NUNHEMS NETHERLANDS B.V.,NAPOLEONSWEG, NETHERLANDS vs. ASSISTANT COMMISSIONER OF INCOME TAX,, INTERNATIONAL TAXATION, GURGAON

That Ld. AO and Ld. DRP erred in facts and in law in not appreciating that the provision of IT support services provided by the Assessee to its AE does not amount to use or right to use of "scientific, industrial and commercial equipment" and thereby cannot be treated as royalty.

Briefly stated, the facts of the case are that the assessee company is registered under the law of Netherlands. The company’s purpose, by collaboration with partners, is to improve vegetable varieties and solutions for customers, the vegetable value chain and consumers worldwide.

The assessee, during the subject year, received an amount of Rs 3,58,03,283/- on account of testing services rendered to Nunhems India Private Limited ('Nunhems India') to improve plant varieties. The assessee also received Rs 10,66,76,030 on account of reimbursement of information technology ('IT') support services from Nunhems India Private Limited ('Nunhems India'). The Assessee filed its return of income ('ROI') for AY 2021-22 on 15 March 2022 declaring NIL taxable income and claimed the above receipts as non-taxable. Subsequently, ROI filed was picked up for scrutiny, and vide assessment order dated 28 September 2023, passed under section 143(3) read with section 144C(13) of the Act,

The ld AR further stated that the Assessee receives request for testing of seeds/leaves from Nunhems India through a common software

The ld AR submitted that these are standard services being rendered by the Assessee and referred to page 73-82 of Paper- book in relation to the process of communication for marker testing services.

The ld AR stated that the testing services rendered by the Assessee are routine in nature and are provided on recurring basis. Further, the Assessee did not make available any skill, know-how, knowledge, experience, etc. known to the recipient of the service (Nunhems India) so as to equip Nunhems India to independently perform the technical function by itself in future, without the help of the Assessee (service provider) and placed reliance in the case of Diamond Services International (P.) Ltd. V Union of India (2008) 169 Taxman 201/304 ITR 201 (Bombay HC) wherein it was held that payment in relation to service of grading and certification of diamonds performed from laboratory situated in USA does not make available technical knowledge, experience, skill, etc. to enable the person acquire the service to apply the technology contained therein and also is not liable to be taxed as royalty.

The ld AR also pointed out that one of the members of the Dispute Resolution Panel concurred with the Assessee's contention that provision of testing services does not fall under the 'make available' clause and, therefore, is not taxable as fees for technical services. The ld AR concluded that the testing services are "services" rendered by the Page 6 of 33 taxable in the hands of the Assessee since no technology or skills of the Assessee are being made available to Nunhems India through these services.

Per contra, the ld. DR relied upon the orders of the Assessing Officer and the DRP. The ld DR submitted that the assessee had provided information in the form of test reports to its associate enterprise in India i.e. M/s Nunhems India Private Limited (Nunhems India) to improve plant varieties, achieving breeding progress through the assessment of external and internal traits such as plant habitus, disease resistance, yield or quality traits. Nunhems India breeding programs of seeds and business operations depend on such reports and thus has commercial significance. Further, information is also of industrial in nature as it aids to the business activity of the recipient. The ld DR stated that the test reports also share scientific knowledge, experience, skill etc., thus, imparting of information concerning technical, industrial, commercial or scientific knowledge, experience or skill and thus receipts accruing out of such activities amounts to royalty income as per the Act and under the tax treaty. The ld DR submitted that the decision of Hon'ble Supreme Court in the case of M/s Engineering Analysis Centre of Excellence Private Limited vs CIT are not applicable to the facts of the case as the Page 7 of 33 regarding taxation of equipment royalty.

In rejoinder, the ld AR stated that the test reports issued by the assessee is a service and does not amount to royalty and that scope of definition of royalty under the India-Netherlands tax treaty is narrower than the definition contained under the Act. Unless the information provided can fit into 'experience', the same will not be regarded as royalty. The ld AR also submitted that the test reports provided by the assessee does not constitute 'information' as no experience is shared with Nunhems India. The ld AR emphasized that access to Nautilus software does not amount to royalty since no use/right to use of copyright contained in the software is being given by the assessee to Nunhems India.

We have heard the rival submissions and have perused the relevant material on record. In order to adjudicate the issue at hand, firstly, it is relevant to note the Service Agreement For Research And Development Activities between the assessee, Nunhems Netherlands B.V. and Nunhems India Private Ltd dated 28.09.2021 which confirms the understanding and practice of the parties since 01.01.2012. It provides the following:

REIMBURSEMENT OF COSTS In consideration of Services provided by SERVICE PROVIDER under this Agreement, NUNHEMS INDIA shall pay SERVICE PROVIDER the costs incurred by SERVICE PROVIDER in the performance of Services hereunder, with a Mark-up of six per cent (6%) to such costs.

