AIOLOS ENGINEERING CORPORATION,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX INT. TAXATION 1(1)(1), MUMBAI

The grounds of appeal raised by the assessee are as under:

The assessee has filed its return for A.Y. 2020-21 declaring total income as NIL. The case of the assessee was selected for scrutiny assessment, accordingly notices under Section 143(2) and 142(1) were issued. The questionsraised by the AO are duly responded by the assessee thereafter a draft assessment was passed on 28.03.2022, assessing the total income of assessee at Rs. 30,28,99,032/-, which was objected by the assessee before the Dispute Resolution Panel (DRP) under the provision of Section 144C(2) of the Act. The ld. DRP had disposed of the objection of the assessee by dismissing the grounds raised before them vide order dated 30.12.2012. Accordingly, the income of assessee was assessed u/s 143(3) r.w.s. 143C(13) of the Act. While completing the assessment u/s 143(3), the AO has made an addition of Rs. 30,28,99,032 treating the income received from Tata Projects Ltd. (TPL) to be the Fees for Technical Services (FTS) and alternatively as royalty.

Being aggrieved with the aforesaid addition to the assessee is in appeal before us in the present case.

At the outset, learned Senior Counsel representing the assessee submitted that the amount received by the assessee for providing of services in the form of engineering design review is a technical consultancy service, which falls within the purview of fees for technical service defined u/s 9(1)(vii) of the Act. Further, the assessee being a tax resident of Canada holds a valid residency certificate issued by the tax authorities in Canada,is eligible to the beneficial provisions in the DTAA. As per the article 12(4) of the DTA, fee for technical service is not taxable under the DTAA, in the absence of making available technical knowledge, experience, skill, knowhow or processes. Further, as per Article 5(2)(i) of the DTAA, the term permanent establishment shall include inter ala furnishing of services other than included services as defined under Article 12 of the DTAA, through employees or other personnel if activities of such nature continuefor a period or periods aggregating more than 90 days within any 12 months period. It is submitted that the engineering design service provided by the assessee company involved complex activities requiring highly specialized skills. However, these services have not resulted in the making available of any technical knowledge, experience, skill, knowhow or processes.

Learned A.R. reiterated assessee’s submissions before the AO and before the DRP and has referred to a paper book furnished before us showing the copy of sub-contract entered between Tata Projects Ltd. and AIOLOS Engineering Corporation dated November, 5th 2018. Placed at page no. 3 to 230 of the assessess’s paper book.

Ld. Counsel referred to the scope of work which is stated at page 3 of the said agreement categorically defining the scope of work related to the design and procurement support services portion of the project in accordance with technical parameters stipulated in the contact and terms and conditions of this agreement. The responsibility of the assessee company in the said sub-contract was to perform certain activities outside India i.e. (i) technical information as required for design engineering, construction an initial operations of Trisonic Wind Tunnel (TWT) including drawing, specifications and building interface requirements and (ii) procurement support services including the review of supplier proposal documents/inspection of vendor facilities outside India to elaborate scope of work. Further, ld. A.R. referred to the clause regarding scope of work in the said agreement at para 3.2 according to which the scope of work is the design, realization, integration and commissioning of 1.2m Trisonic Wind Tunnel at VSSC. The work in Aerodynamic structure and control design, analysis, detailed design, detailed engineering, fabrication, procurement, inspection, third party inspection, transportation to site, loading and unloading material at site, civil and electrical works, integration of system, commissioning, acceptance testing, training and documentation of all system defined in this section as a fully turnkey project and shall meet to tunnel performance requirement given in Section 3.1. However, the permanent shall not enter into a separate contract for AMC with the contractor at the completion of warranty period as per terms given below at the discretion of department.

Ld. A.R. further read through the functioning of Trisonic Wind Tunnel system from the said agreement having technical specification of Tunnel system to define the scope of of work of the assessee company, Tata Projects Ltd. (EPC contractor) and Indian Space Research Organisation(client). Ld. Counsel drew out attention to the scope defined in the project under investigation wherein the assessee (AIOLOS) has been entrusted with preliminary engineering and detailed engineering for various items.

