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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 ..... ought to tax as fees for technical services. An example of this type is a service is set out in example no. 7 to the MoU appended to the Indo US tax treaty, which is adopted in respect of Indo Dutch tax treaty as well- as noted earlier in this order As long as the Assessing Officer can demonstrate, after collecting necessary details from the assessee, that the non taxable consideration component (i.e. consideration for physical deliverables, consideration for services other than technical services and consideration for services which donnot transmit the technical know how etc) is less than fifty percent of the overall consideration paid by the assessee for basic refinery package, he can certainly come to that conclusion. It is, therefore, necessary that all the requisite details, as may be available to the assessee and as may be requisitioned by the Assessing officer, must be taken into account to facilitate this apportionment. We are, however, not inclined to conduct this exercise directly at the stage of second appeal. We, therefore, remit the matter to the file of the Assessing Officer by upholding the plea of the assessee in principle and directing the Assessing Officer to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e broken up, to determine the appropriate taxability of various components of supply and/ or services which have been covered in a single contract. 4. The learned CIT(A) has erred in holding that, for interpreting the term 'make available' the Indo-Netherland DTAA has to be applied as such and interpreted in itself without any extraneous help, such as referring to the MOU of the India-US DTAA which explains the said term. 5. The learned CIT(A) has erred in rejecting the law laid down by various judicial pronouncement wherein it has been held that in interpreting the language of a treaty, reliance can be placed on other tax treaties where identical language is used, since the Government can be considered to have contemplated the same meaning to be assigned to the same term in the other tax treaties. 6. The learned CIT(A) has erred in rejecting the appellant's claim, that 50% of the services rendered under the BRP would be commercial in nature, as per the provisions of the India-Netherlands DTAA read with MOU to the India-US DTAA. 7. The learned CIT(A) has erred in rejecting the appellant's claim that various services rendered under the BRP wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments receipts are concerned, the matter was decided in favour of the assessee, in principle, by the CIT(A) and the matter rests there. We are, therefore, concerned with the second aspect, i.e. receipts for commercial services aggregating to ₹ 7,69,29,360. As far as this receipt is concerned, the Assessing Officer required the assessee to show cause as to why this receipt was not offered to tax in the hands of the assessee. It was, inter alia, explained by the assessee that the related services rendered by the assessee are not technical services in nature and do not fall within the purview of FTS as defined under Article 12 of the (India Netherlands) tax treaty , and that without prejudice to the above, even if, for the sake of argument, it is assumed that the commercial services under TSA are technical in nature, they would still not qualify as FTS as they do not make available any technical knowledge, experience, skill, know-how, or process, or consist of the transfer of technical plan or technical design as per the definition under the tax treaty . Reliance was placed on the decisions of this Tribunal in the cases of Raymonds Limited Vs DCIT [(2003) 86 ITD 791 (Mum)] a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ook again to him when these services are needed in future. Teaching/ educational services have been separately dealt elsewhere in the treaty. In view of the above, meaning of expression make available has to be read in the present context. 4. The Assessing Officer then proceeded to deal with memorandum to the India United States Double Taxation Avoidance Agreement [(1991) 187 ITR (Statute) 102; Indo US tax treaty, in short] which provides that in the case of technical training , technology will be deemed to have been made available . On the basis of this analysis, the Assessing Officer finally treated the entire amount as taxable @ 10% on gross basis under Article 12 of the Indo Dutch tax treaty by, inter alia, observing as follows: In view of the above discussion it is clear that the services which the assessee is providing to RIL are arising out of the technical expertise that it has in the field and therefore, is in the nature of making available technical knowledge, experience, skill, know-how. The assessee could not have provided the various services described above to the other companies if it did not have the required technical skill, Expertise or experience in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same are also being provided to other members of the Royal Dutch Shell club. 2.2 RIL employee s who would be engaged in the day-to-day operations of the refinery would be referring to the above manuals etc. on a day-to-day basis in order to enable them to discharge their duties effectively in order to improve the reliability of operation and reduce the down time for our refinery and thus improve profitability. In the event RIL employee s after referring to the above manuals etc. require personal advice and assistance of Appellant, they will render the requisite consultancy services and assistance either though telephone, electronic media or by deputing their personnel to visit India for short periods. The agreement envisages that the above services to be provided by the personnel of Appellant would be in respect of various commercial as well as technical aspect of day to day operation of our refinery. 2.3 The various commercial aspects in respect of which services will be provided by the personnel of Appellant under the Basic Refinery Package are as under: (i) RIL would be included in the mailing list of Appellant and accordingly, RIL would receive regular updat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plant optimisation etc., for improving the operational efficiency and profitability of RIL s refinery. 3. Optional services In addition to the deliverable and services to be provided by Appellant under the BRP, Appellant would also provide to RIL consultancy services and assistance in the various commercial and technical aspect of the day-to-day operations of our refinery which are not covered under the scope of BRP, as and when specifically requested by RIL from time to time. The services to be rendered by Appellant under the optional services would include review/audit of any part of the plant from the stand point of design, operability, revamp, debottleneck to increase throughput efficiency etc. and pace setting programs with the objective of improving profitability of our refinery. It would also include review like organisational preparedness review, fire and safety review, health safety and environmental review special on-site and off-site training programs, commissioning start-up assistance by specialists, assistance in handling emergency situations and disaster management etc. 6. It was also submitted that, under the arrangement with the Indian client, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ynergy 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 Planning Action Guide These provide guidelines in conducting a business continuity review and development of a Crisis Management Process. 5. Planning and scheduling (Decision support) This is short PPT presentation on integrated planning and scheduling and on processes, tools and organisation. 6. Business Process Management guideline This guideline - Provide guidance for Quality Management Advisors, who will be involved with training for any facilitation in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ramic 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 condition affecting the neck, upper back, shoulders, wrist or hand. RSI are the most commonly reported work related health problem. This document, one of the Shell Group HSE Advisor Panel s Yellow Guide (YG) series provides management tools and examples of best practices to address this issue. 