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TMI Blog2019 (5) TMI 1686X X X X Extracts X X X X X X X X Extracts X X X X ..... e for such services cannot be termed as fee for technical services We hold that the assessing officer erred in taxing the service agreement receipt as fee for included services as per Article 12(4) of India USA DTAA for such services as mentioned in para 4 (supra), in absence of clause in the service agreement dated 09.01.2009, that the recipient would be able to perform these services of its own without any further assistance of the assessee. - Decided in favour of assessee Reimbursement of expenses as fee for included services - Revenue receipts - HELD THAT:- The agreement is basically to share the product without paying the royalty but by paying the consideration which occurs only on the use of the product and not otherwise. The assessing officer taxed the said receipt as consideration for the use of process or formula and fall under the definition of royalty. CIT(A) confirmed the action of the assessing officer holding the assessing officer has assigned valid reason while taxing the receipt. AO has not examined the facts as per the reply and the explanation furnished by the assessee. Considering the facts that we have already allowed the Ground No. 2 holding that as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms of the tax treaty between India and USA). 4.The learned CIT(A) erred in confirming the addition made by assessing officer by treating the reimbursements amounting to ₹ 498,576 as 'fees for included services' as per Article 12 of the tax treaty between India and USA. 5.The learned CIT(A) erred in confirming the action of the assessing officer of charging interest under section 234B and 234C of the Act. 2.Brief facts of the case are that the assessee is a company established under the laws of Delaware, USA. The assessee is one of the world leading Business Information in Media Information, Directories Consumer Information. The assessee group is represented in India through its two legal entity i.e. AC Neilson Org-Marg Private Ltd (ACNOM) for customised research services and retails measurement services and Act Neilson Research Private Ltd. (ACNRS). The assessee filed its return of income for Assessment Year 2009-10 on 27.09.2010 declaring income of ₹ 17,75,26,437/-. The assessment was completed on 22.05.2014 under section 143(3) read with section 144C(3) of the Act. During the period relevant to the A.Y. under consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d services as per Article-12 of India-US DTAA, not taxable in India. The Assessing Officer treated the intra-group services as services in the nature of fees for included services (FIS). The ld. AR of the assessee further submits that the services provided by assessee to India Companies as per service agreement consists of; a)Development and determination of short and long term business strategies; b)Overall management and coordination in relation to general policies and strategies per country and he if and per division; c)Maintenance of external relationships, to the extent that these services do not comprise Shareholder Services; d)Human resources services regarding group policies; e)Legal services; f)Insurance services; g)Development, control and maintenance of management information systems; h)Administrative support to group companies, including analysis of management information; i)Development of short and long term IT policies and strategies; j)Management and co-ordination of IT policies between group companies; k)Tax services; l)Financial risk m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the copy of written submissions filed before ld CIT(A). 7.On the other hand, the ld. DR for the revenue supported the order of authorities below. The ld. DR for the revenue further submits that no separate details about the services rendered by assessee, to its group entity, have been provided during the assessment proceeding. The service agreement is a part of main agreement. The assessee has provided dedicated services which are actually in the nature of fees for included services. The receipts are in the nature of FIS as advisory services and also signify fees for included services. In support of his submission, the ld. DR relied upon the decision of Cochin Tribunal in M/s US Technology Resources Pvt. Ltd. vs. ACIT in ITA Nos. 99-104/Coch/2017 dated 29.01.2018. 8.In the rejoinder submissions the ld. AR for the assessee submits that, the case law relied by ld. DR for the revenue is based on the different facts. In the said case the services were provided in the field of management decision making (as recorded in para 22 of the said decision), which is missing the general services agreement of the assessee. 9.We have considered the submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... management support services is in the nature of FIS. The assessing officer also concluded that the advisory services have been used by the Indian entities in the course of their business activities which are utilised for the betterment and improvement of their business model and other practices, which has ultimately reflected in the increase of profitability of Indian entity. The employees of Indian entity are highly qualified and educated. Therefore, the receipt of general service agreement was treated by assessing officer as fee for include services. The assessing officer also relied on the decision of AAR in Perfetti VAN Holding B.V (case No. AAR No.869 of 2010 dated 09.12.2011). 11.Before ld CIT(A) the assessee filed detailed written submissions as made before us. It was also specifically brought to the notice of ld CIT(A) that the decision rendered by AAR in Perfetti VAN Holding B.V (supra) relied by the assessing officer has already been set aside by Delhi High Court, directing AAR to pass the order afresh. The ld CIT(A) confirmed the order of assessing officer without giving any different finding. 12.We have also examined the service agreement date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 4(a) of Article 12 refers to technical or consultancy services that are ancillary and subsidiary to the application or enjoyment of any right, property, or information for which a payment described in paragraph 3(a) or ( b) is received. Thus, paragraph 4(a) includes a technical and consultancy services that are ancillary and subsidiary to the application or enjoyment of an intangible for which a royalty is received under a licence or sale as described in paragraph 3(a), as well as those ancillary and subsidiary to the application or enjoyment of industrial, commercial, or scientific equipment for which a royalty is received under a lease as described in paragraph 3(b). It is understood that, in order for a service fee to be considered ancillary and subsidiary to the application or enjoyment of some right, property, or information for which a payment described in paragraph 3(a) or ( b) is received, the service must be related to the application or enjoyment of the right, property, or information. In addition, the clearly predominant purpose of the arrangement under which the payment of the service fee and such other payments are made must be the application or enjoymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that while undertaking the above services the assessee has not executed any contracted to make available any technical expertise so as to use those services independently by the licensee. All the services under taken by the assessee are either support services, IT enable services, coordination or tax services as referred above are not such which require transfer of technology, skill to the receipt company. 17.The Hon ble Karnataka High Court in CIT Vs De Beers India Minerals (P) Ltd. while considering the similar question of law while considering the provisions of India- Netherland Double Tax avoidance Agreement (India- Netherland DTAA), while considering the facts that where a Netherland Company rendered technical services to the assessee, without making available any technical expertise so as to enable assessee use those services independently in future, payment made for such services cannot be termed as fee for technical services , the relevant part of the decision is extracted below; 13.Under the Act if the consideration paid for rendering technical services constitutes income by way of fees for technical services, it is taxable. However, Article 12 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning of the word 'make available', the said clause has to be applied, and to be read into this agreement also. Therefore, it follows that for attracting the liability to pay tax not only the services should be of technical in nature, but it should be made available to the person receiving the technical services. The technology will be considered 'made available' when the person who received service is enabled to apply the technology. The service provider in order to render technical services uses technical knowledge, experience, skill, know how or processes. To attract the tax liability, that technical knowledge, experience, skill, know how or process which is used by service provider to render technical service should also be made available to the recipient of the services, so that the recipient also acquires technical knowledge, experience, skill, know how or processes so as to render such technical Services. Once all such technology is made available it is open to the recipient of the service to make use of the said technology. The tax is not dependent on the use of the technology by the recipient. The recipient after receiving of technology may use or may no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licence to manufacture and sell products, the licence to use technology, technical marketing and commercial know-how in the manufacture, sales and advertisement and promotion of the products, offer technicians, marketers, salesman, in-house legal counsel and the experienced employees to assist in the activities mentioned above. Under the Service Agreement, specifically the Service recipient require the use of proprietary knowledge and processes belonging to Perfetti Group. Specified services such as Accounting budgeting, sales, marketing, forex management, loans, HR, legal support etc. and specified services are to be provided on continuous basis. Therefore, it was held in the aforesaid case, that the case falls within the purview of Article 12.5(a) of the DTAC on such service which are ancillary and subsidiary to the applicant or enjoyment of right property or information for which the payment prescribed in paragraph 4 of the Article is to be made. Therefore, it is a case of royalty and not fee for technical service. Even otherwise it is clear under the terms of the agreement the technical know-how in the manufacturing, sales, advertisement and promotion of the products is made a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies which continuously upgrade designs, model and other engineering plans and formulae which are used by the applicant for the purpose of its business. The main objective of setting up of an exclusive platform is not for providing information technology but for enabling the applicant to use data in the form of designs, plan, model and engineering formulae etc., in 2D 3D form. The character of the payment is clearly royalty as defined in Article 13(3) of DTAA as well as to Explanation 2 to Section 9(1)(vi) of the Act. The agreement clearly establishes that the applicant as to prepare for the installation at the fixed gateway sites for proper installation of equipment by France telecom. It is to act as bailee of the equipment which is under its control and use for its business. The use of equipment is with the usual condition of warranty and the network could be managed by the applicant. The equipment installed is to be integrated into Areva Net Global Network which is managed and controlled by the French Company for equipment installation at gateway sites in Noida and Chennai constitute PE in India as the equipment has been used by the French Company in the course of its business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra) held that rendition of IT support services to assessee by a Canadian company, even if certain equipment were to be used, that by itself did not vest any right in assessee to use equipment and thus, payments made by assessee could not be viewed as payments for 'use or right to use' any industrial, commercial or scientific equipment. The relevant part of the order is extracted below; 15.We find that so far as taxability under Article 12, i.e. with respect to 'Royalties and fees for included services' is concerned, we find that Article 12(4) provides that, The term fees for technical included services as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through 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, know-how or processes, which enables the person acquiring the services to apply the technolog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, skill, 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 tests of rendering services and making technical knowledge available at the same time is satisfied. 19.Further, the coordinate bench of Pune Tribunal in Sandvik Pty. Ltd Vs DCIT (supra) while considering the provisions of India Australia DTAA held that the assessee had only provided back-up services and IT support services for solving IT related problems to its Indian subsidiary and services were not made available, payment received for such services could not be taxed in India in view of article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me was taxable in the hands of the Netherlands Company. As the wordings of Article 12 in the Indo-Netherlands Treaty are analogous to Article 12 of the India Australia Treaty, as expression 'make available' is also used while determining fiscal jurisdiction of the contracting state, the Hon'ble High Court explained the meaning of the expression 'make available' which was appearing in the Indo-Netherlands Treaty. 20.In view of the above factual and legal discussions, we hold that the assessing officer erred in taxing the service agreement receipt as fee for included services as per Article 12(4) of India USA DTAA for such services as mentioned in para 4 (supra), in absence of clause in the service agreement dated 09.01.2009, that the recipient would be able to perform these services of its own without any further assistance of the assessee. 21.The ratio of decision of Cochin Tribunal in M/s US Technology Resources Pvt. Ltd. vs. ACIT (supra) relied by ld. DR for the revenue is not helpful to the revenue. In the said case the assessee rendering the services in the field of management decision making. Further, in the said case it was clearly he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... element of income. 28.The reply of the assessee was not accepted by the assessing officer holding that non-resident resident company, the service provider has provided services through PWC Consulting to the Indian entity who are service recipient. It was further held by assessing officer that if the expenses were not meet by the service recipient, the expenses would have been met by the service provider and the service provider might have charged the additional amount from the service recipient. Therefore, the assessing officer held that the payment cannot be regarded as reimbursement as the payment is for the use of the product and not for sharing the expenses. The agreement is basically to share the product without paying the royalty but by paying the consideration which occurs only on the use of the product and not otherwise. The assessing officer taxed the said receipt as consideration for the use of process or formula and fall under the definition of royalty. The ld CIT(A) confirmed the action of the assessing officer holding the assessing officer has assigned valid reason while taxing the receipt. We have noted that the assessing officer has not examined the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X
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