Case Law Details
IN THE ITAT AHMEDABAD BENCH ‘C’
Sintex Industries Ltd.
Versus
Assistant Director of International Tax
IT APPEAL NOS. 2021 (AHD.) OF 2009 & 639 (AHD.) OF 2010
[ASSESSMENT YEARS 2009-10 & 2010-11]
JANUARY 18, 2013
ORDER
A.K. Garodia, Accountant Member – Both these appeals are filed by the assessee which are directed against two separate orders of Ld. CIT(A) Gandhinagar dated 30.03.2009 for the assessment year 2009-10 and dated 30.11.2009 for the assessment year 2010-11. Since the issue involved is similar in both these years, both these appeals were heard together and are being disposed of by way of this common order for the sake of convenience.
2. First, we take up the appeal of the assessee for the assessment year 2009-10 in I.T.A. No. 2021/Ahd/2009. The grounds raised by the assessee in this year are as under:
“The appellant being dissatisfied with the order passed by the learned Commissioner of Income- Tax (Appeal), Gandhinagar prefers an appeal against the same on the following amongst other grounds, which are without prejudice to each other.
1. The order passed by the learned Commissioner of Income Tax (Appeals) is erroneous and contrary to the provisions of law and facts and therefore requires to be suitably modified.
2. Based on the facts of the case the appellant is not required to deduct tax at source u/s. 195 in respect of the payment made to Texoplas Limited.
3. The Learned CIT(A) has erred in holding that concerned payment, to be made to Texoplas Limited (UK), is covered by the definition of the term “Fees for technical Services” under Article 13 of India-UK DTAA and hence is taxable in India and accordingly tax is required to be deducted at source u/s 195 of the Act.
3.1 Learned CIT(A) has erred in fact and in law in not appreciating that the consultancy services has to have the technical element in order to be classified as ‘fees for technical services’ within clause (c) of Article 13(4) of India – UK DTAA.
3.2 Learned CIT(A) has erred in not appreciating that the definition of ‘fees for technical services’ would cover only those services which make available the knowledge of technical element to the recipient of the services.
4. Based on the facts of the case, Texoplas Limited does not have permanent establishment in India and hence the said income of Texoplas Limited shall not be taxable in India as per Article 7 of DTAA between India-UK.
5. It is submitted that, consequential to holding that no tax is required to be deducted at source, learned ADIT be directed to refund the tax paid by the appellant.
Your appellant prays for leave to add to alter and/or to amend any of the grounds before the final hearing of the appeal.”
3. Brief facts till the stage of filing of appeal by the assessee for the assessment year 2009-10 are noted by Ld. CIT(A) in paras 2 & 3 of his order and for the sake of ready reference, these paras of the order of Ld. CIT(A) are reproduced below:
“2. It was found that the assessee has mentioned section 246A under which the appeal has been preferred. Consequent to queries raised, the Authorised Representative stated that the section has been wrongly mentioned; the same should have been u/s. 248 and expressed regrets for the error. The present appeal squarely falls within the purview of section 248, as it was appellant’s responsibility to bear the liability of TDS and after deduction of such a tax, an application has been made to the Assessing Officer for non-deduction u/s. 195(2), which stands rejected. The appellant is in appeal against that rejection. Since the wrong mention of the section as 246A instead of 248 cannot be treated as a fatal action to deprive the appellant’s right of appeal, otherwise provided in the Act, the appeal stands admitted and is being treated as an appeal u/s. 248.
