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TMI Blog2014 (11) TMI 404X X X X Extracts X X X X X X X X Extracts X X X X ..... rent. The payments made are taxable as fee for technical services. Since assessee has not deducted tax on the said payments, AO is correct in raising the demands u/s 201 and 201(1A). - Decided against assessee. - ITA. No. 147/Hyd/2005, ITA.No.1163/Hyd/2014 - - - Dated:- 12-11-2014 - Shri B. Ramakotaiah And Shri Saktijit Dey,JJ. For the Petitioner : Mr. PSRVV. Surya Rao For the Respondent : Mr. YVST Sai ORDER Per B. Ramakotaiah, A. M. These two appeals are by assessee against the common order of Ld. CIT(A)-III, Hyderabad dated 5th December, 2004 pertaining to orders of A.O. under section 201(1) read with section 201(1A) of the I.T. Act, on the payments made to foreign entities without deduction of tax at source. 2. Assessing Officer passed common order dated 05.03.2003 and Ld. CIT(A) also passed a common order for A.Ys. 2002-03 and 2003-04. Accordingly, assessee filed a common appeal in respect of both the assessment years. When it was pointed out assessee filed revised form for the year 2002-03 which was originally numbered as ITA.No.147/2005 and fresh appeal for A.Y. 2003-04 which was listed as ITA.No.1163/2014. Since in second memo in Form No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and as to the facts and circumstances of the case in holding that fees for technical services are in open area of taxation and that the services can be taxed in both the countries with reference to opening clauses of the relevant article but failed to note that such opening clauses are applicable only if the payments fit into the definition for fees for included services there under. 9. The learned Commissioner of Income Tax Appeals erred in law and as to the facts and circumstances of the case in holding that, with reference to the Article 13(7) with UK and the Article 12(8) with Netherlands, fees for technical services shall be deemed to arise in the state in which the permanent establishment or the fixed base of the payer but failed to note that the application of the aforesaid articles arises only if the payments fit into the definition for the term given under Article 13 and 12 respectively, 10. The learned Commissioner of Income Tax Appeals erred as to the facts and circumstances of the case in holding that the Assessee had not submitted any written submission and therefore he finds it really difficult to understand the argument contrary to the fact that the relevant ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... study of its effects in a small number of healthy volunteers. The response, effect on metabolism and possible toxicity are carefully monitored and have to be completely satisfactory before the drug can be passed for further studies, namely with patients who have the disorder for which the drug is to be used. In phase-II, tests are administered at first to a limited number of these patients to determine effectiveness, proper dosage and possible adverse reactions. These search studies are scrupulously controlled under stringent conditions. Larger groups of patients are subsequently involved to gain a wider sampling of the information. Finally in Phage-III, a full-scale clinical trial is set up. At the end of phase-III, the company can file for NDA (New Drug Application). If the regulatory authority is satisfied about drug's quality, safety and efficacy, the innovator company receives a license to produce the drug and sell it. In the phase-IV, studies post-marketing surveillance is done, wherein feedback is gathered from a variety of patients. As the drug becomes widely used, it eventually finds its proper place in therapeutic practice, a process that may take years. 3.2. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubject to the provisions of this Act, the total Income of any previous year of a person who is a non-resident includes all Income from whatever sources derived which : (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; Explanation (1) : Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken Into account in a balance sheet prepared in India. Explanation (II) : For the removal of doubts, it is hereby declared that Income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him In India. Section 9(I)(Vii) income by way of fees for technical services payable by- (a) the Government; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or other personnel) which : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this Article is received; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this article is received ; or (c) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. 12.5. The term fees for technical services as used in this article means payments of any kind to any person, other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 14, in consideration for services of a managerial, technical or consultancy nature. 3.6. Considering the above referred provisions, Assessing Officer came to the conclusion that the payments made by the Assessee were fees for technical services as defined in section 9(i)(Vii) and also as per the definitions available in the above referred two DTA agreements. Accordingly, A.O. considered that the fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnical services . The Assessee agrees with the Assessing Officer that the payment made by them will constitute fees for technical services , as per the provisions of IT Act., 1961. 4.1. Ld. CIT(A) noted that the case of Assessee is that there is difference between the definition of fees for technical services as given in Explanation to Section 9(1)(vii) and as the concept of fees for technical services , as defined in the Double Taxation Avoidance Agreement and so the payments are not covered by TDS provisions. 4.2. The arguments of assessee before the Ld. CIT(A) are that while there is a conflict between the domestic tax provisions and the DTAA, then the provisions of DTAA should prevail upon. Accordingly, it was submitted that the payments made by them were not such fees for technical services , which should be brought to tax under section 9(1)(vii) of the IT Act. 4.3. The second argument of Assessee was that the payments made by them to the foreign parties represented business income earned by the foreign parties which was not taxable in India as per the provisions of article 7 of the DTAA with UK and article 12 of the DTAA with Netherlands. Assessee argued that un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 9(i)(vii) of the IT Act 1961. The payments made by Assessee company is not being held as royalty and hence the argument of Assessee that no patent or trademark is granted to DRF is irrelevant. Assessee himself admits that the payments are taxable as fee for technical service as per the provisions of section 9(i)(vii) of the IT Act, which is correct. The second argument put forward by Assessee in the above paragraph is that M/s.Simbec Research Ltd. and M/s. NDDO Oncology BV are not transferring any technical know-how or technical plan or technical design to Assessee. However, this is not correct and it is amply evident from both the agreements of Assessee with M/s. Simbec Research Ltd. and t-t/s. NDDO Oncology BV. The agreements with M/s. Simbec Research Ltd. and M/s. NDDO Oncology BV is not that only the final report will be given to Assessee after the studies are completed. There is regular interaction between Assessee and the research organizations and Assessee is made ware of each and every happening during the course of study . 