Case Law Details

Case Name : Buro Happold Limited Vs. DCIT (ITAT Mumbai)
Appeal Number : ITA No. 1296/Mum./2017
Date of Judgement/Order : 15/02/2019
Related Assessment Year : 2012-13
Courts : All ITAT (6002) ITAT Mumbai (1832)

Buro Happold Limited Vs. DCIT (ITAT Mumbai)

Background

Nowadays, it is quite normal that multinational companies or companies belonging to same group having international presence share their human resources, experiences, technical knowledge & know how for overall growth and development of the group. From taxability point of view, the consideration paid by the service receiver to the service provider for receipt of such technical services are on continuous radar of the Income Tax Authorities. The tax authorities while analysing this transaction look at the substance of the transaction rather than its form due to which, issues relating to withholding of tax at the time of payment/credit or taxability of such income earned by the foreign company arises.

The definition of ‘Fees for technical services’ as per Explanation 2 to section 9(1)(vii) of the Income Tax Act, 1961 (‘the Act’) states that:

 “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”. 

From the above definition, fees for technical services widely includes any consideration for rendering of managerial, technical and consultancy services. However, in some tax treaties (e.g. India-UK treaty, India-Singapore treaty) the term ‘fees for technical service’ is restrictive to include payment made to any person in consideration of providing managerial, technical and consultancy services, if such service make available the technical knowledge, experience, skill, know how or process.

The term ‘Make available’ has been explained by Revenue authorities in case of CIT & Another vs. De Beers India Minerals Pvt Ltd [2012] 346 ITR 467 (Karnataka HC), Raymond Ltd vs. DCIT [2003] 86 ITD 791 (Mum-ITAT), Intertek Testing Services India Pvt Ltd [2008] 307 ITR 418 (AAR Rulings) which broadly means as under:

  • The technical or consultancy services rendered should be of such a nature that ‘makes available’ to the recipient technical knowledge and know how.
  • The service should be aimed at and result in transmitting the technical knowledge etc so that the payer of service could derive an enduring benefit and utilize the knowledge or know how in future or on his own without the aid of the service.
  • the technical knowledge, skill, etc must remain with the person receiving the services even after the particular contract comes to an end.
  • Some sort of durability or permanency of the result of the ‘rendering of services’ is envisaged, which will remain at the disposal of the person utilizing the services.
  • The fruits of the services should remain available to the person utilizing the services in some concrete shape such as technical knowledge, experience, skill etc.

Based on the above explanations on the term make available in the judicial precedents, it is generally construed that make available clause is mainly applicable in respect of services which would impart technical knowledge, skill, experience, knowhow or process and not in the cases where there is supply of technical plan or design.

Recently, the Mumbai ITAT has addressed on the issue regarding the applicability of ‘make available’ clause when there is supply of technical plan/design in the case Buro Happold Ltd vs DCIT (ITA No 1296/Mum/2017, dt of order 15 February 2019). The Facts, Issue and the Judgement of the case are as under:

Facts

Buro Happold Ltd (‘the assessee’) is a company registered in UK and is tax resident of UK. The assessee is basically involved in the business of providing engineering design and consultancy services. As a part of such services, the assessee provides structural and MEP (Mechanical, Electrical and Public Health) engineering for various buildings. For the captioned AY, the assessee filed its return of income declaring nil income. During the course of assessment proceedings, the Assessing Officer (‘the AO’) observed that the assessee has earned an amount of  INR 1.09 crores, from the provision of consulting engineering services to Buro Happold Engineers India Pvt. Ltd. (‘Group Company’ or  ‘BHEI’) and contended that such income can be considered as fees for technical service in the hands of the assessee. The assesse in rebuttal to AO’s contention submitted that it had not made available any technical knowledge or skill to BHEI while providing engineering design and consultancy services and therefore, such amount received cannot be called as fees for technical service and such income shall be considered as business income of the assesse and in the absence of Permanent Establishment in India the said income cannot be considered as taxable in India.

Issues before Mumbai ITAT

  • Whether development and transfer of a technical plan or technical design simplicitor without making available technical knowledge, experience, skill, knowhow or processes, etc., would be in the nature of fees for technical services.
  • In the event, it is held that development and transfer of a technical plan or a technical design also requires making available technical knowledge, experience, skill, knowhow or processes, etc., whether in the present case such condition is satisfied.

Held

The Hon’ble Mumbai ITAT while addressing this issue in favour of assesse has observed that on careful reading of Article 13(4)(c) of the India-UK DTAA, it becomes clear that the words “or consists of the development and transfer of a technical plan or technical design”, appearing in the second limb has to be read in conjunction with “make available technical knowledge, experience, skill, knowhow or processes”. The reasoning of the Assessing Officer that the second limb of Article-13(4)(c) of the India-UK DTAA has to be read independently, cannot be the correct interpretation of the said Article.

