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2016 (11) TMI 1249 - ITAT MUMBAI

2016 (11) TMI 1249 - ITAT MUMBAI - TMI - Taxability of “Management Service Fees” - whether amount received by the assessee from its Indian entity as “royalty” under Article 12(4) of Indian- Netherlands Treaty - Held that:- As highlighted above, with regard to various streams of services like providing of information technology; operational support; marketing; quality, health, safety and environment; estimating and engineering; and personal and organization, administration and legal services, the .....

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- We ourselves have analyzed each and every aspect of services rendered by 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 departme .....

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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) 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( .....

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after giving the effect to our decision as above. - ITA No. : 7589/Mum/2012 - Dated:- 7-10-2016 - SHRI G S PANNU, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER AND For The Appellant : Shri Porus Kaka For The Respondent : JShri N K Chand ORDER PER AMIT SHUKLA, J.M.: The aforesaid appeal has been filed by the assessee against final assessment order dated 30.10.2012, passed under section 143(3) r.w.s. 144C(13) in pursuance of direction given by the Dispute Resolution Panel (DRP) under .....

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77; 22,57,89,998 2. The learned AO/DRP 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 ₹ 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 .....

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w-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 kn .....

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ces fees. Taxability of the reimbursement of salary received of ₹ 2,22,39,146 10. The learned AO/DRP erred in law and in facts in holding that the reimbursement of salary expenses received by the Appellant are taxable as fees for technical services under Article 12(5)(a) of the India- Netherlands Treaty. 11. The learned AO/DRP failed to appreciate the fact that the crew members provided on dredgers by the Appellant is neither sharing of any experience and information concerning industrial, .....

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constituted pure reimbursements which are not taxable as fees for technical services under the Act. Set-off of unabsorbed depreciation of ₹ 23,65,99,081 against the additions made to the income of the Appellant 14. The learned AO erred in law and in facts in adjusting the unabsorbed depreciation of ₹ 23,65,99,081 against the additions made to the income of the Appellant being, Royalty and fees for technical services income taxable on gross basis without deduction of expenses and dep .....

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fees for technical income taxable on gross income basis. Set-off brought forward business losses of ₹ 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 ₹ 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 gro .....

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s 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 that no show cause notice for furnishing details with regard to appropriateness of the documentation maintained for international transactions was issued to the Appellant. Initiation of penalty proceedings under section 2 .....

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proceedings under section 271(1)(c) of the Act, when the Appellant had made full and true disclosures both, in Return of Income and during assessment proceedings . 2. Thus, the main issues which have been raised by way of aforesaid grounds are: , taxability of Management Service Fees of ₹ 22,57,89,998/- received by the assessee from its Indian entity as royalty under Article 12(4) of Indian- Netherlands Treaty; , taxability of reimbursements of salary received by the assessee from the Ind .....

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y both the parties ground nos.19 to 22 are to be treated as infructuous. 3. Brief facts and the background of the case are that, the assessee, (hereinafter referred to as VODMC) is a company 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 y .....

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upport, 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 Dred .....

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,998 on VOIPL . The assessee s main contention had been that, the services rendered in pursuance of the service agreement are not in the nature of FTS under the Indo-Dutch DTAA, because there is no make available of any technical knowledge, experience, skill, know how or process, etc. That apart, it was stated that VODMC s project office has not played any role in rendering of any of the above services, therefore, same are not attributable to its project office also and thus, on this ground also .....

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sessment order. The Assessing Officer examined the content of the Service Agreement entered by the VODMC and VOIPL on 1st April, 2004 and noted the following relevant portion:- During the term of this Agreement, the Service Company shall on a continuing basis, provide the Service Recipient Company with assistance and support in the field of personnel and organization, operation support, quality, health, safety and environment, designated personnel offshore, information technology, estimation and .....

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rectly 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, suppor .....

