TMI Blog2009 (11) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax Practitioner, Mr. Nirankar Saxena,Mr. Chander Shekhar Sharma. Present for the Department: Mr. Sushil Kumar, Addl. DIT(IT), R-3. RULING The applicant is a non-profit company registered under the Companies Act, 1956. It is also registered under section 11A and 80G of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). Hence, it is stated that its income is not taxable in India. The applicant has entered into a Memorandum of Understanding (MOU) with Defence Research Development Organisation (DRDO) on 25th July, 2008. As per the MOU, the applicant has to assist DRDO laboratories in identification and business development of competitive global technologies from its inventory of existing defence-related innovations. In order to implement the MOU, the applicant and DRDO have jointly initiated a programme known as "Accelerated Technology Assessment and Commercialization" ("ATAC"). The programme, it is stated, is for a period of 24 months. The applicant states that a major part of the programme has to be completed by the applicant and the rest with the help of UT(IC2) of University of Texas (for short 'UT'). 2. The applicant entered into an agreement with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Introduction of ATAC programme and training to the innovators for technology nomination FICCI India Technology Assessment Identification of Fast Track Technology FICCI India Approval of the identified technologies FICCI India Final approval of the identified technologies UT(IC2) USA Scoring sheet for each technology application FICCI India Final approval UT(IC2) USA Scan for each technology application to identify uniqueness and novelty UT(IC2) USA Technology assessment by way of SME validation of the selected technology in coordination with POCs, innovators and industry experts UT(IC2) USA Preparation of Quick Look report for the selected technologies UT(IC2) USA Defining and executing business development strategies for selected technologies UT(IC2) 6. The DRDO will pay consultancy fee of INR 4.5. crores to FICCI in various stages. The payment to be made to UT(IC2) by the applicant is 660,000 US dollars payable in 5 install ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e from the University of Texas under the title "Statement of Federal Exempt Status". It reads as follows: TO WHOM IT MAY CONCERN: The University of Texas at Austin ("University") is an agency of the State of Texas ("State"), is a resident of the United State of America for purposes of U.S. taxation, and is exempt from U.S. tax under the Internal Revenue Code ("IRC"). However, University is required to pay tax on certain unrelated business taxable income in accordance with IRC ss.511(a)(2)(B) and must annually file an income tax return with the Internal revenue Service." 10.Having regard to this statement, we find that the applicant is liable to tax in USA as per the criterion laid down in Article 4 and the mere fact that the University has been granted exemption from tax under the provisions of Internal Revenue Code (IRC) does not take it out of the category of tax resident. In fact, the University has stated in the Certificate that it is statutorily bound to file Income-tax return. Moreover, it has to pay tax on the non-exempt income. Hence, the first question has be answered in the affirmative by holding that the DTAA would be applicable in the instant case. 2nd Question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. 13.The succeeding para 5 excludes certain activities/services from the purview of para 4. It reads thus: "(5) Not with standing paragraph 4, "fees for included services" does not include amounts paid: (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a) ; (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals making the payments; or (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not support the inference of teaching by an educational institute. UT (IC2) is, no doubt, a wing of the University of Texas which caters to the needs of higher education. For that reason, it cannot be concluded that the activities undertaken by UT are in the nature of teaching. Example 10 appended to the Protocol of DTAA illustrates the inter-relation between teaching and the promotion of technology. The example is quoted below: Facts: An Indian automobile manufacturer decides to expand into the manufacturer of helicopters. It sends a group of engineers from its design staff to a course of study conducted by the Massachusetts Institutes of Technology (MIT) for two years of study in aeronautical engineering. The Indian firms pays tuition fees to MIT on behalf of the firm's employees. Is the tuition fee a fee for an included service within the meaning of Article 12? Analysis: The tuition fee is clearly intended to acquire a technical service for the firm. However, the fee paid is for teaching by an educational institution, and is, therefore, under paragraph 5(c), not an included service. It is irrelevant for this purpose whether MIT conducts the course on its campus or at so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces" instead of 'included services' is the expression used in India-UK treaty. The Authority explained the connotation of the phrase "make available technical knowledge, experience, skill" etc. as follows: "The service should be aimed at and result in transmitting the technical knowledge, etc., so that the payer of service could derive an enduring benefit and utilize the knowledge or know-how in future on his own without the aid of the service provider. By making available the technical skills or know-how, the recipient of the service will get equipped with that knowledge or expertise and be able to make use of it in future, independent 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 a lot of technical knowledge and experience of the service provider would have gone into it. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause (b) of Art.12.4 of the DTAA is attracted. 