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Dy. Commissioner of Income Tax International Taxation, Baroda Versus Bombardier Transportation India Pvt. Ltd.

2017 (1) TMI 780 - ITAT AHMEDABAD

Fee for Technical Services (FTS) - deduction of tax at source under section 195 - Payment made towards various IT support services received from the Holding Company and associated enterprises of the group concerns - Held that:- We find that the related payments made by the assessee to BT Canada were in the nature of reimbursements, and, as evident from the details taken to record earlier in this order, there were specific cost allocations which were borne by the assessee. These payments, by no s .....

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e components of economic activity for which consideration is paid, it is neither practicable, nor permissible, to assign monetary value to each of the segment of this economic activity and consider that amount in isolation, for the purpose of deciding character of that amount. - The payment, as we have observed earlier, is for the activity of specialized data processing. It is neither practicable, nor permissible, to assign monetary value to each of the segment of this economic activity and .....

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t is used in rendition of these services, such a payment, or part thereof, cannot be treated as payment for use of equipment. Revenue’s case is thus acceptable as payment for use of equipment. In any case, the details furnished by the assessee also support the fact of reimbursement. When recipient does not have any income embedded in the related payment as reimbursement, there cannot be any occasion for deduction of tax at source under section 195. In view of these discussions, as also approving .....

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“make available” technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design The services provided by BT Canada were simply management support or consultancy services which did not involve any transfer of technology. It is not even the case of the Assessing Officer that the services were such that the recipient of service was enabled to perform these services on its own without any further recourse to the servi .....

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make available’ has a specific meaning in the context of the tax treaties and there is, thus, no need to adopt the day to day meaning of this expression, as has been done by the Assessing Officer. - In view of these discussions, and as we concur with the well reasoned findings of the learned CIT(A), we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter on this count as well. The order of the CIT(A) stands confirmed. - Decided against revenue - ITA .....

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. 2. Ground no. 1 is general in nature and does not call for any specific judication by us. 3. In ground no. 2, the Assessing Officer has raised the following grievance: The learned CIT(A) has erred on facts and in law in holding that the payment of ₹ 9,19,96,649/- made towards various IT support services received from the Holding Company and associated enterprises of the group concerns are not in the nature of Fee for Technical Services (FTS). 4. So far as this grievance of the assessee i .....

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cer noticed that the assessee has made payments, aggregating to ₹ 9,19,96,649 to Bombardier Transportation Canada Inc (BTCI, in short). The details of these payments are as follows:- Service Units Text (USD) (INR) TDS Nature of service Finance System - Maneja 48,711 2,647,306 NO ERP application used at Maneja site of the company by employees in Finance department to do accounting and reporting of all financial transactions HR Connect 45,321 2,463,072 NO Common standard HR platform used thr .....

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finition of roles and responsibilities) and thus frees resources and provides data for a faster and better HR service. Intens 4,716 256,283 NO Intens is a 3-tier application framework used to do scientific calculations in the fields of engineering. Kronos India 123,436 6,708,397 NO Kronos is a Time and Attendance system used to record time and attendance of all employees of the company. In oilier words in conjunction with "time clocks" all blue and white collar employees in the company .....

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cess, as and when required, information stored on the server database. Lotus Notes server used by employees in the Mainline / Passenger Division of the company to communicate with various stakeholders and to receive and send LN DB Mainline Division 140,759 7,649,869 NO e-mails both internally within the company and also to external people and also lo access, as and when required, information stored on the server database LN DB Rail Control Solutions-Division 10,945 594,850 NO Lotus Notes server .....

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, employees working in project management function of the mainline division have to record and enter the details of that claim in this database. Maximo - DB MAXPPC 28,511 1,549,481 NO It is a Enterprise Asset Managem ent solution that has unique industry solutions for various business processes. This flexible solution provides a single platform to deliver asset lifecycle and maintenance management from end-to-end across the enterprise.. Consisting of six core modules - Materials, Procurement, As .....

