Thursday, March 21, 2013

Service Tax can’t be demanded from service provider in case of reverse charge



[2013] 31 taxmann.com 168 (Ahmedabad - CESTAT)
CESTAT, AHMEDABAD BENCH
Commissioner of Service Tax, Ahmedabad v. Landmark Automobiles (P.) Ltd.
 
Section 65(105)(zl) of the Finance Act, 1994, read with rule 2(1)(d) of the Service Tax Rules, 1994 - Insurance Auxiliary Services - Assessee, an insurance agent, received commission from general insurance company - Department demanded service tax thereon - Assessee argued that his services were covered under reverse charge under rule 2(1)(d)(ii) and insurance company was person liable to pay service tax - Department asked assessee to furnish certificate of discharge of service tax liability from general insurance company -
 
HELD : Defence put up by assessee was correct inasmuch as rule 2(1)(d)(ii) clearly casts responsibility on general insurance company to discharge service tax liability on commission paid by them to their agent - Said defence is enough for assessee to state that amount received by them has already been taxed by Government in hands of insurance company - Hence, department's appeal was liable to be dismissed [Paras 4 & 5] [In favour of assessee]


ORDER
 
1. This appeal is filed by the Revenue against order in appeal No. 116/2011 (STC)/K. ANPAZHAKAN/Commr.(A)/Ahd, dt.24-05.201l vide which the first appellate authority has set aside the demands of service tax liability with interest and penalties imposed by the adjudicating authority on the respondent.
 
2. Heard both sides and perused the records.
 
3. The issue involved in this case is regarding the discharge of service tax on the ground of commission received by the respondent from M/s. IFFCO-TOKIO General Insurance Company Lid. The said commission has been given by M/s. IFFCO-TOK1O General Insurance Company Ltd. to the respondent as a licensed agent. The first appellate authority has held that as per the provisions of rule 2(l)(d)(ii) of the Service Tax Rules, 1994 the respondent need not discharge the service tax liability and discharging of the service tax liability is casted on the insurance company. The first appellate authority has relied upon the certificate given by M/s. IFFCO-TOKIO General Insurance Company Ltd. to that effect. In the grounds of appeal, Revenue has said that the certificate which has been produced by the respondent before the first appellate authority does not clarify the period to which service tax has been claimed to have been paid by the M/s. IFFCO-TOKIO General Insurance Company Ltd., and the first appellate authority has not verified the payment particulars made by the insurance company corresponding/relating to certificate in question and hence the order in appeal is bad in law and needs to be set aside.
 
4. After considering the submissions made at length by both sides and perusal of the records, I find that there is no dispute to the fact that the respondent M/s. Landmark Automobiles Pvt. Ltd. is licensed agent of M/s. IFFCO-TOKIO General Insurance Company Ltd. It is also undisputed that the demand of the service tax is raised on the commission received by them as a licensed agent from the said M/s. IFFCO-TOKIO General Insurance Company Ltd. I find that the defence put up by the respondent before the: lower authorities is correct inasmuch as the provisions of rule 2(1)(d)(ii) of the Service Tax Rules, 1994 clearly casts responsibility on the: insurance company to discharge the service tax liability on the commission paid by them to their licensed agent. In the current case, that defence is enough for the respondent herein to state that the amount received by them from M/s. IFFCO-TOKIO General Insurance Company Ltd. has already been taxed by the government in the hands of the insurance company. I find that the first appellate authority was correct in allowing the appeal filed by the respondent.
 
5. In my considered view, the impugned order is correct, legal and does not suffer from any infirmity. The impugned order is upheld and the appeal is rejected.


Wednesday, March 13, 2013

“Write-off” of unrealized export bills – Export of Goods and Services – Simplification of procedure

