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PER PAWAN SINGH, JUDICIAL MEMBER;
This appeal by assessee under Section 253 of Income-tax Act is directed against the order of ld. CIT(A)-55, Mumbai dated 25.03.2015, which in turn arises from the assessment order dated 22.05.2014 passed under section 143(3) r.w.s 144C(3) of the Income-tax Act (the Act) for Assessment Year 2010-11. The assessee has raised the following grounds of appeal:
1. The learned CIT(A) has erred in not adjudicating the ground that neither any show cause notice nor any opportunity was provided to the appellant to furnish reasons why GSA receipts from ACNOM and ACNRS should not be taxable.
2. The learned CIT(A) erred in confirming the action of the assessing officer in treating the GSA receipts amounting to Rs. 189,243,151 as 'fees for included services' as per Article 12 of the tax treaty between India and USA.
Mum 2015 - The Nielsen Company (US) LLC
3. Without prejudice to the above ground of appeal
, the learned CIT(A) erred in not directing the assessing officer to apportion and treat as not taxable, some portion of the total receipts towards services, which by their very nature do not make available any technical knowledge, experience, skill, "know-how to the Indian entities (in terms of the tax treaty between India and USA).
4. The learned CIT(A) erred in confirming the addition made by assessing officer by treating the reimbursements amounting to Rs. 498,576 as 'fees for included services' as per Article 12 of the tax treaty between India and USA.
5. The learned CIT(A) erred in confirming the action of the assessing officer of charging interest under section 234B and 234C of the Act.
Brief facts of the case are that the assessee is a company established under the laws of Delaware, USA. The assessee is one of the world leading Business & Information in Media & Information, Directories & Consumer Information. The assessee group is represented in India through its two legal entity i.e. AC Neilson Org-Marg Private Ltd (ACNOM) for customised research services and retails measurement services and Act Neilson Research Private Ltd. (ACNRS). The assessee filed its return of income for Assessment Year 2009-10 on 27.09.2010 declaring income of Rs. 17,75,26,437/-. The assessment was completed on 22.05.2014 under section 143(3) read with section 144C(3) of the Act. During the period relevant to the A.Y. under consideration, the assessee received a sum of Rs. 18,92,43,151/- from A.C. Nelson Indian Company under service agreement for administrative and management support services and claimed as not taxable in India under Article-12 of the India-US Tax Treaty (DTAA). The assessee claimed that the services rendered by assessee do not pertain to make available any technical knowledge, skill etc. The assessee also Mum 2015 - The Nielsen Company (US) LLC received an amount of Rs. 4,98,576/- from Indian entity on account of reimbursement of actual expenditure which does not fall under Article-12 of DTAA. The Assessing Officer treated the receipt of Rs. 18,92,43,151/- as income in the nature of fees for included services. The other receipt of Rs. 4,98,576/- was not allowed as reimbursement of expenses and considered for use of a process or formula which falls under the definition of royalty under the DTAA. On appeal before the ld. CIT(A), both the additions was confirmed. Therefore, further aggrieved by the order of ld. CIT(A), the assessee has filed the present appeal before us.
We have heard the submission of ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the Revenue and perused the material available on record. Ground No.1 relates to not providing proper opportunity and non-adjudication of ground. The ld. AR of the assessee has not argued anything. Therefore, this ground is treated as not pressed, resultantly dismissed. 4. Ground No.2 & 3 relates to treating the receipt of Rs. 18.92 Crore as fees for included services as Article-12 of India-US DTAA. The ld. AR of the assessee submits that assessee is a tax resident of USA. The assessee provided services in its group in India entity ACNON for customize research services and retail management services and to ACNRs for customize market research services. The assessee entered into licence agreement on 01.01.2009 for use of Nelson business system and knowhow 3 ITA No. 4362 Mum 2015 - The Nielsen Company (US) LLC Nelson Software and Patents in India. The assessee also entered into a separate service agreement dated 01.01.2009 with ACNRs for rendering services in the field of commercial, financial, accounting legal matters, logistics, developing and engineering, sales and marketing and others matters. The assessee received Rs. 18.92 Crore against the service agreement receipt, which cannot be treated as royalty or fees for included services as per Article-12 of India-US DTAA, not taxable in India. The Assessing Officer treated the intra-group services as services in the nature of fees for included services (FIS). The ld. AR of the assessee further submits that the services provided by assessee to India Companies as per service agreement consists of; a) Development and determination of short and long term business strategies; b) Overall management and coordination in relation to general policies and strategies per country and he if and per division; c) Maintenance of external relationships, to the extent that these services do not comprise Shareholder Services; d) Human resources services regarding group policies; e) Legal services; f) Insurance services; g) Development, control and maintenance of management information systems; h) Administrative support to group companies, including analysis of management information; i) Development of short and long term IT policies and strategies; Mum 2015 - The Nielsen Company (US) LLC j) Management and co-ordination of IT policies between group companies; k) Tax services; l) Financial risk management services, to the extent these services do not comprise Financing Services; m) Support in the area of international staffing, career development and international job rotation; and n) Market research, target research and competitor research and o) Stock based compensation.
