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TMI Blog2016 (11) TMI 1249X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in law and in facts, in holding that the management service fees received by the Appellant are taxable as "Royalty" under Article 12(4) of the Double Taxation Avoidance Agreement between India and Netherlands ('India -Netherlands Treaty''), thereby making an addition of Rs. 22,57,89,998 to the income of the Appellant. 3. The learned AO/DRP failed to appreciate the fact that the services provided by the Appellant are in the nature of business support and administration services and are not in nature of sharing of information concerning industrial, commercial and scientific experience. 4. The learned AO/DRP failed to appreciate that services rendered by the Appellant are in the nature of business support and administration services and not in the nature of technical or consultancy services. 5. The learned AO/DRP failed to appreciate that the services rendered by the Appellant do not "make available" any technical knowledge, experience, ski, know-how or processes and hence is not taxable in view of the India - Netherlands Treaty. 6. The learned AO/DRP failed to appreciate the fact that business support and administration service fees received by the Appellant are withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 to 44C and section 57(1) are allowed against the income taxable under section 115A of the Act, on gross basis as Royalty and fees for technical services. 16. The learned AO failed in appreciating that brought forward depreciation allowance for the current year by virtue of section 32(2) of the Act and hence as per section 115A(3), cannot be absorbed/set-off against Royalty and fees for technical income taxable on gross income basis. Set-off brought forward business losses of Rs. 5,55,14,086 against the additions made in the income of the Appellant 17. The learned AO erred in law in facts in adjusting the brought forward business losses of Rs. 5,55,14,086 against the additions made as Royalty and fees for technical services income. 18. The learned AO failed to appreciate the fact that income earned by the Appellant from rendering management services to its group entities or reimbursement of salary received will be classified under the head 'Income from other sources'. Accordingly, the learned AO erred in setting off brought forward losses against the income earned by the Appellant under the head 'Income from other sources'. Initiation of penalty proceedings under section 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incorporated in Netherlands and is eligible for benefits of Indo-Netherland DTAA as per Article 4. VODMC is primarily international Dredging contractor and is engaged in the business of undertaking capital dredging, maintenance of dredging projects and other dredging related activities. However, during the year under consideration, i.e. AY 2009- 10 there were no dredging contracts executed by VODMC in India. Thus, assessee had not earned any income from contractual operations in India in the relevant assessment year except for recovery of bad debts of Rs. 50,00,068/-. VODMC had entered into "Services Agreement" with 'Van Oord India Private Limited' (VOIPL), under which it has provided certain assistance and support on continuous basis to VOIPL in the field of personnel and organization, operation support, quality, health, safety and environment, designated personnel offshore, information technology, estimation and engineering, marketing and administrative services in connection with the operations of their business of marine construction and related activities. VODMC also provided certain crew members to VOIPL. In the notes to the Computation of income filed along with the return o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assistance and support in crew management, planning and administration functions and assistance in development of policies in respect of human resource; Operations support * Assistance in ensuring that qualifying projects are commenced correctly through project co-ordination and costly errors are avoided or limited; * Assistance in project execution and related activities; Quality, health, safety and environment * Assistance in formulating business processes for organizational and project matters; Designated Personnel ashore * Designating a person ashore to maintain contract the crew of the ship and the Service Recipient Company; Information Technology * Providing information technology support during the performance of a project, support with respect to hardware and software and transformation of information; Estimating and Engineering * Assistance in cost budgeting and engineering; Marketing * Advice and support on marketing efforts, product information and support in public relations programs, marketing of the product; Administration * Assistance in financial, accounting, auditing and insurance matters; and Legal * Provision of advice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed all the evidences. On going through the same he observed that it is providing "user manual" having instructions along with technical design as to how the folders are to be maintained regarding logon instructions, work place securities, accessing network drives, how to open an archive along with technical designs and diagrams, etc. It also contains the standard procedures for inspection, checklist of main equipments, project plan, safety walk, safety work report, drawing solution along with drawing have also been given. The literature regarding marine engineering solutions, main equipments and dredging solutions have also been given in detail along with the terms and designs. This he inferred that it is nothing but sharing of experience of industrial, commercial and scientific in nature and hence payments received by the assessee are to be treated as "royalty" under Article 12(4) of India-Netherland DTAA. He further held that, once these services are taxable as "royalty" then it is not required whether the services have been rendered in India or not. 5. Regarding second aspect of reimbursement of salary expenses, the Assessing Officer noted that, assessee company has received ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th VODMC in respect of the said services which have been highlighted above. 