3. The applicant contends that the services under various contracts except contract no. 5 cannot be brought within the sweep of `royalties’ as defined in Art. XII.3 of the Double Taxation Avoidance Agreement (hereinafter referred to as `DTAA’ or `Treaty’), that there was no permanent establishment in India except in relation to Contract no.6 and that royalty income in respect of the contract no. 5 has to apportioned in such a manner that only income attributable to the Indian operations is taxed in India. Though initially in the application the applicant conceded to pay tax at 15 per cent on the royalty income under Contract no. 5, the above contention was raised drawing support from the decision of the Supreme Court in Ishikawajima – Harima Heavy Industries Ltd. v. DIT [268 ITR 408].
5. First we shall address the question whether the receipts earned by the applicant under various contracts are in the nature of royalties as defined in Art. XII.3 of DTAA between India and Australia. The relevant extracts of para 3 are given below:
“3. The term “royalties” in this Article means payments or credits, whether periodical or not, and however described or computed, to the extent to which they are made as consideration for :
(a) the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trade mark or other like property or right;
(b) the use of, or the right to use, any industrial, commercial or scientific equipment;
(c) the supply of scientific, technical, industrial or commercial knowledge or information;
(d) the rendering of any technical or consultancy services (including those of technical or other personnel) which are ancillary and subsidiary to the application or enjoyment of any such property or right as is mentioned in sub-paragraph (a), or any such equipment as is mentioned in sub-paragraph (b) or any such knowledge or information as is mentioned in sub-paragraph (c);
(e) the use of, or the right to use :
(i) motion picture films;
(ii) films or video tapes for use in connection with television; or
(iii) tapes for use in connection with radio broadcasting;
(f) total or partial forbearance in respect of the use or supply of any property or right referred to in sub-paragraphs (a) to (e); or
(g) the rendering of any services (including those of technical or other personnel), which make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or design; (emphasis supplied).
but that term does not include payments or credits……………….”
5.1. In the DTAA, there is no separate provision dealing with `fee for technical services’, whereas in the Income-tax Act, 1961, income from royalties and fee for technical services are separately dealt with under section 9(1)(vi) and (vii) respectively. Art.XII of the DTAA, is a veritable combination of both royalties and f.t.s. which are treated separately under domestic law. The Income-tax Act defines, `fees for technical services’ as any consideration including lumpsum
consideration for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel). The concept of technical services liable to tax under the DTAA is not as wide as that contained in the corresponding provision in I.T.Act. There are two limbs in clause (g) Art.12.3 of DTAA: (i) rendering of services which make available (emphasis supplied) technical knowledge, experience, skills, know-how or processes, (ii) transfer of a technical plan or design. The question argued before us is whether one of the two limbs of (g) is attracted in the instant case. Of course, attention was focused more on the first part of clause (g). It is well settled that whenever there is conflict between the provision contained in the Treaty and the corresponding provision in the domestic law the provision in the Treaty will prevail unless the domestic law provision is more beneficial to the assessee. This is the specific principle embodied in Section 90(2) of I.T.Act. In the case of UOI vs. Azadi Bachao Andolan*, the legal position in this regard has been stated by the Supreme Court thus:
“A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which they apply, would operate even if inconsistent with the provisions of the Income-tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the Legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections “subject to the provisions” of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income-tax Act in the matter of ascertainment of chargeability to income-tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC.
