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TMI Blog2011 (7) TMI 1108X X X X Extracts X X X X X X X X Extracts X X X X ..... e to non resident company and no liability could be fastened on it under section 201/201(1A). We, therefore, reverse the impugned order of the ld. CIT(A) upholding the order passed by the Assessing Officer on this issue under section 201/201(1A) and allow the appeal of the assessee - Decision in favour of Assessee. Fees for included services under Article 12(4) of the DTAA - Remittances made to the CROs - Assessee paid fees to CROs (Non- resident entities) in respect of bio-equivalence studies, clinical/analytical charge - HELD THAT:- In the case of ANAPHARM INC., IN RE [ 2008 (9) TMI 27 - AUTHORITY FOR ADVANCE RULINGS] , a similar issue had come up wherein the non-resident assessee had received similar payments from Indian pharma companies for providing services of CROs and the question was whether the said payments are taxable in India AND held services rendered by the non-resident assessee as CROs were not for fees for included services as they did not make available any technology to the recipient. Therefore, we are in the view that the nature of services rendered by CROs to the assessee-company is such that the same cannot be regarded as technical or consultancy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of USA and did not have any permanent establishment in India during the year under consideration as contemplated in Article 5 of the DTAA between India and USA. It was also submitted that the said company did not make available any technical knowledge to the assessee-company and, therefore, the payment made to the said company was not taxable in India. 4. The submissions made as above on behalf of the assessee-company before him was analysed by the Assessing Officer in para Nos. 3.3 to 3.5 of his order as under :- The payment by the assessee-company has to be either Business income or Fees for Technical Services . The basis character of the payment clearly shows that the payment is for certain services rendered by the non-resident company and there is no business connection between the assessee-company and the non-resident company. Hence, question of whether the non-resident company, i.e., CKP has any fixed base of permanent establishment in India or not does not arise and, therefore, become irrelevant. Now, whether the payment is to be considered as Fees for Technical Services. Explanation 2 to section 9(1)(vii) defines Fees for Technical Services as under : F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support of its case, the following submissions were made and the judicial pronouncements were relied upon on behalf of the assessee :- The appellant has, as background, stated that M/s. C.K. Prahlad Inc. of USA is a company supported by Mr. C.K. Prahlad who popularly is also called management expert or management guru. He conducts short-term lecture series for corporate with the object of motivating the employees, with a view to providing self-confidence and leadership to the employees. The appellant had also invited him for such short-term lecture series. It was a programme of 2 days where, in different sessions, he would explain personality development and personal development concepts to a group of people. The appellant has furnished to me list of 160 odd participants who were spread across various grades, functions, cadres who attended the group seminar. The appellant has furnished samples of the slides shows to demonstrate the scope of subjects and discussions that M. Prahlad is accustomed to. The appellant claims that the services are general in nature. The lecturer addresses the whole group to create some awareness. The lectures are comparable to any other Yoga seminar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provisions 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 . Thus, it is seen that managerial services as imparted by Mr. CKP is covered in above definition. It is also seen that similar definition is given under Article 12(4) of India-US DTAA which reads as under :- Article 12(4) For purposes of this article, fees for included services means 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 : (a)are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b)make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act ), an assessee is eligible to adopt provisions of tax treaties if the same are more beneficial to the assessee. Accordingly, we are relying on relevant provisions of India-US Tax Treaty to decide the taxability of payments made. Relevant extract of Article 12 of India-US Tax Treaty is reproduced as under :- Article 12 - Royalties and fees for included services- For purposes of this Article, fees for included services means 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, property or information for which a payment described in paragraph 3 is received; or make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. From the above, it can be seen that as per Article 12, definition of Fees for included services is restricted to technical or consultancy services and not managerial services. Since the term managerial s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gy in its business. The presentation made by Mr. C.K. Prahlad was general in nature and was attended by M5 level employees (Senior Manager) from various departments (Please refer to list of participants at page No. 2.5 of PB). Provisions of the Treaty are further