The services rendered are purely in the nature of support services which cannot be said that they are continuous. There is no transfer of technology, skill and technical knowhow. It was submits that if there was any transfer of technology, skill etc there would be necessity to continue with the agreement and the purpose for which the services of the assessee were sought will be defeated. The ld. AR of the assessee also referred Article-12 of India-US DTAA, wherein royalty and fees for included services is defined. The ld. AR of the assessee further submits that the ld. CIT(A) relied on the decision of Authority of Advance Ruling (AAR) in case of Perfetti Van Melle Holding BV which has been set-aside by Hon’ble Delhi High Court in Perfetti Van Melle Holding BV Vs AAR reported vide [2014] 52 Taxman.com 161 (Del.) dated 30.09.2014 and this fact was brought to his notice. The ld CIT(A) despite bringing this fact to his notice relied on the same decision in confirming the action of assessing officer. Mum 2015 - The Nielsen Company (US) LLC
In further support of his submission, the ld. AR of the assessee relied upon the decision of Karnataka High Court in CIT vs. D. Beers India Minerals (P.) Ltd. 21 taxmann.com 214 (Kar.), decision of AAR in Ernest& Young (P.) Ltd.,[2010]189 Taxman 409(AAR), decision of Ahmedabad Tribunal in Sandvik Australia Pty. Ltd. vs. DDIT [2013] 31 taxmann.com 256 (Pune- Trib.), DCIT vs. Bombardier Transportation India (P.) Ltd. [2017] 77 taxmann.com 166 (Ahmedabad-Trib.). The ld AR for the assessee also filed the copy of decision of Delhi High Court in Perfetti Van Melle Holding B.V. Vs AAR [2014] 52 taxman.com (Delhi) on the reliance that the decision of AAR was set aside and the case was restored back to consider the matter afresh. The assessee has also filed on record the copy of return of income with computation of income and Transfer Pricing report under Form 3CEB, copy of licence agreement dated 01.01.2009 entered by assessee with ACNOM, copy of service of service agreement dated 01.01.2009 entered by assessee with ACNOM, copy of Indo-US DTAA and the copy of written submissions filed before ld CIT(A).
On the other hand, the ld. DR for the revenue supported the order of authorities below. The ld. DR for the revenue further submits that no separate details about the services rendered by assessee, to its group entity, have been provided during the assessment proceeding. The service agreement is a part of main agreement. The assessee has provided dedicated services which are actually in the nature of fees for included services. The 6 Mum 2015 - The Nielsen Company (US) LLC receipts are in the nature of FIS as advisory services and also signify fees for included services. In support of his submission, the ld. DR relied upon the decision of Cochin Tribunal in M/s US Technology Resources Pvt. Ltd. vs. ACIT in ITA Nos. 99-104/Coch/2017 dated 29.01.2018. 8. In the rejoinder submissions the ld. AR for the assessee submits that, the case law relied by ld. DR for the revenue is based on the different facts. In the said case the services were provided in the field of management decision making (as recorded in para 22 of the said decision), which is missing the general services agreement of the assessee. 9. We have considered the submission of the parties and have gone through the orders of authorities below. During the assessment the assessee claimed that the receipt from service agreement do not qualify as ‘fee for included services’ as per Article 12 of the India-US DTAA. The assessing officer asked the assessee to provide the service agreement and explain the nature of advisory services. The assessee filed its reply dated 19.12.2013 and also provided the details of the services rendered under the general service agreement. The assessing officer recorded the submissions of the assessee in para 6 of his order. However, the explanation furnished by the assessee was not accepted by the assessing officer. The assessing officer treated the receipt in the nature of fee for included services (FIS). The assessing officer also concluded that FIS has been defined in Article 12(4) of India-US DTAA, according to which the payment in consideration for rendering of 7 Mum 2015 - The Nielsen Company (US) LLC any consultancy services, which consist of provision of services for technical or other personnel, if such services inter alia make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. It was further concluded that Memo of Understanding attached with India-US DTAA, the term ‘make available’ means that the person acquiring the services is enabled to independently apply the technology. The facts that the services are ‘continuous’ does not itself imply that they do not enable the recipient to independently apply the knowledge/ skill that is provided. The word ‘enable’ is used in the sense that the services should be such that they make the recipient able or wiser in the subject matter. The services are continuous to ensure that the knowledge provided and applied by the recipient can be revived for further enabling it to perform its task better.
