Case Law Details

Case Name : JDIT- OSD (IT) 3(1) Vs. Harvard Medical International USA (ITAT Mumbai)
Appeal Number : ITA No. 1558/MUM/07
Date of Judgement/Order : 18/11/2011
Related Assessment Year : 2002- 03
Courts : All ITAT (4269) ITAT Mumbai (1423)

JDIT- OSD(IT) Vs. Harvard Medical International USA (ITAT Mumbai) The payment in question was purely for the purpose of advising, recommending and assisting in relation to healthcare projects. It was also for conducting education and training programmes. It was also for the purpose of review and giving feed back of various aspects and new cardiac hospital to be set up, recommendation on planned patient care delivery system.

In page 1 5A to 1 5D of the CIT(A)’s order a summary of the activities undertaken by the assessee for WHL have been given. A perusal of the same shows that the consideration received by the assessee cannot be said to be royalty as they were not a payment for use of order, the right to use any copy right, trademark or industrial, commercial or scientific experience. Similarly the assessee did not make available any technical knowledge, experience, skill know how or process. The decision of the Delhi Bench of the ITAT in the case of Sheraton International Inc.(supra) supports the plea of the assessee that where the agreement between the parties provides that there was no economic consideration for right to use the name it cannot be said that any payment can be called royalty. So also the consideration paid in a lump sum cannot be split as a part being in the nature of royalty and any part being in the nature of FIS as laid down in the case of Motorola Inc.(supra). The payment cannot be said to be FIS for the reason that nothing is made available by the Assessee to WHL and in this regard, the observations while deciding payments received by the Assessee from MAX would be equally applicable to the payments received from WHL also. We are of the view that the entire payment received by the assessee from WHL is in the nature of business profits and since the assessee does not have a PE in India the same cannot be brought to tax in India.

INCOME TAX APPELLATE TRIBUNAL, MUMBAI

BEFORE SHRI N.V. VASUDEVAN(J.M) & SHRI B. RAMAKOTAIAH (A.M)

JDIT- OSD(IT) 3(1) Vs. Harvard Medical International USA

ITA NO. 1558/MUM/07 (A.Y. 2002- 03) ,

ITA NO. 1559/MUM/07 (A.Y. 2003- 04)

Harvard Medical International USA Vs. JDIT- OSD(IT) 3(1)

C.O.NO. 145/M/07(Arising out of ITA No. 1558/M/07),A.Y.2002-03.

C.O.No. 146/M/07(Arising out of ITA No. 1559/M/07) A.Y.2003-04.

JDIT- OSD(IT) 3(1) Vs. Wockhardt Hospitals Ltd.

ITA NO. 3610/MUM/05

Date of hearing     :             15/11/2011
Date of pronouncement : 18/11/2011

ORDER

PER N.V.VASUDEVAN, J.M,

ITA No. 1558/Mum/07 is an appeal by the Assessee against the order dated 26.10.2006 of CIT(A)- XXXIII, Mumbai, relating to AY 02-03. The Assessee has filed C.O. No. 145/Mum/07 against the very same order of the CIT(A).

ITA No.1558/Mum/07 (Revenue’s appeal)

2. Gr. No. 1 raised by the Revenue in its appeal reads as follows:

“1. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in directing the Assessing Officer to treat 50% of the fees received from Wockhardt Hospital Ltd. as non taxable representing teaching in or by educational institution and balance 50% as Royalty, as against 90% as Royalty and 10% as fees for included services held by the Assessing Officer”

The above ground of appeal can be conveniently decided together with Gr. No. 1 to 3 raised by the Assessee in its cross objection, which reads as follows:

“1.On the facts and circumstances of the case, and in law, the learned Commissioner of Income Tax (Appeals) – XXXIII, Mumbai [‘the CIT(A)’] erred in holding that the fees of USD 2,00,000 received by the Respondent from MAX India Ltd. (‘MAX’) during the year are fees for included services (‘FIS’) under Article 12(4) of the Double Taxation Avoidance Agreement between India and USA (‘the DTAA’) and thus, liable to tax.

It is prayed that the learned Assessing Officer (‘AO’) be directed to hold that the fees from MAX for services rendered by the Respondent are outside the scope of Article 12 of the DTAA and further in the absence of a Permanent Establishment in India, be held to be not taxable in India.

2. On the facts and circumstances of the case and in law, the learned CIT(A) erred in taxing USD 465,000, 50% of the fees of USD 9,30,000 received by the Respondent from Wockhardt Hospitals Limited (‘WHL’), as ‘royalties’ under Article 12(3) of the DTAA.

It is prayed that the learned AO be directed to treat the entire fees from WHL for services rendered by the Respondent as outside the scope of Article 12 of the DTAA and further in the absence of a Permanent Establishment in India, be held to be not taxable in India.

3. Without prejudice to Grounds 1 and 2 above, on the facts and circumstances of the case and in law, the fees received by the Respondent from MAX and WHL ought to be regarded as “Business Profits”, and in the absence of a Permanent Establishment in India in terms of Article of the DTAA, be held to be not taxable in India.”

