TMI Blog2022 (4) TMI 1279X X X X Extracts X X X X X X X X Extracts X X X X ..... asis of sub-clause 4(a) of Article 12, the Ld. FAA has committed the error. On perusal of licensing agreement effective from 1st January, 2012 submitted by the assessee it can be observed that the intangible referred to in Article 1 means the intellectual property set forth on appendix (i) hereto, which may be amended from time to time . Appendix I shows that it is a trade mark for use of which the licensing agreement was executed. There is no recital in the agreement which would indicate that the use of tangible by Indian Associate was in any way necessary for the effective application or enjoyment of right, property or information, for which the royalty was agreed to be paid. The services rendered were not customarily provided and it is also not so otherwise established by the Revenue on the basis of any cogent evidence that such services are customarily provided in cases of licensing agreements for the use of Trade Mark. The consideration for these services cannot be considered to be insubstantial portion, rather the matter of fact is that for assessment year 2013-14, the assessee received in respect of support services and royalty income. The most important factor bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch consideration should be FIS. Rather the consideration was in the form of reimbursement of expenses on actual basis of constituents like travelling, food, boarding and lodging of consultants employed by Indian Counterpart. The cost of training recovered from the Indian Associate was due to these expenditures on the trainees. Thus, in regard to the additions the findings of the learned FAA deserve to be reversed. - ITA No.1165/Del/2019 And ITA No.1166/Del/2019 - - - Dated:- 26-4-2022 - Sh. Anil Chaturvedi, Accountant Member And Sh. Anubhav Sharma, Judicial Member For the Assessee : Shri S.K.Aggarwal, CA For the Revenue : Sh. Sanjay Kumar, Sr. DR ORDER PER ANUBHAV SHARMA, JM: The assessee has preferred these appeals against the orders dated 13.11.2018 of the Commissioner of Income Tax (Appeal)- 43, New Delhi in appeal no. 121/2016-17 for the assessment year 2013-14 and appeal no. 269/2016-17 for the assessment year 2014-15. The ITA No. 1165/Del/2019, A.Y. 2013-14 arises out of assessment order dated 07.04.2016 the ITA No. 1166/Del/2019, A.Y. 2014-15 arises out of order dated 30.01.2017 passed by the Dy. Commissioner of Income Tax, International Taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iary to the application and enjoyment of the right in Article 12(3) of the treaty. 1.5 In regard to reimbursement of actual training expenses as per Cost Reimbursement Agreement . Ld. CIT(A) confirmed the assessment order by holding that it meets the requirement of make available under Article 12(4)(b) of the treaty. 2. Aggrieved by the order of Ld. First Appellate Authority, Ld. CIT(A) the appeal has been preferred raising following grounds : 1. Amount received for providing Support Service treated as Fees for Included Services (FIS) 1.1. The Hon ble CIT(A), has erred on the facts and circumstances of the case and in law, in treating the amount received for providing support services of ₹ 1,607,675 as FIS under paragraph 4(a) of Article 12 of the India-USA Double Taxation Avoidance Agreement ( India-US DTAA ) that is being ancillary and subsidiary to the application or enjoyment of the right, property or information for which royalty is received by the Appellant. 1.2. The Hon ble CIT(A), has erred on the facts and circumstances of the case and in law, in applying provisions of paragraph 4(a) of Article 12 of India-US DTAA and having failed to app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the hearing of the appeal. The Appellant prays for appropriate relief based on said grounds of appeal and the facts and circumstances of the case. 3. Heard the ld. Counsel for the appellant-assessee and the ld. Sr. DR and perused the record. The determination of issues as raised ground wise is as follows :- GROUND NO. 1 4. In regard to this ground it was contended that appellant merely provides support services like finance services, human resources services, information systems for use of worldwide systems of communications, corporate communication and legal services as per Service Agreement dated 12.03.2012 which was effective from 1st January, 2011 and the Indian Associate Company, RRAIPL, use to compensate the assessee for providing the aforesaid services for an amount equal to proportionate of the provider cost i.e. without any mark up. It was submitted that the support services are not ancillary and subsidiary to the services provided under the licensing agreement under Article 12 (4)(a) of the treaty as held by Ld. F.A.A. Ld. Counsel relied the provisions of treaty to submit that following conditions should be fulfilled for a receipt to be taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of FTS like Article 12(4) of India-USA DTAA. The Hon ble Delhi High Court held: 23. As regards the nature of the service being provided under the Management Services Agreement, again the Court is unable to find any case made out by the Revenue before the AAR that what was provided was anything other than the managerial service which in any event stands excluded in the definition of the fees for technical services under the Indo- UK DTAA. Consequently, this question also does not survive for consideration. 24. For all of the above reasons, this Court finds that the impugned order dated 2nd May, 2014 of the AAR holding that the payment made by the Petitioner for the managerial services provided by Steria France should be treated as fee for technical services in respect of which tax had to be withheld under Section 195 of the Act, is unsustainable in law. The questions posed by the I Petitioner before the AAR are accordingly answered as under: (i) The payment made by the Petitioner to Steria France for the managerial services provided by: the latter cannot be taxed as fee for technical services; and (ii) The said payments are not liable to withholding of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 4 of The Treaty are reproduced below : 3. The term royalties as used in this article means : a. payment of any kind received as 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 contingent on the productivity, use or disposition thereof; and b. payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of article 8. 