The assessing officer further concluded that Article 12(4)(b) of DTAA between India and USA all the administrative and management support services rendered as per general service agreement in intra group services are with the primary intention to maintain the brand name of assessee and know-how, with the intention of carrying on the business in line with the best practice globally. The entity may not be part of the group but the payment is for the usage of brand name of assessee and hence management support services is in the nature of FIS. The assessing officer also concluded that the advisory services have been used by the Indian entities in the course 8 ITA No. 4362 Mum 2015 - The Nielsen Company (US) LLC of their business activities which are utilised for the betterment and improvement of their business model and other practices, which has ultimately reflected in the increase of profitability of Indian entity. The employees of Indian entity are highly qualified and educated. Therefore, the receipt of general service agreement was treated by assessing officer as fee for include services. The assessing officer also relied on the decision of AAR in Perfetti VAN Holding B.V (case No. AAR No.869 of 2010 dated 09.12.2011).
Before ld CIT(A) the assessee filed detailed written submissions as made before us. It was also specifically brought to the notice of ld CIT(A) that the decision rendered by AAR in Perfetti VAN Holding B.V (supra) relied by the assessing officer has already been set aside by Delhi High Court, directing AAR to pass the order afresh. The ld CIT(A) confirmed the order of assessing officer without giving any different finding.
We have also examined the service agreement dated 09.01.2009 between assessee and ACNOM. The assessee has agree to provide the services to ACNOM which we have noted in para 4(supra). We have also perused the provisions of India USA DTAA as notified by the Government of India in Notification No.GSR 990(E), dated 20-12-1990. Article 12 of DTAA between India and USA deals with royalties and fees for included service.
Fee for included service is defined in clause 4 of Article 12 of DTAA. For Mum 2015 - The Nielsen Company (US) LLC the purpose of appreciation, clause 4 of Article 12 of the DTAA between India and USA is extracted below:
"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 provision 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 paragraph 3 is received; or (b)Make available technical knowledge, experience, skill, know-how, or processes, or consist of development and transfer of a technical plan or technical design.
13. As per the above definition in DTAA, fees for included services means payment of any kind to any person in consideration for rendering of any technical or consultancy services. We have noted that the term "managerial service" as prescribed in Explanation 2 to section 9(1)(vii) of the Indian Income-tax Act, 1961 is not found in clause 4 of Article 12 of the DTAA between India and USA.
14. For further appreciation of the relevant portion of the Memorandum of Understanding executed between India and USA on 15th May, 1989 is also extracted below:
"Under paragraph 4, technical and consultancy services are considered included services only to the following extent: (1) as described in paragraph 4(a), if they are ancillary and subsidiary to the application or enjoyment of a right, property or information for which are royalty payment is made; or (2) as described in paragraph 4(b), if they make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. Thus, under paragraph 4(b), consultancy services which are not of a technical nature cannot be i Paragraph 4(a) Paragraph 4(a) of Article 12 refers to technical or consultancy services that are ancillary and subsidiary to the application or enjoyment of any right, property, or information for which a payment described in paragraph 3(a) or ( b) is received. Thus, paragraph 4(a) includes a technical and consultancy services that are 10 Mum 2015 - The Nielsen Company (US) LLC ancillary and subsidiary to the application or enjoyment of an intangible for which a royalty is received under a licence or sale as described in paragraph 3(a), as well as those ancillary and subsidiary to the application or enjoyment of industrial, commercial, or scientific equipment for which a royalty is received under a lease as described in paragraph 3(b). It is understood that, in order for a service fee to be considered "ancillary and subsidiary" to the application or enjoyment of some right, property, or information for which a payment described in paragraph 3(a) or ( b) is received, the service must be related to the application or enjoyment of the right, property, or information. In addition, the clearly predominant purpose of the arrangement under which the payment of the service fee and such other payments are made must be the application or enjoyment of the right, property, or information described in paragraph 3. The question of whether the service is related to the application or enjoyment of right, property, or information described in paragraph 3 and whether the clearly predominant purpose of the arrangement is such application or enjoyment must be determined by reference to the facts and circumstances of each case.