explained by the technical explanation to said treaty. (Relevant extract is filed at page Nos. 82-85 of PB) wherein on the concept of fees for included services as per Article 12 it is stated that technology will be considered made available when the person acquiring the service is enabled to apply the technology in its own right without resources to the person providing the services. In the present case, no such technology has been transferred to the appellant-company by CKP Inc. In this regard, it is pertinent to note that the AAR in the case of Federation of Indian Chambers of Commerce Industry (FICCI) ( 189 Taxman 270 ) (Refer Page Nos. 129-141 of PB-II) had ruled that entrepreneurial workshops does not make available any technology, knowledge or skill though they open up new vistas of thinking. Relevant extract of the said ruling is reproduced as under :- As regards the entrepreneurial workshop whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntense technological effort and a lot of technical knowledge and experience of the service provider would have gone into it. But that is not enough to fall within the description of services which make available the technical knowledge, etc. 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 future without depending on the provider. Further, even for the academic purpose if the services rendered by CKP Inc. are treated as consultancy in nature then also the services cannot be treated as fees for included services as per the Treaty. As per Memorandum of Understanding (MoU) to the India-US Tax Treaty (Refer pages 82-85 of PB), consultancy services would fall in the definition of fees for included services only if the same are technical in nature. Consultancy services which are non-technical in nature would not be covered by the definition of fees for included services . Further, in the case of Bharat Petroleum Corporation Ltd. v. Jt. CIT ( 14 SOT 307 ) (Mum. - Trib.) (Refer Page Nos. 142-144 of PB-II) the ITAT examined the taxability of fees paid to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of ITAT in the case of Wockhardt Life Sciences v. Dy. CIT [IT Appeal No. 3625 (Mum.) of 2005, dated 8-6-2005]. 11. The ld. D.R., on the other hand, has strongly relied on the impugned order of the ld. CIT(A) in support of revenue s case on this issue and has particularly invited our attention to paras 3.3 to 3.5 of the said order to submit that the amount in question paid by the assessee to M/s. C.K. Prahlad Inc., USA was taxable in India as held by the ld. CIT(A) for the reasons given therein and the assessee-company, thus, was under an obligation to deduct tax at source from the said payment as per the provisions of section 195. He has contended that the services rendered by the said company to the assessee-company were in the nature of managerial consultancy services and the amount paid for the said services, thus, was chargeable to tax in India. 12. We have considered the rival submissions and also perused the relevant material on record. There is no dispute that as per the provisions of section 90 of the Income-tax Act ( Act ), an assessee is eligible to adopt provisions of tax treaties if the same are more beneficial to the assessee. As per Article 12 of India-US Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal knowledge and experience of the service provider would have gone into it. But that is not enough to fall within the description of services which make available the technical knowledge, etc. 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 future without depending on the provider. 13. As already observed, a perusal of the presentation made by CKP shows that the services rendered by them to the assessee-company were essentially in the nature of sharing management experiences and business strategies and the same having nothing to do with the pharma industry in particular, it cannot be said that the said services were technical in nature. As per Memorandum of Understanding (MoU) to the India-US Tax Treaty, consultancy services would fall in the definition of fees for included services only if the same are technical in nature. Consultancy services which are non-technical in nature would not be covered by the definition of fees for included services . In the case of Bharat Petroleum Corpn. Ltd. v. Jt. CIT [2007] 14 SOT 307 (Mum.), it was held by the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia. 2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) failed to appreciate that technical knowledge and technical experience was made available to the assessee in India on the basis of which substantial modifications were made in the drugs/formulations, thereby satisfying the provisions of Article 12(4) of the Indo-US, Indo-UK and Indo-Canada DTAAs. 3. On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in relying upon the judgment of the Mumbai High Court in the case of Diamond Services International (P.) Ltd. v. Union of India and has failed to appreciate that in that case, no action was taken by the assessee on the date/information provided. 