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TMI Blog2013 (11) TMI 304X X X X Extracts X X X X X X X X Extracts X X X X ..... g the issue of payments made by the assessee company to Contract Research Organisations (CRO) without making deduction of tax at source. The detailed grounds raised by the Revenue, which are common for both the assessment years, are as under- "1. The order of the Hon'ble Commissioner of Income-tax(Appeals) is erroneous on facts and in law. 2. The Hon'ble Commissioner of income tax (Appeals) erred in his findings that the CROs do not part with their technical knowledge/skill to the assessee. The bio-equivalence study is a research activity. The technical knowledge or know bow in respect of a research study is the findings or result of the study which will be consolidated in the report. The payments made by the assessee to the CROs is to obtain the study report or to obtain the technical knowledge/knowhow from the study. 'This attracts the provisions of para 4(b) of Article 12 of the DTAA with USA. 3. The Hon'ble Commissioner of Income-tax (Appeals) erred in his findings that the Protocol is developed in tune with the requirements of their respective regulatory authorities and there is no transfer of technical plan/design in it. This is like arguing that there is no transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a DTAA with one country with that of other. Some countries have kept separate clause in the Protocols in the DTAA to allow them to apply the changes incorporated in DTAA with any other country incorporated in DTAA with any other country in their DTAA also if it is favourable to them. (eg; Clause 3 of the Protocol of the DTAA between India and Israil, Para 4 of the Protocol of the DTAA between India and Sweden). In the DTAA with Canada or USA such Provision is not there. Further Canada and USA follows two different models of DTAA and applying provision of USA DTAA to Canada DTTAA is against law. Federal taxation laws are very stringent that taxation is done transaction wise. Hence any payment from federal countries to India is made after withholding taxes at source. 7. The Hon'ble Commissioner of Income-tax (Appeals) erred in holding that even for Canada payments if the payment does not fall under the definition of fees for included services it falls under business profits. Clause 3 of Article 12 of DTAA with Canada says that any income that is taxable as per Indian Laws can be taxed in India but @ 15% only. Since the payments towards bio-equivalence studies are taxable in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,96,70,289 TOTAL 16,59,55,236 20,39,00,125 5. The assessee company on the reason that the amounts paid do not require any TDS to be effected, repatriated the amounts to the above company without making deduction of tax at source under the provisions of the Act. The DCIT Circle 14(3)(TDS) Hyderabad, conducted an inspection on the assessee company and issued a show cause letter as to why the payment by the company should not be treated as 'fee for included services' in terms of Article 12 of the respective Double Taxation Avoidance Agreement (DTAA). 6. It was the submission of the assessee company that the payments are not 'fee for included services', being 'business profits' in the hands of the recipients in terms of Article 7 of the DTAA. It was further submitted that since the CROs did not have any Permanent Establishment (PE) in India, the amounts are not taxable in India and accordingly, there is no need for making any TDS by the assessee. The contentions of the assessee were not acceptable to the DCIT, who held that assessee should have deducted TDS at 15% of the amount or at least should have obtained non-deduction certificate at the time o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... These heads are like heads of income in the Income Tax Act and any receipt has to be brought under only one head of income and if a particular receipt does not fall under any of the heads, it has to be brought under the last omnibus head, namely, 'other income.' 2.10. It is not the contention of the DCIT and the appellant that the payments come under the last head viz. 'Other Income". It is the contention of the appellant that the receipt falls under the head "business profit" for the recipient. whereas according to the DCII, the receipts falls under the head "royalties and fees tor included services" in general and "tees tor included services" in particular. 2.11. Therefore, the only issue to be decided in this case is whether the payment made by the appellant to four of the CROs were "business profits" in the hands of the CROs or "fees for included services". 2.12. Wile there is no definition of "business profits" in the DTAA with Canada, para 7 of Article 7 of DTAA with USA defines "business profits" as under:- "Business profits means income derived from any trade or business including income from the furnishing of services other than included services and including inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture. 2.15. As mentioned earlier. the DTAA with USA treats income derived from furnishing of services as "business profits". Therefore, can we say that the CROs in USA were doing business as they were furnishing services to the appellant '? Then, in that case, can we also say that the Canadian CROs also do business by applying the same yardstick ? Particularly, when the Act treats the "profits and gains of profession" at par with "profits and gains of business", can't we say that eventhough in the hands of the recipient CROS, they were professional receipts, they were business profit' in view of these peculiar circumstances ? Before coming to a conclusion, let us see para 4(b) of Article 12 of the DTAAs. 2.16. The CROs conduct a sort of study about the impact of the medicine produced by the appellant on the human beings in USA and gives its findings at the end of the study. No doubt, the CROs prepare what is known as "Protocol" and the appellant and the CROs agree with each other that the studies are to be conducted according to the minute details mentioned in the protocol. As per the agreement, the appellant can check whether the CROs make the study according to the protocol a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces, I hold that para 4(b) of Article 12 does not apply to the case of the appellant. 2.20. Now that it is decided that para 4(b) of Article 12 is not applicable and since it is not the contention of the DCIT that the DTAAs do not apply for the appellant, the only way to reconcile the position is that the CROs should be treated as having derived profits from furnishing of services, other than included services and hold that the receipt should be treated as "business profits" in the hands of the recipient CROs in USA. Even though a similar para (para 7 of Article 7) is not in the DTA with Canada, I hold that such an interpretation should be given to the payment made to Canadian CROs also, as, the DTAAs with USA and Canada are very similar and absence of a similar definition does not mean that we are prevented from giving such interpretation. In these circumstances I hold that the receipt in the hands of Canadian CROs should also be treated as "business profits 8. Before us, the Learned Departmental Representative reiterated the contentions as made out by the Assessing Officer vide his detailed order and referred to S.9(1)(vii) and S.5 of the Income-tax Act, besides Articles 12 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of field study on its behalf, which would help it in getting registered with the Regulatory Authority. Since there is no making available of technical skill, knowledge or expertise or plans or designs in the present case, the amounts paid by the assessee do not fall under Article 12, but come within the purview of Article 7 of the DTAA. Therefore, the amounts paid are to be considered as business receipts of the said CROs and since they do not have any PE in India on which aspect there is no dispute, there is no need to deduct tax at source. Similar issue was analysed and considered by the AAR in the case of Anapharm INC (supra), which is one of the recipients in the assessee's case also. The AAR in that case held as under- "Mere provision of technical services is not enough to attract art. 12(4)(b). It additionally requires that the service provider should also make his technical knowledge, experience, skill, know-how etc., known to the recipient of the service so as to equip him to, independently perform the technical function himself in future, without the help of the service provider. In other words, payment of consideration would be regarded as 'fee for technical/includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to this provision, the applicant has not made its technical expertise, know-how, etc., available to R. It is only natural that R which has developed the generic drug should enjoy the intellectual property rights in relation thereto. The analytical test has not contributed to the development of new generic drug. The test has only shown whether that drug is as efficacious as the reference drug. Development of new drug and testing its efficacy are not one and the same thing. By merely acquiring knowledge of the testing methods one does not get any insight as to how a new drug could be developed. In the light of the above discussion interpreting the expression 'make available', it follows that c1. (b) of art. 12(4) relied upon by the Revenue does not come into play and the services in question cannot be considered to be "fees for included service" within the meaning of this provision. The second limb of cl. (b) refers to "development and transfer of a technical plan or technical design". Obviously, that has no application here. The applicant uses its experience and skill itself in conducting the bioequivalence tests, and provides only the final report containing conclusions, to the c ..... 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