TMI Blog2021 (11) TMI 1033X X X X Extracts X X X X X X X X Extracts X X X X ..... orted by the fact that the term of the agreement is five years and services provided by the assessee are repetitive and ongoing in nature. This means that PGCIL is not able to apply technical or skill use by the assessee for rendering such services. Given that repetitive nature of the services, it would be factually incorrect to allege that the services make available any technical knowledge, expertise, skill, knowhow or processes to PGCIL. The taxability of offshore software and hardware maintenance and support services has to be examined in terms of beneficial provisions of Article 12 of the tax treaty. We find that in the case in hand, the customer would not be able to apply technology on its own and the customer would continue to depend on the assessee for provision of software and hardware maintenance and support services in future as well. DR, in his written submissions, has reiterated the findings of the DRP which, as mentioned elsewhere, were based on incorrect facts. Further, judicial decisions relied upon by the ld DR are not applicable on the facts of the case In hand qua the agreement under dispute. Considering the facts of the case in totality, in light of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dingly, direct for deletion of the addition. Charging of interest under section 234B and 234C - HELD THAT:- This has been settled by the Hon'ble Supreme Court in the case of Mitsubishi India Ltd [ 2021 (9) TMI 875 - SUPREME COURT] in which the Supreme Court has held that prior to Assessment Year 2013 14, no interest is to be charged under section 234B of the Act. Charging of interest under section 234C is consequential. We, accordingly, direct the Assessing Officer to charge interest as per provisions of the law. - ITA No. 5544/DEL/2011, ITA No. 429/DEL/2013, ITA No. 458/DEL/2014, ITA No. 1731/DEL/2015, ITA No. 1008/DEL/2016, ITA No. 634/DEL/2017, ITA No. 5815/DEL/2017 - - - Dated:- 24-11-2021 - SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER For the Appellant : Shri Sachit Jolly, Adv., Ms. Disha Jham, Adv For the Respondent : Mrs. Anupama Anand, CIT-DR ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER:- The above captioned appeals by the assessee are preferred against the separate orders of the DRP/CIT(A) pertaining to assessment years 2008-09 to 2014-15. Since all these appeals pertain to same assessee and were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld counsel. Since the provisions of the tax treaty are more beneficial to the assessee, provisions of Section 9(1)(vii) of the Act are done away with. 11. The entire quarrel is now considered within the relevant articles of the Tax Treaty. 12. The order of the DRP for Assessment Year 2010 11 is based upon the finding that the Assessing Officer in the assessment for Assessment Years 2004-05, 2005 06 and 2006-07 had taken up the taxability in the hands of the assessee in relation to two contracts and held that the consideration received for licensing of software and training for both the projects is in the nature of Royalty as per Domestic Law as well as Article 12 of the Treaty. 13. The DRP further observed that for Assessment Year 2004 05, 200506 and 2006 07, the assessee did not file appeals and accepted the departmental view on the taxability of the consideration received. 14. A perusal of the background of the assessee shows that the DRP has proceeded on erroneous facts. Firstly, the agreement referred to and considered is dated 19.01.1998, when the assessee was not even in existence. The said agreement was with GE Harris Energy Control Systems LLC for offshore sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the year 2001 and, therefore, could have never executed the agreement on 19.01.1998. 17. Observations of the DRP, as mentioned elsewhere, wherein it has referred to the assessment for Assessment Year 2004 5 to 2006 07 wherein the assessee accepted the departmental view is, in fact, reference to the confession made by GE Harris Energy Control System and not the assessee. We find that GE Harris Energy Control Systems did not prefer any appeal for the smallness of the amount. In fact, the following letter dated 12.11.2008 addressed to the ADIT, International Taxation, would clear the dust: Dear Madam, Re: GEEnergyControl Systems, LLC (Formerly known as GE Harris Energy Control Systems LLC) Permanent Account Number: AACCG7043R Assessment Year: 2006-07 Sub: Assessment proceedings u/s 143(3) of the Income-tax Act, 1961 This is in respect of the ongoing assessment proceedings u/s 143(3) of the Income-tax Act, 1961-('Act') for the Assessment Year ( AY ) 2006-07. At the outset, we, on behalf of and under the instructions of our captioned client, submit that the assessee had entered into a turnkey project agreement with Power Grid Corporation of India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above on record. 18. The agreements in dispute before us is long-term software and hardware maintenance and support agreements, signed between the assessee and PGCIL for Southern and Western region. 