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TMI Blog2010 (4) TMI 867X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in India. HELD THAT:- We have also gone through the material available on record regarding nature of services rendered by the assessee to STPL. Descriptions of services rendered by the assessee are given in invoices raised by the assessee on STPL. It is clear from these documents that what are provided by the assessee, was only strategic consulting. The Memorandum of understanding is a tool to understand as to what meaning was intended to be conveyed in the DTAA between countries. Since the wording of Article 12(4)( b ) of the treaty and Article 12(4)( b ) of the DTAA between India and US are identical, the MOU to the Indo-US treaty can be looked into to see what meaning India and Switzerland would have contemplated in the treaty. The law is settled that a DTAA with one country can be compared with the DTA with another country in case of ambiguity and in order to understand the true scope and meaning of the concerned DTA. The Karnataka High Court in the case of A.E.G. Telefunken v. CIT [ 1998 (3) TMI 107 - KARNATAKA HIGH COURT] compared the DTA with German Democratic Republic with the DTA with Finland towards this end. the Tribunal in the case of Raymond Ltd. v. Dy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of royalty. In the result, all the appeals by the revenue are dismissed. - N.V. VASUDEVAN AND J. SUDHAKAR REDDY, JJ. Rajan Vora for the Appellant. Aarsi Prasad for the Respondent. ORDER N.V. Vasudevan, Judicial Member. - ITA No. 5820/Mum./2004 is an appeal by the revenue against the order dated 25-5-2004 of learned CIT(A)-XXXI, Mumbai relating to assessment year 1996-97. ITA No. 4256/Mum./2004 is an appeal by the revenue against the order dated 8-3-2004 of learned CIT(A)-XXXI, Mumbai relating to assessment year 1997-98. ITA No. 4252/Mum./2004 is an appeal by the revenue against the order dated 8-3-2004 of learned CIT(A)-XXXI, Mumbai relating to assessment year 1998-99. ITA No. 5821/Mum./2004 is an appeal by the revenue against the order dated 25-5-2004 of learned CIT(A)-XXXI, Mumbai relating to assessment year 1999-2000. ITA No. 6575/Mum./2004 is an appeal by the revenue against the order dated 30-6-2004 of learned CIT(A)-XXXI, Mumbai relating to assessment year 2001-02. 2. Grounds of appeal raised by the revenue in all these appeals are common and which reads as follows : (1)On the facts and circumstances of the case and in law, l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... create business problems across national boundaries, the assessee has in its Managing Director a skilful multilingual negotiator with a broad based international experience. 4. The assessee entered into strategic consulting services agreement dated 2-1-1995 with Stock Traders (P.) Ltd. (STPL) an Indian company engaged in the business of financing and making investments. STPL was also engaged in the business of promoting joint ventures and alliances with overseas and multinational corporations. With a view to expand its existing project and making investments in new one, STPL wanted to avail services provided by the assessee. As per the agreement dated 2-1-1995, the assessee agreed to render following services : ( i )Assessee was to render any or all the services under the agreement at any place outside the territory of the Republic of India, depending on the requirements of STPL. ( ii )Assessee was to make an endeavour to locate new business opportunities and partners for STPL and recommend proposals for new projects and negotiate, co-ordinate with existing and new joint venture partners for technology transfers, equity participation etc. and secure them support for an app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xable as royalty under Article 12(3) of the IS treaty on the ground that assessee has provided to STPL information concerning industrial, commercial or scientific experience. u That the fees received by the assessee can also be taxed as fees for included services under Article 12(4) of the IS treaty on the ground that STPL has utilized the services in its own business and therefore, the technology should be considered to have been made available to STPL. u That Article 12(5) of the IS treaty provides for certain exclusions from the term fees for included services for payments made towards certain services, however the assessee case is not covered by the exclusions prescribed. u That STPL is a dependent agent of the assessee and therefore, the assessee has a PE in India; accordingly, even if the fees received by the assessee are not regarded as royalty/fees for included services under Article 12 of the IS treaty such fees will be taxable in India under Article 7 of the IS treaty. 7. On appeal by the assessee, learned CIT(A) held that receipts by the assessee from STPL cannot be brought to tax and that they are not in nature of royalty or fees for technical services withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee on STPL; the same reads as follows : "ISS India Project : Billing for services rendered in connection with negotiating with the Managing Director of ISS Asia, Mr. Stuart Graham, in respect of commencing the examination of the Indian Market opportunity for ISS values added services (including cleaning and maintenance), and for the systematic evaluation of a joint venture project in India between ISS and Stock Traders (P.) Ltd. including co-ordinating with the ISS Group in respect of this study, and reaching an agreement in principle on behalf of stock traders that ISS will work with stock traders in India, if agreement on market entry is reached, amounting to US$ Twenty Thousand only. USD 20,000." 13. Summary of the services rendered in connection with the above invoice was as follows : "ISS India Project Summary of services rendered : u At the request of the board of STPL Preroy arranged for a meeting with the Managing Director of ISS Asia, Mr. Stuart Graham in Zurich on 30th October, 1997. u Preroy prepared an agenda for the meeting (a copy was provided to STPL) in order to structure the meeting according the STPL priorities. u The meeting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other State. 