3. The appellant has framed its case through 5 grounds of appeal but the effective ground is primarily one only, namely the payments made by the appellant to M/s. Texoplas Ltd., U.K. for providing details of fabric designs is not taxable and hence no TDS should have been deducted. The various grounds are the limbs of the assessee’s arguments:”
4. Further facts are noted by Ld. CIT(A) in para 5 of his order which is also reproduced below:
“5. Apparently, similar arguments had been made before the Assessing Officer also, as per the copy of the letter dated 01/08/2008 addressed to him, filed during the appellate proceedings. The stand of the Assessing Officer is that the services rendered by M/s. Texoplas Ltd. get covered by the definition of fee for technical services as per Explanation (2) to section 9(1). As per him since section 9(l)(vii)(b) r.w. Explanation 2 would lead to the conclusion that the services rendered by M/s. Texoplas Ltd. were in the nature of consultancy and were used by a resident for the purpose of business, the income shall be deemed to have accrued in India. Consequently, provisions of section 195 for the TDS purposes shall be applicable. Further, reacting to the appellant’s reference to the aspect of Taxability under Indo-UK DTAA and the interpretation to be drawn from Indo-US DTAA alongwith the MOU signed by the two Governments, the Assessing Officer held that MOU to the Indo US tax Treaty shall not be applicable to the Indo-UK tax Treaty. He further held that the interpretation of Article 13 of Indo-UK tax Treaty is amenable to the interpretation that the experience and skills of the employees of M/s. Texoplas Ltd. is being made available to the appellant and hence services rendered are consultancy services and the payment can be termed as “fee for technical services”. Thereby he rejected the appellant’s contention for non-deduction of tax on the remittance to M/s. Texoplas Ltd.”
5. Being aggrieved, the assessee carried the matter in appeal before Ld. CIT(A) but without success and now, the assessee is in further appeal before us.
6. A copy of the agreement with M/s. Texoplas Limited is placed at paras 8-26 of the paper book and in particular our attention was drawn to pages 3.02 and 3.03 of this agreement which are available on page 14 of the paper book. It was submitted that para 3.02 of the agreement provides responsibility of the consultancy firm M/s. Texoplas Limited and responsibility of the assessee for taxes in connection with admissibility of the appeal of the assessee as per the provisions of Section 248 of the Income tax Act, 1961.
7. As against this, it was submitted by the Ld. D.R. that the appeal of the assessee is not maintainable u/s 248 since assessee is not required to bear the tax as per the agreement.
8. In the rejoinder, it was submitted by the Ld. A.R. that Ld. CIT(A) has already admitted the appeal u/s 248 and the revenue is not in appeal against this admission of appeal by Ld. CIT(A) and hence, this issue cannot be raised now by the Ld. D.R.
9. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. For the sake of ready reference, we reproduce below the relevant paras no.3.02 and 3.03 of the agreement which are available on page 14 of the paper book.
“3.02 Responsibility of CONSULTANT for Taxes.
Any taxes, duties or other governmental charges due (directly or indirectly) by CONSULTANT in connection with the receipt of the compensation shall be the exclusive responsibility of CONSULTANT without any right of reimbursement from CLIENT for such taxes, duties or other governmental charges.
3.03 Responsibility of CLIENT for Taxes
Any taxes, duties or other governmental charges due (directly or indirectly) by CLIENT in connection with the payment of the compensation shall be the exclusive responsibility of CLIENT without any right of reimbursement from CONSULTANT, or deduction from the FEE to CONSULTANT.”
10. We also reproduce the provisions of Section 248 of the Income tax Act, 1961, which are as under:
“Where under an agreement or other arrangement, the tax deductible on any income, other than interest, under section 195 is to be borne by the person by whom the income is payable, and such person having paid such tax to the credit of the Central Government, claims that no tax was required to be deducted on such income, he may appeal to the Commissioner (Appeals) for a declaration that no tax was deductible on such income.”