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iz. customer agreement, financial information, all customer correspondences, customer claims/ disputes, minutes of the meetings, etc. are archieved and kept in this database for future reference purpose P…… China 1,375 74,716 NO Project Management application used to keep and archieve all records and database separately for each customer project/contract in the RCS division of the company. It is a Version Control tool, a Change Management tool and a Requirement Package used as Conf .....

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t output from a remote location using a Microsoft Windows operating system SAP Global FORE 26,519 1,441,245 NO Finance Global consolidation system used by-employees in Finance department of the company for reporting financial results of the company and also to maintain contract wise financial summary viz. sales, cost gross margin, overheads, Net margin, etc. VCM Template Solution 221,003 12,010,931 NO SAP Value Change Managem ent (VCM) system for Asia Sales Force 14,798 804,215 NO Customer Relat .....

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523,555 NO Bar Coding application for PPC Maneja site of the company used to do inventory management viz. keep record of all the inventory of raw material, finished goods, etc. at the site. It is an efficient way to keep a check and control on the inventory in the site. Payroll System - India 14,323 778,400 NO HR Payroll System for India - containing data base of all employees of the company .and used to prepare the monthly payroll of all Indian employees PRO BT Global 22,773 1,237,637 NO MS Pro .....

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management application Depreciation - 2012- 4062 EPPM Template F 55 3,002 NO Depreciation of Project management application PDM Metaphase 11,603 630,593 NO Product Data Management (PDM) tool PDM enhancements & bug fixing for PDM LAE division Project Scope; Fit Gap and Blueprint for PDM stabilization / optimisation Deployment of template functionalities as agreed between Business and IS Change management for the adaptation to the template processes Template localization based on legal or cont .....

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s, as evident from the nature of payments set out above and as was claimed by the assessee, were towards information system support services at a group level and has been charged from the appellant based on costs incurred towards consumption of various service elements by the appellant. The cost for each service element is determined by (a) applying an explicitly given price to the number of units of service consumed, or (b) calculating the share of globally incurred cost based on defined keys. .....

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t in the context of Indo Canadian tax treaty, only such payments as have an element for use of IPRs could be considered as royalties, but then the present payments are for standard facilities. It was also explained that the BT Canada has not received any payments for commercial exploitation of copyright embedded in the applications. The Assessing Office, however, rejected this stand and proceeded to hold that these amounts are taxable as royalties under section 9(1)(vi) of the Income Tax Act as .....

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he view that a major portion of the payment is for the use or right to use industrial, commercial or scientific equipment, while remaining cover the use of various processes for which access has been granted by the assessee company . He thus held that the assesse ought to have withheld tax at source @10% from these payments. Accordingly, a demand under section 201(1) r.w.s. 195 was raised on the assessee. Aggrieved, assessee carried the matter in appeal before the CIT(A) who upheld the plea of t .....

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provisions under the Act relating to taxation of income from royalty income are as follows: Section 9(1)(vi) income by way of royalty payable by- (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; Explanation 2. - For the purposes of this .....

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ncluding the amounts referred to in section 44BB; - Explanation 4. - For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. Explanation 5 - For the removal of doubts, it is hereby clarified that the royalty in .....

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as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work including cinematograph films or work on film tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contin .....

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rding time & attendance etc. used by the appellant are primarily in the nature of applications for data processing or warehousing wherein the appellant does not get control/power of use/disposal of hardware or server involved. No use or right to use of any equipment or process is conferred upon the appellant. The appellant is merely granted a facility and the consideration for the same cannot be construed as royalty. Therefore, going by the principles as elucidated by the Technical Advisory .....

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of provision of standard services. When we see from the perspective of the DTAA, it is trite that for any consideration to be taxed as royalties , it has to be first showed that the customer/payer has a right to use of an right, information or property and secondly, such right, information or property should be in the nature of Intellectual Property Rights such as patent, formula, secret process, copyright or any other similar property. In the light of the various judicial decisions relied upon .....

