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TMI Blog2012 (11) TMI 675X X X X Extracts X X X X X X X X Extracts X X X X ..... der have gone into it. 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. 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 technical knowledge available at the same time is satisfied." The scope of work would show that different types of services were rendered by the subsidiary in USA. With regard to the Marketing Agreement, and Overseas Services Agreement, no part thereof was having income element which was chargeable to tax under the provisions of Income-tax Act in India in view of Article 12.4 of DTAA. Therefore, insofar as payments made against bills raised by the non-resident entity of the assessee based on these two agreements, assessee could never be fastened with liability to deduct tax at source. However, for the second agreement, namely, "Offshore Development (Facilitation) Agreement", one of the items of services rendered by the entity abroad could have an element of income chargeable to tax in India, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fall within the definition of "technical services". As per assessee, M/s Tex Tech Inc. USA was only a subsidiary company of the assessee and its role was limited to collection of input materials or manuscripts from assessee's customers in USA and scanning such manuscripts and uploading them for the assessee to retrieve them in India. Assessee, thereafter, downloaded such data, did typesetting thereof and then uploaded it back to the subsidiary in USA. The said subsidiary was to download the typeset pages, print such pages, and return it to the ultimate customers. Assessee also mentioned that M/s Tex Tech Inc. USA was receiving certain input materials electronically from the clients, which were also uploaded to the assessee in India and assessee had to do the typesetting work and send it back to M/s Tex Tech Inc. USA, for ultimate delivery to the clients. As per the assessee, the role of its subsidiary in USA was related to production, co-ordination and shipping of materials from the customers to assessee in India and back, and coordinate issues regarding quality, scheduling of delivery etc. M/s Tex Tech Inc. USA was also advising the assessee on business prospects in USA, and moni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting service was providing support to the customers with regard to billing and payment and also collection of such amounts. As per this agreement, the US subsidiary was required to provide market information as and when required by the assessee. Offshore development facilitation service agreement was for scanning of manuscripts and uploading it to India and also for notifying the assessee through e-mail. Once the assessee had done the typesetting in India and uploaded it back to US subsidiary, they were to download such formatted pages, print the pages and courier it to the ultimate customers. The payments effected as per the second agreement, were for these services. The last one was where assessee had received orders from customers for e-publishing and assessee required its subsidiary in USA to do all the work including preparation of typesetting from manuscripts, printing pages and shipping it back to clients. 6. Submission of the assessee was that none of the above three categories of payments fell within the scope of Article 12 of Indo-US DTAA. Assessee was only making use of the services of its subsidiary in USA which facilitated the business of the assessee. As per the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... experts, and each of the activity undertaken by the US company on behalf of assessee, were in the nature of technical services. Collection of manuscripts from the clients, co-ordinating the data, uploading it for the assessee to do the typesetting were all technical services. Even the so-called marketing services rendered by the US company were also technical in nature since it involved technical collaboration with the clients, for making out a specific methodology that was to be followed for uploading the final typesetting. 9. Further continuing his argument, learned D.R. stated that all the overseas clients of the assessee were directly billed by the assessee. For the services rendered by the US subsidiary, assessee was paying based on the bills raised by the US subsidiary. Even when work was fully done by the US company, as required by certain clients of the assessee, substantial technical services were rendered by them. Once assessee was given format and specification and also technical instructions, it was possible for the assessee to use such technical knowledge for its other assignments also, giving an enduring benefit to it. Even if it was advisory service given by the U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m, the invoices raised by the US company would clearly show that there was no rendering of any technical services at all. Learned A.R. placing reliance on the decision of Hon'ble Karnataka High Court in the case of CIT v. De Beers India Minerals (P.) Ltd., argued that no type of technical service was made available by the US subsidiary to the assessee and there was no question of any technical knowledge which enabled the assessee to derive an enduring benefit, being made available to it. Assessee could not utilize the knowledge received from US company for its own benefit. According to him, in view of such specific observation of Hon'ble Karnataka High Court with regard to the term "making available", various decisions of Authority for Advance Rulings, relied on by the learned D.R., had to be ignored. Learned A.R. also relied on the decision of GE India Technology Centre (P.) Ltd. (supra) for arguing that assessee being under a bonafide belief that no tax had to be deducted at source, it could not be fastened with any liability for default of that nature. 