19. In the agreement under the head definitions GE means GE Energy Management Services INC, the entity which licensed software in original contract for SR ULDC Scheme and is providing support services hereunder, either itself or through its designee. 20. Under the head Support Services , only services governed by this agreement are those maintenance and support services described in the scope of work that are to be performed from outside of India, specifically software support to be provided from Melbourne, Florida USA any training to be done by GE Energy Management Services employees and any hardware supply and support that may be provided from outside of India. This agreement does not govern nor purport to obligate GE to provide any maintenance and support services from middle India. Any such services may be procured under a separate contract notwithstanding that such services maybe described in Attachment 1. Such description is for informational purposes only. 21. At ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion Processor, Work Stations, FGPs, Splitters, UCC cards, power supply units. Routers, flubs, LAN cabling, SCSI cables, RAID Box, 1party products supplied by GP. (as set forth in the Agreement), internal/external hard disc, etc., * configuration of the replaced hardware /software, periodic routine checking as part of a preventive maintenance program (as described in further detail in this agreement) which would include checking of functionality of Hardware and software, * services to bring op any or all SCADA-EMS systems upon its failure and to restore the functioning of SCADA-EMS system at all the Control Centres viz. RSCC/SLDCs/Sub-SLDC/SCC under SR ULDC Schemes, * The Despatcher Training Simulator system at RSCC (DTS) (both hardware and software) would also be covered under this contract. However, some of these equipment/components namely RTUs and its accessories VPD modems and Us power supplies, transducers, printers, loggers, NMS PCs are not included in the scope of this Agreement. Routine works like data base building, addition of ICC!P, Analog and Status points and other such work which are classified as-day-to-day operational activity would primarily be the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 service fee to be considered ancillary and subsidiary to the application or enjoyment of some right, property, or information for which a payment described in paragraph 3(a) or (b) is received, the service must be related to the application or enjoyment of the right, property, or information. In addition, the clearly predominant purpose of the arrangement under which the payment of the service fee and such other payments are made must be the appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mer will clean the latter's machinery on a regular basis. As part of the arrangement, the U.S. company leases to the Indian company a piece of equipment which allows the Indian company to measure the level of bacterial deposits on its machinery in order for it to known when cleaning is required. Are the payments for the services fees for included services? Analysis : In this example, the provision of cleaning services by the U.S. company and the rental of the monitoring equipment are related to each other. However, the clearly predominant purpose of the arrangement is the provision of cleaning services. Thus, although the cleaning services might be considered technical services, they are not ancillary and subsidiary to the rental of the monitoring equipment. Accordingly, the cleaning services are not included services within the meaning of paragraph 4(a). y 25. If Article 12(4)(a) is read along with MOU, in our considered opinion, it is clear that for a service to qualify as FIS, two broad conditions must be fulfilled: a) that the service is in connection with a right property or information which qualifies as royalty under article 12(3); b) the predominant p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the following judicial precedents: DIT V. Guy Carpenter Co Ltd (ITA No. 202/2012) (Delhi High Court) In this case, the Delhi High Court concurred with the decision of Delhi 1TAT which relying on the case Raymond Limited V. DCIT (supra) held that that once sec: 9(l)(vii) of the Income-tax Act stops with the rendering of technical services, the DTAA. between India UK goes further and qualifies such rendering of services with words to the effect that the services should also make available technical knowledge, experience, skills, know-how or processes to the person utilizing the services. The Hon'ble Tribunal further observed that the word which occurring in the said Article after the word services and before the words make available not only describes or defines more dearly the antecedent noun ( services ) but also give additional information about the same in the sense that it requires that the services should result in making available to the user technical knowledge, experience, skill, know-how or processes etc. Thus, the normal, plain and grammatical meaning of the language employed in the said Article 13(4)(c.) is that a mere rendering of services is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 fad that the provision of the service that may require technical knowledge, skills, 