Sharing of management experience and business strategies by a foreign professional cannot be termed as technical service under India-USA tax treaty

Facts

ISSUE NO. I

• The assessee was an Indian company engaged in the business of manufacturing pharmaceuticals. It paid USD 80,000 to a non-resident named C.K. Prahlad Inc. (“CKP Inc.) of USA without withholding any tax at source thereon. CKP Inc. of USA was a company incorporated under laws of the USA. CKP Inc. had sent one of its professionals (Mr. C.K. Prahlad), being a management guru, to India for a period of two days to address the conference on future strategy which was held for the benefit of the employees of the assessee.
• The assessee claimed that since CKP Inc. did not make available any technical knowledge to it, the amount paid was not ^„fee for included services^‟ within the meaning of the term under Article 12 of India-USA Double Taxation Avoidance Agreement (“tax treaty”) and thus was not taxable in India in the hands of CKP Inc. Further, in the absence of CKP Inc. having a permanent establishment (“PE”) in India, this amount is also not chargeable to tax in India as business income under Article 7 of the India-USA tax treaty.
• The Assessing Officer (“AO”) held that the assessee was required to deduct tax at source from the remittances of USD 80,000 made to CKP Inc. of USA under section 195 of the Income-tax Act, 1961 (“the Act”). The Commissioner (Appeals) upheld the decision of the AO. The assessee preferred an appeal before the Tribunal.

ISSUE NO. II

• The assessee also has an in-house research facility. In order to claim that any newly developed generic drug is equivalent to original reference drug, it has to obtain evidence in the form of certificates from research organization (“CRO”). The generic drugs developed by the assessee are, therefore, sent for testing at the laboratories of CROs abroad. CROs conduct test and experiments on these drugs and send back analysis report containing results of such test and experiment. The non-resident CROs do not develop the drugs and only gives a clinical report of the experiment done by them. The assessee made payments to various non­resident CROs on account of bio-equivalence study, analysis charges, testing charges, sub-chronic toxicity study charges, etc. The assessee did not withhold tax at source on these amounts on the ground that the services rendered by CRO^‟s do not make available any technology to the assessee to enable him to apply the same in future development/invention of the drugs and hence it cannot be termed as ^„fee for included services^‟ under tax treaty between India and USA, UK and Canada.
• The AO held that the total payment of Rs. 87,974,723 made by the assessee to the non-resident entities on account of bio-studies, clinical analysis, etc., was in the nature of fees for technical services and the same was taxable in India.
• On appeal, the Commissioner (Appeals) held that there was no transfer of technical knowledge, plan or design to the assessee, hence, the services rendered for furnishing clinical reports by CROs does not amount to fees for included/technical services within the meaning of the term under India-USA, India-Canada, India-UK, India-Netherlands, India-France and India-Australia tax treaties, as no technical service is being imparted to the assessee which enable the assessee to use it in future independently. Aggrieved of order of the Commissioner (Appeals), the Revenue appealed the matter before the Tribunal.

Issues before the Tribunal

• Whether the remittance of conference expense by the assessee to CKP Inc. of USA was chargeable to tax in India and whether the assessee was liable to deduct tax at source from the said remittance?
• Whether payments made by the assessee amount to fees for included services under the tax treaty with USA, UK and Canada on the ground that technology has been made available to the assessee to enable him to apply the same for future development of the drugs and hence whether the payments are taxable in India?

Observations and Ruling of the Tribunal

• As per section 90 of the Act, an assessee is eligible to adopt provisions of tax treaties if the same are more beneficial to the assessee.

ISSUE NO. 1

• As per Article 12 of the India-US tax treaty, the definition of ^„fees for included services^‟ is restricted to technical or consultancy services and since ^„managerial services^‟ are not covered in the said definition, the same cannot be taxed in India. Article 1 2(4)(b) of the tax treaty covers only such technical or consultancy services which ^„make available^‟ technical knowledge, experience, skill or know-how, etc., so as to enable the recipient of services to apply the said technology independently in its business. The services offered may be the product of intense technological effort and a lot of technical knowledge and experience of the service provider would have gone into it. But that is not enough to fall within the description of services which make available the technical knowledge, etc. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in future without depending on the provider.

• It is, therefore, necessary to ascertain whether the services rendered could be termed as technical or consultancy services. In this regard, it is observed that Mr. C.K. Prahlad is a management guru and a perusal of the presentation made by him shows that the services rendered by CKP Inc. were essentially in the nature of sharing management experiences and business strategies and it had nothing to do with the pharma industry in particular. The services rendered by CKP Inc., therefore, cannot be termed as technical services as no technical knowledge has been made available to the assessee.
• The Authority of Advance Ruling (“AAR”) in the case of Federation of Indian Chambers of Commerce & Industry  [2010] 189 Taxman 270 (AAR-New Delhi) has held that entrepreneurial workshops does not make available any technology, knowledge or skill though they open up new vistas of thinking.
• As per the Memorandum of Understanding (“MoU”) to the India-USA tax treaty, ^„consultancy^‟ services would fall in the definition of ^„fees for included services^‟ only if the same are technical in nature. Consultancy services which are non-technical in nature would not be covered by the definition of ^„fees for included services^‟.
• Keeping in view the facto-legal position, it was held that the nature of services rendered by CKP Inc. to the assessee is such that the same cannot be regarded as technical or consultancy services so as to fall within the definition of “fees for included services” as given under Article 12 of the Indo-USA tax treaty. The payment made for the said services, thus, is in the nature of business profits in the hands of CKP Inc. as covered under Article 7 of the India-USA tax treaty and the said party admittedly having no Permanent Establishment in India in the year under consideration, the same was not chargeable to tax in India. Consequently, the assessee was not liable to withhold tax from the said payment made to CKP Inc.

ISSUE NO. 2

• The CROs use their own skills, equipments, etc., to prepare the report. However, what they ultimately supply to the assessee is the analysis report and there is no parting with their skills and know-how to the assessee. The services rendered by CROs, thus, are not technical in nature but are merely in the nature of commercial services. The fees paid for such services does not amount to fees paid for technical services or fees paid for making available any technology to the assessee-company in order to enable to apply the same for developing/inventing new drugs in future.
• In the case of Anapharma Inc., in re [2008] 305 ITR 394 (AAR-New Delhi), a similar issue had come up for consideration before the AAR wherein the non-resident assessee had received similar payments from Indian pharma companies for providing services of CROs and the question was whether the said payments are taxable in India. It was held by the AAR in this context that the services rendered by the non-resident assessee as CROs were not for fees for included services as they did not make available any technology to the recipient.
• Keeping in view the facto-legal position, the nature of services rendered by CROs to the assessee is suchthat the same cannot be regarded as technical or consultancy services so as to fall within the definition of “fees for included services” and the payment made for such services, therefore, was not chargeable to tax in India in the hands of the concerned CROs. Consequently, the assessee was not liable to withhold tax from the said payment made to CROs. The order of the Commissioner (Appeals) was upheld and the Revenue^‟s appeal was dismissed.