D.D.I.T. (I.T.) 2(1), MUMBAI vs. SIEMENS LTD., MUMBAI

Assessee filed application u/s.195(2) for making remittance to KEMA Testing Laboratory. The AO held that the payments to be made by the 3 & 8367/Mum/2011 & CO 247/Mum/2012 M/s. Siemens Ltd., applicant would qualify as "Fees for technical services" as per section 9( 1) (vii) of the I.T.Act, 1961 as well as, per DTAA between India and Netherlands. Hence, AO directed to deduct tax @ 1 0% on the gross amount of payments to be made to KEMA Testing Laboratory.

Learned DR Shri K.L. Kanak appearing on behalf of the Revenue contended that power transformers are one of the most valuable assets of 7 & 8367/Mum/2011 & CO 247/Mum/2012 M/s. Siemens Ltd., an electrical generation and transmission system. Manufacturing a power transformer and transporting it to the site involves substantial costs. However, the damage caused by a transformer failure and the subsequent loss of production may end up costing far more. Utility companies, like Power Grid, therefore try to keep their transformers in operation for as long as possible. During electrical operation, power transformers are subjected to electrical, mechanical, thermal and environmental stresses. Power transformers are exposed to mechanical stresses during transportation, during relocation, during earthquake or during external short circuits. Transformers have to withstand stress of operating voltages as well as pulse voltages like lightening or switching pulses. The inner losses, terminally caused by load current must be dissipated. High temperature caused by deterioration of transformer insulation material. Transformer failure caused by these stresses can lead to explosions, subsequent fire and costly after-effects such as clean-up and plant repair as well as long duration of transformer replacement. Therefore, utilities and service providers test power transformers in order to assess their conditions, schedule maintenance and plan their replacement. 11. Learned DR further contended that for confirming the specifications and performances of an electrical power transformer it has to go through numbers of testing procedures. Some tests are done at manufacturer premises before delivering the transformer. Mainly two types of transformer testing are done at manufacturer premises- type test of transformer and routine test of transformer. In addition to that some transformer tests are 8 & 8367/Mum/2011 & CO 247/Mum/2012 M/s. Siemens Ltd., also carried out at the consumer site before commissioning and also periodically in regular & emergency basis throughout its service life.

As per learned DR, the perusal of the documents submitted by the assessee before the Hon'ble ITAT on 06.01.2017, it is seen that the power transformers manufactured by the assessee were required to conform to the specifications IS-2026 and IEC-60076 (Part 1 to Part 5). (Please refer to page 55 of the submission dated 06.01.2017, which were submitted before the CIT(A)). Further, pages 87 to 88B enumerate the 'Type Tests' prescribed by Powergrid to Siemens, to be conducted on every power transformer. The order of the Ld. CIT(A) also gives a brief idea of the tests which are required to be carried out on each transformer. It may be seen that Power Grid had mandated that - (a) The transformers shall be designed, manufactured and tested in accordance with the best international practices under strict quality control. (b) The transformers should be capable of withstanding adequate thermal, mechanical, dielectric and electrical stress during its lifetime of 30 years. (c) Design review shall be conducted by Power Grid at different stages of design, selection of raw material and manufacturing process. (The scope of such design review is described on page 6 of the appellate order).

In the instant case, the 'type tests' and 'additional type tests' (please refer page 40 of the submission dated 06.01.2017) were carried out by the KEMA Laboratories. As submitted by the assessee, the transformers so manufactured by Siemens Ltd., were transported to Netherlands in CKD (Completely Knocked Down) condition. The transformers were reassembled in the Netherlands and type tests and additional type tests were carried out on such transformers. The transformers were sent back to India (probably in CKD condition) where powergrid carried out the same type tests and additional type tests again on these transformers before accepting the same from the assessee (please refer para 9.3, page 40 of the submission dated 06.01.2017).

These examples are only illustrative. It may be seen that for carrying out each of the above tests, separate instruments/equipments are required. These instruments / equipments have to be connected to the different parts of the transformer. Different kind of currents (AC/DC) have to be injected, at different voltages, for different time-periods and of different frequencies. The results of these tests have to be examined for acceptance within the margins of error stipulated by international bodies. The analysis of the various test results is carried out by experts and engineers considering the unique needs and configuration of each transformer.

A plain reading of the procedure laid down for short circuit withstand test by IEC makes it evident that this test cannot be carried out by the machine alone, automatically and without human intervention. These examples are only illustrative and not exhaustive. However, it establishes beyond doubt that these tests require definite human expertise and interface and cannot be carried out in a mechanical manner. Though carried out by sophisticated equipments, without the involvement of technicians and engineers, neither can it be carried out nor can be understood. Thus the arguments of the assessee in this regard is liable to be rejected in toto.