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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 received. Further, in no case shall the Service Company be held responsible for outcome of the implementation emanating from any advise provided by the Service Company . It was also submitted by the assessee that, the assistance to the Indian company was given for the following stages in the dredgi .....

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any mark up. 4. The Ld. Assessing Officer after analyzing the Service Agreement and the submissions of the assessee, observed that, the Indian entity/VIOPL is totally dependent upon the foreign enterprise for its experience in industrial, commercial and scientific field. In fact, starting from the pre-bid stage the assessee company is providing full support services till the post project completion stage. The Indian company is engaged in a highly technical business of dredging activities for wh .....

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rocuring business and for its successful implementation as well. During the course of assessment proceedings, the assessee was asked to furnish the documentary evidences in support of the business management services, in response to which the assessee vide letter dated 18.11.2011 has furnished 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 instruct .....

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t 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 .....

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ta-for ₹ 6,024,959. Thereafter, employee-wise break-up of salary along with respective days of stay in India for the crew members of Volvox Delta and Volvox Atlanta in India was submitted. It was contended that, the stay of the employee in all the cases did not exceeded 90 days and, therefore, in view of the provision of section 10(6)(viii), such salaries would not be taxable in India. The assessee s submissions in this regard have been incorporated in the page 14 of the assessment order. .....

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id observations and the findings on both the issues by the Assessing Officer have been upheld by the DRP also. 7. Before us the Ld. Senior Counsel, Mr. Porus Kaka after explaining the entire facts submitted that, the Indian Subsidiary, VOIPL came into existence in the year 1997 and before that the assessee was performing its work directly in India. The assessee is one of the leading dredging company in the world and with an objective to achieve consistency of approach and economies of scale for .....

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arious 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 .....

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ificate 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) Total General Administrative expenditure EUR 10,27,13,000 (c) Overhead Percentage =(b)/(a) * 100 6.7% (d) Total Turnover of BOIPL for FY 2008-09 INR 3,28,48,01,955 (e) Cost allocation to BOIPL = (d) * (c) INR 22,00,81,731 (f) Invoice raised by VODMC on VOIPL EUR 32,99,576.18 .....

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ctions;  workplace security;  archiving emails;  workplace restore . Assisting in IT infrastructure (Network, email, etc.) . Software maintenance services, . Troubleshooting services, etc. . IT User guidelines (Pages 12 to 38 of the Paperbook) . Sample Correspondence Between BOIP and IT service desk of VODMC which demonstrates the troubleshooting/ support services provided 2 Operational Support Various operating checklists (formats)Are provided by VODMC which Assists VOIP .....

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Distributed by VOIPL to its Potential clients . Obtaining certificate of Approval 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 (Pleas .....

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l 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 concer .....

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ans that the person should be able to make use of information independently on its own account without recourse to the provider in future. In other words, the recipient would be enabled to utilize the knowhow for his own purpose without taking any assistance from the provider. In case of the assessee, continuous services which have been provided to VIOPL do not fall in any manner in the realm of providing of any kind of knowhow but are purely in the nature of services. Thereafter, with respect t .....

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the use of group companies computer systems. IT teams prepared the manual providing information and not secret information, which is available over the internet. The information provided is on the method of using the computer system and not on the method of design or create a computer system. The recourse of the helpdesk/troubleshooting services for certain issues are required on regular basis. The Appellant-assessee can provide knowhow only when the receipt is able to replicate or create the c .....

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th 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 industria .....

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yds 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, commercial or scientific is made available to VOIPL not is any knowhow transferred. These are pure support services. d) Quality, health, Safety and Environment ( QHSE ): The assessee conducts internal audits on regular intervals to determine the adherence to QHSE procedures. There is .....

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DMC and a testing report is done which again assists in determining the estimate for the dredging time and hence, the bid. No knowhow is transferred by VODMC to VOIPL at any stage and the soil report is prepared individually for each site. It does not also transfer any know how since VOIPL cannot replicate/redo the same in its own business at any stage. f) Personal and organization, administration and legal: The assessee assists in finalizing the bid submissions on legal, performance and other g .....