The issue to be adjudicated, in the present case, is whether the Marker Testing Services and Double Haploid ('DH') Services, considering the nature of service, would fall within the definition of Royalty as enumerated in Article 12(4) of the Indo-Netherlands DTAA. Firstly we need to understand the nature of services rendered.

The nature of service rendered by the assessee to Nunhems India, according to the ‘Service Agreement For Research And Development Activities’ between the assessee, Nunhems Netherlands B.V. and Nunhems India Private Ltd, operational since 01.01.2012, is to support the breeding programs in India by providing marker analysis services and Page 9 of 33 test but are ‘marker analysis services’ provided by the assessee to support Nunhems India’s breeding programs in India. The Cambridge English Dictionary describes the term ‘analysis’ as the act of studying or examining something in detail, in order to discover or understand more about it, or your opinion and judgment after doing this. Thus the ‘marker analysis service’ contains examination of the seeds and leaves on which the assessee and its Indian AE forms an opinion and judgement with respect to future breeding programs in India. In fact, the said Agreement by the use of term “shall” mandates the assessee to support breeding programs in India. We note from the pages 56 to 57 of the Paper book filed before us as to what is involved in the Process flow for Marker Testing Services. Firstly, Nunhems India sends some dried leaves to Nunhems Netherland for Marker analysis by placing a request, for testing of such leaves, through a common tool called as "Nautilus" which is available to Nunhems group entities. Such tool is used by all the Nunhems group entities situated in different parts of the world for the purpose of placing request for such testing of leaves. Further, the required details of such leaves are also placed on the portal. All the leaves sent from Nunhems India is labelled by Assessee as different sample with a different number. Thereafter, all those samples shared

There is another type of service which is called Double Haploid ('DH') Services. A doubled haploid (DH) is a genotype formed when haploid cells undergo chromosome doubling. Doubled-haploid technology enhances "forward breeding" by allowing hybrids to be bred with new traits. This gives the assessee an earlier look at new lines and greater knowledge about their environmental adaptability before they are fully tested, developed and marketed. The process flow involved for DH Services is that firstly, Nunhems India sends some seeds to Assessee for DH conversion. The Assessee grows these seeds at their poly houses till the time they become a plant. Out of that plant, a tissue or cell is extracted in R&D centre and new plant is formed which is called a DH plant. From DH plant, seeds are extracted again by R&D centre and sent Page 11 of 33 process is 1.5 years (i.e., 18 months).

Given this factual matrix of the case, we find that the AO has treated the receipts from marker analysis services and Double Haploid s services as “Royalties” under Explanation 4 to section 9(1)(vi) of the Act read with Article 12(4) of the Indo-Netherlands DTAA, on the ground that the assessee imparts its scientific experience with Nunhems India, in the form of test reports which are used as information that decides the industrial or commercial viability of the seeds. The AO holds the view that the information, as to whether it is industrial, scientific or commercial, has to be seen from the perspective of information recipient. Thus, consideration received by the assessee is for use of or right to use of information concerning industrial, commercial or scientific experience and the same is liable to be taxed as royalty. The AO is also of the view that the access to Nautilus platform/software/application also amounts to use of or right to use of copyright and use of equipment and consideration for the same is royalty.

On the other hands, the assessee explains the process by stating that all the activity of placing request for such testing of leaves and seeds to getting the result, is done through a common tool called as "Nautilus"

In order to decide whether the aforesaid payments would fall under “Royalty”, it would be prudent to quote the relevant provision of Indo-Netherlands DTAA which defines the Royalty in Article 12 clause 4 as under:

The other type of testing which takes 1.5 years (i.e., 18 months) i.e., Double Haploid ('DH'), the process of testing of seeds is more technical which involves chromosome doubling in the seed, where the assessee grows these seeds at their poly houses till the time they become a plant. Out of that plant, a tissue or cell is extracted in R&D centre and new plant is formed which is called a DH plant. From DH plant, seeds are extracted again by R&D centre and sent back to Nunhems India. Thus, Doubled-haploid testing imparts technology and knowledge to Nunhems India to "forward breeding" by allowing hybrids to be bred with new traits

The aforesaid activities undertaken by the assessee, demonstrates the scientific and technical knowledge of the assessee which is not available with the Indian AE. The assessee’s knowledge and scientific experience has a direct link in converting an average seed, sent by the Indian AE, into a healthy double Haploid seeds. These seeds are created by controlled scientific method to produce offspring with enhanced traits, such as higher yield, significantly increase crop productivity, pest and disease resistance- potentially reducing the need for chemical pesticides and drought resistance and greater uniformity i.e., making them easier to grow and harvest.