As per the rule of ejusdem generis, the words “or consists of the development and transfer of a technical plan or technical design” will take colour from “make available technical knowledge, experience, skill, knowhow or processes”.

The ITAT further held that, the department has failed to establish on record that through development and supply of technical designs / drawings / plans the assessee has made available technical knowledge, experience, skill, knowhow or processes to the service recipient so as to bring the amount received within the meaning of fees for technical services under Article-13(4)(c) of the India-UK DTAA. Therefore, the amount received by the assessee has to be treated as business profit and in the absence of a PE in India, it cannot be brought to tax in India.

Conclusion

This decision of Mumbai ITAT gives a new direction to the ‘make available’ clause to cover within its ambit the transfer of technical plan or design. In simple words, in order to determine taxability of transaction involving transfer of technical plan or design one needs to test such transaction under the ‘make available clause’. This decision can be used as a defence by the tax payers where there has been transfer of technical plan or design, however the same has not been ‘make available’  thereby, excluding it from the definition of fees for technical services.

FULL TEXT OF THE ITAT JUDGEMENT

Aforesaid appeal has been filed by the assessee challenging the order dated 8th November 2016, passed by the learned Commissioner of Income Tax (Appeals)–55, Mumbai, for assessment year 2012–13.

2. In ground no.1, the assessee has challenged the taxability of amount received of Rs. 1,01,44,808, towards common cost recharge as fees for technical services. Whereas, in ground no.2 the assessee has challenged taxability of the amount of Rs. 1,09,03,039, received towards consulting engineering services as fees for technical services.

3. Since, the Assessing Officer and the first appellate authority have treated the common cost recharge as part of consulting engineering services, hence, is in the nature of fees for technical services, we propose to address the preliminary issue whether the amount received towards consulting engineering services can be treated as fees for technical services under the India–United Kingdom (UK). Double Taxation Avoidance Agreement (DTAA).

4. Brief facts are, the assessee, a company, is registered in UK is a tax resident of UK. The assessee is basically involved in the business of providing engineering design and consultancy services. As a part of such services, the assessee provides structural and MEP (Mechanical, Electrical and Public Health) engineering for various buildings. For the assessment year under dispute, the assessee filed its return of income on 31st March 2014, declaring nil income. In course of assessment proceedings, the Assessing Officer after calling for necessary information and details and examining them found that in the previous year relevant to the assessment year under dispute the assessee has earned an amount of Rs. 1,09,03,039, from the provision of consulting engineering services to Buro Happold Engineers India Pvt. Ltd. (BHEI). Further, the assessee has also received an amount of Rs. 1,01,44,808, from BHEI as a cost recharge towards Head Office expenses. Being of the view that the aforesaid amounts received by the assessee, since, has accrued and arisen as income in India as per section 9 of the Income Tax Act, 1961 (for short “the Act”) called upon the assessee to explain why it should not be treated as fees for technical services under Article–13(4) of the India–UK tax treaty and brought to tax. In response, it was submitted by the assessee that as per Article– 13(4)(c) of India–UK tax treaty, unless the assessee makes available technical knowledge, experience, skill, knowhow or processes or consists of the development and transfer of a technical plan or technical design, it cannot be treated as fees for technical services. It was submitted that since the term “make available” is not defined under the tax treaty, the meaning of the same has to be understood in general parlance and based on judicial precedents. Relying upon certain judicial precedents it was submitted that since while providing engineering consultancy services the assessee has not made available any technical knowledge or skill to BHEI for enabling it to apply them independently, the amount received by the assessee would not qualify as fees for technical services under India–UK DTAA and has to be charecterised as business income under Article–7 of the DTAA. It was submitted, since the assessee has no Permanent Establishment (PE) in India, such business income cannot be brought to tax under Article–7 of the DTAA. As regards common cost recharge, it was submitted that the assessee incurs certain common cost, such as, legal, I.T. related, H.R., etc. for group entities and the cost for the same is charged to various group entities based on a pre–determined cost allocation / apportionment key. It was submitted, since the amount received by the assessee from BHEI is a part of cost allocation on a cost–to–cost basis without any profit element, it is not taxable in India.

