DEPUTY DIRECTOR OF INCOME-TAX vs. M/S. SANDVIK INFORMATION TECHNOLOGY AB.,, PUNE

आदेश आदेश / ORDER आदेश आदेश

PER D. KARUNAKARA RAO, AM

There are total 3 appeals under consideration. ITA Nos. 500 and

501/PUN/2016 are filed by the Revenue against the two different orders of

DRP, commonly dated 02-12-2015 involving A.Yrs. 2009-10 & 2012-13. The

CO No.124/PUN/2017 is filed by the assessee against the directions of the

DRP qua holding of the re-assessment proceedings as valid. Before us, at the

outset, Ld. Counsel for the assessee did not press the said Co. Therefore, the

same is dismissed as ‘not pressed’.

raised by the Revenue in both the appeals are identical. The issue in these

appeals relates to chargeability of payments received by the assessee, a

Sweden based company in lieu of the services rendered to the Indian based

company.

of reference to facts. The grounds raised by the Revenue are extracted here as

under :

“1. Whether on the facts and in the circumstances of the case, the DRP, Mumbai erred in concluding that the services provided by the assessee do not quality as Fees for Technical Service under clause (b) of Para 4 of Article 12 of Double Taxation Avoidance Agreement between India and Portuguese Republic by referring to the Protocol of India-Sweden DTAA.

3 ITA Nos.500 & 501/PUN/2016 & Co No. 124/PUN/2017 M/s. Sandvik Information Technology AB

Foreign Company and rendered support services to the Indian based company

namely Sandvik Asia Private Limited (SAP). Assessee received a sum of

Rs.6,76,46,959/- in this year as per the agreement dated 01-04-2002 for

rendering the said services. In the re-assessment proceedings, the AO treated

the said sum as chargeable in India, i.e. Fee for Technical Services (in short

‘FTS’). AO made the assessment u/s.144(1) r.w.s. 143(2) r.w.s. 147 of the Act

determining the taxable income of the Foreign Company at Rs.6,76,46,959/-.

AO did not accept the claim of the assessee that the payment received by the

assessee is not for FTS. Applicability of Protocol linked ‘make available’ clause

in the agreement was not allowed too by the AO.

payments received by the assessee do not constitute FTS under Article 12 of

the Tax Treaty between India and Sweden read with Protocol thereto.

Referring to the availability of clause relating to the ‘make available’ with the

Protocol attached to the Tax Treaty between India and Sweden, assessee

argued that the payments are not made in the context of ‘make available’ to the

impugned services. Therefore, the payments received do not constitute FTS.

Assessee relied on various decisions including that of decision of the

Coordinate Bench of the Tribunal in the group concerns of the assessee, i.e.

Sandvik Australia Pty. Ltd. Asia Private Limited TS-46-ITA-2013-Pune ITAT

apart from many others. The details are given in Para No. 3.2.12 of the order of

4 ITA Nos.500 & 501/PUN/2016 & Co No. 124/PUN/2017 M/s. Sandvik Information Technology AB

DRP. The DRP considered the AO’s finding as well as the submissions of the

assessee and held that the decision of the Tribunal in the case of Sandvik AB

Vs. DDIT vide ITA No.1720/PN/2011 advocates for considering the Protocol

linked ‘make available’ clause, Tax Treaty between India and Sweden.

Eventually, the DRP gave the finding that the payments are not attributable to

the FTS or Royalty as they are in the nature of help desk and IT support

services. The relevant Para No.4.4 of the order of DRP is extracted here as

under :

“4.4 Our Finding We have gone through in detail the submission made by the assessee. The services are in the nature of helpdesk and IT support services. According to us there services do not qualify as Royalty neither under the Act nor under the tax treaty between India and Sweden.”

Accordingly, the DRP granted relief to the assessee. Aggrieved with the

directions given by the DRP, the Revenue is in appeal before us.

AO. Further, he fairly submitted that there is no ‘make available’ clause in the

Indo-Sweden Treaty but for the Protocol with ‘make available’ clause attached

to the Treaty between the two countries. In effect, the provisions of ‘make

available’ clause applies to the Indo-Sweden Treaty too.

decision of the Tribunal in the case of Sandvik Australia Pty. Ltd. as well as the

Sandvik AB Vs. DDIT (supra) and submitted that the facts in both the cases are

identical and the ‘make available’ clause is applicable in both the cases. He

also submitted that the services rendered by the assessee do not constitute

FTS or Royalty.

