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TMI Blog2015 (12) TMI 142X X X X Extracts X X X X X X X X Extracts X X X X ..... a. 2. The learned CIT(A) has erred in rejecting appellant's claim to seek nontaxability of 50% of the receipts in respect of Basic Refinery Package ('BRP') as exempt from tax for the following reasons: * The learned CIT(A) erred in holding that the agreement for BRP has to be read as a composite one. * The learned CIT(A) erred in holding that the appellant has no basis to claim that 50% of the services rendered were commercial. * The learned CIT(A) erred in holding that the appellant's attempt to bifurcate its service into technical and non-technical part is devoid of any basis, logic and is self-contradictory. * The learned CIT(A) erred in holding that the argument of 'make available' either does not apply or cannot be pinpointed by the appellant. * The learned CIT(A) erred in holding that the neither there is any relevance of Memorandum of Understanding ('MOU') to Indo-US DTAA in facts of the case nor can this MOU in that context extendable to Indo-Netherlands DTAA. 3. The learned CIT(A) has erred in rejecting the appellant's claim (which has been upheld in various judicial pronouncements), that a composite contract ought to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h section 195 of the Act, interest under Section 234B and Section 234C of the Act should not be charged. 11. Your appellant reserves the right to add, amend , alter or vary all or any of the above grounds of appeal as they or their representative may think fit". 3. The issue in appeal lies in a rather narrow compass of material facts. The assessee before us, i.e. Shell Global Solutions International BV, is a company incorporated in, and tax resident of, the Netherlands. During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that while the assessee has duly accepted taxability of its receipts aggregating to Rs. 65,21,62,165 as fees for technical services, the assessee has claimed receipts aggregating to Euros 16,75,781, i.e. Rs. 17,26,50,194, as non taxable in nature. The non taxable receipts included reimbursement of expenses, aggregating to Rs. 1,78,40,156, received from Hazira Port Pvt Ltd, Hazira LNG Pvt Ltd and Welspun Gujarat Stahl Rohren Limited, in addition to fees for commercial services aggregating to Rs. 7,69,29,360 received from Reliance Industries Limited. So far as the reimbursements receipts are concerned, the matter was decided in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctments in the United States" and added that "The expression 'make available' has been used in enactment 'Terrorism Risk Insurance Act' of United States and in 'Copyright Infringement Act' of the United States, and, on these Acts, there are number of decisions have come up regarding meaning of the expression 'make available' which means offer or make accessible or provide, furnish things in this context". The Assessing Officer then referred to some more google searches justifying the meaning as "making accessible". He then proceeded to summarize his findings, at page 12 of the assessment order, as follows: This clearly suggests that the words 'make available' which were used in treaty in that context, and the treaty too suggests that these services in the nature of technical knowledge, skill etc were offered or made accessible to the other party, and it never meant that that the other party should be trained or made expert in such technical knowledge. It will be absurd on the part of a person to make other person expert of its own competency which will result in a situation that the recipients of the services will not look again to him when these services are needed in future. Tea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal services has been considered, by the assessee himself, as taxable and the due taxes, as applicable under Article 12 of the Indo Dutch treaty, were paid thereon. As to the nature of commercial services rendered by the assessee, the assessee submitted as follows: The scope of services to be rendered by Appellant under the aforesaid agreement is under: 2. Basic Refinery Package ('BRP') 2.1 Under this package Appellant would provide to RIL from outside India deliverables in the form of goods likes best practices, manuals, guidelines, standards, drawings, handbooks, training manual etc. developed by appellant based on their expertise and experience in running refineries all over the world. All these deliverables have been developed by appellant over a long period, as a result of their vast experience in commercial as well as technical matters relating to designing, engineering, installation, operation, maintenance and trouble shooting in refineries round the world and the same form a part of the existing library of Appellant. None of the deliverables have been specifically prepared for RIL and the same are also being provided to other members of the Royal Dutch Shell club. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has accumulated a vast knowledge and has a database on the suppliers/manufactures for various inputs materials, catalyst and chemicals. Appellant will provide from time to time, relevant commercial data and information to RIL under the above agreement which can be used in our procurement activities for better negotiations, selection of better products (alternative products), alternative sources of suppliers/manufacturers around the world with objective to minimise cost of input materials and thus improve profitability of RIL's refinery. (v) The hydrocarbon management procedure contained in the abovementioned manual/guidelines can be used by RIL for analysing fuel and loss figures obtained in RIL's refinery during operation and identify the potential areas for reducing such loss and convert the hydrocarbons to more valuable products thus improving our overall profitability. (vi) RIL would also obtain certain software packages developed by Appellant which are related to optimisation, catalyst performance analysis, planning and scheduling, oil improvement functions, plant optimisation etc., for improving the operational efficiency and profitability of RIL's refinery. 3. Option ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncy Conference Year 2002 Impact services and technology to improve margins Reliance Laboratory Efficiency - February 2003 Fuels Product Quality - June 2004 Help Desk Query Consolidated List Sr List of CD's 1 2 Performance and Efficiency conference Oil movement, crude oil and product quality conference 1. Oil Movement Newsletter The Oil Movement News letter contains general information/articles on Oil and Gas industry, which are contributed by refineries from all over the world. Further this newsletter aims to maximise the synergy by bringing together the full range of specialism involved in Oil Movements. 2. Hydrocarbon Logistics Newsletter The hydrocarbon logistics newsletter is intended as a source of informal information on all matters in the field of planning and scheduling of interest to staff active in the area. Each of the news letter issue covers various topics in the field of planning and scheduling. 3. Guidelines for Business travel and Office working These guidelines are for the benefit and protection of the staff that are engaged in any type of business activity away from their primary work location. 4. Business Continuity and Contingency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of incidents which results in injury or illness and in damage to assets, the environment or company reputation. It also addresses incidents that had no adverse outcomes (near misses). It sets out rules for the reporting of incident by Shell companies and joint ventures. 11. Man Made Vitreous Fibers ('MMVF')(HSE) MMVF include products containing refractory ceramic fibers, Fiberglass and mineral wool. This guideline establishes requirements for managing and working with MMVF because available toxicity information and recommendations from manufacturers support controlling exposures to these materials. 12. Benchmarking training seminar This is the material provided by Shell during "Benchmarking Training Seminar" conducted at their training centre "Leeuwenhorst", Netherlands. 13. Fitness to work (HSE) The purpose of this document is to ensure that a lack of Fitness to Work (FTW) does not result in significant injury or illness, risks o the business or risk to the community or company reputation and to comply with the Group Minimum Health Management Standard. 14. Repetitive Strain Injury ('RSI') in office environment (HSE) RSI from personal computer use is a medical c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gain insight into the factors that influence laboratory efficiency. 22. Fuels Product Quality Refinery News ('FPORN') - June 2004 EPQRN is a news letter which is issued up to 4 times a year and present tropical information in brief, easily accessible articles on fuel issues affecting refinery customers. I also provide information on developments in fields of automotive fuels (including non-traditional fuels like bio-fuels), aviation fuels, industrial gas oil and residual fuel oil. 23. Help Desk Query Consolidated List This document the consolidated list of closed query which were faced by the operating personnel and other personnel during the functioning of refinery. 1. Oil Movement Newsletter The Oil Movement News letter contains general information/articles on Oil and Gas industry, which are contributed by refineries from all over the world. Further this newsletter aims to maximise the synergy by bringing together the full range of specialism involved in Oil Movements. 2. Hydrocarbon Logistics Newsletter The hydrocarbon logistics newsletter is intended as a source of informal information on all matters in the field of planning and scheduling of interest to staff acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Road Transport. It has been designed for use by Shell management and supervisory staff in developing safe driving policies and procedures for their Rod Transport operations and inclusions with HSSE case document. 10. Incident classification, investigation and reporting (HSE) This document provides guidance on the classification, investigation and reporting of incidents which results in injury or illness and in damage to assets, the environment or company reputation. It also addresses incidents that had no adverse outcomes (near misses). It sets out rules for the reporting of incident by Shell companies and joint ventures. 11. Man Made Vitreous Fibers ('MMVF')(HSE) MMVF include products containing refractory ceramic fibers, Fiberglass and mineral wool. This guideline establishes requirements for managing and working with MMVF because available toxicity information and recommendations from manufacturers support controlling exposures to these materials. 