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TMI Blog2023 (6) TMI 176X X X X Extracts X X X X X X X X Extracts X X X X ..... independently of the assessee. The utility of the services available in the form of a report, though highly technical in nature, comes to an end, little thereafter, if not immediately, after its rendition. Support that the Indian entity seeks after the report is delivered is to understand the report from the assessee. Elements necessary for make available is absent in the services rendered by the assessee to its Indian customers/ clients, inasmuch as even for the said reports, the customers have to continuously refer to the assessee and the same is not freely made available to the Indian customers. Thus, technical services rendered by the affiliates do not make available technical knowledge, experience, skill, know-how or process while preparing these reports for their, Indian customers/ clients. In light of the aforementioned judicial decisions, we are of the considered view that the service recipient of the assessee is unable to make use of the said technology only by itself in its business or for its own benefit without recourse to the assessee year after year. Decided in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and section 271F of the Act On the facts and in the circumstances of the case and in law. the learned AO erred in initiating penalty proceedings under section 271(1)(c) and section 271F of the Act. All the above grounds are without prejudice to each other. The Appellant craves for leave to add. amend, vary, omit or substitute or withdraw any of the aforesaid grounds at any time before or at the time of hearing of the matter with the Income Tax Appellate Tribunal. The Appellant prays that appropriate relief be granted based on the said grounds of appeal and the facts and circumstances of the case." 3. Brief facts of the case are as under: The facts and circumstances in all the three assessment years under consideration are identical as submitted by the Ld.AR as well as the Ld.DR. It is also submitted that the issue alleged by the assessee in all the three appeals are on common grounds. For the sake of convenience, we refer to the facts for A.Y. 2013-14 and the decision shall be applied mutatis mutandis to the other two assessment years being 2014-15 & 2017-18. We refer to the facts as narrated in A.Y. 2013-14. 3.1 The assessee is a non-resident incorporated under the laws ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nical laboratory services are not liable to be taxed as FTS in India on account of the beneficial provisions of the Treaty, although such services could be characterized as FTS under the Act. The company submitted that it does not make available any technical knowledge, experience, skill, know-how or processes which enables the person acquiring the services to apply the technology therein. Thus, in absence of 'make available' the services cannot be characterized as FTS under the treaty. The assessee has contended that preclinical laboratory services are not liable to tax as FTS in India on account of beneficial provisions of treaty. However, this contention of the assessee is not acceptable because Charles River Laboratory has provided laboratory services through test reports to various Indian entities, which was disposed of vide speaking order dated 09.03.2022" 3.6 The Ld.AO thereafter noted that as M/s. Syngene International Ltd. did not deduct TDS along with other Indian entities who had made payments to assessee, proceedings u/s. 201 of the act were initiated in case of M/s. Syngene International Ltd. for non-deduction of tax at source on the payments made to assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to derive an enduring benefit and be in a position to utilise the knowledge or know-how in future on his own. In the instant case the Indian entity derive an enduring benefit in the form of research. 11.4.5 In the case of M/s. XYZ Ltd. AAR, New Delhi A.A.R. No. 928 Of 2010, the applicant a tax resident of Hong Kong had provided inspection, verification, testing and certification (IVTC) services to Indian customers and payment received/receivable by applicant in relation to said services would be chargeable to tax in India as 'fees for technical services' under section 9(1)(vii)(b) and liable for deduction of TDS u/s 195. (XYZ Ltd. In re [2012] 348 ITR 20 (AAR-New Delhi) technical services utilized in India. 11.4.6 In view of the facts in above paras, it is clear that, payments received by the assessee for providing laboratory services through test reports are in the nature of fee for technical services as defined U/s 9 (1)(vii) of the Income of the Income Tax Act as well Article 12 of Indo- USA DTAA which is taxable in India. 12. Finding: 12.1 The consideration received by the assessee is towards the testing charges which is technical in nature. It also ensures th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the Ld.AO, the assessee filed objections before the DRP. 4. Before the DRP, it was submitted that CRL Inc has not made available any services to its customers in India in view of the Memorandum of Understanding ("MoU") of Treaty on Article 12. During the DRP proceedings, the assessee, has submitted the sample agreements, invoice copies, TRC and details of income received from various Indian customers. 5. The DRP after considering the submissions of the assessee held as under: "2.2.1 Having considered the submissions, it is noticed from the Draft Asst. Order that the AO has observed that the revenue earned by the assessee falls under the Explanation 2 to section 9(1)(vii) of the Act, wherein FTS is defined as consideration for rendering of any managerial, technical or consultancy services. Further, the AO has given a finding at Para 12.1 of the Draft Order that the consideration received by the assessee is towards testing charges which is technical in nature, that the primary consideration for laboratory services is served by being an ancillary. 2.2.2 The assessee company has, however, submitted that: (i) Preclinical laboratory services rendered does not qualify as Roy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rts contain a factual narration of the test procedure and the result of the test and thus. do not transfer any technology / know-how / knowledge to the customers nor do they grant any right to access/use of the underlying technology used to perform these services. Further, the designing of the test procedures and the equipment and technology used to carry out the test procedures are proprietary to CRL Inc. and are not accessible/ made available to its client. Accordingly. the pre-clinical laboratory services rendered by the Assessee to its customers in India would not be chargeable to tax in India, since the Assessee does not have a PE in India and further such services do not qualify as FIS as per Article 12(4)(b) and the MoU of the Treaty as submitted above. As mentioned above, CRL Inc is a resident of the USA and is eligible for Treaty benefit under section 90 of the Act. Therefore, in order for the preclinical laboratory services to qualify as FIS under the Treaty. it would need to satisfy the requirements outlined in the make available clause. The definition of FIS as per the Treaty is as follows -- "For purposes of this Article, "fees for included services.' means ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddy's Laboratories Ltd. reported in (2013) 35 taxmann.com 339 for A.Ys. 2003-04 and 2004-05 and a subsequent decision reported in (2017) 78 taxmann.com 63 for A.Ys. 2007-08 and 2008-09 wherein the Hon'ble Hyderabad Tribunal has followed the view expressed by the authority of advanced ruling in case of Anapharm Inc. reported in (2008) 174 Taxman 124. Before the Hon'ble Hyderabad Tribunal, the payments made by Dr. Reddy's Laboratories to a similar contract research organisation who was referred to as CRO therein was under consideration. The issue that was considered was whether the payments made by Dr. Reddy's Laboratories to the CRO therein was business profits in the hands of the CRO or if for included services. Hon'ble Hyderabad Tribunal in great detail dealt with the issue by observing 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' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at have gone into it, so as to enable them to carry out those tests themselves in future. A broad description or indication of the type of test carried out to reach this conclusion does not enable the applicant's client to derive requisite knowledge to conduct the tests or to develop the technique by itself. The mere fact that the tests in question are highly technical in nature will not make a difference. In its affidavit the applicant affirms that only final results, conclusion of data of bioequivalence tests are provided to the recipient. Clinical procedure, analytical methods, etc., which are proprietary items of the applicant, have neither been nor will they ever be transferred, assigned or handed over to 5 or any other Indian client. From the perusal of the relevant agreements, no provision is found which Dr.Reddy's Laboratories Limited, Hyderabad would entitle the clients to know the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not paid for that purpose. On the basis of the final report, the pharmaceutical companies will not be able to find out what method, procedure or protocol was used in conducting the tests. Moreover, the test reports are drug specific. Hence the material furnished by the applicant will not in any way help the customers to facilitate further research and development of new drugs as contended by the Revenue. As such, the fees received by the applicant are to be treated as business income and not royalty income. Since the applicant is in the business of providing bio- analytical services to various pharmaceutical companies, the consideration received by it from them would be its business income. In view of art. 7 r/w art. 5, such income can be taxed in India only if the applicant has a PE in this country. The applicant has denied the existence of any PE here and there is nothing on record to indicate Dr.Reddy's Laboratories Limited, Hyderabad anything to the contrary. On the 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 &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business are and shall remain Laboratory's exclusive property, including but not limited to; present and future documentation, scientific and technical data, test procedures and other information that is owned or licensed by Laboratory and that is not developed hereunder. Laboratory shall have the right to use concurrent control data as part of its general historical database. Any data, discoveries or inventions developed or generated pursuant to this Agreement which directly relate to any information or materials provided by Sponsor hereunder, including without limitation new data, uses, processes or compositions directly relating to the information or materials provided hereunder shall be the exclusive property of Sponsor. Laboratory agrees to assist Sponsor in securing for Sponsor any patents, copyrights or other proprietary rights in such data, discoveries or inventions, and to perform all acts that may be reasonably required to vest in Sponsor all right, title and interest in such data, discoveries or inventions, and Laboratory shall be compensated at its standard rates for such assistance. All costs and expenses associated with establishing Sponsor's rights therein s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s held that the applicants had tax presence in India and therefore its Indian customers / clients were required to withhold tax u/s. 195 of the act. Such ruling was given in case of an applicant, a resident of a country with whom India did not have a tax treaty and hence the applicant was not entitled to the benefits u/s. 90(2) of the act. 15.2 In the present facts of the case, the assessee before us is a US entity and there is a DTAA between India and USA. This particular point has been totally missed out by the authorities below while referring to this decision in order to deny the benefit available to the assessee before us. We therefore are of the view that this particular decision of AAR relied by the revenue is distinguishable on facts. 16. Another decision relied by the revenue was in the case of Stempeutics Research Pvt. Ltd. reported in (2016) 75 taxmann.com 240. 16.1 It is a case where the assessee was a Malaysian company who had its research driven company in India with a mandate of R&D and manufacturing of therapeutic products based on stem cells. The assessee before the Tribunal was a Malaysian subsidiary and there is a categorical finding that the outcome product a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating in India would fall within the expression 'fees for technical services' as appearing in article 13(4)(c) of the DTAA read with section 9(1)(vii) of the said Act. 11. The Tribunal also noted the process by which the transaction takes place. It has been pointed out that the originating insurer in India would contact J.B. Bodal M.B. Boda for placing identified risks/class of risks with international reinsurers. J.B. Boda, in turn, would contact one or more international firm(s) of reinsurance broker(s) like the assessee for competitive proposals from the international reinsurer. Then, the international reinsurance brokers like the assessee would contact other primary brokers and various syndicates in the Lloyds market for competitive proposals. Based on the various offers or proposals given by the international reinsurance brokers, like the assessee, to J.B. Boda, the latter would present various options to the originating insurer in India, which would take a final decision in the matter. Based on the decision of the originating insurer in India, the policy terms would then be agreed upon and the risk would be placed with the international reinsurer. It was also pointe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the agreement is inconsistent with the definition of fees for technical services provided in Explanation 2 to Clause (vii) of sub Section (1) of Section 9. In view of Section 90 the definition of fees for technical services contained in the agreement overrides the statutory provisions contained in the Act. In fact, the latest agreement between India end Singapore further clarifies this position, where they have explained the meaning of the word 'make available'. According to the aforesaid definition fees for technical service means payments of any kind to any person in consideration for services of technical nature if such services make available technical knowledge, experience, skill, know how or processes, which enables the person acquiring the service to apply technology contained therein. Though this provision is not contained in India Netherlands Treaty, by virtue of Protocol in the agreement, Clause (iv) (2) reads as under:- "If after the signature of this convention under any Convention or Agreement between India and third State which is a member of the OECD India should limit its taxation at source on dividends, interests, royalties, fees for technical servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is technical knowledge, experience, skill, know how or process to the recipient of the technical service, in view of the Clauses in the DTAA. the liability, to tax is not attracted. 15. The learned Additional Solicitor General relied on 3 Judgments to point out that was the earlier view. Now there is a departure supporting the department. The first Judgment on which reliance is placed is, the Judgment of the Advance Ruling Authority in the case of Perfetti Van Melle Holding B.V., In re [2012] 204 Taxman 166/[2011] 16 taxmann.com 207 (AAR-New Delhi) where it was held as under:- "The expression 'make available' only means that the recipient of the service should be in a position to derive an enduring benefit and be in a position to utilise the knowledge or know-how in future on his own. "By making available the technical skills or know how, the recipient of the same will get equipped with that knowledge or expertise and be able to make use of it in future, independent of the service provider. So when the expertise in running the industry run by the group is provided to the Indian entity in the group to be applied in running the business, the employees of the India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The employees of the Indian Company get equipped to carry on their business, market or service market on their own without reference to the service provider when the service . Agreement comes to an end. It is a case of making available the technical knowledge. The recipient of the service was conveyed specifically the right to continue the practice put into effect and adopt it under the agreement on its expiry. 18. From the aforesaid discussion it is clear that test is whether the recipient of the service is equipped to carry on his business without reference to the service provider. If he is able to carry on his business in future without the technical service of the service provider in respect of services rendered then, it would be said that technical knowledge is made available. 20. In the aforesaid case the business of the applicant being that of executing the projects for transmission and distribution of power on turnkey basis, it is the French Company and other Group Companies 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 edge, 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." 20. Under the India US DTAA, a service would not be FTS unless technical knowledge, experience, skill, know-how or processes is made available to the person making the payment, even where other ingredients are satisfied. Now it has to be seen whether the 'technical services' are made available to Indian customers/ clients. 21. In the instant case, the Indian customers/client ..... X X X X Extracts X X X X X X X X Extracts X X X X
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