A P (DIR Series)
CIRCULAR NO
88/RBI., Dated: March 12, 2013
“Write-off” of unrealized export bills – Export of Goods and Services – Simplification of procedure
Attention of Authorized Dealer Category – I (AD Category –I) banks is invited to A.P. (DIR. Series) Circular No. 12 , 30 , 61 , 40 , 33 and 03 dated September 09, 2000, April 04, 2001, December 14, 2002, December 05, 2003, February 28, 2007 and July 22, 2010 respectively in terms of which the exporters were given limited powers of write-off and also AD Category – I banks have been permitted to accede to the requests for "write-off" made by the exporters, subject to the conditions, inter alia, that the exporter had to surrender proportionate export incentives, if availed of, in respect of the relative shipments.
2. With a view to further simplifying and liberalizing the procedure and for providing greater flexibility to all exporters as well as the Authorized Dealer banks, the earlier instructions have been reviewed. It has now been decided to effect, subject to the stipulations regarding surrender of incentives prior to”write-off” adduced in the A.P. (DIR Series) Circular No. 03 dated 22 July 2010 , the following liberalization in the limits of “write-offs” of unrealized export bills:
1. Self “write-off” by an exporter
(Other than Status Holder Exporter) ----------------------------------------------------- 5%*
2. Self “write-off” by Status Holder Exporters ------------------------------------------ 10%*
3.‘Write-off” by Authorized Dealer bank ------------------------------------------------ 10%*
*of the total export proceeds realized during the previous calendar year.
3. The above limits will be related to total export proceeds realized during the previous calendar year and will be cumulatively available in a year.
4. The above “write-off” will be subject to the following conditions:
(a) The relevant amount has remained outstanding for more than one year;
(b) Satisfactory documentary evidence is furnished in support of the exporter having made all efforts to realize the dues;
(c) The case falls under any of the undernoted categories :
(i)
The overseas buyer has been declared insolvent and a certificate from the official liquidator indicating that there is no possibility of recovery of export proceeds has been produced.
(ii)
The overseas buyer is not traceable over a reasonably long period of time.
(iii)
The goods exported have been auctioned or destroyed by the Port / Customs / Health authorities in the importing country.
(iv)
The unrealized amount represents the balance due in a case settled through the intervention of the Indian Embassy, Foreign Chamber of Commerce or similar Organization;
(v)
The unrealized amount represents the undrawn balance of an export bill (not exceeding 10% of the invoice value) remaining outstanding and turned out to be unrealizable despite all efforts made by the exporter;
(vi)
The cost of resorting to legal action would be disproportionate to the unrealized amount of the export bill or where the exporter even after winning the Court case against the overseas buyer could not execute the Court decree due to reasons beyond his control;
(vii)
Bills were drawn for the difference between the letter of credit value and actual export value or between the provisional and the actual freight charges but the amount has remained unrealized consequent on dishonour of the bills by the overseas buyer and there are no prospects of realization.
(d)
The exporter has surrendered proportionate export incentives (for the cases not covered under A. P. (DIR. Series) Circular No.03 dated July 22, 2010), if any, availed of in respect of the relative shipments. The AD Category – I banks should obtain documents evidencing surrender of export incentives availed of before permitting the relevant bills to be written off.
(e)
In case of self write-off, the exporter should submit to the concerned AD bank, a Chartered Accountant's certificate, indicating the export realization in the preceding calendar year and also the amount of write-off already availed of during the year, if any, the relevant GR / SDF Nos. to be written off, Bill No., invoice value, commodity exported, country of export. The CA certificate may also indicate that the export benefits, if any, availed of by the exporter have been surrendered.
5. However, the following would not qualify for the “write off” facility :
a. Exports made to countries with externalization problem i.e. where the overseas buyer has deposited the value of export in local currency but the amount has not been allowed to be repatriated by the central banking authorities of the country.
b. GR / SDF forms which are under investigation by agencies like, Enforcement Directorate, Directorate of Revenue Intelligence, Central Bureau of Investigation, etc. as also the outstanding bills which are subject matter of civil / criminal suit.
6. The respective AD banks may forward a statement in form EBW , in the senclosed format, to the Regional Office of Reserve Bank under whose jurisdiction they are functioning, indicating details of write-offs allowed under this circular.
7. AD banks are advised to put in place a system under which their internal inspectors or auditors (including external auditors appointed by authorised dealers) should carry out random sample check / percentage check of “write-off” outstanding export bills.
8. Cases not covered by the above instructions / beyond the above limits, may be referred to the concerned Regional Office of Reserve Bank of India.
9. Authorized Dealers may bring the contents of the Circular to the notice of their constituents concerned.
10. The directions contained in this Circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.
RBI/2012-13/435
(Rashmi Fauzdar)
Chief General Manager

Monday, March 11, 2013

9(1)(vii): Services rendered by machines is not “fees for technical services”

9(1)(vii): Services rendered by machines is not “fees for technical services”
 

The assessee made payment to a laboratory in Germany for carrying out certain tests on circuit breakers manufactured by the assessee and to certify that the said circuit breakers met with international standards. The assessee claimed that as the said tests were carried out by sophisticated machines without human intervention, the services did not constitute “fees for technical services” as defined in s. 9(1)(vii) of the Act. The AO & CIT(A) rejected the claim on the ground that the services were “technical” in nature and that even assuming human intervention was necessary, the same was present in the form of humans observing the process, preparing the report, issuance of certificate and monitoring the machines. On appeal by the assessee to the Tribunal, HELD allowing the appeal:
(i) Explanation 2 to s. 9(1)(vii) defines the expression “fees for technical services” to mean “any consideration for the rendering of any managerial, technical or consultancy services”. The word “technical” is preceded by the word “managerial” and succeeded by the word “consultancy”. Applying the principle of noscitur a sociis, as the words “managerial and consultancy” have a definite involvement of a human element, the word “technical” has to be construed in the same sense involving direct human involvement. If services are provided using an equipment or sophisticated machine or standard facility, it cannot be characterized as “technical services” so as to fall within s. 9(1)(vii) (Bharati Cellular Ltd 319 ITR 258 (Del) & Skycell Communications 251 ITR 53 (Mad) followed; fact that Bharati Cellular has been set aside by the SC in Bharat Cellular Ltd 330 ITR 239 (SC) does not affect this principle);
(ii) On facts, the services provided by the German laboratory for testing the circuit breakers was a standard service done automatically by machines and not requiring human intervention. The fact that humans are required for observing the process, preparing the report, issuance of certificate and for monitoring of machines is not a relevant criterion. The test is whether the services are rendered by a human or by a machine. If a human renders the technical services with the aid of a machine, the services are “technical services”. But if the services are rendered by a machine without human interface or intervention, then it is not “technical services” as defined. The mere fact that certificates have been provided by humans after the test is carried out by the machines does not mean that services have been provided by human skills.
Contrast with Kotak Securities 340 ITR 333 (Bom) where a similar argument that transaction charges paid to the stock exchange for the automated BOLT system is not for “managerial services” was not accepted
 
