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2019 (5) TMI 1686

..... ider. For services the assessee has not executed any contracted to make available any technical expertise so as to use those services independently by the licensee. All the services under taken by the assessee are either support services, IT enable services, coordination or tax services as referred above are not such which require transfer of technology, skill to the receipt company. The Hon’ble Karnataka High Court in CIT Vs De Beers India Minerals (P) Ltd. [2012 (5) TMI 191 - KARNATAKA HIGH COURT] while considering the similar question of law while considering the provisions of India- Netherland Double Tax avoidance Agreement (India- Netherland DTAA), while considering the facts that where a Netherland Company rendered technical services to the assessee, without making available any technical expertise so as to enable assessee use those services independently in future, payment made for such services cannot be termed as ‘fee for technical services’ We hold that the assessing officer erred in taxing the service agreement receipt as ‘fee for included services’ as per Article 12(4) of India USA DTAA for such services as mentioned in para 4 (supra), in a .....

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..... eal: 1.The learned CIT(A) has erred in not adjudicating the ground that neither any show cause notice nor any opportunity was provided to the appellant to furnish reasons why GSA receipts from ACNOM and ACNRS should not be taxable. 2.The learned CIT(A) erred in confirming the action of the assessing officer in treating the GSA receipts amounting to ₹ 189,243,151 as 'fees for included services' as per Article 12 of the tax treaty between India and USA. 3.Without prejudice to the above ground of appeal, the learned CIT(A) erred in not directing the assessing officer to apportion and treat as not taxable, some portion of the total receipts towards services, which by their very nature do not make available any technical knowledge, experience, skill, "know-how to the Indian entities (in terms of the tax treaty between India and USA). 4.The learned CIT(A) erred in confirming the addition made by assessing officer by treating the reimbursements amounting to ₹ 498,576 as 'fees for included services' as per Article 12 of the tax treaty between India and USA. 5.The learned CIT(A) erred in confirming the action of the assessing officer of charging interest und .....

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..... ssessee submits that assessee is a tax resident of USA. The assessee provided services in its group in India entity ACNON for customize research services and retail management services and to ACNRs for customize market research services. The assessee entered into licence agreement on 01.01.2009 for use of Nelson business system and knowhow Nelson Software and Patents in India. The assessee also entered into a separate service agreement dated 01.01.2009 with ACNRs for rendering services in the field of commercial, financial, accounting legal matters, logistics, developing and engineering, sales and marketing and others matters. The assessee received ₹ 18.92 Crore against the service agreement receipt, which cannot be treated as royalty or fees for included services as per Article-12 of India-US DTAA, not taxable in India. The Assessing Officer treated the intra-group services as services in the nature of fees for included services (FIS). The ld. AR of the assessee further submits that the services provided by assessee to India Companies as per service agreement consists of; a)Development and determination of short and long term business strategies; b)Overall management and coo .....

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..... he ld AR for the assessee also filed the copy of decision of Delhi High Court in Perfetti Van Melle Holding B.V. Vs AAR [2014] 52 taxman.com (Delhi) on the reliance that the decision of AAR was set aside and the case was restored back to consider the matter afresh. The assessee has also filed on record the copy of return of income with computation of income and Transfer Pricing report under Form 3CEB, copy of licence agreement dated 01.01.2009 entered by assessee with ACNOM, copy of service of service agreement dated 01.01.2009 entered by assessee with ACNOM, copy of Indo-US DTAA and the copy of written submissions filed before ld CIT(A). 7.On the other hand, the ld. DR for the revenue supported the order of authorities below. The ld. DR for the revenue further submits that no separate details about the services rendered by assessee, to its group entity, have been provided during the assessment proceeding. The service agreement is a part of main agreement. The assessee has provided dedicated services which are actually in the nature of fees for included services. The receipts are in the nature of FIS as advisory services and also signify fees for included services. In support of hi .....

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..... ing it to perform its task better. 10.The assessing officer further concluded that Article 12(4)(b) of DTAA between India and USA all the administrative and management support services rendered as per general service agreement in intra group services are with the primary intention to maintain the brand name of assessee and know-how, with the intention of carrying on the business in line with the best practice globally. The entity may not be part of the group but the payment is for the usage of brand name of assessee and hence management support services is in the nature of FIS. The assessing officer also concluded that the advisory services have been used by the Indian entities in the course of their business activities which are utilised for the betterment and improvement of their business model and other practices, which has ultimately reflected in the increase of profitability of Indian entity. The employees of Indian entity are highly qualified and educated. Therefore, the receipt of general service agreement was treated by assessing officer as fee for include services. The assessing officer also relied on the decision of AAR in Perfetti VAN Holding B.V (case No. AAR No.869 of .....

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..... , if they are ancillary and subsidiary to the application or enjoyment of a right, property or information for which are royalty payment is made; or (2) as described in paragraph 4(b), if they make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. Thus, under paragraph 4(b), consultancy services which are not of a technical nature cannot be i Paragraph 4(a) Paragraph 4(a) of Article 12 refers to technical or consultancy services that are ancillary and subsidiary to the application or enjoyment of any right, property, or information for which a payment described in paragraph 3(a) or ( b) is received. Thus, paragraph 4(a) includes a technical and consultancy services that are ancillary and subsidiary to the application or enjoyment of an intangible for which a royalty is received under a licence or sale as described in paragraph 3(a), as well as those ancillary and subsidiary to the application or enjoyment of industrial, commercial, or scientific equipment for which a royalty is received under a lease as described in paragraph 3(b). It is understood that, in order for a servic .....

