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TMI Blog2009 (7) TMI 1277X X X X Extracts X X X X X X X X Extracts X X X X ..... to promote publishing related services in the UK market. The services included managing client relationship and providing catalytic support for deliverables to the clients of the assessee. 3. As per the agreement, KGL is entitled to three types of payments. The first one being compensation fee to the extent of 2% on the gross revenue receipts from the client. Secondly, specific expenses incurred for providing services as per the agreement and thirdly, it is entitled to mark-up of 5% on the on expenses paid back by way of equivalent sum. In addition to the average of client relationship and system to promote publishing related services in UK market, KGL was to render front-end services as mentioned above in their area that includes managing client relationship and providing catalytic support for deliverables. In addition to this KGL was also to render services in connection with identifying new and potential clients to develop a strong and competitive market position for such services in UK. In order to provide such services, KGL was to engage necessary professionals with suitable qualifications and background and further to provide training to them to enable such professionals to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge, experience and skill in the field of publishing. The assessee is also getting consultations and advise as to how to proceed in the American and English markets. These are not only technical, but also consultancy in nature. Hence, it is clear that the payments made by the assessee is falling within the ambit of article 13.4(c) of the India-UK Treaty. The concept of making available the technical knowledge, skill, experience, know-how or process finds place in article 13.4(c) of the DTAA. The Assessing Officer held that publishing related jobs have to be performed by those possessing certain element of knowledge and skill. As against knowledge, skill would be acquired only through experience and practice. It is clear that technical skill is being made available to the payer. The assessee contended that the services rendered to it by KGL cannot partake the meaning of the term 'make available' since such services do not enable the use, the skill or experience independently in future. It is simply benefited by it. The Assessing Officer held that there is no elucidation of available as to the meaning of the term 'make available'. The ordinarily understood meaning of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to note that a large chunk of about 78% of the reimbursement is on account of rent, salaries and taxes. All such would obviously form a regular expenditure of the KGL for the rendering the service. He further noted that in the provision of taxation, the payment made for the purpose of rendering services are to be charged normally on gross basis without taking into consideration the expenses incurred for rendering such services. Hence, so as to overcome this provision, KGL entered into an agreement whereby expenses were to be reimbursed and thereby not to get charged to tax while only a small residual amount of fees would run the danger of being charged to tax. It is to be observed that both the parties to the transaction are group companies, wherein M/s. Infomedia India Ltd., holds 100% of the equity of KGL, while beneficially holding 90% of the equity of the assessee. Thus, it is clear that MSA has been so drafted to suit the convenience of both the parties. It is very essential to see the actual payment in fact, as one single payment but arbitrarily divided into two components viz., fees and reimbursement. He further held that the entire amount is being paid only for rendering s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer has erred in holding that the aggregate of commission/marketing fee, reimbursement of expenses and mark-up amounts to making available technical-skill or know-how to the appellant company under the India-UK tax treaty. 10. Relying upon the board circular no.23 of 1969, the assessee contended that marketing commission is not liable to be taxed and in support of the above, the assessee invited the attention of the Commissioner of Income-tax(A) to circular No.29, dt.23.8.1969 r.w. circular No.786, dt.7.2000 which according to the assessee, clearly amplifies vide para 3(4) of the circular no.23 of 69, which reads as under: "FOREIGN AGENTS OF INDIAN EXPORTERS-A foreign agent of Indian exporter operates in his own country and no part of his income arises in India. His commission is usually remitted directly to him and is, therefore, not received by him or on his behalf in India. Such an agent is not liable to income-tax in India on the commission." According to the assessee, no part of the payment arises or accrues in India, as the recipient is a non-resident agent of the Indian exporter i.e., the assessee, since the payment is directly remitted abroad, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plan or technical design." 12. The assessee submitted so as to explain whether the marketing and customer support functioning of KGL as laid down in clause 3(3) of MSA, as mentioned in para 3 above, it is essential to examine the historical perspective in terms of arrangement existing prior to the classification of Cepha Imaging (assessee) and KGL, by Infomedia India Ltd., in the year 2006 and subsequent entering into MSA dt.1.4.2007. In fact, prior to March, 2006, KGL outsourced both back-office operations such as the editing, typesetting, layout design and other publishing related assignments to Cepha and such assignments were denominated on the basis of per page rates which were in line with the rates prevailing for such outsourcing. However, this arrangement was comprehensively altered after the acquisition of both the companies to achieve the object of increasing the operations of the company, viz., Infomedia India, and generate more functions from KGL to Cepha. This would ultimately result in scaling down the front-end operations of KGL in order to reduce operating costs in the UK. After the acquisition of 100% shares of KGL and 41% share in Cepha, the business arrangem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded that as per the financial terms contained in clause (5) of the MSA, KGL was entitled to 2% of the gross revenue receivable from the clients as 'compensation fee' on a sum equal to specific costs which fall within the purview of the terms of MSA plus 5% mark-up fee of such cost. He found on a perusal of the copies of the invoices relating to both prior and post MSA that invoices were raised by Cepha on KGL for copyediting and typesetting and in turn KGL raised invoices on its clients on per page rate basis. The Commissioner of Income-tax(A) also noted that post-MSA invoices raised by KGL on Cepha reveals that two sets of invoices were separately raised, one set for marketing fee on journals and the other for costs incurred on overheads. The Commissioner of Income-tax(A) held that there is not even a remotest reference to the rendering of any managerial, technical or consultancy services. He held that though the Assessing Officer had at length discussed on the technical nature of publishing related services rendered by KGL through professionals employed, no attempt was actually made to gather any evidence relating to publishing trade, to substantiate his observations, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The foreign parties providing consultancy service which involves the use of substantial technical skill and expertise is not, however, making available to the assessee company any technical experience, knowledge or skill etc., nor is it transferring a technical plan or design. What is transferred to the assessee through the service contract is commercial information. 15. The assessee also relied on the decision of the Mumbai ITAT in Raymond Ltd., vs. DCIT (2003) 80 TTJ 120, wherein it was held that mere rendering of a service is not included unless the person utilizing the service is able to make use of such technical knowledge etc., by himself in his business or for his own benefit and without recourse to the performer by the services, in future. It was further submitted that to 'make available' there should be transmission of technical knowledge, experience, skill etc., from the person rendering the services to the person utilizing the same. The Tribunal further held that the Memorandum of Understanding with one country could be looked as an aid to construction of a similarly worded definition in another treaty. The assessee also placed reliance on the following decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e technical knowledge, expertise and skill in the field of publishing and consultation to other parties, i.e., advising how to proceed in the UK and US markets. Strictly these are not only technical but are also consultancy in nature and hence, it falls within Article 13.4(c) of the Indo-UK treaty. Refuting to the above, assessee contended that the assessee will not fall within the ambit of Article 13.4(c) for the reason that the person rendering technical and consultancy services were not making available technical knowledge, expertise and skill, knowhow or process to the assessee. Since these were not made available to the assessee, there is no question of Article 13.4(c) being attracted. It was further contended that no part of the payment arises or accrues in India as the recipient is a non-resident agent of the Indian exporter. The learned DR's contention is correct that the publishing related jobs have to be performed by those possessing certain element of knowledge and skill that could be obtained only through expertise and practice, as contended by the assessee. That knowledge is not made available to the assessee. Unless knowledge is also made available to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Authority for Advance Rulings in Tekniskil (Sendirian) Berhard vs. Commissioner of Income-tax (1996) 222 ITR 552, the Authority held that mere rendering services and paying fees for such technical services alone is not sufficient to bring the payment to tax net. It was held that by virtue of Article 7 of DTAA, the income or profit to an enterprise of a contracting State shall be taxable only in that State unless the enterprise carries on business in other State through a permanent establishment situated therein. 20. The Special Bench, Mumbai, in the case of Mahindra and Mahindra Ltd., vs. DCIT (Mumbai) (SB) (2009) 313 ITR 263 (AT), had an occasion to consider the meaning of the word 'make available' with eference to DTAA between India and UK, wherein the Tribunal at page 329 observed as under: "We have considered the rival submissions in the light of material placed before us and precedents relied upon. We find that clauses (1) and (2) of article 13 in the DTAA with the UK clearly provide that the fees for technical services are taxable in India. Now we have to consider the meaning of the term "fees for technical services" as employed in this articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permanent establishment will not make any difference because the reimbursement in this case does not survive by itself as it is not the only payment made. It is part and parcel of the whole gamut of payments proposed. The Assessing Officer held which is also supported by the learned DR that all the three payments are in fact one, so as to give different colours it has been mentioned under three items, one as commission payment at 2%, second as reimbursement of expenses and the third as mark-up of 5%. 22. In the case reported in Raymond Ltd., vs. DCIT (2003) 86 ITD 791 (supra), the Tribunal Mumbai Bench held that in a case wherein no technical knowledge, expertise, skills, know how or process etc., were "made available" to the assessee company by the non-resident agent, then no part of the fees for managerial services could be considered as fees for technical services, since the work "managerial" does not find mention in the Article concerned. Therefore, the Tribunal held the management commission in the instant case could not be charged to tax. Hence the Tribunal held the assessee was under no obligation to deduct tax u/s.195. The Tribunal in this case further ..... 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