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TMI Blog2013 (12) TMI 308X X X X Extracts X X X X X X X X Extracts X X X X ..... rs an appeal against the same on the following amongst other grounds, which are without prejudice to each other. 1. The order passed by the learned Commissioner of Income-tax (Appeals) is erroneous and contrary to the provisions of law and facts and therefore requires to be suitably modified. 2. Based on the facts of the case the appellant is not required to deduct tax at source under section 195 in respect of the payment made to Texoplas Ltd. 3. The learned Commissioner of Income-tax (Appeals) has erred in holding that concerned payment, to be made to Texoplas Ltd. (UK), is covered by the definition of the term 'fees for technical services' under article 13 of the India-U.K. Double Taxation Avoidance Agreement and hence is taxable in India and accordingly tax is required to be deducted at source under section 195 of the Act. 3.1 The learned Commissioner of Income-tax (Appeals) has erred in fact and in law in not appreciating that the consultancy services has to have the technical element in order to be classified as 'fees for technical services' within clause (c) of article 13(4) of the India-U.K. Double Taxation Avoidance Agreement. 3.2 The learned Commissioner of Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned Commissioner of Income-tax (Appeals) in paragraph 5 of his order which is also reproduced below : "5. Apparently, similar arguments had been made before the Assessing Officer also, as per the copy of the letter dated August 1, 2008 addressed to him, filed during the appellate proceedings. The stand of the Assessing Officer is that the services rendered by M/s. Texoplas Ltd. get covered by the definition of fee for technical services as per Explanation 2 to section 9(1). As per him since section 9(1)(vii)(b) read with Explanation 2 would lead to the conclusion that the services rendered by M/s. Texoplas Ltd. were in the nature of consultancy and were used by a resident for the purpose of business, the income shall be deemed to have accrued in India. Consequently, the provisions of section 195 for the TDS purposes shall be applicable. Further, reacting to the appellant's reference to the aspect of taxability under the Indo-U.K. Double Taxation Avoidance Agreement and the interpretation to be drawn from Indo-US Double Taxation Avoidance Agreement along with the memorandum of understanding signed by the two Governments, the Assessing Officer held that memorandum of understand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny right of reimbursement from client for such taxes, duties or other governmental charges. 3.03 Responsibility of client for taxes Any taxes, duties or other governmental charges due (directly or indirectly) by client in connection with the payment of the compensation shall be the exclusive responsibility of client without any right of reimbursement from consultant, or deduction from the fee to consultant." We also reproduce the provisions of section 248 of the Income-tax Act, 1961, which are as under : "Where under an agreement or other arrangement, the tax deductible on any income, other than interest, under section 195 is to be borne by the person by whom the income is payable, and such person having paid such tax to the credit of the Central Government, claims that no tax was required to be deducted on such income, he may appeal to the Commissioner (Appeals) for a declaration that no tax was deductible on such income." From the above provisions of section 248 of the Income-tax Act, 1961 and from the relevant paragraph of the agreement, it comes out that if it is found that if the payer is to bear the tax and if he has made payment of tax and if he claims that no tax is re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oy A.G. [2010] 39 SOT 187 (Mum.) ; (b) R. R. Donnelley India Outsource P. Ltd., In re [2011] 335 ITR 122 (AAR) ; (c) CIT v. De Beers India Minerals P. Ltd. [2012] 346 ITR 467 (Karn) ; and (d) DIT v. Guy Carpenter and Co. Ltd. [2012] 346 ITR 504 (Delhi) I.T.A.No. 202 of 2012 dated April 23, 2012 (Delhi High Court) copy filed. He further submitted that since in the present case, there is no technical expertise made available to the assessee by the consultant, the payment by the assessee to the consultant cannot be considered as fees for technical services and it cannot be added into income of the consultant, i.e., M/s. Texoplast Ltd. and, therefore, no TDS is deductible by the assessee from this payment. As against this, the learned Departmental representative supported the orders of the authorities below. It was submitted by him that for the purpose of interpreting the India-U.K. Double Taxation Avoidance Agreement, reliance cannot be placed on the memorandum of understanding entered between India and the US. Regarding the argument that the services rendered are technical services and it does not make available technical knowledge, experience, skill, know-how or process, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s agreement ; (h) Carry out further tasks pursuant to clause 2.02 (a) to (g) as mutually agreed in writing by consultant and client from time to time." The relevant article is article 13 of the Double Taxation Avoidance