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TMI Blog2016 (11) TMI 1358X X X X Extracts X X X X X X X X Extracts X X X X ..... as treated the reimbursement costs as technical fees by relying on the Advance Ruling in the case of AT & S [287 ITR 421], in fact which is not at all applicable to the Appellant's case. (b) The learned CIT(A)-IV, Bangalore has erred in upholding the Assessing Officer's view of taxing payment made to a Malaysian Company towards reimbursement of expenses as per the provisions of Double Taxation Avoidance Agreement 'as technical fees' and treated as 'assessee in default' under Section 201(1) and 201(1A) read with Section 195 of the Income-tax Act, 1961. (c) The learned CIT(A)-IV, Bangalore has failed to applying the following decisions relied on by the Appellant. (i) ITO vs. Dr. Willmar Schwabe [2005] 3 SOT 71 (ITAT - Mumbai) (ii) CIT vs. Tata Engg. & Locomotive Co. Ltd. (245 ITR 823) Delhi (iii) CIT vs. Industrial Engg. Projects (P.) Ltd. (202 ITR 1014) Mumbai (iv) Clifford Chance, United Kingdom (82 ITD 106, Mumbai - ITAT) (v) CIT vs. Dunlop Rubber Co. Ltd. (now Dunlop Holdings Ltd) (142 ITR 493 Calcutta) (d) The learned CIT(A)-IV, Bangalore has erred in relying on the following decisions, which are not all applicable to the Appellant's case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer before the CIT (Appeals) but could not succeed. 4. Before us, the learned Authorised Representative of the assessee has submitted that the tripartite agreement between the assessee, Cipla and its subsidiary is not legally enforceable agreement. This agreement is only a frame work of tripartite agreement mutually agreed among the parties therefore there is no provision for MOU for rendering technical services either by the assessee to its subsidiary or by the subsidiary to the assessee. The deposit made by the Cipla to the assessee is to meet the R&D expenses incurred by the assessee and its Malaysia subsidiary. That itself does not mean that the reimbursement of expenses made by the assessee to its Malaysian subsidiary are in the nature of FTS. The subsidiary of assessee is carrying on its own R&D activity and does not render any technical services to the assessee. Further the assessee and its subsidiary are developing products for their own business in their own independent status. The agreement with Cipla is to sell the new product manufactured by the assessee and its subsidiary to Cipla on a principle to principle basis. Therefore the assessing authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e under Section 195 of the Act does not arise on the remittances made to Non-residents; it arises only when such remittance is of a sum chargeable to tax under the Act. Therefore the learned Authorised Representative has submitted that being any sum to Non-resident is liable to deduct tax if such sum is chargeable to tax under the Act. The reimbursement of expenses made by the assessee to SRM, Malaysia are all on principle to principle basis. As per the agreement the final product was to be sold to Cipla on principle to principle basis. Hence the amount paid by the assessee to subsidiary at best be treated as business income under DTAA and in the absence of PE is not chargeable to tax in India. Learned Authorised Representative relied upon the following decisions : i. Director of Income Tax (Intl. Taxation) Vs. Sun Microsystems India Pvt. Ltd. in ITA No.35/2010 Dt.2.6.2014 (Kar) ii. CIT Vs. Dunlop Rubber Co. Ltd. (1983) 142 ITR 493 (Cal) iii. Ishikawajma-Harima Heavy Industries Ltd. Vs. Director of Income Tax (2007) 288 ITR 408 (SC) 5. On the other hand, the learned Departmental Representative has submitted that the meaning of FTS as provided in the Act as well as under DTAA cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment received from Cipla Ltd....." Therefore all expenditure incurred in pursuance to this agreement have been treated in lieu of the services rendered by the foreign company for which payment is being received by the Malaysian Company. Logically since the expenditure flows from the agreement itself, therefore such expenditure have to be treated as receipts received in lieu of the services itself. If the same had not been given, it would not be incorrect to conclude that there would be no services rendered. Therefore if due to financial relations between the two companies as being holding and subsidiary company, the holding company agreed to reimburse all costs relating to clinical treats, it does not one take away the character of the receipt itself which is for technical services (as per the law dictionary it is described as a charge for labor or services esp. professional services). It is relevant to note that there is no separate agreement between CIPLA and the Malaysian Company. The essential question is what is the services rendered for which income arises for the Malaysian company and whether there was any liability for taxation in India. Once both conditions are satisfied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision of services by technical or other personnel but does not include payments for services mentioned in Articles 14 & 15 of this Convention." There is no dispute that as per the MOU between the parties, the cost of R & D as well as clinical trials undertaken by the assessee and its Malaysian subsidiary was to be borne by Cipla and in turn outcome of the R & D as well as clinical trials will be belonging to Cipla. Thus the outcome product of the R & D as well as clinical trials would not belong to the assessee or its subsidiary but the Cipla had the right over the same. Therefore the Cipla has right to acquire the outcome in the shape of technical information, technology documentation, know how and process involved in all clinical R&D. Though the assessee has reimbursed the expenses to its subsidiary however in case the payment is considered as tax for technical services then the element of profit becomes irrelevant as the gross payment is taxable. The definition of Fees for Technical Services (FTS) of the Indo-Malaysia DTAA provides under Article 13 Clause 3 as under : " Article 13 (3) : The term 'fees for technical services' means payment of any kind in consideration for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A. The findings are as under : "11. We have considered the issue. Keeping in mind the detailed order of the CIT(A), which is extracted above and the provisions of the Income-tax Act read with DTAA with USA and Canada, which are almost similar, we have no reason to differ from the order of the CIT(A). Even though the Assessing Officer considered that the payments were made by way of 'fee for technical services' as per Article 12 of the DTAA, the same is taxable in the source country only if such services make available any technical knowledge, expertise, etc. or there is transfer of technical plan or design. In this case, as rightly considered by the learned CIT(A), Assessee was conducting clinical trials through the CROs in USA to comply with the regulations therein and the CROs who are experts in this field were only conducting studies and submitting the reports in relation thereto. They are neither transfer of technical plan or technical design nor making available of technical knowledge, experience or know-how by the CROs to Assessee company. In fact, Assessee company did not get any benefit out of the said services in USA and assessee was only getting a report in respect of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... details of the analytical methods and procedures employed by the applicant in carrying out the bioequivalence tests. The only doubt cast by c1. 15 of the agreement with 5 is cleared by S's statement that the said clause which was part of standard format was never given effect to. It seems to be inapplicable also having regard to the actual modalities of the transaction as set out in the application. Then agreement with R says that R shall be the owner of the tested samples and test compounds. Further, the applicant will store tested samples and test compounds for three months and make these available to the client at the expiry of that period. Handing over tested samples and test compounds cannot be equated with making technology, knowhow, etc., available* to R. The agreement also states that R shall be the owner of all intellectual property rights resulting from the services. This would mean that, if on the basis of these results, the client is able to acquire patent or other intellectual property rights in respect of new generic drugs developed by it, then the applicant shall not claim any interest whatsoever in such right. It is altogether a different aspect. By agreeing to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts stated, the existence of PE in India cannot be inferred also. It is, therefore, ruled that the fee paid by S and R to the applicant in respect of bioequivalence tests conducted by it is in the nature of 'business profits' under art. 7 and the same is not taxable in India as the applicant does not have a PE situated in this country.-Raymond Ltd. vs. Dy. CIT (2003) 80 IT] (Mumbai) 120 : (2003) 86 ITD 791 (Mumbai), McKinsey & Co. Inc. (Phillippines) & Ors. vs. Asstt. Director of IT (2006) 99 IT] (Mumbai) 857 concurred with; Diamond Services International (P) Ltd. vs. Union of India (2008) 216 CTR (Bom) 120 : (2008) 169 Taxman 201 (Bom) relied on. Conclusion: Applicant, tax resident of Canada, only providing final results to its Indian clients by using highly sophisticated bio-analytical knowhow, without providing any access whatsoever to the clients to such know-how, fee received by it is business income and not fee for technical/included services or royalty and applicant having no PE in India, such income would not be taxable in India by virtue of relevant provisions of DTAA between India and Canada. 12. We agree with the above opinion expressed by the AAR and accord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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