TMI Blog2023 (6) TMI 176X X X X Extracts X X X X X X X X Extracts X X X X ..... rt, though highly technical in nature, comes to an end, little thereafter, if not immediately, after its rendition. Support that the Indian entity seeks after the report is delivered is to understand the report from the assessee. Elements necessary for make available is absent in the services rendered by the assessee to its Indian customers/ clients, inasmuch as even for the said reports, the customers have to continuously refer to the assessee and the same is not freely made available to the Indian customers. Thus, technical services rendered by the affiliates do not make available technical knowledge, experience, skill, know-how or process while preparing these reports for their, Indian customers/ clients. In light of the aforementioned judicial decisions, we are of the considered view that the service recipient of the assessee is unable to make use of the said technology only by itself in its business or for its own benefit without recourse to the assessee year after year. Decided in favour of assessee. - IT(IT)A Nos. 88 to 90/Bang/2023 - - - Dated:- 1-6-2023 - Shri. Chandra Poojari, Accountant Member And Smt. Beena Pillai, Judicial Member For the Assessee : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 71F of the Act On the facts and in the circumstances of the case and in law. the learned AO erred in initiating penalty proceedings under section 271(1)(c) and section 271F of the Act. All the above grounds are without prejudice to each other. The Appellant craves for leave to add. amend, vary, omit or substitute or withdraw any of the aforesaid grounds at any time before or at the time of hearing of the matter with the Income Tax Appellate Tribunal. The Appellant prays that appropriate relief be granted based on the said grounds of appeal and the facts and circumstances of the case. 3. Brief facts of the case are as under: The facts and circumstances in all the three assessment years under consideration are identical as submitted by the Ld.AR as well as the Ld.DR. It is also submitted that the issue alleged by the assessee in all the three appeals are on common grounds. For the sake of convenience, we refer to the facts for A.Y. 2013-14 and the decision shall be applied mutatis mutandis to the other two assessment years being 2014-15 2017-18. We refer to the facts as narrated in A.Y. 2013-14. 3.1 The assessee is a non-resident incorporated under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reclinical laboratory services are not liable to be taxed as FTS in India on account of the beneficial provisions of the Treaty, although such services could be characterized as FTS under the Act. The company submitted that it does not make available any technical knowledge, experience, skill, know-how or processes which enables the person acquiring the services to apply the technology therein. Thus, in absence of 'make available' the services cannot be characterized as FTS under the treaty. The assessee has contended that preclinical laboratory services are not liable to tax as FTS in India on account of beneficial provisions of treaty. However, this contention of the assessee is not acceptable because Charles River Laboratory has provided laboratory services through test reports to various Indian entities, which was disposed of vide speaking order dated 09.03.2022 3.6 The Ld.AO thereafter noted that as M/s. Syngene International Ltd. did not deduct TDS along with other Indian entities who had made payments to assessee, proceedings u/s. 201 of the act were initiated in case of M/s. Syngene International Ltd. for non-deduction of tax at source on the payments made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the service should be in a position to derive an enduring benefit and be in a position to utilise the knowledge or know-how in future on his own. In the instant case the Indian entity derive an enduring benefit in the form of research. 11.4.5 In the case of M/s. XYZ Ltd. AAR, New Delhi A.A.R. No. 928 Of 2010, the applicant a tax resident of Hong Kong had provided inspection, verification, testing and certification (IVTC) services to Indian customers and payment received/receivable by applicant in relation to said services would be chargeable to tax in India as 'fees for technical services' under section 9(1)(vii)(b) and liable for deduction of TDS u/s 195. (XYZ Ltd. In re [2012] 348 ITR 20 (AAR-New Delhi) technical services utilized in India. 11.4.6 In view of the facts in above paras, it is clear that, payments received by the assessee for providing laboratory services through test reports are in the nature of fee for technical services as defined U/s 9 (1)(vii) of the Income of the Income Tax Act as well Article 12 of Indo- USA DTAA which is taxable in India. 12. Finding: 12.1 The consideration received by the assessee is towards the testing charges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd related expenses, the income also arises and accrues in India and falls within the ambit of section 5 of the IT Act as the services are utilized for earning income in India and the conduct of business activities in India. On this count also they are taxable in India and the classification of income is imported from the DTAA. Aggrieved by the order of the Ld.AO, the assessee filed objections before the DRP. 4. Before the DRP, it was submitted that CRL Inc has not made available any services to its customers in India in view of the Memorandum of Understanding ( MoU ) of Treaty on Article 12. During the DRP proceedings, the assessee, has submitted the sample agreements, invoice copies, TRC and details of income received from various Indian customers. 5. The DRP after considering the submissions of the assessee held as under: 2.2.1 Having considered the submissions, it is noticed from the Draft Asst. Order that the AO has observed that the revenue earned by the assessee falls under the Explanation 2 to section 9(1)(vii) of the Act, wherein FTS is defined as consideration for rendering of any managerial, technical or consultancy services. Further, the AO has given a f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der of the Ld.AO, the assessee is in appeal before this Tribunal. 