3.  The facts and circumstances under which the aforesaid grounds arise for consideration are as follows:

The Assessee is a non-resident and is incorporated as corporation under laws of Massachusetts USA. Objectives of the corporation are as follows :-

“Exclusively to perform internationally certain charitable and educational functions of and to carry out certain charitable and educational purposes of President and Fellows of Harvard College (Harvard) a charitable institution for higher education duly incorporated and existing under the laws of the commonwealth of Massachusetts, and otherwise to advance the charitable and educational objectives of Harvard’s Medical school (the Harvard Medical School), by assisting other medical schools, to provide high quality medical training and to enhance the quality of patient care and research by teaching training and sharing medical and technological know-how with scientists and health care professionals in countries which may not have ready access to such information by participating in and promoting joint medical research initiatives throughout the words by assisting medical institutions throughout the words in various related administrative and management functions, and by providing such other charitable and educational services in the medical field to and for the benefit of Harvard Medical School and such other organisations affiliated with, or related to Harvard as Harvard may designate, provided that such organisations further the educational purposes of Harvard and are organisations described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended from time to time.”

4. During the previous year the Assessee received a sum of US $ 11,30,000 from the following persons

1. Max India Ltd. (Max)US $ 2,00,000 For services rendered in relation to health care.

2. Wockhardt Hospital Ltd. (WHL) US$ 9,30,000 For services rendered in relation to health care.

The issue that requires consideration in this appeal is as to whether the aforesaid receipts are chargeable to tax in India in the hands of the Assessee. The AO after considering the nature of services rendered by the Assessee for which it received the aforesaid payments was of the view that 90% of the aforesaid payments was in the nature of Royalty taxable under Article 12(3) of the DTAA between India and USA and 10% of the aforesaid payments was in the nature of Fees for Included Services(FIS) taxable under Article 12(4) of the DTAA between India and USA. On appeal by the Assessee, the CIT(A) held that the 50% of the fees received by the Assessee from WHL was in the nature of Royalty and the remaining 50% was not taxable because it was payment to the Assessee for teaching in or by educational institutions within the meaning of Article 12(5)(c) of the DTAA between India and USA. As far as payment received from Max is concerned, the CIT(A) held that the entire payment was “Fees for Included Services” (FIS) within the meaning of Article 12(4) of the DTAA and chargeable to tax. Aggrieved by the order of the CIT(A) holding that 50% of the fees received by the Assessee from WHL is not Taxable, the Revenue has preferred ground No. 1. Aggrieved by the order of CIT(A) holding that 50% of the fees received by the Assessee from WHL is taxable as Royalty, the Assessee has raised ground No. 2 & 3 in its C.O. Aggrieved by the order of CIT(A) holding that payments received from MAX is taxable as FIS, the Assessee has raised Ground No.1 and 3 before the Tribunal.

5. In AY 2000-01 & 2001-02, similar payments made by MAX to the Assessee under the same agreement was considered by this Tribunal in ITA No.4656/Mum/05 and 4660/Mum/05 in its order dated 22.12.2009 and it was held by this Tribunal that the entire payments received by the Assessee was not in the nature of FIS and was taxable as business profits in India. Since, the Assessee did not have a permanent establishment in India, the same was held to be not taxable. Nevertheless, the D.R. submitted before us that he would like to point out certain aspects which were not considered by the Tribunal in the aforesaid orders. With regard to the payments received from WHL, the issue arises for the first time and has to be considered in the light of the services rendered by the Assessee for which payments were received. With this background, we shall now consider the nature of services rendered by the Assessee to MAX and WHL.
6. Nature of services rendered by the Assessee to MAX:

The assessee entered into a collaboration agreement dated 1.3.1999 with Max. As per the agreement, the assessee agreed to extend its capability in health care management, medical education and research to Max. As per the agreement, the assessee (referred to as HMI) agreed to provide following services to Max (clause 7 of the Agreement):-

(a) HMI will advice and assist Max in Max’s developing its overall healthcare strategy, including advising and assisting with Max’s feasibility study concept design and master planning and taking a leadership role in the evaluation and selection of local medical partners and the specific clinical services to be provided concerning the facility to be built in the National Capital Region of Delhi.

(b) HMI will advise and assist in development of quality programs and systems, medical education and training programs and clinical protocols for the clinical services to be provided by the facility and will advise in the development of information systems for the facility.

(c) HMI will advise in the development of the facility to be owned managed and/ or operated by Max and the company, including equipment choice and planning procurement (if requested), site selection, and architectural consultation.

(d) HMI will provide consultation and technical advice on management administration and operations of the company and the facility, including rendering of advice and determining the criteria for selection of key personnel and medical partners and a human resources needs assessment for the company.

(e) HMI shall provide to Max the deliverable/ inputs as specified in Exhibit A hereto and shall organise, structure and implement critical education and training programs for key personnel to the extent specified in the said Exhibit A. Such training will be conducted in India or elsewhere as is deemed necessary by both parties.

Clause-8 of the Agreement lists out the obligations of MAX like giving its business plans, finance, capital, budgets etc. In consideration of rendering the aforesaid services, Max agreed to pay the consideration as set out in clause 9 of the agreement. Clause-9 of the Agreement provides that for rendering services herein contemplated, HMI shall be paid a fee or remuneration in US$ by Max. Clause 10 of the agreement provides that MAX will have the right to designate itself as “Harvard Medical International Associated Institution” together with the use of HMI’s designated logo.

7. Services rendered by the Assessee to WHL:

The Agreement between the Assessee and WHL is titled as” Memorandum of Agreement for Education & Training Services”. The agreement is dated 14-12-2000. It provides for rendering of the following services: (Clause 1 of the Agreement)

“Services rendered by H!M! to WHL for the relevant year

Consulting in relating to health care projects

– Advising WHL on its overall health care strategy in Bombay and Southern India, including reviewing and providing feedback on existing health care projects:

– Make recommendations regarding the prioritization of new health care projects;

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– Provide ongoing consultation/advice to WHL’s corporate staff –

– Advise on aligning systems to address insurance needs to enable WHL ‘s pro-active – approach in health care;

     -Advise and assistance in relation to the key selection of clinical specialist, key job descriptions for key positions such as Clinical Leaders, Nursing Leaders, Administrator Leaders, and key IT personnel

– Advise and assistance in relation to emergency medical systems for the related specialities.