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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, assess .....

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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 whi .....

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rved that the cost incurred by assessee in rendering the aforesaid services has been allocated to VOIPL. In support he relied upon the decision of ITAT C Bench, Mumbai in the case of Cairn Energy India Pty Ltd v ACIT, reported in [2009] 126 TTJ 226 and catena of other decisions, the list of which are as under: CIT v Siemens Aktiongeselschaft [2009] 310 ITR 320 (Bom High Court) DIT v A P Moller Maersk AS [2015] 374 ITR 497 (Bom High Court) CIT v Expeditors International(India) (P) Ltd.[2012] 209 .....

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who is a non-resident employee of a foreign shipping company and the 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 compli .....

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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 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 betw .....

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ee 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 upon the said decision. The relevant observation and finding of the Tribunal, as incorporated in the DRP s order is reproduced hereunder:- We find .....

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contract assigned to it. It is in the light of the above declaration that the assessee company has undertaken to provide all sorts of services to its Indian subsidiary, wherever necessary, to execute the dredging contract. Such services include not only arranging the dredgers from abroad, but also application of technical mind to select and choose appropriate parties to execute the work entrusted to its Indian subsidiary. The argument of the assessee company that the payments were made by the In .....

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man 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 .....

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rovided 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 th .....

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to its Indian subsidiary in India. Further, it is to be seen that the original contract was awarded to the assessee company itself. The contact was thereafter assigned to its subsidiary on the basis of an assignment agreement. It is clear from the order of the Assessing Officer that the subsidiary company does not have the technical, organizational and managerial competence to carry out the contract work by itself. Therefore, in fact, the assessee company itself had, to a great extent, execute t .....

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l services is also decided against the assessee . 13. In the rejoinder before us, the Ld. Senior Counsel Mr. Porus Kaka submitted that the said decision is not applicable on the facts of the present case for the various reasons, 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 reimbursem .....

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ment 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, commercial and scientific field. The Indian entity is engaged in highly technical business o .....

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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 .....

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d definitions of know-how. The words payments … for information concerning industrial, commercial or scientific experience are used in the context of the transfer of certain information that has not been patented and does not generally fall within other categories of intellectual property rights. It generally corresponds to un-divulged information of an industrial, commercial or scientific nature arising from previous experience, which has practical application in the operation of an ente .....

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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. .....

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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 .....

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deration for the provision of know-how but, rather, for the provision of services, include: - payments obtained as consideration for after-sales service; - payments for services rendered by a seller to the purchaser under a warranty; - payments for pure technical assistance; - payments for a list of potential customers, when such a list is developed specifically for the payer out of generally available information (a) payment for the confidential list of customers to which the payee has provided .....

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mation in response to frequently asked questions or common problems arise frequently . From the above clarification, it can be ostensibly inferred that, to qualify as payment towards information concerning industrial, commercial or scientific experience, person must provide knowhow to the recipient, that is, 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 industri .....

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tly 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 as u .....

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ing 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, commerci .....

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n such a case, it cannot be held that such services are in nature of royalty . Thus, in principle we hold that if the services have been rendered de-hors the imparting of knowhow or transfer of any knowledge, experience or skill, then such services will not fall within the ambit of Article -12. …. If such services do not involve imparting of knowhow or transfer of any knowledge, experience or skill, then it cannot be held to be taxable as royalty 15. Thus, what we have to see is, whether .....

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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 suppo .....

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essee merely conducts internal audits on regular intervals so that proper adherence 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 .....

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s 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 above which has been certified by the Auditors as given in the paper book from pages 9 to 11. Once the auditors have certified that, such allocation of costs represents the actual expenditures then, we do not find any reason to hol .....

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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. 17. Now, coming to the issue of taxability of reimbursement of salary as FTS u .....

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y 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 chargeabl .....

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