We are of the considered view that the report the assessee sends to the India AE, encapsulate all the scientific experience and knowledge of the assessee, gleaned in the process of converting the seed from ordinary to double Haploid seeds, prepared over a time period spanning over 18 months. The reports sent to the Indian AE are nothing but a bank of scientific experience and advice emanating from technological and scientific method undertaken by the assessee as mandated in the “Agreement” itself.

We are of thus of the considered view that the assessee is not simply providing Testing services. It provides specific information of the leaves and seeds to the Indian AE which are soaked in assessee’s scientific experience where the assessee carries out experiments on the seeds sent to it, involving extraction of tissue or cell to create a new plant. Further a new breed of seed is extracted from the said plant developed by the assessee which is utilized by Nunhems India in breeding new variety of plant for commercial exploitation. The assessee through such information, in the form of test reports, provide support to the Page 17 of 33 the Indian AE to achieve breeding progress through the assessment of external and internal traits such as plant habitus, disease resistance, yield or quality traits. The assessee provides its Indian AE, plants value chain and solutions for its customers and consumers worldwide demonstrating the industrial and commercial ramification of the analysis conducted by the assessee.

The assessee has taken a plea that the testing services rendered by the Assessee are routine in nature and are provided on recurring basis and that the Assessee did not make available any skill, know-how, knowledge, experience, etc. known to the recipient of the service (Nunhems India) so as to equip Nunhems India to independently perform the technical function by itself in future, without the help of the Assessee (service provider). On the issue of “make available”, we are of the considered view that the Article 12(4) of the Indo-Netherlands DTAA, nowhere provides the condition of “make available” be satisfied for determining a consideration, fall under “Royalty”. The provisions of Article 12(4) of the Treaty requires that the consideration be for information concerning industrial, commercial or scientific experience. As we have delineated above, the Test Reports are not simply a certificate or blood report, but sharing and partaking of an Page 18 of 33 Nunhems India which enables the Indian AE to improve the “plant variety, and achieve breeding progress through assessment of external and internal traits such as plant habitus, disease resistances, yield and quality traits. variety of seeds of different plants”. In cases of ‘seeds’, the assessee converts the seeds sent by Indian AE into Double Haploid, grows these seeds into DH plant and extracts seeds from the said DH Plants and gives the extracted seed to the Indian AE. The entire information of scientific experience from conversion of seed into DH plant and extraction of seed from that DH plant, is captured in the Test Report which is shared with the Indian AE. This imparting of scientific experience and knowledge to the Indian AE, through Test reports, for a consideration, is independent of the “make available” clause being satisfied for the purposes of treating the said consideration fall under the definition of “Royalty” under Article 12(4) of the Treaty.

The assessee reliance on the Commissioner of Income-tax, International Taxation -1 vs. Amazon Web Services, Inc and Commissioner of Income-tax, International Taxation vs. RELX Inc (supra) doesn’t help the cause of the assessee as facts are distinguishable. In the case of Amazon, the facts were that the assessee provided standardized and automated computing services/AWS services

In the case of Relx, the court was concerned with issue of subscription fees and held that it would not fall within the ambit of Article 12(4)(b) of the Indo-US DTAA, since the access accorded to the Indian consumer was neither a transfer of copyright nor would it satisfy the requirement of “included service” comprising of an element where technical knowledge, experience, skill, know-how or processes was made available. The subscription fee would neither be “royalty” nor can it be validly viewed as Fees for Technical Services.

The reliance in the case of Diamond Services International (P.)

In none of the above cases, the hon’ble Courts was not concerned with the definition of “Royalty” under Article 12(4) of the Indo- Netherlands DTAA, being consideration for information concerning industrial, commercial or scientific experience under the specific facts of the instant case. In the instant case, it is very relevant to note with regard to test on seeds, the assessee doesn’t only sends test reports to its Indian AE, it converts the “seeds” into Double Haploid (DH) plant and provides the seeds, with enhanced properties, extracted from the said DH plants, for commercial exploitation. Such creation of ‘enhanced’ seeds involves technology and scientific experience whose information is passed on to the Indian AE. These distinguishing features in the instant facts of the case, makes it different from the facts of the cases decided by the hon’ble Courts in the above cases. We therefore hold that the said receipts from Testing service, satisfies the condition enumerated in Article 12(4) of the Indo-Netherlands Treaty to be considered as “Royalty”. The ground 1 to 3 are dismissed.

