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Income Tax Appellate Tribunal, DELHI BENCH ‘DB, NEW DELHI
Before: Sh. Kul BharatDr. B. R. R. Kumar
Per Dr. B. R. R. Kumar, Accountant Member:
1. The present appeals have been filed by the assessee in ITA Nos. 438 & 439/Del/2012, ITA No. 4877/Del/2013 against the orders of the ld. CIT(A)-II, Dehradun dated 10.10.2021, 01.12.2011, 18.06.2013, in ITA No. 1327/Del/2016 against the order of the ld. CIT(A)-II, Noida dated 12.01.2016 and the appeal in ITA No. 5865/Del/2010 filed by the assessee are directed against the order dated 23.12.2009 passed by the AO u/s 143(3) of the Income Tax Act, 1961. Since the grounds are common in all the appeals they are being adjudicated together.
2. The return of income was filed on 29.07.2011 showing income of Rs. Nil by M/s ONGC Ltd. in its capacity as the representative assessee of M/s University of Calgary, Alberta, Canada.
During the relevant previous year, ONGC had made payments of Rs. 51,34,788/- to University of Calgary, Alberta, Canada ("non-resident”) for long term collaboration, participation, training, maintenance and service of air injection equipment. Air injection equipment is used to carry out Air injection study in heavy, medium and light oil reservoirs. Air injection is one of the most upcoming technologies for increasing the recovery of oil.
4. The assessee was asked to justify to show cause as to why the revenues received by it may not be treated as "Fees for Technical Services"
5. The submission of the assessee is as under:
“1. As per section 90(2) of the Act, where a DTAA exists, the provisions of the Act continue to apply vis-a-vis those of the DTAA, to the extent they are more beneficial to the assessee. In the instant case, the non-resident is a tax resident of Canada and is, therefore, entitled to be governed by the provisions of DTAA between India and Canada, to the extent they are more beneficial than the provisions of the Act.
2. Under the India-Canada DTAA, the concept equivalent to "fees for technical services" is "fees for included services". Article 12 of India-Canada DTAA deals with "Royalties and fees for included services".
6. The AO held that perusal of the scope of work under the contract and also from the scope of work, it is seen that assessee NRC is providing technical consultancy services and also carrying out equipment maintenance activities through provision of its experts and professional by sending them to visit and stay at ONGC site and institute at Ahmadabad etc. The AO held that the professionals have worked and carried out CT tests alongwith equipment maintenance and providing consultancy services which have been done collaboratively with ONGC is personnel.
7. The scope of work as mentioned in the contract is as under:-
“Scope of work- Two U of C professionals will visit ONGC twice per year for one week and two week periods for equipment maintenance. During two week visit, one CT test will be conducted collaboraiively. U and C may send additional professionals whenever required. The cost of the contract for the first two years (from Effective Date of the contract) shall be USD 300,000. The total cost of contract for five years shall be USD 816,000 subject to renewal of existing MOU from April 11, 2009 onwards….
List of equipment for maintenance A. HP A! 100 mm Diameter Combustion Tube System 1. Combustion Tube 2. Pressure Jacket 3. Gas Injection System 4. Water Injection System 5. Back Pressure Control System 6. Production system 7. Pre test Core preparation and Core flooding systems 8. Product Gas Analyses System 9. Other Instrumentation and Equipment All the necessary pressure transducers, gauges and thermocouples with dual readout (i.e. computerized and digital/analog), SCR and Triac heater power controllers, etc.
Control and Data Acquisition System."
8. The AO held that it is evident that the contract is in the nature of AMC contract for maintenance and combustion tube testing which includes and is performed through joint participation under long term collaboration between ONGC and professionals of University of Calgary by undertaking collaborative research through the MOU between ONGC and assessee. The services are technical Page | 5 and consultancy in nature and in view of it being a joint participation under collaboration nature activity it can be easily said that the technical knowledge, experience, skill, know-how possessed by NRC has been shared and made available to ONGC personnel and ONGC institute. This is evidenced by the perusal of para 1.2 of scope of project which states as under:
"1.2 The Project shall be supervised and conducted jointly by both the parties in the following manner:
(a) The portion of the project which is related to the institute and to be performed by it shall be under the direction and supervision of Group General Manager Head, IRS, Dr. R.V. Marathe and General Manager-Heavy Oil Development, Mr. Sidhartha Sur. (b) The portion of the project which is required to be performed by the University shall be under the direction and supervision of Drs. R.G. Moore and S.A. Mehta."
Therefore, the AO held that the revenue received in lieu of the services rendered by the assessee are treated as fee for technical services as per the provision of sec 9(1)(vii) of the I.T. Act, 1961 to be taxed on gross basis applying the provisions of sec. 115A of the I.T. Act. It has been mentioned by the assessee in the computation filed in the return of income that University of Calgary, Canada does not have permanent establishment in India. Therefore, the relevant provision of Article 12 of DTAA does not come to the aid of the assessee as far as "make available" clause of the DTAA is concerned. The above observation clearly shows that services rendered would eventually aid ONGC in better recovery of oil. Accordingly, the AO taxed the amount u/s 9(1)(vii) of the Income Tax Act, 1961.
10. The ld. CIT(A) confirmed the action of the AO.
Heard the arguments of both the parties and perused the material available on record.
The provisions of Article 12 of India-Canada DTAA is as under:
“ARTICLE 12 ROYALTIES AND FEES FOR TECHNICAL SERVICES
Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to 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 Agreement 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 the 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.
3. The term 'royalties' as used in this Article means:
(a) payment 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) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 from activities described in paragraph 3(c) or 4 of Article 8.
For the purposes of this Article, 'fees for included services' means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services :
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design.
Notwithstanding paragraph 4, 'fees for included services' does not include amount paid :
(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 5(a); (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 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 14.
The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or the fees for included services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for included services are paid is effectively connected with such permanent establishment or fixed base. In such a case the provisions of Article 7 or Article 14, as the case may be, shall apply.
Royalties and fees for included services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or the fees for included services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the obligation to pay the royalties or the fees for included services was incurred, and such royalties or fees for included services are borne by that permanent establishment or fixed base, then such royalties or fees for included services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.
Where by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for included services, having regard to the use, right, information or services for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Agreement.”
The India-Canada DTAA to mean payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) by such person if the following condition is satisfied:
*the services provided by the person make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. It is only in a situation where the aforesaid condition is satisfied that the payments made to a person in consideration for the rendering of any technical or consultancy services can be said to fall within the meaning of the term "fees for included services" as defined in the said Article 12. Thus, even if some payments are made to a person in consideration for the rendering of any technical or consultancy services, the same cannot be termed as "fees for included services" unless the aforesaid conditions is satisfied.
Therefore, even if the services rendered by the non- resident to ONGC in this case are considered as technical or consultancy services, it is necessary to show they can be brought to tax as "fees for included services". Further, in this case, the services provided by the non-resident do not make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.
We have gone through the order of the AO and the scope of the work as mentioned by the revenue authorities. The scope of the work involves conducting test collaboratively and to manage contract and conducting combustion tube testing just because the test has performed through joint participation under long term collaboration they cannot be said to be made available to the ONGC personnel and ONGC institute. The ONGC personnel and ONGC institute cannot independently conduct the test in the absence of the research team from University of Calgary, Alberta, Canada. Hence, the invocation of make available clause is wrong on facts on record and hence in the absence of technical expertise, being made available by the non-resident assessee to ONGC in India, the payments cannot be treated as FTS.
TDS credit to be given
In the result, all the appeals of the assessee are allowed.
Order Pronounced in the Open Court on 27/12/2022.