11. From the above provisions of Section 248 of the Income tax Act, 1961 and from the relevant para of the agreement, it comes out that if it is found that if the payer is to bear the tax and if he has made payment of tax and if he claims that no tax is required to be deducted, he may appeal to Ld. CIT(A) for a declaration that no tax is deductible on such income. In view of this fact that the appeal was already admitted by Ld. CIT(A) u/s 248 and the revenue is not in appeal against this order of Ld. CIT(A) regarding admission of appeal u/s 248, we are of the considered opinion that the question raised by the Ld. D.R. of the revenue regarding admissibility of appeal u/s 248 of the Income tax Act, 1961, cannot be raised in the present case because the decision is already taken by Ld. CIT(A) for admission of appeal u/s 248 and the revenue is not in appeal before us on this issue and even no cross objection is filed by the revenue and hence, this objection raised by the Ld. D.R. cannot be even considered in the present case and hence, we reject the same.
12. On merit, regarding the requirement of deduction of tax u/s 195, it was submitted by the Ld. A.R. that obligation of consultant i.e. M/s. Taxoplas Ltd. are contained in para 2.02 of the agreement which is available on page 13 of the paper book and the relevant DTAA between India and UK is available on pages 27-47 of the paper book and the relevant Article is Article 13 in respect of royalty and fees for technical services, which is also available on pages 37-39 of the paper book. He also submitted that DTAA between India and USA is available on pages 48-69 of the paper book and the MOU on meaning of term ‘fees for included services’ under India – US DTAA is available on page 70 of the paper book. He pointed out that as per this MOU between India and USA in respect of fees for included services which is pari materia to FTS, it is required that it shall make available technical knowledge, experience, skill, know how and process and consists of development and transfer of a technical plan and technical design. He placed reliance on the following judicial pronouncements:
(a) Dy. DIT v. Preroy A.G. [2010] 39 SOT 187 (Mum.)
(b) R.R. Donnelley India Outsource (P.) Ltd., In re [2011] 335 ITR 122
(c) CIT v. De Beers India Minerals (P.) Ltd. [2012] 346 ITR 467
(d) DIT v. Guy Carpenter &Co. Ltd. [2012] 207 Taxman 121
13. He further submitted that since in the present case, there is no technical expertise made available to the assessee by the consultant, the payment by the assessee to the consultant cannot be considered as FTS and it cannot be added into income of the consultant i.e. M/s. Texoplas Ltd. and, therefore, no TDS is deductible by the assessee from this payment.
14. As against this, the Ld. D.R. supported the orders of authorities below. It was submitted by him that for the purpose of interpreting India UK DTAA, reliance cannot be placed on the MOU entered between India and US. Regarding the argument that the services rendered are technical services and it does not make available technical knowledge, experience, skill, know how or process, it was submitted that the services rendered by this party i.e. the consultant, is of technical nature in the area of services provider expertise and it has made available all fabric designs to the assessee. Reliance was also placed by him on the following judgments:-
(a) DIT v. Rio Tinto Technical Services [2012] 17 taxmann.com 70
(b) Organisation Development Pte. Ltd. v. Dy. DIT 50 SOT 421 (Chennai)
(c) Shell India Markets (P.) Ltd., In re [2012] 18 taxmann.com 46
15. In the rejoinder, it was submitted by the Ld. A.R. that these judgments cited by the Ld. D.R. are not applicable in the facts of the present case.
16. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. First, we reproduce para 2.02 of the agreement which contains the obligations of the consultant:
“2.02 Obligations of Consultant
In its capacity as a CONSULTANT for SERVICES to CLIENT CONSULTANT shall, from and after the effective date hereof, either directly or through CONSULTANT’S AFFILIATES, furnish to CLIENT the following services:
(a) Look out in the market to forecast and evaluate new trends with regard to fabric designs for cotton shirting especially in the trend setting markets Italy, France and United Kingdom and give feed back to CLIENT;
(b) Consult and visit designers, design-studios, fashion trend setters to evaluate trends and needs with regard to fabric designs for cotton shirting in trend setting countries like Italy, France and United Kingdom and give feed back to CLIENT;
(c) Visit fashion and textile fairs as well as fashion and textile trade – shows in trend setting countries like Italy, France and United Kingdom to evaluate new trends in fabric design and give feed back to CLIENT;
(d) Visit fashion shows in Milan, Rome, Paris and London to evaluate new trends in fabric design-and give feed back to CLIENT;
(e) Quarterly deliver 9000 fabric designs for cotton shirting to CLIENT according to the terms and conditions specified in Exhibit “C”;
(f) Provide detailed quarterly progress report in writing to the client along with, proof of the new designs developed by CONSULTANT;
(g) CONSULTANT will show and/or make available documents and reports in respect of the transactions relating to this AGREEMENT;
(h) Carry out further tasks pursuant to clause 2.02 (a) – (g) as mutually agreed in writing by CONSULTANT and CLIENT from time to time.