Agreement between India and the U.K. available on pages 37-39 of the paper book, which is also reproduced below (page 249 of 206 ITR (St.)): "13. Royalties and fees for technical services 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State ; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed : (a) in the case of royalties within paragraph 3(a) of this article, and fees for technical services within paragraphs 4(a) and (c) of this article ; (i) during the first five years for which this Convention has effect ; (aa) 15 per cent. of the gross amount of such royalties or fees for technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property, other than property described in paragraph 3(a) of this article ; (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 private use of the individual or individuals making the payment ; or (e) to an employee of the person making the payments or to any individual or partnership for professional services as defined in article 15 (independent personal services) of this Convention. 6. The provisions of paragraphs 1 and 2 of this article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce : "May 15, 1989 U.S.-India tax treaty Memorandum of understanding concerning fees for included services in article 12 Paragraph 4 (in general) This memorandum describes in some detail the category of services defined in paragraph 4 of article 12 (royalties and fees for included services). It also provides examples of services intended to be covered within the definition of included services and those intended to be excluded, either because they do not satisfy the tests of paragraph 4, or because, notwithstanding the fact that they meet the tests of paragraph 4, they are dealt with under paragraph 5. The examples in either case are not intended as an exhaustive list but rather as illustrating a few typical cases. For case of understanding, the example in this memorandum described U.S. persons providing services to Indian persons, but the rules of article 12 are reciprocal in application. Article 12 includes only certain technical and consultancy services. But technical services, we mean in this context services requiring expertise in a technology. By consultancy services, we mean in this context advisory services. The categories of technical and consultancy services are to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned by reference to the facts and circumstances of each case. The factors which may be relevant to such determination (although not necessarily controlling) include : 1. The extent to which the services in question facilitate the effective application or enjoyment of the right, property, or information described in paragraph 3 ; 2. The extent to which such services are customarily provided in the ordinary course of business arrangements involving royalties described in paragraph 3 ; 3. Whether the amount paid for the services (or which would be paid by parties operating at arm's length) is an insubstantial portion of the combined payments for the services and the right, property, or information described in paragraph 3 ; 4. Whether the payment made for the services and the royalty described in paragraph 3 are made under a single contract (or a set of related contracts) ; and 5. Whether the person performing the services is the same person as, or a related person to, the person receiving the royalties described in paragraph 3 (for this purpose, persons are considered related if their relationship is described in article 9 (associated enterprises) or if the person providing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder which the former will clean the latter's machinery on a regular basis. As part of the arrangement, the U.S. company leases to the Indian company a piece of equipment which allows the Indian company to measure the level of bacterial deposits on its machinery in order for it to know when cleaning is required. Are the payments for the services fees for included services? Analysis : In this example, the provision of cleaning services by the U.S. company and the rental of the monitoring equipment are related to each other. However, the clearly predominant purpose of the arrangement is the provision of cleaning services. Thus, although the cleaning services might be considered technical services, they are not 'ancillary and subsidiary' to the rental of the monitoring equipment. Accordingly, the cleaning services are not 'included services within the meaning of paragraph 4(a). Paragraph 4(b) Paragraph 4(b) of article 12 refers to technical or consultancy services that make available to the person acquiring the services, technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plant or technical design to such person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n firm for a few months. Are the payments to the U.S. firm considered to be payments for 'included services' ? Analysis : The payments would be fees for included services. The services are of a technical or consultancy nature; in the example, they have elements of both types of services. The services make available to the Indian company technical knowledge, skill and processes. Example 4 Facts : A U.S. manufacturer operates a wallboard fabrication plant outside India. An Indian builder hires the