Education & Training Programms in relation to System-wide Core  Competencies

– Provide training for WHL executives.

– Provide hospital managers and/ or clinicians training in areas of Hospital Management including hospital organisation, human resources etc. Laboratory Management, Medical Records Management training, including medical record components, medical record filing systems, medical record coding, Pharmacy Management & Education, Infection Control etc.

– Provide Nursing Leadership & Professional Development Education & Fellowship – Program.

– Continuing medical and nursing education program in India on select topics

– Teach and/ or conduct educational workshops etc. Facility Specific Deliverable (new Cardiac and Women’s Hospitals)

– Review and give feedback to WHL on various aspects for the new cardiac hospital i.e. in respect of clinical programs, evaluation of the site plans reviewing and providing feedback on the design prepared by WHL of the hospital facility, etc.

– Provide recommendations on the amount and type of on-site orientation and – education & training programs required for each type of personnel.

– Review and provide recommendation on the planned patient care delivery system.

– Provide programs to assist WHL in the development of clinical program plan, for the new women’s hospital and plan for hospital site.

8. The consideration payable for services to be rendered by the Assessee to WHL has been set out in clause-2 of the Agreement. Clause-3 of the Agreement provides for use of the name of the Assessee by WHL. The relevant portions thereof are as follows:

“3. USE OF NAMES; INTELLECTUAL PROPERTY:-

(a) Subject to the terms of this MOA, and for the duration thereof WHL, the Existing Cardiac Hospital and the Existing Kidney Hospital, and, when developed, the Propose Cardiac Hospital and the Proposed Women’s Hospital, each may refer to itself as receiving education and training services from HMI and designate themselves as a “Harvard Medical International Associated Institution.” WHL’s and such Facilities’ use of such name will be in accordance with the restrictions set forth below, and such other reasonable restrictions intended to protect the goodwill in the name as HMI may impose from time to time. Any other use of the name “Harvard” and the associated logos and designs (alone or as part of another name) in connection with this MOA, the Services, WHL or any Facility shall be permitted only during the term of this MOA and only upon the written approval of and in accordance with restrictions agreed to by, HMI.

(b)The use of the names and logos of WHL and the Facilities by HMI shall be subject lo the terms of this MOA, and for the duration thereof, HMI may use the name of WHL .by referring to its relationship with WHL in factual statements to the effect that HMI is providing the services here under. WHL. HMI’s use of such name will be in accordance with the, restrictions set forth below.

(c) All materials delivered to WHL by or o behalf of HMI in connection with providing Services, together with all copyright, trademark, trade dress, trade secret, patent, and other proprietary rights therein (“Intellectual Property”) shall belong exclusively to HMI. During the term of this MOA, HMI hereby grants to WHL and the Facilities rights to use the whole (not individual pieces alone) of such Intellectual Property (other than the name “Harvard”, or any of its logos and designs, which is governed by the provisions of Section 3(a) above), free of any royalty or any related economic consideration. Notwithstanding the foregoing, HMI shall, also retain all rights to use the intellectual Property, subject to the terms of this MOA.

9. Case of the Assessing Officer:According to the AO, the Assessee by virtue of the aforesaid agreements gave a right to use copy righted items, deliverables, name, logo etc. The intellectual property rights in the materials delivered by the Assessee to Max and WHL remained exclusive property of the Assessee. According to the AO the use of the name Harward carries immense value as it is associated with quality. The Assessee had duly protected its intellectual property rights to its name and its logo in the agreement and has given only limited rights to MAX and WHL to use them. Thus the consideration received by the Assessee to the extent of 90% can be attributed to the right to use the logo and therefore 90% of the payments received by the Assessee has to be construed as Royalty. The remaining 10% was to be considered as FIS. The sums received by the Assessee as aforesaid were accordingly brought to tax by the AO.

10. On appeal by the Assessee the CIT(A) held that the 100% of the receipts by the Assessee from MAX has to be considered as FIS and in this regard followed the order of his predecessor in A.Y. 0 1-02. As far as receipts from WHL is concerned, the CIT(A) held as follows:

“5. I have gone through the facts of the case very carefully. The services rendered to WHL is entirely different from services rendered to MAX. In the case of WHL, the main emphasize is on Education & Training. The Exhibit ‘A’ and Exhibit ‘B’ clearly shows that the main emphasis is on Education and Training. Further the appellant has also brought out the summary of certain Educational Activities undertaken by HMI for WHL. Further, undoubtedly HMI is an educational Institution. As pointed out by the appellant, the CIT(A)XXXI in his order No. CIT(A)XXXIIDDIT/ (IT)2 (1) / IT-256/ 03-04/04-05 dated 4.2.05 in the case WHL (Wockhardt Hospitals Ltd) for the F.Y. 03-04, has held that 50% of the payment made by WHL to Harvard Medical Institution (HMI) is for “teaching in by educational institution” and hence cannot be considered a Fees for Included Services (FIS) and so not taxable. He has also held that the remaining 50% should be treated as royalty. The relevant para 9 & 10 of the order is extracted below:

“9. 1 have carefully considered the facts of the case and the submission made by the appellant. The memorandum of agreement entered into by the appellant (WHL) with Harvard Medical International (HMI) provides for rendering of certain services by HMJ to WHL. The services to h rendered are broadly as under:

(a) According of “associate institution status” to WHL at corporate level.
(b) Two HMI ‘s executives will participate on the WHL health care advisory board with 1 -2 days meetings being held twice in India.
(c) HMI will provide WHL executives training at Boston in the areas of pharmacy management and education, infection control and education, bio medical engineering and education, clinical nutrition and education, and environmental services and education.

