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TMI Blog2025 (4) TMI 1131X X X X Extracts X X X X X X X X Extracts X X X X ..... ful exercise of jurisdiction, rendering the assessment proceedings as invalid. 2: That on the facts and in the circumstances of the case and in law, the directions issued by the Learned Dispute Resolution Panel ('Ld. DRP') dated June 14, 2022 and the order dated July 29, 2022 passed by the Learned Assistant Commissioner of Income-tax, Circle International Taxation 1(2)(1), Delhi ('Ld. AO') under section 143(3) r.w.s. 144C of the Act assessing the income of the appellant at INR 7,73,11,738/- is based on assumptions, surmises and conjectures, and has been passed without proper consideration of the factual and legal submissions made by the Appellant During the course of assessment proceedings. 3: On the facts and in the circumstances of the case and in law, the Ld. AO has erred in computing the total income of the Appellant at INR 7,73,11,738 as against Nil return of income filed by the Company. 4: That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in law in holding that service fee accrued to the Company is in the nature of Fee for Technical services and taxable in India. 4.1: That on the facts and in the circumstances of the case and in l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Appellant craves leave to add, alter, amend or withdraw all or any of the Grounds of Appeal and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing. Further, this ground of appeal is independent of the grounds of appeal already filed by the Appellant." 2.2 Before us, the above-mentioned additional grounds have not been pressed; hence, all additional grounds stand dismissed. Grounds numbered 1 and 3, being general in nature, do not require specific adjudication. Ground No. 6, being consequential, also stands dismissed. Ground No. 7 is in respect of initiation of penalty proceedings, which is premature; hence, it is also dismissed. 2.3 Vide ground numbered 5, the appellant assessee has requested for allowance of credit of TDS of INR 8,201,229/-. After hearing both parties, we hereby direct the AO to allow the credit of TDS of INR8,201,229/-as per law (subject to the Rule 37BA of the I. T. Rules read with section 199(1) of the Act) after proper verifications. 2.4 Grounds numbered 2, 4 and 4.1 requiring specific adjudication will be dealt hereinafter. 3. The relevant facts giving rise to this appeal are that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Panel. The AO is directed to make a factual verification of the assessee's contentions in terms of all the extant rules and regulations including the below- - Taxability as per sections 5(2) & 9(1)(iii), - Taxability under the DTAA, article 12(4) of India-USA DTAA, - on issue of Services are not technical in nature, - on issue of Services do not 'make available' any technical knowledge, know- how, skill etc. to the recipient, - the Memorandum of Understanding entered between India and USA, - judicial precedents cited by the assessee, - Circular no. 14 (XL-35) dated 11th April 1955 issued by the Central Board of Direct Taxes By considering the above, the AO is directed to pass a reasoned and speaking order to complete the assessment proceedings. Hence, the grounds of objections in this regard are disposed of accordingly." 3.1 In pursuance of the above directions of the DRP, the AO passed the final assessment order determining income ofINR77,311,738/- as against the income of INR 137,478,148/- as per the draft assessment order. This final assessment order is in appeal before us. 4. The Ld. Counsel submitted that the appellant assessee, a tax- resident of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imited [TS-384-ITAT-2023 (Del.) ii. Bio Rad Laboratories Inc. [TS-1009-ITAT-2022 (Del.) iii. Guy Carpenter & Co. Ltd. [2012] 346 ITR 504 (Del) iv. De Beers India Minerals (P.) Ltd. [2012] 346 ITR 467 (Karnataka) v. Intertek Testing Services India (P.) Ltd. [2008] 307 ITR 418 (AAR) 4.3 The Ld. Counsel further submitted that the appellant assessee provided only general administrative and support services and being holding company of the Crocs India discharged its functions for capacity planning, demand planning, financial planning, analysis and merchandizing. These services provided by the appellant assessee were not in the nature of one-time service where the service provider; i.e. the appellant assessee performed its job and moved away. Here, in this case, the appellant assessee was providing services year after year in continuous manner which got evident from the details mentioned in the agreement dated 1st January, 2009. These services were not taxable in India pursuant to the provision of DTAA which would prevail over the provisions of the domestic tax law of India, to the extent beneficial to the assessee (P.V.A.L. Kulandangan Chettiar [2004] 267 ITR 654). 4.4 The Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l distinguished the case law Foster Wheeler France S.A. [TS 62-ITAT-2016 (Chen.) by submitting that the Foster Wheeler had provided technical& engineering services, whereas the appellant assessee had provided general administrative &support services. The Foster Wheeler was expertise in engineering and construction works. It provided technical and engineering services, whereas the appellant assessee was engaged in Crocs Brand footwear & accessories and providing services of general administrative & support services. The technical knowledge given by the Foster Wheeler could be used subsequently by the recipient, whereas in the case of the appellant assessee, it was not same and thus, exploitable later and further by the Crocs India. Similarly, the case of US technology resources Pvt. Ltd. (TS-511-ITAT-2013) was distinguished by the Ld. Counsel. 