6. Therefore, we have to consider in the first instance whether irrespective of the wider concept of f.t.s in the domestic law, the definition in clause (g) of Article XII.3 which has been relied upon by both sides covers the facts of the present case. It is clear from a reading of clause (g) that mere rendering of technical services is not sufficient to attract that clause. The services should be such that make available to the recipient of services technical knowledge, skills, know-how, etc. possessed or deployed by the provider of services. The expert knowledge, skills etc. behind the service should be imparted to the other contracting party. The essence of clause (g) is what is compendiously referred to as transfer of technical know-how. A provision similar to clause (g) has been interpreted by this Authority in a recent case of Intertek Services India (P) Ltd. (307 ITR 418) (AAR)
“Rendering of service and making use of service go together. They are two sides of the same coin. But clause (c) of article 13(4)* does not stop at that. It carves out a qualification thereto by employing the words “which make available technical experience, skill, know-how or processes”. Rendering technical or consultancy service is followed by a relative pronoun “which” and it has the effect of qualifying the services. That means, the technical or consultancy service rendered should be of such a nature that “makes available” to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting the technical knowledge, etc., so that the payer of service could derive an enduring benefit and utilize the knowledge or know-how in future on his own without the aid of the service provider. By making available the technical skills or know-how, the recipient of the service will get equipped with that knowledge or expertise and be able to make use of it in future, independent of the service provider. In other words, to fit into the terminology “make available”, the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. The services offered may be the product of intense technological effort and a lot of technical knowledge and experience of the service provider would have gone into it. But that is not enough to fall within the description of services which make available the technical knowledge, etc The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in future without depending on the provider. Taking some examples, the training given to a commercial aircraft pilot or training the staff in particular skills such as software development would fall within the ambit of the said expression in clause (c). Supposing, a prescription and advice is given by the doctor after examining the patient and going through the clinical reports. The service rendered by the doctor cannot be said to have made available to the patient, the knowledge and expertise possessed by the doctor. On the other hand, if the same doctor teaches or trains students on the aspects of diagnosis or techniques of surgery, that will amount to making available the technical knowledge and experience of the doctor. “
6.1. The Authority also referred to the MOU appended to the India-US DTAA which explains the scope of the expression `make available’ in the context of technical services in the following words:
“Generally speaking, 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 may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service, within the meaning of paragraph (4)(b).”
6.2. Viewed from the above angle we do not think that the applicant has made available to ONGC any technical knowledge, experience, skill or know-how possessed by it. The services broadly are:
Review of technical & commercial bid document of proposed Mumbai High North Water Injection-cum- Compression Platform (MNW) project.
Assisting in review of various detailed design/engineering documents and cost optimization during detailed engineering phase of MNW project.
Review the existing design philosophy, study adequacy of existing facilities, conduct study of optimum requirement of additional compression and other facilities.
Undertaking (i) Package 2 (Pre award activities including bid package preparation for Process Platform) of Mumbai High South Redevelopment Scheme. (MSW project) (ii) Package 4 (review of bid package of 5 well platforms) and (iii) Monitoring, vetting & incorporation of Brown-field bid package work (to be carried out by Indian Consultant JBTI) of Mumbai High South Redevelopment Scheme.
Review the documents prepared by Hyundai Heavy Industries (HHI) for design and procurement stage of MHS Process Platform Project (MHS Project).
6.3. By undertaking such services, the applicant no doubt furnished to ONGC valuable information or inputs of technical nature in order to proceed with the work relating to the two projects. The reports/ recommendations furnished by the applicant undoubtedly have a technical content which in turn helped ONGC in many ways. ONGC derived benefit from the use of end-product, namely, reports/ recommendations provided by the applicant. From that it does not follow that technical knowledge of the applicant and the inputs deployed by the applicant for preparing those reports are acquired or applied by the applicant. It cannot be said that the recipient of the service, namely, ONGC will get equipped with the knowledge and expertise of the service provider and be able to make use of it in future, independent of the service provider. It is also relevant to notice that reports are project/contract- specific and can hardly be of any use to the applicant once the particular contract comes to an end. The Revenue’s representative has argued that the `make available’ criterion is satisfied in the instant case for the reason that the review and report would help or assist ONGC to make use of the information while interacting with the bidders and preparing tender documents in so far as the Contract no.(1) is concerned. For the reasons stated supra we cannot accept this argument which proceeds on a misinterpretation of the phrase `make available’. It is not a case where any technology has been made available to ONGC. Though ONGC has benefited by the advisory services rendered by the applicant. A failed attempt was also made by the Departmental Representative to invoke the second link by contending that the work done by the applicant amounts to development of technical plan. It is contended that the expression `technical plan or design’ ought not to be construed in a narrow sense. But it includes the technical data and specifications contained in the report and in respect of Contracts (2), (3) and (5), the work involved modification of designs prepared by third parties. The technical plan or design was transferred to the ONGC after making value additions and imposed from a technical angle, it is contended. However widely the expression `technical plan or design’ is understood, we are unable to hold that in the instant case, any technical plan or design was evolved by the applicant and transferred to ONGC.