15. From this Memorandum of Understanding, it is obvious that as provided in clause 4(b) of Article 12 of the India USA DTAA, that if the technical or consultancy services made available are technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design are considered to be technical or consultancy services. It is also clarified that consultancy services not of technical nature cannot fall under "included services". In view of this Memorandum of Understanding between two sovereign countries, the consultancy services which are technical in nature alone are to be included as technical and consultancy services for the purpose of fees for included services as per sub clause 4(b) of Article 12 of DTAA between India and USA.
16. In view of the above provisions of the India USA DTAA, we have seen the service agreement executed between the assessee and the service 11 Mum 2015 - The Nielsen Company (US) LLC provider. The services provided by the assessee consist of development and determination of short and long term business strategies; overall management and coordination in relation to general policies and strategies per country and per division, maintenance of external relationships to the extent that these services do not comprise shareholder services; human resources services regarding group policies; legal services; insurance services; development, control and maintenance of management information systems; administrative support to group companies, including analysis of management information; development of short and long term IT policies and strategies; management and co- ordination of IT policies between group companies; tax services; financial risk management services, to the extent these services do not comprise Financing Services; support in the area of international staffing, career development and international job rotation; market research, target research and competitor research and stock based compensation.
We have noted that while undertaking the above services the assessee has not executed any contracted to make available any technical expertise so as to use those services independently by the licensee. All the services under taken by the assessee are either support services, IT enable services, coordination or tax services as referred above are not such which require transfer of technology, skill to the receipt company. Mum 2015 - The Nielsen Company (US) LLC
17. The Hon’ble Karnataka High Court in CIT Vs De Beers India Minerals (P)
Ltd. while considering the similar question of law while considering the provisions of India- Netherland Double Tax avoidance Agreement (India- Netherland DTAA), while considering the facts that where a Netherland Company rendered technical services to the assessee, without making available any technical expertise so as to enable assessee use those services independently in future, payment made for such services cannot be termed as ‘fee for technical services’, the relevant part of the decision is extracted below;
13. Under the Act if the consideration paid for rendering technical services constitutes income by way of fees for technical services, it is taxable. However, Article 12 of the aforesaid India-Netherlands Treaty defines fees for technical services for the purpose of Article 12 which deals with royalties and fees for technical services. The fees for technical services means the payment of any amount to any person in consideration for rendering of any technical services only, if such services make available technical knowledge, expertise, skill, know- how or processes. If the technical knowledge expertise, skill, know how or process is not made available by the service provider, who has rendered technical service for the purpose of Article 12 of DTAA it would not constitute fees for technical services. To that extent the definition of fee for technical services found in the agreement is inconsistent with the definition of fees for technical services provided in Explanation 2 to Clause (vii) of sub Section (1) of Section 9. In view of Section 90 the definition of fees for technical services contained in the agreement overrides the statutory provisions contained in the Act. In fact, the latest agreement between India end Singapore further clarifies this position, where they have explained the meaning of the word 'make available'. According to the aforesaid definition fees for technical service means payments of any kind to any person in consideration for services of technical nature if such services make available technical knowledge, experience, skill, know how or processes, which 13 Mum 2015 - The Nielsen Company (US) LLC enables the person acquiring the service to apply technology contained therein. Though this provision is not contained in India Netherlands Treaty, by virtue of Protocol in the agreement, Clause (iv) (2) reads as under:- "If after the signature of this convention under any Convention or Agreement between India and third State which is a member of the OECD India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention."