24. The scope of work is detailed in Attachment A to the Agreement. The applicant has filed a set of documents to highlight the activities related to the four components of the programme set out in Attachment A. The programme component No.1 as per Attachment A is Training. A workshop is conducted for DRDO officers and scientists at management level to provide a broad understanding of the key principles involved in the technology commercialization process. FICCI will provide the classroom facility for this purpose and UT will provide the instructor with training materials. Two training programmes were arranged for 5 days and various aspects of ATAC were explained by means of power point presentation. It is clarified by the applicant's counsel that the training materials are nothing more than customized modules. The other segment of training is "Technology Commercialization Management Board Workshop". It is stated that the said Workshop which was to take place in USA was found to be unnecessary and therefore not conducted. 25. Explaining broadly the principles involved in technology commercialization and making the participants f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew Board. It contains an indepth analysis of the commercial potential and recommends the appropriate commercialization technologies to be adopted, best market opportunities that exist and potential industry partners with whom further negotiations could be done for the commercialization of technology. Each report contains Commercialization rating which helps the Management Board make business decisions. Technologies selected by the Technical Review Board of DRDO will move into the Business Development phase of the programme. The technologies selected for Quicklook reports are furnished in Encl 9 of the Paper book. A sample of the Quicklook report prepared by UT is given in Encl 10. 27. Evaluating the potential of technologies after interaction with the experts and passing on the results of its interaction and furnishing relevant informations which are by and large within public domain in order to enable DRDO to find potential customers do not fall within the scope of services contemplated in paragraph 4 of Art.12 of the DTAA. 28. The business development phase is the third phase of the programme's commercialization process. In this phase, UT with the assistance of FICCI pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would amount to making available the technical knowledge, experience, skill, know-how or processes possessed 18 by UT. Acting as a facilitator and technical consultant for the purpose of commercialization of identified technologies, screening and assessment of technologies by deploying the expertise and resources which UT has, and preparing technical reports including market analysis cannot be legitimately brought within the purview of para 4(b) of Art.12. Expression of opinion, formulation of recommendation, and rendering assistance to DRDO in connection with ATAC programme do not really make available the technical knowledge or know-how to DRDO, except perhaps in an incidental or indirect manner. UT's services and the consideration received therefor cannot therefore be brought within the ambit of Art.12.4 of DTAA. 33. The learned Departmental Representative has particularly drawn our attention to Quicklook Report prepared by UT and contended that such report imparts technical knowledge and valuable information to DRDO and therefore it amounts to transfer of technology. We find no substance in this contention. There is no factual or legal basis to support the inference that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessed has superior accuracy. The greatest benefit, according to those interviewed, is that the kit could reveal the result in 2 hours. The cost of conducting the test is much lower when compared to others in the market. 'Development Status' is the next item discussed. It only contains the information provided from discussions with the innovator. Then, under the heading 'Market Analysis', it is stated that a total of two markets were studied and those are: (1) ELISA based test kits for JE primarily in South East Asia and (2) ELISA based test kits for West Nile Virus. The points mentioned are: (a) where the market exists and who are the competitors? (b) average pricing per test; (c) key opportunities i.e. the test being superior to existing methods, one of the major competitors likely to exit the market and the cost for the test {in terms of manufacture and laboratory requirements} being much lower; and (d) key challenges i.e, the market being quite small and the target market group in South East Asia belonging to poorer regions with limited access to healthcare and the likelihood of technology facing some IP barriers. In the same manner, the 'market' relating to West Nile virus h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scope of services contemplated by paragraph 4 of Art.12 of the DTAA. We fail to understand how such services amount to transfer of technical know-how or process or transfer of a technical plan, as contended by the Revenue. 38. We may in this context usefully refer to the ruling of this Authority in Anapharm Inc, in re1. While reaching the conclusion that the bio-analytical services and reports provided to the pharmaceutical companies by the applicant Anapharm Inc. cannot be brought within clause (b) of Art.12(4) of the DTAA between India and Canada, the following observations were made at p.407: "We find that, in the present case, the agreements of the applicant fall in the latter category, as the applicant uses its experience and skill itself in conducting the bio-equivalence tests, and provides only the final report containing conclusions, to the applicant. The information concerning scientific or commercial experience of the applicant or relating to the method, procedure or protocol used in conducting bio-equivalence 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 pharmac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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