TMI Blog2018 (11) TMI 201X X X X Extracts X X X X X X X X Extracts X X X X ..... the terminology of ‘royalty’. Article 5 of the RDCA clearly shows that all the assistance, information and advice given under the RDCA are for the exclusive use only by all participating Philips Group entities and the only reason for restriction on sharing with the third parties is to protect the interests of the Philips Group as a whole. Therefore, we are of the view that the receipts under RDCA are not taxable as the same is not ‘Royalty’ under Article 12(4) of the India-Netherlands DTAA, and it is a cost sharing agreement, in nature of reimbursement, hence we delete the addition. Taxability of receipts under Management Support Services Agreement (MSSA) received by Koninklijke Philips Electronics N.V (Assessee), as per MSSA agreement between assessee and Philips Electronics India Limited (‘PEIL’) - Held that:- As per sub section 2 of section 90 of the Act DTAA entered into with the foreign company is a statutory document recognized under the Income Tax Act and by sub section 2, the provisions of the Income Act would apply only to the extent that they are more beneficial to the assessee. We note that as per Article 12 of India-Netherland DTAA these receipts do not fall in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... background, we summarize and concise the grounds raised by the Assessee as follows: Ground No.1 Taxability of receipts of ₹ 242,653,150/- under Research and Development Co-operation Agreement (RDCA) received by Electronics N.V (Assessee), as per RDCA agreement between assessee and Philips Electronics India Limited ( PEIL ). Ground No.2 Taxability of receipts of ₹ 112,90,58,312/- under Management Support Services Agreement (MSSA) received by Koninklijke Philips Electronics N.V (Assessee), as per MSSA agreement between assessee and Philips Electronics India Limited ( PEIL ). Ground No.3. That on the facts and in the circumstances of the case, the ld. A.O and the Hon ble DRP erred in not appreciating the bona fide change in position regarding nontaxability of receipts under RDCA and MSSA adopted by the assessee for A.Y 2008-09, which resulted from better evolution/interpretation of law through judicial precedents. Ground No.4 . That on the facts and in the circumstance of the case, the AO erred in not granting full credit for tax deducted at source amounting to ₹ 163,028,554/- despite the fact that the company has filed all the original certificates duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Further, during the year under consideration, no application of section 195 of the Income Tax Act was made, relating to such payments. 6. During the assessment proceedings, the assessee was asked to explain the nontaxability of the income under Research Development Cooperation Agreement (RDCA). In response, the assessee submitted that Philips Electronics (India) Limited, India (hereafter referred to as, PEIL ) is a subsidiary of Koninklijke Philips Electronics, NV ( hereafter referred to as, KPENV). The PEIL s business is divided into various divisions such as lighting, consumer electronics, medical systems, software. Philips, being a leading player inter alia in the consumer electronics, domestic appliances, lighting products and Healthcare, conducts R D activities for the purposes of continuously innovating and introducing newer range of products in the global market. Philips has developed a business model whereby R D activities carried out at various R D centers of Philips have been pooled into KPENV in the Netherlands. The PEIL (Indian Co.) had entered into Research Development Co-operation Agreement ( RDCA ) with KPENV on 13th December 2004. On perusal of the preamble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted and recovered from the group companies and it is towards the reimbursement of such costs that it has received payments from PEIL under the RDCA. 7. The company was of the view that the payments received by it under the RDCA were nothing but reimbursement of cost incurred by it on research and development work, for its group companies. It cannot be said that the company had rendered any service of technical or consultancy nature to PEIL or to any of the other group companies when it provides the results of corporate research to them. The company does not deploy any personnel to perform any services in India. Therefore, the payments are not taxable in India as per the provisions of Article 12 of the India-Netherland Tax Treaty. Whether the payments received by the company were in the nature of royalty. In this connection it was submitted that the company was not receiving any consideration for transferring or conferring such rights and benefits. All the group companies including PEIL has a right flowing under the terms of the agreement itself to avail of the fruits of research in its own right. Though the legal ownership of IPR rests with KPENV as a matter of convenience an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d noticed that as per Article 2 of the RDCA the assessee undertakes to render concern research and development services to PEIL and more in particular agrees: (a). to provide the company [i.e PEIL] with an access to the benefits and information, existing and future, resulting from undertaking the research and development programmes to the extent to which