6.4. Assuming that the applicant has furnished certain designs in modification of the designs prepared by the third party or the ONGC, the essence of the transaction is not development and transfer of a technical design or plan but consists of rendering services which would technically help the other contracting party, namely, ONGC. In this context, the counsel for the applicant has drawn our attention to clause (v) of the Agreement relating to the ownership and confidentiality clauses contained in clauses (v) and (vi) of the Agreement. The applicant submits that the ownership of all the documents remains with ONGC and that the applicant shall ensure confidential handling of all matters pertaining to plans, policies and other information relating to the project and that the consultants shall not prepare articles or photographs relating to the services and/or the project or facilities or installations. Reliance has been placed on the decision of ITAT Bangalore Bench in the case of ITO vs. De Beers India Minerals (P) Ltd*. In that case the question arose whether the respondent company was liable to deduct tax at source on the payments made to a foreign company for conducting air-borne geo- physical survey and providing report for locating the potentials parts for the exploration of diamonds. The learned members of the Tribunal observed thus:
” `Fugro’ has surveyed, collected and processed the data on behalf of De Beers. There is no doubt that `Fugro’ performed the services using substantial knowledge and expertise but such technical experience, skill or knowledge has not been made available to `De Beers’.”
7.2 Before proceeding further, we may mention that in a recent ruling given in the case of the applicant in AAR No.747 of 2007, this Authority has taken the view while interpreting art.XII.3 of the Treaty that each agreement therein should be separately considered. But, that was in the context of a different provision with different language. Art.XII.4 transposes royalty income into business income in the circumstances stated therein. Art.XII.4 speaks of a situation where a person beneficially entitled to royalties carries on business in the other contracting state (in which the royalties arise) through a PE situated therein and the services are effectively connected with such PE. While interpreting this provision and considering the expression “effectively connected”, this Authority held that the services falling within the scope of each agreement shall be effectively connected to PE which was a fixed place therein and it is not enough that the services in one of the agreements only was connected with the PE. The inter-connection between the royalty generating services in each of the agreements and the PE was stressed. We would like to clarify that the ratio of the said ruling cannot be made applicable to the present case where a different provision and a different issue concerning the existence of PE calls for consideration.
7.3. In order to see whether clause (c) of Art.V.3 applies, the question to be asked and answered is whether the foreign enterprise furnished services in India to the other contracting party i.e. ONGC for an aggregate period of more than 90 days in a span of 12 months. The expression `furnishing of services’ should legitimately include doing activities or operations which are integral or contributory to the provision of services. In fact, there is no dispute on this point. The point of controversy, as already noted, is whether the word `services’ should be confined to a single contract where there is more than one with the same party and the number of days specified in sub-clause (i) of clause (c) should be counted Contract-wise. On the facts of the present case, we do not find any warrant to understand the expression `services’ in such a truncated manner. Firstly, various contracts involving rendering of services in India were with one party, namely, ONGC. Secondly, the contracts related to redevelopment of Bombay High South and North off-shore Oil Fields aimed at stepping up the recovery of oil and gas. The activities in connection with the contracts were to be carried out in and around Mumbai. Moreover, broadly, the nature of work and services are of the same pattern. Thus, from geographical and commercial point of view, the services cannot be dissociated from each other for the purposes of Art.V.3(c). It is reasonable to take the view that the duration of the totality of services furnished under various contracts between the same parties during the 12 month period has to be taken into account. If so, the yardstick of 91 days stands satisfied.
7.4. Now, we will get into some details to identify the particular contracts which give rise to the deemed PE under clause (c) of Art.V.3. Going by the facts and figures furnished by the applicant, we find that during the financial year 2002-03 the applicant’s employees visited India to carry out the activities in connection with Contracts 2,3 and 4 as follows :
Contract No.2 – 39 days (April, May, November and December, 2002)
Contract No.3 – 17 days (May to June 2002)
Contract No.4 – 42 days in 2002-03 (July to Sept., 2002; and March, 2003;
17 days in 2003-04)
Contracts 2,3 and 4 were effective from April 2002 and July 2002 respectively.