11. We have perused the orders and heard the rival submissions. The question here is whether the US company, which incidentall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".]" 12. It might be true that the services rendered by subsidiary abroad would fall within the above definition, at least prima facie. It might also be true that in view of Explanation provided under Section 9(2) of the Act introduced by Finance Act, 2010 with retrospective effect from 1.6.1976, requirement regarding a residence or place of business or business connection in India for a non-resident is irrelevant for the purpose of determining the tax liability for fees for technical services received by a non-resident outside India. But, as already mentioned by us, if the assessee is able to show that the services rendered by the entity abroad, would not fall within the meaning of "fees for included services" as defined under Article 12.4 of DTAA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in servers and communicate access mechanisms. 3.2 Y shall use the instructions sent along with the files for carrying out digitization services in respect of manuscripts and books and other materials. 3.3 X will also provide final quality assurance of products delivered by Y prior to shipment to customer. 3.4 X will ship the product to customer either electronically or physically based on customer preference. 3.5 The parties understand that the receipt of the work carried out by X under this Agreement could be received in India at the time of downloads or in cyberpace when the files are placed in a server to facilitate access." It is pertinent to note that 'X' denotes the US subsidiary here. 14. The third agreement called "Overseas Services Agreement" placed at paper-book page 53 onwards gives scope of work of the US company as under:- "3. Scope 3.1 X hereby agrees to provide services referred to in Para 3.2 and the details of service shall be mutually agreed upon from time to time. 3.2 X using domain expertise, tools and infrastructure, shall carry out the following services: (i) Receipt of manuscripts and licensed materials from customers. (ii) Identif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d effecting dispatches to customer locations. In other words, whole of the work was done by the US company and when whole of the work was done by US company, for start to finish, we cannot say that assessee was receiving any technical knowledge, skill, know-how or benefit of any technical plan or technical design from them. 16. This leaves us with the second agreement called "Offshore Development (Facilitation) Agreement". The scope of work has been reproduced by us above at para 13. By virtue of clause 3.1, US company has to process customer materials, prepare instructions and prepare files for the assessee to carry out e-publishing services and also has to upload these to the assessee. All these will definitely involve technical know-how, but, still there is no technical knowledge as such made available to the assessee which will give it an enduring benefit. Similar is the case with the type of service mentioned at clause 3.3 also. By virtue of this clause, the entity abroad has to provide quality assurance. This provision of quality assurance might also involve some technical expertise, but, we cannot say that such technology was made available to the assessee by the said enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces and making technical knowledge available at the same time is satisfied." 17. When viewed from the above interpretation given by Hon'ble Karnataka High Court of term "making available", it is clear that except for the work mentioned in clause 3.2 of the second agreement, there was no technical knowledge or service made available by the entity abroad to the assessee in any of the other work. If the instructions sent by the entity abroad were such that it could give a technical expertise to the assessee, which it could use even after the expiry of the contract thereby giving it an enduring benefit in its e-publishing work, then without doubt, it will fall within the meaning of "fees for included services". If this was the case, then assessee was obliged to deduct tax at source on the payments effected by it to the subsidiary in USA, arising out of all the three agreements, if it had not sought a certificate from A.O., as stipulated in Section 195(2). Here, the decision of Hon'ble Apex Court in the case of GE India Technology Centre (P.) Ltd. (supra) becomes relevant. Para 10 of the said decision is reproduced hereunder, for brevity:- "10. In Transmission Corporation case (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gible to tax in India. In our view, the above observations of this Court in Transmission Corporation case (supra) which is put in italics has been completely, with respect, misunderstood by the Karnataka High Court to mean that it is not open for the payer to contend that if the amount paid by him to the non-resident is not at all "chargeable to tax in India", then no TAS is required to be deducted from such payment. This interpretation of the High Court completely loses sight of the plain words of s. 195(1) which in clear terms lays down that tax at source is deductible only from "sums chargeable" under the provisions of the I.T. Act, i.e. chargeable under ss. 4, 5 and 9 of the I.T. Act." 18. It is an admitted position that separate invoices were raised by the subsidiary to the assessee, based on the three different agreements, and copies of such invoices have been placed at paper-book page 7 onwards. Thus, three agreements were not a composite one. The scope of work would show that different types of services were rendered by the subsidiary in USA. With regard to the Marketing Agreement, and Overseas Services Agreement, no part thereof was having income element which was charge ..... X X X X Extracts X X X X X X X X Extracts X X X X
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