(d) Training of A WHL nurse Managers at Boston.

(e) HMJ will provide WHL educational resources and reference material.
(f) QJ HMJ will provide training nursing educational programs in India and this training pro gram is limited to WHL staff

(g) HMI will provide the services of consultants to WHL hospital to teach or conduct educational workshops.

(h) HMI will provide the educational programs to assist WHL in developing processes to monitor the overall progress of the project.

(i) HMJ provides educational programs and recommendations in respect of panned patient care delivery system.

(j) HMI will provide training programs in developing a comprehensive hospital commissioning plan.

The appellant has contended that some services will not form part of fees for included services’ because under Article 12(5) of the DTAA, amounts paid for teaching in or by education institutions is excluded from fees for included services’. Copy of Articles of Organization has been filed to show that HMJ is an educational institution engaged in charitable and educational functions internationally. Notification from Internal Revenue Service, USA has also been; filed which has granted exemption to HMI for taxes as charitable and educational institution.

10. However, apart from the above, the point; which is to be noted in the facts of the case that the impugned agreement also provides that WHL for the existing Cardiac Hospital and the existing Kidney Hospital and the proposed Cardiac Hospital and Women ‘s Hospital may refer itself as receiving education and training services from HMI and designate themselves as a “Harvard Medical International associated Institution” (Refer para 3 (a) of the Agreement). Further, WHL has not only been authorised to uses the name and logo of HMJ but there is also a provision in the agreement whereby HMI is prohibited to grant any such right and facility to any other entity other than WHL in the Indian territories as specified in the Agreement ( see para 5(a) of the Agreement). Thus, it becomes evident that the impugned payment by WHL to HMI is not merely for rendering of educational and training services but I also for allowing usage of HMI’s brand name and log. The argument that clause (c) of para 3 of the Agreement states that right to use the intellectual property is provided by HMI to WHL free of any royalty of any related economic consideration is only a misnomer. In fact clause (c) of para 3 of the agreement itself excludes the usage of the name “Harvard “and its logos and designs from the declaration that usage of intellectual property is allowed free of charge. Therefore, in these circumstances the whole of the payment made by WHL to HMI cannot be ascribed towards educational and training services, which is specifically excluded from “fees for included services” under Article 12(5)(c) of the DTAA. In the circumstances of the case, I consider that it will be appropriate to hold 50% of the impugned payments towards teaching in a educational institution, which will not qualify as ‘fees for included services” and balance 50% towards use of the name “Harvard” and its logos and designs, which will be liable to tax as royalty in the hands of HM under Article 12 of the DTAA at 15%. Since the tax is stated to be borne by WHL, it will have to be grossed up. The Assessing Officer is directed to give effect accordingly.”

5.1 In view of all the above, I hold that 50% of the payments should be considered as payment made for ‘teaching in by educational institution’ and hence this 50% of the amount cannot be considered as FIS and hence not liable to tax in India. This cannot be also taxed under Article 7 of DTAA as the appellant is not having PE in India. The remaining 50% is to be taxed as royalty towards the use of the name “Harvard” and its logos and designs. In this regard I entirely agree with the order of the CIT(A)XXXI mentioned above”

11. Aggrieved by the order of the CIT(A), the Assessee as well as the Revenue are in appeal before the Tribunal on the grounds which have already been set out in the earlier part of this order.

12. We have heard the rival submissions. We shall first take up for consideration the receipts by the Assessee from MAX. As far as these receipts are concerned, the facts are identical to the facts as it existed in AY 01-02 which the Tribunal has already decided. The learned D.R. attempted to put forth before us submissions to the effect that the Assessee was not imparting education and had profit motive in all its dealing with MAX. These submissions were made in the context of Article 12(5)(c) of the DTAA between India and USA. These submissions are not relevant in respect of payments received by the Assessee from MAX because it was nobody’s case that these receipts are for teaching in or by educational institutions and therefore not in the nature of FIS because of Article 12(5)(c ) of DTAA between India and USA. The case of the AO was that 90% of these receipts are to be treated as Royalty and 10% FIS. The CIT(A) held that the entire receipts has to be considered as FIS. The revenue is not in appeal against the order of the CIT(A). Therefore what remains for consideration is as to whether the payments are Royalty to the extent of 90% and 10% FIS or the entire payment is to be considered as FIS. On this aspect the Tribunal on identical facts in the case of the Assessee for AY 00-0 1 and 0 1-02 held as follows:

“10. We have heard the rival submissions. The issue for consideration is as to whether the receipt by the assessee from Max can be said to be in the nature of FIS. We have already set out the details of activities which the assessee was to provide Max India Ltd. The relevant articles in the treaty are as follows:

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.

3)  The term ‘royalties’ as used in this Articles 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 film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition thereof and;

(b) payment of any kind received as consideration for the use of or the right to use, the industrial, commercial or scientific equipment other than payments derived by an enterprise in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 or Article 8.

4) For the purposes of this article ‘fees for included services’ means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provisions 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 para 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.