16. After having perused the Chartered Accountant s certificate and undertaking furnished by the assessee-company in connection with the foreign remittances, the Assessing Officer required the assessee to provide the details of all the remittances made to the non-resident. On going through the details provided by the assessee, it was noticed by the Assessing Officer that the assessee-company had not deducted tax at source from the payments made to various non-residen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the DTAA, i.e., Royalties and Fees for included services and, therefore, no tax is withheld as per DTAA. 17. The aforesaid submissions made on behalf of the assessee were not found acceptable by the Assessing Officer on the basis of following analysis made by him in the assessment order :- The submissions made on this behalf have been considered. The charging sections of the incomes is section 5 and the deeming provisions are in section 9(1) of the Income-tax Act. The relevant section 5(2)(b) of the Act states as under :- Subject to the provisions of this Act, the total income of any previous year of a person who is non-resident includes all income from whatever source derived which accrues or arises or is deemed to accrue or arise to him in India during such year. Further, the provisions of section 9(1)(vii)( b) state that :- The following incomes shall be deemed to accrue or arise in India : Income by way of fees for technical services payable by a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purpose of making or earning any income f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee makes used of it in its business carried on in India. Thus, these protocols make available technical knowledge, experience, skill process/procedure, etc., to the assessee-company and, hence, the same are in the purview of section 9(1)(vii) of the Income-tax Act. It also comes under the purview of Article 13 of DTAA with U.K. and Article 12 of DTAA with Canada and USA which clearly states that the fees for included 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 included services is a resident of the other Contracting State, the tax so charged shall not execeed . . . . Thus, the DTAA also does not prohibit from charging of tax in the Contracting State in which they arise. In a similar ruling of AAR in the case of South West Mining Ltd. [ 278 ITR 233 [2005]], it was observed that the resident company was carrying on export of minerals and was obtaining reports from non-resident consultant of analysis of samples. The analysis and ores was conducted by the non-resident consultant from the technical laboratories of the consultant in Canada. The AAR h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hyderabad Bench of ITAT in the case of Charminar Drugs Ltd. v. ITO ( 76 ITD 37 ). The Mumbai Bench of ITAT in the case of Satellite Television Arian Region Ltd. v. Dy. CIT has also taken the same view while considering the proceedings under section 201 of the Act. Thus, where there exists any doubt as to the chargeabi-lity of income to tax to the non-resident payee, tax must be deducted at source ex abundanti coutela as held by the Mumbai ITAT in the case of Dy. CIT v. Arthur Anderson Co. Ltd. [ITA No. 9125/Mum./1995, dated 29-7-2003]. 18. On the basis of the aforesaid analysis, it was held by the Assessing Officer that the total payment of ₹ 8,79,74,723 made by the assessee to the non-resident entities on account of bio-studies, clinical analysis, etc., was in the nature of fees for technical services and the same was taxable in India. He held that the assessee-company, therefore, was under an obligation to deduct tax at source from the said payments under section 195 and since the assessee-company had failed to do so, the Assessing Officer treated it as the assessee in default in respect of tax of ₹ 1,09,67,405 which was deductible at source from the said paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 195 of the Act. It is seen that the Assessing Officer has given much emphasis on the document of protocol as opposed to the nature of service availed by the appellant. It is noticed that the generic drugs as developed by the appellant at its in-house research are being sent for testing at the laboratory of CROs. There is considerable force in the submissions of the appellant that the CRO is not providing or inventing any drug. The CRO conducts test and experiments on these drugs and sends back the appellant analysis report containing results of the experiment. Thus, it is akin to diamond testing and credit analysis report. The non-resident does not develop the drugs and only gives a clinical report of the experiment done by them. The fees paid for such consideration does not amount fees for technical services not it make available any technology to the appellant to enable him to apply the same is future developing/inventing the drug. The CRO works like an impartial agency who reports certain factual parameters observed by him on the consumer of a drug after he has consumed the drug. There is some similarly between analysis of a hospital laboratory report and the CRO repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of technical knowledge to the assessee and (ii) there was no transfer of technical plans or designs. In the instant case also, the CROs has compiled the drugs sample, processed, experimented and delivered the result of the services to the appellant. Thus, in view of this finding, there was no transfer of technical knowledge, plan or design to the appellant, hence, I hold that the services rendered for furnishing clinical reports by CROs does not amount as fees for included services as no technical service is being imparted to appellant which can enabled it to use in future independently. The case of the appellant, I agree, is fully covered by Bombay High Court judgment in the case of Diamond Services International (P.) Ltd. v. UOI [ 304 ITR 201 ] were also there was use of skill, know-how, judgment, equipment to produce the report for the benefit of the payer. The High Court regarded the report to be akin to the opinion of a lawyer or a doctor or a laboratory, wherein the context of highly skilled work of grading and analysis of diamond done by experts after using high cost equipments, the High Court held that furnishings of an analysis or appraisal on such report by an expert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cements, I allow the appeal in favour of the appellant in respect of remittances made to persons who are residents of USA, UK, Canada, Netherlands, France and Australia and dismissed the appeal in respect to the remittances made to residents other than USA, UK, Canada, Netherlands, France and Australia. The Assessing Officer is, therefore, directed to recalculate the tax and in liability under section 201 and 201(1A) in accordance with this finding. Accordingly, this ground of appeal is partly allowed. 21. The ld. CIT(A) thus held that out of the remittances aggregating to ₹ 36.76 lakhs sent by the assessee abroad, only the payment of ₹ 1.79 lakhs made to persons who are residents other than USA, UK, Canada, Netherlands, France and Australia was chargeable to tax in India and the assessee-company was liable to deduct the tax at source from the said payment. He, therefore, treated the assessee-company as in default to the extent of that tax amount and, accordingly, directed the Assessing Officer to re-calculate the liability of the assessee under section 201/201(1A). Aggrieved by this relief allowed to the assessee by the ld. CIT(A), the revenue has preferred this ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her than technical in nature. The work done by CRO is of standardized nature; CRO does similar work for others also. Predominant part of fees is towards participation fees of volunteers and in respect of pathology reports. Assessee is not enriched by CRO in any manner; assessee is already possessed of the knowledge. The Drug which is being tested is formulated and provided by the assessee. CRO neither does communicate any improvements therein nor does it have wherewithal to do it. Even assuming the assessee did not have that know-how; CRO does not enrich the assessee such that it is able to apply the technology. Even assuming the drug has failed in the bio-equivalence test, CRO does not provide advice or suggestion for neither improvement; nor does CRO has any capacity to suggest such improvement. Reliance is placed on the Authority for Advance Ruling (AAR) in the case of Anapharma Inc, Canada reported in 305 ITR 394 (refer to page Nos. 156-170 of PB-II), which provided services of CRO and received payments from India Pharma Companies and held in favour of the applicant that the services rendered by the applicant CRO are not fees for included services as they do not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed on the following judicial precedents : CESC Ltd. v. Dy. CIT ( 87 ITD 653) (Cal. - Trib.) (TM) Raymond Ltd. v. Dy. CIT ( 86 ITD 791) (Mum. - Trib.) (Refer Page Nos. 116-125 of PB-II) Mckinsey and Company Inc. ( 99 ITD 549 ) (Mum. - Trib.) (Refer Page Nos. 145-149 of PB-II) BPCL v. Jt. DIT ( 14 SOT 307 ) (Mum. - Trib.) ITO (Int. Tax) v. DeBeers India Minerals (P.) Ltd. ( 115 ITD 191 ) (Bang.) (Refer Page Nos. 182-185 of PB-II) Kotak Mahindra Primus Ltd. v. Dy. DIT ( 11 SOT 578 ) (Mum. - Trib.) (Refer Page Nos. 186-191 of PB-II) Dy. CIT v. Boston Consulting Group (P.) Ltd. ( 94 ITD 31 )(Mum. - Trib.) (Refer Page Nos. 150-155 of PB-II). In view of the forgoing, the fees paid to CRO cannot be regarded as fees for included services and, therefore, no tax is withheld as per DTAA. Without prejudice to above, it submitted that section 9 of the Act deals with income deemed to accrue or arise in India. Section 9(1)(vii) deals with income earned by a non-resident by way of fees for technical services. It, inter alia, provides that the income earned by a non-resident by way of fees for technical services which is payable by a person who is a resident of India, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing with their skills and know-how to the assessee-company. The services rendered by CROs, thus, are not technical in nature but are merely in the nature of commercial services. The fees paid for such services, in our opinion, therefore, does not amount to fees paid for technical services or fees paid for making available any technology to the assessee-company in order to enable to apply the same for developing/inventing new drugs in future. 25. In the case of Anapharma Inc., In re [2008] 305 ITR 394 3 (AAR-New Delhi), a similar issue had come up for consideration before the Authority for Advance Ruling wherein the non-resident assessee had received similar payments from Indian pharma companies for providing services of CROs and the question was whether the said payments are taxable in India. It was held by the AAR in this context that the services rendered by the non-resident assessee as CROs were not for fees for included services as they did not make available any technology to the recipient. In the case of Diamond Services International (P.) Ltd. v. Union of India [2008] 304 ITR 201 4 (Bom.), the assessee had availed the services of non-resident assessee for grading and cert ..... X X X X Extracts X X X X X X X X Extracts X X X X
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