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TMI Blog2016 (3) TMI 501X X X X Extracts X X X X X X X X Extracts X X X X ..... providing quotations based on specifications developed by the assessee for the power plant, supplying drawing review to enable integration of the equipment and undertaking document of designs, that the services were split up under the head technical services, start-up services and overall responsibilities. The assessee submitted before the that AO the overall responsibility and management of the project was carried out by the assessee from outside India, that no Permanent Establishment(PE)was created in India, that the amounts received by the assessee for undertaking overall responsibility did not amount to transfer of technology/technical knowhow to JTPCL, that no technical services/included services were provided by the assessee to JTPCL as envisaged by the Act/DTAA. It was further argued that in case of supply of equipment and essential spares no part of the activities was carried out in India, that as per the terms of the contract the title of all the equipments and spares was transferred to JTPCL at the port of shipment i.e. overseas, that the payment of supply of equipments etc. was received outside India, that portion of the amount received on account of supply of equipment/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al skill/ know-how/experience, that the services provided by the assessee could not have been provided through books and literature by giving designs and drawing, that assessee had made technology available to the Indian company, that the technology involved complete engineering of the power plant and could not be related only to equipment and design supply, that the scope of work covered supply of basic design engineering, technical specification, integration of design at various level of construction of the plant, that the plant was one of the first that used corex gas, that it involved technology which was not available in India, that such a plant could not be made from specification sent in manuals or through occasional visits of personnel. With regard to, services under the head overall responsibility, the AO held that same were not just management responsibility, that the technical services could not be provided by the assessee from US, that the employees of the assessee had visited India for 43 days, that there were several Indian technicians who worked under the supervision of American employees, that the receipt in the hands of the assessee was nothing but in the form of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been defined in the tax treaty to mean payments of any kind to any person in consideration for the rendering of any technical or consultancy services, that the payment made by Indian company to the assessee for obtaining engineering and design work fell within the definition of FIS under article 12(4)(b) of the treaty, that unless the assessee had provided and made available technical plant/technical design for setting up power plant it would have not been possible for the Indian company to set up the power plant on its own, that the technical plant/designs made available by the assessee helped JTPCL to apply the technology for generation of power, that under paragraph4(b)of the agreement the assessee was to make available technical and consultancy services to JTPCL, that the agreement dated 20/09/1995 showed that the assessee had supplied drawings,samples and models and had also provided instructions and training for operation and maintenance of the plant, that in view of technical knowledge, experience and skill made available by the assessee to JTPCL through technical design and client it could be concluded that the assessee had earned FIS, that total income of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of services rendered by it, that it had split the services under three heads i.e. technical services, start up services and over all responsibility, that the scope of technical services related to conceptualisation of a detailed and complete power plant design, that it had to prescribe the specification of equipments that were necessary for a power plant, that the equipments were to be designed by the identified manufacturers as suggested by the assessee, that it had to ensure that each section of the supply would be designed, specified and manufactured with the skill and care, that it had to ensure and co-ordinate the design of each section and equipment, that under the head 'start up services' it had to deal with the complexities involved in executing the project, that the services under the head 'start up services' included making available persons original supplier to ensure smooth start up and commissioning of the plant, that the startup services included equipment, installation,operation and maintenance, training of personnel and assistance/advise on commissioning and start-up, that the overall responsibility services included incorporation of equipment as per the design unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hence the Indian company was liable for deduction of tax. The Hon'ble court decided the issue in favour of the assessee and held that receipts could not be brought to tax in India, that the payments made by it were not taxable under the provisions of section 9 of the Act. 5.2.We would also like to refer to the decision of the Hon'ble Supreme Court delivered in the case of Ichikawajama-Harima Heavy Industries Ltd.