11. A plain reading of the above clause makes it clear that only such technical and consultancy services are covered by Article 12(4) as either (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information referred to in Article 12(3), or (b) ‘make available’ technical knowledge, experience, skill know-how etc. The learned CIT(A) has applied provisions of Article 12(4)(b) to the entire receipts by the assessee. The Assessing Officer sought to invoke Article 12(3) for a portion of the receipt and Article 12(4) for the remainder. We are of the view that there is no scope for applying Article 12(3) to the receipts by the assessee in the present case. It is not even Revenue’s case before us that the assessee’s case has anything to do with Article 12(3). The case of the Revenue therefore hinges on the applicability of Article 12(4)(b) which applies to rendering of only such technical or consultancy services as ‘make available’ technical knowledge, experience, skill or know-how etc. In other words, in order to attract the taxability of an income under Article 12(4)(b), not only the payment should be in consideration for rendering of technical or consultancy services, but in addition to the payment being consideration for rendering of technical services., the services so rendered should also be such that ‘make available’ technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.

12. The learned CIT(A) has referred to the definition of ‘fees for technical services’ as given in Explanation 2 to section (1)(vii) of the I.T. Act, 1961 which is as follows :-

“Explanation 2 : For the purposes of this clause, ‘fees for technical services’ means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provisions of services of technical or other personnel) but does not include consideration for nay construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head ‘salaries’.

He concluded that the assessee was rendering a technical services and held that the entire receipts by the assessee has to be considered as Fees for Technical Services. The learned CIT(A) has overlooked the position that section 9(1)(vii) Explanation 2, stops with the ‘rendering’ of technical services, the DTAA goes further and qualifies such rendering of services with worlds to the effect that the services should also make available technical knowledge, experience, skill etc. to the person utilizing the services. These worlds are ‘which make available’. The meaning of the expression make available were considered by the Tribunal in the case of Raymond Ltd. Vs. DCIT (2003) 80 TTJ (Mum) 120. The Tribunal after elaborate analysis of all the related aspects observed that :-

“The words ‘making available’ in Article 13.4 refers to the stage subsequent to the ‘making use of’ stage. The qualifying words is ‘which’ the use of this relative pronoun as a conjunction is to denote some additional function the ‘rendering the services’ must fulfil. And that is that it should also ‘make available’ technical knowledge, experience, skill etc. The word which occurring in the article after the word ‘services’ and before the words ‘make available’ not only described or defines more clearly the antecedent noun ‘(services’) but also gives additional information about the same in the sense that it requires that the services should result in making available to the user technical knowledge, experience, skill, etc. Thus, the normal, plain and grammatical meaning of the language employed is that a mere rendering of services is not roped in unless the person utilising the services is able to make use of the technical knowledge, etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill etc. must remain with the person utilising the services even after the rendering of the services has come to an end. A transmission of the technical knowledge, experience, skill, etc. from the person rendering services to the person utilising the same is contemplated by the article. Some sort of durability or permanency of the result of the ‘rendering services’ is envisaged which will remain at the disposal of the person utilising the services. The fruits of the services should remain available to the person utilising the services in some concrete shape such as technical knowledge, experience skill etc.

13. In the Raymond’s case (supra), the Tribunal also held that rendering of technical services cannot be equated with making available the technical services. In the case of CESC Ltd. Vs. DCIT (2003) 80 TTJ (Cal) (TM) 806: (2003) 87 ITD 653 (Cal)(TM) also the question regarding the scope of expression making available came up for the consideration of the Tribunal. In that case, the Tribunal was dealing with the scope of Article 13(4)(c) of the Indo-UK tax treaty which is admittedly in pari materia with Article 12(4) of the India-USA tax treaty with which we are presently concerned. The majority view was that in order to be attracted by the provisions of the said article of the tax treaty, not only the services should be technical in nature but should be such as to result in making the technology available to person receiving the technical services in question. The Tribunal also referred to with approval the extracts from protocol to the Indo- US tax treaty to the effect that ‘generally speaking, technology will be considered made available, when the person acquiring the service is enabled to apply the technology.

14. We have already set out the nature of services to be rendered by the assessee to Max India Ltd. A perusal of the clauses of Agreement dated 1.3.1999 between the assessee and Max India Ltd. clearly shows that they are purely in the nature of advisory services. Nothing is made available to Max India Ltd. by the assessee. As to whether or not giving advisory services can be considered to be making available included services, example No. 7 given in the MOU between India and USA on the DTAA throws some more light on the understanding of the Government s of India and the USA on the subject. This example is as follows :-

 “Facts : the India vegetable oil manufacturing firm has mastered the science of producing cholesterol free oil and wishes to market this product worldwide. It hires an American Marketing consultancy firm to do computer simulation of the world market for such oil and to advise it on marketing strategies. Are the fees paid to the US company for included services?

Analysis : the fees would not be for included services. The American company is providing a consultancy which involves the use of substantial technical skill and expertise. It is, 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 does not make the service a technical service within meaning of para (4)(b).”

 This example, set out in the MOU between the Indian and US governments, also makes it clear that consideration for advisory services rendered cannot be treated as fees for included services under Article 12(4)(b).

