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TMI Blog1997 (8) TMI 517X X X X Extracts X X X X X X X X Extracts X X X X ..... vide services of all descriptions to any person, firm or corporation and to generally co-ordinate the affairs of and to represent any other person, firm or corporation . According to the statement of facts filed by the applicant, its business is principally to provide management and consulting services to B s subsidiaries or affiliated companies worldwide. It does not provide such services to any unrelated parties. On April 16, 1994, AB entered into a management provision agreement with XYZ under which XYZ offered, and AB received, managerial services for the establishment, development and operation of its business in the manufacture and sale of cars under the joint venture agreement. The provision for management services was approved by the Ministry of Industry while approving the proposal for the setting up of the joint venture. The letter of approval said : D. Management services : It is noted that XYZ , a wholly owned subsidiary of B , USA, would be providing management services on a costas-incurred basis by deputing maximum of five of their employees to the joint venture, for a period up to three years, for providing management and technical service to the j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the applicant to AB . The applicant has a liaison office in India. However, according to the applicant, the services under the management provision agreement are entirely unconnected with the liaison office. The bio-data of the five expatriate personnel which need not be extracted here in full, indicate that four of them are bachelors in electrical, industrial, mechanical/electrical engineering and two of them also possess degrees in business administration whereas the fifth one has a degree only in business administration. It is stated by the applicant that the control over the expatriates is exercised by the board of directors of AB and not by XYZ . In this connection, the attention of the authority is invited to article 7 of the joint venture contract between A and B which provides that the company shall be managed by a board of directors which shall consist of eight directors, four of whom shall be appointed by B and the other four shall be appointed by A in accordance with the parties contributions to paid-incapital. In this connection, attention is also drawn to article 7(7)(xxiv) according to which, various matters, including the delegation of any autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t liable to tax in India ? (2) Is any part of the amount paid on behalf of the employees towards Indian taxes liable to tax in India ? (3) Can XYZ claim that the amounts invoiced are in the nature of reimbursement of expenses and that, therefore, the question of any amount being taxable does not arise ? (4) As XYZ has not filed any return of income, can it claim a refund of the taxes withheld by AB ? (5) Would XYZ be entitled to interest in respect of the refund referred to in question (4) above ? (6) Is XYZ justified in its belief that it is not required to file a return of income, apart from the reason of having to claim a refund of taxes withheld by AB ? However, after some discussions, in the course of arguments, only the first question was pressed. The applicant has filed a statement containing its interpretation of law in respect of the questions on which advance ruling has been sought. During the course of arguments, learned senior counsel for the applicant, elaborating the interpretation as given in the statement annexed to the application, advanced three main propositions which are to the following effect : (1) There is no income gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalties or fees for included services in all other cases ; and (ii) during the subsequent years, 15 per cent. of the gross amount of royalties or fees for included services ; and (b) in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services as defined in this article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this article, 10 per cent. of the gross amount of the royalties or fees for included services . . . 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, knowhow, or processes, or consist of the development and transfer of a technical plan or technical design. Learned counsel argued that the role ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der (see [1991] 187 ITR (St.) 135, 138) : 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 ease of understanding, the examples in this memorandum describe 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. By 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 some extent overlapping because a consultancy service could also be a tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r software development. Under paragraph 4(b), technical and consultancy services could make technology available in a variety of settings, activities and industries. Such services may, for example, relate to any of the following areas : 1. bio-technical services ; 2. food-processing ; 3. environmental and ecological services ; 4. communication through satellite or otherwise ; 5. energy conservation ; 6. exploration or exploitation of mineral oil or natural gas ; 7. geological surveys ; 8. scientific services ; and 9. technical training. It then proceeds to give a number of illustrations to indicate in what kinds of cases paragraph 4(b) will be applicable and in what kinds not. These examples have been referred to in the course of arguments and may be extracted here (see [1991] 187 ITR (St.) 139 ) : Example (3) : Facts.-A U. S. manufacturer has experience in the use of a process for manufacturing wallboard for interior walls of houses which is more durable than the standard products of its type. An Indian builder wishes to produce this product for its own use. It rents a plant and contracts with the U. S. company to send experts to India to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erol out of the oil. The Indian company contracts with the U. S. company to modify the formulas which it uses so as to eliminate the cholesterol, and to train the employees of the Indian company in applying the new formulas. Are the fees paid by the Indian company for included services ? Analysis.-The fees are for included services. The services are technical, and the technical knowledge is made available to the Indian company. Example (7) : Facts.-The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol-free oil and wishes to market the product worldwide. It hires an American marketing consulting firm to do a computer simulation of the world market for such oil and to advise it on marketing strategies. Are the fees paid to the U. S. company for included services ? Analysis.-The fees would not be for included services. The American company is providing a consultancy service which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc., nor is it transferring a technical plan or design. What is transferred to the Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices to AB by placing the services of its employees at the disposal of AB for carrying on its manufacturing business and that clauses 7, 9 and 18(c) of the agreement make it clear beyond all doubt that information, ideas, and technical knowledge were being made available to AB by these employees, bringing the case within the ambit of sub-clause (b). Before dealing with these contentions, it is necessary to make a reference to paragraph (6) of article 12 which reads thus (see [1991] 187 ITR (St.) 116 ) : The provisions of paragraphs 1 and 2-under which the tax of 20 per cent. is being sought to be imposed-shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties or fees for included 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 royalties or fees for included services are attributable to such permanent establishment or fixed base. In such case the provisions of article 7 (business profits) or article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hose services within the parameters of sub-clauses (i) and (ii) of clause (l) of para. 5(2) will itself constitute a permanent establishment in India and the profits attributable to these services will be chargeable to tax in India under article 5. On the other hand, if the services rendered by XYZ fall within the definition of included services , the fees for which those services are received will be taxable only under article 12 unless the foreign concern, i.e., XYZ can be found to have some other permanent establishment in India. The mere rendering of the included services is not sufficient to found a permanent establishment in India and so there will be no permanent establishment to attract the provisions of article 12(6). This is the reason why learned counsel tries to get out of the clutches of article 5(2)(l) altogether by arguing that the XYZ is furnishing no services at all to AB and it is this argument that has to be met first. It is difficult to accept this argument. Even according to the applicant, its business principally is to provide management and consultancy services to B s subsidiaries or affiliated companies worldwide. Clauses B to E of the preamb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Carborandum Co. v. CIT [1977] 108 ITR 335. In that case, the appellant, a foreign company, had entered into an agreement with an Indian company for rendering technical and know-how services to an Indian company, inter alia, in the matter of providing the latter with a resident factory manager for starting the plant and superintending its operations during its initial production stages as also other technical personnel necessary for operating the plant and training Indian personnel to replace the foreign personnel as quickly as possible. The Income-tax Officer and the Appellate Tribunal held that at least five per cent. of the fees paid to the appellant had accrued or arisen in India, although the services of foreign personnel were made available outside India and the Indian company employed them on the basis of agreements with them so that they became employees of the Indian company and worked under its control and the training to the Indian personnel by the appellant s employees was imparted outside India. On a reference, the High Court entertained a new contention that the agreement established a business connection between the appellant and the Indian company and that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh human agency and it does so through its own employees. The agreement is, therefore, for the furnishing or rendering of such services, as are covered by the definition, by XYZ to AB . This apart, there is another important point of distinction between the present case and Carborundum s case [1977] 108 ITR 335 (SC). In the latter, the foreign company provided the personnel who became the Indian company s employees and were paid by it. The amount or fee paid to the foreign company was a proportion of the general costs of research, education and training incurred by the foreign company on behalf of several associated companies, including the Indian company. Here AB does not pay any remuneration to the employees. The responsibility of XYZ is much more than that of a mere employment agency ; it continues to have its nominees on its own pay roll and, though they may be serving AB and its board in their day-to-day work, they continue to be XYZ employees and they are paid by XYZ . The mode of remuneration paid to XYZ is also significant. XYZ is not being paid a remuneration for having recruited and deputed efficient employees to serve AB . It is paid as remuneration ever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ma facie, as constituting a permanent establishment. As these examples are to be seen against the background of the general definition given in paragraph 1, it is assumed that the Contracting States interpret the terms listed, a place of management , a branch , an office , etc., in such a way that such places of business constitute permanent establishments only if they meet the requirements of paragraph 1. This argument runs contrary to the well-established principle of statutory interpretation that an inclusive definition is intended to add to the primary meaning so as to bring within its scope items which may or may not fall within the scope of the primary definition. That apart, even assuming, at best, that the inclusion clause should be interpreted against the background of the general definition contained in paragraph 1 and bears some analogy to it, all that can be said is that sporadic or isolated activities of the kind referred to in clause (l), will not be sufficient to constitute a permanent establishment and that there should be some degree of continuity or durability and a framework against which the services are rendered. That kind of framework and degree o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement of the parties regarding its interpretation ; (c) any relevant rules of international law applicable in the relations between the parties. . . 6. A special meaning shall be given to a term if it is established that the parties so intended. He has also expressed his opinion thus in para. 57 at page 24 : . . . (final) protocols and in some cases other completing documents are frequently attached to treaties. Such documents elaborate and complete the text of a treaty, sometimes even altering the text. Legally they are a part of the treaty and their binding force is equal to that of the principal treaty text. When applying a tax treaty, therefore, it is necessary carefully to examine these additional documents. According to learned counsel, the MOU clarifies that the services rendered cannot be said to have made technology available to AB merely from the fact that provision of the services may require technical input to the person rendering the services or from the fact that the products which embody technology are used by such person. The contrast drawn by him, it would seem, is between passive or indirect receipt of benefits of technology belonging ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... logy and knowledge developed by the employees in the course of their work. Reference has also been made to the letter of approval of the Government of India which shows that the Government was informed that these personnel were being deputed for a period of up to three years for providing management and technical service to the joint venture so that the services of these employees could eventually be replaced by the Indian personnel. It is, therefore, difficult to accept the plea that no technology, information, know-how or processes were made available to AB by XYZ . The question whether the services rendered by the five nominees of XYZ can be said to be technical or consultancy services , however, is not free from difficulty. The dictionary meanings of the expressions technical and consultancy have very wide amplitude and do not restrict their applicability only to engineering or scientific areas of knowledge. But this area of tax legislation and jurisprudence clearly suggests that the distinction sought to be made by learned counsel between managerial services on the one hand and technical services or consultations, on the other, is not purely artificial and ima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... read with article 5(2)(l) of the DTAA. There was some discussion before the Authority as to the manner in which the business profits attributable to the permanent establishment (i. e., these services) should be computed and, whether in computing such profits the deduction of expenses incurred to earn them is permissible or not. Learned counsel stated that he was not praying for a ruling on that aspect and that he would be satisfied with a ruling on the first question set out in the application. The Authority, therefore, refrains from going into that question or expressing any views thereon. The Authority would, however, like to reiterate that, in case the authorities find that, in fact, the five nominees of XYZ , or any of them, are found, in appropriate proceedings, to be rendering technical or consultancy services, they will be at liberty to treat the case as one governed by article 12 and invoke the provisions of article 12(1) and (2) to charge them to income-tax. For the reasons discussed above, the Authority gives the following ruling on the questions raised by the applicant : Question Ruling 1. Is any part of the amount invoiced by XYZ to AB in terms of the man ..... X X X X Extracts X X X X X X X X Extracts X X X X
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