17. The relevant article is Artilce13 of DTAA between India and UK available on pages 37-39 of the paper book, which is also reproduced below:-
ARTICLE 13 – Royalties and fees for technical services –
1. Royalties and fees for technical 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 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; (ad) 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 cases; and
(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, 10 per cent of the gross amount of such royalties and fees for technical services.
3. For the purposes of this Article, the term “royalties” means :
(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematography films or work on films, tape or other means of reproduction for user in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and
(b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic.
4. For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term “fees for technical services” means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which :
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received; or
(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received ; or
(c) 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. The definition of fees for technical services in paragraph 4 of this Article shall 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 property described in paragraph 3(a) of this Article;
(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 private use of the individual or individuals making the payment; or
(e) to an employee of 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 paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the obligation to make payments was incurred and the payments are borned by that permanent establishment or fixed base then the royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.
8. Where, owing to a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services paid exceeds for whatever reason the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Convention.
9. The provisions of this Article shall not apply if it was the main purposes or one of the main purposes of any person concerned with the creation or assignment of the rights in respect of which the royalties or fees for technical services are paid to take advantage of this Article by means of that creation or assignment.”
18. It was also argued that MOU in respect of India and US DTAA is also relevant for the purpose of understanding the meaning of term ‘fee for technical services’. In India US DTAA, article 12 is the Article in respect of royalty and fee for included services. The contents of this MOU are available on pages 72-78, which are also reproduced below for the sake of ready reference:
“May 15, 1989 U.S. – INDIA TAX TREATY
Memorandum of understanding concerning fees for included services in Article 12
Paragraph 4 (in general)
This memorandum describes in some detail the category of services defined in paragraph 4 of Article 12 (Royalties and Fees for Included Services). It also provides examples of services intended to be covered within the definition of included services and those intended to be excluded, either because they do not satisfy the tests of paragraph 4, or because, notwithstanding the fact that they meet the tests of paragraph 4, they are dealt with under paragraph 5. The examples in either case are not intended as an exhaustive list but rather as illustrating a few typical cases. For case of understanding, the example in this memorandum described U.S. persons providing services to Indian persons, but the rules of Article 12 are reciprocal in application.
Article 12 includes only certain technical and consultancy services. But technical services, we mean in this context services requiring expertise in a technology. By consultancy services, we mean in this context advisory services. The categories of technical and consultancy services are to some extent overlapping because a consultancy service could also be a technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in a technology is required to perform it.
Under paragraph 4, technical and consultancy services are considered included services only to the following extent: (/) as described in paragraph 4(a), if they are ancillary and subsidiary to the application or enjoyment of a right, property or information for which are royalty payment is made; or (2) as described in paragraph 4(b), if they make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. Thus, under paragraph 4(b), consultancy services which are not of a technical nature cannot be included services.