Phillips [i.e the assessee] has the free right to do so and advise and assist the company in applying the same. (b). to grant the Company requisite authorization including granting a non-exclusive, non-transferable and indivisible license, as may be necessary for applying the benefits of the research and development programmes in the country under which Philips is or will be entitled to grant such license, Article 3 of the RDCA refers to the Concern Research and development Services which shall be provided by the assessee, in as far as they are reasonably required for the manufacture and/or sale of such types of products as will be manufactured and/or sold by the company from time to time.' The Concern Research and development Services, which Phillips shall render to the Company, may include: a. Providing to the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e agreed upon between the parties from case to case; the company shall also be advised about the maintenance of special machinery, tools and instruments supplies by Philips, k. Admitting at the company s specific request and at mutually agreed times, a reasonable number of employees of the company to factories and other works premises of Philips to the extent to which Philips has the right to do so, so that such employees of the company can familiarize themselves with working methods, manufacturing processes and services methods for products not yet known or used by the company, It has been agreed that Philips would render the services mentioned above, to the company outside the country. Any services that would be required to be rendered by Philips in or within the country, whether by way of deputation of employees/representative or otherwise, would be mutually agreed amongst the parties hereto and the same would not form part of this agreement. Article 4 of the RDCA authorizes the company i.e. PEIL to use the benefits arising from the research and development programmes undertaken by Philips, in the manufacturing, sale and use of products by the company in the country. Arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or ( vi) the rendering of any services in connection with the activities referred to in subclauses (i) to 25[(iv), (iva) and](v). In view of the above provisions of the Act, thus the payment made to the assessee under RDCA would be taxable in India in its hands as per the provisions of section 9(1)(vi) of the Act. The ld AO noted that the assessee in its submissions, admitted the fact that it has the legal ownership of the IPR. After going through the contents of the RDCA contract, the ld AO observed that the assessee has accorded the licence to use the same to PEIL and in return for which it receives remuneration. The contention of the assessee that none of its employees is required to visit India for rendering any work and hence, its receipts under RDCA would not be taxable in India is no longer a matter of concern especially in view of insertion of Explanation to section 9 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmes undertaken by the assessee. 10. To ascertain the applicability of Clause Article 12(4) of the India-Netherlands Double Taxation Avoidance Agreement [DTAA] in the assessee s case, the ld AO analyzed, the Article 12(4), which is reproduced as under: ARTICLE 12 Royalties and fees for technical services 1. ....................... 2......................... 3........................ 4. 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 or artistic or scientific work including cinematograph films, any patent, trademark, design or model plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. Without prejudice to the assessee s submissions, though the provision of section 245S(1) of the Income Tax Act, 1961 specifically lays down that the ruling of the Hon ble AAR shall be binding only (a) on the applicant who had sought it; (b) in respect of the transaction in relation to which the ruling had been sought; and (c) on the Commissioner, and the income-tax authorities subordinate to him, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uling of the AAR in the case of ABB Ltd in support of the claim that the payments were mere reimbursements under a cost sharing agreement . The DRP noted that u/s 245S(1) of the Act, a ruling of AAR is binding only on the applicant and on the CIT and the concerned Assessing Officer and that too only in respect of the transaction in question. The Assessing Officer discharged her burden on this count also by distinguishing the facts in the assessee s case and pointing out that there is no cost contribution agreement in the case of assessee as was there in the case of ABB. The DRP observed that the assessee had on its own been declaring the payment in question as Royalty in the earlier years and therefore there seems to be no need for this panel to go into the question whether the case of the assessee is covered by the definition of the term royalty u/s 9(1)(vi) or Article 12 of the India-Netherlands DTA agreement. Therefore, ld. DRP held that Assessing Officer in the draft order had dealt with this issue that the payments were in the nature of royalty and it cannot be said to be a cost contribution agreement. The ld. DRP also explained the terminology of cost contribution agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but not a cost Contribution Agreement . Therefore, the submissions made by the assessee that the payments made by PEIL are only reimbursements of expenditure cannot be accepted. The ld DRP noted that from the terms of the agreement extracted above that the payments were in the nature of consideration for the right to use of the research undertaken by the assessee and therefore, addition ₹ 242,653,150/- made by the assessing officer in the draft order was confirmed by the ld DRP. 12. Aggrieved by the order of the ld. DRP/Assessing Officer, the assessee is in appeal before us. 13. Mr. Arvind Sonde, the ld. Counsel for the assessee, submitted before us that KPENV is continuously engaged in research and development programs and these rights, knowhow and experience under the research and development programs are generated for the benefit of the individual member companies of the Philips group. The PEIL wishes to ensure continuity in its business operations and for that reason it is interested to take advantage of the research and development programs and secure access to the benefits resulting therefrom. As per the agreement, the entire costs of the basic R D are shared ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D for common benefit. The ld Counsel pointed out that, in essence, the agreement is in the nature of cost sharing agreement. The cost contribution formula is evolved so as to ensure the distribution of the burden of actual cost amongst the participating entities. The fact that R D information can only be accessed by the parties to the agreement and the further fact that the licensed income derived by the limited commercial exploitation of IPR would go to reduce the amount which the participants would have to contribute are clear pointers that an internal arrangement has been evolved by the participating group entities through a joint endeavor to reap the benefits of research. The agreement mainly points out as to how the corporate funding would be arranged, in connection with the R D activities therefore; the payments made by PEIL are not in the nature of royalties liable to be taxed in India as per the provisions of Article 12 (4) of the India-Netherland Tax Treaty. The ld Counsel also narrated the various Articles of the RDCA agreement before the Bench, and pointed out that by no stretch of imagination the payments made by PEIL are in the nature of royalties, therefore, the addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges and the observations made in this regard are as below: That the Receipts under RDCA is in the nature of 'remuneration' and not reimbursement. In this context reference is made below to the clause of the Agreement dated 13-12-2004 which reads as follows: Whereas, it is finally recognized that such a system of separate payments does no justice to the continuous efforts of Philips to undertake such research and development programmes for the benefit of the Company and other member companies of the Philips Concern and accordingly, the parties have agreed on a remuneration system which is based on the relation existing from year to year between the activities of the Company and the activities of Philips and its Associated Companies worldwide. The ld DR pointed out that the 'Remuneration' under Article 6 of the RDCA reads as follows: In consideration of the Concern research and development services mentioned at Article 3, rendered by Philips under this Agreement the Company agrees to pay Philips a remuneration by aggregating amounts calculated as follows: a. That part of the Concern research and development services cost, excluding any costs in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the RDCA that the receipts under RDCA are basically 'consideration' received from PEIL for the right to use of the research and development services undertaken by the assessee. Further, in the event of any failure to make payment by PEIL to the assessee Within thirty days after receipt of such statement , an interest to be charged at an appropriate rate, therefore, the RDCA agreement is in the nature of Royalty and assessee is liable to pay tax on these receipts. The DR therefore stated before the Bench that the receipts as specified in the RDCA agreement are in the nature of remuneration and not mere reimbursement as claimed by the assessee. 16. We have given a careful consideration to the rival submissions and perused the material available on record, we note that assessee is a tax resident of the Netherlands and is engaged in the business of lighting, consumer electronics, medical systems, etc. The assessee does not have a permanent establishment in India. During the assessment year 2005-06, the assessee had entered into Research and Development Cooperation agreement (RDCA) with Philips India (PEIL). The assessee had offered the receipts under the RDCA for ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 3 of the RDCA, to the extent relevant for our analysis, reads as follows: The Concern Research and development Services, which Phillips shall render to the Company, may include: a. Providing to the company such results and documentation from Philips research and development laboratories as are relevant to the business of the company, including results of test inspections and of investigations of products and their constituent parts, b. Providing to the Company such information resulting from the research