TMI Blog2013 (12) TMI 308X X X X Extracts X X X X X X X X Extracts X X X X ..... ant is fees for technical services - Tax is deductible by the assessee from the payments made by the assessee, to the consultant - Decided against assessee. - I.T.A. No.2021/ Ahd/2009 & I.T.A.No. 639/Ahd/2010 - - - Dated:- 18-1-2013 - Shri A. K. GARODIA AND Shri KUL BHARAT, JJ. For the Respondent: Shri Yogesh Shah, AR For the Appellant : Shri D C Patwari, CIT DR ORDER A. K. Garodia (Accountant Member).- Both these appeals are filed by the assessee which are directed against two separate orders of the learned Commissioner of Income-tax (Appeals) Gandhinagar dated March 30, 2009 for the assessment year 2009-10 and dated November 30, 2009 for the assessment year 2010-11. Since the issue involved is similar in both these yeas, both these appeals were heard together and are being disposed of by way of this common order for the sake of convenience. First, we take up the appeal of the assessee for the assessment year 2009-10 in I.T.A. No. 2021/Ahd/2009. The grounds raised by the assessee in this year are as under : "The appellant being dissatisfied with the order passed by the learned Commissioner of Income-tax (Appeals), Gandhinagar prefers an appeal against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een preferred. Consequent to queries raised, the authorised representative stated that the section has been wrongly mentioned ; the same should have been under section 248 and expressed regrets for the error. The present appeal squarely falls within the purview of section 248, as it was the appellant's responsibility to bear the liability of TDS and after deduction of such a tax, an application has been made to the Assessing Officer for nondeduction under section 195(2), which stands rejected. The appellant is in appeal against that rejection. Since the wrong mention of the section as 246A instead of 248 cannot be treated as a fatal action to deprive the appellant's right of appeal, otherwise provided in the Act, the appeal stands admitted and is being treated as an appeal under section 248. 3. The appellant has framed its case through five grounds of appeal but the effective ground is primarily one only, namely the payments made by the appellant to M/s. Texoplas Ltd., U.K. for providing details of fabric designs is not taxable and hence no TDS should have been deducted. The various grounds are the limbs of the assessee's arguments :" Further facts are noted by the learned Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 248 of the Income-tax Act, 1961. As against this, it was submitted by the learned Departmental representative that the appeal of the assessee is not maintainable under section 248 since the assessee is not required to bear the tax as per the agreement. In the rejoinder, it was submitted by the learned authorised representative that the learned Commissioner of Income-tax (Appeals) has already admitted the appeal under section 248 and the Revenue is not in appeal against this admission of appeal by the learned Commissioner of Incometax (Appeals) and hence, this issue cannot be raised now by the learned Departmental representative. We have considered the rival submissions, perused the material on record and have gone through the orders of the authorities below. For the sake of ready reference, we reproduce below the relevant paragraphs 3.02 and 3.03 of the agreement which are available on page 14 of the paper book. "3.02 Responsibility of consultant for taxes. Any taxes, duties or other governmental charges due (directly or indirectly) by consultant in connection with the receipt of the compensation shall be the exclusive responsibility of consultant without any ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ligation of consultant, i.e., M/s. Taxoplas Ltd. are contained in paragraph 2.02 of the agreement which is available on page 13 of the paper book and the relevant Double Taxation Avoidance Agreement between India and the U.K. is available on pages 27-47 of the paper book and the relevant article is article 13 in respect of royalty and fees for technical services, which is also available on pages 37-39 of the paper book. He also submitted that the Double Taxation Avoidance Agreement between India and the U.S.A. is available on pages 48-69 of the paper book and the memorandum of understanding on meaning of term "fees for included services" under the India-US Double Taxation Avoidance Agreement is available on page 70 of the paper book. He pointed out that as per this memorandum of understanding between India and the U.S.A. in respect of fees for included services which is pari materia to fees for technical services, it is required that it shall make available technical knowledge, experience, skill, know-how and process and consists of development and transfer of a technical plan and technical design. He placed reliance on the following judicial pronouncements : (a) Deputy DIT v. Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : (a) Look out in the market to forecast and evaluate new trends with regard to fabric designs for cotton shirting especially in the trend setting markets Italy, France and the United Kingdom and give feedback to client ; (b) Consult and visit designers, design-studios, fashion trend setters to evaluate trends and needs with regard to fabric designs for cotton shirting in trend setting countries like Italy, France and the United Kingdom and give feedback to client ; (c) Visit fashion and textile fairs as well as fashion and textile tradeshows in trend setting countries like Italy, France and the United Kingdom to evaluate new trends in fabric design and give feedback to client ; (d) Visit fashion shows in Milan, Rome, Paris and London to evaluate new trends in fabric design and give feedback to client ; (e) Quarterly deliver 9,000 fabric designs for cotton shirting to client according to the terms and conditions specified in exhibit "C" ; (f) Provide detailed quarterly progress report in writing to the client along with, proof of the new designs developed by consultant ; (g) Consultant will show and/or make available all documents and reports in respect of the transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic. 4. For the purposes of paragraph 2 of this article, and subject to paragraph 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 a 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 paragraph 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 paragraph 3(b) of this article is received ; or (c) make available technical knowledge, experience, skill, knowhow or processes, or consist of the development and transfer of a technical plan or technical design. 5. The definition of fees for technical services in paragraph 4 of this article shall not includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, the amount of the royalties or fees for technical services paid exceeds for whatever reason the amount which would have been paid in the absence of such relationship, the provisions of this article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Convention. 9. The provisions of this article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the rights in respect of which the royalties or fees for technical services are paid, to take advantage of this article by means of that creation or assignment." It was also argued that memorandum of understanding in respect of the Indo-US Double Taxation Avoidance Agreement is also relevant for the purpose of understanding the meaning of the term "fee for technical services". In the Indo-US Double Taxation Avoidance Agreement, article 12 is the article in respect of royalty and fee for included services. The contents of this memorandum of understanding are available on pages 72 to 78, which are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) includes a technical and consultancy services that are ancillary and subsidiary to the application or enjoyment of an intangible for which a royalty is received under a licence or sale as described in paragraph 3(a), as well as those ancillary and subsidiary to the application or enjoyment of industrial, commercial, or scientific equipment for which a royalty is received under a lease as described in paragraph 3(b). It is understood that, in order for a service fee to be considered 'ancillary and subsidiary' to the application or enjoyment of some right, property, or information for which a payment described in paragraph 3(a) or (b) is received, the service must be related to the application or enjoyment of the right, property, or information. In addition, the clearly predominant purpose of the arrangement under which the payment of the service fee and such other payments are made must be the application or enjoyment of the right, property, or information described in paragraph 3. The question of whether the service is related to the application or enjoyment of right, property, or information described in page 73 paragraph 3 and whether the clearly predominant purpose of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment allocable to such services do not form a substantial part of the total consideration payable under the contractual arrangement. Are the payments for these services fees for 'included services' ? Analysis : The payments are fees for included services. The services described in this example are ancillary and subsidiary to the use of manufacturing process protected by law as described in paragraph 3(a) of article 12 because the services are related to the application or enjoyment of the intangible and the granting of the right to use the intangible as the clearly predominant purpose of the arrangement. Because the services are ancillary and subsidiary to the use of the manufacturing process, the fees for these services are considered for included services under paragraph 4(a) of article 12, regardless of whether the services are described in paragraph 4(6). Example 2 Facts : An Indian manufacturing company produces a product that must be manufactured under sterile conditions using machinery that must be kept completely free of bacterial or other harmful deposits. A U.S. company has developed a special cleaning process for removing such deposits from that type of machi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical, and industrial engineering) ; 2. Architectural services ; and 3. Computer software development. Under paragraph 4(b), technical and consultancy services could make technology available in a variety of settings, activities and industries. Such services may, for example, relate to any of the following areas : 1. Bio-technical services ; 2. Food processing ; 3. Environmental and ecological services ; 4. Communication through satellite or otherwise ; 5. Energy conservation ; 6. Exploration or exploitation of mineral oil or natural gas ; 7. Geological surveys ; 8. Scientific services ; and 9. Technical training. The following examples indicate the scope of the conditions in paragraph 4(b) : Example 3 Facts : A U.S. manufacturer has experience in the use of a process for manufacturing wallboard for interior walls of houses which is more durable than the standard products of its type. An Indian builder wishes to produce this product for its own use. It rents a plant and contracts with the U.S. company to send experts to India to show engineers in the Indian company how to produce the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any to modify the formulae which it uses so as to eliminate the cholesterol, and to train the employees of the Indian company in applying the new formulae. Are the fees paid by the Indian company for included services? Analysis : The fees are for included services. The services are technical, and the technical knowledge is made available to the Indian company. Example 7 Facts : The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol-free oil and wishes to market the product world wide. It hires an American marketing consulting firm to do a computer simulation of the world market for such oil and to adverse it on marketing strategies. Are the fees paid to the U.S. company for included services ? Analysis : The fees would not be for included services. The American company is providing a consultancy service which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc., nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : An Indian hospital purchases an X-ray machine from a U.S. manufacturer. As part of the purchase agreement, the manufacturer agrees to install the machine, to perform an initial inspection of the machine in India, to train hospital staff in the use of the machine, and to service the machine periodically during the usual warranty period (2 years). Under an optional service contract purchased by the hospital, the manufacturer also agrees to perform certain other services throughout the life of the machine, including periodic inspections and repair services, advising the hospital about developments in X-ray film or techniques which could improve the effectiveness of the machine, and training hospital staff in the application of those new developments. The cost of the initial installation, inspection, training and warranty service is relatively minor as compared with the cost of the X-ray machine. Is any of the services described here ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of the X-ray machine ? Analysis : The initial installation, inspection, and training services in India and the periodic service during the warranty period are anc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stereo sound system and a burglar and firm alarm system. He hires an American electrical engineering firm to design the necessary wiring system, adapt standard software, and provide instructions for installations. Are the fees paid to the American firm by the Indian individual fees for included services ? Analysis : The services in respect of which the fees are paid are of the type which would generally be treated as fees for included services under paragraph 4(b). However, because the services are for the personal use of the individual making the payment, under paragraph 5(d) the payments would not be fees for included services." As per the obligation of the consultant, which is Texoplast Ltd. in the present case, this party is required to deliver 9,000 fabric designs for cotton shirting to the assessee every quarter. The consultant is also required to show and/or to make available all documents/reports in respect of the transaction relating to this agreement and to provide detailed quantity report in writing to the client, i.e., the assessee, along with specific /new design developed by the consultant. The compensation is payable by the assessee to the consultant at US$22 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the consultant. Considering all these facts and even after considering memorandum of understanding between India and the US, we are of the considered opinion that the services received by the assessee and provided by the consultant, i.e., Texoplast Ltd. is nothing but fees for technical services and hence, tax is deductible by the assessee from the payments made by the assessee, to the consultant M/s. Texoplast Ltd. Now, we discuss the applicability of the various judgments cited by the learned authorised representative. Most of the judgments are in respect of this aspect that memorandum of understanding between India and the US should also be considered. We have already considered the memorandum of understanding between India and the US and hence, these judgments are no more relevant for the issue in dispute. Regarding other judgments cited by the learned authorised representative, we find that the same are not applicable in the present case because the facts are different. In the case of CIT v. De Beers India Minerals P. Ltd. [2012] 346 ITR 467 (Karn), it was held that this is not the case of fees for technical services because in that case, it was found that the Dutch comp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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