable in the hands of the Appellant. Ground 3 - Considering the higher of the amounts mentioned in the transfer pricing certificate (i.e. Form 3CEB) of the Appellant and the information as provided by HPPL, HLPL and SHGPL under section 133(6) of the Act as the tota! receipts of the Appellant (i.e. ₹ 11,68,49,305) The learned AO computed the total income of the Appellant by considering the details provided by HPPL, HLPL and SHGPL and ignoring the details provided by the Appellant. During the course of the appeal proceedings, it was submitted that the difference between the revenues reported by the Appellant and information furnished by HLPL, HPPL and SHGPL differed on account of the following - i) Additional sum recorded by SHGPL which was reversed by it in su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces. It is trite law that nature of income is to be seen in the hand of earner of the income i.e. in the present case in the hand of the assessee and not in the hand of recipient. These services may appear to be broad commercial services but are to be provided by the employees of the assessee who are having technical knowledge, experience and skill in respective field i.e. logistics, legal services, etc. These services have been provided on long term basis to the Indian entities as these are newly established entities in India of the Shell Group and in above broad categories of services they will be requiring services from the assessee company. It is clear that Indian entities will be receiving Emails / Instructions from the assessee to carry out implementation of these services in their Indian business. Since technical personnels of the assessee will not be visiting India generally and quantum of these services are huge, Indian entities through their Indian employees will be absobing and utilizing these technical knowledge, experience and skill received through Instructions / Emails, etc. in their business operation. 3. The issue regarding whether these services are fees for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee, or in consideration of technical services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee, under an agreement approved by the Board in this behalf, and such income is received in convertible foreign exchange in India, or having been received in convertible foreign exchange outside India or having been converted into convertible foreign exchange outside India, is brought into India, by or on behalf of the assessee in accordance with any law for the time being in force for regulating payments and dealings in foreign exchange, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction of the whole of the income so received in, or brought into India in computing the total income of the assessee Thus it can be seen that the assessee company was providing training through services to various Indian entities on long term basis so that they can carry out their business functions. In view of same the activity of the assessee will -, also be covered as royalty under paragraph 4 of Article 12 of Indian Netherland Treaty in respect of providing information concerning industrial, commercial or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws that it means merely offering or made accessible to the other party and it never meant that he other party should be trained or made expert in such technical knowledge. It will be absurd on part of a person to make other person expert of its core competency, which will result in situation that the recipients of services will not look again to him when these services are needed in future. Training / teaching / educational services have separately been dealt else where in the trite. In view of above, the meaning of 'make available' has been read in the present context. Further attention is invited the decision of Hounrable ITAT, Bangalore in the case of M/s Bovis Lend Lease India Pvt. Ltd. Vs. ITO, 36 SOT 166 Bangalore where word made available' in paragraph 101 and 102, which are reproduced as under : 101. Hence, in the instant case, we have to see as to whether the requirement of 'make available' is satisfied in this case. The appellant is receiving various services. In respect of assistance in the operation of business, it has been made clear that LLAH will provide education and training including the training material for the staff of the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income is deemed to accrue or arise in India. Sec. 9 prescribes that the income by way of Fees for Technical Services is considered as income deemed to accrue or arise in India. Certain Articles of the Tax Avoidance treaties for e.g. Article 12(4), have endorsed this legal position. b.1) Next is an exception as carved out in Sec. 90 of the Act empowering the Govt. to enter into an agreement with an another State for granting certain relief. Hence there is no more a dispute that a Treaty overrides the provisions of the Act. But in a situation as persisted in this appeal, the first step ought to be taken by the Revenue Authorities to give a clear-cut finding as prescribed under Sec. 9(1) (vii) of the Act. It is very simple. It is expected from the A.O. to go-through each and every clause of the Agreement in question. If rendering of 'technical service' is the essence of the terms of the Agreement then the provisions of Sec. 9 are required to be applied. The service needs to be 'technical' and/or 'consultancy' in nature. In the present case it was accepted by the assessee that the agreement covered the following types of services :- (i) Commercial Suppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cy services (including the provision of services of technical or other personnel) which: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in para 3(a) of this Article is received; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in para 3(b) of this Article is received; or (c) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design . On conjoin reading of Sec.9(1)(vii) and Article 12.4 of DTAA , clause (c), supra, it emerges that 'Fees for Technical Service' is a consideration received in the hands of the recipient, provided, those technical knowledge or know-how etc. are 'make available' to the person who made the payment in lieu of those services. This term is a subject matter of controversy. Broadly speaking in our humble opinion 'make available' means to allow somebody to make use of the know- how or knowledge. This has been further expanded that 'make available' means that the person receivin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of those parties. The A.O. has also to find-out that if the services rendered by this assessee were not made available to those Hazira parties for their business purpose then under what ground they have claimed business expenditure, if any? 5.1 In the light of the above discussion and the reasons assigned hereinabove, we hereby restore ground no.1 back to the stage of the AO. This ground is hereby allowed only for statistical purpose protanto. 6. Regarding Ground No.2, we have noted that this ground was not decided by learned CIT(A) and that question of claim of reimbursement of expenditure was not made before the AO. In the written submission, the learned A.R., MR. Dhinal Shah has submitted that the appellant has received ₹ 95,10,671/- as reimbursement of expenditure from SHGPL in the course of rendering services. The assessee has, therefore, required to establish that those expenditures were first incurred out of pocket expenses then only the question of reimbursement can be decided. The assessee is, therefore, required to furnish the details of the bills through which the reimbursement was claimed since all those facts were not earlier examined by the Revenue Au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue of charging of interest under Section 234B and C can be raised before the AO while giving effect to this order. Resultantly, ground no.2 and 3 may also be treated as allowed for statistical purpose only. 11. In the result, ITA No.3950/Ahd/2008 is allowed for statistical purpose. C- ITA No.52/Ahd/2009 (for A.Y. 2005-06) 12. This is an appeal filed by the Revenue arising from the order of learned CIT(A)-XXI, Ahmedabad, dated 29.09.2008. 13. The only grievance of the Revenue is that learned CIT(A) has erred in deleting the penalty of ₹ 1,08,00,000/- levied under Section 271(1)(c) of the IT Act. The AO has levied the penalty under Section 271(1)(c) vide order dated 28.03.2008 on the income determined under Section 143(3) of ₹ 11,68,49,305/-. However, as per the discussion made hereinabove, the impugned amount is yet to be finalized because we have restored the matter back to the stage of the AO. At present, we hereby hold that on account of fact that the issue has been restored back to the file of the AO, therefore, the penalty does not survive. Otherwise also, the learned CIT(A) has given certain directions and partly allowed the appeal of the assessee. R ..... X X X X Extracts X X X X X X X X Extracts X X X X
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