5 ITA Nos.500 & 501/PUN/2016 & Co No. 124/PUN/2017 M/s. Sandvik Information Technology AB

the services rendered by the assessee constitute ‘make available’ services.

given by the Tribunal in the case of group concern of the assessee, i.e. Sandvik

Australia Pty. Ltd. in ITA No.93/PN/2011 decided on 31-01-2013. The said

finding given by the Tribunal is reproduced below for the sake of completeness

of this order :

“13. 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. 14. The expression ‘make available’ has come for consideration before the Hon'ble High Court of Karnataka in the case of M/s.De Beers India Minerals Pvt. 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 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, the Lordships explained the expression as under: “13. Under the Act if the consideration paid for rendering technical services constitute income by way of fees for technical services, it is taxable. However, Article 12 of the aforesaid India-Netherlands Treaty

6 ITA Nos.500 & 501/PUN/2016 & Co No. 124/PUN/2017 M/s. Sandvik Information Technology AB

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 and 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 enables the person acquiring the service to apply technology contained therein. Though this provision is not contained in India Netherlands Treaty, but 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 the 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

7 ITA Nos.500 & 501/PUN/2016 & Co No. 124/PUN/2017 M/s. Sandvik Information Technology AB

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 process to the recipient of the technical service, in view of the Clauses in the DTAA, the liability to tax is not attracted.” 15. Their Lordships also considered the decisions of the Authority for Advance Rulings (AAR) where the term ‘make available’ is interpreted. The relevant discussion and observations of their Lordships are as under: “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, skills, 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, 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 test of rendering services and making technical knowledge available at the same time is satisfied.” 16. In the present case, as per the terms of the agreement between the assessee company and Sandvik Asia Ltd., does not support the case of the Revenue that the assessee’s case is covered in clause (g) of para 3 to Article 12 of the India Australia Treaty as the assessee has not made available any technical knowledge or expertise to the recipient Indian company. In our opinion, the assessee has only provided the back-up services and IT support services for solving IT related problems to its Indian subsidiary. Hence, unless and until the services are not made available, same cannot be taxable in India. We, therefore hold that the services rendered by assessee company to its Indian group companies, though are in the nature of technical services, but is not covered in para (3)(g) to Article 12 of the India Australia Treaty and hence, the same is not taxable in India. We also hold that the amount received by the assessee cannot be treated as a Royalty even under the normal provisions of I.T. Act. But under the normal provision of the I.T. Act the same constitute consideration for rendering the technical services covered u/s.9(1)(vii) of the I.T.Act. Accordingly, Ground No.1 is allowed and issue is decided in favour of the assessee.”

8 ITA Nos.500 & 501/PUN/2016 & Co No. 124/PUN/2017 M/s. Sandvik Information Technology AB

9.1 Further, on the similar issue, we find the Pune Bench of the Tribunal in the case M/s. Sandvik AB Vs. DDIT in ITA No.1720/PN/2011 order dated 28- 11-2014. The said para is reproduced below :

“12. So far as the present case before us is concerned, on the basis of the protocol to the DTAA between the India and Sweden the assessee can claim the benefit of the conditions imposed for bringing to tax the fees for technical services in the treaty between the India and Portuguese. We, therefore, hold that on the principle of the most favoured nation (MFN) clauses the payment of Rs.5.93 crores received by the assessee company from its Indian subsidies cannot be brought to tax. We, therefore, allow the grounds taken by the assessee on the above reasons”

Therefore, there is no dispute on the existence of a Protocol in the context of the Indo-Sweden DTAA. It contains the reference to the ‘make available’ clause. The payment becomes FTS or otherwise, only when the conditions relatable to ‘make available’ clause are met. It is a covered issue by virtue of the orders of the Tribunal in the group cases of the assessee. Considering the settled nature of the issue, we are of the opinion that the decision taken by the DRP in favour of the assessee is fair and reasonable and it does not call for any interference. Thus, we hold that the sum received by the assessee is not taxable in India. Accordingly, the grounds raised by the Revenue in both the appeals are dismissed.

Order pronounced on 08th day of August, 2018. Sd/- Sd/-

(िवकास िवकास िवकास अव�थी िवकास अव�थी अव�थी /VIKAS AWASTHY) (डी अव�थी डी डी. क�णाकरा डी क�णाकरा क�णाकरा राव क�णाकरा राव राव/D. KARUNAKARA RAO) राव �याियक �याियक सद�य �याियक �याियक सद�य सद�य/JUDICIAL MEMBER लेखा सद�य लेखा लेखा सद�य लेखा सद�य सद�य/ACCOUNTANT MEMBER सद�य पुणे / Pune; �दनांक / Dated : 08th August, 2018. Satish

9 ITA Nos.500 & 501/PUN/2016 & Co No. 124/PUN/2017 M/s. Sandvik Information Technology AB

आदेश आदेश क� आदेश आदेश क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत / Copy of the Order forwarded to : अ�ेिषत

अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT (IT/TP), Pune) िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “बी बी बी” ब�च, बी 4. पुणे / DR, ITAT, “B” Bench, Pune. गाड� फ़ाइल / Guard File. 5.

आदेशानुसार / BY ORDER,

// True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune.