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TMI Blog2013 (8) TMI 446X X X X Extracts X X X X X X X X Extracts X X X X ..... ce Agreement between India and Netherlands ('India-Netherlands Tax Treaty'). 2. Without prejudice to the above, the learned CIT(A) has erred on facts and in law in taxing the reimbursement of expenses as 'Fees for technical services' under Article 12 of the India-Netherlands Tax Treaty. 3. Without prejudice to the above, the learned CIT(A) has erred on facts and in law in 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 Hazira Port Private Limited, Hazira LNG Private Limited and Shell Hazira Gas Private Limited (presently known as Hazira Gas Private Limited) under Section 133(6) of the Act as the total receipts of the Appellant (i.e. 116,849,305)." 2) Facts in brief as emerged from the corresponding assessment order dated 29.03.2006 passed u/s 143(3) were that the appellant is a Foreign 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 ' i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pport Service Agreement' ( in short SSA) and the amount received was not the ' Fees for Technical Services' (in short FTS ) under the Double Taxation Avoidance Agreement, Article 12, between India and Netherland( known as India- Netherland Tax Treaty). 3.1) The assessee has also submitted that the difference in the total amount received was due to the different exchange rate applied by those concerns while giving information U/s 133(6) of the Act. 3.2 ) An another issue had cropped up before Ld. C.I.T.(A), on account of a remand report, in respect of the Permanent Establishment ( P. E. ) in India of the assessee i.e. Shell International B.V. ( in short SIBV). 3.3) From the side of the assessee certain reply and counter- replies were furnished and from the side of the Revenue a Remand Report was furnished. After considering those submissions the LD.CIT(A) has 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" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technology of transportation of Natural Gas and LNG was provided by the assessee. According Ld. CIT(A) the technical services were made available as per Article 12 of DTA Agreement. Finally it was concluded that payments made by the Indian Companies were 'fees for technical services' hence given right treatment by the A.O. 3.5) About the grievance of correct amount received by the assessee, the CIT(A) has held as under :- "I have carefully considered the submissions made by the ld. Authorised Representative though the assessee has claimed that SHGPL has recognized, an additional sum of Rs. 4197783/- which was reversed in the following year but there is no such confirmation filed by the assessee to show that these amount has been reverse by the respective companies. Assessee can always approach the Assessing Officer for rectification in this regard if he is able to substantiate this claim. It has been claimed that the balance amount of Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under the SSA 1,03,35,044 SHGPL Rendering support services under the SSA 5,82,26,204 SHGPL Reimbursement of mobilization expenses 95,10,671 Total 10,80,22,380 The return of income was filed by the Appellant by contending that the services rendered under the said SSAs being commercial in nature do not fall within the definition of Fees for Technical Services ('FTS') and therefore, are not taxable in India. Assessment Order u/s 143(3) The Income-tax Officer, Ward 1(4), Ahmedabad [hereinafter 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hever is more beneficial. This view is supported by the Supreme Court in the UOI and Anr vs. Azadi Bachao Andolan and Anr (263 ITR 708) and also by Circular Mo. 333 dated 2 April 1982. Accordingly, the said provisions of the India-Netherlands tax treaty are reproduced hereunder: "fees for technical 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)..... (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 desi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion service does not make the service a technical service within the meaning of paragraph 4(b). In view of the above, it is very clear that rendition of consultancy services which impart commercial information or knowledge would not constitute technical services and hence would not be taxable under the India - Netherlands tax treaty. The same view has also been upheld in the following decisions: 1. DCIT vs. Boston Consulting Group Pte Ltd. - 94 ITD 31 (Mum. ITAT) 2. Bharat Petroleum Corporation 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, experien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 'make available', the technical knowledge, 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 lot of technical knowledge and experience of the service 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already attached for Your Honours' reference. Portugal is member country of OECD. India has signed a Tax Treaty with Portugal on 1 April 1998 ie after the India-Netherlands Tax Treaty. Relevant extract of Article 12 of India - Portugal Tax Treaty is reproduced as under: "4. For the purposes of this Article, "fees for included services" means payments of any kind, other than those mentioned in Article 14 and 15 of this Convention, to any person in consideration 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 im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to the various judicial precedents which support the contention of the Appellant that reimbursement of expenditure received is not to treated as income in the hands of the Appellant - 1. Siemens Aktiongelgsellschaft ( 310 ITR 320) (Bom.) 2. Director of Income-tax (International Taxation) Vs Krupp Udhe GmbH (2010-TIOL-214-HC-MUM-IT) (Bom.) 3. Mahindra and Mahindra Ltd. vs DCIT (313 ITR 263) (AT) (Mum. ITAT)(SB) 4. Compagnie Francaise 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. Rs. 11,68,49,305) The learned AO computed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded in all he three agreements are exactly similar and are as under : * Commercial support * Logistics, * Public affairs, * Human resource matters, * Finances, banking and treasury, * Administrative, * Legal, and * Healthcare services. However, it is clearly mentioned in the agreements that employees of M/s Shell International B.V. (assessee) will not be coming to India for rendering the services. 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 ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e from the Government of a foreign State or a foreign enterprise in consideration for the use outside India of any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, commercial or scientific knowledge experience or skill made available provided or agreed to be made available or provided to such Government or enterprise by the assessee, 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 asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edge, experience, skill, etc. from the persons rendering the services to the persons utilizing the same and some sort of durability or permanency of the result of rendering of the service is fulfilled. An effort was made to find the common meaning of the word 'made available' through the google search on the internet, the results of which are enclosed as Annexure V\' which clearly shows 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, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the judicial as also quasi-judicial authorities are required to assign reasons in support of their conclusion. Although the assessee had raised the objection that the said assessment order is against the natural justice but CIT(A) has not given his verdict. b) On merits, the trite law is that under the provisions of I.T.Act a non-resident is subject to tax in India to the extent any 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . But, as discussed supra, the DTAA prescribes an exception. The relevant clause is clause 4 of Article 12 of the model tax treaty reads as follows: "For the purposes of para 2 of this Article, and subject to para 5 of this Article, the term "fees for technical services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the recipient. All these questions can only be answered by a thorough investigation 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. 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 Rs. 95,10,671/- as reimbursement of expenditure from SHGPL in the course of rendering service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y. 2003-04, hence this ground is restored back to the stage of the AO to be decided on the same lines as directed hereinabove. Resultantly, this ground is allowed for statistical purpose. 10. Ground No.2 and 3 are consequential in nature and presently do not survive because the final quantum of assessment is yet to be ascertained. The 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 Rs. 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 Rs. 11,68,49,305/-. However, as per the discussion made hereinabove, the impugned amount is yet to be finalized because ..... X X X X Extracts X X X X X X X X Extracts X X X X
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