Paragraph 4(a)
Paragraph 4(d) 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(o), 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 enjoyment of the right, property, or information described in paragraph 3. The question of whether the service is related to the application or enjoyment of right, property, or information described in 73 paragraph 3 and whether the clearly predominant purpose of the arrangement is such application or enjoyment must be determined by reference to the facts and circumstances of each case. Factors which may be relevant to such determination (although not necessarily controlling) include :
1. The extent to which the services in question facilitate the effective application or enjoyment of the right, property, or information described in paragraph 3 ;
2. The extent to which such services are customarily provided in the ordinary course of business arrangements involving royalties described in paragraph 3 ; J. Whether the amount paid for the services (or which would be paid by parties operating at arm’s length) is an insubstantial portion of the combined payments for the services and the right, property, or information described in paragraph 3 ;
4. Whether the payment made for the services and the royalty described in paragraph 3 are made under a single contract (or a set of related contracts); and
5. Whether the person performing the services is the same person as, or a related person to, the person receiving the royalties described in paragraph 3 [for this purpose, persons are considered related if their relationship is described in Article 9 (Associated Enterprises) or if the person providing the service is doing so in connection with an overall arrangement which includes the payer and recipient of the royalties]. To the extent that services are not considered ancillary and subsidiary to the application or enjoyment of some right, property, or information for which a royalty payment under paragraph 3 is made, such services shall be considered “included services” only to the extent that they are described in paragraph 4(Z). Example 1 Facts :
A U.S. manufacturer grants rights to an Indian company to use manufacturing processes in which the transferor has exclusive rights by virtue of process, patents or the protection otherwise extended by law to the owner of a process. As part of the contractual arrangement, the U.S. manufacturer agrees to provide certain consultancy services to the Indian company in order to improve the effectiveness of the latter’s use of the processes. Such services include, for example, the provision of information and advice on sources of supply for materials needed in the manufacturing process, and on the development of sales and service literature for the manufactured product. The payment allocable to such services do not form a substantial part of the total consideration payable under the contractual arrangement. Are the payments for these services fees for “included services”?
Analysis: The payments are fees for included services. The services described in this example are ancillary and subsidiary to the use of manufacturing process protected by law as described in paragraph 3(a) of Article 12 because the services are related to the application or enjoyment of the intangible and the granting of the right to use the intangible as the clearly predominant purpose of the arrangement. Because the services are ancillary and subsidiary to the use of the manufacturing process, the fees for these services are considered for included services under paragraph 4(a) of Article 12, regardless of whether the services are described in paragraph 4(6).
Example 2
Facts:
An Indian manufacturing company produces a product that must be manufactured under sterile conditions using machinery that must be kept completely free of bacterial or other harmful deposits. A U.S. company has developed a special cleaning process for removing such deposits from that type of machinery. The U.S. company enters in to a contract with the Indian company under which the former will clean the latter’s machinery on a regular basis. As part of the arrangement, the U.S. company leases to the Indian company a piece of equipment which allows the Indian company to measure the level of bacterial deposits on its machinery in order for it to known when cleaning is required. Are the payments for the services fees for included services ?
Analysis:
In this example, the provision of cleaning services by the U.S. company and the rental of the monitoring equipment are related to each other. However, the clearly predominant purpose of the arrangement is the provision of cleaning services. Thus, although the cleaning services might be considered technical services, they are not “ancillary and subsidiary” to the rental of the monitoring equipment. Accordingly, the cleaning services are not “included services” within the meaning of paragraph 4(a).
Paragraph 4(b)
Paragraph 4(b) of Article 12 refers to technical or consultancy services that make available to the person acquiring the services, technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plant or technical design to such person. (For this purpose, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person). This category is narrower than the category described in paragraph 4(a) because it excludes any service that does not make technology available to the person acquiring the service. 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(6). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. Typical categories of services that generally involve either the development and transfer of technical plants or technical designs, or making technology available as described in paragraph 4(6), include ;
1. Engineering services (including the sub-categories of bio-engineering and aeronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical, and industrial engineering) ;
2. Architectural services; and 3. Computer software development. Under paragraph 4(6), technical and consultancy services could make technology available in a variety of settings, activities and industries. Such services may, for examples, relate to any of the following areas :