As per learned DR this issue is not covered by the order of the ITAT in assessee‟s own case in in so far as the said judgment was delivered in a different set of facts. Following are the distinguishing features of the above case: (i) In the above case, the assessee had made payments of 'Pehla Testing Laboratory, Germany', for carrying out, incidentally, 'type tests' on circuit breakers. The assessee claimed that this is a 'standard service provided by the Laboratory, which is done automatically by the machines'. The Hon'ble ITAT summed up the issue by observing that "the main contention in this regard was that it is not a FTS but the payment was purely for standard facility provided by the Laboratory which is done automatically by the machines without any human intervention". The assessee in that case made 17 ITA No.8368 & 8367/Mum/2011 & CO 247/Mum/2012 M/s. Siemens Ltd., extensive reliance on the judgments of the Hon'ble Delhi High Court in case of CIT Vs. Bharati Cellular Limited [319 ITR 258] and that the Hon'ble Madras High Court in case of Skycell Communications Ltd. Vs. DCIT (2001) 251 ITR 53 (Mad). To contend that “Technical services involve a human element, whereas in the case of the assessee, there is no involvement of human interface. ii) The Hon'ble ITAT summed up its observations in the following manner: "Thus if a standard facility is provided through a usage of machine or technology, it cannot be termed as rendering of technical services. Once in this case it has not been disputed that there is not much of the human involvement for carrying out the tests of circuit breakers in the laboratory and it is mostly done by machines and is a standard facility, it cannot be held that Pehla Testing Laboratory is rendering any kind of technical services to assessee. "

The Hon'ble Tribunal further observed as under: "If any person delivers any technical skill or services or makes available any such services through aid of any machine, equipment or any kind of technology, then such a rendering of service can be inferred as "technical services". In such a situation, there is a constant human endeavour and the involvement of the human interface. On the contrary, if any technology or machine developed by human and put to operation automatically, wherein it operates without any much of human interface or intervention, then usage of such technology cannot per se be held as rendering" technical services" by human skills. It is obvious that in such a situation some human involvement could be there but it is not a constant endeavour of the human in the process. Merely because certificates have been provided by the humans after a test is carried out in a Laboratory automatically by the machines, it cannot be held that services have been provided through the human skills. " (iii) At the outset it is submitted that the 'type tests' of circuit breakers are different from 'type tests' of transformers. In case of the former, tests are carried out on a sample basis, and are of the nature of 'destructive testing'. That is to say, the samples sent for testing are destroyed after the test results and are not returned back to the manufacturer. The results are also of 'pass/fail' type. On the other hand, in the case of power transformers', tests are carried out on each unit of the product (i.e., the power transformers) and are of the nature of 'non-destructive 18 & 8367/Mum/2011 & CO 247/Mum/2012 M/s. Siemens Ltd., testing'. The transformers are not destroyed or discarded after carrying out the tests. The results are also expressed in terms of margin of error which serve as inputs for the manufacturers to redesign, reassemble or remanufacture the product, or replace the auxiliary systems as the case may be. Hence, there are qualitative difference between the 'type tests' of a circuit breaker and that of a power transformer. (iv) Kind reference is invited to paras 3.8 to 3.10 above, wherein it is demonstrated that the „type tests‟ carried out by KEMA Laboratory in the instant case is not, and cannot be, done automatically by the use of 'standard facilities', without 'human intervention'. The process involved in 'type testing' of a power transformer has been illustrated in the above paragraphs. The procedure laid down by the IEC has also been submitted, which demonstrate that the tests require constant human endeavour. The tests, in fact, cannot be carried out by the machines alone, howsoever sophisticated. It requires human involvement by way of (a) devising the test plan to the mutual satisfaction and agreement of the parties concerned as well as within the guidelines laid down by IEC/CIGRE, (b) setting up the testing equipments for each individual tests listed under the broad head of 'type tests', (c) connection of the input/output terminals of the transformer with appropriate current/voltage generating set, (d) setting of appropriate current, voltage which are 'injected' into the transformer at different frequencies, (e) physical observation of the operation/performance of the transformer and its various components during and after the specific tests, (f) examination of the interior/exterior of the transformer, windings, core, transformer oil, auxiliary units and relays and protective devices and analysis of the same vis-a-vis other test results, and finally (g) preparation of the test results indicating the qualitative as well as quantitative results of the various tests. It is, therefore, not a case where the transformers are put on a test bed, connected with some sophisticated equipments and the rest is done automatically by some computer or other automated devices, the result of which is a test report on which someone puts his or her signature mechanically. It may be appreciated that there is a continuous human involvement. At each stage, the expertise of the technicians/engineers is required. For example, there may be instances where the transformers fail the first few tests and further tests are not carried out in order to prevent damages, and the transformers are sent back or dismantled for addressing some vital problem which are rectified and put back for testing. Thus the 'type testing' of a power transformer requires constant human endeavour, and, in fact, satisfies the criteria laid down by this Hon'ble Tribunal in assessee's own case (ITA No. 4356/Mum/2010), for qualifying a service as a „technical service‟.