12. Benchmarking training seminar This is the material provided by Shell during "Benchmarking Training Seminar" conducted at their training centre "Leeuwenhorst", Netherlands. 13. Fitness to work (HSE) The purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marketing and upstream. 21. Reliance Laboratory Efficiency - February 2003 As a part of the process of continuous improvement, RIL wished to compare their laboratory with Shell facilities in terms of manpower efficiency and numbers of samples/tests. This document records the finding of Shell, based on the questionnaire which was developed to identify and gain insight into the factors that influence laboratory efficiency. 22. Fuels Product Quality Refinery News ('FPORN') - June 2004 EPQRN is a news letter which is issued up to 4 times a year and present tropical information in brief, easily accessible articles on fuel issues affecting refinery customers. I also provide information on developments in fields of automotive fuels (including non-traditional fuels like bio-fuels), aviation fuels, industrial gas oil and residual fuel oil. 23. Help Desk Query Consolidated List This document the consolidated list of closed query which were faced by the operating personnel and other personnel during the functioning of refinery. 7. It was then submitted that in view of the limited scope of fees for technical services under the Indo Dutch tax treaty, only such services which did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to that. This is becauseI. i) The various services are being offered as a package for which a single consideration is being charged. ii) RPL or RIL has the option to use various services and hence imputing value to each of the service is not possible at the time of contract. iii) Each service itself contains four or five components and clearly it will depend on the situation in real-time as to what component is utilized by RIL and to what extent, making it mathematically still more uncertain the pricing of each service. iv) The underlying purpose of the package in RIL context is the is the operationalising the refinery of RIL. Obviously in such a scenario the various services are inter-dependent and complimentary and cannot be segregated. 5.12. Notwithstanding that contract has to be read as a whole, even the services offered in the Basic Package are technical in nature only. Although in its written submission the appellant has laid great emphasis on the newsletters, conference etc. if one were to look at the Annexure A, listing the services, it can be seen that each service has four or five components and providing newsletters or CDs are only a part of the disseminat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... packages have been included in this chart. iii) The splitting done has no basis and makes no sense. For example, the maximum amount of the (67.5%) has been claimed to have been spent inRefSim, NetSim etc. etc." 5.15 The activity would fall in the service Planning & Scheduling of Annexure A. As per the appellant's classification, it has 40% Technical component while 60% non-technical component. This split up would completely fail any logical test. If improvement and development of systems is treated as passing on the experience or skill or processes it has to be 100% technical. If because of any reason, it is thought otherwise, it has to be 100% non-technical or commercial. There can not be a middle ground. Similarly, service management is part of consultancy services, which forms 13.7% of time spent has been split into 10% technical and 90% non-technical on a basis best known to appellant but being not amendable to any logical reasoning. 5.16 Therefore, it is more than clear that the appellant had no basis for claiming 50% of the Basic refinery package for commercial services. Its attempt to provide some kind of bifurcation is technically fallacious, contradictory, lacks log ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do-U.S. Treaty. Having not signed such a memorandum with U.K. Government for an instrument which is signed later, in fact shows the true intention of the parties, namely that the parties to this agreement did not want to restrict the meaning of word "fee for technical services". iii) Even if the two DTAAs can be compared, the fact that the title being used by the two are different would have its due significance. While the U K. Treaty uses the term "fee for technical services", the ITS. Treaty talks of "fee for included services" If, as the various authors have stated, the provisions are para-materia, it needs to be sorted out why did the two treaties have used different nomenclature to describe such services. These can not be a case redundancy or usage in spirit. Clearly the intention in the U.S. Treaty was to cover the "included" services while the Holland Treaty was much wider; The presence of MOU in one case and absence in the other could thereby be explained in the context. 5.20. Therefore, in my view, the Indo-Netherland Treaty has to be applied as such and interpreted in itself, without any extraneous help. 5.21. Hence, considering all the facts and the legal angles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of a managerial, technical or consultancy nature. V. Ad ARTICLE 12 It is understood that, in case India applies a levy, not being a levy covered by Article 2, such as the Research and Development Cess, on payments meant in Article 12, and if, after the signature of this Convention under any Convention or Agreement between India and a third State which is a member of the OECD, India should give relief from such levy, directly, by reducing the rate or the scope of the levy, either in full or in part, or, indirectly, by reducing the rate or the scope of the Indian tax allowed under the Convention or Agreement in question on payments as meant in Article 12 of this Convention with the levy, either in full or in part, then, as from the date on which the relevant Indian Convention or Agreement enters into force, such relief as provided for in that Convention or Agreement shall also apply under this Convention. (Emphasis, by underlining, supplied by us) 13. Vide agreement and protocol dated 12th September 1989, Indo US tax treaty introduced a much narrower definition of fees for technical services. This definition, set out in Article 12(4) of the Indo US tax treaty, referred to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as illustrating a few typical cases. For ease of understanding, the examples in this memorandum describe U.S. person 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 service requiring expertise in a technology. But 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 technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in a technology is required to perform it. Under paragraph 4, technical consultancy services are considered included services only to the following extent : (1) as described in paragraph 4(a), if they are ancillary and subsidiary to the application or enjoyment of a right, property or information for which a royalty payment is made; or (2) as described in paragraph 4(b), if they make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 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 service is doing so in connection with an overall arrangement which includes the payer or and recipient of the royalties]. To the extent that services are not considered ancillary and subsidiary to the application or enjoyment of some right, property, or information for which a royalty payment under paragraph 3 is made, such services shall be considered "included services" only to the extent that they are described in paragraph 4(b) Paragraph 4(b) Paragraph 4(b) of the Article 12 refers to technical or consultancy services that make available to the person acquiring the service technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at in the event of India extending any benefits to another OECD country, inter alia, directly by reducing the rate or "indirectly, by reducing the rate or the scope of the Indian tax allowed under the Convention or Agreement in question on payments as meant in Article 12 of this Convention with the levy, either in full or in part" then, as from the date on which the relevant Indian tax treaty enters into force, "such relief as provided for in that Convention or Agreement shall also apply under this Convention". Unlike many other tax treaties, such as with Philippines and Switzerland, wherein where similar provisions, for incorporation of favourable provisions contained in other tax treaties, are existent, but with the exception that in order to make the incorporation effective, the Governments of two countries should first mutually decide of such incorporation in the form of amendment of tax treaty. That's not the case in Indo Dutch treaty. Therefore, whatever benefit is extended under Indo US tax treaty is, by the virtue of MFN clause, stands incorporated in Indo Dutch tax treaty as well. In other words, to decide the scope of 'fees for technical services', we have to see the scop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. 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 the future without depending upon the provider. Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as "fee for technical/included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied. 18. Learned CIT(A) was thus clearly in error in holding that the provisions of the Indo US tax treaty cannot be read into the provisions of Indo Dutch tax treaty. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s adopted in respect of Indo Dutch tax treaty as well- as noted earlier in this order, as follows: 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 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 company through the service contract is commercial information. The fact that technical skills were required by the performer of the service in order to perform the commercial information service does not make the service a technical service within the meaning of paragraph 4(b). 19. In this light, let us now take a look at a few deliverabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and - information sources. * Ensure full participation by Reliance Staff in Shell Global Solutions workshops, seminars, conferences etc. * Put in place a communication and reporting structure between Shell Global Solutions staff at Site, Reliance, and Shell Global Solutions' home bases. Stay in good contact with other stake holders at site. The main purposes of these communication structures are to enhance concerted on-going activities, maximum pro-activity and effective determination of service needs, to provide efficient progress-monitoring andadministering and provide basis for review and appraisal. * Ensure the communication structure stays effective. * Send monthly progress reports to Shell Global Solutions and keep the business groups in Shell Global Solutions fully informed on developments in their respective areas. * Pay regular visits to Shell Global Solutions to ensure that the business unit stay fully clear about required service levels. Personnel matters * Promote and assist in maintaining goal-oriented direction of advisory and seconded staff of Shell Global Solutions. Hence, ensure that: Shell Global Solutions staff are and stay clear bout overa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations to scope, and agreed with Reliance prior to the review. 1. SIOP will carry out a review of all appropriate facilities (including the marine terminal, outside plot and inside plot). SIOP will report the finding of the review to Reliance and will seek an understanding on the action items with Reliance prior to departure of the review team. 2. The review will be carried out and will encompass an examination of any "Operations Implementation Plan" which has already been developed by Reliance. Areas to be covered will include organisation, management system, decisionmaking, communications channels, training plans and precommissioning/ start-up plans. 3. The review will seek to identify any deficiencies which could impact on a successful start-up and initial period of operation of the new facilities. 4. The results of the review are intended to assist Reliance in constructive manner to improve the readiness of is organisation to operate the new facilities. 5. Reliance is responsible for following-up on the list of action items. PRE-START-UP TECHNICAL HSE REVIEW OBJECTIVE The objective of a technical pre-start-up HSE review is to ensure that all possible operating c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability and status of start-up/shutdown and emergency procedures, standing instructions, operating manual and start-up planning and training programmes (with detailed spot checks as considered appropriate). 4. A list will be prepared showing the deficiencies identified and placing them in one of two categories: * A items - which would lead to an unacceptably hazardous situation if the installation was to be started up without modifications. * B items - which, even if not implemented before start-up, would leave an acceptable level of safety and general technical HSE features on a short-term basis. Implementation should be at first opportunity but not later than during the first planned shutdown. 5. A formal report of the findings and recommendations of the review will be prepared. While at the draft stage, the report is discussed and agreed with the relevant site management representatives (preferably immediately at the end of the review visit). The report will include a record of the discussions and consensus on key issues, such as accepted deviations from standards and guidelines. 20. None of the above deliverables involve any transfer of technology even though certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration and apportion it to the various ingredients or elements comprised in the contract. The cases referred to by the Tribunal and Sri Ahuja as to the indivisibility of a contract arose in an entirely different context. For purposes of income-tax, a principle of apportionment has always been applied in different contexts. Consolidated receipts and expenses have always been considered apportionable in the contexts: (a) of the capital and revenue constituents comprised in them; (b) portions of expenditure attributable to business and non-business purposes; (c) of places of accrual or arisal; and (d) of agricultural and non-agricultural elements in such receipts or payments. This is a point that does not need much elaboration and it is sufficient to refer to decided cases cited under the passages on this topic at pp. 47, 137, 264, 621 and 677 of Kanga & Palkhivala's the Law and Practice of Income Tax (Volume I, eighth edition). We are, therefore, of the opinion that, if, as we have held, the contracts in the present case oblige the assessee to make available information and render services to the foreign Government of the nature outlined in s. 80-O, it is the duty of the Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd thus coming to the conclusion that "Obviously, items covered by other packages have been included in this chart". He was in error in concluding the total time spent for service rendered in connection with BRP cannot exceed 3,600 man-hours i.e 1,200 man-hours per contract yea. The aforesaid limit applied to services rendered by the appellant under the category of 'Help desk services' which were to be rendered within the BRP and not for the various services to be rendered under the BRP. The action of the CIT(A) cannot, therefore, be sustained in law. We have also noted that there is no specific discussion about the values to be assigned to the consultancy services which are non technical in nature and to the physical deliverables. We have also noted that in the 195(2) order, the Assessing Officer has categorically observed that "only a part of the total services under the agreement are taxable on account of its being a composite contract and also because the commercial services rendered by the assessee are saved from taxation in view of Article 12 of the Indo Dutch DTAA read with protocol to DTAA between India and USA" and then proceeded to adopt 50% of total payment under ..... X X X X Extracts X X X X X X X X Extracts X X X X
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