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 test of rendering services and making technical knowledge available at the same lime is satisfied. (Para 22) * Raymond Limited V. DCIT (86 1TD 791) (Mumbai ITAT) Thus, the normal, plain and grammatical meaning of the language employed, in our understanding, is that a mere rendering of services is not roped in unless the person utilizing the services is able to make use of the technical knowledge, etc. by himself in his business or for his own benefit and without recourse to the performer of the service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction himself in future, without, the help of the service provider, 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 (Emphasis supplied). ISRO Satellite Centre (2008) (307 ITR 59) (AAR) AAR reiterated the principle of make available and held that it implies that the technical knowledge, skill, etc. remains with the person utilizing the services even after the particular transaction is over. Merely enabling the use of services or products into which technical inputs have gone does not amount to making available technical knowledge, skills, etc. The recipient of service must be able to absorb and apply the technology on its own in its future activities Dell international services India (P) Ltd. (AAR) (218 CTR 209) The phrase make available occurring in art. 12(4) has been clarified in the MoU to the treaty itself to the situations where the person receiving the service is enabled to apply the technology. As there is no transfer of any technology in the sense that the recipient of the sen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the service provider. In other words, to fit into the terminology make available , the technical knowledge, skills etc. must remain with the person receiving the services even after the particular contract comes to an end. The services offered may be the product of intense technological effort and lot of technical knowledge and experience of the service provider would have gone into if. But, that is not enough to fall within the description of services which make available the technical knowledge, etc. 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 future without depending on the provider. Taking some examples, the training given to a commercial aircraft Pilot or training the staff in particular skills such as software development would fall within the ambit of the said expression in clause (c). Supposing, a prescription and advice is given by the doctor after examining the patient and going through the clinical reports. The service rendered by the doctor cannot he said to have made available to the patient, the knowledge and expertise possessed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... totality, in light of the judicial decisions discussed here in above, we are of the considered view that the receipts from PGCIL do not qualify as Royalty under Article 12(4)(a) and 12(4)(b) of the India US DTAA. The same is directed to be deleted. 34. We will now address to the NDPL contract. This is relevant only for Assessment Years 2010 11, 2011 12 and 2012 13. 35. NDPL contract is divided into two purchase orders. The first purchase order is towards software licenses and second purchase order is for offshore services. For Assessment Year 2010 11, the assessee received consideration under both purchase orders but for Assessment Year 2011 12 only license fee under first purchase order was received and in 2012 13 only service fee was received under second purchase order. 36. Under the first purchase order, no copyright has been transferred to NDPL and there is only right to use the software, which is clear from the relevant contract. This issue has now been well settled by the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt Ltd in Civil Appeal No. 8733 to 8734 of 2018 alongwith a bunch of 104 appeals. The relevant findings of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is towards software as is evident from the contract with NDPL. The relevant clause of the contract relating to scope of service makes it clear that services are in the nature of remote troubleshooting and do not make available any skill, knowledge, experience to NDPL. 39. Considering the facts of the case in light of the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt Ltd [supra] we are of the considered view that the consideration for services in connection with supply of software do not qualify as FIS under Article 12(4)(a) or 12(4)(b) of the India USDTAA. We, accordingly, direct for deletion of the addition. 40. The other issue relates to charging of interest under section 234B and 234C of the Act. 41. In so far as charging of interest under section 234B of the Act is concerned, this has been settled by the Hon'ble Supreme Court in the case of Mitsubishi India Ltd in which the Supreme Court has held that prior to Assessment Year 2013 14, no interest is to be charged under section 234B of the Act. Charging of interest under section 234C is consequential. We, accordingly, direct the Assessing Officer to charge i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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