 
 

 

Saturday, March 9, 2013

Sandvik Australia Pty Ltd v Deputy Director of Income Tax (International Taxation) - Income deemed to accrue or arise in India (FTS)

In favour of: The assessee; Income deemed to accrue or arise in India — Fees for technical services — IT support services — Expression “make available” — Meaning of — Assessee an Australian Company provided IT support services to Indian Group companies in Asia Pacific region in order to achieve the consolidated and standardised IT environment in Sandvik Group — Services provided were in the nature of Help Desk, administrative and maintenance IT support, data storage — Payments received by assessee from two group companies from India, ie Sandvik Asia Ltd and Walter Tools India Pvt Ltd, were claimed to be not taxable in India — AO and DRP held that amount received by the assessee from its Indian affiliates are taxable as fees for technical services — Held, Technology will be considered as made available when the person receiving the services is able to apply the technology by himself — Assessee was responsible for updation of patches of the software and provision of backup and recovery services in respect of data stored on the centralised server — Assessee has only provided the back-up services and IT support services for solving IT related problems to its Indian subsidiary — Agreement with the Sandvik Asia Ltd nowhere suggest that assessee has to make available the required technical know-how for solving the problems faced in their IT related problems — Unless and until the services are not made available, same cannot be taxable in India — Services rendered by assessee-company to its Indian group companies, though are in the nature of technical services, but is not covered in para (3)(g) to Art 12 — Same is not taxable in India — Further amount received by assessee cannot be treated as a Royalty even under the normal provisions of IT Act — But under the normal provision of the IT Act the same constitute consideration for rendering the technical services covered u/s .9(1)(vii) — Thus IT support services provided by assessee does not make available any technical know how and are not taxable in India — Assessee’s appeal allowed.
CCH Citation: (2013) 35 CCH 121 PuneTrib
ITAT Bench “A”, Pune,
ITA No 93/PN/2011,
Assessment Year: 2007–2008,
R S Padvekar, JM and R K Panda, AM,
Decided on: 31 January 2013.
Held: Assessee’s appeal allowed.
As per the agreement, assessee was responsible for updation of patches of the software and provision of backup and recovery services in respect of data stored on the centralised server. The responsibility of the assessee is to maintain and upkeep of the centralised server owned by it. Assessee has not imparted any technical know-how, skill, process or technical plan or design and hence, in view of Art 12(3)(g), the amount received by the assessee cannot be taxed in India. (Para 9)
The agreement with the Sandvik Asia Ltd. nowhere suggest that assessee has to make available the required technical know-how for solving the problems faced by the Sandvik Asia Ltd in their IT related problems. (Para 10 and11)
The expression “making available” is very much important to decide in which contracting state the amount received for rendering the services relating to the technical know-how is to be taxed. The expression “make available” is used in the context of supplying or transferring technical knowledge or technology to another. It is different than the mere obligation of the person rendering the services of that persons own technical knowledge or technology in performance of the services. The technology will be considered as made available when the person receiving the services is able to apply the technology by himself. (Para 13)
The terms of the agreement between the assessee-company and Sandvik Asia Ltd does not support the case of the Revenue that the assessee’s case is covered in cl (g) of para 3 to Art 12 of the India–Australia Treaty as the assessee has not made available any technical knowledge or expertise to the recipient Indian company. The assessee has only provided the back-up services and IT support services for solving IT related problems to its Indian subsidiary. Hence, unless and until the services are not made available, same cannot be taxable in India. The services rendered by assessee company to its Indian group companies, though are in the nature of technical services, but is not covered in para (3)(g) to Art 12 of the India Australia Treaty and hence, the same is not taxable in India. We also hold that the amount received by the assessee cannot be treated as a Royalty even under the normal provisions of IT Act. But under the normal provision of the IT Act the same constitute consideration for rendering the technical services covered u/s 9(1)(vii) of the IT Act. Accordingly, Ground No 1 is allowed and issue is decided in favour of the assessee. (Para 16)
Ratio decidendi:
Consideration received by Australian Company for providing IT support services to Indian group companies, not taxable as fees for technical services under DTAA, since no technical knowhow was made available.
Cases referred:
Kotak Mahindra Primas Ltd v DCIT 105 TTJ 578 (Delhi)
Skycell Communications Ltd v DCIT 251 ITR 53 (Mad)
Legislation referred:
Income-tax Act, 1961, s 9(1)(vii), 5(2), 90, 144C(5)
 