As per learned D.R. it is also respectfully submitted that it is not a case of the use of a „standard‟ facility‟. First of all, the term 'standard facility' is not defined anywhere. Its meaning has to be derived from its generic use and understanding. The Hon'ble Madras High Court also did not define the term in the case of Skycell Communications Ltd. [251 ITR 53 (Madras)], relied upon by the assessee. However, a number of situations have been listed in the said judgement to illustrate what may be termed as a 'standard facility'. The illustrations are payments for use of telephone, cable TV, internet, automobile, railway, the aeroplane, consumption of electrical energy etc. (Para 13). In all these situations, the recipient of service is merely given access to a 'black box' which performs a service without involvement of the person providing this 'black box'. The 'black box' is fixed, or nearly fixed, in time, configuration, or performance output. However, in case of the assessee, the 'black box' in the form of testing programs (Program AI, A2, B & C, as indicated in the invoice of KEMA Laboratories), which is a dynamic entity. It is not 'static' in time, configuration or performance. Unlike the illustrations in Skycell, in the instant case, the service provider is actively invested in the functions, attributes or outputs of the 'black box'. The assessee is also actively involved in a manner which helps it change, modify or improve the design, functions, attributes, capacities or performance of the test objects, 20 & 8367/Mum/2011 & CO 247/Mum/2012 M/s. Siemens Ltd., that is the transformers. Thus, the facts of the instant case are vastly and starkly different from the illustrations given in Skycell.

Even the assessee has not explained in what manner does the entire laboratory of KEMA qualifies for a 'standard facility'. In a general understanding, a 'standard facility' is something which performs pre- defined tasks for certain specified inputs or objects. It may also be understood to be something which performs 'standard service' for a given subject. In the parlance of Income Tax, the word has been used by way of illustration, such as a transponder of a satellite for uplinking/downlinking, mobile communication system including mobile towers (BTSs/MTSs) for providing roaming services to other mobile network subscribers, fibre optic cables etc. and the likes. It may be seen that such 'standard facilities' does not require any human intervention for performing out the pre-designed services. There is no human involvement once the systems, hardwares or softwares are 'programmed' for performing a particular service or services. The quality or quantity of the output or services cannot be influenced or altered in any way by human beings opposed to that, the 'type testing' of power transformers, as explained in the preceding paragraphs, requires continuous involvement of and monitoring by human beings. Physical observation is a crucial part of the type testing of transformers. It is but natural that sophisticated instruments / equipments are required for performing the tests, for how else a high voltage / current be generated for injecting into the transformers.

To sum up, the 'type tests' on power transformers of Siemens have not been carried out on some 'standard facility' by machines automatically without human intervention. On the contrary, there is a constant human endeavour involved in testing of a power transformer. Therefore, the instant case of the assessee is not covered by the judgment of this Hon'ble Tribunal in ITA No. 4356/Mum/2010. Rather, the observations of the Hon'ble Tribunal in the above case support the argument of the Revenue where it has been demonstrated in the facts of the case as well as with the help of technical literature available in open media that 'technical services' have indeed been rendered by KEMA to Siemens as the very nature of the type testing of power transformer requires. The arguments of the assessee in this regard are, therefore, liable to be rejected.

As per learned AR KEMA have made available services to the assessee for this purpose reference was made to Article 12 of treaty which is reproduced below:- 5. For purposes of this Article, fees for technical 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 4 of this Article is received; or (b) make available technical knowledge, experience, skill, know- how or processes, or consist of the development and transfer of a technical plan or technical design.

Royalties or fees for technical services shall be deemed to arise in one of the States when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of one of the States or not, has in one of the States a permanent establishment or a fixed base in connection with which the contract under which the royalties or fees for technical services are paid was concluded, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of royalties or fees for technical services having regard to the royalties fees for technical services for which they are paid, exceeds the amount which would have been agreed upon b the paper and the beneficial owner in the laws of each state, due regard being had to the other provisions of this convention.

The term 'make available' has not been defined in the India- Netherlands DTAA. It, however, has been explained in the MoU of India- USA DTAA, the relevant portions of which are reproduced below: ARTICLE 12 Royalties and fees for included services - 1. ... 4. For 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 24 & 8367/Mum/2011 & CO 247/Mum/2012 M/s. Siemens Ltd., (b) make available technical knowledge, experience, skill, know- how, or processes, or consist of the development and transfer of a technical plan or technical design.

As per learned DR, Article 12 includes; only certain technical and consultancy services. But technical services, we mean in this context services requiring expertise in a technology. By consultancy services, we mean in this context advisory services. The categories of technical and consultancy services are to some extent overlapping because a consultancy service could also be a technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in a technology is required to perform it. 31. 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 service which are not of technical nature cannot be included services. Paragraph 4(b) of Article 12 refers to technical or consultancy services that make available to the person acquiring the services, technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plant or technical design to such person. (For this purpose, the person acquiring the service shall be 25 & 8367/Mum/2011 & CO 247/Mum/2012 M/s. Siemens Ltd., deemed to include an agent, nominee, or transferee of such person). This category is narrower than the category described in paragraph 4(a ) because it excludes any service that does not make technology available to the person acquiring the service. Generally speaking, 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 may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are 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. The following examples indicate the scope of the conditions in paragraph 4( b) : Example 3 Facts: A US. manufacturer has experience in the use of a process for manufacturing wallboard for interior walls of houses which is more durable than the standard products of its type. An Indian builder wishes to produce this product for its own use. It rents a plant and contracts with the V.S. company to send experts to India to show engineers in the Indian company how to produce the extra-strong wallboard. The V.S. contractors work with the technicians in the Indian firm for a few months. Are the payments to the US. firm considered to be payments for "included services" ?

In view of the above, it was argued by learned DR Mr. K.L.Kanak that if we are to import the meaning of „make available‟ from the India-US DTAA, it would mean that a technology is 'made available' if the person acquiring the services is enabled to apply the technology. Various courts have 27 & 8367/Mum/2011 & CO 247/Mum/2012 M/s. Siemens Ltd., explained the words 'make available' as under: " ... a mere rendering of services is not roped in unless the person utilising the services is able to make use of the technical knowledge, etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill, etc. must remain with the person utilising the services even after the rendering of the services has come to an end. A transmission of the technical knowledge, experience, skills, etc. from the person rendering the services to the person utilising the same is contemplated by the article. Some sort of durability or permanency of the result of the "rendering of services" is envisaged which will remain at the disposal of the person utilising the services. The fruits of the services should remain available to the person utilising the services in some concrete shape such as technical knowledge, experience, skills, etc. [Para 92] Raymond Ltd. Vs. DCIT, IT AT Mumbai [(2003) 86 ITD 791] "Make available means to provide something to one, which is capable of use by the other. Such use may be for once only or on a continuous basis. In our context to make available the technical services means that such technical information or advice is transmitted by the non-resident to the assessee, which remains at its disposal for taking the benefit therefrom by use. Even the use of such technical services by the recipient for once only will satisfy the test of making available the technical services to the assessee. If the non-resident uses all the technical services at its own end, albeit the benefit of that directly and solely flows to the payer of the services, that cannot be characterized as the making available of the technical services to the recipient. " Mahindra & Mahindra Ltd. v. Dy. CIT [2009] " ... 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." Perfetti Van Melle Holding B.V (A.A.R. No.869 of2010) Decided on 9th December, 2011 "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.” CIT & ITO vs. De Beers India Minerals (P) Ltd., (2012) 72 DTR (Kar) 82)

It has been held by the Ld. Karnataka High Court in case of De Beers (supra) that "the question whether along with rendering technical services, whether the technical knowledge with which the services were rendered was also made available to the assessees/customers is purely a question of fact which is to be gathered from the terms of the contract, the nature of services undertaken and what is transmitted in the end after rendering technical services.

As per learned DR in the instant case, the assessee, Siemens; is in the business of manufacturing power transformers which it intends to sell to Power Grid Corporation. Siemens is in the business of manufacturing of power transformers for a number of years. Power transformers are one of the most valuable assets of and electrical generation and transmission system. Manufacturing a power transformer involves substantial costs. These equipments are required to perform in a manner meeting a very high standard of reliability and sturdiness and able to withstand severe 'shocks'. However, power transformers are not 'assembly-line' products.

In case of the assessee, this is precisely what takes place. For Siemens, manufacturing of power transformers is a continuous process, even though each transformer is to be designed new for the specific needs of the customers. Each customer naturally, and invariably, requires that the transformers meet the latest technical standards prescribed by the world bodies like IEC/IEEE/CIGRE etc. Each manufacturer also keeps pace with the developments in the field of electrical- mechanical engineering, material science, instrumentation etc. Each manufacturer is also in continuous endeavour to ensure maximum efficiency and best performance for its products. In this backdrop, testing of transformers and its auxiliary systems including protective devices, play and crucial role in the product development cycle of a transformer. It is the test results, which indicate the performance of the transformers. A satisfactory test result validates the technology, processes or materials used in the manufacturing of the transformer. An unsatisfactory test result or a failure compel the manufacturer to 'go back to the drawing board' and necessitate or precipitate a 'design review'. A test result within the margins of acceptance provides an input to the manufacturer to calibrate and standardize its design and processes, whereas results outside the limits of acceptance initiate a review of the research and development (R&D). In either case, the test results give enduring benefits to the 31 & 8367/Mum/2011 & CO 247/Mum/2012 M/s. Siemens Ltd., assessee which goes a long way in improvement of its manufacturing system. These benefits go much beyond the immediate need of the customer as the insight that the test results provide has universal and futuristic application.