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..... gement information; development of short and long term IT policies and strategies; management and coordination of IT policies between group companies; tax services; financial risk management services, to the extent these services do not comprise Financing Services; support in the area of international staffing, career development and international job rotation; market research, target research and competitor research and stock based compensation. We have noted that while undertaking the above services the assessee has not executed any contracted to make available any technical expertise so as to use those services independently by the licensee. All the services under taken by the assessee are either support services, IT enable services, coordination or tax services as referred above are not such which require transfer of technology, skill to the receipt company. 17.The Hon ble Karnataka High Court in CIT Vs De Beers India Minerals (P) Ltd. while considering the similar question of law while considering the provisions of India- Netherland Double Tax avoidance Agreement (India- Netherland DTAA), while considering the facts that where a Netherland Company rendered technical services t .....

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..... or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention." 14.Therefore the Clause in Singapore agreement which explicitly makes it clear the meaning of the word 'make available', the said clause has to be applied, and to be read into this agreement also. Therefore, it follows that for attracting the liability to pay tax not only the services should be of technical in nature, but it should be made available to the person receiving the technical services. The technology will be considered 'made available' when the person who received service is enabled to apply the technology. The service provider in order to render technical services uses technical knowledge, experience, skill, know how or processes. To attract the tax liability, that technical knowledge, experience, skill, know how or process which is used by service provider to render technical service should also be made availab .....

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..... e model on their own without reference to the service provider, when the service agreement comes to an end. It is not as if for making available, the recipient must also be conveyed specifically the right to continue the practice put into effect and adopted under the service agreement on its expiry." 16.In the aforesaid case, the applicant holding Company was to provide to its subsidiary Company in India the licence to manufacture and sell products, the licence to use technology, technical marketing and commercial know-how in the manufacture, sales and advertisement and promotion of the products, offer technicians, marketers, salesman, in-house legal counsel and the experienced employees to assist in the activities mentioned above. Under the Service Agreement, specifically the Service recipient require the use of proprietary knowledge and processes belonging to Perfetti Group. Specified services such as Accounting budgeting, sales, marketing, forex management, loans, HR, legal support etc. and specified services are to be provided on continuous basis. Therefore, it was held in the aforesaid case, that the case falls within the purview of Article 12.5(a) of the DTAC on such ser .....

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..... Applicant. In that context it was held that the service provider under the IT agreement are in the nature of fees for technical services and taxable under the DTAA as well as under the Act. 20.In the aforesaid case the business of the applicant being that of executing the projects for transmission and distribution of power on turnkey basis, it is the French Company and other Group Companies which continuously upgrade designs, model and other engineering plans and formulae which are used by the applicant for the purpose of its business. The main objective of setting up of an exclusive platform is not for providing information technology but for enabling the applicant to use data in the form of designs, plan, model and engineering formulae etc., in 2D & 3D form. The character of the payment is clearly royalty as defined in Article 13(3) of DTAA as well as to Explanation 2 to Section 9(1)(vi) of the Act. The agreement clearly establishes that the applicant as to prepare for the installation at the fixed gateway sites for proper installation of equipment by France telecom. It is to act as bailee of the equipment which is under its control and use for its business. The use of equipm .....

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..... her words, payment of consideration would be regarded as "fee for technical/included services" only if the twin tests of rendering services and making technical knowledge available at the same time is satisfied. 18.The coordinate bench of Ahmedabad Tribunal while considering the provisions of India- Canada DTAA and following the decision of Hon ble Karnataka High Court in Dee Beers India (P) Ltd (supra) held that rendition of IT support services to assessee by a Canadian company, even if certain equipment were to be used, that by itself did not vest any right in assessee to use equipment and thus, payments made by assessee could not be viewed as payments for 'use or right to use' any industrial, commercial or scientific equipment. The relevant part of the order is extracted below; 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 included services" as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature .....

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..... he technical knowledge, skill?, etc., must remain 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. 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, skill, etc., does not mean that technology is made 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 tests of rendering services and making technical knowledge .....

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..... h. During the early stage, various techniques were employed for the purpose of carrying out geophysical survey, the assessee entered into agreement with M/s.Fugro Elbocon B.V. Netherlands, who had a team of experts specialised in air borne geophysical services for clients. For the technical services rendered by them the said assessee had paid consideration. The Assessing Officer applied Article 12 of the Indo-Netherlands Treaty and held that the same was taxable in the hands of the Netherlands Company. As the wordings of Article 12 in the Indo-Netherlands Treaty are analogous to Article 12 of the India Australia Treaty, as expression 'make available' is also used while determining fiscal jurisdiction of the contracting state, the Hon'ble High Court explained the meaning of the expression 'make available' which was appearing in the Indo-Netherlands Treaty. 20.In view of the above factual and legal discussions, we hold that the assessing officer erred in taxing the service agreement receipt as fee for included services as per Article 12(4) of India USA DTAA for such services as mentioned in para 4 (supra), in absence of clause in the service agreement dated 09.01. .....

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..... group company on the basis of number of expat employee in the entity on prorate basis. Thus, this is a mere reimbursement of expenses by assessee on behalf of Indian entity. It was further submitted that the assessee not charged any mark-up over the cost incurred by it and merely charged proportionate amount of invoice raised by PWC and it does not involve any element of income. 28.The reply of the assessee was not accepted by the assessing officer holding that non-resident resident company, the service provider has provided services through PWC Consulting to the Indian entity who are service recipient. It was further held by assessing officer that if the expenses were not meet by the service recipient, the expenses would have been met by the service provider and the service provider might have charged the additional amount from the service recipient. Therefore, the assessing officer held that the payment cannot be regarded as reimbursement as the payment is for the use of the product and not for sharing the expenses. The agreement is basically to share the product without paying the royalty but by paying the consideration which occurs only on the use of the product and not otherw .....

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