15. We will now deal with the decisions referred to by learned CIT(A) in support of his conclusions. The decision in the case of Advance Ruling Petition No. P-6 of (1995) 234 ITR 371 was a case where admittedly there was a situation where technology was made available. So also in the case of Advance Ruling P.NO. 13 of 1995 228 ITR 487. The decision in the case of CESC Ltd. (supra) actually supports the plea of the assessee. For the reasons set out above, we are of the view that learned CIT(A) indeed erred in holding that the monies received by the assessee from Max India Ltd. constitute ‘fees for included services’ within the meaning of Article 12(4) of the India-US treaty, and are accordingly liable to be taxed in India. Since, the assessee does not have any permanent establishment in India, the incomes so arising to them in India cannot be taxed under Article 7 as ‘business profits’ either. Therefore, we direct the Assessing Officer to delete the impugned additions.”
13. The learned D.R. submitted before us that once the Assessee gives material in the form of standard operating procedures, technical advice etc., it makes available to Max knowledge, experience, skill, know-how and in this regard brought to our notice certain clauses of the Agreement. In this regard our attention was drawn to Exhibit-A of the agreement dt. 1.3.2000. He laid emphasis on the fact that there was reference to objective of ensuring that Max enjoys continued status as an HMI Associated Institution. We have given a careful consideration to the above submission of the learned D.R. and are of the view that the same is without any merit. Exhibit A referred to by the learned D.R. is plan envisaged in difference phases. All the phases only refers to advise given by the Assessee to max to achieve excellence in hospital management like medical equipment to be used, number of medical staff required, on-site training required etc. These services do not make available any technical knowledge, experience, skill, know-how, as explained in the decisions referred to in the order of the Tribunal in Assessee’s case for AY 00-0 1 and 0 1-02. We therefore reject the contentions of the learned D.R. before us and respectfully following the decision of the Tribunal in Assesses’s own case for AY 00-0 1 and 0 1-02, hold that learned CIT(A) indeed erred in holding that the monies received by the assessee from Max India Ltd. constitute ‘fees for included services’ within the meaning of Article 12(4) of the India-US treaty, and are accordingly liable to be taxed in India. Since, the assessee does not have any permanent establishment in India, the incomes so arising to them in India cannot be taxed under Article 7 as ‘business profits’ either. Therefore, we direct the Assessing Officer to delete the impugned additions. The relevant grounds of cross objection of the Assessee are allowed.

14. We shall now take up for consideration the fee received by the Assessee from WHL. On this receipt, we shall first deal with the question whether the receipts in question are Royalty to the extent of 90% and FIS to the extent of 10% or whether they are in the nature of Business profits. The question whether the receipts are for teaching in or by educational institution in the light of the Article 12(5)(c) of the DTAA between India and USA will arise for consideration only if it is held to be FIS under Article 12(4) of the DTAA between India and USA.

15. We have already seen the nature of services rendered by the Assessee to WHL. From a perusal of the nature of services rendered by the assessee to the WHL it is clear that nothing is made available by the assessee to WHL. The emphasis of the ld. D.R before us was that the use of the name Harward Medical International Inc., given in clause (3) of the agreement dated 14/12/2000 is the essence of the agreement and all the other services rendered are only incidental. According to him it is only the use of the assessee’s name and logo that gives benefit to WHL and, therefore, the provisions of Article 12(3)(a) and Article 12(4)(a) will make it either a royalty or a fees for included services. In this regard it was also submitted by the ld. D.R that the assessee in clause 5 of the agreement has agreed not to establish any alliance similar to the one entered into with WHL. This clause according to the ld. D.R also shows that it is only the right to use the logo and name of the assessee was the prime consideration for the payment of consideration to the assessee by WHL.
16. The ld. Counsel for the assessee in this regard submitted that the right to use the logo and name of the assessee by WHL was only incidental. In this regard he drew our attention to clause 3(c) of the agreement dated 14/12/2000, wherein it has been made clear that there are no economic consideration for right to use the name or logo of the assessee. Our attention was also drawn to the decision of Hon’ble Delhi Bench of the ITAT in the case of Sheraton International Inc. vs. DDIT, 107 ITD 120 (Del), wherein it was held that where main purpose of the agreement was to render services and use of trademark or trade name was only incidental then the entire payment or even a part of it cannot be considered as royalty. The Tribunal also held that where the agreement between the parties specifically provide use of trademark free of cost, no part of the consideration paid for services rendered can be treated as royalty. The aforesaid decision was also confirmed by the Honourable Delhi High Court reported in (2009) TIOL-57-HC­Del- IT. Our attention was also drawn to the decision of the Special Bench of the ITAT in the case of Motorola Inc. vs. DCIT, 95 ITD 269(Del)(SB), wherein it was held that where a lumpsum consideration was paid it was not open to the Income Tax Authorities to split the same and treat a part of the same as royalty.

17. We have considered the rival submissions. We are of the view that the consideration received by the assessee can neither be said to be royalty nor FIS. The payment in question was purely for the purpose of advising, recommending and assisting in relation to healthcare projects. It was also for conducting education and training programmes. It was also for the purpose of review and giving feed back of various aspects and new cardiac hospital to be set up, recommendation on planned patient care delivery system. In page 1 5A to 1 5D of the CIT(A) ‘s order a summary of the activities undertaken by the assessee for WHL have been given. A perusal of the same shows that the consideration received by the assessee cannot be said to be royalty as they were not a payment for use of order, the right to use any copy right, trademark or industrial, commercial or scientific experience. Similarly the assessee did not make available any technical knowledge, experience, skill knowhow or process. The decision of the Delhi Bench of the ITAT in the case of Sheraton International Inc.(supra) supports the plea of the assessee that where the agreement between the parties provides that there was no economic consideration for right to use the name it cannot be said that any payment can be called royalty. So also the consideration paid in a lumpsum cannot be split as a part being in the nature of royalty and any part being in the nature of FIS as laid down in the case of Motorola Inc.(supra). The payment cannot be said to be FIS for the reason that nothing is made available by the Assessee to WHL and in this regard, the observations while deciding payments received by the Assessee from MAX would be equally applicable to the payments received from WHL also. We are of the view that the entire payment received by the assessee from WHL is in the nature of business profits and since the assessee does not have a PE in India the same cannot be brought to tax in India. Consequently, Ground No.2 & 3 of the Cross Objection of the assessee are allowed.