5.2 Ld.CIT(A) considered and decided as under: 16. It is interesting to note the effort put in by the Assessing Officer in checking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s services. 4. Page 4 of annex C to pre clinical research and development agreement - Detailed study protocols will be sent to sponsor for approval prior to the start of each study. Thus, from a perusal of the above, it is clear that during the course of performance of the study, Mls.DRF has access to the technical information, technology, documentation, knowhow and processes involved in the whole procedure of study. In view of this, it cannot be said that the technology was not made available by the foreign company to Assessee. As could be seen from the averments made in the agreements reproduced above, such technology, technical information, knowledge, processes are indeed made available but kept confidential. Specific clauses are there in those agreements to transfer all know-how and processes developed from the study to Assessee. Since the technology is implicitly made available, obviously the recipient is enabled to apply the same. Hence the payments to M/s. Simbec Research Ltd. and M/s. NDDO Oncology BV certainly falls within the purview of the definition of fees for technical services as defined in clause 4(c) of Article 13 of the DTAA with UK and clause 5(b) of Arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence, tax at source was not deducted from the remittance made to Simbec Research Ltd. 19.1. The Assessing Officer has declined to accept the above argument on the ground that once assessee accepts that the payment for development charges are In fact, fees for technical services , as per the definition in Explanation to section 9(1)(vii) of the IT Act, then the same cannot be considered as business income earned by the other contracting parties of their respective countries. 19.2 Moreover, these payments also satisfy the definition of fees for technical services as given in DTAA . These payments cannot be considered as business income. Therefore, there is no application of article 7(1) of DTAA between India and UK. Article 7(1) does not define or distinguish between 'business income' and 'fees for technical services'. It merely says business income will be taxed in the state where it is earned. Therefore, there is no conflict between DTAA and Indian Laws. There is no scope of any controversy and its resolution to claim that provisions of DTAA should prevail. In addition, the Ld. CIT(A) observed that fees for technical services are an open area for taxati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to arise in the State in which the permanent established or fixed base is situated': ARTICLE 12(8) OF DTAA BETWEEN INDIA NETHERLAND: Royalties or fees for technical services shall be deemed to arise in one of the States when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of one of the States or not, ties ill one of the States a permanent establishment or a fixed base in connection with which the contract under which the royalties or fees for technical services are paid was concluded, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 23. Both the special articles are categorical ill stating that fees for technical services shall be deemed to arise in the state in which the permanent establishment or the fixed base of the payer of the fees for technical services is situated. In this case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ek patents etc. against the knowledge generated in the process of sponsored research. The Assessee may give his argument as to why this should not be held as included services for which fees were paid? 5.7. He records that assessee company has not responded to this query. Ld. CIT(A) opined that this clearly brings out the fact that when the knowledge generated in the course on rendering of technical services will be transferred to the sponsorer of the research and will be his sole property including the rights over the patents, which are likely to be generated in the course of technical services, then, there is no doubt that such technical services is a true subject matter of charge of Income tax, in terms of section 5 and section 9 of the Income Tax Act. 5.8 Accordingly, the Ld. CIT(A) concluded Vide para 29 that the Assessing Officer was right in coming to the conclusion that the payment by assessee of fees by assessee company to the foreign parties were fees for technical services which was subject to tax in India. The claim of assessee that these payments were business income earned by the foreign parties is of no relevance because the business income of the foreign pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee was conducting clinical trials through the CROs in USA to comply with the regulations therein and the CROs who are experts in this field were only conducting studies and submitting the reports in relation thereto. They are neither transfer of technical plan or technical design nor making available of technical knowledge, experience or know-how by the CROs to Assessee company. In fact, Assessee company did not get any benefit out of the said services in USA and assessee was only getting a report in respect 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 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 Assessee s case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les and test compounds cannot be equated with making technology, know-how, etc., availableK to R. The agreement also states that R shall be the owner of all intellectual property rights resulting from the services. This would mean that, if on the basis of these results, the client is able to acquire patent or other intellectual property rights in respect of new generic drugs developed by it, then the applicant shall not claim any interest whatsoever in such right. It is altogether a different aspect. By agreeing 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 availab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on: Applicant, tax resident of Canada, only providing final results to its Indian clients by using highly sophisticated bio-analytical know-how, without providing any access whatsoever to the clients to such know-how, fee received by it is business income and not fee for technical/included services or royalty and applicant having no PE in India, such income would not be taxable in India by virtue of relevant provisions of DTAA between India and Canada. 12. We agree with the above opinion expressed by the AAR and accordingly, we uphold that the amounts paid by Assessee company to the CROs are not taxable in India. That being so, there is no need for Assessee to deduct tax at source. Consequently, the impugned order of the CIT(A) is confirmed and the grounds raised by the Revenue in these appeals are rejected . 9. But In this case, Ld. CIT(A) who considered the case of Dr. Reddy Laboratories also earlier, distinguished the facts to state that these are not agreements with contract research organisations but with independent research entities. The clause of the agreement also indicate that assessee has rights over the patents, secret knowledge etc., attained during the course ..... X X X X Extracts X X X X X X X X Extracts X X X X
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