DCIT, CHENNAI vs. FORD INDIA PVT. LTD., KANCHEEPURAM

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 1 of 55 IN THE INCOME TAX APPELLATE T RIBUNAL, CHENNAI D BENCH, CHENNAI [Coram: Pramod Kumar AM and G Pavan Kumar JM] I.T.A. Nos. 673 and 840 /Chny/2015 Assessment years: 2011-12 and 2012-13 Dy Commissioner of Income Tax LTU -II, Chennai ……………………..........Appellant Vs Ford India Limited ……………………......Respondent S P Koil Post, Chengalpattu 603 204 Kanchipuram [PAN: AAACM4454H] I.T.A. Nos. 748 and 749 /Chny/2015 Assessment years: 2011-12 and 2012-13 Ford India Limited ……………………..........Appellant S P Koil Post, Chengalpattu 603 204 Kanchipuram [PAN: AAACM4454H] Vs Dy Commissioner of Income Tax LTU -II, Chennai ……………………......Respondent Date of concluding the hearing : November 2, 2016 January 31st, 2017 Date of pronouncing the order : Appearances by: R Durai Pandian for the Assessing Officer Raghunathan Sampath and Prachi Jain for the assessee O R D E R Per Pramod Kumar AM:

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 2 of 55 2. We begin with the appeals for the assessment year 2011-12, and take up the revenue’s appeal first.

2.1 The Id. CIT(A) failed to appreciate that the services rendered by the above parties to the assessee falls within the meaning of fee for Technical services(FTS) as per explanation 2 to Sec.9(1)(vii)of Income Tax Act, hence the assessee was liable to deduct tax on the same. 2.2 The Id. CIT(A) erred in holding that Article 12 of DTAA with Thailand provides only for taxation of royalty and the fee for technical services is not defined and therefore same was in the nature of "business profit" falls within the ambit of Article 7 of DTAA as per which business profit can be taxed in India only if the enterprises carries on business in India through PE situated in India and thus the assessee was not liable for deduction u/s.195 in respect of these payments. 2.3 The Id. CIT(A) erred in not considering the Circular No.333 dated 02/04/1982 of the CBDT as per which when there is no specific provision in the agreement, it is basic law i.e. the Income Tax Act will govern the taxation of income. 2.4 The Ld. CIT(A) failed to appreciate that as the services rendered by the non-resident in Thailand fall within the definition of fee for technical

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 3 of 55 service as per Income tax Act, there is no requirement for PE in India and the same is taxable in India and hence the assessee ought to have deducted TDS on the said payments.

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 4 of 55 become business income of the recipient. In our opinion, when DTAA is silent on an aspect, the provisions of the Act has to be considered and applied.” However, nothing turns on this decision as the principle laid down therein find favour with the jurisdictional High Court. In the case of Bangkok Glass Industries Pvt Ltd Vs ACIT [(2013) 257 CTR 356 (Mad)], Hon’ble Madras High Court rejected this school of thought and dealing with India Thailand tax treaty, which does not have FTS clause, rejected the claim of the revenue that even though the Thai entity did not have any PE in India and, for that reason this amount could not have taxed in India under article 7, FTS could be taxed as ‘other income’ under article 22. Their Lordships, in this context, also observed that, “Since the said income does not fall as miscellaneous income, the same cannot be brought under art. 22.” Of course, the question as to what really constitutes miscellaneous income, as visualized by Their Lordships, covered by Article 22 was left open- a question which we will endeavor to humbly address. As we deal with this aspect of the matter, and to explain the related principle in little more detail. Let us first take a look at the relevant treaty provision. The relevant treaty provisions are as follows:

ARTICLE 22- Other income

Items of income of a resident of a Contracting State, wherever arising, not expressly dealt with in the foregoing Articles may be taxed in that State. Such items of income may also be taxed in the Contracting State where the income arises.

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 5 of 55 taxed as ‘other income’ nevertheless. It is important to bear in mind the import of expression ‘not expressly dealt with in the foregoing articles’. Similarly, if independent personal services cannot be taxed in the source state as minimum threshold limit of fixed base is not satisfied, such a treaty concession cannot be nullified by invoking article 21. When a particular nature of income is dealt with in the treaty provisions, and its taxability fails because of the conditions precedent to such taxability and as specified in that provision are not satisfied, that is the end of the road for taxability in the source state. It is also important to bear in mind the fact that article 21 states that it applies to the “items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing articles of this Agreement”. Therefore, it is not the fact of non taxability under the operative articles (i.e. article 6 to 21) which leads to taxability under residuary clause in article 22, but the fact of income of that nature being covered by those articles which can lead to taxability under article 22. There could be many such items of income which are not covered by these specific treaty provisions, such as alimony, lottery income, gambling income, rent paid by resident of a contracting state for the use of an immoveable property in a third state, and damages (other than for loss of income covered by specific provisions of the treaty) etc. This is how UN Model Convention Commentary, which is referred to earlier in this order, also explains the scope of this article. In our humble understanding, therefore, article 22 does not apply to items of income which can be taxed in any situations under article 6-21 whether or not such an income is actually taxable under these articles. The question then arises whether income earned by the recipients in question, i.e. Fuji Asia Co Ltd-Thailand ad Auto Alliance Co Ltd-Thailand, can be said to in the nature of an income which is not expressly dealt with by other operative articles (i.e. article 6 to 21) of the treaty. The income earned by these entities was in the regular course of their business, and there is no dispute about this fundamental aspect. There cannot also be dispute about the fact that in the event of these entities satisfying the conditions regarding existence of permanent establishment in India, the amounts so received by these entities would have been taxable as business income. The income in question is thus clearly dealt with by article 7 read with article 5 and the reason why it has not been taxed is that the entities concerned did not have permanent establishments in India. Clearly, therefore, the income in question is covered by the provisions of the Indo Thai tax treaty but is not taxable on the facts of the case before us as the recipients did not have a PE in India. Once we come to the conclusion that the income embedded in the payments in question is of such a nature which is covered by articles 6 to 21 of the treaty but is not taxable in India as the condition precedent for the taxability under the related article is not satisfied, it is an inevitable corollary of this finding that article 22 cannot be pressed into service in respect of the said income. As we hold so, we are alive to the fact that there is no specific taxability provision, under India Thailand tax treaty with respect to taxability of fees for technical services. Profits earned by rendering fees for technical services

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 6 of 55 are only a species of business profits just as the profits any other economic activity. However, without the character of such receipts in the nature of business receipts being altered, the fee for technical services is dealt with separately in some treaties for the reason because, under those treaties the related contracting states proceed on the basis that even in the absence of the permanent establishment or fixed base requirements, the receipts of this nature can be taxed, on gross basis, at the agreed tax rate, and, to that extent, such receipts does not fall in line with the scheme of taxation of business profits under art. 7 and professional income under 14. It is interesting to note that the moment the threshold limits for permanent establishment or fixed base, as the case may be, is satisfied, the taxability shifts on net basis as business profits or professional (independent personal services) income. The business receipts or professional receipts thus cannot be seen in isolation with the fees for technical services. Its only the fact of, and mode of, taxation in the absence of PE or fixed base, which gets affected as a result of the fees for technical services. When there is an FTS clause, the FTS gets taxed even in the absence of the PE or the fixed base, but the character of FTS receipt is the same, i.e. business income or professional (independent personal) income, in the hands of the same. When there is no FTS clause, this sub categorization of income becomes irrelevant, because FTS or any other business receipt, the income embedded in such receipts gets taxed only if there is a permanent establishment or fixed base- as the case may be. The scope of business profit and independent personal service completely covers the fees for technical services as well. With FTS article or without FTS article, the income by way of fees of technical services continues to be dealt with the provisions of articles relating to business profits, independent personal services, and additionally, in the event of existence of an FTS article, with the article relating to the fees for technical services.

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 7 of 55 therefore, "the burden is first on the Revenue to show that the assessee has a taxable income under the DTAA, and then the burden is on the assessee to show that that its income is exempt under DTAA". Quite clearly, when there is no taxability under the respective treaty provisions, there cannot be any taxability under the provisions of the Income Tax Act either.

11 Ground no. 2 is thus dismissed.

S.No Name of the Party Countr Amount Nature of service y (Rs) 1. Ford Motor USA 6,19,411 Reimbursement of Company FIPL expenses of plant fire protection engineering services fees on cost sharing basis 2. Ford Motor UK 92,578 Reimbursement of Company FIPL expenses for usage of application sharing system related charges – Data centre charges & fixed assessment charges

3.1 The Id. CIT(A) failed to appreciate that the assessee has not produced any agreement with parent company for reimbursement and in the absence of an agreement, the above payments have to be treated as fee for annual maintenance charges attracting tax as per explanation 2 to Sec.9(1)(vii) of the Act and the assessee was liable for deduction of tax at source. 3.2 The Id. CIT(A) erred in holding that the remittance by way of reimbursement of expenses, has no 'income' element embedded in it, and therefore does not attract tax deduction at source u/s. 195(1). 3.3 The Ld. CIT(A) erred in not considering the decision of the Hon'ble Kerala High Court in the case of Cochin Refineries Ltd Vs. CIT reported in 222 ITR 354 (Ker) (1996), where the Hon'ble court has held that TDS is applicable even in reimbursement of expenses.

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3.4 The Ld. CIT(A) erred in not considering the decision of the Delhi Tribunal in the case of HNS India VSAT Inc. Vs. DDIT, wherein it is held that "in view of the fact, that no application was made by the assessee u/s. 195(2) to Assessing Officer, assessee was under obligation to deduct tax at source from payments made to sub-contractors in terms of Section 195(1), having failed to do so, Assessing Officer was fully justified in making additions",

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 9 of 55 India UK tax treaty

Article 13: Royalty and fees for included 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(a) of this article is received; or

(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or

(c) make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design.

Indo US tax treaty Article 12- Royalty and fees for included services

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or

(b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. [Emphasis by underlining etc supplied by us]

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 10 of 55 transfer of technology in the sense that the user of service should be enabled to do the same thing next time without recourse to the service provider. The services provided by non residents did not involve any transfer of technology. It is not even the case of the Assessing Officer that the services were such that the recipient of service was enabled to perform these services on its own without any further recourse to the service provider. It is in this context that we have to examine the scope of expression ‘make available’.

The technical or consultancy service rendered should be of such a nature that it "makes available" to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology "making available", the technical knowledge, skill?, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it.

The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, 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.

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 11 of 55 18. As we have noted earlier, it is not even the case of the Assessing Officer that the assessee, i.e. recipient of services, was enabled to use these services in future without recourse to the service providers. The tests laid down by Hon’ble Court were clearly not satisfied. For this short reason alone, the amounts in question were not taxable as fees for technical services under the provisions of the respective tax treaties. The law is well settled, we may add at the cost of repetition, that under article 90(2) where the Government has entered into a tax treaty with any tax jurisdiction, in relation to the assessee to whom such treaty applies, “the provisions of this (i.e. Income Tax) Act shall apply to the extent they are more beneficial to that assessee”. When the amounts are not taxable under the provisions of the respective tax treaties, there cannot be any occasion to deal with the provisions of the Income Tax Act. We, therefore, approve the conclusions arrived at by the CIT(A) on this issue as well, and decline to interfere in the matter.

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 12 of 55 of Section 195(1), having failed to do so, Assessing Officer was fully justified in making additions". 21. So far as this grievance of the Assessing Officer is concerned, the relevant material facts are as follows. This amount was paid by the assessee to Ford Motor Co USA and is in the nature of reimbursement of insurance brokerage incurred by the FMC USA who had engaged Marsh to negotiate the insurance premium globally. A copy of the invoice was also placed on record. Yet the Assessing Officer proceeded to treat the payment as payment for managerial fees covered by the scope of fees for technical services under section 9(1)(vii), Aggrieved, assessee carried the matter in appeal before the CIT(A) who upheld the stand of the assessee and concluded that in view of the provisions of article 12(4) unless services satisfy the make available clause, there cannot be taxability in the source jurisdiction and this condition is admittedly not satisfied. The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us.

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 13 of 55 2.1 The learned CIT(A) erred in holding that the following remittances in the nature of installation and commissioning charges qualify as Fees for Technical Services under the provisions of section 9(1)(vii) of the Income -tax Act, 1961 ('the Act'): Parties Country Amount (in INR) a) Cinetics Landis Ltd UK 1,40,98,343 b) Marposs Ltd UK 92,84,969 c) Royal Tool Control Ltd UK 75,96,835 d) Movomech International AB Sweden 64,43,896 e) Impco Machine Tools USA 17,15,746

2.2 The learned CIT(A) failed to appreciate that installation and commissioning was a part of the composite contract to purchase the imported machineries and the same do not qualify as Fees for technical services/Fees for included services under the respective articles of the Double Taxation Avoidance Agreement ('DTAA').

2.3 Without prejudice to the above grounds, the learned CIT(A) failed to appreciate that the services had not been made available to the Appellant and consequently the charges paid would not qualify as Fees for technical services/Fees for included services under the respective articles of the DTAA.

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 14 of 55 successful functioning, without imparting the technical knowledge of the functioning of the machinery, the same cannot operated by FIPL and put to use for production” The Assessing Officer also observed that “only because the supplier has agreed to undertake installation of the machinery, the payments cannot taken as towards sale of machinery”. Relying upon the ruling given by the Authority for Advance Ruling, in the case of HESS ACC Systems BV, In Re [(2012) 349 ITR 532 (AAR)], the Assessing Officer concluded that “the payments made fall under the category ‘fees for technical services’ as per Explanation 2 to Section 9(1)(vii), which prevails over the treaty where it is defined the services are inexplicably and essentially linked to the supply of goods”. It was thus concluded that the assessee had an obligation to deduct tax at source from these payments and, accordingly, a tax withholding demand under section 201 r.w.s 195, was raised on the assessee. Aggrieved, assessee carried the matter in appeal before the learned CIT(A) but without any success. Learned CIT(A) held that “appellant is under an obligation to deduct tax at source in respect of payments made in connection with installation/ erection of machinery etc as installation is ancillary and subsidiary to use equipment or enjoyment of the right for such use”. Aggrieved, the assessee is in second appeal before us.

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 15 of 55 Article 12(3)(b)- Fees for technical services

The term 'fees for technical services' means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provisions of services by technical or other personnel but does not include payments for services mentioned in Articles 14 and 15 of this Convention.

With reference to Articles 10, 11 and 12:

In respect of Articles 10 (Dividends), 11 (Interest) and 12 (Royalties and fees for technical services) if under any Convention. Agreement or Protocol between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, or fees for technical services 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, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items of income shall also apply under this Convention

[Emphasis by underlining etc supplied by us]

4.For the purposes of this Article, "fees for included services" means payments of any kind, other than those mentioned in Articles 14 and 15 of this Convention, to any person in consideration of the rendering of any technical or consultancy services (including through the provisions of services of technical or other personnel) if such services:

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 16 of 55 (a)are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received, or (b) make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design which enables the person acquiring the services to apply the technology contained therein.

(a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property; (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international craft; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals making the payment; (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 14; (f) for services rendered in connection with an installation or structure used for the exploration or exploitation of natural resources referred to in paragraph 2(g) 1 of Article 5; (g) for services referred to in paragraph 3 of Article 5.

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 17 of 55 enters into force later. As all the three DTAAs discussed above entered into force on a date earlier than the commencement of the previous year 1995-96, the scope of technical services, for the purpose of Indo-French DTAA, cannot be broader than that envisaged in the above DTAAs. In this view of the matter, we hold that the 'fees for services that are ancillary and subsidiary, as well as inextrically and essentially linked, to the sale of property' are outside the scope of technical services so far as Indo-French DTAA is also concerned, even though no such specific exclusion clause is incorporated directly in the treaty itself, right from the time Indo-French DTAA entered into force. 34. The Authority for Advance Ruling, in its ruling in the case of Steria India Ltd In Re [(2014) 364 ITR 381 (AAR)], however, touched a different chord. The Authority for Advance Ruling observed that unless a notification specifically provides so, the provisions of the treaty cannot be read down. In effect, thus, it declined to read ‘make available’ clause in a treaty because of the MFN clause, and, while doing so, the Authority for Advance Ruling observed as follows: What is stated by the Protocol is for India to limit its taxation at source for the detail items mentioned therein. The restrictions are on the rates and 'make available' clause cannot be read in the items. On the basis of the Protocol, notification No.9602 [F.No.501/16/80-FTD], dated 6.9.1994 as amended by Notification No. SO 650(E), dated 10.7.2000. was issued by Govt. of India. The said Notification does not include anything about the 'make available' provision. Had the intention of the Protocol or the Government is to include 'make available' clause in the Tax Treaty between India and France, it should have been done so in the said Notification. We have taken note of the Notification issued in the case of India Netherland Tax Treaty whereby the Protocol was given effect to. The changes in the Treaty on the basis of the Protocol were given effect by Notification only. We do not see any reason as to why different treatment will be given in the present case. Tax Treaties are between two sovereign nations and every country has a particular relation with another countries and same treatment are not given to all the countries. Say, for example, definitions of fees for technical services are more restrictive with some countries than the others. Every Treaty has particular purpose depending on the relationship between the two countries. While agreeing with various judgments that ordinary meaning of the Treaties should be given while interpreting the provision of the Tax Treaties and even to the extent of liberal interpretation of the Treaty, we cannot import any clause like 'make available' in the Treaty that is not there so as to change tax complexion of the Treaty provision. Protocol or Memorandum of Association can be made use for interpreting provision of the Treaty, it will not be correct/proper to import words, phrases or clause that is not available into the Treaties between two Sovereign nations, on the basis of Treaties with another countries. In this particular case, it may be stated at the most that India is under obligation as per the terms of the Protocol to limit its tax rate or rate of scope as was done in the notification as mentioned above but such type of action will not be within the purview of this Authority. 14. The services being accepted as technical services under the Act and the Tax Treaty, the payment for the services will be covered by 'fees for technical services' chargeable under the Act. The submission of the applicant that the services being managerial which was omitted in the definition of fees for technical services in the revised DTAA between India - UK entered into in the year 1993,

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 18 of 55 the managerial services rendered by the applicant will also automatically be omitted in the definition of fees for technical services under the Tax Treaty between India-France by application of the Protocol, is also not acceptable for the reasons discussed above regarding application of the Protocol in the Treaty. The payment for services rendered by the applicant will therefore, falls under the definition of fees for technical services even under the Tax Treaty between India- France. In summary, the payments made by the applicant for the services rendered comes under the definition of fees for technical services both under the Act and the Treaty and is liable to tax in India. [Emphasis by underlining etc supplied by us] 35. Hon’ble Delhi High Court, however, did not approve this approach adopted by the Authority for Advance Ruling. When the aforesaid ruling came up for challenge before Their Lordships, in the case of Steria (India) Ltd Vs CIT [(2016) 386 ITR 390 (Del)], Hon’ble High Court specifically approved the stand taken by the ITC decision (supra) on this point, and for that reason negated the stand of the Assessing Officer, by holding as follows: 18. The Court is, therefore, unable to agree with the conclusion of the AAR that the Clause 7 of the Protocol, which forms part of the DTAA between India and France, does not automatically become applicable and that there has to be a separate notification incorporating the beneficial provisions of the DTAA between India and UK as forming part of the India- France DTAA. 19. The next question that arises is concerning to extent to which the benefit under the India-UK DTAA can be made available to the Petitioner. As already noticed, the definition of “fee for technical services” occurring in Article 13(4) of the Indo-UK DTAA clearly excludes managerial services. What is being provided by Steria France to the Petitioner in terms of the Management Services Agreement is managerial services. It is plain that once the expression 'managerial services' is outside the ambit of ‘fee for technical services’, then the question of the Petitioner having to deduct tax at source from payment for the managerial services, would not arise. It is, therefore, not necessary for the Court to further examine the second part of the definition, viz., whether any of the services envisaged under Article 13(4) of the Indo- UK DTAA are “made available” to the Petitioner by the DTAA with France. 20. Mr Ganesh, learned Senior Counsel made a reference to the decision of the ITAT in DCIT v. ITC Ltd. (2002) 82 ITD 239 (ITAT Kolkata), where the Protocol separately executed between the India and France which formed part of the DTAA between the two countries was interpreted. It was held by the ITAT, and in the view of this Court correctly, that the benefit of the lower rate or restricted scope of fee for technical services under the Indo-French DTAA was not dependent on any further action by the respective governments. It was held that the more restricted scope of fee for technical services as provided for in a DTAA entered into by India with another OECD member country shall also apply under the Indo-French DTAA with effect from the date on which the Indo-French DTAA or such other DTAA enters into force.

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 19 of 55 36. Quite clearly, in the light of the above discussions, even under Indo Swedish tax treaty ‘make available’ clause is to be read into. Accordingly, for the detailed reasons set out earlier in this order while dealing with ground no. 3 of the appeal filed by the Assessing Officer for the same assessment year, unless by rendition of the technical services there is a transfer of technology in the sense that the recipient of these services is enabled to perform these services in future without recourse to the service provider, the taxability under FTS does not come into play. As we have noted earlier, it is not even the case of the Assessing Officer that the assessee, i.e. recipient of services, was enabled to use these services in future without recourse to the service providers. The tests laid down by Hon’ble Courts in Guy Carpenter (supra) and De Beers (supra) were clearly not satisfied. For this short reason alone, the amounts in question were not taxable as fees for technical services under the provisions of the respective tax treaties. It is not, and it cannot be, anybody’s case that by rendering installation and commissioning services, the recipient of such services is enabled to perform the same task next time without recourse to the service provider. For this short reason alone, the plea of the assessee merits acceptance. We need not even deal with other contentions raised by the assessee which remain open. In any event, as learned counsel for the assessee rightly submits, this issue is also covered, in favour of the assessee, by a coordinate bench decision in the case of Birla Corp Ltd Vs ACIT [(2015) 153 ITD 679 (Jab)] wherein the coordinate bench has, inter alia, observed as follows:

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I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 21 of 55 activities in connection therewith, cannot be brought to tax in the source country. During the course of hearing and at the instance of the bench, learned counsel for the assessee has filed details of the work carried on at the installation and assembly site in respect of all the transactions, as it did take place in the relevant financial period, and, as evident from even a cursory look at these details, in none of these cases the conditions for creation of PE are satisfied. 42. In view of the above discussions, even if a part of the income, embedded in the impugned payments made to non-resident vendors, can indeed be attributed to the installation, assembly or commissioning activities of the plant, machinery or equipment purchased, such an income, on the facts of this case, cannot be brought to tax as business income under article 7 read with article 5 of the respective DTAAs. ……… ……… 44. One common factor in all the above treaty provisions is that the expression ‘fees for technical services’, which is also referred to as ‘fees for included services’ in some the treaties i.e. Indo Swiss and Indo US tax treaties, describes these services in a rather general manner whereas the expression ‘construction, installation or assembly project or supervisory activities in connection therewith’ find a specific mention in the PE clauses in all the related treaties. Generally speaking, and de hors the restricted meanings assigned by ‘make available’ clause or exclusion clauses, installation or commission activities are a particular type of technical services. There is thus a general provision for rendering of technical services and a specific provision for rendering of technical services in the nature of construction, installation or project or supervisory services in connection therewith. 45. While on this issue, it is important to bear in mind the fact that when it comes to ‘services PE’, as in article 5(2)(l) of Indo US tax treaty or article 5(2)(k) of Indo UK tax treaty, any services which can be covered by the FTS or FIS clause in the respective tax treaty are specifically excluded as these clauses refer to “the furnishing of services, other than included services as defined in Article 12 (Royalties and fees for included services), within a Contracting State by an enterprise through employees or other personnel “ and “the furnishing of services including managerial services, other than those taxable under Article 13 (Royalties and fees for technical services), within a Contracting State by an enterprise though employees or other personnel” respectively. There is no such exclusion clause in the PE article dealing with construction, installation and assembly activities, including supervision activities relating thereto. It is also not in dispute, as has been stand of the revenue all along, that the construction, installation and assembly activities are de facto in the nature of technical services. To that extent, and unlike in the case of the provisions relating to Service PE, there is indeed overlapping effect of Article 5 and Article 12 or Article 13, so far as such services are concerned. As to what should be done in such a situation, we find guidance from the observations of Hon'ble Supreme Court in the case of Union of India vs. India Fisheries (P) Ltd. [57 ITR 331 (1965)] "If there is an apparent

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 22 of 55 conflict between two independent provisions of law, the special provision must prevail." This principle is described in Sampat lyengar's Commentary on Law of Income-tax (9th Edn; Vol. 1, p. 48) as follows: "The general maxim is generalia specialibus non derogant, that is, general things will not derogate from special things. The maxim is also otherwise expressed as generalibus specialia derogant. A special provision normally excludes the operation of a general provision. ... It can be resorted to for deciding the competing claims of two provisions in the same enactment, one specific and other general with some overlapping between the two. The requisite conditions to attract this principle are: Firstly, both the general enactment and the particular enactment must be simultaneously operative, the general enactment covering larger field and particular enactment covering a limited field out of a larger field covered by the general enactment and, secondly, there must be nothing contained in the general provisions indicating the legislative intent to overrule or set aside the particular provision." 46. Similar views were also expressed in the case of ITO vs. Titagarh Steels Ltd [79 ITD 532 (2001)], wherein one of us, while articulating the views of Kolkata C Bench, had observed as follows : "It is fairly well-settled in law that general provisions do not override specific provisions, as aptly described by the maxim 'generalia specialibus non derogant.' A special provision normally excludes the operation of a general provision and we are of the view that such a principle governs the instant case also. In the case of South India Corpn. (P) Ltd. vs. Secretary, Board of Revenue AIR 1964 SC 207, Hon'ble Supreme Court had an occasion to consider whether Art. 277 or Art. 372 of the Constitution of India should govern the particular situation involved therein. Their Lordships then pointed out that "a special provision should be given effect to the extent of its scope, leaving the general provision to control cases where specific provisions do not apply."

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 23 of 55 right to tax the income”, the right to tax will not vest in the source country unless time limit threshold is satisfied as “the reason for the time limit (indeed for the permanent establishment threshold more generally) is to encourage businesses to undertake preparatory or ancillary operations in another State that will facilitate a more permanent and substantial commitment later on, without becoming immediately subject to tax in that State”. If we are to interpret the FTS and FIS clauses overlapping with PE clause in practice, and apply the FTS and FIS clauses when PE taxation cannot be invoked, the very purpose of PE provisions will stand defeated and it will be contrary to the UN Model Convention Commentary quoted earlier in this order, which, as a coordinate bench has held in the case of Graphite India Ltd Vs DCIT [6 ITD 384 (2002)], are in the nature of ‘contemporanea expositio’. While holding so, the coordinate bench, speaking though one of us (i.e. the Accountant Member), had observed as follows: 17. The aforesaid interpretation is clearly in harmony with the OECD and UN Model Conventions’ official commentaries, as elaborated in paras. 9 and 10 above. As the provisions of art. 15 of Indo-US DTAA, and corresponding provisions in these model conventions, are identical in material respects i.e., are in pari materia, the UN and OECD Model Conventions, and Commentaries thereon, have key role in determining connotations of the expressions employed in art. 15. Hon’ble Andhra Pradesh High Court has, in the case CIT vs. Visakhapatnam Port Trust (1984) 38 CTR (AP) 1 : (1983) 144 ITR 146 (AP), referred to OECD commentaries on the technical expressions and the clauses in the model conventions, and referred to, with approval, Lord Radcliffe’s observations in Ostime vs. Australian Mutual Provident Society (1960) AC 459, 480 : (1960) 39 ITR 210, 219 (HL), which have described the language employed in these documents as the "international tax language". In view of the observations of Hon’ble Andhra Pradesh High Court, in Visakhapatnam Port Trust’s case (supra), these model conventions and commentaries thereon constitute international tax language and the meanings assigned by such literature to various technical terms should be given due weightage. In our considered view, the views expressed by these bodies, which have made immense contribution towards development of standardization of tax treaties between various counties, constitute ‘contemporanea expositio’ inasmuch as the meanings indicated by various expressions in tax treaties can be inferred as the meanings normally understood in, to use the words employed by Lord Radcliffe, ‘international tax language’ developed by bodies like OECD and UN. 48. When we put it to the learned Departmental Representative as to what is the purpose of an installation PE clause in Article 5, if PE or no PE, the consideration for installation and assembly project, or supervisory activities in connection therewith, are to be taxed anyway as FTS or FIS, he pointed out that the assessee has on its own accepted the taxability under the FTS clause and withheld tax, on that basis, while making specific remittances for independent payments for the installation and commissioning charges. It could thus not be possible for the assessee to take an about turn now and claim that such payments are not taxable anyway. Learned counsel for the assessee, on the other hand, fairly submitted that the taxability of such payments as FTS or

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 24 of 55 FIS was taken as granted, without appreciating this nuance of the matter, as coming to the light in the course of this hearing, so far as standalone payments for these services were concerned, but neither such a conduct on the part of the assessee can constitute estoppel against the correct legal position nor would it imply that the a part of sale consideration can be fictionally treated as towards such services and then treated as FTS or FIS while the scope of such payments, under the tax treaties, is confined to amounts actually paid as FTS or FIS. We are unable to see legally sustainable merits in the stand of the learned Departmental Representative. The taxability of an income is to be decided on the basis of the provisions of law and not conduct of the parties. Just because the assessee has accepted a taxability in respect of some other transaction, no matter howsoever related, the legal remedies available to the assessee cannot be negated. There cannot be, and there is no, estoppel against the law. In view of the above discussions, in our considered view, in a situation in which there are specific PE clauses in relation to a particular type of services, which are covered in the scope of services covered by the scope of the ‘fees for technical services’ or ‘fees for included services’, the taxability of consideration for such services must remain confined to taxability of profits under the relevant specific PE clause. In our humble understanding, the provisions for taxability as FTS or FIS will not come into play in such cases. ……………… ……………..

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 25 of 55 information which is covered by the definition of ‘royalty’ in art. 12(3), is also includible in the ‘fees for technical services’ and accordingly liable to be taxed in the source country. 24. The scheme of the tax treaty, so far as royalties and fees for technical services (termed as ‘fees for included services’ in the India US tax treaty) is clearly like this. When principal transaction itself is such that it involves taxability in the source country, the transactions subsidiary and integral to such a transaction also give rise to the taxability of subsidiary transact ions in the source country. On the other hand, when principal transaction is such that it does not generally give rise to taxability in the source country, the transaction subsidiary and integral to such a transaction also does not give rise to taxability in the source country. In other words, the subsidiary and integral transactions have to take colours from the principal transaction itself and are not to be viewed in isolation. That is the intent and purpose, in our understanding, of the provisions of art. 12(5)(a) ……………….. 55. In view of these discussions, in our humble understanding, Installation, commissioning or assembly of a plant, machinery or equipment, or any supervision activity connected therewith, is ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of such a property i.e. plant, equipment or machinery. Therefore, for this short reason, any consideration for installation, commissioning or assembly activities, or supervision services in respect thereof, of a property, which obviously includes a plant, equipment or machinery, cannot be included in fees for included services under the Indo Swiss tax treaty as well. Accordingly, even if there be any income embedded in the impugned payments, in respect of installation, commissioning or assembly activities, or supervisory activities connected therewith, the same cannot be brought to tax, in view of the provisions of Article 12(5)(a) of Indo Swiss tax treaty, in the hands of the Swiss vendors as well. As corresponding provisions also find place in Indo UK [Article 13(5)(a)] and Indo US [Article 12(5)(a)] tax treaties, for this reason as well and for the material facts being similar, the consideration for installation, commissioning or assembly activities, or supervision services in respect thereof, can also not be subjected to tax in India in the hands of the UK and US based vendors either. 56. As evident from a plain look at the language employed in the FTS and FIS clauses of related tax treaties the taxability as FTS or FIS arises at the point of time when the payment is “actually” made “for” technical services “arising in a Contracting State and paid to a resident of other Contracting State”. The event triggering the taxability under the tax treaties is the payment and not accrual. In any event, it is also beyond dispute that the provisions of Section 195 come into play at the time of payment or credit, whichever is earlier, and not on the basis of accrual method of accounting- as has been so vigorously canvassed in the orders of the authorities below. Holding so, a co- ordinate bench of this Tribunal, in the case of C J International Hotels Ltd Vs ITO [79 ITD 506 (2001)] and speaking through one of us (i.e. the Accountant Member), has observed as follows: We find that the lower authorities have proceeded on the fallacy that taxability in the hands of the foreign company and TDS liability of the

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 26 of 55 tax deductor are not one and same thing. It is, however, well settled that tax deduction at source is only one mode of recovery of the taxes due on recipient of that income, but it cannot be equated with final determination of tax liability in the hands of the recipient of such income. No doubt, in case of non-resident assessee, it is open to the regular AO to treat person from or through whom such assessee is in receipt of any income, as an agent under s. 163(1)(c) of the Act and, accordingly, assess such person in respect of that income as a ‘representative assessee’, but the case before us does not relate to such assessment under Chapter XV and we are only in seisin of the issue regarding tax deduction at source liability of the tax deductor company. The only relevant question, therefore, is as to at what point of time tax deduction at source liability under s. 195 crystallises in the present case—at the time of payment of the franchise fees, at the time of crediting the same to the account of M/s Societe Des Hotels Meridien, or, as argued by the Revenue, at the time of the franchise fees accruing to the aforesaid company. The answer to this question is provided by the plain and unambiguous language of s. 195 itself which states that tax is to be deducted "at the time of credit of such income to the account of the payee or at the time of payment thereof............whichever is earlier". In our considered view, it is not open to the Revenue, for the purpose of determining TDS liability of an assessee tax deductor, to tinker with, or in anyway reject, the method of accounting employed by such assessee tax deductor. The judicial precedents relied upon by the authorities below deal with the issue of taxability in the hands of the foreign company and therefore, in our considered view, these judicial precedents have no bearing on the determination about the point of time when TDS liability under s. 195 crystallises. It is also not in dispute that account of the payee was not credited at the time of accrual of income and the accounting was done on cash basis. On these facts, TDS liability of the assessee cannot be said to crystallize at the time of income actually accruing to the foreign company and Revenue’s claim that taxability crystallizes at the time of income accruing to the foreign company is not even relevant for deciding that question. As Rowlatt, J. has said, Cape Brandy Syndicate vs. IRC 1 KB 64, "in a taxing statute, one has to look merely at what is clearly said; there is no room for any intendment...". Since s. 195 specifically provides for deduction of tax at source at the time of payment or crediting the payee’s account, whichever is earlier, we are unable to approve the stand of the Revenue regarding deduction of tax at source on the basis of accrual of income. In this view of the matter, we are of the considered opinion that the TDS liability, under s. 195, arises only when the income is credited to the account of the payee or on actual payment of the same, whichever is earlier. We further hold that mere accrual of income in the hands of the foreign company cannot be a sufficient proximate reason for tax deductor’s liability under s. 195 of the Act. In view of this legal position, as also bearing in mind the fact that the AO has raised the impugned demand under ss. 201(1) and 201(1A) on the basis of taking TDS liability at the point of accrual of income in the hands M/s Societe Des Hotels Meridien, we cancel the impugned orders, hold that these orders are indeed contrary to the scheme of the Act, and restore the matter to the file of the AO(TDS) for passing fresh orders, if necessary, in accordance

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 27 of 55 with the law and after giving due opportunity of hearing to the assessee tax deductor.

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 28 of 55 be taxed as business profits either. There is no other treaty provision under which these amounts can be brought to tax in India under the respective tax treaty. The law is well settled, we may add at the cost of repetition, that under article 90(2) where the Government has entered into a tax treaty with any tax jurisdiction, in relation to the assessee to whom such treaty applies, “the provisions of this (i.e. Income Tax) Act shall apply to the extent they are more beneficial to that assessee”. When the amounts are not taxable under the provisions of the respective tax treaties, there cannot be any occasion to deal with the provisions of the Income Tax Act. We, therefore, disapprove the conclusions arrived at by the CIT(A) and direct the Assessing Officer to delete the related disallowance. Ground no. 2 is thus allowed.

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 29 of 55 Assessing Officer under section 195(1) of the Act. Aggrieved, assessee carried the matter in appeal but without any success. The assessee is not satisfied and is in further appeal before us.

ARTICLE 12

Royalties and fees for included services

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 30 of 55 the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed :

(a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article (other than services described in sub-paragraph (b) of this paragraph ):

(i) during the first five taxable years for which this Convention has effect,

(A) 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub-division or a public sector company; and

(B) 20 per cent of the gross amount of the royalties or fees for included services in all other cases; and

(ii) during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services; and

(b) in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services as defined in this Article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this Article, 10 per cent of the gross amount of the royalties or fees for included services.

(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and

(b) payment of any kind received as consideration for the use of, or the right to use, the industrial, commercial, or scientific equipment, other

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 31 of 55 than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 or Article 8.

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or

(b) make available technical knowledge, experience, skill, know- how, or processes, or consist of the development and transfer of a technical plan or technical design.

(a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a);

(b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in international traffic;

(c) for teaching in or by educational institutions;

(d) for services for the personal use of the individual or individuals making the payment; or

(e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent personal services).

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 32 of 55 permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for included services are attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business profits) or Article 15 (Independent personal services), as the case may be, shall apply.

ARTICLE 15 Independent personal services 1. Income derived by a person who is an individual or firm of individual (other than a company) who is a resident of a Contracting State from the performance in the other Contracting State of professional services or other independent activities of a similar character shall be taxable only in the first-mentioned State except in the following circumstances when such income may also be taxed in the other Contracting State :

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(a) if such person has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State; or (b) if the person's stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 90 days in the relevant taxable year. 2. The term ‘professional services' includes independent scientific, literary, artistic, education or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 34 of 55 rendered by the assessee can fall in this category of services. This issue, regarding the scope of article 15 of Indo-US tax treaty, came up for consideration, almost one and a half decade ago, before a coordinate bench of this Tribunal in the case of Graphite India Ltd Vs DCIT [(2002) 86 ITD 384 (Kol)]. Speaking through one of us, i.e. the Accountant Member, the Tribunal had then, inter alia, observed as follows:

[Emphasis, by underlining, supplied by us now]

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 35 of 55 8. There is no change in the legal position; nothing contrary to the decision so rendered has been brought to our notice. Viewed in the light, software development service rendered by an individual, which essentially requires predominantly intellectual skill, dependent on individual characteristics of the person pursuing software development, and based on specialized and advanced education and expertise, is also a professional service. As regards the objection of the Assessing Officer that software development is not specifically covered by article 15(2), as evident from the opening words of this provision to the effect “the term ‘professional services' includes (emphasis, by underlining, supplied by us)”, the specific professions set out therein are only illustrative and not exhaustive. The emphasis is essentially on the nature of services, but then, as we have noted above, that test is satisfied on the facts of this case. While dealing with the scope of services which are covered by article 15, it is important to bear in mind the fact that there could indeed be overlapping effect of the scope of services covered by the other articles but as long as the services are rendered by an individual or group of individuals, generally rendition of such services is covered by article 15. The exclusion clause set out in article 12(5)(e) typically exemplifies this approach. We may, in this regard, also refer to the observations made by a coordinate bench of this Tribunal, in the case of Linklaters LLP Vs ITO [(2011) 9 ITR Tri 217 (Mum)], as follows:

"The Group discussed the relationship between art. 14 and sub- para 3(b) of art. 5. It was generally agreed that remuneration paid directly to an individual for his performance of activity in an independent capacity was subject to the provisions of art. 14. Payments to an enterprise in respect of the furnishing by that enterprise of the activities of employees or other personnel are subject to arts. 5 and 7. The remuneration paid by the enterprise to the individual who performed the activities is subject either to art. 14 (if he is an independent contractor engaged by the

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 36 of 55 enterprise to perform the activities) or art. 15 (if he is an employee of the enterprise). If the parties believe that further clarification of the relationship between art. 14 and arts. 5 and 7 is needed, they may make such clarification in the course of negotiations."

(Emphasis, by underlining, supplied by us)

Article 13(5) – Fees for technical services

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Article 15- Independent Personal Services

(a) he is present in that other State for a period or periods aggregating to 90 days in the relevant fiscal year ; or

(b) he, or the partnership, has a fixed base regularly available to him, or it, in that other State for the purpose of performing his activities ;

but in each case only so much of the income as is attributable to those services.

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 38 of 55 grievance of the assessee in respect of UK based receipt as well. The Assessing Officer will delete this tax withholding demand as well.

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I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 40 of 55 (c) make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design. [Emphasis, by underlining, supplied by us] 51. We have noted that this protocol clause does not require any additional steps to be taken by the contracting states to give effect to such lower scope of the fees for technical services. In this view of the matter, and for the detailed reason set out in dealing with ground no. 2 of this appeal in respect of implementation of MFN clause in protocol as also scope of make available clause in tax treaties- which we need not set out again for the sake of brevity, the plea of the assessee indeed merits acceptance. The observations made in paragraphs 31 to 36, earlier in this order, apply here as well. As for the nature of data processing fees, it does not enable the recipient of service to perform the same service again on its own without recourse to the service provider. The ‘make available’ clause is thus clearly not satisfied. It cannot also be treated as payment for use of equipment as the payment is for processing of data as a service package and not for the control and use of the equipment on which data is processed- a proposition duly supported by the coordinate bench decision in the case of Kotak Mahindra Primus Ltd Vs DDIT [(2006) 11 SOT 578 (Mum)]. Accordingly, the tax withholding demand in respect of this payment of Rs 10,58,295 must also stand deleted. 52. Ground no. 4 is thus allowed.

S.No. Name of the Party Amount Nature of payment 1. Autoconsol (Thailand) 1,42,98,185 Regular preventive maintenance Co. Ltd. of B517 Sash returnable steel racks

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 41 of 55 2.1 The Id. CIT(A) failed to appreciate that the services rendered by the above parties to the assessee fails within the meaning of fee for Technical services (FTS) as per explanation 2 to Sec.9(1)(vii)of Income Tax Act, hence the assessee was liable to deduct tax on the same. 2.2 The Id. CIT(A) erred in holding that Article 12 of DTAA with Thailand provides only for taxation of royalty and the fee for technical services is not defined and therefore same was in the nature of "business profit" fails within the ambit of Article 7 of DTAA as per which business profit can be taxed in India only if the enterprises carries on business in India through PE situated in India and thus the assessee was not liable for deduction u/s 195 in respect of these payments. 2.3 The Id. CIT(A) erred in not considering the Circular No.333 dated 02/04/1982 of the CBDT as per which when there is no specific provision in the agreement ,it is basic law i.e. the Income Tax Act will govern the taxation of income 2.4 The Ld.CIT(A) failed to appreciate that as the services rendered by the non-resident in Thailand fall within the definition of fee for technical service as per Income tax Act, there is no requirement for PE in India and the same is taxable in India and hence the assessee ought to have deducted TDS on the said payments.

S.No. Name of the Party Country Amount (Rs) Nature of service 1. Ford Corporate & USA 2,27,754 Fire protection Employee Insurance Engineering services 2. Ford Group Philippines 10,56,462 Everest media ride Philippines and drive reimbursement of

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 42 of 55 expenses 3. Ford Motor Company USA 25,97,283 Fire protection Engineering services 4. Ford Motor Company USA 26,84,142 Reimbursement of actual costs on environmental resources management 3.1 The Id. CIT(A) failed to appreciate that the assessee has not produced any agreement with parent company for reimbursement and in the absence of an agreement, the above payments have to be treated as fee for annual maintenance charges attracting tax as per explanation 2 to Sec.9(1)(vii) of the Act and the assessee was liable for deduction of tax at source. 3.2 The Id. CIT(A) erred in holding that the remittance by way of reimbursement of expenses, has no 'income' element embedded in it, and therefore does not attract tax deduction at source u/s. 195(1). 3.3 The Ld.CIT(A) erred in not considering the decision of the Hon'ble Kerala High Court in the case of Cochin Refineries Ltd. Vs. CIT reported in 222 ITR 354 (Ker) (1996), where the Hon'ble court has held that TDS is applicable even in reimbursement of expenses. 3.4 The Ld. CIT(A) erred in not considering the decision of the Delhi Tribunal in the case of HNS India VSAT Inc. Vs. DDIT, wherein it is held that "in view of the fact, that no application was made by the assessee u/s. 195(2) to Assessing Officer, assessee was under obligation to deduct tax at source from payments made to sub-contractors in terms of Section 195(1), having failed to do so, Assessing Officer was fully justified in making additions

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 43 of 55 63. We find that the Assessing Officer had completely lost sight of the fact that in the Indo US tax treaty there is ‘make available’ clause in the fees for technical services, which is termed as fees for included services in the said treaty, and it is not even the case of the Assessing Officer that the rendition of services resulted in any transfer of technology in the sense that recipient of service, even if any, as enabled to perform such a service on his own without recourse to the service provider. As for the India Philippines DTAA, we have noted that it does not provide for taxability of fees for technical services. There was thus no occasion to invoke the domestic law provisions as the case of the revenue failed on the treaty provisions itself. In view of these discussions, as also referring to the detailed discussions in respect of ground nos 2 and 3 in Assessing Officer’s appeal for the assessment year 2011-12, we uphold the relief granted by the CIT(A) and decline to interfere in the matter.

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 44 of 55 f) Marposs Ltd UK 651,287

2.2 The learned C1T(A) failed to appreciate that installation and commissioning was a pan of the composite contract to purchase the imported machineries and the same does not qualify as Fees for technical services/Fees for included services under the respective articles of the Double Taxation Avoidance Agreement ('DTAA').

2.3 Without prejudice to the above grounds, the learned CIT(A) failed to appreciate that the services had not been made available to the Appellant and consequently the charges paid would not qualify as Fees for technical services/ Fees for included services under the respective articles of the DTAA. 69. Learned representatives fairly agree that all the material facts and circumstances of this issue are materially the same as in ground no. 2 in assessee’s appeal for the assessment year 2011-12, and, therefore, whatever we decide for the assessment year 2011-12 will apply mutatis mutandis to this assessment year as well. Vide our order on this issue earlier in this order, and for the detailed reasons set out in this order earlier dealing with scope of make available clause in the related treaties, we uphold the plea of the assessee. It is not even the case of the Assessing Officer that the assessee, i.e. recipient of services, was enabled to use these services in future without recourse to the service providers. The tests laid down by Hon’ble Courts in Guy Carpenter (supra) and De Beers (supra) were clearly not satisfied. For this short reason alone, the amounts in question were not taxable as fees for technical services under the provisions of the respective tax treaties. It is not, and it cannot be, anybody’s case that by rendering installation and commissioning services, the recipient of such services is enabled to perform the same task next time without recourse to the service provider. For this short reason alone, the plea of the assessee merits acceptance. We need not even deal with other contentions raised by the assessee which remain open. The income embedded in these payments are thus not taxable as FTS, and it is not even the case of the revenue that the installation period crossed the PE installation threshold limit. These amounts cannot be taxed as business profits either. There is no other treaty provision under which these amounts can be brought to tax in India under the respective tax treaty. The law is well settled, we may add at the cost of repetition, that under article 90(2) where the Government has entered into a tax treaty with any tax jurisdiction, in relation to the assessee to whom such treaty applies, “the provisions of this (i.e. Income Tax) Act shall apply to the extent they are more beneficial to that assessee”. When the amounts are not taxable under the provisions of the respective tax treaties, there cannot be any occasion to deal with the provisions of the Income Tax Act. We, therefore, disapprove the conclusions arrived at by the CIT(A) and direct the Assessing Officer to delete the related disallowance.

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 45 of 55

3.2 The learned CIT(A) erred in denying the benefit of applying the Most Favored Nation clause as per the protocol to the India-France and India- Sweden DTAAs, based on which the Appellant had applied the restricted scope of taxation contained in India's DTAA with Portugal or USA or UK. 3.3 The learned CIT(A) failed to appreciate that installation and commissioning was a part of the composite contract to purchase the imported machineries and the same does not qualify as Fees for technical services / Fees for included services under the respective articles of the DTAA. 3.4 Without prejudice to the above grounds, the learned CIT(A) failed to appreciate that the services had not been made available to the Appellant and consequently the charges paid would not qualify as Fees for technical services / Fees for included services under the respective articles of the DTAA.

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 46 of 55 paragraphs 31 to 36 above, we find that the issue is covered in favour of the assessee inasmuch as ‘make available’ clause is required to be read into the relevant treaty provision for fees for technical service and since it is not even the case of the Assessing Officer that the rendition of services resulted in any transfer of technology, we uphold the plea of the assessee and direct the Assessing Officer to delete the tax withholding demands in question. The assessee gets the relief accordingly.

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 47 of 55 6. There is no, and cannot be any, dispute with the basic legal position, as inherent in the scheme of the Indian Income Tax Act under section 90, that the provisions of a duly notified double taxation avoidance agreement will override the provisions of the Income Tax Act, unless, and to the extent, the latter are beneficial to the assessee. As Late Prof. Klaus Vogel, in his oft referred book 'Klaus Vogel on Double Taxation Conventions', had observed that, "the treaty acts like a stencil that is placed over the pattern of domestic law and covers over certain parts". Dr. Vogel's perception on this issue quite appropriately sums up the legal position in India as well. A tax treaty essentially restricts the rights of the source state on taxation of an income arising therein, inasmuch as residence country generally has unqualified right to tax global income of its tax subjects anyway, and, therefore, it is useful to begin by examining, from a source country's perspective, whether the income in question can at all be taxed in the source state under the applicable tax treaty. Let us, therefore, begin by examining the taxability of consultancy fee paid to GMPL in the light of applicable tax treaty provisions.

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 48 of 55 Representative are quite at variance with the stand being taken by the directorate of international taxation in all other cases. That does not make any difference to our decision on this issue, because even without this benevolence of the learned Departmental Representative, we will still come to the same conclusion. The reason is this. There are at least two non-jurisdictional High Court decisions, namely Hon'ble Delhi High Court in the case of DIT Vs Guy Carpenter & Co Ltd (2012 TII 14 HC DEL INTL) and Hon'ble Karnataka High Court in the case of CIT Vs De Beers India Pvt Ltd (TS-312-HC-2012), in favour of the assessee, and there is no contrary decision by Hon'ble jurisdictional High Court or by Hon'ble Supreme Court. We bow before higher wisdom of Hon'ble Courts above and hold that unless there is a transfer of technology involved in technical services extended by Singapore company, the 'make available' clause is not satisfied and, accordingly, the consideration for such services cannot be taxed under Article 12(4) of India Singapore tax treaty. Learned Departmental Representative, however, proceeds to give a new twist to the case of the revenue. Learned Departmental Representative has now come up with the argument that even if the income embedded in payments to GMPL were not taxable in India under Article 7 (i.e. business profits) or under Article 12, these amounts were taxable under article 23 of the applicable tax treaty. He invites our attention to Article 23 which provides that " (i)tems of income which are not expressly mentioned in the foregoing Articles of this Agreement may be taxed in accordance with the taxation laws of the respective Contracting States." His interpretation of the scope of this provision is that when taxability fails under all articles of the applicable tax treaty, the taxability automatically arises under this provision. In other words, for example, when a business profit is not taxable under Article 7, this non taxability is not the end of the road so far as taxability in the source state is concerned, because, according to the learned Departmental Representative, the taxability of business profit in such a situation, though not taxable under article 7, automatically shifts to the taxability under article 23, effectively under the domestic laws of the source state. He has also filed a note, though more little carefully worded than his arguments in the court room, which also lays lot of emphasis on the scope of article 23, as also the fact that the foreign company should "have approached the authority for advance ruling as per the provisions of sections 245N to 245V of the Income Tax Act, 1961 to be on the right side of the law, instead of failing to fulfil their tax obligations and presuming and assuming non applicability of certain provisions of the Income Tax Act vis-a-vis the DTAA between India and Singapore". Learned Departmental Representative goes on to state that "the assesse has preferred the tortuous (path) over the strai ght". Learned Departmental Representative has also laid lot of emphasis about, what he perceives as, learned CIT(A)'s categorical finding that the payments made to GMPL were in the nature of 'other income' and, therefore, should be taxed under article 23 of the Indo Singapore tax treaty.

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 49 of 55 expenditure being royalty, fees for technical services and other sum chargeable under the Act, if it is payable outside India, or in India to a non resident, and on which tax is deductible at source under Chapter XVII B and such tax has not been deducted", and it wa s in this context that the CIT(A) noted that though the fee paid to GMPL was not covered by fees for technical services, it could fall under the head 'other sum' but since the said other sum was not chargeable to tax in India, the assessee did not have any tax withholding obligation. This classification of income was not in the context of treaty classification but in the context of, what he believed to be, two categories of income referred to under section 40(a)(i), i.e. 'royalties and fees for technical services' and 'other sums chargeable to tax'. As the CIT(A) did so, he missed out the expression 'interest' appearing in Section 40(a)(i) but that is hardly material in the present context. What is material is that the expression 'other income' was used in the context of mandate of Section 40(a)(i) and not in the context of treaty classification of income. Learned Departmental Representative has clearly missed out this vital fact. Let us now turn to the provisions of Article 23 of the applicable tax treaty. As we have noted earlier, this treaty provision provides that "items of income which are not expressly mentioned in the foregoing Articles of this Agreement may be taxed in accordance with the taxation laws of the respective Contracting States". Learned Departmental Representative's argument is that "consultancy charges, brokerage, commission, and incomes of like nature which are payments which are covered by the expression "other sums" as stated in Section 40(a)(i) and chargeable to tax in India as per the Income Tax Act, and also liable to tax as per taxation laws of Singapore" are squarely covered by Article 23 of the India Singapore tax treaty. This argument proceeds on the fallacious assumption that 'other sums' under section 40(a)(i) constitutes an income which is not chargeable under the specific provisions of different articles of India Singapore tax treaty, whereas not only this expression 'other income' is to be read in conjunction with the words immediately following the expression 'chargeable under the provisions of this (i.e. the Income Tax Act 1961) Act', it is important to bear in mind that this expression, i.e. 'other sums, also covers all types of incomes other than (a) interest, and (ii) royalties and fees for technical services. Even busine ss profits are covered by the expression 'other sums chargeable under the provisions of the Act' so far as the provisions of Section 40(a)(i) and Section 195 are concerned and, therefore, going by this logic, even a business income, when not taxable under article 7, can always be taxed under article 23. That is clearly an absurd result. A tax treaty assigns taxing rights of various types of income to the source state upon fulfilment of conditions laid down in respective clauses of the treaty. When these conditions are satisfied, the source state gets the right to tax the same, but when those conditions are not satisfied, the source state does not have the taxing right in respect of the said income. When a tax treaty does not assign taxability rights of a particular kind of income to the source state under the treaty provision dealing with that particular kind of income, such taxability cannot also be invoked under the residuary provisions of Article 23 either. The interpretation canvassed by the learned Departmental Representative, if accepted, will render allocation of taxing rights under a treaty redundant. In any case, to suggest that consultancy charges, brokerage and commission can be taxed under article 23, as has been suggested by the learned Departmental Representative, overlooks the fact

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 50 of 55 that these incomes can indeed be taxed under article 7, article 12 or article 14 when conditions laid down in the respective articles are satisfied.

…………The question is whether the profits from the shipping operations in international traffic can be said to be "an item of income" "not dealt with" in the previous articles of DTAA ? We do not think so. Among the various items of income in the foregoing articles, business profits into which the shipping income falls has been dealt with under article 7. Profits from the international operation of ships are only a species of business profits just as the profits from international air transport. The latter is dealt with separately in article 8 for the reason that it does not fall in line with the scheme of taxation of business profits under article 7. Exclusive right is given to the State in which the enterprise resides. Permanent Establishment test is irrelevant under article 8. Hence, a separate article. As far as the profits from international operation of ships are concerned, it is an integral part of business profits; at the same time, they are excluded from the business profits - article for the obvious reason that it is not intended to be covered by the Treaty. That income has been left to the care of domestic law under which the burden of taxation on such income has been minimized (vide section 172 of Income-tax Act). We are of the considered view that a particular species of income which is specifically referred to in article 7 and deliberately left out of its genus, namely business profits, cannot be said to be an item of income not dealt with under article 7. The expression 'deal with' is a comprehensive expression having different shades of meaning. In the New Chambers Thesaurus, the meanings of'deal with' are given thus:

"1. deal with a situation, attend to, concern, see to, manage, handle, tackle, cope with, get to grips with, take care of, look after, sort out, process."

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 51 of 55

In Collins Cobuild English Language Dictionary, it is stated thus:

"If a book, speech, film etc. deals with a particular thing, it has that thing as its subject or is concerned with it."

In Shorter Oxford Dictionary (Thumb Index Edn.) one of the meanings given is:

"be concerned with (a thing) in any way; busy or occupied oneself with, esp. with a view to discuss or refutation."

The following meaning given in the New Oxford American Dictionary may also be noted :

"take measures concerning (someone or something) ……. take or have as a subject; discuss."

……………………..

9.1 The applicant's counsel submitted that an item of income can be said to have been dealt with in an article of the Treaty only if it defines its scope as well as allocates the right to tax such income between the two Contracting States. Mere exclusion of shipping business profits from article 7 does not amount to dealing with that item of income. We find it difficult to accept this contention. Allocation of taxing right to the source State can well be done by such a process of exclusion. There is no particular manner or methodology of achieving that result. The expression 'dealt with' does not necessarily mean that there should be a detailed or elaborate treatment of the subject

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 52 of 55 78. The approach so adopted by the coordinate bench has approval of the Hon’ble jurisdictional High Court in the case of Bangkok Glass Industry (supra) wherein Their Lordships declined to examine taxability of a receipt in the nature of fees for technical service, which failed the test of taxability under the respective treaty provision, under ‘other income’ clause of the treaty. This aspect of the matter and the impact of Hon’ble jurisdictional High Court’s decision in the case of Bangkok Glass Industry (supra) has been discussed at length in dealing with ground of appeal no. 2 of the appeal by the Assessing Officer for the assessment year 2011-12. We rely upon the said analysis in this context as well. As the issue regarding approaching the residuary income clause, in a case in which the FTS tests fail, is covered by the decision of Hon’ble jurisdictional High Court, it is not even necessary to deal with how other Hon’ble High Courts have dealt with the issue. In view of Hon’ble jurisdictional High Court’s aforesaid decision on the issue, and in the absence of any Hon’ble Supreme Court decision to the contrary, the view so take by the coordinate bench decision holds good in law. Respectfully following the view so taken by the coordinate bench, which is also in harmony with Hon’ble Delhi High Court in the case of Guy Carpenter (supra), Hon’ble Karnataka High Court in the case of De Beers India (supra) and Hon’ble jurisdictional High Court decision on this issue in the case of Bangkok Glass Industries (supra), we uphold the grievance of the assessee. This tax withholding demand must also, therefore, stand deleted. We order so.

5.2 The learned CIT(A) has failed to recognize that the payment for offsite installation and onsite support was a part of the composite contract to purchase and configure the autosave software on account of which the

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 53 of 55 related payments would not qualify as Fees for included services under India-US DTAA. 5.3 Without prejudice to the above grounds, the learned CIT(A) failed to appreciate that the services had not been made available to the Appellant and consequently the amount paid would not qualify as fees for included eservices under India-US DTAA. 81. So far as this ground of appeal is concerned, during the course of proceedings before the Assessing Officer, the payment of Rs 13,10,830 was made to MDIT Inc for installation and extended support of change management software system, which was in the nature of off the shelf software. The payment of Rs 2,08,558 to Systems Software Inc. was in respect of annual licence fees for products in the nature of software. During the proceedings before the Assessing Officer, it was noted that the claim of the assessee is that these payments are neither in the nature of fees for technical services nor royalty, as defined under Article 12 of Indo US tax treaty, and, as such, the assessee did not have any tax withholding obligations. The Assessing Officer, however, rejected this plea and held as follows: The submissions of the company is carefully considered. However, the same is not acceptable. In respect of above payments, the same is made towards annual fees and towards software support services which is continuously provided to the company for utilizing technical knowledge by way of licence fees and the same is imparted to the company by technically qualified persons, the technical skill is provided to the company in installing software and for maintaining the same without break which falls under the category “fees for technical services’ as per section 9(1)(vii) of the Income Tax Act. Hence, it is held that the assessee should have deducted tax at source from the remittances made to the above parties at 10% of the amount paid. 82. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. In a brief order, the CIT(A) upheld the action of the Assessing Officer and declined to interfere in the matter. The assessee is not satisfied and is in further appeal before us. 83. We have heard the rival contentions, perused the material on record and duly considered the facts of the case in the light of the applicable legal position. 84. We find that as far as software payments are concerned, as the law stands now in the light of Hon’ble jurisdictional High Court’s judgment in the case of CIT Vs Vinzas Solutions India Pvt Ltd (TA No. 861 of 2016; judgment dated 4th January 2017), these payments are not taxable as royalty even under the provisions of the Income Tax Act. In any event, under the provisions of the Indo US tax treaty and as is held by a number of coordinate bench decisions, the use of copyrighted article cannot result in taxation of consideration for the same as royalty. As for the support services, this is not, and cannot be, anyone’s case that these services resulted in any transfer of technology and thus satisfied the make available clause in FTS taxation provisions under the Indo US tax treaty. The authorities below have simply

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 54 of 55 proceeded to apply the domestic law, in respect of FTS, without any regard to the overriding treaty provisions. In view of these discussions, as also bearing in mind entirety of the case, we uphold the plea of the assessee and direct the Assessing Officer to delete the tax withholding demand in respect of these payments as well. 85. Ground no. 5 is also thus allowed. 86. In ground no. 6, the assessee has raised the following grievance: 6. Others 6.1 The learned CIT(A) erred in law by failing to adjudicate on the taxability of the following remittances : Parties Country Amount (INR) a) Ford Motor Company of Australia 1,00,81,008 Australia Ltd b) Visteon Electronics USA 302,400 Corporation Without prejudice to the above, the aforesaid payments were a part of the composite contract to purchase the imported machineries and the same does not qualify as Fees for technical services/Fees for included services under the respective articles of the Double Taxation Avoidance Agreement ('DTAA'). 6.3 Without prejudice to the above, that aforesaid services have not made available any technical know-how or knowledge to the Appellant and consequently the charges paid would not qualify as Fees for technical services/Fees for included services under the respective articles of the DTAA. 6.4 The Appellant prays that directions be given to grant all such relief arising from the grounds of appeal mentioned supra as also all consequential relief thereto.

I.T.A. Nos. 673, 840, 748 and 749 /Chny/2015 Assessment Years: 2011-12 and 2012-13 Page 55 of 55 make it clear that unless the Assessing Officer can make out a case as to how the services, in consideration of which the impugned payments are made, satisfy the requirements of ‘make available’ clause in Indo US and Indo Australia tax treaties, there cannot be any occasion to hold the assessee responsible for non-deduction of tax source from these payments.

Sd/- Sd/- G Pavan Kumar Pramod Kumar (Judicial Member) (Accountant Member) Chennai, the 31st day of January, 2017. Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) DR (6) Guard File

By order etc

Assistant Registrar Income Tax Appellate Tribunal Chennai benches, Chennai