1. Bio-technical services ;
2. Food processing ;
3. Environmental and ecological services ;
4. Communication through satellite or otherwise ;
5. Energy conservation ;
6. Exploration or exploitation of mineral oil or natural gas ;
7. Geological surveys ;
8. Scientific services ; and
9. Technical training.
The following examples indicate the scope of the conditions in paragraph 4(6) :
Example 3
Facts:
A U.S. manufacturer has experience in the use of a process for manufacturing wallboard for interior walls of houses which is more durable than the standard products of its type. An Indian builder wishes to produce this product for its own use. It rents a plant and contracts with the U.S. company to send experts to India to show engineers in the Indian company how to produce the extra-strong wallboard. The U.S. contractors work with the technicians in the Indian firm for a few months. Are the payments to the U.S. firm considered to be payments for “included services” ?
Analysis:
The payments would be fees for included services. The services are of a technical or consultancy nature; in the example, they have elements of both types of services. The services make available to the Indian company technical knowledge, skill and processes.
Example 4
Facts :
A U.S. manufacturer operates a wallboard fabrication plant outside India. An Indian builder hires the U.S. company to produce wallboard at that plant for a fee. The Indian company provides the raw materials, and the U.S. manufacturer fabricates the wallboard in its plant, using advanced technology. Are the fees in this example payments for included services ?
Analysis:
The fees would not be for included services. Although the U.S. company is clearly performing a technical service, no technical knowledge, skill, etc., are made available to the Indian company, nor is there any development and transfer of a technical plant or design. The JJ.S v company is merely performing a contract manufacturing service.
Example 5 Facts :
An Indian firm owns inventory control software for use in its chain of retail outlets throughout India. It expands its sales operation by employing a team of travelling salesmen to travel around the countryside selling the company’s wares. The company wants to modify its software to permit the salesmen to assess the company’s central computers for information on what products are available in inventory and when they can be delivered. The Indian firm hires a U.S. computer programming firm to modify its 76 software for this purpose. Are the fees which the Indian firm pays treated as fees for included services ?
Analysis:
The fees are for included services. The U.S. company clearly performs a technical service for the Indian company, and it transfers to the Indian company the technical plan (i.e., the computer programme) which it has developed.
Example 6 Facts :
An Indian vegetable oil manufacturing company wants to produce a cholesterol-free oil from a plant which produces oil normally containing cholesterol. An American company has developed a process for refining the cholesterol out of the oil. The Indian company contracts with the U.S. company to modify the formulas which it uses so as to eliminate the cholesterol, and to train the employees of the Indian company in applying the new formulas. Are the fees paid by the Indian company for included services ?
Analysis:
The fees are for included services. The services are technical, and the technical knowledge is made available to the Indian company.
Example 7 Facts:
The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol-free oil and wishes to market the product world wide. It hires an American marketing consulting firm to do a computer simulation of the world market for such oil and to adverse it on marketing strategies. Are the fees paid to the U.S. company for included services ?
Analysis:
The fees would not be for included services. The American company is providing a consultancy service which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc., nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. The fact that technical skills were required by the performer of the service in order to perform the commercial information service does not make the service a technical service within the meaning of paragraph 4(b).
Paragraph 5
Paragraph 5 of Article 12 describes several categories of services which are not intended to be treated as included services even if they satisfy the tests of paragraph 4. Setforth below are examples of cases where fees would be included under paragraph 4, but are excluded because of the conditions of paragraph 5.
Example 8 Facts :
An Indian company purchases a computer from a U.S. computer manufacturer. As part of the purchase agreement, the manufacturer agrees to assist the Indian company in setting up the computer and installing the operating system, and to ensure that the staff of the 77 Indian company is able to operate the computer. Also, as part of the purchase agreement, the seller agrees to provide, for a period often years, any updates to the operating system and any training necessary to apply the update. Both of these service elements to the contract would qualify under paragraph 4(6) as an included service. Would either or both be excluded from the category of included services, under paragraph 5(a), because they are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of the computer ?