and development programmes undertaken by Philips as the Company may reasonably need relating to products, manufacturing processes, working methods and the rendering of after sales service, c. Providing the Company with information resulting from the research and development programmes undertaken by Philips concerning the establishment and maintenance and installation of factories, laboratories and office buildings of the Company and corning the environmentally hygienic and economical use of natural resources such as water, living space, air, raw materials and energy, d. Providing the Company with information generated from research and develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in terms of products and services with a view to maintaining at all times a high level of efficiency and quality in the development, production and servicing of products to be sold and services to be rendered by the company. The services described in this Article 3 shall be given by Philips in as far as they are reasonably required for the manufacture and/or sale of such types of products as will be manufactured and/or sold by the company from time to time. From Article 3 of the Agreement it is evidently clear that research and development services which the Philips group companies are enjoying includes results of test inspections and investigation of products and their constituent parts. It provides guidance for manufacturing process, working method and rendering of packing, handling, shipping services etc. Apart from this it provides information in respect of environment hygiene and economical use of natural resources such as water, air, raw materials and energy. Therefore, it is evidently clear that these services are essential for the group companies and since the parent company is providing the services to various group companies, therefore, whatsoever cost incurred on accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aring is concerned, which is mentioned in Article 6 of the RDCA, which provides that the concern research and development services mentioned at Article 3, rendered by Philips under this Agreement the company agrees to pay to Philips a remuneration by aggregating amounts calculated as follows: (1) That part of the concern research and development services costs, excluding any costs in relation to basic research services, per product or group of products which corresponds to the ratio between the company s production of said product or group of products and the production by the concern companies of said product or group of products, determined in accordance with Philips accounting principles. (2) That part of the concern research and development services costs in relation to basic research services which corresponds to the ratio between the Relevant Local turnover and the relevant world turnover. It is abundantly clear that the Philips group companies agreed to pay Philips (KPENV) a remuneration to reimburse cost of the research and development in the ratio mentioned in Article 6. This remuneration is kind of a reimbursement only. We note that after going through the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. The above definition covers three categories of payments received: to fall within the purview of the term 'Royalty'. They are consideration for the use of, or the right to use: (i) any copyright of literary, artistic or scientific work including cinematograph films; (ii) any patent, trade mark, design or model, plan, secret formula or process; or (iii) for information concerning industrial, commercial or scientific experience. In the case of the Assessee the research and development services for which the Assessee receives the shared costs clearly has to be considered in category (iii) and clauses(i) and (ii) plainly do not apply and has never even been disputed/invoked by the tax authorities as well. This category of the Royalty definition deals with information concerning industrial, commercial or scientific experience . The meaning and ambit of the phrase information concerning technical, industrial, commercial or sci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mands, it should be taken as experience after acquiring minimum qualifications required and will, therefore, necessarily have to be posterior to the acquisition of the qualification. The grading certificate which is issued does not involve any transfer of commercial interest to the party paying or getting the right to use the experience of GIA. There is also no transfer of any skill or knowledge of GIA to the customers in the issuance of grading reports. The payments received is not the one for the use or the right to use experience, but is instead one for the application of experience to a certain factual situation i.e. GIA shall apply its expertise to the diamonds submitted by the clients and determine its true feature. For that purpose we may consider the expression use as defined in various dictionaries. In the Oxford English Reference Dictionary it is defined as exploit for one s own ends, employ, apply. In Chambers Dictionary it is defined to mean Use to employ for some purpose. Apply to one s own purpose. The act so employing, using or putting into service . The nature of the transaction between GIA and its client does not invest the party making payment wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in