Ld. A.R. further relied on the definitions in article 12 of the Canadian Treaty, wherein at clause no. 4 the definition of fee for included services is explained, which contemplates for the purpose of article, that ‘fee for included services’ means payments of any kind to any person in consideration for the rendering of any technical or consultancy service (including through the provision of service of technical and other personal), if such services, are ancillary and subsidiary to the application or enjoyment of right, proprietary or information for which a payment described in paragraph 3 is received, or make available technical knowledge experience, skill, knowhow or processes or consist of development and transfer of a technical plan for technical design. To validate the aforesaid contention that the services provided by the assessee to Tata Projects are not in the nature of fee for technical services or royalties, Ld. Counsel submitted that the identical issue has been deliberate upon by the Co- ordinate Bench of ITAT, Pune in the case of Gera Developments Pvt. Ltd. v. DCIT (2016) 160 ITD 439 (Pune-Trib.), wherein it is held that the payments made by the assessee, Indian company to a US company for architectural design and drawings of different buildings and facilities could not be held as fee for technical services, as merely passing of project specific architectural drawings and design measurement did not amount to making available technical knowledge, knowhow or processes and consequently, no TDS was deductible from the said payment. Ld. A.R. further placed his reliance on the decision of Buro Hapold Limited v. DCIT [2019] 103 taxmann.com 344 (Mumbai)wherein the Co-ordinate Bench of Mumbai Tribunal has concluded that the payment received by an assessee,who is U.K. based company for providing consultancy services to an Indian entity will not be considered as fee for technical services under Article 13(4)(c) of the India-UK DTAA, as supply was contact specific and was not made available to Indian entity to be used in any other projects in future. Ld. A.R. also submitted certain more decisions having similar findings the same are listed as under:

Further, as to whether the aforesaid transaction between the assessee and Tata Projects Ltd. can be treated as royalty,ld. A.R. placed his reliance on certain more decisions, referred to supra, wherein it is held that the assessee company is arranging design and drawing as a foreign company for the purpose of manufacture of terminal equipments and the revenue is of the view that such transaction was in the nature of royalty within the meaning of Section 2(9)1(vi) and accordingly, brought to tax, to which commissioner of appealtook a view that transaction was merely for import of design and drawing from non-resident against a lump sump payment and therefore payment so made could not be in the nature of royalty, the Tribunal confirmed the view taken by the commissioner of appeals and the question of that whether in order that a payment made be treated as royalty for the purpose of article XIII of DTA between India and UK. We decide that the design or model etc. must retain property in them and permit use or allow right to use such patent, design models for consideration. Whether the import of design and drawing postulates and out and out transfer for sale of such design or drawing and non-resident company did not retain any property in them, consideration bad for said transfer, could not be treated as royalty falling under Article XIII of DTA between India and U.K.

It is further submitted by Ld. A.R. that while the assessee company is only providing design services which is not in the nature of creating any right, copyright, copyright to be kept with the assessee for taking enduring advantages in the form of any consideration depending upon uses of such technology by the recipients the same cannot be treated as royalty within the meaning of Article 12(3) of Indo –Canada DTAA. The definition of royalty on fee for included services are reproduced from the Canadian treaty which are as under:

Based on aforesaid submissions, it was prayed that the transaction in question was neither in the nature of royalty nor a in the nature of fee for 10 technical service, being there is absence of any make available of technical knowledge or know-how. Therefore, the same cannot be taxed in India. It is also submitted that the language of Indo-US treaty is pari-martia with the language of Indo-Canda treaty therefore, the decisions relied upon based on US-DTAA or UK DTAA can be safely applied in the case of a Company resident of Canada. Ld. A.R. are also relied on a decision of ITAT Mumbai reported in (2019) 103 taxmann.com 344 in the case of Buro Hapold Limited v. DICT (Mumbai), wherein the Tribunal has held that the payment received by assessee, a UK based company for providing consultancy services to an Indian entity will not be considered for fee technical services under Article 13(4)(C) of Indian-UK DTAA, as supply was contract specific and was not made available to Indian entity to be used in any other projects in future. It is submitted that the services of assessee, herein are also similar to services provided in the case relied upon in the case of Buro Hapold Ltd. (supra) therefore, the consideration received for such services cannot be taxed in India.