18. Ground No.2 raised by the revenue in its appeal reads as follows: “On the facts and circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition on account of reimbursement of expenses of Rs. 45,34,096/-.”
19. The material facts in respect of this ground of appeal are as follows: During the previous year the assessee received a sum of US$ 93,371 from WHL, Max and Shri Ramachandra Medical College and Research Institute (SRMCRI). According to the assessee this payment was reimbursement of actual expenses incurred by the assessee on behalf of WHL, Max & SRMCRI. According to the assessee reimbursement of expenses was towards air fare , lodging, food, etc. incurred by the assessee’s personnel during their visits to India. It was also submitted that as per the agreement between WHL and Max and the assessee, WHL and Max were required to bear the cost of expenses that may be incurred in relation to the provision of services. The assessee submitted before the AO that since the receipt was reimbursement of expenses the same cannot be treated as income. The AO however was of the view that the reimbursement of expenses were also part of the consideration paid for rendering services and the same were brought to tax treating 90% of the same as royalty and 10% as FIS.

20. On appeal by the assessee the CIT(A) following the order in assessee’s own case for A.Y 200 1-02 held that the sums in question were reimbursement of expenses and the same cannot be brought to tax in the hands of the assessee.

21. It is not in dispute before us that in A.Y 2001-02 in ITA No.4426/M/05 similar issue was considered by this Tribunal and the Tribunal held as follows:

“16. Ground No. 4 raised by the assessee reads as follows :-

On the facts and circumstances of the case and in law, learned CIT(A) though agreeing in principle that reimbursement of expenses received in connection with the services rendered does not constitute income however erred in confirming the addition made by the Assessing Officer on account of the reimbursement of actual expenditure of US$ 94,875 on the ground that the appellant failed to furnish the details of the same, without giving an opportunity to the appellant to substantiate its claim.

17 We have already noticed that the assessee was providing education and training programmes to hospitals, medical schools in India. The assessee had entered into agreements for providing those facilities with Max. The assessee had also entered into an agreement for providing services to Wockhardt Hospitals Limited (WHL). The assessee received a sum of US$ 75,000/- during the previous year. The assessee had entered into an agreement for rendering educational services to WHL dated 14.12.2002. Earlier there was a letter of intent dated 28.2.2000 signed between the assessee and Wockhardt Life Sciences Ltd. (WLSL)(erstwhile name of WHL). In terms of the above letter of intent, the assessee was to assemble a team of professionals to visit Wockhardt Health Care Team for the purpose of defining the working relationship, role of the assessee and to create comprehensive programmes for achieving provision of services by the assessee. WLSL agreed to reimburse the assessee for all direct and indirect cost relating to such visits by the team of professional of the assessee. A Sum of US$ 75,000 received by the assessee during the previous year from WHL was reimbursement of such expenses. The aforesaid sum of US$ 75,000 was in the nature of an interim payment and in the event of regular agreement being entered into between Wockhardt and the assessee, the same has to be adjusted towards consideration payable by the Wockhardt to the assessee under the agreement for providing various services. It appears that later on, the assessee and Wockhardt entered into a contractual agreement and this sum of US$ 75,000 was adjusted against travel related and administrative direct expenses incurred by the assessee prior to the date of agreement. In course of assessment proceedings, the Assessing Officer wrote to WHL regarding above payment. It appears that the payment was made by Wockhardt Pharmaceutical Division of Wockhardt group and subsequently made over by Wockhardt representing Hospital Division of the Group. Payment was not thus reflected in WHL books; but was actually borne by the Wockhardt.

18. The assessee also received another sum of US$ 19,874.91 from Max. This was also claimed to be reimbursement of expenses by the assessee. As per the agreement to provide services between the assessee and Max, expenses of Max related to the agreement on account of travel, boarding, lodging etc. of Assessee’s personnel have to be borne by Max. It is further provided that such payment is not part of the consideration payable by Max to the assessee.
19. Aforesaid receipts was brought to tax as income of the assessee by the Assessing Officer and the same was confirmed by learned CIT(A). The stand of the assessee before the Assessing Officer as well as learned CIT(A) was that since, the aforesaid payments were reimbursement of actual expenses, they could not be considered as income of the assessee. Learned CIT(A) agreed with the stand of the assessee that reimbursement of expenses cannot be considered as income; but held that the assessee has not filed details of reimbursement of actual expenses incurred; and therefore, claim of the assessee cannot be accepted.

20. Before us, learned counsel for the assessee brought to our notice invoice raised by the assessee on Wockhardt Ltd. which is at page No. 96-97 of the assessee’s paper book and the invoice raised on Max India Ltd. which at page No. 98 of the assessee’s paper book. Perusal of these invoices shows that the payment of US$ 75,000 by Wockhardt Ltd. is related to travel and administrative direct expenses and legal expenses. As far as payment of Max is concerned, it has description of travel cost bill as per the agreement. In our view, aforesaid documents prima facie shows that they were reimbursement of expenses. We are however of the view that these documents would not be sufficient to establish case of the assessee. The assessee has to establish that these were expenses incurred by the assessee which were actually to be incurred by Wockhardt Ltd. and Max respectively. It has to be further established that these receipts are not adjusted against any payment which the assessee has to receive under agreement to provide services. Subject to the assessee establishing that these receipts has nothing to do with the receipts for rendering various services under the agreement with Wockhardt Ltd. & Max and subject to further proof that these expenses were incurred by the assessee; but were to be incurred by Wockhardt & Max, the assessee will be entitled to claim deduction. We deem it fit and appropriate to restore this issue to the Assessing Officer with liberty to the assessee to let in appropriate evidence in this regard before the Assessing Officer. For statistical purposes Ground No. 4 of the assessee is treated as allowed. In the result, appeal by the assessee is partly allowed.”

