TMI Blog2016 (11) TMI 1249X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee in terms of the “service agreement” and also analyzed the definition of “royalty” as given in Article 12(4) and have reached to a conclusion that the said services and reimbursement of cost does not fall under the realm of “royalty”. Moreover here in this case, the revenue’s main thrust is that the payment received by the assessee from VOIPL is “royalty” and here it is not the case of FTS by the department and, therefore, we are refraining ourselves from going into the aspect of FTS qua the services rendered in terms of the service agreement. Taxability of reimbursement of salary as FTS under Article 12(5) - Held that:- Assessee has given the employee-wise break-up of salary along with respective days of stay in India for the crew members on Volvox Atlanta and it is amply evident that stay of none of the crew members in India has exceeded 90 days. Similarly, with respect to reimbursement of salary of crew members Volvox Delta also it is seen that the days of stay again does not exceed 90 days. Rather it is only for the period of 35 days. This is evident from the certificate issued by the ‘Director General of Shipping’ dated 10th September, 2009 given to VOIPL. Onc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic 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 without any markup and constitute pure allocation of cost which is not taxable as royalty nor Fees for Technical Services under the Act. 7. The learned AO/DRP failed to appreciate that for the services rendered by the Appellant to qualify as royalty, the same should provide know-how to the recipient. 8. The learned AO/DRP erred in law and in facts, in holding that services rendered by the Appellant involve development and transfer of a technical pan or technical design. 9. The learned AO/DRP erred in adopting an approach based on unsubstantiated presumpti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 271G of the Act 19. The learned AO erred in initiating the penalty proceedings under section 271G of the Act, which is applicable in cases of failure to furnish information or documents as required under section 92D of the Act, without appreciating the fact that the international transaction entered by the Appellant are not taxable in India. 20. the learned AO erred in initiating penalty proceeding under section 271 G of the act, without considering the fact tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see had not earned any income from contractual operations in India in the relevant assessment year except for recovery of bad debts of ₹ 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 of India, the assessee had given following note: During the financial year ended March 31, 2009, Van Oord Dredging and Marine Contractor BV (VODMC), Netherlands has provided certain business management to Van Oord India Private The above services have been rendered entirely from outside India and no role is played by VODMC s Project Office, in rendering the said services. Since, VODMC s Project Office has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s; 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 and assistance in fiscal and legal matters. 2. Nature and Extent of services a) b) All services to be rendered by the Service Company will be advisory and consultative and the Service Recipient Company shall have the final authority for the implementation of a advice and assistance recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 certain payments on account of reimbursement of expenses which were mainly salary incurred on personnel and staff on behalf of VOIPL for sums aggregating to ₹ 2,22,39,146/-. In response to the show cause notice the assessee submitted that, the salary paid by the assessee on behalf VOIPL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 allocation was given in the following manner:- S No. Particulars Amount (a) Total Group Turnover of BODMC EUR 1,53,60,56,000 (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... From Lloyds Register Netherland BV . Brochures (Please Refer page 67 to 75 Of the Paper book) 4 Quality, Health, Safety and Environment ( QHSE ) . Conducting at regular intervals Internal audits to determine Adherence to QHSE procedures . Increasing safety awareness within Van Oord group . Updating health, safety and environment policy to be followed by the group. . 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 assis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Appellant-assessee can provide knowhow only when the receipt is able to replicate or create the computer system by itself. With changing technology these information is required to be updated from 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. These FAQ s; how to login to the system, charge the password etc can never amount to transfer of knowhow. b) Operational support : The Van Oord as a group operates at a high standard of safety, where ever it may operate. VODMC provides with the checklist (format) 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 checklis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ODMC and VOIPL being in the dredging industry need to have a high level of safety where ever it may operate. The information provided by VODMC is general information and not any kind of secret information, which could be obtained over the internet. These services are provided on continuous basis and constantly updated from time to time. These are pure services without any transfer of Knowledge, skill and experience concerning industrial, commercial or scientific is made available to VOIPL. 9. Mr. Kaka, summarizing his contentention submitted that, assessee while rendering business support services to VOIPL is not making available any kind of knowhow to the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he stay of none of the employees have admittedly exceeded 90 days. He submitted that, the crew members were non-residents and working on foreign ships i.e. the dredgers Volvox Atlanta and Volvox Delta and their stay in India did not exceed 90 days. The same he pointed out that could be verified from the break-up of the number of days the crew deputed on dredger Volvox Atlanta stayed in India and minimum Training requirement compliance certificate issued by the Director General Shipping dated 10 September, 2009 the copy of which has been enclosed as page 149 of the paper book. In the light of the above, he submitted that the crew members sourced from VODMC, satisfied all the conditions prescribed under the provisions of section 10(6)(viii) of the Act and therefore, the salary income received by the crew members was not taxable in India. Further, VODMC has not charged any mark up on such salary payments. Accordingly, VOIPL has made reimbursement of the salary paid to VODMC to the crew members of the dredger, which by itself not taxable in India under the provisions of section 10(6)(viii) of the Act. In the light of the aforesaid facts, he submitted that the reimbursement was on accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to