U.S. company to produce wallboard at that plant for a fee. The Indian company provides the raw materials, and the U.S. manufacturer fabricates the wallboard in its plant, using advanced technology. Are the fees in this example payments for included services ? Analysis : The fees would not be for included services. Although the U.S. company is clearly performing a technical service, no technical knowledge, skill, etc., are made available to the Indian company, nor is there any development and transfer of a technical plant or design. The U.S company is merely performing a contract manufacturing service. Example 5 Facts : An Indian firm owns inventory control software for use in its c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial information service does not make the service a technical service within the meaning of paragraph 4(b). Paragraph 5 Paragraph 5 of article 12 describes several categories of services which are not intended to be treated as included services even if they satisfy the tests of paragraph 4. Set forth below are examples of cases where fees would be included under paragraph 4, but are excluded because of the conditions of paragraph 5. Example 8 Facts : An Indian company purchases a computer from a U.S. computer manufacturer. As part of the purchase agreement, the manufacturer agrees to assist the Indian company in setting up the computer and installing the operating system, and to ensure that the staff of the 77 Indian companies is able to operate the computer. Also, as part of the purchase agreement, the seller agrees to provide, for a period of ten years, any updates to the operating system and any training necessary to apply the update. Both these service elements to the contract would qualify under paragraph 4(b) as an included service. Would either or both be excluded from the category of included services, under paragraph 5(a), because they are ancillary and subsidiary, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sefulness of the machine to the hospital depends on the service, the manufacturer has full responsibility during this period and this cost of the services is a relatively minor component of the contract. Therefore, under paragraph 5(a) these fees are not fees for included services, regardless of whether they otherwise would fall within paragraph 4(b). Neither the post-warranty period inspection and repair services, nor the advisory and training services relating to new developments are 'inextricably and essentially linked' to page 78 the initial purchase of the X-ray machine. Accordingly, fees for these services may be treated as fees for included services if they meet the tests of paragraph 4(b). Example 10 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 to study 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 cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o return all the documents and other internal document of the client but there is no clause in the agreement to say that the client, i.e., the assessee is required to return the design supplied by the consultant. Hence, it is apparent that the design supplied by the consultant to the assessee becomes the property of the assessee and it can be used by the assessee for its own business and it can also be sold by the assessee to any outsider for consideration. Now, in the light of these facts, we examine the applicability of the India U.K. treaty first. As per article 13 of the India U.K. treaty, clause (c) of sub-article 4, fees for technical services may make available the technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. In the facts of the present case, the consultant, i.e., Texoplast Ltd. is required to transfer the fabric design to the assessee and those fabric designs are to be developed by the consultant, i.e., Texoplast Ltd. and this party is also required to provide detailed quantity progress report in writing to the assessee along with specific or new design developed by the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailable technical expertise for the knowledge in respect of collection or processing of data to the assessee. In that case, there was no development and transfer of plan or design. But in the present case, fabric design was developed and transferred and hence, this judgment is not applicable in the present case. Similarly, the Tribunal decision rendered in the case of Deputy DIT v. Preroy A.G. [2010] 39 SOT 187 (Mum.) is also not applicable in the present case because the facts are different. In that case, this strategic consultancy service to STPL but in the present case, technical design of fabrics was also supplied to the assessee. Similarly, the ruling of AAR in the case of R. R. Donnelley India Outsource P. Ltd., In re [2011] 335 ITR 122 (AAR) is also not applicable. In that case, services were involving routine data entry, application sorting, document handling and data operating, not involving of sophisticated technology and were non managerial, non technical and non consultancy services. The judgment of the hon'ble Delhi High Court rendered in the case of DIT v. Guy Carpenter and Co. Ltd. [2012] 346 ITR 504 (Delhi) is also not applicable as the facts are different. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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