LABVANTAGE SOLUTIONS INC.,KOLKATA vs. ACIT, CIRCLE-2(2)(1), INT. TAXATION, NEW DELHI
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Income Tax Appellate Tribunal, DELHI BENCH ‘D’, NEW DELHI
Before: SHRI G.S. PANNU, VICE- & SHRI SAKTIJIT DEY, VICE-
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘D’, NEW DELHI BEFORE SHRI G.S. PANNU, VICE-PRESIDENT AND SHRI SAKTIJIT DEY, VICE-PRESIDENT ITA No. 683/Del/2020 Assessment Year: 2016-17 Labvantage Solutions Inc., Versus ACIT, Circle 2(2)(1), C/o Deloitte Haskins & Sells LLF, Intl. Taxation, New Delhi. Bengal Intelligent Park, Building Omega, 13th & 14th Floor, Block- DP & GP, Sector-5, Salt Lake Electronic Complex, Kolkata. PAN: AABCL8994J (Appellant) (Respondent) Assessee by : Mr. Ketan Ved & Mr. Yishu Goel, A.R. Revenue by : Sh. Sanjay Kumar, Sr. DR Date of hearing : 06.10.2023 Date of pronouncement: 29.12.2023 ORDER
This is an appeal by the assessee against order dated 29.11.2019 of learned Commissioner of Income-tax (Appeals)-43, New Delhi pertaining to assessment year 2016-17.
On merits, the issue raised by the assessee in main grounds is whether the fees received of Rs.4,23,81,848/- would amount to fees
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for included services (FIS) under Article 12 of India-USA Double
Taxation Avoidance Agreement (DTAA). In addition to the main
grounds, the assessee has raised the following additional grounds:
“1 : 1 The Commissioner of Income-tax (Appeals) ['CIT(A)] erred in holding the impugned assessment Order to be valid which has been passed without passing a draft Assessment Order u/s. 144C(1) of the Income-tax Act, 1961 ['Act'] for the year under consideration. 1 : 2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, a draft Assessment Order ought to have been passed u/s. 144C(1) of the Act, and hence the impugned Order passed without a draft Assessment Order is incorrect, illegal and void ab-initio and the CIT(A) ought to have held as such. 1 : 3 The Appellant submits that the impugned Order be struck down void ab initio and bad in law.” 3. Since the issue raised in the additional grounds is purely legal
and jurisdictional issue going to the root of the matter, which can be
disposed of based on facts and materials available on record without
requiring investigation into fresh facts, we are inclined to admit the
additional grounds for adjudication. In sum and substance, the issue
raised in additional ground is whether, the assessee, being an eligible
assessee in terms of section 144C(15) of the Income-tax Act, 1961,
the Assessing Officer should have passed draft assessment order in
terms of section 144C(1) of the Act before passing the final
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assessment order. For deciding this issue, few relevant facts are
required to be gone into.
Briefly stated, the assessee is a non-resident corporate entity
incorporated in USA and a tax resident of USA. For the assessment
year under dispute, the assessee filed its return of income on
30.03.2017 declaring total income at Rs.4,49,20,980/-. The total
income so declared comprised an amount of Rs.4,23,81,848/-
received towards rendition of marketing, support and research
services to TCG Life Science Pvt. Ltd. In addition, the assessee
received an amount of Rs.25,39,132/- as royalty income from
Labvantage Solutions Pvt. Ltd. The royalty income was offered to tax
by the assessee in India with payment of tax @ 10%. Whereas,
claiming that it had no permanent establishment (PE) in India, and
treating the fee received of Rs.4,23,81,848/- as business income, the
assessee did not offer to tax such income. In course of assessment
proceedings, the Assessing Officer called upon the assessee to
explain why the fee received of Rs.4,23,81,848/- for provision of
marketing, support and research services should not be treated as
FIS. In response, the assessee submitted that the amount does not
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qualify as FIS under Article 12(4) of India-USA DTAA, as the make
available condition enshrined therein is not satisfied.
The Assessing Officer, however, did not find merit in the
submissions of the assessee. He observed that for rendering such
services, the assessee had deputed its personnel to India, who
worked along with employees of service recipient and in course of
rendition of such services, employees of the assessee had made
available technical know-how, knowledge, skill etc. through training to
the employees of the service recipient. Thus, the Assessing Officer
held that since, the services rendered are in the nature of managerial,
technical and consultancy services and in course of rendering such
services, the assessee has made available technical know-how,
knowledge, skill etc. to the service recipient, the fee received would
be in the nature of FIS under Article 12(4) of the DTAA. Accordingly,
he completed the assessment by bringing to tax the fee received by
the assessee towards rendition of such services. Against the
assessment order so passed, the assessee filed an appeal, inter alia,
on the ground that the assessee, being an eligible assessee in terms
of section 144C(15) of the Act, the Assessing Officer at the first
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instance should have passed a draft assessment order and only
thereafter could have proceeded to pass the final assessment order.
He submitted, since the Assessing Officer has not followed the
mandate of section 144C(1) read with section 144C(15) of the Act,
the assessment order is void ab initio. Learned Commissioner
(Appeals), however, was not convinced with the submissions of the
assessee. He was of the view that since the Assessing Officer has
not made any variation in the income returned, which is prejudicial to
the assessee, there was no requirement for passing any draft
assessment order under section 144C(1) of the Act.
Before us, learned counsel appearing for the assessee
submitted that in the return of income filed for the impugned
assessment year, though, the assessee has returned income of
Rs.4,49,20,980/-, however, it has offered to tax only the royalty
income of Rs.25,39,132/-. Drawing our attention to a sample copy of
return form ITR-6, learned counsel submitted, since there is no
specific column for claiming exemption under DTAA, the assessee
did not claim exemption under DTAA in respect of the fee received
towards provision of marketing, support and research services. He
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submitted, though, technically the Assessing Officer has not made
any variation to the income returned, however, actually, he has made
a variation by bringing to tax the fee received from support services.
Thus, he submitted, the assessee qualifies as an eligible assessee
under section 144C(15) of the Act. He submitted, since, the
Assessing Officer has not passed a draft assessment order under
section 144C(1) of the Act before passing the final assessment order,
the assessment order is invalid.
Strongly relying upon the observations of learned first appellate
authority, learned Departmental Representative submitted, there
being no variation made by the Assessing Officer to the income
returned, which is prejudicial to the interest of assessee, there is no
requirement to pass a draft assessment order under section 144C(1)
of the Act. In support of such contention, learned Departmental
Representative relied upon following decisions :
(i). M/s. Amadoroco Limited vs. ACIT, ITA No. 784/Del/2020 dated 03.03.2023. (ii). M/s. Worldpart Limited vs. DCIT (ITA No. 36/Chny/2018) dated 01.07.2022.
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We have considered rival submissions in the light of decisions
relied upon and perused materials on record. A reading of section
144C sub-section (1) makes it clear that the said provision has
overriding effect over all other provisions contained in the Act. It says
that in case of an eligible assessee, if the Assessing Officer proposes to make, on or after 1st day of October, 2009, any variation on the
income or loss returned, which is prejudicial to the interest of such
assessee, then in the first instance, the Assessing Officer must
forward a draft of the proposed assessment. Keeping in perspective the aforesaid provisions, if we examine the facts of the present case,
it can be seen that the assessee has returned income of
Rs.4,49,20,980/- and the Assessing Officer has completed the
assessment adopting the same income. The variation, if any, is with
regard to the taxability of the said income. While the assessee has
claimed that the income is not taxable under the provisions of tax
treaty, the Assessing Officer has rejected such claim. Thus,
essentially, the AO has not made any variation to the returned
income, which is prejudicial to the interest of assessee. In case of
Amadoroco Limited vs. ACIT(supra), the coordinate Bench while
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faced with a similar situation, has held that in cases, in which no
variation in the income or loss returned is proposed by the Assessing
Officer, there is no requirement for passing draft assessment order in
terms of section 144C (1) of the Act. Same view has been expressed
by the coordinate Bench in case of M/s. Worldpart Limited vs. DCIT
(supra). No contrary decision has been brought to our notice by
learned counsel for the assessee.
We may further observe that Finance Act, 2020 has amended
the provisions of section 144C (1) of the Act by omitting the words “in
the income or loss returned” w.e.f. 01.04.2020. Thus, by virtue of the
aforesaid amendment, any variation, which is prejudicial to the
interest of the assessee, can lead to assumption of jurisdiction under
section 144C(1) of the Act. However, this is a case relating to a
period prior to the aforesaid amendment. Therefore, the amendment,
being prospective in nature, would not apply. Thus, respectfully
following the decisions of the coordinate Benches, we hold that the
Assessing Officer has rightfully proceeded to assess assessee’s
income under section 143(3) of the Act. Additional grounds are
dismissed.
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The substantive issue raised in the main grounds relate to
addition of an amount of Rs.4,23,81,848 as FIS under Article 12 of
India-USA (DTAA). In the year under consideration, assessee had
received an amount of Rs.4,23,81,848 from TCG Life Sciences Pvt.
Ltd., an Indian Entity, for providing marketing support and research
services etc. While assessee had claimed it to be in the nature of
business receipts, the Assessing Officer has treated as FIS under
Article 12(4) India-USA-DTAA by holding that the nature of services
provided by the assessee are technical and consultancy services but
in course of rendition of such services, assessee had made available
technical knowledge, experience, skill, know-how etc. to the service
recipient. Learned First Appellate Authority has endorsed the view
expressed by the Assessing Officer.
We have considered rival submissions and perused the
material on record.
The crux of the arguments advanced by the learned counsel for
the assessee is to the effect that even assuming the services
rendered are in the nature of technical or consultancy services, still,
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to make available condition enshrined under Article 12(4)(b) of the treaty is not fulfilled.
Before we proceed to examine the aforesaid contention of the
assessee, it is necessary to observe that the assessee company is
an innovative global solution provider of enterprise solution tailored
for leading laboratories. It provides services in genomics, proteomics,
drug discovery and development, formulation, process research,
manufacturing, raw-material testing and quality management
laboratories across multiple industries including Life Sciences.
Whereas, TCG Life Sciences Private Ltd., an Indian entity, is a
lifetime research organization and as per the facts and material on
record, TCG Life Sciences Pvt. Ltd. offers a comprehensive suite of
discovery research services and provides integrated drug discovery
solution platform to its customers that include leading pharmaceutical
companies in Europe and USA.
The assessee had entered into an agreement with TCG Life Sciences Private Ltd. on 1st March 2015 for providing services for the
purpose of improvement and marketing of products and TCG Life
Sciences Pvt. Ltd.. As per the terms of agreement, assessee shall
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deploy its marketing and research advisory personnel to work
alongside TCG Life Sciences Pvt. Ltd. so as to improve the quality
and marketing of the products and services.
Reading of the agreement reveals that the advisory personnel
assigned to perform the services rendered must be professionally
capable and acceptable to TCG Life Sciences Pvt. Ltd. They are to
perform the duties assigned by the TCG Life Sciences Pvt. Ltd.
adopting best efforts, skills and abilities to promote the interest of
TCG Life Sciences Pvt. Ltd. The agreement further provides that after
completion of work, assessee shall return all such information in any
form, products and all study related documents to TCG Life Sciences
Pvt. Ltd., which were provided to assessee during the period of
research. The agreement further provides, assessee shall provide
necessary advisory services related to products and services of TCG
Life Sciences Private Ltd. and scientific research application in the
development of its products and services. The agreement further
provides that TCG Life Sciences Private Ltd. shall have the right to
engage its officers to co-monitor the work assigned to the assessee.
Thus, on a reading of the agreement as a whole, it appears that,
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though, the advisory personnel of the assessee were deployed to
carry out certain work relating to services required by TCG Life
Sciences Private Ltd., however, there is nothing in the terms of the
agreement to suggest that in course of providing such services, the
personnel deployed by the assessee have imparted any training to
the professionals of the TCG Life Sciences Private Ltd. and through
such training, made available technical know-how, knowledge, skill
etc. The terms of the agreement indicate that the advisory personnel
deployed by the assessee would be working on their own and in case
it is so required, the officers of TCG Life Sciences Private Ltd. can co-
monitor their work. Though, the Assessing Officer and learned First
Appellate Authority have observed that in course of rendering of
services the assessee has made available technical know-how,
knowledge, skills etc. to the service recipient, however, such
observation is not backed by substantive evidence.
On the contrary, on a reading of observations made by learned
First Appellate Authority in paragraph 5.2.3 of the appellate order, it is
evident that the conclusion drawn regarding fulfilment of make
available condition is more on conjecture and surmises rather than
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based on evidences. In fact, the specific observations of learned First
Appellate Authority are as under:
“……….in the present case, it is acknowledged that the persons providing the services are highly skilled and knowledgeable in their respective field. Their entire skills in no manner, be passed on the client during the course of rendering of advice. It is, however, also equally important to note, that in view of the scope specifically laid out a part of the skills would certainly be transferred and made available to the clients in India……”.
From the aforesaid observations of learned First Appellate
Authority, it is very much clear that he himself is of the opinion that
the entire skills in no manner be passed on to the client in course of
rendering of services. Therefore, what is the extent of skill, know-
how, knowledge etc., which has been made available, has neither
been specified nor demarcated. Therefore, the conclusion drawn by
learned First Appellate Authority is more in the realm of imagination
rather than based on facts. It is fairly well settled, technical know-
how, knowledge, skills etc. can be considered to have been made
available when the person acquiring the services is in a position to
apply the technology independently. Merely because, the provision of
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service may require technical input by the person providing the
services does not mean that technical know-how, skill etc. are made
available to the person receiving such service.
In the facts of the present appeal, in our view, the Revenue has
failed to establish on record that while rendering services, assessee
has made available technical knowledge, know-how, skill etc. to TCG
Life Sciences Private Ltd. so as to bring it within the ambit of Article
12(4)(b) of the tax-treaty. That being the factual position emerging on
record, we have no hesitation in holding that the fee received by the
assessee from TCG Life Sciences Private Ltd. cannot be treated as
FIS under Article 12(4)(b) India-USA DTAA. The Assessing Officer is
directed accordingly.
In the result, the appeal is partly allowed.
Order pronounced in the open court on 29 /12/2023.
Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) VICE-PRESIDENT VICE-PRESIDENT Dated: 29.12.2023 *aks/-
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