support the operations of its Indian subsidiary. The argument of the assessee company that the payments were made to its Indian subsidiary only as reimbursement of expenses cannot be accepted at its face value. The facilities arranged and coordinated or obtained by the assessee to support the operations of its Indian subsidiary are not layman s activities. Even to choose the best dredger, it is necessary to have adequate technical knowhow about the nature and place of work to be carried out by its Indian subsidiary. It is not possible to simply say that the assessee had only brought dredgers from outside India to the Indian port for dredging and kept back once the work is over. These are oversimplified statements. Apart from arguing that the payments were in the nature of reimbursement of expenses, the assessee has not explained anything about the pricing of the services, for which the so-called reimbursements were made by the Indian subsidiary to the assessee company. It is the case of the assessee that expenses were reimbursed by the Indian subsidiary at par with the invoices issued by third parties. But there is nothing on record to show that the price negotiated betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which can be summarized as under:- (a) In the case of Van Oord Acz, the main contract was awarded to the foreign company which was subcontracted to the Indian subsidiary; (b) The assessee did not explain anything about the pricing of the services for which the reimbursements were made; (c) The assessee did not establish that it had offered services to the Indian subsidiary on cost to cost basis; (e) The fees in the said were held to be in the nature of fees for technical and not royalty. 14. We have heard the rival submissions, perused the relevant finding given in the impugned orders as well as material referred and relied upon before us. The first issue for our adjudication is, whether the fees received by the assessee from its Indian entity, VIOPL for management and support services is to be treated as royalty under Article 12(4) of India-Netherland-DTAA or not. The entire gamut of facts and nature of services provided by the assessee to VOIPL in the terms of service agreement dated 1st April, 2004 has already been discussed above elaborately. The revenue s case is that, the VOIPL is completely dependent on assessee (VODMC) for its experience in industrial, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. It is recognized that the grantor is not required to play any part himself in the application of the formulas granted to the licensee and that he does not guarantee the result thereof. This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party. Payments made under the latter contracts generally fall under Article 7. The need to distinguish these two types of payments, i.e. payments for the supply of know-how and payments for the provision of services, sometimes gives rise to practical difficulties. The following criteria are relevant for the purpose of making that distinction: - Contracts for the supply of know-how concern information of the kind described in paragraph 11 that already exists or concern the supply of that type of information after its development or creation and include specific provisions concerning the confidenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a strong emphasis has been given to concept of knowhow . There is an element of imparting of knowhow to the other so that other can use or has right to use such knowhow . In case of industrial, commercial or scientific experience, if services are being rendered simply as an advisory or consultancy then it cannot be reckoned as royalty because the advisory or assistance does not connotes imparting of the skill or experience to other albeit the person is rendering the services from his own knowhow and what he is imparting is his conclusion based on his own skill and experience. The imparting of knowhow envisages that the recipient should be able to make use of such knowhow independently on its own account without recourse of the provider of the knowhow in future. For being regarded as royalty there has to be alienation or use of or right to use of any knowhow and without any transfer of any knowledge, experience or skill, it cannot be termed as royalty . In the case of GECC Asia Ltd. vs. DDIT ( supra ) had occasion to deal with the term information concerning to industrial, commercial or scientific experience and after referring to various commentaries, observed and held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt; estimating and engineering; and personal and organization, administration and legal services, there is no imparting of any kind of knowledge, skill or experience by way of information concerning industrial, commercial or scientific which is made available to VOIPL. For instance, information technology services are provided for use of group companies computer system where IT teams providing manual general information without providing any information or method to design or create a computer system. It is mainly kind of help desk and trouble-shooting services which are required on regular basis. For operational support system also, it mainly provides for check-list for project plans, safety work and inspection plans etc. Similarly, for marketing, the assessee provides for emarketing through its website and maintaining it, printing and publishing brochures which can be distributed to its potential clients. It also helps VOIPL to obtain the certificate of approval from the concerned organizations and obtained the contracts on the regular basis. Regarding quality health and safety environment services, the assessee merely conducts internal audits on regular intervals so that proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of taxability of reimbursement of salary as FTS under Article 12(5), we find that the assessee has paid salary for sums aggregating to ₹ 2,22,39,000/- which has been classified under the following heads:- Salary to crew members of dredger Volvox Delta- ₹ 16,214,187; and Salary to crew members of dredger Volvox Atlanta- ₹ 6,024,959. On pages 147 and 148 of the paper book, the assessee has given the employee-wise break-up of salary along with respective days of stay in India for the crew members on Volvox Atlanta and it is amply evident that stay of none of the crew members in India has exceeded 90 days. Similarly, with respect to reimbursement of salary of crew members Volvox Delta also it is seen that the days of stay again does not exceed 90 days. Rather it is only for the period of 35 days. This is evident from the certificate issued by the Director General of Shipping dated 10th September, 2009 given to VOIPL. Once that is so, then in terms of section 10(6)(viii) which reads as under:- (viii) any income chargeable under the head Salaries received by or due to any such individual a non-resident as remuneration for services rendered in co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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