5. The Assessing Officer after considering the submissions of the assessee did not find merit in them. As regards receipt from engineering consultancy services, the Assessing Officer observed that the amount received falls broadly under the category of fees for technical services as per Article–13 of India–UK tax treaty. Referring to consulting services agreement for MEP engineering services design executed on 6th May 2011, the Assessing Officer observed that the services rendered by the assessee includes supply of design / drawing and the provision of other services are ancillary to supply of designs and drawings. The Assessing Officer observed, as per Article–13(4)(c) of the India–UK tax treaty, payment received for development and transfer of a technical plan or technical design would be in the nature of fees for technical services, irrespective of the fact, whether it also makes available technical knowledge, experience, skill, knowhow, etc. Interpreting the provisions of Article–13(4)(c), the Assessing Officer observed that the words “make available” go with technical knowledge, experience, skill, knowhow, etc., but do not go with “the development and transfer of a technical plan or a technical design”. He observed, the second limb of clause–(c) of Article–13(4) of India–U.K. tax treaty can be invoked when the amount is paid in consideration for rendering of any technical and consultancy services consisting of development and transfer of a technical plan or technical design. Thus, he held that the amount received of Rs. 1,09,03,039, being in the nature of fees for technical services under Article–13(4)(c) of the India–UK DTAA is taxable in India and levied tax @ 15% on the gross amount as per Article–13(2)(a)(ii) of the India–UK tax treaty.

6. As regards amount of Rs. 1,01,44,808, received on account of common cost recharge, the Assessing Officer observed that assessee’s claim that allocation of cost is on the basis of a pre–determined cost allocation / apportionment key is unacceptable since the assessee has not explained what is the pre–determined apportionment key and the justification for such apportionment. Further, he observed, assessee’s claim that the allocation / payment is on cost–to–cost basis is not acceptable since no supporting evidence in this regard was furnished except an invoice raised. Thus, the Assessing Officer concluded that the cost recharge relates to and is ancillary to the provision of consulting engineering services which has been held to be in the nature of fees for technical services, hence, taxable in India. He observed, cost recharge is merely an extension of and directly related to the consulting engineering services, hence, is taxable as fees for technical services under Article–13(4)(c) of the India–UK tax treaty. Accordingly, he brought to tax the amount of Rs. 1,01,44,808, to tax by treating it as fees for technical services. Being aggrieved with the additions made by the Assessing Officer as aforesaid, the assessee preferred appeal before the first appellate authority.

7. The learned Commissioner (Appeals), however, concurring with the view expressed by the Assessing Officer held that the amount received towards consulting engineering services is in the nature of fees for technical services not only under section 9(1)(vii) of the Act but also under Article–13(4)(c) of the India–UK tax treaty. He observed, technical services in the form of designing and planning could not have been rendered by the assessee without locating technical personnel in India for execution of the designs and drawing. He observed, planning, designing and execution are the three cornerstones of the technical services irrespective of the way an agreement is worded and drafted. He observed, since in assessee’s case an entire team of experts from London arrived for nearly a month for every project executed during the year and assisted and guided the team of customers and clients in execution of the project at the site of the clients through discussion, dialogue, assistance, guidance, instructions and supervision of the customers’ project sites in India, the amount received towards such services is in the nature of fees for technical services under section 9(1)(vii) of the Act. Referring to Article–13 of the India–UK tax treaty, the learned Commissioner (Appeals) observed that provision of specific design and drawing for each project requires application of mind by various technicians having knowledge in the field of architectural, civil, electrical, electronic faculties and even making a specific project related drawing and design will amount to provision of architectural services. Further, overseeing its implementation and execution at site in India by technical personnel from London will amount to making available the technical services consisting of providing drawing and design would be fees for technical services both under section 9(1)(vii) of the Act as well as Article–13 of India–U.K. tax treaty. Thus, he held that the amount received towards consulting engineering services is in the nature of fees for technical services and taxable in India. As regards the amount received towards cost recharge, learned Commissioner (Appeals) agreed that such amount is ancillary and incidental to consulting engineering services, hence, to be treated as fees for technical services.

8. The learned Authorised Representative submitted, Pune Municipality wanted to develop a twin city, hence, appointed assessee as a consultant. He submitted, as per the terms and condition of the agreement, there is no specific price structure for technical design and plan. In this context, he drew our attention to relevant clauses of the agreement submitted in the paper book. He submitted, as per the terms of the agreement, the assessee is to receive an amount of ` 1.2 per sq.ft. based on the specified development area. He submitted, even with regard to other projects in Mumbai, the plans are made by architect of the builder. He submitted, the assessee is rendering consultancy services and supply of design and drawing is only incidental to such consultancy services. He submitted, being a tax resident of UK, assessee is governed by India–UK tax treaty. He submitted, the consultancy services provided by the assessee are project based and the consultancy services for one project cannot be used for any subsequent project. Drawing our attention to Article– 13(4)(c) of India–UK tax treaty, the learned Authorised Representative submitted, for treating the amount received by the assessee as fees for technical services, the assessee must make available technical knowledge, experience, skill, etc. He submitted, the words “consists of the development and transfer of technical plan or technical design” in the second limb of Article–13(4)(c) cannot be read disjunctively but has to be read along with the first limb. Therefore, unless the development and transfer of a technical plan or technical design makes available the technical knowledge, experience, skill, know how or processes to the service recipient, the amount received cannot be treated as fees for technical services. The learned Authorised Representative submitted, since the technical plan or design provided by the assessee is project specific, there is no scope for the service recipient to use such plan or design subsequently in any other project. Thus, he submitted, the amount received towards consulting engineering services cannot be treated as fees for technical services.