them and permit the use or allow the right to use such patents, designs or models, plans, secret formula, etc. to another person. Where there is no transfer of the right to use, payment made cannot be treated as royalty It then Hon ble Bombay High Court considered whether using experience knowledge or skill in the rendering of a service is tantamount to imparting such knowledge experience or skill. This too was rejected in the following words: . As discussed earlier it is true that GIA may have the experience of grading. However, does it impart its experience to its client? In our opinion there is no imparting of its experience in favour of the client. What the client receives is the report where the GIA uses its commercial or technical knowledge to give a report to the client. Illustrative example would be a lawyer giving advise to his client, a doctor giving his medical opinion, a laboratory submitting blood analysis report and the like. These cannot be said to be imparting of information by the person who possesses such information. What such person does is uses his experience and technical know-how for a consideration without parting with that information. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4) of the India-Netherlands DTAA, and it is a cost sharing agreement, in nature of reimbursement, hence we delete the addition of ₹ 242,653,150/-. 21. Now we shall take Ground No.2, which relates to taxability of receipts of ₹ 112,90,58,312/- under Management Support Services Agreement (MSSA) received by Koninklijke Philips Electronics N.V (Assessee), as per MSSA agreement between assessee and Philips Electronics India Limited ( PEIL ). 22. The brief facts qua the issue are that Philips Electronics India Limited ( PEIL ) has entered into a Management Support Services Agreement ( MSSA ) with Koninklijke Philips Electronics N.V (KPNEV) on 22nd October 2004. As per Article 2 of the agreement, the KPENV shall provide to PEIL such resources in commercial, accounting, auditing, financial, fiscal, social and legal matters and in other fields as KPENV possesses and would furnish the same to PEIL to facilitate its business operation. The assistance may relate to: a) the distribution and trading of products, particularly with respect to advertising, sales promotion, public relations, market research, labelling, packaging, shipping and forwarding, long-term export busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt received by the assessee from PEIL being essentially cost recharge, which is not taxable. The assessee also submitted that the provisions of Article 12 of the Double Taxation Avoidance Agreement ('DTAA'), that India has entered with Netherlands which deals with taxability of Royalties and fees for technical services arising in one of the contacting state and payable to resident of another contracting state. Article 12 of the DTAA defines the expression 'fees for technical services to mean payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel), if such services are ancillary and subsidiary to the application or enjoyment of the right, property or information or make available technical knowledge, experience, skill, knowhow or processes, or consist of the development and transfer of a technical plan or technical design. The definition of 'fees for technical services as pet Article 12 contain a term make available and it has to be seen whether the services rendered by KPENV to PEIL as per the terms of the MSSA actually ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the provisions of the Treaty Law, that is, Article 12(5)(b) of India-Netherland DTAA. In view of the make available clause being embedded in the MSSA contract, the judicial pronouncements relied upon by the assessee would no longer be relevant in this case. Therefore, the total amount of ₹ 1,129,058,312/- received by the assessee under MSSA should be taxable in the hands of the assessee, and this way, the ld AO made addition to the tune of ₹ 1,129,058,312/-. 25. Aggrieved by the order of ld. A.O, the assessee filed an application before the Dispute Resolution Panel (DRP) who has confirmed the addition made by the ld Assessing Officer. Before the ld. DRP, the assessee submitted that the proposal of A.O to tax the receipts of ₹ 1,129,058,312/- under the MSSA as fees for technical services (FTS) under section 9(1)(vii) read with Article 12 of the India-Netherland DTAA is not tenable. The MSAA was entered into by the assessee in October 2004. The receipts from the MSSA were also declared by the assessee as its income in earlier Assessment Years and also in the original return. However, in the revised return the assessee has claimed that it is exempt fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no sharing or pooling of resources to generate a property, right, IPR etc in which all the participants have well determined share of resources to be pooled and benefits to be derived. Therefore, ld DRP noted that MSSA is not merely a reimbursement of costs incurred by KPENV. 