Judgement:
 
1. In this appeal, the assessee has questioned the action of the A.O. for treating the payment of Rs.1,07,71,888/- received from M/s.Sandvik Asia Ltd., Pune, as taxable being royalty/FTS. The assessee has taken the following grounds:
1.1. The Learned Deputy Director of Income-tax, (International Taxation)-II, Pune, i.e., Assessing Officer (AO) has erred in holding that the IT support services rendered by the Appellant are in the nature of Royalty/FTS within the meaning of article 12 of the India-Australia treaty and/or Section 9(1)(vii) of the Income Tax Act, 1961.
1.2. The Learned AO has erred in holding that the services rendered by the Appellant fall within the ambit of Royalty/FTS without any discussion of the facts, terms of the contract or the binding case law cited before the authorities.
2.1. The learned AO has erred in making an addition of Rs.1,07,71,888 by treating such IT support services as chargeable to tax in India.
2. The facts which revealed from the record are as under. The assessee is a non-resident company incorporated in Australia. The assessee filed the return of income for the A.Y. 2007-08 declaring nil income. The return filed by the assessee was selected for scrutiny by issuing notice u/s.143(2) of the Act. The A.O. has observed that the assessee company is a tax resident of Australia as per the treaty between India and Australia. The assessee received the payment of Rs.1,05,83,086/- from Sandwich Asia Ltd., and Rs.1,88,802/- from Walter Tools India Pvt. Ltd. So far as the payment received from Sandvik Asia Ltd., and Walter Tools India Pvt. Ltd., the assessee stated before the A.O. that the said payment is not received to make available technical knowledge, skill, know- how or process and the same do not fall within the ambit of royalty under Article 12 of the Treaty (DTAA) between India and Australia. Assessee also contended that as assessee is
not having any Permanent Establishment (PE) in India, the said income is not taxable. Assessee also contended that the services rendered by it are in the nature of IT support services.
2.1. The A.O. has observed that the IT support services for which the assessee has received the payment from the Indian group companies is taxable under the normal provisions of the Income Tax Act, 1961. The assessee has claimed the benefit of the Treaty. The A.O. has noted that the assessee gives the IT support in Asia–pacific region which was introduced in order to achieve the consolidated and standardised IT environment in Sandvik Group. The services provided by the assessee are in the nature of Help Desk, administrative and maintenance IT support. Assessee also claimed that in view of the Treaty between India and Australia, as no technical services are made available to its group companies in India, the payment is exempt. The A.O. also referred to the agreement made between the assessee and the Sandvik Asia Ltd., date 19.12.2006, part of the same is reproduced in the draft order on pages No.3 to 6. The A.O., therefore, concluded that as per the agreement the assessee is not only providing the basic IT services such as help desk support, by supporting Sandvik IT personnel but much more than that which is IT infrastructure to those facilities. The A.O. has also observed that the assessee is also charging payments from its affiliates for providing the infrastructure which is evident from the copy of the invoices submitted by the assessee. A.O. also referred to section 5(2) r.w.s. 9(1)(vi) and section 9(1)(vii) and concluded that the services rendered by the assessee company to its group companies in India i.e. Notes Domino Administration, SBS, Windows operations, network infrastructure, global server, and AS400 data processing are services in the nature of technical services and payments made for those services get covered under the fees for the technical services.
2.2. The A.O. also referred to article 12 of the DTAA (Treaty) between India and Australia and noted that according to the terms of the Treaty, fees for technical services (FTS) means payments of any kind to any person in consideration of rendering any technical or consultancy services if such service make available technical knowledge, experience, skill, know-how or process or consists of development and transfer of technical plan or technical design. In the opinion of the A.O., the assessee has created global basic infrastructure to provide the global functional services. He further held that the services rendered by the assessee are in the nature of the technical services to its Indian affiliates. The assessee opposed the conclusion of the A.O. that the services rendered to Indian affiliates are in the nature of technical services by taking the stand that the payment for the services rendered by the assessee is not in the form of the royalty income and nor it is FTS. Assessee further contended that assessee has not made available any technical knowledge, experience, skill and know-how. The assessee also relied on the decision in the case of Kotak Mahindra Primas Ltd. Vs. DCIT 105 TTJ 578 (Delhi), Skycell Communications Ltd. Vs. DCIT 251 ITR 53 (Mad.). The A.O. did not accept the contention of the assessee that the services rendered by the assessee are not the technical services and hence the payment received by it from its Indian affiliates cannot be treated as FTS. The A.O. also held that so far as the taxability of the payment received by the assessee from its Indian affiliates is concerned, the same is taxable u/s.9(1)(vii) of the Act as assessee cannot get the benefit even under the Treaty.
3. The issue was carried before the DRP as assessee raised the objections against the draft assessment order. The DRP-II, Pune, passed the order in the form of directions u/s.144C(5) of the I.T.Act dated 30.10.2010 and confirmed the view taken by the TPO that the amount received
by the assessee from its Indian affiliates are taxable in the normal provisions of the Act u/s.5(2) r.w.s. 9(1)(vi) and 9(1)(vii) of the Income Tax Act, 1961 as well as same is taxable in view of the Article 12 of the DTAA between India and Australia. The operative part of the findings of the DRP is as under:
“5. We have considered the submission of the A.R. and have also gone through the assessment order. The assessee has created Global basic infrastructure to provide the global functional services. As per the agreement dated 19.12.2006 made between the assessee and M/s.Sandvik Asia Ltd. the providing party (assessee) is prepared to transfer such knowledge to the Receiving Parties (SAL), and to provide the Receiving parties with Information Technology consultancy and data processing services. Therefore, we are of the opinion that as per this agreement the assessee has rendered IT Support Services, which are technical services and which results in the transfer of technical knowledge to its Indian Affiliate and make available technical knowledge, experience, skill and know how to its Indian affiliates. These services cannot be considered as helpdesk and user administration services, networking services and data centre services. Further it is observed that according to treaty, FTS means payments to any kind to any person in consideration for the rendering of any technical or consultancy services if such services make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. Hence the payment received by the assessee gets squarely covered as per the provisions of section 5(2) in conjunction with sec.9(1)(vi) and 9(1)(vii) of the I.T. Act, 1961 and Article 12 of the Treaty and hence taxable in India.
5.1. Further, it has to be stated that in the agreement entered into by the assessee with its AE it has been provided that “the provider party is prepared to transfer such knowledge to the receiving party”.
5.2. It is clear from the above that in the contract itself, there is a provision for transfer of knowledge and thus making it available to the other contracting party. Further, technical knowledge, experience and skills have been made available to the assessee and the assessee has rendered the IT support services. In view of these facts and circumstances, the assessee’s case is taxable u/s.9(1)(vii) of the I.T. Act and also it falls within royalty/fee for technical services within the meaning of Article 12 of DTAA between India and Australia. Hence, the panel is of the view that the A.O. is justified in holding that the receipts are taxable in India and therefore, the Panel declines to interfere.”
4. As per the directions of the DRP, the Assessing Officer passed the assessment order bringing to tax the entire amount received by the assessee from its two affiliates in India. Now the assessee is in appeal before us.
5. The ld. Counsel for the assessee vehemently submitted that the services rendered by the assessee are not only limited to its affiliates or group companies in India but the same are for the entire Asia region. He submits that the assessee acts as a global information technology support centre for the Asia-pacific region and is responsible for providing necessary IT support services for Sandvik Asia Ltd. in Asia-pacific region. He submits that assessee company has installed servers in various locations in Asia-pacific region i.e., Singapore, Malaysia, China, Japan, Korea,
India, etc., and the regional servers installed at various locations are part of global infrastructure maintained by the assessee. He submits that there are two servers located in India, one is at Mehsana(Gujarat) and another is in Gurgaon. He submits that the services rendered by the assessee company do not make available any technical knowledge, skill, know-how or process to the recipients and they do not fall within the ambit of the royalties under Article 12 of the Treaty. He submits that even it is not the case of the A.O. also that the payments received by the assessee company is in the nature of the royalty though he has mentioned royalty/FTS in the draft order as well as in the final order. He submits that the Ld. Counsel referred to the agreement entered into between the assessee and Sandvik Asia Ltd. (page Nos.2 to 10 of the compilation). He took us to the entire agreement more particularly the definition clause, the service clause as well as Schedule II where the services are specified. He submits that so far as taxability of the payments received by the assessee from the Indian affiliates, the same is taxable under the normal provisions of the Act more particularly under sec.9(1)(vi)/9(1)(vii) but in view of the DTAA between India and Australia, unless and until the technical knowhow is made available the same cannot be taxed in India. He submits that the nature of the services has been elaborated in the agreement between these two parties, the assessee and Sandvik Asia Ltd. and these are as under:
1. Giving advice to the receiving parties – IT personnel
2. Help Desk Support
3. Contacting Sandvik’s IT personnel
4. Providing IT operations and support service in IT infrastructure.
5. Disseminating related IT information.
6. He referred to page No.11 of the compilation, which is the copy of the submission made before the A.O. explaining what services are rendered by assessee company to the Sandvik Asia Ltd. His main thrust of the argument is that assessee is only rendering IT support services but is not imparting any technical knowhow or knowledge to its Indian affiliates and unless and until the technical know-how is imparted, the same cannot be taxable in India in view of the DTAA more particularly Article 12. Ld. Counsel took us to Article 12 of the India Australia Treaty more particularly sub-para 3(g) and submits that it is clear from the language used in the Treaty that unless the services are made available to the person acquiring the services, the same cannot be taxed in the contracting State. He placed his reliance on the decision of the Hon'ble High Court of Karnataka in the case of CIT, Central Circle, Bangalore and another vs. M/s.De Beers India Minerals Pvt. Ltd. ITA No.549, 550 and 551 of 2007 judgment dated 15.3.2012. Finally he concluded that there is a difference between rendering the services and to make available the services. In case of the first category of the services, the services are rendered to give the end results without imparting any technical know-how or its knowledge and the issues are sorted out. But in case where the services are made available, in that case it is open to the recipient of the services to make use of the technology. He therefore pleaded for allowing Ground No.1.
7. Per contra, the ld. DR put his more emphasis on the recitals of the agreement (page No.2 of the compilation) in which it is mentioned that the assessee company (providing party) is prepared