14. Therefore the Clause in Singapore agreement which explicitly makes it clear the meaning of the word 'make available', the said clause has to be applied, and to be read into this agreement also. Therefore, it follows that for attracting the liability to pay tax not only the services should be of technical in nature, but it should be made available to the person receiving the technical services. The technology will be considered 'made available' when the person who received service is enabled to apply the technology. The service provider in order to render technical services uses technical knowledge, experience, skill, know how or processes. To attract the tax liability, that technical knowledge, experience, skill, know how or process which is used by service provider to render technical service should also be made available to the recipient of the services, so that the recipient also acquires technical knowledge, experience, skill, know how or processes so as to render such technical Services. Once all such technology is made available it is open to the recipient of the service to make use of the said technology. The tax is not dependent on the use of the technology by the recipient. The recipient after receiving of technology may use or may not use the technology. It has no bearing on the taxability aspect is concerned. When technical service is provided, that technical service is to be made use of by the recipient of the service in further conduct of his business. Merely because his business is dependent on the technical service which he receives from the service provider, it does not follow that he is making use of the technology which the service provider utilises for rendering technical services. The crux of the matter is after rendering of such technical services by the service provider, whether the recipient is enabled to use the technology which the service provider had used. Therefore, unless the service provider makes available his technical knowledge, experience, skill, know how or 14 Mum 2015 - The Nielsen Company (US) LLC process to the recipient of the technical service, in view of the Clauses in the DTAA the liability, to tax is not attracted.
15. The learned Additional Solicitor General relied on 3 Judgments to point out that was the earlier view. Now there is a departure supporting the department. The first Judgment on which reliance is placed is, the Judgment of the Advance Ruling Authority in the case of Perfetti Van Melle Holding B.V., In re [2012] 204 Taxman 166/[2011] 16 taxmann.com 207 (AAR-New Delhi) where it was held as under:- "The expression 'make available' only means that the recipient of the service should be in a position to derive an enduring benefit and be in a position to utilise the knowledge or know-how in future on his own. "By making available the technical skills or know how, the recipient of the same will get equipped with that knowledge or expertise and be able to make use of it in future, independent of the service provider. So when the expertise in running the industry run by the group is provided to the Indian entity in the group to be applied in running the business, the employees of the Indian entity get equipped, to carry on that business model or service model on their own without reference to the service provider, when the service agreement comes to an end. It is not as if for making available, the recipient must also be conveyed specifically the right to continue the practice put into effect and adopted under the service agreement on its expiry."
16. In the aforesaid case, the applicant holding Company was to provide to its subsidiary Company in India the licence to manufacture and sell products, the licence to use technology, technical marketing and commercial know-how in the manufacture, sales and advertisement and promotion of the products, offer technicians, marketers, salesman, in-house legal counsel and the experienced employees to assist in the activities mentioned above. Under the Service Agreement, specifically the Service recipient require the use of proprietary knowledge and processes belonging to Perfetti Group. Specified services such as Accounting budgeting, sales, marketing, forex management, loans, HR, legal support etc. and specified services are to be provided on continuous basis. Therefore, it was held in the aforesaid case, that the case falls within the purview of Article 12.5(a) of the DTAC on such service which are ancillary and subsidiary to the applicant or enjoyment of right property or information for which the payment prescribed in paragraph 4 of the Article is to be made. Therefore, it is a case of royalty and not fee for technical service. Even otherwise it is clear under the terms of the agreement the technical know-how in the manufacturing, sales, 15 Mum 2015 - The Nielsen Company (US) LLC advertisement and promotion of the products is made available. Therefore, the aforesaid finding recorded is legal and cannot be found fault with.
Yet another Judgment relied on is in the case of Shell India Markets (P.) Ltd., In re [2012] 205 Taxman 288 / 18 taxmann.com 46 (AAR-New Delhi) where also the Authority For advance Ruling held relying on findings recorded in Perfetti Marketing case where it was held that "the expression 'make available' only means that the recipient of the service should be in a position to derive an enduring benefit and be in a position to utilise the knowledge or know-how in future on his own." Here, the industrial specific expertise is provided to the Indian entity which is applied in running its business. The employees of the Indian Company get equipped to carry on their business, market or service market on their own without reference to the service provider when the service . Agreement comes to an end. It is a case of making available the technical knowledge. The recipient of the service was conveyed specifically the right to continue the practice put into effect and adopt it under the agreement on its expiry.