Per contra, the ld. D.R. vehemently relied on the decisions of ld. A.O./DRP and submitted to uphold the same.

We have considered the rival submissions, perused the material available on record and examined the case laws and decisions relied upon by the assessee. In order to examine and analyse the nature of the services rendered by the assessee, it is pertinent to note that, as explained by the Assessing Officer himself in the assessment order, the assessee had acted in the capacity of a sub- vendor along with Tata Projects Ltd. (TPL) and had entered into an agreement with Vikram Sarabhai Space Centre (VSSC), functioning under the Indian Space Research Organisation (ISRO), in relation to the construction of a state-of-the- art Trisonic Wind Tunnel (the project).For this purpose, TPL had entered into an agreement for undertaking design review projects in accordance with the parameters agreed upon therein. During the relevant assessment year, the assessee company rendered critical design review and final design review services, along with engineering design and review services, in relation to the project. In consideration thereof, the assessee company received income of Rs. 30,28,99,032/-. The Assessing Officer examined the nature of such receipts and called upon the assessee to explain why the same should not be taxable in India as Fee for Technical Services (FTS) or royalty.The assessee made submissions before the Assessing Officer in this regard; however, the same were not found satisfactory. The Assessing Officer accordingly concluded that the payments were made for the use of, or the right to use, any design and, therefore, fell within the ambit of royalty under the provisions of the Act as well as the India- Canada DTAA. Accordingly, the Assessing Officer held that the consideration received by the assessee from TPL towards provision of engineering design and review services constituted royalty and was taxable in India under the provisions of the Act as well as the India-Canada DTAA.The assessee challenged the aforesaid finding before the DRP. However, the DRP dismissed the objections raised by the assessee and upheld the view taken by the Assessing Officer. Consequently, the impugned addition was made in the assessment. Aggrieved by the aforesaid addition, the assessee is in appeal before us.

Before proceeding further first we have to see the nature of services which the assessee has provided to TPL, which is explained in the agreement between these two parties. The objected of the agreement is describes as under:

Further, certain definitions, as described in the said agreement are as under:

From the aforesaid clauses of the agreement, it is evident that the assessee has neither created any rights in the designs provided to TPL nor have make available any technical knowledge, experience, skill, know-how or processes to TPL. Further, the services provided by the assessee do not involve the development and transfer of any technical plan or technical design capable of being used by the Indian entity, i.e., TPL, for any other project in future, as the designs provided by the assessee are specific to the project under consideration. Therefore, respectfully following the ratio of law emerging from the decision in the case of Buro Hapold Limited (supra), we find that the services provided by the assessee are neither in the nature of Fees for Technical Services (FTS) nor royalty, consequently, cannot be taxed in India either under the provisions of the Act or under Article 12 of the DTAA between India and Canada.Further, in the case of Buro Hapold Limited (supra), the relevant finding was that where the amounts received towards consultancy and engineering services were not in the nature of Fees for Technical Services, on the ground that there was nothing on record to establish that the benefit of “make available” was bestowed upon the Indian entity for use in its future projects, apart from the project for which the assessee had rendered the services, such services could not fall within the ambit of Article 12(4)(a) or Article 12(4)(b) or Article 12(3)(b) of the India- Canada DTAA. Accordingly, such services were held not to be taxable in India.In the present case also, having regard to the terms and conditions of the agreement and the nature of services actually rendered by the assessee, we find that the technical knowledge, experience, skill, know-how or processes were not in the nature of made available to TPL in any manner enabling it to independently apply the same for any future project. The designs and technical inputs supplied by the assessee were project specific. We, therefore, find substance in the submissions of the assessee and are persuaded to set aside the findings of the Ld. AO. Accordingly, the income received by the assessee from Tata Projects Limited amounting to Rs. 30,28,99,032/- on account of the designing services rendered is held to be exempt fromincome tax in India. Accordingly, the addition made by the ld. AO is directed to deleted.

In the result the appeal filed by the assessee stands allowed in above terms.