9. As regards the amount received towards cost recharge, the learned Authorised Representative submitted, except the agreement, the assessee had produced all other evidences before the Assessing Officer. The learned Authorised Representative submitted, even assuming but not admitting that the assessee had not produced any evidence towards apportionment / allocation of cost, in worst case scenario, the amount received towards cost recharge can be treated as business profit. However, in the absence of a PE in India such amount cannot be brought to tax. He submitted, the departmental authorities have not established that there is any element of provision of technical service in the cost recharge. Therefore, under no circumstances, it can be treated as fees for technical services.

10. The learned Departmental Representative orally as well as through written submission dated 20th November 2018, submitted that since the assessee has neither supplied any agreement with BHEI regarding consulting engineering services, an adverse inference has to be drawn against the assessee. He submitted, the assessee has also not disclosed the complete facts of its business model. In this context, he brought to our notice certain documents filed in the paper book to indicate that the same person has signed both on behalf of the assessee and BHEI. He submitted, as per the material furnished by the assessee in the paper book, the services rendered in relation to Goel Ganga Group project includes infrastructure engineering, concept design, master planning, renewable energy, west to energy, rain water harvesting, traffic transportation engineering, ground engineering, Geo technical, etc. He submitted, since the assessee itself was not executing the project, it has provided technical/engineering consultancy advice as well as technical design to parties in India enabling them to further apply and re–apply such technology in India. Thus, he submitted, the fees received by the assessee is for making available technical knowledge, experience as well as development and transfer of a technical plan or technical design. He submitted, a reading of the agreement between the assessee and BHEI makes it clear that the key deliverable of the assessee is development and transfer of technical designs/drawings. In this context, he drew our attention to the relevant pages of the paper book. Thus, he submitted, in each segment of advice and drawings BHEI and assessee participate together and they do not work in isolation to each other. Their works are inter–dependent which is not possible unless they share knowledge and knowhow, etc. He submitted, BHEI makes designs and drawings only after understanding and incorporating the effect of designs and drawings and advisory provided by the assessee. He submitted, there are various other parties also were involved in the overall scheme. He submitted, BHEI is responsible to the Indian client for everything and the assessee is only a sub–contractor of BHEI. He submitted, it is impossible on the part of BHEI to implement the project without the knowhow and experience of the assessee. He submitted, the employees of the assessee work closely with the employees of the Indian company and supports/advises them and provide assistance to them on various technical and engineering matters. Therefore, technical knowledge, experience, etc., are made available to the Indian company. He submitted, the technical services provided by the assessee are of such nature that they are capable of being used in future. He submitted, there is no bar under the agreement for the Indian company for using such knowhow, knowledge in future. Thus, he submitted, the amount received by the assessee is in the nature of fees for technical services under Article–13(4)(c) of the India–U.K. tax treaty. In this context, he heavily relied upon the observations of the first appellate authority. Further, in support of his contention, the learned Departmental Representative relied upon certain judicial precedents as mentioned in the written submissions.

11. As regards the amount received by the assessee towards cost recharge, the learned Departmental Representative submitted, the assessee has failed to lead any evidence to prove that services have actually been rendered for the cost recharge. Further, he submitted, the assessee failed to furnish any document to satisfy the need test. He submitted, no documentary evidence was furnished by the assessee to establish that BHEI had actually required such services. He submitted, no documentary evidences were also filed indicating the manner in which the services to be provided to BHEI were identified. He submitted, BHEI has no knowledge and say in finalization of names, qualifications of persons allegedly working for it. It has no say or control over the foreign company making the expenses. He submitted, the Indian company was incorporated on 15th February 2008, whereas, the cost sharing started w.e.f. 1st April 2011. He submitted, if the Indian company was able to conduct its business activity in the absence of any services provided by the assessee, there was no need for availing such services afterwards. He submitted, the assessee also failed to furnish any documentary evidences to show that services were actually rendered to the Indian company. He submitted, the assessee also failed to prove the benefit test by demonstrating that the services rendered are in commercial interest of the Indian company and the Indian company has derived any utility or benefit out of such services. Thus, he submitted, since the assessee has failed all the aforesaid tests, the claim of the assessee cannot be accepted on face value. Further, he submitted, since there is one contract between the assessee and the Indian company for all kind of services, the cost recharge nothing but ancillary and incidental to the provision of technical designs/plans/drawings, hence, has to be treated as fees for technical services as per Article–13(4)(c) of the India–UK tax treaty. In this context, he referred to the extract of the decisions cited in the written submissions.

