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2016 (3) TMI 501

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..... opinion, the services provided by the assessee were linked inextricably and essentially to the start-up services and sale of equipment to JTPCL. Therefore, the payment received by it cannot be treated as FIS. In our opinion,payment received by the assessee under the contract constituted business profit within the meaning of article 7 of the Tax-treaty. As per article 7(1) of the treaty business profit of an assessee can be taxed in India only if it has a PE in India. In the case under consideration the assessee is not having PE in India whether fixed or otherwise. Considering the above, we are of the opinion that the order of the FAA cannot be sustained. So, reversing his order,we decide effective ground of appeal in favour of the assessee. - ITA no. 8567/Mum/2010 - - - Dated:- 11-3-2016 - Sh. Rajendra,Accountant Member Ram Lal Negi,Judicial Member For The Assessee : Shri Kanchan Kaushal, Dhanesh Bafna For The Revenue : Shri Jasbir Chauhan PER RAJENDRA, AM Order U/s.254(1) of the Income-tax Act, 1961 (Act) Challenging the order dated 30.8.2010 of CIT(A)-Mumbai, the assessee had filed the present appeal. 2. The assessee-company filed its ret .....

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..... ransfer of information were mentioned in clause.6.5 and 6.6 of the contract, that the information imparted by the assessee related to information on erection and the operation/maintenance manual, that the consideration would not fall under the scope of income deemed to accrue or arise in India, that the contractual obligation of the assessee did not require the assessee to transfer the technology to JTPCL, that no technology,per se,was transferred to JTPCL, that the receipt would not be liable to tax in India.With regard to start up services the assessee contended that such services would arise only after JTPCL had imported the equipments, that the consideration would not involve any transfer of technology by the assessee, that in the absence of a PE the amount received by the assessee for providing start up support would not be taxable in India. It was further argued that payments made for rendering consultancy services were not technical in nature, that they would not fall under the purview of included services that same would be liable for taxation in terms of provisions contained in the Article 7 of the DTAA, that there was no continuity of business relationship between JPTCL a .....

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..... ee had also made available technical plans and designs, that same was to be assessed as fees for included services. Finally, he held that services rendered by the assessee were fee for included services(FIS)as per Article 12 of the treaty. 4. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA). Before him, it was argued that it had not undertaken the responsibility of either carrying out the installation or assembling of the project or supervising such activities of installation /assembling, that the payment received by it from JTPCL under the contract was not exigible to tax in India, that it was engaged in general business of supplying equipment and rendering services as desired by its clients, that the payments received by it as per the agreement with JTPCL constituted business profit in its hand as per the provisions of Article 7 of Indo-US Tax Treaty, that the payment for rendering services had to be judged in the light of provisions of Article 12(4) of the Treaty, that the assessee had not received any royalty from JTPCL, that rendering of various services would not constitute included services , that the assessee .....

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..... was not part of the Article-12(4)(b) of the DTAA, that the AO/FAA had not looked into the provisions of tax-treaty and had deliberated upon only on applicability of provisions of section 9(1)(viii) of the Act, that the AO had not discussed as to how the services were made available, that the overall responsibilities were not on technical side and therefore same were not covered by the DTAA, that the assessee had not parted with any knowledge or drawing/design. Alternatively, it was argued that even if services were made available as envisaged under Article 12(4) of the Treaty, same was covered by the provisions of Article-12(5)(a) of the Article. AR relied upon the cases of Wockhardt Ltd. (10 taxmann.com208);De Beers India Minerals (P.) Ltd.(21taxmann.com 214) and Birla Corporation Ltd.(ITA251-52/Jab/13-AY.10-11 and 11-12 dt.24.12.2014). The Departmental Represnetative (DR)contended that it was not the case of sale of equipment, that technical and consultancy services made available to the assessee, that they would include managerial services also, that services were provided not only for installation of the project but to run the project, that comprehensive knowledge was made avai .....

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..... FAA upheld the order of the AO. 5.1. Before proceeding further, it would be useful to find out as to what services were rendered by the assessee to JTPCL. As per the contract following technical services were provided to JTPCL: i. Engineering and design work relating to conceptualisation of the power plant ii.providing specification regarding the material required for the power plant iii.providing suppliers quotations and reviewing documents to enable compliance with specification developed by the assessee for the power plant iv.previewing drawings to unable integration of the equipment to be supplied to JTPCL v.undertaking preparation of final document of the design of the plant and equipment necessary for the power plant The start-up-services provided by the assessee,under the contract, included the following: i).development of packages thereby the various instrumentation, electrical, mechanical and equipment listing were drawn up and were further broken down into subsystems for the purpose of commissioning by the start-up contract ii).laying out of test procedures for the various subsystems equipment and components. We are of t .....

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..... sufficient territorial nexus with India with the services rendered, that distinction had to be made between rendition of services and utilisation thereof, that as per section 9 (1) (vii) deemed fees for technical services would accrue in India when such fees were paid by a resident, that the said section could not be interpreted so widely to bring to tax the income of a non-resident entity received outside India from a resident for services rendered outside India, that the test of residence was that of taxpayer and not that of the recipient of such services, that for section 9(1) to be applicable it was necessary that the services were not only utilised in India but also were rendered in India ought to have a live link with India that the entire income from fees as envisaged in Article 12 of DTAA would become taxable in India. In short, the Hon ble court held that unless the services were rendered and utilised in India the income could not be taxed in India.We would like to reproduce paragraphs 68-72 of the judgments and same read as under: 68.Global income of a resident although is subjected to tax, global income of a non-resident may not be. The answer to the question would .....

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..... capable of being given a meaning. There, therefore, may not be any reason not to give full effect thereto. However, even in relation to such income, the provisions of art. 7 of the DTAA would be applicable, as services rendered outside India would have nothing to do with permanent establishment in India. Thus, if any services have been rendered by the head office of appellant outside India, only because they were connected with permanent establishment. Even in relation thereto, principle of apportionment shall apply. 72. The Authority, in our opinion, has committed an error in this behalf, as if services rendered by the head office are considered to be the services rendered by the permanent establishment, the distinction between Indian and foreign operations and the apportionment of the income of the operations shall stand obliterated. It would be contrary to the intent and purport of the Double Taxation Convention which is a part of the scheme under the IT Act. 73. We, therefore, hold as under : Re : Offshore supply : (1) That only such part of the income, as is attributable to the operations carried out in India can be taxed in India. (2) Since all parts of the .....

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..... ome of non-resident taxpayers received by them outside India from Indian concerns for services rendered outside India. (4) The test of residence, as applied in international law also, is that of the taxpayer and not that of the recipient of such services. (5) For s. 9(1)(vii) to be applicable, it is necessary that the services not only be utilized within India, but also be rendered in India or have such a live link with India that the entire income from fees as envisaged in art. 12 of DTAA becomes taxable in India. (6) The terms 'effectively connected and 'attributable to are to be construed differently even if the offshore services and the permanent establishment were connected. (7) Sec. 9(1)(vii)(c) of the Act in this case would have no application as there is nothing to show that the income derived by a non-resident company irrespective of where rendered, was utilized in India. (8) Article 7 of the DTAA is applicable in this case, and it limits the tax on business profits to that arising from the operations of the permanent establishment. In this case, the entire services have been rendered outside India, and have nothing to do with the .....

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..... erience/skill/know-how or process or consists of development and transfer of technical plan/technical design. In short,under paragraph 4(b)consultancy services which are not of technical nature cannot be treated as included services. We would also like to refer to the Example 2 to MoU that deals with paragraph 12 (4)(b) of the tax treaty and same reads as under: Paragraph of article 12 refers to technical or consultancy services that make available to the person acquiring the service, technical knowledge is, experience, skill, know-how or processes or consists of the development and transfer of technical plan or technical design to such person .. This category is narrower than the category described in paragraph 4(a) because it excludes any services that does not make technology available to the person acquiring the service. Generally speaking, technology will be considered made available when the person acquiring the service is enabled to apply the technology. The fact that provisions 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 the s .....

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..... test envisaged by the above judgment is applied to the facts of the case it has to be held that perusal of the contracts, entered into by the assessee with JTPCL,reveal that the services provided by it under the contracts did not in any way make available technical knowledge and experience skill or know-how to the Indian Compnay. It had supplied the equipments to Indian company outside India,so the payments made by JTPCL to the assessee would not constitute FIS, as per Article 12 of the Treaty. Services mentioned in Examples 4 and 7 of the MoU are more or less similar to the services rendered by the assessee.We have also taken note of Article 12 (5)of the Treaty which stipulates that FIS would not include the amounts if same are inextricably and essentially linked to the sale of property. In the case under consideration, in our opinion, the services provided by the assessee were linked inextricably and essentially to the start-up services and sale of equipment to JTPCL. Therefore, the payment received by it cannot be treated as FIS. In our opinion,payment received by the assessee under the contract constituted business profit within the meaning of article 7 of the Tax-treaty. As .....

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..... rvices to apply the said technology independently in its business. In the instant case, no such technology could be said to have been made available to the assessee company by CKP, as the services rendered by it to the assessee company were merely in the nature of sharing management experience and business strategies .. As per memorandum of understanding (MoU)to the India-US tax treaty consultancy services would fall in the definition of fees for technical services only if the same are technical in nature. Consultancy services which are non-technical in nature would not be covered by definition of fees for included services . In view of the aforesaid, it was to be held that the nature of services rendered by CK P to the assessee-company was such that the same could not be regarded as technical or consultancy services so as to fall within the definition of fees for included services as given in article 12 of the Indo-US tax treaty. The payment made for the said services was in the nature of business profits in the hands of CKP Inc.is covered under article 7 of the treaty and the said party, admittedly, having no PE in India in the year under consideration the same was not chargeabl .....

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