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dicial reliance that can placed on this proposition including the landmark judgement of the Hon'ble Supreme Court in the case of Azadi Bachao Andolan vs. UOI 263 ITR 706 (SC) where it has been unequivocally held that the interpretation given under the DTAAs ought to be given even where it is inconsistent with the provisions of the I.T Act. On going through the items for the purpose of which payments have been made by the appellant clearly shows that there was no use of or right to use of any .....

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o use the embedded copyright. Strictly speaking, use of a copyright in a software for the purpose of commercial exploitation in terms of reproduction, sub-lisence etc. only would tantamount to royalties. Further, none of the payments have also been made towards use of any industrial, commercial, or scientific equipment. In view of discussion above, I am of the considered view that the payment made by the Appellant for the provision of IT support services cannot be taxed as 'Royalties' un .....

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t source u/s 195 of the Act in the absence of any component of income involved. Thus, there existed no liability of the appellant to deduct any TDS u/s 195 (1) of the I.T. Act. This ground of appeal is allowed accordingly. 6. Aggrieved by the relief so granted by the CIT(A), the Assessing Officer is in appeal before us. 7. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal positon. 8. We find that the rel .....

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t to use the equipment by the assessee. The service may involve use of equipment but that does not vest right in the assessee to use the equipment. Even if a part of consideration can be said to be on account of use of equipment by breaking down all the components of economic activity for which consideration is paid, it is neither practicable, nor permissible, to assign monetary value to each of the segment of this economic activity and consider that amount in isolation, for the purpose of decid .....

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s concerned. During the course of hearing before us, when we put this proposition to the learned Departmental Representative, he did not have much to say beyond placing reliance on the stand of the Assessing Officer. We also find that this issue is also covered, in favour of the assessee, by a coordinate bench decision of this Tribunal which has, in the case of Kotak Mahindra Primus Ltd vs DDIT [(2007) 11 SOT 578 (Mum)] wherein it was observed by the bench that The Indian company does not have a .....

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the payment is for act of specialized data processing by the Australian company. Use of mainframe computer in the course of processing of data is one of the important aspects of the whole activity but that is not the purpose of, and consideration for, the impugned payment being made to Australian company. The payment, as we have observed earlier, is for the activity of specialized data processing. It is neither practicable, nor permissible, to assign monetary value to each of the segment of thi .....

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basis that any equipment is used in rendition of these services, such a payment, or part thereof, cannot be treated as payment for use of equipment. Revenue s case is thus acceptable as payment for use of equipment. In any case, the details furnished by the assessee also support the fact of reimbursement. When recipient does not have any income embedded in the related payment as reimbursement, there cannot be any occasion for deduction of tax at source under section 195. In view of these discuss .....

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d enterprises of the group concerns are not in the nature of Royalty. 11. So far as this ground of appeal is concerned, the relevant material facts are like this. During the course of verification of TDS returns, the Assessing Officer noticed that the assessee has made payments of ₹ 6,80,54,110, on account of Administration, Marketing, Procurement and CCR Services and ₹ 40,67,408, on account of Human Resources Services, to BT Canada. These services were rendered by BT Canada, at the .....

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re in the nature of management support and advisory services. On these facts, the Assessing Officer was of the view that these services result in passing on suitable knowledge, skill and experience during the course of execution of these services which itself makes available experience and skill of the non resident to the assessee which gets hit by the mischief of definition of fees for technical services in the DTAA . The Assessing Officer was also of the view that the service of technical inpu .....

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much as the assessee was enabled to perform the same services in future without recourse to the service provider, that the fees for these services is covered by the definition of fees for technical services in the Indo Canadian tax treaty. Accordingly, the assessee was held to have committed a default in not deduction tax at sources from these payments, @ 15%, under section 195 of the Act. The resultant demand under section 201 r.w.s. 195 was, therefore, raised by the Assessing Officer. Aggrieve .....