18. From the aforesaid statement of law it is clear the test is whether the recipient of the service is equipped to carry on his business without reference to the service provider, if he is able to carry on his business in future without the technical service of the service provider in respect of services rendered then, it would be said that technical knowledge is made available.
19. The 3rd Judgment on which reliance was placed is Areva T & D India Ltd. Again the opinion expressed by the Advance Ruling Authority whereunder under the terms of the agreement the French Company has to provide support service to the Central team in the area of Information Technology to the Applicant and to its subsidiaries in the world. The provision of support services by the French Company would itself make available, the technical knowledge/experience to the Applicant. In that context it was held that the service provider under the IT agreement are in the nature of fees for technical services and taxable under the DTAA as well as under the Act.
In the aforesaid case the business of the applicant being that of executing the projects for transmission and distribution of power on turnkey basis, it is the French Company and other Group Companies which continuously upgrade designs, model and other engineering plans and formulae which are used by the Mum 2015 - The Nielsen Company (US) LLC applicant for the purpose of its business. The main objective of setting up of an exclusive platform is not for providing information technology but for enabling the applicant to use data in the form of designs, plan, model and engineering formulae etc., in 2D & 3D form. The character of the payment is clearly royalty as defined in Article 13(3) of DTAA as well as to Explanation 2 to Section 9(1)(vi) of the Act. The agreement clearly establishes that the applicant as to prepare for the installation at the fixed gateway sites for proper installation of equipment by France telecom. It is to act as bailee of the equipment which is under its control and use for its business. The use of equipment is with the usual condition of warranty and the network could be managed by the applicant. The equipment installed is to be integrated into Areva Net Global Network which is managed and controlled by the French Company for equipment installation at gateway sites in Noida and Chennai constitute PE in India as the equipment has been used by the French Company in the course of its business in providing technical data to the group companies.
21. Therefore from the aforesaid Judgments it is not possible to hold that there is a departure by the advance Ruling Authority in respect of its earlier views. It is in this background we have to look at the facts of this case, in order to find out whether the service provider has made available the technical knowledge to the assessee so as to foist the liability of payment of tax.
22. What is the meaning of "make available". The technical or consultancy service rendered should be of such a nature that it "makes available" to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know- how on his own in future without the aid of the service provider. In other words, to fit into the terminology "making available", the technical knowledge, skill?, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. 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 the future without depending upon the provider. Technology will be considered "made available" when the person 17 Mum 2015 - The Nielsen Company (US) LLC acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as "fee for technical/included services" only if the twin tests of rendering services and making technical knowledge available at the same time is satisfied.
The coordinate bench of Ahmedabad Tribunal while considering the provisions of India- Canada DTAA and following the decision of Hon’ble Karnataka High Court in Dee Beers India (P) Ltd (supra) held that rendition of IT support services to assessee by a Canadian company, even if certain equipment were to be used, that by itself did not vest any right in assessee to use equipment and thus, payments made by assessee could not be viewed as payments for 'use or right to use' any industrial, commercial or scientific equipment. The relevant part of the order is extracted below;
We find that so far as taxability under Article 12, i.e. with respect to 'Royalties and fees for included services' is concerned, we find that Article 12(4) provides that, "The term "fees for technical included services" as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through 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 paragraph 3 is received ; or (b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein". In order to invoke article 12(4)(a) it is necessary that such services should "make available" technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design The services Mum 2015 - The Nielsen Company (US) LLC
provided by BT Canada were simply management support or consultancy services which did not involve any transfer of technology. It is not even the case of the Assessing Officer that the services were such that the recipient of service was enabled to perform these services on its own without any further recourse to the service provider. It is in this context that we have to examine the scope of expression 'make available'.