The results of the 'type tests' carried out by KEMA on a particular piece of transformer are, therefore, not services the effect of which are localized for that particular piece. As a result of the „type tests‟ the assessee exactly knows the kind of amendment, innovation or improvisation that it is required to carry out for all future manufacturing of transformers. Some tests may indicate the acceptability of a new material (for example, those used for transformer cores, tanks, casings etc., or, transformer oil). Some other tests may point to design flaws which will make the transformer susceptible to various kinds of electro-mechanical stress. Nevertheless, each test (result) serves a purpose of either validating a design/process/system or the need for improvement in some parameters. By means of these test results, the service provider (KEMA) makes available its technical experience, knowledge or skill which go a long way in designing, developing, calibrating, standardizing or even discarding a component, process, material or (in-house) testing equipments/systems of the assessee. Such experience, knowledge or skill help the assessee eliminate the possibility of committing an error in future. Thus the test results, which are nothing but physical manifestation of the services provided by KEMA on the transformers, provide the technical expertise, knowledge, skill or experience of KEMA to the 32 & 8367/Mum/2011 & CO 247/Mum/2012 M/s. Siemens Ltd., assessee which remain at the disposal of the latter much after the services have been rendered. The assessee can utilize this knowledge or knowhow in its future operations and thus the testing services of KEMA provide an enduring benefit to the assessee. It is, therefore, submitted that KEMA carried out technical services which are 'made available' to Siemens Ltd. and, accordingly, the payments thereof are FTS within the meaning of Article 12(5) of the DTAA between India and the Netherlands.

The Department places its reliance on the judgment of the Hon'ble Chennai ITAT in case of Foster Wheeler France S.A. Vs. DDIT [ITA Nos. 774/MDS/2014 and 641/MDS/2015, judgment delivered on 05.02.2016] (a) The assessee-company was engaged in the business of engineering and construction contract, engineering equipment and power equipment supplier. In this case, the assessee entered into an agreement with Reliance Petroleum Limited for providing technical and engineering services with regard to delayed Coker Unit of Reliance Petroleum Limited. The entire services rendered at the premises of Reliance Petroleum Limited. For providing technical and engineering services to Reliance Petroleum Limited, the assessee in turn entered into another agreement with Foster Wheeler USA to monitor and review the work done by the assessee's employees on an agreed consideration. The assessee received best practices in different engineering specifications as well as engineering details to be adopted in execution of the different phases of the project. The engineering specifications, services, were being provided to the assessee by its USA associate. When the assessee-company 33 ITA No.8368 & 8367/Mum/2011 & CO 247/Mum/2012 M/s. Siemens Ltd., completed projects with Reliance Petroleum Limited, the assessee would be well equipped and capable of executing identical project in engineering in respect of the details and skill, expertise and information provided by USA associate. (b) The Hon'ble Chennai Tribunal discussed the cases of De Beers (Karnataka HC) (supra), Raymond Ltd. (Mumbai ITAT), Sandvik Australia Pty Ltd. (Pune ITAT) as well as Intertek Testing Services India Pvt. Ltd. (AAR). The Hon'ble Tribunal held as under:

While deciding the case of Foster Wheeler France, the Hon'ble Chennai Bench of ITAT relied extensively of the judgment of the Hon'ble Cochin Bench of ITAT in US Technology Resources Pvt. Ltd. Vs. ITAT [ITA No. 222/Coch/2013, judgment dated 27.09.2013] (attached herewith as ANNEXURE-D). In this judgement, the Hon'ble Cochin Tribunal 34 & 8367/Mum/2011 & CO 247/Mum/2012 M/s. Siemens Ltd., discussed all the above cases and in addition, the judgments of Hon'ble Andhra Pradesh High Court in case of GVK Industries Ltd. Vs. ITO [(1997) 228 ITR S64 (AP)] and that of ITAT Mumbai in Wockhardt Ltd. Vs. ACIT [(2011) 10 Taxmann.com 208 (Mum)]. Before the Hon'ble Tribunal the AIR of the assessee also relied on the judgments of ITAT Mumbai in the cases of DCIT Vs. Boston Consulting Group Pte Ltd. [(200S) 94 ITD 31 (Mum)], Mahindra & Mahindra Ltd. Vs DCIT [(2009) 30 SOT 374 (Mum) (SB)] and DDIT Vs Scientific Atlanta Inc [2009- TIOL-585-ITAT- MUMl Distinguishing all the above judgments on facts, the Hon'ble ITAT Cochin held that "the information, expertise and training provided by the USA company was absorbed by the assessee-company in their decision making process and it was utilized for the purpose of business. The USA Company made available all the technical data, information, expertise to the assessee-company which was absorbed and made use of by the assessee-company in their managerial and financial decision making process and other decisions in the development of the business. Therefore, the expertise and technology which was made available by the USA company is a technical service within the meaning of Article 12(4)(b) of the DTAA between India and USA. 11 41. Reliance was placed by learned D.R. on the judgment of this Hon'ble ITAT in the case of Sargent & Lundy Vs ACIT [ITA No. 8986/Mum/2010, judgment dated 24.07.2013] (attached herewith as ANNEXURE-E). In this case, the assessee was incorporated in and was tax resident of USA. It was a consulting firm engaged in providing services to the power industry 35 ITA No.8368 & 8367/Mum/2011 & CO 247/Mum/2012 M/s. Siemens Ltd., by providing diverse services such as operating power plants, decommissioning consulting, project solutions and other engineering based services. In the previous year relevant to the assessment year under consideration, the assessee received a sum of Rs.2,22,16,154/- from L&T Limited for rendering consulting and engineering services in relation to Ultra Mega Power projects in Mundra and Sesan. The Hon'ble Tribunal held as under:

In view of the above submission, learned DR concluded that in the facts of the case, KEMA has 'made available' its technical experience, knowledge or skill while carrying out the 'type tests' on the transformers by way of the test results. It needs to be appreciated that these test results are not generated as a result of some automatic operation of machines. The same requires constant human endeavour and physical involvement of experts and engineers. There are a number of tests carried out in a phased and sequential manner, each under expert 36 & 8367/Mum/2011 & CO 247/Mum/2012 M/s. Siemens Ltd., supervision. The different tests have not only made use of sophisticated machines but also the expertise and analysis of the men operating these machines. These results provide valuable feedback and are important art of the product development cycle of a power transformer. They serve as essential inputs for validation, improvisation, modification, calibration or even outright rejection of the designs, processes, manufacturing practices, materials used, instrumentations employed or systems and services employed by the assessee, which deliver enduring benefits to it. The knowledge or insight provided by KEMA remain with the assessee even after the (testing) services have been rendered (on a particular transformer). They are used by the assessee in the future design, development and manufacturing of power transformers. These inputs are even applicable for other type of equipments which utilize the same material, processes or systems as those of the power transformer. Thus, the utility of the test results are even beyond the transformers. In these facts, the technical services of KEMA provide enduring benefits to the assessee and, accordingly, technical services have been 'made available' to the assessee. Hence, the payments thereof are taxable as FTS under the India-Netherlands DTAA.

On the other hand, learned AR contended that as per DTAA between India and Netherland all technical services to be taxable in India “Make Available” clause is to be satisfied. In terms of the decision of Bombay High Court in case of Diamond Services International Pvt. Ltd. 304 ITR 20 by providing the type test certificate in Netherlands, after testing the 37 & 8367/Mum/2011 & CO 247/Mum/2012 M/s. Siemens Ltd., transformer in Netherlands, using the equipment installed in Netherlands, KEMA has not made available any technical knowledge or expertise or skill to the' assessee. Further relying on the decision of Authority of Advance Ruling reported at 326 ITR 487, he argued that Netherland company has not “made available” any technical expertise, knowledge or skill in India, therefore, fees paid to the Netherlands company for testing the transformer of the assessee-company has not rendered any technical services within the scope of Article 12(5) of the treaty. Hence, fees paid to the Netherlands Company is not taxable in India. Further reliance was placed on the decision of ITAT Special Bench in case of Mahindra & Mahindra 313 ITR 263. Further reliance was placed on the decision of ITAT in assessee‟s own case in ITA No.4356/Mum/2010 dated 12/02/2013 wherein similar payment made for standard facility provided by laboratory using the sophisticated equipment for carrying out test was held to be not liable for deduction of tax at source.

We have considered rival contentions and carefully gone through the orders of the authorities below. We had also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by learned AR and DR during the course of hearing before us. From the record, we found that assessee is a manufacturer of transformers in India which are required to be designed as per the requirement of Power Grid Corporation of India to whom these transformers are supplied. These transformers are required to be type tested in lab of an international standard, accordingly assessee entered 38 & 8367/Mum/2011 & CO 247/Mum/2012 M/s. Siemens Ltd., into agreement with KEMA Testing Laboratory, Netherlands to carryout short circuit test and certify the transformers. Assessee filed application u/s.195(2) for making remittance to KEMA, however, AO directed to deduct tax at 10% on the gross amount payable to KEMA Testing Laboratory.

Similarly for testing the transformer, assessee has taken on rent oil with equipment from SMIT Transformatoren BV. SMIT has provided crane and man lift on rental basis. On the amount so paid the AO directed to deduct tax at 10% on the gross payment.

By the impugned order, CIT(A) held that Netherlands company has not “made available” any technical expertise, knowledge or skill to the assessee in India. Therefore fees paid to Netherland company for testing of transformer of assessee company was not for rendering any technical services within the scope of Article 12(5) of the treaty. Hence, fees paid to the Netherlands company is not taxable in India. Similar issue has been dealt by the Tribunal in assessee‟s own case vide order dated 12/02/2013, wherein for standard facility provided by laboratory by using highly sophisticated equipment for carrying out test was held to be not liable to tax in India in the form of fee for technical services. The precise observation of Tribunal was as under:-

We have given our anxious consideration to the rival contention, orders passed by the CIT (A) as well as AO and the decisions relied upon by the parties. One of the main issue for our adjudication which also goes to the core of the issue is, whether the payment made to Pehla Testing Laboratories in Germany, for carrying out certain tests on circuit breakers manufactured by assessee for the purpose of certification, so as to meet the international standard, falls within the 39 & 8367/Mum/2011 & CO 247/Mum/2012 M/s. Siemens Ltd., meaning of fees for technical services and is taxable within the meaning of section 9(1)(vii). Assessee in pursuance of its tender formalities with the Gujarat Energy Transmission Corporation Ltd and Maharashtra State Electricity Transmission Company Ltd. was required to obtain type testing certificate of the circuit breakers manufactured by it. For this purpose it has sent the circuit breakers to be tested in the Laboratory of PTL, wherein the circuit breakers undergo destructive in the Laboratories. Once it passes through the test in the Laboratories, certificate is given by the PTL for the quality of the product manufactured by assessee. Whether such a payment for this kind of testing falls within the realm of fees for "technical services". Section 9(1)(vii) provides that income by way of Fee for Technical Services shall deemed to accrue or arise in India. Explanation 2 defines the "fees for technical services" as under: Section 9(1)(vii) "(vii) income by way of fees for technical services payable by-- (a) the Government ; or (b) a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : [Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.] [Explanation 1.--For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.] Explanation [2].--For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".] [Explanation.--For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non- resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,-- 40 & 8367/Mum/2011 & CO 247/Mum/2012 M/s. Siemens Ltd., (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India".

From the above, it is seen that the expression "fees for technical services" has been given as consideration for rendering managerial, technical or consultancy services. No other definition as such of the term technical services in the Act has been given. The word "technical" as appearing in Explanation 2 is preceded by the word "managerial" and succeeded by the word "consultancy". It cannot be read in isolation as it takes colour from the word "managerial and consultancy" between which it is sandwiched. The Courts have held that in such a case principle of noscitur a sociis gets attracted, which means that the meaning of the word or expression is to be gathered from the surrounding word i.e. from the context. Coupling of the words together shows that they are to be understood in the same sense. The word "managerial and consultancy" is a definite indicative of the involvement of a human element. Managerial services and consultancy services has to be given by human only and not by any means or equipment. Therefore, the word "technical" has to be construed in the same sense involving direct human involvement without that, technical services cannot be held to be made available. Where simply an equipment or sophisticated machine or standard facility is provided albeit developed or manufactured with the usage of technology, such a user cannot be characterized as providing technical services. The Hon'ble Delhi High Court in the case of CIT vs. Bharati Cellular Ltd (supra) in this regard has observed and held as under: "13....... "In the said Explanation the expression " fees for technical services" means any consideration for rendering of any " managerial, technical or consultancy services" . The word " technical" is preceded by the word " managerial" and succeeded by the word " consultancy" . Since the expression " technical services" is in doubt and is unclear, the rule of noscitur a sociis is clearly applicable. The said rule is explained in Maxwell on the Interpretation of Statutes (Twelfth Edition) in the following words (page 289) : " Where two or more words which are susceptible of analogous meaning are coupled together, nosicutur a sociis, they are understood to be used in their cognate sense. They take, as it were, their colour from each other, the meaning of the more general being restricted to a sense analogous to that of the less general." This would mean that the word " technical" would take colour from the words " managerial" and " consultancy" , between which it is sandwiched. The word " managerial" has been defined in the Shorter Oxford English Dictionary, Fifth Edition as :

Similarly, the word "consultancy" has been defined in the said Dictionary as the work or position of a consultant; a department of consultants. "Consultant" itself has been defined, inter alia, "as a person who gives professional advice or services in a specialized field". It is obvious that the word "consultant" is a derivative of the word "consult" which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as " ask advice for, seek counsel or a professional opinion from; refer to (a source of information) ; seek permission or approval from for a proposed action" . It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant.

The Hon'ble Judge in the case of Skycells Communications Ltd (Supra) while interpreting the word "fees for technical services" as 43 & 8367/Mum/2011 & CO 247/Mum/2012 M/s. Siemens Ltd., defined in Explanation 2 to section 9(1)(vii) has made a very important observation: "5. In the modern day world, almost every facet of one's life is linked to science and technology in as much as numerous things used or relied upon in every day life is the result of scientific and technological development. Every instrument or gadget that is used to make life easier is the result of scientific invention or development and involves the use of technology. On that score, every provider of every instrument or facility used by a person cannot be regarded as providing technical service. When a person hires a taxi to move from one place to another, he uses a product of science and technology, viz., an automobile. It cannot on that ground be said that the taxi driver who controls the vehicle, and monitors its movement is rendering a technical service to the person who uses the automobile. Similarly, when a person travels by train or in an aeroplane, it cannot be said that the railways or airlines is rendering a technical service to the passenger and, therefore, the passenger is under an obligation to deduct tax at source on the payments made to the railway or the airline for having used it for travelling from one destination to another. When a person travels by bus, it cannot be said that the undertaking which owns the bus service is rendering technical service to the passenger and, therefore, the passenger must deduct tax at source on the payment made to the bus service provider, for having used the bus. The electricity supplied to a consumer cannot, on the ground that generators are used to generate electricity, transmission lines to carry the power, transformers to regulate the flow of current, meters to measure the consumption, be regarded as amounting to provision of technical services to the consumer resulting in the consumer having to deduct tax at source on the payment made for the power consumed and remit the same to the Revenue. Satellite television has become ubiquitous, and is spreading its area and coverage, and covers millions of homes. When a person receives such transmission of television signals through the cable provided by the cable operator, it cannot be said that the home owner who has such a cable connection is receiving a technical service for which he is required to deduct tax at source on the payments made to the cable operator. Installation and operation of sophisticated equipments with a view to earn income by allowing customers to avail of the benefit of the user of such equipment does not result in the provision of technical service to the customer for a fee.

When a person decides to subscribe to a cellular telephone service in order to have the facility of being able to communicate with others, he does not contract to receive a technical service. What he does agree to is to pay for the use of the airtime for which he pays a 44 & 8367/Mum/2011 & CO 247/Mum/2012 M/s. Siemens Ltd., charge. The fact that the telephone service provider has installed sophisticated technical equipment in the exchange to ensure connectivity to its subscriber, does not on that score, make it provision of a technical service to the subscriber. The subscriber is not concerned with the complexity of the equipment installed in the exchange, or the location of the base station. All that he wants is the facility of using the telephone when he wishes to, and being able to get connected to the person at the number to which he desires to be connected. What applies to cellular mobile telephone is also applicable in fixed telephone service. Neither service can be regarded as "technical ser- vice" for the purpose of section 194J of the Act.

The use of the internet and the world wide web is increasing by leaps and bounds, and there are hundreds of thousands, if not millions, of subscribers to that facility. The internet is very much a product of technology, and without the sophisticated equipment installed by the internet service providers and the use of the telephone fixed or mobile through which the connection is established, the service cannot be provided. However, on that score, every subscriber of the internet service provider cannot be regarded as having entered into a contract for availing of technical ser- vices from the provider of the internet service, and such subscriber regarded as being obliged to deduct tax at source on the payment made to the internet service provider. Thus if a standard facility is provided through a usage of machine or technology, it cannot be termed as rendering of technical services. Once in this case it has not been disputed that there is not much of the human involvement for carrying out the tests of circuit breakers in the Laboratory and it is mostly done by machines and is a standard facility, it cannot be held that Pehla Testing Laboratory is rendering any kind of technical services to assessee. In our conclusion, we thus hold that payment made by assessee to the PTL in Germany is not in consideration for rendering of any kind of "technical services" either in the nature of managerial or technical or consultancy services. Therefore, it does not fall within the ambit of section 9(1)(vii).

In our final conclusion we hold that the learned CIT (A) was not correct in holding that the payment made by assessee to Pehla Testing Lab was in any manner in the nature of "fees for technical services" within the ambit of section 9(1)(vii) read with Explanation 2 and accordingly there was no requirement in law to deduct tax at service on such payment. In the result this issue is decided in the favour of the assessee.