12. In rejoinder to the written submissions filed by the learned Departmental Representative, the learned Authorised Representative submitted, the learned Departmental Representative has advanced completely new/fresh arguments which are neither the reasoning of the Assessing Officer nor the First Appellate Authority. He submitted, learned Departmental Representative cannot raise new contentions/propositions which were never raised by the departmental authorities. In support of such contention, the learned Authorised Representative relied upon the following decisions:–

i) Mahindra & Mahindra v/s DCIT, 313 ITR (AT) 263 (Mum.) (SB);

ii) CIT v/s Prakash L. Shah, 115 ITD 167 (Mum.) (SB);

iii) ACIT v/s Aishwarya Rai, 127 ITD 204 (Mum.); and

iv) ITO v/s Anant Y. Chavan, 126 TTJ 984 (Pune).

13. Without prejudice to the aforesaid submission, the learned Authorised Representative has given parawise rebuttal to the written submissions filed by the Department in the following manner:–

Sr.
No.
Paragraph No. of written sub Our comments
1. 1 and 2 No comments.
2. 3
  • The assessee has submitted invoice, break-up of expenditure etc. Without anything further, the
    same cannot be disbelieved by the Revenue.
  • The corresponding expenditure has been debited and claimed as common cost recharge by Buro Happold India which has been allowed by the Revenue in 143(3) assessment for A.Y. 2013-14 and 2014-15 whereas for A.Y. 2012-13 the same has been accepted by Revenue u/s. 143(1) of the Act. As undertaken during the course of the hearing, the assessee is enclosing the copies of scrutiny assessment order for A.Y. 2013-14 and 2014-15. (Exhibit 1& Exhibit 2)
  • In any case, non-furnishing of further evidence does not lead to the conclusion that the receipt is on account of rendering of engineering consultancy services.
  • Need test, evidence test and benefit test are relevant for the person incurring the expenditure not for recipient.
3. 4
  • The expenditure against the title “unknown Barclay Card” represents expenditure through Barclay”Credit Card. The word unknown” is due to typographical error.
  • The Revenue has concluded in para 4.5 that the sum represents markup” and not the cost. If this is correct, then only a markup can be considered for the purpose of taxation. In any case, the conclusion that it represents consideration for engineering consultancy services is not correct.
  • The facts in the case of Centrica India Offshore Pvt. Ltd. v CIT [364 ITR 336 (Del)] relied upon by the department in para no 4.7 are completely different from that of assessee. The Hon’ble High Court was deciding an issue regarding taxability of reimbursement of salaries and while deciding the same the Hon‟ble High Court dwelled upon the issue that nomenclature of the agreement cannot change the nature of services
4. 5
  • The Assessing Officer did not ask for agreement copies vide notice dated 21.01.2015 

(copy enclosed as Exhibit 3). The submissions of assessee dated 17.03.2015 pertains to consultancy engineering services agreement in respect of Goel Ganga Project and Worli project.

  • The fact of cost sharing agreement was raised at the fag end of assessment proceedings on 17.03.2015 as a result of which the cost sharing agreement was produced for the first time before CIT(A).
  • In initial years, as per the group policy,
    common costs were not recovered from entities, to support the initial years of operations.
  • The assessee has entered into similar bilateral agreements with other group companies as well and a sample copy of the agreement was produced before CIT(A).
  • There is no legal requirement of registering the inter-company agreement.
  • Mr Michael Williamson was appointed as
    director on 26.02.2014. However he was employed as CFO of the company since 2011. The designation
    mentioned as director in the agreement is by oversight.
  • The break-up of consideration on account of consultancy/engineering services and cost allocation receipts for the current and subsequent years is as under:
A.Y. Consulting &
Engineering
Service
Cost Recharge
2012-13 (Year
under
consideration)
Rs. 1,09,03,039 Rs. 1,01,44,808
2013-14 Rs. 2,76,51,790 Rs. 3,86,37,281
2014-15 Rs. 1,20,58,336 Rs. 5,16,60,995
2015-16 Rs. 96,59,182 Rs. 2,49,71,127
2016-17 Rs. 1,07,79,220 Rs. 3,42,31,362

It is evident from the above, that there is no co-relation between the amounts of consultancy / engineering services and cost recharge. If the revenue’s allegation that part of revenue from consultancy services has been depicted as cost recharge, then there would have been some
correlation between the amounts of consultancy / engineering services and cost recharge.