27. The ld DRP noted that if the services can be said to be fees for technical services under Article 12 of the DTAA, then a perusal of MSAA shows that the scope of services as mentioned in the MSAA is not exhaustive as it refers to: Services in commercial, accounting, auditing, financial, fiscal, social and legal matters and in all other fields in which Philips has resources. As Philips is a world leader in electronics and electrical gadgets, medical equipments etc. the fields in which it would have expertise would surely encompass sophisticated technology. As the agreement leaves the scope of services open ended, it is not possible to agree with the assessee that technical services would not be included. Further, clause ( g) of Article 2 provides that the assessee would admit the employees of PEIL to its premises so that they can acquaint themselves with the commercial and other knowle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o so, so that they can acquaint themselves with commercial and other knowledge as specified above, familiarize themselves with the organisation of the Philips group and with working methods used by it. 30. Mr. Arvind Sonde, the ld counsel for the assessee, also pointed out that the KPENV has in its possession substantial resources in commercial, financial, accounting, and other matters which could be employed for the benefit of the individual group companies. As a part of such initiative, the company has entered into an agreement with its group companies and as part of the aforesaid agreement has provided assistance to its group entities in India in commercial, accounting, auditing, financial, fiscal, social and legal matters. The company recovers the cost incurred by it by allocating it amongst the group companies along with a limited mark-up (10%) on cost which essentially stand for various risks such as currency risk, non-payment risk etc. What has been allocated to the group companies including PEIL in India is the cost incurred by the assessee for rendering the services and there is no element of profit involved therein. Thus, the amount received by the assessee from PEIL b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quiring the services is enabled to apply the technology. The mere fact that the provisions of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skill, etc., are made available to the person purchasing the service, within the meaning of Article 12 para 4(b) between India and USA which is in pari materia with Article 12(5)(b) of India Netherlands DTAA. The ld Counsel had also relied on several judgments such as the decisions of AAR in the case of Worley Parsons reported in 313 ITR 74 (AAR), the Hon'ble Delhi Tribunal in the case of NQA Quality Systems Registrar Ltd. v. Dy. CIT and the decision of the AAR in the case of Invensys Systems Inc reported in 317 ITR 438(AAR). 31. On the other hand, Shri G.Mallikaarjuna, CIT-DR, for the Revenue, vehemently submitted before us that the receipts from the MSSA were declared by the assessee as its income in earlier Assessment Years and also in the original return of income for the assessment year under consideration. However, in the revised return the assessee has claimed that it is exempt from tax. The ld DR stated before the Bench that the assessee should follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year i.e. 2008-09 on this issue regarding claim of receipts under MSSA being that of reimbursements/sharing of costs contended that: If the tests laid down in the OECD Guidelines in respect of a CCA are applied to the terms of MSSA, it becomes evident that it is not a CCA but a typical 'Intra Group Services Agreement' which has a one way flow of services from service provider to the recipient and a similar reverse flow of consideration for such services from the recipient to the service provider. There is no sharing or pooling of resources to generate a property, right, IPR etc. in which all the participants have well determined share of resources to be pooled and benefits to be derived. For the reasons mentioned in details while dealing with the objection no.1, the contention that the amounts represent mere 'reimbursements' which do not have any nature of profit is rejected. In light of the above, the Hon'ble DRP, Kolkata in the assessee's case for the A.Y.2008- 09, had regarded the assessee's claim 'not a tenable proposition.' As such, the contention of the Assessee that receipts under the MSSA being in the nature of 'Reimburs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g and auditing matters relating to such subjects as: ( i) accounting and auditing principles and methods; ( ii) budgeting methods; ( iii) capital structure, loans, exchange risks, financial research, warranties and guarantees, credit management; the establishment and management of finance and lease companies and all further banking activities, including long-term finance plans; ( iv) developments of data processing; d) fiscal and legal matters, including patents, trademarks and customs duties, particularly in international transactions; e) personnel matters particularly with respect to: i) the selection and training of personnel; ii) an adequate personnel policy; f) insurance; and g) admittance at the Company s specific request and at mutually agreed times of a reasonable number of employees of the company to its premises to the extent to which KPNV has the free right to do so, so that they can acquaint themselves with commercial and other knowledge as specified above, familiarise themselves with the organization of the Philips group and with working methods used by it or receive advice on specific matters in the field described above. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealing with the scope of services and contended that as the Agreement leaves the scope of services open ended, hence it is not possible to agree that 'technical' services would not be included. It was contended that the description of some of the services reflected that they were 'consultancy' services. Accordingly, the contention that the services do not fall in the domain of 'technical and consultancy' services could not be accepted and hence even though the word 'managerial services' was not included in the definition of the term FTS in the India-Netherlands DTAA, it could not be said that the services rendered by the Assessee under MSSA were not FTS under the said definition. In support of the aforesaid contention, the DR placed reliance on ruling of the AAR in the case of Shell India Markets Pvt. Ltd. [2012] 342 ITR 223 (AAR). 33. We have given a careful consideration to the rival submissions and perused the materials available on record, we note that the main grievance of the ld DR for the Revenue is that in Article 2 of the MSSA between the assessee and PEIL dated 22-10- 2004, the make available clause itself is in-built in the MSSA, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended that under the MSSA the Assessee is imparting to Philips India, its specialized knowledge and experience which remains undivulged to the public hence the MSSA is mostly an agreement for 'provision for commercial know-how or commercial experience' and the payments received thereunder constitute 'Royalty' as per Article 12(4) of the DTAA. The DR placed reliance on the provisions of Article 2 of the MSSA dealing with the scope of services, to contend that the make available clause is in-built in the MSSA. The DR contended that as the services provided by the Assessee clearly require substantial expertise, skill and resources in the field of lighting, consumer electronics, medical systems, etc. The MSSA is mostly an agreement for 'provision of commercial know-how or commercial experience' and the payments received under it would constitute 'Royalty'. To the extent that the payments relate to training of personnel to enable them to perform tasks on their own, they would satisfy the 'make available' clause and would qualify as FTS under the India-Netherlands DTAA. The DR referred to the provisions of Article 2 of the MSSA dealing with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under consideration, because the essence of the MSSA is not to grant any patent, trade mark, design or model, plan, secret formula or process. We note that the aforesaid definition of 'Royalty' under Article 12(4) of the India-Netherlands DTAA is identical to that contained in Article l2(2) of the OECD Model Tax Convention (Version 2014) on Income and on Capital. We also note that the receipts under MSSA are also not taxable as fees for technical services ( FTS ) under Article 12(5)(b) of the India Netherlands DTAA, as Article 12(5) of the India Netherlands DTAA does not cover managerial services. Similar to the definition of fees for included services/fees for technical services under India-USA and India-UK DTAA, the India Netherlands DTAA does not cover managerial services within the definition of technical services. It only covers technical or consultancy services. A brief comparative position of India-UK DTAA, India-USA DTAA, and India-Netherlands DTA are given below: India-UK DTAA India-USA DTAA India-Net'ands DTA Article 13 Royalties and Fees for technical services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the nature of the services under the MSSA, it is clear that they fall under the category of 'managerial' services and not technical or consultancy services. For that we rely on the decision of AAR in the case of Invensys Systems Inc.. In re 317 ITR 438 (AAR) wherein the nature of services involved in the case of Invesys were as follows: Environmental health safety; Human resource support and learning and development initiatives; Assistance on key projects; Assistance in relation to finance, internal audit, treasury and tax: Corporate secretarial and legal support: The AAR, inter-alia held as under: Though some of the services required to be performed under the agreement have the trappings of technical or consultancy services, looking at the substance and the predominant nature of the services, they primarily fall under the category of 'managerial'. Hence it is abundantly clear that the services provided by the Assessee under MSSA are managerial in nature. Though the scope of services in the Agreement is open ended, the residuary provisions clearly state that only services similar in nature to the defined scope shall be rendere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xperience 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. Technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made at available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as fee for technical/included services' only if the twin test of rendering services and making technical knowledge available at the same time is satisfied. [Para 22] We note that Coordinate Bench of ITAT, Mumbai in the case of Raymond s Limited (86 ITD 791) held that mere rendition of services does not fall within the gamut of the term make available unless the recipient of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. Are the fees paid to the US company for included services ? Analysis : The fees would not be for included services. The American company is providing a consultancy service which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc. nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. The fact that technical skills were required by the performer of the service in order to perform the commercial information service does not make the service a technical service within the meaning of para 4(b). We note that if we apply the aforesaid well settled meaning of the term make available to the facts of the assessee s case under consideration, the nature of services covered under Article 2 of the MSSA are in the area of commercial, accounting, auditing, financial, social and legal matters, human resources, insurance etc. and it can be seen that the services provided do not make available technical knowledge/skill/expertise, etc. Therefore, by providing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the RDCA receipts and MSSA receipts for taxation in India since inception, therefore, the assessee should follow the consistency. Therefore, ld. DRP noted that in assessee s case under consideration, nothing new has happened nor has any fresh fact been brought on record except for the ruling of the AAR in the case of ABB Ltd 322 ITR 564, in support of the claim that these both payments were mere reimbursements under a cost sharing agreement . We note that the assessee has also raised ground No.3 on the said issue, which reads as follows: 3.That on the facts and in the circumstances of the case, the ld. A.O and the Hon ble DRP erred in not appreciating the bona fide change in position regarding non-taxability of receipts under RDCA and MSSA adopted by the assessee for A.Y 2008-09, which resulted from better evolution/interpretation of law through judicial precedents. We note that as per the return of income filed and the notes annexed with it, the assessee is a foreign company incorporated in Netherlands and is the parent company of the Philips group which operates in the areas of lighting, consumer electronics, domestic appliances, components and medical systems ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s embedded and it is only reimbursement of costs. The RDCA receipts and MSSA receipts are also not taxable in India as per the provisions of Article 12 of the India- Netherland Tax Treaty, hence these receipts are not taxable in India. In the light of the above discussions, the payments made to KPENV towards PEIL's share of the cost incurred in respect of RDCA and MSSA activities are not liable to be taxed under the Act as business income in the absence of permanent establishment in India, having regard to Article 7 of the India-Netherlands Tax Treaty, nor can it be subjected to tax as royalty or fees for technical services under Article 12 of the said Treaty. 39. We note that because of subsequent development in law and court decisions, the assessee chose not to offer the receipts on account of RDCA and MSSA agreements. It is well-settled principle of law that there is no estoppel against law and in this regard reliance is placed on the decision of the Hon ble jurisdictional High Court of Calcutta in the case of wherein it was held: ....... An assessee is liable to pay tax only upon such income as can be in law included in his total income and which can he lawfull ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the CIT(A). The relevant observations of the Hon ble Supreme Court in the case of National Thermal Power Co. Ltd (Supra) are given below for ready reference: 3. Under s. 254 of the IT Act the Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction denied, we do not see any reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. We do not see any reason to restrict the power of the Tribunal under s. 254 only to decide the grounds which arise from the order of the CIT(A). Both the assessee as well as the Department have a right to file an appeal/cros ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extent they are more beneficial to that assessee. Therefore, as per sub section 2 of section 90 of the Act DTAA entered into with the foreign company is a statutory document recognized under the Income Tax Act and by sub section 2, the provisions of the Income Act would apply only to the extent that they are more beneficial to the assessee. We note that as per Article 12 of India-Netherland DTAA these receipts do not fall in the definition of Royalty or Fees for technical services therefore, the assessee is not liable to pay tax on these receipts in India and this way, the DTAA provisions will prevail. Hence, assessee can change its stand at any point of time if it seems to him that the receipts are not taxable in his hand as per the provisions of law. Therefore, we do not agree with ld DR for the Revenue, so far this issue is concerned. 41. The assessee has raised the Ground No.4 which reads as follows: 4. That on the facts and in the circumstance of the case, the AO erred in not granting full credit for tax deducted at source amounting to ₹ 163,028,554/- despite the fact that the company has filed all the original certificates during the course of the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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