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Planning, Management Support, Others, HRSSO, Legal, Corporate Office Fees, Supply Management, Communication, Bids, Intellectual Property, Six Sigma. The services rendered by the appellant may at best be categorized as 'technical' in nature under domestic law. However, under the treaty, the qualifying words 'make available' are of significance and hence, if any technical or consulting service is not making available technology to the service recipient, the same cannot suffer TDS .....

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ence on the concept of make available'. From the perusal of the agreement with BT-Canada and the annexures thereto, the nature of services are such that these do not enable the service recipient to make use of the said technical or managerial services independently. More so in the instant case where such services have been availed by the appellant regularly year on year, there is no scope of appellant being equipped enough to carry out such services/functions on its own. More importantly, th .....

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pellant buttress the argument put forward by the appellant that the services rendered by BT-Canada are in effect towards the proper functioning of the appellant's business operations and alignment with the Bombardier group's global best practices. Such arrangements are not uncommon among various multi-national enterprises and have also been favourably considered by the following decisions: • Bharti AXA General Insurance Co. Ltd (234 CTR 62) • Bovis Lend Lease (India) Pvt. Ltd. .....

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its expertise/ experience in running refineries and services like undertaking site inspection, technical/organizational review of processes, providing recommendations etc. could not to be taxed as fees for technical services ( FTS' } under India- Netherlands DTAA. It was observed that none of them involve transfer of technology and absent make available' of technology the same cannot be taxed as Fees for technical service. This case is squarely applicable on the facts of the present matt .....

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g the services to apply technology contained therein. It further held that unless there is a transfer of technology involved in technical services the "make available" clause is not satisfied. Thus payment made by assessee, engaged in business of manufacturing ultrasonic meters, to a US company towards calibration and testing of equipment, could not be treated as, fee for technical services' due to non-compliance with make available cause. Further, Ahmedabad Tribunal, in the case o .....

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DTAA. The law is settled so far as the connotations of 'make available' clause in the definition of fees for technical services in the contemporary tax treaties are concerned. It is held to be a condition precedent for invoking this clause that the services should enable the person acquiring the services to apply technology contained therein. The Tribunal observed that there are two non-jurisdictional High Court decisions, namely Delhi High Court in the case of DIT v. Guy Carpenter & .....

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he consideration for such services cannot be taxed under article 13 (4) (c) of India-UK tax treaty. In view of discussion above and respectfully following the above stated decisions of the jurisdictional Tribunal and plethora of rulings from various Courts & Tribunals, I am of the considered opinion that the impugned payment for support services does not warrant to be characterized as fee for technical services under India-Canada DTAA. Further, in view of the decision of the Apex Court in th .....

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o tax in India, there existed no liability of the appellant to deduct TDS u/s 195(1) of the I.T. Act. The AO is directed to grant the relief accordingly. The ground of appeal is accordingly allowed. 12. Aggrieved by the relief so granted by the CIT(A), the Assessing Officer is in appeal before us. 13. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal positon. 14. We find that the relevant provisions in t .....

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njoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design. 15. We find that so far as taxability under Article 12, i.e. with respect to 'Royalties and fees for included services' is concerned, we find that Article 12(4) provides that, "The term "fees for technical in .....

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processes, which enables the person acquiring the services to apply the technology contained therein". In order to invoke article 12(4)(a) it is necessary that such services should make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design The services provided by BT Canada were simply management support or consultancy services which did not involve any transfer of technology. It is not ev .....

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DIT Vs Guy Carpenter & Co Ltd ([(2012) 346 ITR 504 (Del)] and Hon ble Karnataka High Court in the case of CIT Vs De Beers India Pvt. Ltd [(2012) 346 ITR 467 (Kar)] in favour of the assessee, and there is no contrary decision by Hon ble jurisdictional High Court or by Hon ble Supreme Court. In De Beers case (supra), Their Lordships posed the question, as to what is meaning of make available , to themselves, and proceeded to deal with it as follows: The technical or consultancy service render .....

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in with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technol .....

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