22. The ld. D.R submitted before us that neither the AO nor the CIT(A) has given any finding about the nature of reimbursement of expenses and the agreement between the parties as to how and when WHL, Max or SRMCRI has to reimburse the expenses to the assessee. In this regard ld. D.R drew our attention to an invoice raised by the assessee on SRMCRI, wherein the description of the expenses was in relation to air fare of the assessee’s personnel to visit the 3rd convocation of SRMCRI in Chennai, India. According to him the nature of expenses cannot be considered as having been incurred in the course of rendering services to SRMCRI. His plea was that this aspect must be directed to be looked into by the AO in respect of all the invoices in respect of which reimbursement expenses were claimed by the assessee.
23. The ld. Counsel for the assessee however submitted that the agreement between the parties specifically provides for reimbursement of expenses incurred in the course of rendering services to the parties in India.

24. We have considered the rival submissions and are of the view that neither the AO nor the CIT(A) have looked into the terms of the agreement to point out whether the receipts in question are reimbursement of expenses and as to whether they are not part of the agreement to provide services. Even assuming that these receipts were to be considered as part of payment for services rendered, they will not be taxable in India as they would be in the nature of business income. If they are considered as other income, they cannot be brought to tax in view of the Article 23(1) of the DTAA between India and USA. Prima facie the payments are in the nature of reimbursement of expenses. In the absence of any finding by the AO to the contrary the request of the D.R. to remand the issue for fresh consideration cannot be acceded. In that view of the matter we do not find any infirmity in the order of the CIT(A). Consequently Ground No.2 raised by the revenue is also dismissed.

25. Ground No. 4 raised by the assessee in the Cross Objection reads as follows:

“4. On the facts and circumstances of the case and in law, the learned CIT(A)) erred in not adjudicating upon the ground relating to incorrect foreign currency exchange rate applied by the learned AO for conversion of the fees received by the Respondent, into Indian rupees.

It is prayed that the learned AO be directed to apply the exchange rates as per proviso to Rule 115 read with Rule 26 of the Income Tax rules, 1962.”

26. In our view this ground has become academic in view of the conclusion that none of the receipts by the assessee from Max & WHL were taxable in India. Though the CIT(A) has not decided this ground on appeal despite a specific ground raised by the assessee before him, no purpose will be served by remanding the same to CIT(A) for fresh consideration. Consequently we dismiss Ground No.4 raised by the assessee in the Cross Objection.

27. In the result, the appeal by the revenue is dismissed while the Cross Objection by the assessee is partly allowed.ITA 1559/M/07 & Co No. 146/M/07:

28. ITA No. 1559/M/07 is an appeal by the revenue against the order dated 26/10/2006 of CIT(A) 33, Mumbai relating to A.Y 2003- 04 and C.O No. 146/M/07 is a cross objection by the assessee against the very same order of the CIT(A). The ground raised by the revenue in its appeal and Ground No.1 to 3 raised by the assessee in its Cross Objection are identical to the Grounds 1 & 2 raised by the revenue in its appeal ITA 1558/M/07 and Ground No.1 to 3 in the Cross Objection No. 145/M/07 raised by the assessee in tis Cross Objection for A.Y 2002-03. For the reasons given while deciding identical grounds in A.Y 2002-03, we dismiss the grounds raised by the revenue and allow Ground No.1 to 3 raised by the assessee in its Cross Objection. Both the parties agreed that the facts and circumstances prevailing in both the A.Ys are identical. Ground No.4 raised by the assessee in Cross Objection No. 146/M/07 relating to charging of interest is academic and does not require any adjudication.

ITA NO. 3610/MUM/2005- REVENUES’S APPEAL:

29. This is an appeal by the revenue against the order dated 4/2/2005 of CIT(A)-3 1, Mumbai passed in an appeal against the order under section 195(2) of the Act. We have already seen that WHL made payments to Harvard Medical International Inc. in connection with the services rendered by the later in India. M/s. WHL applied for issue of nil deduction of tax at source u/s. 195 of the Act, on the ground that Harvard Medical International Inc. was a non-resident and that payment by M/s. WHL to Harvard Medical International Inc. was business profits and since Harvard Medical International Inc. did not have a PE in India the receipts cannot be brought to tax in India and consequently a certificate of no deduction of tax at source before making payment to Harvard Medical International Inc. should be issue. The AO treated the payment in question as royalty and FIS and directed the assessee to deduct tax at source treating 90% of the payment as royalty and 10% as FIS.
30. On appeal by the assessee the CIT(A) confirmed the order of the AO but however held that only 50% of the payment should be treated as FIS and tax deducted at source accordingly.         We have already seen while deciding the appeal on Harvard Medical International Inc. that the payments by M/s. WHL to Harvard Medical International Inc. are business profits and since Harvard Medical International Inc. does not have a PE in India the same cannot be brought to tax in India for the reasons stated therein. We hold that M/s. WHL has no obligation to deduct tax at source on the payment made to Harvard Medical International Inc. Accordingly this appeal is dismissed.

31. In the result, ITA No.1558/M/07 & 1559/M/07 are dismissed, Cross Objections No. 145/M/07 & 146/M/07 are partly allowed and ITA No.3610/M/05 is dismissed.

Order pronounced in the open court on the 18th day of Nov. 2011.

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