  • In subsequent years, the Assessing Officer has accepted that cost recharge is separate and not on account of consultancy and engineering services. It is submitted that this is the only year wherein the Assessing Officer has alleged that cost recharge is not separate but part of consultancy services.
5. 6
  • The revenue has not brought any evidence on
    record to conclude that cost allocation receipts are part of consultancy engineering services.
6. 7
  • This issue would arise if it is held that cost
    allocation receipt is not in nature of reimbursement but taxable as consultancy services. In any case, the same would not fall within the definition of Fees for Technical Services as per Article 12 of India UK DTAA.
7. 8
  • It is submitted that the revenue has picked up certain clauses from the agreement to contend that the assesse is making available technical knowledge to the Indian company by providing certain services. It is submitted that if the agreement is read as a whole, it is evident that services provided under cost allocation agreement are general managerial services such as managing IT infrastructure, creation and development of banking relationships, provision and management of insurance, etc and do not make available’ any technical knowledge to Indian company.
8. 9
  • The judgment of AAR in case of Intertek Testing Services (307 ITR 418) relied upon by revenue merely lays down that nomenclature is not determinative. While there is no dispute on this well settled proposition, it is submitted that the agreement has to be read as a whole and not selectively to determine the nature of services provided.
9. 10
  • It is not the case of lower authorities that cost
    allocation receipts taxable as Royalty as per Article 13 of India UK DTAA. The revenue cannot raise a new argument or issue which was not before the lower authorities. We rely on submission made at para Nos 1 and 2 above

Ground No 2: Taxability of amount received from consultancy engineering services as fees for technical services

10. 11
  • There is no separate agreement between assessee and Indian company. The consultancy services availed by Indian company are project specific. The project wise letters and agreements exchanged between them were submitted on sample basis before lower authorities.
  • Buro India has entered into an agreement with Goel Ganga and assessee has received all its payments from Buro India. The detailed scope of work, terms and conditions are provided by Buro India and assessee merely confirms the same. Assessee has only exchanged a letter with Goel Ganga Group to confirm the scope of work and has not entered into any agreement with Goel Ganga.
  • It is not the case of lower authorities that assessee has made available technical knowledge, skills to Burro India. The revenue cannot raise a new argument or issue which was not before the lower authorities. We rely on submission made at Para Nos 1 and 2 above. In any case, as stated above, the assessee‟s services are project specific and cannot be used in future by Buro India for any other project hence, it cannot be said that assessee is making available its technical knowledge to the Buro India.
  • It is submitted that no evidence has been brought on record by the revenue, upon whom onus lay, to contend that service provided by assessee are not project specific and can be used by Buro India for other projects. It is submitted that without bringing any positive evidence on record, it cannot be alleged that the services would be used by employees of Buro India in future especially when the services are not general but specific to a particular project.
  • Use of design and drawings is incidental to providing the consultancy services.
  • The revenue has relied merely on the payment schedule to conclude that the assessee is transferring the designs and drawings rather than looking at the scope of work mentioned in the agreement.
  • Assessee and Buro India work together on a project but on different aspects. In-fact Assessee is hired by Buro India to specifically work on certain specialised services (like master planning, Acoustics Engineering, Environmental engineering, etc) where Buro India does not have necessary skills. These are specialised services gained over years of working in this field by Assessee and the same cannot be transferred to Buro India merely because they are part of joint meetings with client or they are jointly working on a project. Further, as stated above, these are project specific services and cannot be used by Buro India for other projects.
  • All decisions relied upon by the revenue are on the proposition of “make available”. As stated above, it is not the case of lower authorities that the assessee has made available technical knowledge to Buro India. The revenue cannot raise a new argument or issue which was not before the lower authorities. We rely on submission made at Para Nos 1 and 2 above
  • Without prejudice to the above, the decisions relied are not applicable to the facts of the present case
  • Foster Wheeler France SA v DDIT (2016) 157 ITR 793 (Chennai)
  • Foster Wheeler France was provided with best practices in engineering services in form of written practices, procedures, forms, specifications and details. Also, the work of Foster Wheeler France reviewed, and execution plan was tracked. However, in the present case, Assessee was providing services which Buro India was not in a position to provide and there was no provision of services to Buro India, and no plans or procedures were provided to Buro India.
  • US Technology Resources P Ltd. vs ACIT (2013) 39 Taxmann.com 23 (Cochin)

In this case, US Technology Resources India was receiving advice, input, experience, experiment–tation and assistance from its US Company in its decision-making process of financial and risk management. US company was also giving training to employees of US Technology Resources India in making use of the inputs, experience, etc. for taking a better and possible decision in order to achieve the desired objective and business goal. Accordingly, it was held that US Company is not making decision for the Indian company but was enabling the Indian company to take decision through its services. In present case, Assessee is not enabling Buro India to carry out any services, in-fact it provides certain specialised services directly to the customers in India

  • Sargent & Lundy, LLC, USA vs. Additional Commissioner of Income Tax (IT) (2013) 37 taxmann.com 134 (Mum)

In this case L&T had taken a bid for installation of power project and to support the bid Sargent & Lundy had provided technical plan, design, projects, etc. which were to be used by L&T to install the power project. In the present case, the consultancy services provided is directly to the ultimate customer and nothing is as such provided to Buro India which is being used by it to render any future services

  • Shell India Markets Pvt Ltd (2012) 345 ITR 206 (AAR)

In this case Shell India received advise and support from its group company in UK for business support services which were then implemented by Shell India. Also, employees of UK Company were working closely with the employees of Shell India and the know-how generated in the services was transferred to the India company as per the agreement. In the present case, Assessee is providing specialised services on a project to project basis and hence the same cannot result is transferring of knowledge.

14. We have considered rival submissions and perused material on record. We have also applied our mind to the decisions relied upon by both the parties. The core issue which needs to be addressed is, whether the amount received by the assessee towards supply of technical designs, drawings, plans, etc., under the consulting engineering services is to be treated as fees for technical services under the India–UK tax treaty. Once this issue is decided, the issue whether cost recharge is in the nature of fees for technical services will automatically get resolved since both the Assessing Officer and learned Commissioner (Appeals) have treated it as fees for technical services on the reasoning that such cost recharge is ancillary and incidental to consulting engineering services.

15. There is no dispute between the parties that the assessee being a tax resident of UK is governed under India–UK tax treaty and if the treaty provisions are more beneficial, they will apply to the assessee in terms with section 90(2) of the Act. From the assessment stage itself, the assessee has pleaded that since the supply of technical design/ drawings/plans by it to the Indian entity does not make available any technical knowledge, knowhow, process, etc., it cannot be treated as fees for technical services under Article–13(4)(c) India–UK tax treaty. Whereas, the Assessing Officer has rebutted such contention of the assessee on the reasoning that as per the second limb of Article– 13(4)(c) of the India–UK tax treaty, amount received towards development and transfer of a technical plan or technical design, by itself, is in the nature of fees for technical services and there is no necessity of fulfilling the condition of “make available”. The learned Commissioner (Appeals) while agreeing with the aforesaid reasoning of the Assessing Officer has further supplemented it by observing that through the provision of technical drawing and design and consultancy services provided through personnel at the site, the assessee has made available technical knowledge, experience, skill, knowhow or processes to the Indian entity, hence, the amount received is in the nature of fees for technical services.

16. For a better understanding of the dispute, it is necessary to look into the scope of work to be undertaken by the assessee under the relevant agreements. On a perusal of the sample copies of the agreements, it is noticed that the assessee was entrusted the work of providing consulting services for a twin city project by the Pune Municipality as well as other building projects in Mumbai. Further, on perusal of the sample copies of the agreement filed in the paper book, it is seen that the work of the assessee is basically to provide consultancy services relating to the projects and in that context to provide technical designs/drawings/plans. It is a fact on record that technical designs / drawings / plans supplied by the assessee under contract are project specific.

17. Keeping in view the aforesaid factual position, we need to examine the taxability of the amount received by the assessee under the India–UK tax treaty. As per Article–13 of the India–UK tax treaty, royalty and fees for technical services arising in a contracting State and paid to a resident of other contracting State may be taxed in that other State. However, such royalty and fees for technical services can also be taxed in the contracting State in which they arise subject to certain restrictions and conditions as enumerated in Article–13(2) of the India–UK tax treaty. Since, in the present appeal the departmental authorities have treated the amount received by the assessee as fees for technical services, we have to look to the meaning of fees for technical services under India–UK tax treaty. Article–13(4) of the India–U.K. tax treaty defines fees for technical services as under:–

“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.”

18. Since, the conditions of Article–13(5) of the India–UK tax treaty are not applicable in the present case, it is not relevant for our purpose. Undisputedly, both the departmental authorities and the assessee are in agreement that if, at all, the amount received by the assessee is treated as fees for technical services, it will come within Article–13(4)(c) of the India–UK tax treaty. Therefore, the following two issues arise for our consideration viz.,

(i) Whether development and transfer of a technical plan or technical design simplicitor without making available technical knowledge, experience, skill, knowhow or processes, etc., would be in the nature of fees for technical services; and

(ii) In the event, it is held that development and transfer of a technical plan or a technical design also requires making available technical knowledge, experience, skill, knowhow or processes, etc., whether in the present case such condition is satisfied.”

19. Undisputedly, in the present case, the amount received by the assessee, which has been treated as fees for technical services is towards supply of technical drawings/designs/plans. On a careful reading of Article–13(4)(c) of the India–UK tax treaty it becomes clear that the words “or consists of the development and transfer of a technical plan or technical design”, appearing in the second limb has to be read in conjunction with “make available technical knowledge, experience, skill, knowhow or processes”. The reasoning of the Assessing Officer that the second limb of Article–13(4)(c) of the India–UK tax treaty has to be read independently, in our view, cannot be the correct interpretation of the said Article. As per the rule of ejusdem generis, the words “or consists of the development and transfer of a technical plan or technical design” will take colour from “make available technical knowledge, experience, skill, knowhow or processes”.

20. Having held so, now it is necessary to examine whether by supply of technical, designs, drawing, plans, the assessee has made available technical knowledge, experience, skill, knowhow or processes. As per the settled principle of law, technology is considered to have been made available when the recipient of such technology is competent and authorised to apply the technology contained therein independently as an owner without depending upon the service provider. The recipient of technology should be able to make use of technical knowledge, experience, skill, knowhow or processes by himself in his business or for his own benefit and without recourse to the service provider in future and for this purpose a transmission of the technical knowledge, experience, skill, knowhow or processes, from the service provider to the service recipient is necessary. In other words, the technical knowledge, experience, skill, knowhow or processes, must remain with the service recipient even after rendering of the services has come to an end. The service recipient must be at liberty to use the technical knowledge, experience, skill, knowhow or processes in his own right. Undisputedly, in the present case, as revealed from the material on record, the technical design/drawings/plans supplied by the assessee to the Indian entity are project specific, hence, cannot be used by the Indian entity in any other project in future. Therefore, the claim of the assessee that it has not made available any technical knowledge, experience, skill, knowhow or processes while developing and supplying the technical drawings/designs/plans has to be accepted. If the Department is of the view that through development and supply of technical designs/drawings/plans the assessee has made available technical knowledge, experience, skill, knowhow or processes, it is for the Department to establish such fact through proper evidence. The assessee certainly cannot be asked to prove the negative. It is worth mentioning, while deciding a dispute of identical nature concerning fees for technical services as per India–USA tax treaty under which definition of fess for included services as per Article–12(4)(b) is identically worded like Article 13(4)(c) of the India–UK tax treaty, the Tribunal, Pune Bench, in Gera Developments Pvt. Ltd. v/s DCIT, [2016] 160 ITD 439 (Pune), has held that mere passing off project specific architectural, drawings and designs with measurements does not amount to making available technical knowledge, experience, skill, knowhow or processes. The Tribunal held that unless there is transfer of technical expertise skill or knowledge along with drawings and designs and if the assessee cannot independently use the drawings and designs in any manner whatsoever for commercial purpose, the payment received cannot be treated as fees for technical services. Though, we have taken note of other decisions cited by the learned Authorised Representative we do not intend to deliberate further on them. As regards the decisions cited by the learned Departmental Representative, we find them to factually distinguishable, hence, not applicable to the present appeal. In any case of the matter, the Department has failed to establish on record that through development and supply of technical designs / drawings / plans the assessee has made available technical knowledge, experience, skill, knowhow or processes to the service recipient so as to bring the amount received within the meaning of fees for technical services under Article–13(4)(c) of the India–UK Tax Treaty. Therefore, in our considered opinion, the amount received by the assessee has to be treated as business profit and in the absence of a PE in India, it cannot be brought to tax in India.

21. Since, we have held the amount received towards consulting engineering services to be not in the nature of fees for technical services, the reasoning of the departmental authorities with regard to cost recharge would also fail, since, they have treated it as ancillary and incidental to consulting engineering services. The, contention of the learned Departmental Representative that the cost recharge fails various tests, such as, need test, benefit test etc. is unacceptable, it is contrary to the finding of the Departmental Authorities. Once, the Departmental Authorities have treated the amount received towards cost recharge to be in the nature fees for technical services, it implies rendering of service by the assessee. Therefore, applying the very same reason on the basis of which we have held the amount received towards consulting engineering services to be not in the nature of fees for technical services as discussed above, we hold that the amount received towards cost recharge cannot be brought to tax in India in the absence of PE. Therefore, the additions made by the Assessing Officer are hereby deleted. The assessee succeeds in both the grounds.

22. In the result, assessee’s appeal is allowed.

Order pronounced in the open Court on 15.02.2019

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