6. The Ld.AR submitted that assessee earned income from vision of pre-clinical laboratory services to its Indian customers. On the completion of its service, the assessee generates a test report for the customers which contains the results of the test carried out on the sample provided by the customers. These test reports contain a factual narration of the test procedure and the result of the test and thus. do not transfer any technology / know-how / knowledge to the customers nor do they grant any right to access/use of the underlying technology used to perform these services. Further, the designing of the test procedures and the equipment and technology used to carry out the test procedures are proprietary to CRL Inc. and are not accessible/ made available to its client. Accordingly. the pre-clinical laboratory services rendered by the Assessee to its customers in India would not be chargeable to tax in India, since the Assessee does not have a PE in India and further such services do not qualify as FIS as per Article 12(4)(b) and the MoU of the Treaty as submitted above. As mentioned above, CRL Inc is a resid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... records placed before us. 10. We note that in the paper book at pages 274-297, master service agreement entered into by assessee with Dr.Reddy s Laboratories Ltd. is placed which has not been yet terminated. At pages 298-299, the master service agreement dated 30.11.2007 stands extended until 30.11.2017. The assessee had relied on the decision of Hon ble Hyderabad Tribunal in case of DCIT vs. Dr. Reddy s Laboratories Ltd. reported in (2013) 35 taxmann.com 339 for A.Ys. 2003-04 and 2004-05 and a subsequent decision reported in (2017) 78 taxmann.com 63 for A.Ys. 2007-08 and 2008-09 wherein the Hon ble Hyderabad Tribunal has followed the view expressed by the authority of advanced ruling in case of Anapharm Inc. reported in (2008) 174 Taxman 124. Before the Hon ble Hyderabad Tribunal, the payments made by Dr. Reddy s Laboratories to a similar contract research organisation who was referred to as CRO therein was under consideration. The issue that was considered was whether the payments made by Dr. Reddy s Laboratories to the CRO therein was business profits in the hands of the CRO or if for included services. Hon ble Hyderabad Tribunal in great detail dealt with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, 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. In the present case, the applicant renders bioanalytical services which, no doubt, are very sophisticated in nature, but the applicant does not reveal to its clients as to how it conducts those tests or the inputs that have gone into it, so as to enable them to carry out those tests themselves in future. A broad description or indication of the type of test carried out to reach this conclusion does not enable the applicant's client to derive requisite knowledge to conduct the tests or to develop the technique by itself. The mere fact that the tests in question are highly technical in nature will not make a difference. In its affidavit the applicant affirms that only final results, conclusion of data of bioequivalence tests are provided to the recipient. Clinical procedure, analytical methods, etc., which are proprietary items of the applicant, have neither been nor will they ever be transferred, assigned or handed over to 5 or any other Indian client. From the perusal of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant uses its experience and skill itself in conducting the bioequivalence tests, and provides only the final report containing conclusions, to the client. The information concerning scientific or commercial experience of the applicant or relating to the method, procedure or protocol used in conducting bioequivalence tests is not being imparted to the pharmaceutical companies and the consideration is not paid for that purpose. On the basis of the final report, the pharmaceutical companies will not be able to find out what method, procedure or protocol was used in conducting the tests. Moreover, the test reports are drug specific. Hence the material furnished by the applicant will not in any way help the customers to facilitate further research and development of new drugs as contended by the Revenue. As such, the fees received by the applicant are to be treated as business income and not royalty income. Since the applicant is in the business of providing bio- analytical services to various pharmaceutical companies, the consideration received by it from them would be its business income. In view of art. 7 r/w art. 5, such income can be taxed in India only if the applicant has a PE in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tomers are to be considered as business receipts in USA and not taxable in India as there is no PE as per Article 7 of India-US DTAA. 12. We have perused the various master service agreements placed in the paper book wherein we refer to clause 13 that defines ownership as under: 13. Ownership. Any inventions and/or techniques for carrying out the Services hereunder which relate to the conduct of Laboratory s business are and shall remain Laboratory's exclusive property, including but not limited to; present and future documentation, scientific and technical data, test procedures and other information that is owned or licensed by Laboratory and that is not developed hereunder. Laboratory shall have the right to use concurrent control data as part of its general historical database. Any data, discoveries or inventions developed or generated pursuant to this Agreement which directly relate to any information or materials provided by Sponsor hereunder, including without limitation new data, uses, processes or compositions directly relating to the information or materials provided hereunder shall be the exclusive property of Sponsor. Laboratory agrees to assist Sponsor in se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity for advanced ruling while considering the facts in 928 of 2010 observed that the payments received / receivable by the applicant in connection with the services rendered by such applicants were in the nature of technical services and taxable as FTS u/s. 9(1)(vii) of the act. The AAR also held that the applicant again availed the benefit of exemption provided in section 9(1)(vii)(b) based on the particular set of facts therein. It was held that the applicants had tax presence in India and therefore its Indian customers / clients were required to withhold tax u/s. 195 of the act. Such ruling was given in case of an applicant, a resident of a country with whom India did not have a tax treaty and hence the applicant was not entitled to the benefits u/s. 90(2) of the act. 15.2 In the present facts of the case, the assessee before us is a US entity and there is a DTAA between India and USA. This particular point has been totally missed out by the authorities below while referring to this decision in order to deny the benefit available to the assessee before us. We therefore are of the view that this particular decision of AAR relied by the revenue is distinguishable on facts. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... smuch as no technical knowledge, experience, skill, know-how, processes, have been made available by the assessee to the insurance companies operating in India. It also does not consist of the development and transfer of any technical plan or technical design. 10. The Tribunal examined the evidence available on record in order to return a finding on the issue as to whether the payments received by the assessee from the insurance companies operating in India would fall within the expression 'fees for technical services' as appearing in article 13(4)(c) of the DTAA read with section 9(1)(vii) of the said Act. 11. The Tribunal also noted the process by which the transaction takes place. It has been pointed out that the originating insurer in India would contact J.B. Bodal M.B. Boda for placing identified risks/class of risks with international reinsurers. J.B. Boda, in turn, would contact one or more international firm(s) of reinsurance broker(s) like the assessee for competitive proposals from the international reinsurer. Then, the international reinsurance brokers like the assessee would contact other primary brokers and various syndicates in the Lloyds market for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration for rendering of any technical services only, if such services make available technical knowledge, expertise, skill, know-how or processes. If the technical knowledge expertise, skill, know how or process is not made available by the service provider, who has rendered technical service for the purpose of Article 12 of DTAA it would not constitute fees for technical services. To that extent the definition of fee for technical services found in the agreement is inconsistent with the definition of fees for technical services provided in Explanation 2 to Clause (vii) of sub Section (1) of Section 9. In view of Section 90 the definition of fees for technical services contained in the agreement overrides the statutory provisions contained in the Act. In fact, the latest agreement between India end Singapore further clarifies this position, where they have explained the meaning of the word 'make available'. According to the aforesaid definition fees for technical service means payments of any kind to any person in consideration for services of technical nature if such services make available technical knowledge, experience, skill, know how or processes, which enable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dependent on the technical service which he receives from the service provider, it does not follow that he is making use of the technology which the service provider utilises for rendering technical services. The crux of the matter is after rendering of such technical services by the service provider, whether the recipient is enabled to use the technology which the service provider had used. Therefore, unless the service provider makes available his technical knowledge, experience, skill, know how or process to the recipient of the technical service, in view of the Clauses in the DTAA. the liability, to tax is not attracted. 15. The learned Additional Solicitor General relied on 3 Judgments to point out that was the earlier view. Now there is a departure supporting the department. The first Judgment on which reliance is placed is, the Judgment of the Advance Ruling Authority in the case of Perfetti Van Melle Holding B.V., In re [2012] 204 Taxman 166/[2011] 16 taxmann.com 207 (AAR-New Delhi) where it was held as under:- The expression 'make available' only means that the recipient of the service should be in a position to derive an enduring benefit and be in a positio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advance Ruling held relying on findings recorded in Perfetti Marketing case where it was held that the expression 'make available' only means that the recipient of the service should be in a position to derive an enduring benefit and be in a position to utilise the knowledge or know-how in future on his own. Here, the industrial specific expertise is provided to the Indian entity which is applied in running its business. The employees of the Indian Company get equipped to carry on their business, market or service market on their own without reference to the service provider when the service . Agreement comes to an end. It is a case of making available the technical knowledge. The recipient of the service was conveyed specifically the right to continue the practice put into effect and adopt it under the agreement on its expiry. 18. From the aforesaid discussion it is clear that test is whether the recipient of the service is equipped to carry on his business without reference to the service provider. If he is able to carry on his business in future without the technical service of the service provider in respect of services rendered then, it would be said that techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogy 'making available', the technical knowledge, skills, 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 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 edge, 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 techni ..... X X X X Extracts X X X X X X X X Extracts X X X X
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