Analysis:
The installation assistance and initial training are ancillary and subsidiary to the sale of the computer, and they are also inextricably and essentially linked to the sale. The computer would be of little value to the Indian purchaser without these services, which are most readily and usefully provided by the seller. The fees for installation assistance and initial training, therefore/are not fees for included services, since these services are not the predominant purpose of the arrangement. The services of updating the operating system and providing associated necessary training may well be ancillary and subsidiary to the sale of the computer, but they are not inextricably and essentially linked to the sale. Without the upgrades, the computer will continue to operate as it did when purchased, and will continue to accomplish the same functions. Acquiring the updates cannot, therefore, be said to be inextricably and essentially linked to the sale of the computer.
Example 9 – Facts :
An Indian hospital purchases an X-ray machine from a U.S. manufacturer. As part-of the purchase agreement, the manufacturer agrees to install the machine, to perform an initial inspection of the machine in India, to train hospital staff in the use of the machine, and to service the machine periodically during the usual warranty period (2 years). Under an optional service contract purchased by the hospital, the manufacturer also agrees to perform certain other services throughout the life of the machine, including periodic inspections and repair services, advising the hospital about developments in X-ray film or techniques which could improve the effectiveness of the machine, and training hospital staff in the application of those new developments. The cost of the initial installation, inspection, training and warranty service is relatively minor as compared with the cost of the X-ray machine. Is any of the services described here ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of the X-ray machine ?
Analysis :
The initial installation, inspection, and training services in India and the periodic service during the warranty period are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of the X-ray machine because the usefulness of the machine to the hospital depends on the service, the manufacturer has full responsibility during this period and this cost of the services is a relatively minor component of the contract. Therefore, under paragraph 5(a) these fees are not fees for included services, regardless of whether they otherwise would fall within paragraph 4(b).
Neither the post-warranty period inspection and repair services, nor the advisory and training services relating to new developments are “inextricably and essentially linked” to 78 the initial purchase of the X-ray machine. Accordingly, fees for these services may be treated as fees for included services if they meet the tests of paragraph 4(b).
Example 10
Facts:
An Indian automobile manufacturer decides to expand into the manufacturer of helicopters. It sends a group of engineers from its design staff to a course of study conducted by the Massachusetts Institutes 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. Are the amounts paid by the university for these teaching services fees for included services ?
Analysis:
The fees are for teaching in an educational institution. As such, pursuant to paragraph 5(c), they are not fees for included services.
Example 12
Facts:
An Indian wishes to install a computerized system in his home to control lighting, heating and air-conditioning, a stereo sound system and a burglar and firm alarm system. He hires an American electrical engineering firm to design the necessary wiring system, adapt standard software, and provide instructions for installations. Are the fees paid to the American firm by the Indian individual fees for included services ?
Analysis:
The services in respect of which the fees are paid are of the type which would generally be treated as fees for included services under paragraph 4(b). However, because the services are for the personal use of the individual making the payment, under paragraph 5(d) the payments would not be fees for included services.”
18. As per the obligation of the consultant, which is Texoplast Ltd. in the present case, this party is required to deliver 9,000 fabric designs for cotton shirting to the assessee every quarter. The consultant is also required to show and/or make available all documents/reports in respect of the transaction relating to this agreement and to provide detailed quantity report in writing to the client i.e. the assessee, along with specific/new design developed by the consultant. The compensation is payable by the assessee to the consultant @ US$22 for each design supplied by the consultant. As per clause 5.5, on expiry or termination of this agreement, the consultant is required to return all the documents and other internal document of the client but there is no clause in the agreement to say that the client i.e. the assessee is required to return the design supplied by the consultant. Hence, it is apparent that the design supplied by the consultant to the assessee becomes the property of the assessee and it can be used by the assessee for its own business and it can also be sold by the assessee to any outsider for consideration. Now, in the light of these facts, we examine the applicability of the India UK treaty first. As per Article 13 of India UK treaty, clause (c) of sub article 4, FTS may make available the technical knowledge, experience, skill, know how or processes, or consist of the development and transfer of a technical plan or technical design. In the facts of the present case, the consultant i.e. Texoplast Ld. is required to transfer the fabric design to the assessee and those fabric designs are to be developed by the consultant i.e. Texoplast Ltd. and this party is also required to provide detailed quantity progress report in writing to the assessee along with specific or new design developed by the consultant. In our considered opinion, the services rendered by the consultant to the assessee company are falling within this Article 13(4)(c) of India UK DTAA and, therefore, it is FTS.