As for the connotations of make available clause in the treaty, this issue is no longer res integra. There are at least two non-jurisdictional High Court decisions, namely Hon'ble Delhi High Court in the case of DIT v. Guy Carpenter & Co Ltd [2012] 346 ITR 504/207 Taxman 121/20 taxmann.com 807 and Hon'ble Karnataka High Court in the case of CIT v. De Beers India Minerals (P.) Ltd [2012] 346 ITR 467/208 Taxman 406/21 taxmann.com 214 in favour of the assessee, and there is no contrary decision by Hon'ble jurisdictional High Court or by Hon'ble Supreme Court. In De Beers case (supra), Their Lordships posed the question, as to "what is meaning of make available", to themselves, and proceeded to deal with it as follows:
'The technical or consultancy service rendered should be of such a nature that it "makes available" to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology "making available", the technical knowledge, skill?, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. 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 the future without depending upon the provider. Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skill, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as "fee for technical/included services" only if the twin tests of rendering services and making technical knowledge available at the same time is satisfied.
Mum 2015 - The Nielsen Company (US) LLC
Further, the coordinate bench of Pune Tribunal in Sandvik Pty. Ltd Vs DCIT (supra) while considering the provisions of India–Australia DTAA held that the assessee had only provided back-up services and IT support services for solving IT related problems to its Indian subsidiary and services were not made available, payment received for such services could not be taxed in India in view of article 12(3)(g) of Indo-Australia Treaty. The relevant part of the decision is reproduced below:
We are concerned with para No. 3 of Article 12, which defines the term Royalty. Under the IT Act, the term royalty and expression FTS are classified as two different connotations, i.e. 9(1)(vi) and 9(1)(vii). So far as Article 12 is concerned, FTS is included in the term "royalty" for the purpose of deciding in which contracting state the income from the same is to be taxed. Clause (g) in Article 12(3) goes to the roots of the issue. Main thrust of the argument of the Ld. Counsel is that it is not only sufficient to render the services but the same should be made available to the recipient and this particular important aspect is missed by the DRP/TPO. We find that the expression "making available" is very much important to decide in which contracting state the amount received for rendering the services relating to the technical know-how is to be taxed. The expression "make available" is used in the context of supplying or transferring technical knowledge or technology to another. It is different than the mere obligation of the person rendering the services of that persons own technical knowledge or technology in performance of the services. The technology will be considered as made available when the person receiving the services is able to apply the technology by himself.
The expression 'make available' has come for consideration before the Hon'ble High Court of Karnataka in the case of De Beers India Minerals (P.) Ltd. (supra). In the said case, the Treaty between India and Netherlands was for the consideration of their Lordships. The assessee in that appeal was a providing company engaged in the business of 20 Mum 2015 - The Nielsen Company (US) LLC prospecting and mining for diamonds and other minerals. They have been granted licences (Reconnaissance Permits) by the State Government of Karnataka, Andhra Pradesh and Chhattisgarh. During the early stage, various techniques were employed for the purpose of carrying out geophysical survey, the assessee entered into agreement with M/s.Fugro Elbocon B.V. Netherlands, who had a team of experts specialised in air borne geophysical services for clients. For the technical services rendered by them the said assessee had paid consideration. The Assessing Officer applied Article 12 of the Indo-Netherlands Treaty and held that the same was taxable in the hands of the Netherlands Company. As the wordings of Article 12 in the Indo-Netherlands Treaty are analogous to Article 12 of the India Australia Treaty, as expression 'make available' is also used while determining fiscal jurisdiction of the contracting state, the Hon'ble High Court explained the meaning of the expression 'make available' which was appearing in the Indo-Netherlands Treaty.
20. In view of the above factual and legal discussions, we hold that the assessing officer erred in taxing the service agreement receipt as ‘fee for included services’ as per Article 12(4) of India USA DTAA for such services as mentioned in para 4 (supra), in absence of clause in the service agreement dated 09.01.2009, that the recipient would be able to perform these services of its own without any further assistance of the assessee.
The ratio of decision of Cochin Tribunal in M/s US Technology Resources Pvt. Ltd. vs. ACIT (supra) relied by ld. DR for the revenue is not helpful to the revenue. In the said case the assessee rendering the services in the field of management decision making. Further, in the said case it was clearly held the expertise and technology was made available by USA company was a technical services within meaning of Article 12(4)(b) of India-USA DTAA. Mum 2015 - The Nielsen Company (US) LLC
In the result the Ground No. 2 of the appeal is allowed.
Ground No.3 relates to apportion of the total receipt of service agreement.
Considering the facts that we have allowed the ground No.2 of the appeal, therefore, the discussion on this ground of appeal has become academic.
24. Ground No.4 relates to treating the reimbursement of expenses as fee for included services.
25. The ld AR for the assessee submits that during the relevant period the assessee received Rs. 4,98,576/- on account of reimbursement from the Indian entity, thus, the same is not taxable in the hand of assessee. It was submitted that PWC was handling the taxation of the entire Asia- Pacific Region and raised invoice on the assessee for such services. The services were allocated to the group company on the basis of number of expat employee in the entity on prorate basis. In support of his submissions the ld. AR relied on the decision of Bombay High Court in Siemens Aktiongesellschaft 310 ITR 320 (Bom).
26. On the other hand the ld. DR for the revenue relied on the order of the authorities below.
27. We have considered the rival submissions of the parties and have gone through the orders of the lower authorities. During the assessment the assessing officer noted that the assessee received Rs. 4,98,576/- from ACNOM, which was not included in the income and the assessee claimed it as reimbursement of actual expenses and claimed not liable to tax under 22 Mum 2015 - The Nielsen Company (US) LLC India USA DTAA. The assessee was asked as to why this receipt should not be treated as income and taxed accordingly. The assessee filed its reply and contended that that the reimbursement of charges paid to PWC consulting for handling the taxation of the entire Asia- Pacific Region and raised invoice on the assessee for such services. These services were allocated to the group company on the basis of number of expat employee in the entity on prorate basis. Thus, this is a mere reimbursement of expenses by assessee on behalf of Indian entity. It was further submitted that the assessee not charged any mark-up over the cost incurred by it and merely charged proportionate amount of invoice raised by PWC and it does not involve any element of income.
28. The reply of the assessee was not accepted by the assessing officer holding that non-resident resident company, the service provider has provided services through PWC Consulting to the Indian entity who are service recipient. It was further held by assessing officer that if the expenses were not meet by the service recipient, the expenses would have been met by the service provider and the service provider might have charged the additional amount from the service recipient. Therefore, the assessing officer held that the payment cannot be regarded as reimbursement as the payment is for the use of the product and not for sharing the expenses. The agreement is basically to share the product without paying the royalty but by paying the consideration which occurs only on the use of the product and not 23 ITA No. 4362 Mum 2015 - The Nielsen Company (US) LLC otherwise. The assessing officer taxed the said receipt as consideration for the use of process or formula and fall under the definition of royalty. The ld CIT(A) confirmed the action of the assessing officer holding the assessing officer has assigned valid reason while taxing the receipt. We have noted that the assessing officer has not examined the facts as per the reply and the explanation furnished by the assessee. Considering the facts that we have already allowed the Ground No. 2 holding that assessing officer erred in taxing the service agreement receipt as ‘fee for included services’ as per Article 12(4) of India USA DTAA. Thus, on the same principles the receipt cannot be treated as royalty as there is no transfer of process or formula.
The Hon’ble Jurisdictional High Court in CIT Vs Siemens Aktiongesellschaft (supra) while relying on the judgment of a Division Bench of the Delhi High Court in Industrial Engineering Projects (P.) Ltd.'s case [1993] 202 ITR 1014 (Delhi), held that reimbursement of expenses can, under no circumstances, be regarded as a revenue receipt. Similar issue had also come up for consideration before the Division Bench of the Calcutta High Court in Dunlop Rubber Co. Ltd.'s case (142 ITR 493 Cal).
Considering the above factual and legal discussions the Ground No. 4 of the appeal is allowed.
Ground No. 5 relates to charging of interest under section 234B and 234C of the Act. The ld. AR for the assessee submits that no interest to be charged Mum 2015 - The Nielsen Company (US) LLC prior to the amendment brought in statue by Finance Act 2012. In support of his submission the ld. AR for the assessee relied on the decision of Bombay High Court in Ngc Network Asia LLC (222 CTR 85) (Bombay High Court).
On the other hand the ld. DR supported the order of the lower author ties.
We have considered the rival submissions of the parties. Considering the facts and circumstances of the case, we direct the assessing officer to compute the interest by taking in consideration of decision of Bombay High Court in Ngc Network Asia LLC (supra). In the result the Ground No. 5 of the appeal is allowed.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 22/05/2019.