2005 (3) TMI 708 - AT - Income Tax

Taxability of the training fees - Double taxation relief - sale of know-how in fact constitutes sale of property within meanings of that expression under article 12(5)( a ) of the India US tax treaty - Whether or not the training fees paid to a US based company, which is said to be integral to the purchase of know-how from that company, is taxable in India - Principles of interpretation of tax treaties - HELD THAT - There is no dispute that Article 12(5) is an exclusion clause which restricts the scope of applicability of Article 12(4) regarding taxability of certain receipts in the nature of fees for included services in the source country. As we have noted earlier as well, it is not even assessee s case that the receipts in the nature of trading fees are not covered by the normal scope of Article 12(4). In any event, Memorandum of Understanding concerning fees for included services in Article 12 dated 12th September, 1989, attached to and forming part of the India US tax treaty, specifically mentions that scope of Article 12(4b) may extend to, inter alia, technical training . Example (6) given in the MoU States that the fees for training the employees of the Indian company constitutes fees for included services and is, therefore, taxable in the source country as well. The reasoning for this conclusion, as given in the said MoU, is that the services are technical, and the technical knowledge is made available to the Indian company . The assessee s defence against taxability of these receipts in the source country primarily consists of reliance on the scope of exclusion clause set out in Article 12(5)( a ) of the Indo US tax treaty. The exclusion clause, relied upon by the assessee, provides that the services which are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of a property, are not to be treated as fees for included services exigible to tax in the source country. The only rider is that the exclusion clause will not extend to the sale of property referred to in Article 12(3)( a ) of the treaty. It is thus clear that when the principal sale itself is subjected to tax in the source country, the services which are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of a property, are also subjected to tax in the source country. The said principle is also implicit in Article 12(4)( a ) which provides that consideration for rendering any technical or consultancy services, where such services are ancillary and subsidiary to the application or enjoyment of the right, property or information which is covered by the definition of royalty in Article 12(3), is also includible in the fees for technical services and accordingly liable to be taxed in the source country. During the course of hearing before us, we put it to the assessee that the principle elaborated above could, in our understanding, perhaps be the only explanation for the exclusion clauses in article 12(5)( a ) and 12(5)( b ). We also requested the assessee to let us know in case there could be any other intent and scheme of things underlying these clauses. However, learned counsel for the assessee could not enlighten us on this issue. The issue regarding connotations of expression property was heard at considerable length for over two sessions but yet the learned counsel could not come up with any arguments in assessee s defence on the question of intent and scheme of treaty as put to him by the bench. In due deference to the order passed by the co-ordinate bench, we restore the matter to the file of the CIT(A) for examination de novo. While doing so, the CIT(A) shall examine ( i ) whether or not the training is ancillary and subsidiary, as well as inextricably and essentially linked to the sale of know-how, and ( ii ) whether or not the sale of know-how constitutes sale of property. The CIT(A) shall give due and fair opportunity of hearing to the assessee, bear in mind our findings above and shall objectively deal with, by way of a speaking and reasoned order, whatever submissions the assessee prefers to make. The only issue raised in regarding non taxability of training fees in India. Thus, these appeals are allowed for statistical purposes in the terms indicated above. In the result, Appeals are hereby allowed for statistical purposes.

Summary

Issues Involved:

1. Taxability of training fees paid to a US-based company under the India-USA Double Taxation Avoidance Agreement (DTAA).
2. Interpretation of the term 'property' in Article 12(5)(a) of the India-USA DTAA.
3. Whether the training fees are ancillary and subsidiary, as well as inextricably and essentially linked to the sale of know-how.
4. Taxability of payments for technical assistance and know-how under Article 12 of the India-USA DTAA.

Detailed Analysis:

1. Taxability of Training Fees:
The primary issue is whether training fees paid to a US-based company, which are integral to the purchase of know-how, are taxable in India. The assessee contends that under Article 12(5)(a) of the India-USA DTAA, such fees are not taxable in India as they are ancillary and subsidiary to the sale of property (know-how).

2. Interpretation of 'Property':
The assessee argues that 'property' includes 'know-how' under Article 12(5)(a) of the India-USA DTAA. The term 'property' is not explicitly defined in the treaty, leading to reliance on Article 3(2) which states that undefined terms shall have the meaning as per the laws of the State concerning the taxes to which the convention applies. The assessee cites various sources, including the Law Lexicon and judicial precedents, to support that 'property' encompasses 'know-how'.

3. Ancillary and Subsidiary Services:
The assessee claims that training fees are ancillary and subsidiary, as well as inextricably and essentially linked to the sale of know-how, thus falling under the exclusion clause of Article 12(5)(a). The Tribunal previously restored the matter to the CIT(A) to examine whether the training could be considered as such.

4. Taxability of Payments for Technical Assistance and Know-How:
The Departmental Representative argues that the training fees are taxable as 'fees for included services' under Article 12(4)(b) and are not covered by the exclusion clause in Article 12(5)(a). The Tribunal observes that the fees for training of the assessee's personnel are covered by Article 12(4)(b) but for being covered by the exclusion clause in 12(5)(a).

Tribunal's Observations:

Principles of Interpretation:
The Tribunal emphasizes that tax treaties should be interpreted in good faith, considering the ordinary meaning of the terms in their context and in light of the treaty's object and purpose. Literal or legalistic interpretations must be avoided if they defeat the treaty's basic object.

Contextual Meaning of 'Property':
The Tribunal concludes that the term 'property' in Article 12(5)(a) should be interpreted contextually, meaning it should include only such sales that do not lead to taxability of the sale proceeds on a source rule basis. This interpretation avoids the incongruity of different tax treatments for interdependent transactions.

Restoration to CIT(A):
In line with the previous Tribunal order, the matter is restored to the CIT(A) for a fresh examination to determine whether the training fees are ancillary and subsidiary, as well as inextricably and essentially linked to the sale of know-how, and whether the sale of know-how constitutes the sale of property.

Taxability of Technical Assistance Payments:
The Tribunal confirms that payments for technical assistance and know-how are taxable under Article 12(4) of the India-USA DTAA, as they involve the transfer of technical knowledge and are covered by the definition of 'fees for included services'.

Reimbursement of Incidental Expenses:
Following the precedent set by the Kerala High Court and a co-ordinate bench, the Tribunal holds that reimbursement of incidental expenses is part of the fees for technical services and is taxable.

Conclusion:
The appeals regarding the non-taxability of training fees are allowed for statistical purposes, requiring further examination by the CIT(A). The appeals concerning the taxability of payments for technical assistance and know-how are dismissed, upholding their taxability under the India-USA DTAA.