to transfer knowledge as per the agreement to Sandvik Asia Ltd. (receiving party) and hence there should not be any quarrel on the fact that assessee company is not only rendering the back-up IT support services but as per the agreement is also transferring knowledge of the said services to the recipient party i.e., Sandvik Asia Ltd. He submits that the recital clause cannot be neglected in the agreement. He also referred to the Article 12 of the India Australia Treaty and submits that whatever is received by the assessee from the Sandvik Asia Ltd is nothing but royalty. In reply the Ld. Counsel submits that agreement is to be understood after considering the operative clauses and not merely recitals. He submits that the service which is agreed between the parties has been elaborated in clause 2 read with Schedule 2 to the agreement and none of the clauses suggest that the assessee has made available any technical services to Sandvik Asia Ltd. or any affiliate.
8. We have heard the rival submissions of the parties and perused the record. The assessee is a non-resident company. The assessee is providing the IT support services to its group companies in the Asia-pacific region. So far as the issue before us is concerned, two group companies from India, i.e., Sandvik Asia Ltd. and Walter Tools India Pvt. Ltd., have made the payments to the assessee company. The DRP confirmed the action of the TPO treating the payment received by the assessee company from its Indian affiliates as taxable as royalty/FTS. The Ld. Counsel fairly conceded that so far as normal provisions of I.T. Act are concerned, i.e., more particularly section 9(1)(vii), in view of the Explanation 2 below the said section, the amount received by the assessee from its Indian affiliates is taxable as FTS, but the same is exempt in view of the Article 12 of the Treaty. We, therefore, need not go into the first limb of this issue whether the amount received by the assessee company is taxable under the normal provisions of the I.T. Act.
9. Let us examine the claim of the assessee that in view of Article 12 of the India Australia Treaty, as no services are “made available”, hence, the same cannot be taxed in the sourced country. The assessee is providing help desk and user administration services, i.e., IT support and advisory services for solving any IT related problems faced by the users as well as user administration services such as addition of new user/deletion of any existing users in the system. It is further claimed by the assessee company that it also provides IT help desk services in connection with any problems faced by the users in the usage of Lotus Notes i.e., Notes Domino Administration. Assessee also provides S&C based services which are in the nature of IT help desk services in connection with any problems faced by the users in operating various application softwares. Assessee provides networking services which comprise provision of routers and networking lines for connection to the global servers. Assessee also contended that the routers, network lines, WAN and other hardware devices are owned and maintained by the assessee. Assessee also provides data centre services. AS400 software application is stored on the centralised server of the assessee in Sydney. As per the agreement, assessee is responsible for updation of patches of the software and provision of backup and recovery services in respect of data stored on the centralised server. The responsibility of the assessee is to maintain and upkeep of the centralised server owned by it. In sum and substance, assessee has not imparted any technical know-how, skill, process or technical plan or design and hence, in view of Article 12(3)(g), the amount received by the assessee cannot be taxed in India.
10. The assessee has filed the copy of the agreement with the Sandvik Asia Ltd. dated 19.12.2006. It is placed in the Paperbook (page Nos.1 to 10). We find that in the said agreement
the parties have described the nature of the services which the assessee company is to provide to the recipient company i.e., Sandvik Asia Ltd. The DRP has placed his emphasis in the recital of the said agreement where it is stated as under:
“Providing Party is prepared to transfer such knowledge to the Receiving Party and to provide the receiving parties with information technology, consultancy and data process services.”
11. Though the agreement is to be read as a whole and cannot be read into piece-meal basis but what we find as per operative clauses in respect of the contractual obligation of the assessee company nowhere it is suggested that assessee has to make available the required technical know-how for solving the problems faced by the Sandvik Asia Ltd. in their IT related problems.
12. The Assessing Officer has already reproduced Article 12 of the India Australia Treaty in his draft assessment order and he has interpreted that as per the Treaty FTS means payment of any kind to any person in consideration for the rendering of any technical or consultancy services if such services make available technical knowledge, experience, skill, know-how or process or consists of development and data of technical plan or technical design. In view of the above rendered by the assessee company to its Indian affiliates are in the nature of FTS or royalties and same is taxable in India. We reproduce herein under the relevant part of Article 12:
ARTICLE XII - Royalties - 1. Royalties arising in one of the Contracting States, being royalties to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State.
2. Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but the tax so charged shall not exceed:
(a) in the case of :
(i) royalties referred to in sub-paragraph (3)(b) ;
(ii) payments or credits for services referred to in sub- paragraph (3)(d), subject to sub-paragraphs (3)(h) to (l), that are ancillary and subsidiary to the application or enjoyment of equipment for which payments or credits are made under sub-paragraph (3)(b); or
(iii) royalties referred to in sub-paragraph (3)(f) that relate to equipment mentioned in sub-paragraph (3)(b) ;
10 per cent of the gross amount of the royalties; and
(b) in the case of other royalties :
(i) during the first 5 years of income for which this Agreement has effect :
(a) where the payer is the Government or a political sub-division of that State or a public sector company:
15 per cent of the gross amount of the royalties; and (b) in all other cases: 20 per cent of the gross amount of the royalties; and
(ii) during all subsequent years of income: 15 per cent of the gross amount of the royalties.
3. The term “royalties” in this Article means payments or credits, whether periodical or not, and however described or computed, to the extent to which they are made as consideration for :
(a) the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trade mark or other like property or right;
(b) the use of, or the right to use, any industrial, commercial or scientific equipment;
(c) the supply of scientific, technical, industrial or commercial knowledge or information;
(d) the rendering of any technical or consultancy services (including those of technical or other personnel) which are ancillary and subsidiary to the application or enjoyment of any such property or right as is mentioned in sub-paragraph (a), or any such equipment as is mentioned in sub-paragraph (b) or any such knowledge or information as is mentioned in sub-paragraph (c);
(e) the use of, or the right to use : (i) motion picture films;
(ii) films or video tapes for use in connection with television; or
(iii) tapes for use in connection with radio broadcasting;
(f) total or partial forbearance in respect of the use or supply of any property or right referred to in sub-paragraphs (a) to (e);
(g) the rendering of any services (including those of technical or other personnel), which make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or design;
but that term does not include payments or credits relating to services mentioned in sub-paragraphs (d) and (g) that are made;
(h) for services that are ancillary and subsidiary, and inextricably and essentially linked, to a sale of property;
(i)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;
(j)for teaching in or by an educational institution;
(k) for services for the personal use of the individual or individuals making the payments or
credits; or
(l)to an employee of the person making the payments or credits or to any individual or firm of individuals (other than a company) for professional services as defined in Article 14.
4. The provisions of paragraphs (1) and (2) shall not apply if the person beneficially entitled to the royalties, being a resident of one of the Contracting States, carries on business in the other Contracting State, in which the royalties arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the property, right or services in respect of which the royalties are paid or credited are 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.
5. Royalties shall be deemed to arise in a Contracting State when the payer is that State itself or a political sub-division or local authority of that State or a person who is a resident of that State for the purposes of its tax. Where, however, the person paying the royalties, whether the person is a resident of one of the Contracting States or not, has in one of the Contracting States or outside both Contracting States a permanent establishment or fixed base in connection with which the liability to pay the royalties was incurred, and the royalties are borne by the permanent establishment or fixed base, then the royalties shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.
6. Where, owing to a special relationship between the payer and the person beneficially entitled to the royalties, or between both of them, and some other person, the amount of the royalties paid or credited, having regard to what they are paid or credited for, exceeds the amount which might have been expected to have been agreed upon by the payer and the person so entitled 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 amount of the royalties paid or credited shall remain taxable according to the law, relating to tax, of each Contracting State, but subject to the other provisions of this Agreement.
13. We are concerned with para No.3 of Article 12, which defines the term Royalty. Under the IT Act, the term royalty and expression FTS are classified as two different connotations, i.e. 9(1)(vi) and 9(1)(vii). So far as Article 12 is concerned, FTS is included in the term “royalty” for the purpose of deciding in which contracting state the income from the same is to be taxed. Clause (g) in Article 12(3) goes to the roots of the issue. Main thrust of the argument of the Ld. Counsel is that it is not only sufficient to render the services but the same should be made available to the recipient and this particular important aspect is missed by the DRP/TPO. We find that the expression “making available” is very much important to decide in which contracting state the amount received for rendering the services relating to the technical know-how is to be taxed. The expression “make available” is used in the context of supplying or transferring technical knowledge or technology to another. It is different than the mere obligation of the person rendering the services of that persons own technical knowledge or technology in performance of the services. The technology will be considered as made available when the person receiving the services is able to apply the technology by himself.
14. The expression ‘make available’ has come for consideration before the Hon'ble High Court of Karnataka in the case of M/s.De Beers India Minerals Pvt. Ltd. (supra). In the said case, the Treaty between India and Netherlands was for the consideration of their Lordships. The assessee in that appeal was a providing company engaged in the business of prospecting and mining for diamonds and other minerals. They have been granted licences (Reconnaissance Permits) by the State Government of Karnataka, Andhra Pradesh and Chhattisgarh. During the early stage, various techniques were employed for the purpose of carrying out geophysical survey, the assessee entered into agreement with M/s.Fugro Elbocon B.V. Netherlands, who had a team of experts specialised in air borne geophysical services for clients. For the technical services rendered by them the said assessee had paid consideration. The Assessing Officer applied Article 12 of the Indo- Netherlands Treaty and held that the same was taxable in the hands of the Netherlands Company. As the wordings of Article 12 in the Indo-Netherlands Treaty are analogous to Article 12 of the India Australia Treaty, as expression ‘make available’ is also used while determining fiscal jurisdiction of the contracting state, the Hon'ble High Court explained the meaning of the expression ‘make available’ which was appearing in the Indo-Netherlands Treaty, the Lordships explained the expression as under:
“13. Under the Act if the consideration paid for rendering technical services constitute income by way of fees for technical services, it is taxable. However, Article 12 of the aforesaid India-Netherlands Treaty defines fees for technical services for the purpose of Article 12 which deals with royalties and fees for technical services. The fees for technical services means the payment of any amount to any person in consideration for rendering of any technical services only, if such services make available technical knowledge, expertise, skill, know-how or processes. If the technical knowledge expertise, skill, know how or process is not made available by the service provider, who has rendered technical service for the purpose of Article 12 of DTAA it would not constitute fees for technical services. To that extent the definition of fee for technical services found in the agreement is inconsistent with the definition of fees for technical services provided in Explanation 2 to clause (vii) of sub-section (1) of Section 9. In view of Section 90 the definition of fees for technical services contained in the agreement overrides the statutory provisions contained in the Act. In fact, the latest agreement between India and Singapore further clarifies this position, where they have explained the meaning of the word ‘make available’. According to the aforesaid definition fees for technical service means payments of any kind to any person in consideration for services of technical nature if such services make available technical knowledge, experience, skill, know how or processes which enables the person acquiring the service to apply technology contained therein. Though this provision is not contained in India Netherlands Treaty, but virtue of Protocol in the agreement, Clause (iv)(2) reads as under:
“If after the signature of this convention under any Convention or Agreement between India and third State which is a member of the OECD India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment 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, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention.”
14. Therefore the Clause in Singapore agreement which explicitly makes it clear the meaning of the word ‘make available’, the said clause has to be applied, and to be read into this agreement also. Therefore, it follows that for attracting the liability to pay tax not only the services should be of technical in nature, but it should be made available to the person receiving the technical services. The technology will be considered ‘made available’ when the person who received service is enabled to apply the technology. The service provider in order to render technical services uses technical knowledge, experience, skill, know how or processes. To attract the tax liability, that technical knowledge, experience, skill, know how or process which is used by service provider to render technical service should also be made available to the recipient of the services, so that the recipient also acquires technical knowledge, experience, skill, know how or processes so as to render such technical Services. Once all such technology is made available it is open to the recipient of the service to make use of the said technology. The tax is not dependent on the use of the technology by the recipient. The recipient after receiving of technology may use or may not use the technology. It has no bearing on the taxability aspect is concerned. When the technical service is provided, that technical service is to be made use of by the recipient of the service in further conduct of his business. Merely because his business is dependent on the technical service which he receives from the service provider, it does not follow that he is making use of the technology which the service provider utilises for rendering technical services. The crux of the matter is after rendering of such technical services by the service provider, whether the recipient is enabled to use the technology which the service provider had used. Therefore, unless the service provider makes available his technical knowledge, experience, skill, know how or process to the recipient of the technical service, in view of the Clauses in the DTAA, the liability to tax is not attracted.”
15. Their Lordships also considered the decisions of the Authority for Advance Rulings (AAR) where the term ‘make available’ is interpreted. The relevant discussion and observations of their Lordships are as under:
“22. What is the meaning of ‘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, skills, 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.”
16. In the present case, as per the terms of the agreement between the assessee company and Sandvik Asia Ltd., does not support the case of the Revenue that the assessee’s case is covered in clause (g) of para 3 to Article 12 of the India Australia Treaty as the assessee has not made available any technical knowledge or expertise to the recipient Indian company. In our opinion, the assessee has only provided the back-up services and IT support services for solving IT related problems to its Indian subsidiary. Hence, unless and until the services are not made available, same cannot be taxable in India. We, therefore hold that the services rendered by assessee company to its Indian group companies, though are in the nature of technical services, but is not covered in para (3)(g) to Article 12 of the India Australia Treaty and hence, the same is not taxable in India. We also hold that the amount received by the assessee cannot be treated as a Royalty even under the normal provisions of I.T. Act. But under the normal provision of the I.T. Act the same constitute consideration for rendering the technical services covered u/s.9(1)(vii) of the I.T.Act. Accordingly, Ground No.1 is allowed and issue is decided in favour of the assessee.
17. The assessee has taken alternative Ground by way of Ground No.2. As we have decided the issue in favour of the assessee, the alternate Ground does not survive.
18. In the result, the assessee’s appeal is allowed.
 

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