8. After referring to the various clauses given in the "Services Agreement", which are appearing at page 1 to 5 of the paper book, he submitted that none of the services provided any kind of use of or right to use of knowhow to the Indian company. It was in the nature of 'Standard Services' and to ensure that there is a consistency in the approach world-wide and it meets the international standards of the assessee company. Though under the agreement, compensation was based on mark-up but in actual no markup has been received by the assessee nor has been claimed by the Indian Entity, VIOPL. This fact, he submitted can be corroborated from the certificate obtained from the Auditors (Earnest & Young) who have certified on the basis of actual verification of details and documents that only cost incurred by the assessee in rendering to the aforesaid services has been allocated to VOIPL and same has been received by way of reimbursement from the said entity. In support, he has referred to the Auditors report and certificate given at pages 9 to 11 of the Paper-book. Based on these documents, the working of cost a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . . Audit report for internal audit conducted (Please refer page 75 to 83 of the Paper book) 5 Estimating And Engineering VODMC provides need based support /assistance to VOIPL . Reports/study on the nature of Soil, nature of the dredger to be used etc. . Estimating the cost for the project . Carrying out the risk analysis. . Engineering support services And time to time technical advice in relation to the projects carried out . Copy of report from estimation and engineering department (Please refer to page 84 to 136 of the Paper book) 6 Personnel And Organisation Administration and Legal . VODMC assists in providing pre- Bid, performance and other Guarantees to the clients of VOIPL which assists BOIPL in obtaining contracts. . Assistance for finalizing the terms of the contract to ensure that VOIPL . Legal support for Bid Submission letter to be Submitted by VOIPL (Please refer page 137 To 146 of the Paper book) From these documents and the nature of services, he submitted that there is no providing of any knowhow or information concerning the industrial, commercial or scientific experience. None of the services or activities falls within the ambit of 'royalty' a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormat) for project plans, safely work and inspection plans. The information in the checklist is completed in India, by a senior person working on project in India. It is not prepared/companied by VODMC. VIOIPL has to apply its own mind while filing up the information and no information has been passed by the VODMC. These checklists required to be continually updated form time to time on regular basis. No knowledge, skill or experience by way of information concerning industrial, commercial or scientific is made available to VOIPL to create or update the checklist themselves. There is no knowhow that is transferred to VOIPL. c) Marketing: The VOIPL for marketing support is provided with printed/ published brochures which can be distributed to its potential clients. VODMC updates and maintains the website of the group as VOIPL does not have its own website. It also helps VOIPL to obtain certificate of approval (ISO certificates) from the concerned organization viz. Lloyds Register Netherland BV. These services help VOIPL in obtaining contracts on regular basis and hence need to be performed regularly. No knowledge, skill or experience by way of information concerning industrial, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian entity and hence payment made by VOIPL to the assessee cannot be reckoned as "royalty". In support of his contention, he relied upon the following decisions:- Sr. No Case Law Citation 1 GECF Asia Limited v DDIT 65 SOT 257 2 Diamond Services International (P) Ltd Vs. Union of India [2008] 304 ITR 201 3 DDIT v Preroy AG [2010] 39 SOT 187 (Mumbai ITAT) 4 Spice Telecom v ITO [2008] 113 TTJ 502 (Bangalore ITAT) 10. Another limb of his argument on this aspect was that, the 'service fees' which has been received by the assessee for rendering of aforesaid services are without any markup and constitutes pure allocation of cost, which cannot be held to be taxable under the Act. For rendering of aforesaid services VODMC has charged a specified percentage of cost incurred by it for rendering the services to VOIPL, the said services is allocated at the cost of rendering the said services which is allocating by VODMC and is proportionately allocated to various group entities based on the turnover of each entity vis-à-vis the total turnover of Van Oord group. Thus, the services are charged as a percentage of turnovers carried out by VOIPL during the year. Wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10(6)(viii) of the Act. In the light of the aforesaid facts, he submitted that the reimbursement was on account of salary of crew members provided on the dredgers by VODMC. Further, the provision of crew on dredgers has no connection or is not ancillary or subsidiary to the provision of services pursuant to the service agreement entered between VODMC and VOIPL. In any case, he submitted that, being reimbursement of expenses the same cannot be treated as income of the assessee and in support, he relied upon the same set of decisions which have been enlisted above. 12. On the other hand, Ld. DR strongly relying upon the order of the Assessing Officer and DRP submitted that ITAT Bench in the case of assessee in 'Van Oord ACZ Marine Contractors BV vs. ADIT', reported in [2012] 52 SOT 423 has rejected the similar contention of the assessee and submitted that, the fees received from Indian entity for providing coordinating and facilitating the services is in the form of reimbursement of expenses and therefore not taxable, held that, it is in the nature of "fee for technical services". Thus the said decision of the ITAT Chennai Bench should be followed as the Ld. DRP has strongly relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces issued by third parties. But there is nothing on record to show that the price negotiated between the assessee and the third parties and the amounts reflected in the invoices issued by the third parties are prices comparable to similar services provided by international parties. The assessee has not established that it had offered services to the subsidiary company on cost to cost basis at best reasonable and competent prices available at that point of time. Therefore, it is not proper to rule out an element of profit in the invoices raised by third parties themselves, even though what was paid by the subsidiary company to the assessee is the same amount as reflected in the invoices. Therefore, the argument that what has been paid by the subsidiary to the assessee company was only the amount reflected in the invoices issued by the third parties alone, does not go to support the argument of the assessee company that the payments were only reimbursement of expenditure and there was no element of profit in those amounts. As the assessee has not explained the pricing factor with reference to the services reflected in the invoices issued by the third parties, it is not possible to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tely dependent on assessee (VODMC) for its experience in industrial, commercial and scientific field. The Indian entity is engaged in highly technical business of dredging activities for which it requires the information and experience of the VODMC right from the pre-bidding stage till the post project completion stage. Thus, the payment received by the assessee-firm for rendering such kind of services falls within the realm and ambit of 'royalty' as defined in para (4) of Article 12 of the DTAA. The relevant definition of 'royalty' as given in Article 12(4) of India-Netherlands-DTAA reads as under:- "The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark design or model, pan secret formula or process, or for information concerning industrial, commercial or scientific experience". Here, the main emphasis of the Revenue is on the term "for information concerning industrial, commercial or scientific experience". This term mainly alludes to concept of use of or right to use of providing of "kno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de specific provisions concerning the confidentiality of that information. - In the case of contracts for the provision of services, the supplier undertakes to perform services which may require the u se, by that supplier, of special knowledge, skill and expertise but not the transfer of such special knowledge, skill or expertise to the other party. - In most cases involving the supply of know-how, there would generally be very little more which needs to be done by the supplier under the contract other than to supply existing information or reproduce existing material. On the other hand, a contract for the performance of services would, in the majority of cases, involve contractual obligations. For instance, the supplier, depending on the nature of the services to be rendered, may have to incur salaries and wages for employees engaged in researching, designing, testing, drawing and other associated activities or payments to subcontractors for the performance of similar services. Examples of payments which should therefore not be considered to be received as consideration for the provision of know-how but, rather, for the provision of services, include: - payments obtained a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held as under: "The royalty payment received as consideration for information concerning industrial, commercial, scientific experience alludes to the correct of knowhow. There is an element of imparting of knowhow to the other, so that the other person can use or has right to use such knowhow. In case of industrial, commercial and scientific experience, if services are being rendered simply as an advisory or consultancy, then it cannot be termed as "royalty", because the advisor or consultant is not imparting his skill or experience to other, but rendering his services from his own knowhow and experience. All that he imparts is a conclusion or solution that draws from his own experience. The eminent author Klaus Vogel I his book "Klaus Vogel On Double Tax Convention" has reiterated this view on differenced between royalty and rendering of services. The thin line distinction which is to be taken into consideration while rendering the services on account of information concerning industrial, commercial and scientific experience is, whether there is any imparting of knowhow or not. If there is no "alienation" or the "use of" or the "right to use of" any knowhow, then it cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herence to such quality standard and procedures are valid/ should remain valid. Similarly, in the estimating an engineering services and other services also, the assessee is mainly providing tender process, helping and preparing (estimates) and bids and plan consisting in local performance and other guarantees to the client of VOIPL etc. For rendering of these services, there is no element of imparting of any "knowhow" or there is transfer of any knowledge, skill or experience. Thus, in our opinion, none of the services provided by the assessee in the term of "service agreement" falls within the scope and ambit of "royalty" as defined in Article 12(4) of the DTAA. 16. In any case, as pointed by Mr. Porus Kaka, it is an admitted fact that, only actual mark-up has been charged by the assessee and the payment has been received purely on allocation of actual costs and the working of cost allocation as reproduced above has not been disputed either by the Assessing Officer or by the Ld. DRP. The assessee has charged the specified percentage of cost incurred by it for rendering aforesaid services which is based on turnover of each entity and the turnover of Van Oord Group as highlighted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a foreign ship where his total stay in India does not exceed in the aggregate a period of ninety days in the previous year". The salary paid to such non-resident cannot be taxed in India. Once the salary cannot be taxed in India the same cannot be brought in the ambit of FTS under Article 12(5). Thus, on this ground alone, we are of the opinion that the reimbursement of salary paid to the non-resident is exempt from taxability in India by virtue of section 10(6)(viii) and, therefore, same cannot be held to be FTS. Accordingly, the addition made by the Assessing Officer on this score stands deleted. 18. So far as the issue of set off of unabsorbed depreciation and losses is concerned, now in light of our finding given above, we direct the Assessing Officer to follow the provision of section 115A(3) and 32(2) after giving the effect to our decision as above. As regards the unabsorbed losses, the same has not been pressed before us and accordingly, the same is dismissed. 19. Lastly, regarding levy of penalty under various sections, as stated in the starting of the order, we have already held that these grounds are premature and, therefore, no adjudication is required. 20 In view ..... X X X X Extracts X X X X X X X X Extracts X X X X
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