4.6 The Ld. Counsel, with the help of following receipts of the assessee from the Crocs India in lieu of services rendered by it, contended that the receipts from Crocs India clearly demonstrated that there was no element of 'make available' clause embedded in the services rendered by the assessee; otherwise the recipient of the services; i.e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising support including service relating to marketing materials, brochures, bids and sales proposals. 2. MIS and accounting support including internal accounting standards and procedures, US GAAP reporting procedures, and formulation of budgetary control systems along with appropriate standard costing procedures. 3. Treasury function support including advice and assistance on financing business operations, credit and collections management, risk and investment management, and treasury and banking management. 4. information technology support including but not limited to systems applications assistance, management information reporting and facilitating and worldwide network connectivity." 5.2. Further the Ld. CIT-DR drew our attention to the reply of appellant assessee before the AO as mentioned on page 21 and 22 of paper book reproduced as below:- "The assessee is a company incorporated under the laws of United States of America (USA) and is a tax resident of USA. Crocs Inc. is engaged in the design, development, marketing, distribution and sale of casual lifestyle footwear and accessories for men, women, and children and also provides support services on need basis to its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsidiary, 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 professional services as defined in Article 15 (Independent Personal Services)." 6. We have heard both parties and have perused the material available on record. We have gone through the above case laws relied upon by both parties. The core issue is that whether the service charges of INR 77,311,738/- received by the appellant assessee is chargeable to tax in India as FTS. Section 5(2) of the Act provides that the income of a non- resident tax payer can be taxed in India if it is received or is deemed to be received in India or accrues or arises in India. Section 9(1)(vii) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed : (a) in the case of royalties within paragraph 3 (a) of this Articles, and fees for technical services within paragraphs 4 (a) and (c) of this Article,- (i) during the first five years for which this Convention has effect ; (aa) 15 per cent of the gross amount of such royalties or fees for technical services when the payer of the royalties or fees for technical services is the Government of the first-mentioned Contracting State or a political sub-division of that State, and (bb) 20 per cent of the gross amount of such royalties or fees for technical services in all other (ii) during subsequent years, 15 per cent of the gross amount of such royalties or fees for technical services; and (b) in the case of royalties within paragraph 3(b) of this Article and fees for technical services defined in paragraph 4(b) of this Article, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the person making the payments or to any individual or partnership for professional services as defined in Article 15 (Independent personal services) of this Convention. 6. The provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 (Business profits) or Article 15 (Independent personal services) of this Convention, as the case may be, shall apply. 7. Royalties and fees for technical services shall be deemed to arise in a Contracting State where the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person payi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included in the definition and are not dealt with in Article 12A (see the examples in paragraphs 87 to 103 below). 62. Article 12A applies only to fees for technical services, and not to all payments for services. Paragraph 3 defines "fees for technical services" as payments for managerial, technical or consultancy services. Given the ordinary meanings of the terms "managerial", "technical" and "consultancy"' the fundamental concept underlying the definition of fees for technical services is that the services must involve the application by the service provider of specialized knowledge, skill or expertise on behalf of a client or the transfer of knowledge, skill or expertise to the client, other than a transfer of information covered by the definition of "royalties" in paragraph 3 of Article 12. Services of a routine nature that do not involve the application of such specialized knowledge, skill or expertise are not within the scope of Article 12A. 63. The ordinary meaning of the term "management" involves the application of knowledge, skill or expertise in the control or administration of the conduct of a commercial enterprise or organization. Thus, if the management of all or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explains the concept of technical services in the following terms (at page 1184):- "IV. Article 12A(3) UN MC 1. The Model a. Rule The term 'fees for technical services' is defined as: - any payment in consideration for - any service of managerial, technical, or consultancy nature, - unless the payment is made: a. to an employee of the person making the payment; b. for teaching in an educational institution or for teaching by an educational institution; or c. by an individual for services for the personal use of an individual. Article 12A(3) UN MC contains the definition of 'fees for technical services'. In so far that the UN MC itself provides an autonomous definition of 'fees for technical services', national law cannot be used for its interpretation (cf. Article 3 (2) UN MC, see supra m.no. 71). In contrast to Article 12(2) OECD MC which refers to the national law for the interpretation of the different terms in the catalogue of the paragraph, the terms 'management', 'technical', and 'consultancy' of Article 12A (3) UN MC have an autonomous meaning in the UN MC. b. Any Payment The term 'payment' has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng contract, there is often the need for further training of the licensee and the employees; this constitutes a service. Similar problems arise with consulting: The service provider does not transmit its special knowledge, skill, and expertise as such but uses them to make statements on customers' issues. These services are dubbed as 'technical' because they relate to the application of IP and not to fundamental research. Furthermore, in the context of Article 12 OECD and UN MC and their catalogue of IP, the term 'technical' must initially be understood in a traditional way such as 'applied and industrial science' or 'engineering sciences." It excludes social sciences, the arts and humanities, and arts and crafts as well as commercial managerial or professional services such as managers, intermediators, lawyers, and doctors. This narrow understanding of a technical nature was not in every country's interest and, therefore, some DTCs explicitly add managerial services, general consulting, or cover services of all kinds. Article 12A UN MC follows this tradition in including services of managerial and consulting services. This raises the issue of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements on the special issues of the customer. The UN MC apparently draws on this understanding as it excludes services of a routine nature (no. 62 UN MC Comm. on Article 12A). Technical services have to be discerned from routine services with a case-by-case analysis. One important aspect is whether the service is individually customized to the specific needs of the customer. A standard scope of services under a standard contract is a strong argument for routine services. Yet, if a service provider determines the need of a customer in-depth and then chooses from several standardized services in order to offer the one that fits best, they cannot qualify as being of a routine nature. Thus, it is not possible to avoid a qualification as a technical service by simply drafting the contract in a standard manner or using standard service elements. The UN Model Commentary provides some examples. The access to a database will, in most cases, be of a routine nature while the creation of a customized database qualifies as technical services (no. 90, 91 UN MC Comm. on Article 12A). Yet, the selective access to some databases according to the established needs of clients is equivalent to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chaic sense as being confined to the traditional sciences. What authorities commend for consideration is an ascertainment of whether the services rendered involved the application of a specialised skill, knowledge or expertise. It is this shift in understanding which has led to the application of specialised knowledge, skill or expertise with respect to any art, science, profession or occupation being recognised as falling within the ambit of the expression "technical" services. Similarly, the word "consultancy" would entail the provision of advice or service of a specialised nature. There could also be the possibility where technical and consultancy services may also overlap or where the nature of service furnished may be discerned as falling under both those heads. 90. We thus broadly concur with the views expressed and noticed above. However, we note that insofar as these appeals are concerned, there appears to be no contestation on the nature of activities which were rendered by IMG and the respondents have not questioned those services falling within the scope of the expression "technical and consultancy services". The principal issue of disputation was whether the "make ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were core work of the assessee. Therefore, the same cannot be termed as ancillary services. 11. In view of the above, we are of the considered opinion that the services rendered by the assessee to the Crocs India are in the nature of FTS. 12. Now the next question arises before us is that whether the 'make available' condition can be said to have been satisfied. Further, FTS with "make available" clause restricts the interpretation of what would fall within the meaning of FTS. It is not just technical knowledge being transferred but also the recipient being able to utilise the same without any assistance from the service provider; i.e. the assessee. Section 90(2) of the Act along with well-settled jurisprudence allows assessee's to take the Act or the DTAA whichever is beneficial to them. In the present case the assessee has preferred DTAA over the Act. Given this background, we now look at Section 9(1)(vii) of the Act and then the DTAA's with the make available clause interpretation of Section 9(1)(vii) of the Act. 13. In Paragraph 4 of the Article 12 of the India-US DTAA: ""fees for included services" means payments of any kind to any person in consideration for the rendering ..... X X X X Extracts X X X X X X X X Extracts X X X X
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