15 . Group HSE Managemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 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 Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies in the following industries: additives, chemicals, gas and liquefied natural gas, hydrocarbon logistics, industrial markets, motorspirit, refining and oil 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argument that the basic package includes certain technical and commercial services that are independent of each other and can be provided on standalone basis and hence can be considered singly, I am afraid I do not agree 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) Total manhour listed for three years for the purpose are 52690. This amount of time spent is not possible for Basic Refinery Package which was for 1200 hrs per year, i.e. at the most the RIL could have clocked in 3600 manhour. Obviously, items covered by other 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded or excluded in two treaties (as done by Karnataka High Court in case of AEG Telefunker Vs. CJT 151 1TR 222) but attributing meaning on the basis of language being paramateria when one of the treaty has a supplementary MOU and other not, is comparing uncomparable. ii) MOU has been signed, in context of lndo-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 H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ARTICLE 12 Royalties, fees for technical services and payments for the use of equipment 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 . 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 Agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 subsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urveys; 8. scientific services; and 9. technical training. 15. It is important to note that the MFN clause set out in the Indo Dutch tax treaty is a clause which does not need anything other than a greater relief, vis- vis the scope and rate of fees for technical services in the Indo Dutch tax treaty, being given in any other tax treaty with another OECD country. Any such relief being extended automatically incorporates such beneficial arrangement being read into the Indo Dutch tax treaty as well. This MFN clauses clearly stipulates that 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 incorporati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology making available , the technical knowledge, skill?, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are 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 purchasin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On the same lines are various decisions of this Tribunal in the cases of ICICI Bank Limited Vs DCIT [(2008) 20 SOT 453 (Mum)] and McKinsey Co Inc Vs ADIT [(2006) 99 ITD 549 (Mum)]. What essentially follows, therefore, is that as long as the services rendered by the assessee are managerial or consultancy services in nature, which do not involve or transmit the technology, the same cannot be brought to tax as fees for technical services. An example of this type is a service is set out in example no. 7 to the MoU appended to the Indo US tax treaty, which is 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le in terms of services delivered versus service plan and feedback related to quality of individual service contributions. The review process will include operational-, systems-, organisational- and training progress, and staff performance. Promote implementation of the aged corrective actions produced by the review and appraisal process. Communications and relations Familiarise with the Site, its organisation and policies. Stay abreast of economic and other drivers of the decision making process of Reliance Petroleum Limited Ensure rapid familiarisation of Reliance Staff with Shell Global Solutions organisation,- people, 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 provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anagement, and technical and laboratory management. This review is always done for a Shell-owned facility and experience shows that it allows the refinery to eliminate a significant number of problems and achieve a smoother start up (yielding in effect the equivalent of a minimum of two weeks additional profitable processing time). DELIVERABLES The review team, consisting of professionals with extensive refining experience, will deliver a report which includes prioritised list of recommendations for change based on the review findings. This list is developed in a consensus manner between Reliance management and the review team. TERMS OF REFERENCE Typical terms of reference are given below. These should be adopted to include specific items, such as limitations 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty and environment. It will not address fire safety issues; these may be covered by a separate fire safety review if Reliance wishes. Review the interfaces between the various plants to ensure that the safety and environment integrity of the interconnected plants (including utility systems) is not violated by the interconnections. 2. A site inspection will be carried out to: Ensure that the safety and environmental integrity of the design is reflected in the as-built facilities. Review by inspection operability aspects, safe exists and accessibility, with reference to process engineering flow schemes or design drawings when required. Review general safety equipment and safety facilities (e.g. safety showers, gas detectors and alarms). Note: The site inspection does not replace the final and detailed P I check. 3. A check will be carried out on the availability 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 iden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Limited Vs CIT [(1992) 195 ITR 81 (SC)]. Speaking through Hon ble Justice Ranganathan, one of the most distinguished former Presidents of this Tribunal adorning the office of Hon ble Supreme Court judges at the relevant point of time, Hon ble Supreme Court had observed as follows: An assessee cannot claim deduction under s. 80-O in respect of certain receipts merely on the basis that they are described as royalty, fee or commission in the contract between the parties. By the same token, the absence of a specific label cannot be destructive of the right of an assessee to claim a deduction, if, in fact, the consideration for the receipts can be attributed to the sources indicated in the section. The second proposition is equally untenable. Contracts of the type envisaged by s. 80-O are usually very complex ones and cover a multitude of obligations and responsibilities. It is not always possible or worthwhile for the parties to dissect the consideration 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 purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted as attributable to the services which are not taxable as fees for technical services . However, during the assessment proceedings, this aspect of the matter was not examined at all. In the course of the appellate proceedings, learned CIT(A) has rejected the apportionment on the ground that it is not possible to do so. He has observed that the underlying purpose of the package is operationalising the refinery and obviously in such a scenario the various services are interdependent and complimentary and cannot be segregated . We are, for the detailed reasons set out above, unable to see any merits in this approach. We have also noted that the learned CIT(A) was in error in rejecting the apportionment by observing that total man-hours listed for three years for the purpose are 52690, and that this amount of time spent is not possible for Basic Refinery Package which was for 1200 hrs per year, i.e. at the most the RIL could have clocked in 3600 man-hours and 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 canno ..... X X X X Extracts X X X X X X X X Extracts X X X X
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