19. Now, we examine the MOU between India and US. As per this MOU, regarding para 4(b) of Article 12 of India US DTAA, it was provided that there will be no FTS if technology is not made available to the person acquiring the services. It was also specified that technology will be considered “made available” when the person acquiring the services is enabled to apply the technology. In the present case, fabric design is made available to the assessee and the assessee can apply such fabric design to process and produce garments and it can also sell and transfer such fabric design to outsider for consideration and there is no restriction on the assessee in this regard in the agreement between the assessee and the consultant. Considering all these facts and even after considering MOU between India and US, we are of the considered opinion that the services received by the assessee and provided by the consultant i.e. Texoplast Ltd. is nothing but FTS and hence, tax is deductible by the assessee from the payments made by the assessee, to the consultant M/s. Texoplast Ltd.
20. Now, we discuss the applicability of the various judgments cited by the Ld. A.R. Most of the judgments are in respect on this aspect that MOU between India and US should also be considered. We have already considered the MOU between India and US and hence, these judgments are no more relevant for the issue in dispute. Regarding other judgments cited by the Ld. A.R., we find that the same are not applicable in the present case because the facts are different. In the case De Beers India Minerals (P.) Ltd. (supra), it was held that this is not the case of FTS because in that case, it was found that the Dutch company performed services using technical knowledge and expertise and it had given data for the job to the assessee but they had not made available technical expertise for the knowledge in respect of collection or processing of data to the assessee. In that case, there was no development and transfer of plan or design. But in the present case, fabric design was developed and transferred and hence, this judgment is not applicable in the present case.
21. Similarly, the tribunal decision rendered in the case of Preroy A.G. (supra) is also not applicable in the present case because the facts are different. In that case, this strategic consultancy service to STPL but in the present case, technical design of fabrics was also supplied to the assessee.
22. Similarly, the ruling of AAR in the case of R.R. Donnelley India Outsource (P.) Ltd. (supra) is also not applicable. In that case, services were involving routine data entry, application sorting, document handling and data operating, not involving of sophisticated technology and were non managerial, non technical and non consultancy services.
23. The judgment of Hon’ble Delhi High Court rendered in the case of Guy Carpenter & Co. Ltd. (supra) is also not applicable as the facts are different. In that case, this finding is given by ITAT that the assessee was rendering only intermediary services while acting as an intermediary facilitator in getting the reinsurance cover for new India Insurance Co. This finding was also given by ITAT that it cannot be said that the assessee was rendering any type of technical/consultancy services. Hon’ble Delhi High Court has held that there are finding of fact and no substantial question of law arises. This judgment is also not applicable as facts are different.
24. As per above discussion, we have seen that none of the judgments cited by Ld. A.R. is rendering any help to the assessee. As per para 19 above, we have already held that TDS is deductible in the present case. Hence, we decline to interfere in the order of Ld. CIT(A).
25. This appeal of the assessee is dismissed.
26. Now, we take up the assessee’s appeal for assessment year 2010-11 i.e. I.T.A. No. 639/Ahd/2010. Both the sides agreed that facts and arguments are the same and hence, this appeal can be decided on similar line. Accordingly, this appeal is also dismissed.
27. In the combined result, both the appeals of the assessee are dismissed.
28. Order pronounced in the open court on the date mentioned hereinabove.