3. The term royalties as used in this Article means ( a )payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematography 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 the use of, or the right to use, any industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience and ( b )payment of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment. 4. For the purposes of this Article, the term "fees for technical services" means ( a )payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services are ancillary and subsidiary to the application or enjoyment of the right for which a payment described in sub-paragraph ( b ) of Paragraph 3 is rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal plants or technical designs, or making technology available as described in paragraph 4( b ), include : 1. Engineering services (including the sub-categories of bio-engineering and aeronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical, and industrial engineering); 2. Architectural services; and 3. Computer software development. Under paragraph 4( b ), technical and consultancy services could make technology available in a variety of settings, activities and industries. Such services may, for examples, relate to any of the following areas : 1. Bio-technical services; 2. Food processing; 3. Environmental and ecological services; 4. Communication through satellite or otherwise; 5. Energy conservation; 6. Exploration or exploitation of mineral oil or natural gas; 7. Geological surveys; 8. Scientific services; and 9. Technical training. The following examples indicate the scope of the conditions in paragraph 4( b ): Example 3 Facts : A U.S. manufacturer has experience in the use of a process for manufacturing wallboard for interior walls of houses which is more durable than the standard products of its type. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l-free oil from a plant which produces oil normally containing cholesterol. An American company has developed a process for refining the cholesterol out of the oil. The Indian company contracts with the U.S. company to modify the formulas which it uses so as to eliminate the cholesterol, and to train the employees of the Indian company in applying the new formulas. Are the fees paid by the Indian company for included services? Analysis : The fees are for included services. The services are technical, and the technical knowledge is made available to the Indian company. Example 7 Facts : The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol-free oil and wishes to market the product world wide. It hires an American marketing consulting firm to do a computer simulation of the world market for such oil and to adverse it on marketing strategies. Are the fees paid to the U.S. company for included services? Analysis : The fees would not be for included services. The American company is providing a consultancy service which involves the use of substantial technical skill and expertise. It is not, however, making available to the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii ) of the Act stops with the "rendering" of technical services, the DTA goes further and qualifies such rendering of services with words to the effect that the services should also make available technical knowledge, experience, skills etc. to the person utilising the services. These words are "which make available". 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 utilising 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 services in future. The technical knowledge, experience, skill etc. must remain with the person utilising the services even after the rendering of the services has come to an end. A transmission of the technical knowledge, experience, skills etc. from the person rendering the services to the person utilising the same is contemplated by the article. Some sort of durability or permanency of the result of the "rendering of services" is envisaged which will remain at the disposal of the person utilising the services. The fruits of the services s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dustrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience and ( b )payment of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment." Admittedly clause ( a ) will not apply and the case has to be examined only in the light of clause ( b ) of Article 12(3) of the Treaty. In the commentaries to the Organization for Economic Co-operation and Development (OECD) and the United States of America (US) Model Convention and the commentary of the noted author Klaus Vogel to interpret the term consideration for information concerning industrial, commercial or scientific experience . Such commentaries are useful, reliable and a legally accepted basis for interpreting treaties. The commentary of the OECD on Article 12(2) of the OECD Model Convention [corresponding to Article 12(3) of the IS treaty] has clarified that the aforesaid Article alludes to the concept of know-how . Accordingly, the condition for applying Article 12 is that the remuneration should be paid for imparting know-how to the service recipient. The relevant extract of the OECD commentary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence between royalty and rendering services. On page 790 ( Klaus Vogel on Double Taxation Conventions - Third edition), Vogel comments that the criterion used to distinguish the provisions of know-how from rendering advisory service is the concept of imparting. The relevant extract of the commentary has been reproduced below : "Imparting of experience : Whenever the term royalties relates to payments in respect of experience (know-how) the condition for applying Article 12 is that the remuneration is being paid for imparting such know how.... . . .in contrast, the criterion used to distinguish the provisions of know-how from rendering advisory services is the concept of imparting. An advisor or consultant, rather than imparting this experience, uses it himself (BFH, BstBl. II 235 (1971); Ministre des Relations exterieures , Response a M. Bockel, 36 Dr. Fisc. Comm. 1956 (1984). All that he imparts is a conclusion that he draws inter alia from his own experience. His obligation to observe secrets, or even his own interest in retaining his means of production will already prevent a consultant from imparting his experience. In contrast to a person using his own know- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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