Before us, the ld AR vehemently argued that the said receipts are merely reimbursement of IT support services. The assessee has engaged third party, TCS Netherlands, to provide a bundle of IT support services to Nunhems affiliate entities across the globe. Wherever Nunhems India faces any technical issues/ requires any technical support in relation to IT, Nunhems India raises a ticket by way of e-mail (describing the issue being faced) to TCS helpdesk. Subsequently, TCS Netherlands within stipulated time period resolves the technical issue. In relation to such services, the third party raises invoices on the Assessee and Assessee

The ld AR placed reliance on the decision of DIT vs. A.P. Moller Maersk AS [2015] 63 taxmann.com 303 (SC) wherein it was held that payments received by taxpayer towards reimbursement of costs incurred for global telecommunication facility provided to Indian agents could not be termed as FTS.

The ld AR reiterated that it is a settled principle that control over the equipment is mandatory to establish use of such equipment by the payer. In the present case, the Assessee did not have physical control or possession over the equipment used by the Assessee. Reliance is placed in case of Rackspace US Inc., vs DCIT (Supra) (1634/Mum/2016, 1075/Mum/2017, 3507/Mum/2017) (Mumbai - Trib.), wherein, the Hon'ble Mumbai Tribunal held that income earned by assessee (a US

The ld AR further drew our attention towards the SOW entered between the Assessee and third party providing IT services (enclosed as Item 16.1 of Paper-book), to show that the Assessee and other group affiliates cannot solve IT issues on its own in future independently. Every time the Assessee and group entities have to knock the doors of the third party for these IT support services. The technology used in rendering the IT support services are not being transferred for further use of Nunhems group. In other words, the Assessee/ other group entities are not enabled to apply the technology on their own.

The ld AR submitted that in the present case, the services rendered by the Assessee are routine in nature and are provided on recurring basis. The Assessee did not ‘make available’ any skills, know- how, knowledge, experience, etc. known to the recipient of the service so as to equip him to independently perform the technical function himself in future, without the help of the service provider and hence, the same is not taxable as fees for technical services.

The ld DR stated that the assessee provides IT support services which include user authorization, system maintenance, cyber security, data center services, applications and maintenance of various business suites applications etc. Thus, it is not a case of procurement of services rather it is case of making available complete infrastructure to AEs.

The ld DR relied on the decision in the Intertek Testing Services, in (2008) (307 ITR 418), by Authority of Advance Ruling (AAR) that the expression "technical services" cannot be construed in narrow sense as also on in the case of G.V.K. Industries 371 ITR 453 (SC), wherein it

We have heard the rival submissions and have perused the relevant material on record. To adjudicate the issue, it would be relevant to narrate the provision of DTAA defining “Fees for Technical Services”.

We find from the perusal of Master Service Agreement ("MSA"), regarding routine IT support services, between the assessee and Tata Consultancy Services Netherlands BV ("TCS Netherlands"), that TCS Netherlands along with its local supplier, would provide IT support services to the Assessee and Nunhems India wherein Nunhems India may request for end to end IT support services including IT infrastructure services, data centre services, cyber security, applications, and maintenance of various business suite applications etc to be rendered by TCS Netherlands / local supplier on behalf of TCS Netherlands.

In this arrangement, whenever Nunhems India face any technical issues/require any technical support in relation to IT, it raises a ticket by way of e-mail (describing the issue being faced) to IT helpdesk.

Admittedly, the said receipts are merely reimbursement of IT support services, where whatever the third party, TCS Netherlands, charges the assessee, the same is recouped from the Indian AE. We find that the reliance on the decision of DIT vs. A.P. Moller Maersk AS [2015] 63 taxmann.com 303 (SC) wherein it was held that payments received by taxpayer towards reimbursement of costs incurred for global telecommunication facility provided to Indian agents could not be termed as FTS is apt and applies on the facts of the instant case.

We further find that TCS provides a bundle of IT support services and the IT infrastructure remains under the control of TCS. In the instant case, the physical control or possession over the equipment remains with TCS and not with the assessee and hence the case of Rackspace US Inc., vs DCIT (supra) squarely applies wherein, the Hon'ble Mumbai Tribunal held that income earned by assessee (a US company) from rendering cloud hosting services to Indian customers, doesn't constitute royalty under Article 12 of India-USA DTAA due to absence in possession/physical control by customers over the servers/equipment.

In our understanding, in order to invoke make available clauses, technical knowledge and skill must remain with the person receiving the services even after the particular contract comes to an end and 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.”

Similarly, the decision of the hon’ble Delhi Court in the case of Relx (supra) squarely applies to the facts of this issue wherein it held that access to data base did not constitute rendering of any technical or consultancy services and in any case did not amount to technical knowledge, experience, skill, know-how or processes being made available to subscriber neither there was any transfer of copyright. It would also be pertinent to refer to the relevant observations of the Hon'ble High Court in the case of Amazon (supra) which read as under: