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TMI Blog2009 (5) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... ('the Act') on 25.1.2005. It was stated in the application that SREHT was established in the year 1985 and it ran two institutions, namely, Sri Ramachandra Medical College and Research Institute which enjoyed the status of a deemed university, and Sri Ramachandra Hospital, a University hospital. The applicant entered into an agreement with the Harvard Medical International, Massachusetts, USA (HMI), for transfer of knowledge and experience in the field of medical sciences. The applicant stated that it was registered under section 12AA of the Act and HMI was a tax exempt entity in USA. In the light of these facts, the applicant sought ruling of this Authority on the following question: "Whether Tax is to be deducted by SREHT, India on the payments made on account of annual contract fee and additional fee to HMI, USA, when both the parties are exempt from tax in their respective countries." 2. Initially by an order dated 20.2.2006, this Authority rejected the application at the stage of admission having regard to clause(i) of proviso to sub-section(2) of section 245R of the Act. Later, on a petition filed under Rule 19 of AAR (Procedure) Rules, 1996, the application was restor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vered under the head 'Program Deliverables'. This would show that the consideration is paid for making available technical knowledge, experience, skill, know-how or processes to the applicant and the same is covered by article 12(4) of the DTAA. According to Revenue, the examples no. 10 11 of the MOU are not at all applicable in the present case. 5. For giving ruling on the question put forth before us by the applicant, it will first be necessary to ascertain the taxability of the fees being paid to HMI. Section 195 requires that any person who is paying any sum chargeable under the Act, inter alia, to a foreign company, shall at the time of making payment deduct income tax thereon at the applicable rates. It is well settled that taxes are deductible at source from income chargeable under the Act. Where the income is not chargeable to tax, the question of any deduction at source would not arise. 6. We may first look into the contractual arrangement between the applicant and HMI. The two entered into an agreement initially on 11.2.97 for inter-institutional alliance with a validity period upto 31.3.2002. On the expiry of the said agreement, another agreement, namely th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sentative of the applicant and asked him to file additional statement of facts. In response, he filed written submission on 29.12.2008. The written submissions do not give a comprehensive picture and the precise nature of the relevant programmes. Though the agreement contemplates drawing up an annual programme plan it is not clarified whether such plan was actually drawn up and, if so, what are the details thereof. However, a list of activities that took place during 2004-06 in pursuant to the agreement has been given. This list is captioned 'Report of activities of Harvard Liaison Committee'. We observe that the activities that took place during the said period are broadly classifiable into three categories, namely, CME Programmes, Faculty-Student Exchanges and Telemedicine. Under 'CME Programme' the following events took place - * Two day programme titled "Practimed-2004" held on 13 14 March, 2004. This event was organized in association with HMI, New England Journal of Medicine and Association of Physicians of India. * Two day workshop on Leaders in Medical Education (LME) held on 25 26 January, 2005. This was attended by 40 participants from various medical colleges acr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... classified as public charity under section 509(a)(3) of the said Code. We find that HMI is an incorporated entity which has been specifically exempt from tax in USA. As such, it can invoke the provisions of DTAA. Revenue has also not disputed this position. The case of the Revenue is that the income derived by HMI under the contract would attract article 12.4 as it would be in the nature of fees paid for making available technical knowledge, experience, skill, know-how or process. Revenue says that paragraph 5(c) of article would not be attracted, as 'annual alliance development and administrative/maintenance' fee is not purely for teaching in or by an educational institution. 10. ….. 10.1 The relevant provisions of article 12 of DTAA are given below: "ARTICLE 12 - Royalties and fees for included services - 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices (including through the provision of services of 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, or consist of the development and transfer of a technical plan or technical design. 5. Notwithstanding paragraph 4, "fees for included services" does not include amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a) ; (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic ; (c) for teaching in or by educational institutions ; (d) for services for the personal use of the individual or individuals making the payments ; or (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o: Example 10 Facts : An Indian automobile manufacturer decides to expand into the manufacture of helicopters. It sends a group of engineers from its design staff to a course of study conducted by the Massachusetts Institute of Technology (MIT) for two years to study aeronautical engineering. The Indian firms pays tuition fees to MIT on behalf of the firm's employees. Is the tuition fee a fee for an included service within the meaning of Article 12? Analysis : The tuition fee is clearly intended to acquire a technical service for the firm. However, the fee paid is for teaching by an educational institution, and is, therefore, under paragraph 5(c), not an included service. It is irrelevant for this purpose whether MIT conducts the course on its campus or at some other location. Example 11 Facts : As in example 10, the automobile manufacturer wishes to expand into the manufacturer of helicopters. It approaches an Indian university about establishing a course of study in aeronautical engineering. The university contracts with a U.S. helicopter manufacturer to send an engineer to be a visiting professor of aeronautical engineering on its faculty for a year. Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made for them would qualify for exclusion under paragraph 5(c) of article 12. Similarly, the payment made to faculty members for teaching through teleconferencing and other modes of e-learning will also come under paragraph 5(c)of article 12. If the fee paid includes consideration for intellectual property, if any, made available to the applicant, the same is not covered by article 12.5(c). As the applicant makes lump sum payment for various services rendered by HMI, it is not possible for us to say what amount relates to which particular service. On the whole, we would like to observe that the fee paid to HMI at least partly is relatable to the teaching in or by educational institution. 12. In the light of the above discussion, we cannot give ruling that the applicant is not at all liable to deduct any tax at source in respect of the payments made to HMI. It depends on further scrutiny by the appropriate authority in the light of observations made herein. The applicant may make an application to the assessing officer in terms of sub-section (2) of Section 195 of the Act for determination of the appropriate proportion of such payment which would be chargeable to tax. Upon such ..... X X X X Extracts X X X X X X X X Extracts X X X X
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