4. For purposes of this article, fees for included services means payments of any kind to any person in consideration for the rendering of any technical or consultancy services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 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 predoment purpose of the arrangement under which the payment of the service fee and such other payments are made must be the application or enjoyment of the right, property, or information described in paragraph 3. The question of whether the service is related to the application or enjoyment of right, property, or information described in paragraph 3 and whether the clearly predominant purpose of the arrangement is such application or enjoyment must be determined by reference to the facts and circumstances of each case. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable under the contractual arrangement. Are the payments for these services fees for included services ? Analysis: The payments are fees for included services. The services described in this example are ancillary and subsidiary to the use of manufacturing process protected by law as described in paragraph 3(a) of Article 12 because the services are related to the application or enjoyment of the intangible and the granting of the right to use the intangible as the clearly predominant purpose of the arrangement. Because the services are ancillary and subsidiary to the use of the manufacturing process, the fees for these services are considered for included services under paragraph 4(a) of Article 12, regardless of whether the services are described in paragraph 4(b). 5.5.10 In fact the five determining factors for the classification of the consideration under paragraph 4(a) are clearly satisfied in the appellant's case. The predominant factor, in the appellant s case is the grant of license to use the name. This gives rise to royalty and all the other payments and agreements flow from the principle licensor - licensee arrangement. The considerations receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services and royalty income amounted to ₹ 47,62,726/-. The most important factor being that there are separate agreements for the licensing of the intangible and the service agreement. The copy of service agreement on record at page No. 50 58 of the paper book for the assessment year 2014-15, show that this agreement was effective from 1st January, 2011 while the licensing agreement was later in time in terms of being effective from 1st January, 2012. Thus, the learned FAA has fallen in error in squaring up the case of assessee in terms of memorandum to the Treaty and giving a finding that the predominant factor is the grant of license to use the name which gives rise to royalty and all other payments and agreement flow from principal licensor licensee agreement. Thus the finding of Ld FAA, that the five determining factors for the classification of the consideration under paragraph 4(a) are clearly satisfied in the appellant's case is not sustainable. Thus, the findings of the learned FAA deserve to be reversed. The ground is sustained. Ground no 2 10. On behalf of the appellant it was submitted that the assessee incurs administrative expenses for on behalf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal observed that the expenses incurred by the assessee which was engaged in the business of survey of ships, on the training of its employees who would inspect various mechanical and electrical equipments in the ship and ultimately issued a fitness certificate, could not be held as payments made for technical services. The Tribunal while concluding as hereinabove, observed that the employees by taking training from the Principal company had acquired only inputs to enable them to perform their work with desired state of efficiency. (ii). Ershisanye Construction Group India (P) Ltd. vs. DCIT (2017) 84 taxmann.com 108 (Kol) where the Tribunal had observed that payments which were made by a Chinese company in respect of training of Chinese engineers of the assessee in English language would not constitute FTS. (iii). ACIT Vs. PCI Ltd. (2011) 12 taxmann.com 59 (Delhi) where The Hon ble Delhi High Court observed that payments made by the assessee to a non- resident party for training its personnel or customers to explain to the proposed buyers the salient features of the products imported by the assessee in India and to impart training to the customers to use the equipments c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ign. The findings of Ld. FAA skill is being imported to the receipt and at the same time to the Indian entity the service is being rendered are not sustainable. The trainees were only sansitised to understand their job responsibility, the business model, policies and procedures, under which the new recruits were expected to work. The training cannot strictly be even called managerial or leadership training so as to enhance any productivity or profits, but were more of a orientation program at the time of induction of the new recruit. Merely because the training program was of boarding nature, that cannot change the nature of program to fall in the purview of services, for which consideration should be FIS. Rather the consideration was in the form of reimbursement of expenses on actual basis of constituents like travelling, food, boarding and lodging of consultants employed by Indian Counterpart. The cost of training recovered from the Indian Associate was due to these expenditures on the trainees. Thus, in regard to the additions to the extent of ₹ 9,19,388/- in A.Y. 2013-14 and ₹ 10,94,422/- in A.Y. 2014-15 the findings of the learned FAA deserve to be reversed. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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