(288 ITR 408). The facts of the case were that the assessee had entered into an agreement for a turnkey project with Petronet LNG for setting up an LNG receiving, storing and re-gasification unit, that the roles and responsibilities of each member of the consortium were well-defined with separate consideration, that the agreement was for development, designing, engineering and procuring of equipments and to erect storage tank, that the contract involved offshore and onshore supply of equipments as well as offshore/ onshore supply of services. The Hon'ble Supreme Court deciding the special leave petition filed by the assessee, against the ruling of the AAR, held that merely because the contract had been designed as turnkey it would not mean that entire contract must be con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to construe the taxability of a non-resident in respect of income derived by it. Having regard to the internationally accepted principle and DTAA, it may not be possible to give an extended meaning to the words 'income deemed to accrue or arise in India' as expressed in s. 9 of the Act. Sec. 9 incorporated various heads of income on which tax is sought to be levied by the Republic of India. Whatever is payable by a resident to a non-resident by way of fees for technical services, thus, would not always come within the purview of s. 9(1)(vii) of the Act. It must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax. Whereas a resident would come within the purview of s. 9(1)(vii) of the Act, a non-resident would not, as services of a non-resident to a resident utilized in India may not have much relevance in determining whether the income of the non-resident accrues or arises in India. It must have a direct live link between the services rendered in India, when such a link is established, the same may again be subjected to any relief under DTAA. A distinction may also be made between rendition of services and utilization thereof. 70. Sec. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... blishment cannot be said to be involved in the transaction, the aforementioned provision will have no application. The permanent establishment cannot be equated to a business connection, since the former is for the purpose of assessment of income of a non-resident under a DTAA, and the latter is for the application of s. 9 of the IT Act. (6) Clause (a) of Expln. 1 to s. 9(1)(i) states that only such part of the income as is attributable to the operations carried out in India, are taxable in India. (7) The existence of a permanent establishment would not constitute sufficient 'business connection', and the permanent establishment would be the taxable entity. The fiscal jurisdiction of a country would not extend to the taxing entire income attributable to the permanent establishment. (8) There exists a difference between the existence of a business connection and the income accruing or arising out of such business connection. (9) Paragraph 6 of the protocol to the DTAA is not applicable, because, for the profits to be 'attributable directly or indirectly', the permanent establishment must be involved in the activity giving rise to the profits. Re : Offshore ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nked to the supply of goods, and it must be considered in the same manner." In our opinion, considering the above judgments, it can safely be held that services rendered by the assessee cannot be taxed u/s.9(1)(vii)of the Act. 6. Now,we would like to decide the issue as to whether the services rendered by the assessee could be termed FIS as per the provisions of Article 12 of the DTAA. At paragraph 5.1 of our order, we have given the details of services provided by the assessee under the heads 'Technical services' and 'start-up services'.We find that start-up services were carried out on site by the start-up contractors, that all the services were provided from overseas and that no part of it was carried out in India. Though some of the employees of the assessee visited India, but there is no proof that there was any transfer of technology or technical know-how to the JTPCL. As per the Article 12(4) of the tax treaty for a payment to be considered as FTS following conditions have to fulfilled i. the payments has to be in consideration for services of a managerial/technical/ consultancy nature ii. the services should fulfill the condition set out in any of the clause a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... makes available" to the recipient technical knowledge, knowhow 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have any permanent establishment in India during the year under consideration as contemplated by article 5 of the DTAA, that the US company did not make available any technical knowledge to the assessee, that the payment made by it to the non-resident company was not taxable in India. The AO and the FAA did not agree with the assessee. The Tribunal deciding the matter in favour of the assessee, held as under: "As per the provisions of section 90, an assessee is eligible to adopt provisions of tax treaties if the same are more beneficial to the assessee. As per article 12 of the India - US tax treaty, the definition of fees for included service is restricted to technical or consultancy services and since the managerial services are not covered in the said definition, the same cannot be taxed in India. It was, therefore, necessary to ascertain whether the services rendered by could be termed as technical or consultancy services. In this regard it was observed that was a management guru. A perusal of the presentation made by him showed that the services rendered by were essentially in the nature of shading management experiences and business strategies and it had nothing to do with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd newly developed villagers was equivalent to original reference drug, it had to produce evidence in the form of certificates from CRO. The generator developed by the assessee - company were sent for testing at laboratories of CRO abroad. CRO conducted tests and experiments on these drugs and sent back analysis report containing results of such tests and experiments. As rightly observed by the Commissioner (appeals), the CROs, thus, use their own skill equipment etc. to prepare the report. However, what they ultimately supplied to the assessee-company was analysis report and there was no party with their skills and know-how to the assessee-company. The services rendered by CROs, thus, were not technical in nature but were merely in the nature of commercial services. The fees paid for such services, therefore, did not amount to fees paid for technical services or fees paid for making available any technology to the assessee company in order to enable it to apply the sales for developing/inventing new drugs in future. Keeping in view all the facts of the case, it was to be opined that the nature of services rendered by CROs, to the assessee/company was such that the same could no ..... 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