Thus, during 2002-03, the total number of days in which the services have been furnished in respect of Contracts 2 to 4 comes to 98 days. We have not taken into account Contract No.6 for the reason that the said contract was effective from July 2003 and the visits were only from August 2003 onwards and they continued upto October 2004. By the effective date of commencement of that Contract, it is fairly clear that the works entrusted under Contracts No.2,3 and 4 were completed and there was no occasion for the applicant’s employees to undertake any activities in Mumbai in the year 2003-04. Thus, even if Contract No.6 is left out, the services furnished under Contracts 2 to 4 by virtue of the visits of the applicant’s employees during the year 2002-03 were for more than 90 days.
7.5. Coming to Contract No.1, it stands on a different footing. The Contract was effective from 12th March 2001. The applicant’s personnel came to India in March and October 2001 for 7 days. The work thereunder was completed and the report submitted by July 2001. By that time, none of the other contracts commenced and it cannot therefore be bracketed with other contracts and be deemed to be a part of the PE.
7.6. Contract No.5 should be left out of consideration because, as admitted by the applicant, it is a clear case of royalty-related services which cannot be brought within the purview of clause (c) of Art.V(3).
7.7. As regards Contract No.6, there is no dispute about the existence of PE in view of the number of days the applicant’s personnel worked in India.
7.8. In the light of the above discussion, a PE must be deemed to be in existence within the meaning of clause (c) of Art.V.(3) of DTAA in so far as Contracts 2 to 4 and 6 are concerned and the business income therefrom will have to be computed in accordance with Art.VII of DTAA. The receipts under Contract No.1 are not taxable at all in view of our finding that during the period of currency of Contract, there was no PE at all.
9. There remains the contention of the applicant that the royalty income arising from Contract No.5 can be subjected to tax only to the extent of income attributable to the operations in India and the principle of apportionment has to be applied. This plea which was not originally raised in the application has been advanced on the strength of the decision of the Supreme Court in Ishikiwajima- Harima Heavy Industries Ltd. vs. DIT* in the rulings given in AAR Nos.747 and 748 of 2007. We have adverted to the same argument and elaborately discussed the ratio and implications of the judgment in Ishikiwajima case and held that if part of the activities and services were rendered in India, the test of territorial nexus is satisfied and the income deemed to arise under section 9(1)(vi) of the IT Act under a single indivisible contract cannot be apportioned in the manner suggested by the applicant. Having regard to the facts relating to Contract No.5, the rulings of this Authority in AAR747 and 748 would apply with equal force. As noticed earlier, the contract “essentially involved the development and transfer of technical plan and design to ONGC for MHS re-development scheme”. It is the specific case of the applicant that in order to execute this contract, its employees were present in India for 22 days in the year 2002-03 for on-the-spot study, reviewing the documents and providing clarifications. The transfer of plan/design indisputably took place in India. Though the bulk of the work connected with preparation of plan/design and study report was done from Australia, there is sufficient territorial nexus with India and the profits derived from this contract are liable to be taxed under Section 5(2) read with section 9(1)(vi) of the IT Act on gross basis at 15%. It is not permissible to split up such royalty income by allocating part of it to the work done in Australia.
10. In the result, the questions are answered as follows:-
Question Nos.1 to 4
(a) The answer is in the affirmative. The amounts received by the applicant under Contract Nos. 1,2,3 and 4 are not in the nature of royalties;
(b) At the time when Contract No.1 was entered into and implemented, the applicant did not have a PE in India. However, as regards the other three Contracts (no. 2, 3 & 4) as well as Contract No.6, PE must be deemed to exist in view of para 3(c) of Art.V of DTAA.
(c) Receipts under Contracts 2,3 and 4 are liable to be taxed as business income under the Income-tax Act but only to the extent attributable to PE and in accordance with Art.VII.
Question No. 5
(a) The amount received under Contract No.5 is royalty income.
(b) The existence or otherwise of PE is irrelevant especially in view of the fact that the applicant has not invoked para 4 of Art.XII.
(c) Answer is in the affirmative. The applicant is liable to be charged on royalty income on gross basis at the rate of 15%.
Question No. 6
All the answers are in the affirmative. That means the receipts are not in the nature of royalties, the applicant has a PE in India in respect of Contract No.6 and thirdly only so much of receipts as are attributable to the PE are taxable in India as business profits.