Income from license of software not assessable as “royalty”-- Gracemac not followed/Motorola still good law

ADIT vs. TII Team Telecom International Pvt Ltd (ITAT Mumbai)

Income from license of software not assessable as “royalty”. Gracemac not followed; Motorola still good law

The assessee, an Israeli company, entered into an agreement with Reliance Infocomm for supply and licence of software for RIL’s wireless network in India. The assessee received Rs. 3 crores which it claimed to be “business profits” and not taxable for want of a permanent establishment (PE) in India. The AO took the view that the said sum was assessable as “royalty”. This was reversed by the CIT (A) following Motorola Inc 96 TTJ 1 (Del) (SB). In appeal before the Tribunal, the department argued that in view of Gracemac Corp 42 SOT 550 (Del), the use of software was assessable as “royalty”. HELD dismissing the appeal:

(i) Under Article 12 (3) of the India-Israel DTAA, royalty is defined inter alia to mean payments for the “use of” a “copyright” or a “process”. There is a distinction between “use of copyright” and “use of a copyrighted article”. In order to constitute “use of a copyright”, the transferee must enjoy four rights viz: (i) the right to make copies of the software for distribution to the public, (ii) The right to prepare derivative computer programmes based upon the copyrighted programme, (iii) the right to make a public performance of the computer programme and (iv) The right to publicly display the computer programme. If these rights are not enjoyed, there is no “use of a copyright”. The consideration is also not for “use of a process” because what the customer is paying for is not for the “process” but for the “results” achieved by use of the software. It will be a “hyper technical approach totally divorced from ground business realities” to hold that the use of software is use of a “process”. (Motorola Inc 96 TTJ 1 (Del) (SB) and Asia Sat 332 ITR 340 (Del) followed. Gracemac Corp 42 SOT 550 (Del) not followed);

(ii) It is well settled that a DTAA prevails over the Act where it is more favourable to the assessee. The view taken in Gracemac, relying on Gramophone Co AIR 1984 SC 667, that the Act overrides the treaty provisions where there is irreconcilable conflict is not acceptable because (a) it is obiter dicta, (b) contrary to Azadi Bachao Andolan 263 ITR 706 (SC) and (c) Gramophone Co not applicable to I. T. Act as it dealt with law in which specific enabling clause for treaty override did not exist. (Ram Jethmalani vs UOI also considered).

Source: ITATonline

Fees paid to a foreign company for rendering testing and certification services--Not Income accrued in India

Fees paid to a foreign company for rendering testing and certification services could not be treated as income deemed to accrue or arise in India under Section 9(1)(vii) of the Income-tax Act

Recently, the Delhi Bench of Income-tax Appellate Tribunal (the Tribunal) in case of Havells India Ltd1 (the taxpayer) held that testing fees paid to non-resident company could not be treated as income deemed to accrue or arise in India under Section 9(1)(vii) of the Income-tax Act 1961 (the Act).

Further since the income did not accrue or arise in India, the question of deducting tax at source does not arise and consequently payment made to the non-resident was not to be disallowed under Section 40(a)(i) of the Act.

Havells India Ltd v. ACIT [ITA No.1300/Del/2010, dated 27 May 2011]

Facts of the case

• The taxpayer paid INR 1.48 million to CSA International (CSA), a US Company for getting witness testing of AC Contactor as part of CB report and KEMA certification. CSA was assigned this job since it had a specialized knowledge and facility for the requisite testing and certification.

• The Assessing Officer (AO) held that fees paid for testing and certification services rendered by CSA were in the nature of making available of technical knowledge, expertise and skill of CSA, rendering such services to be ‘Fees for Included Services” as per Article 12(4)(b) of the India-USA tax treaty (tax treaty).

• The AO observed that irrespective of whether the non-resident is having a business connection in India or not, the payment made by the taxpayer as Fees for Technical Services (FTS) being utilised in business in India would lead to income being deemed to accrue or arise in India. Further the AO held that since tax was not deducted at source under Section 195 of the Act in respect of testing fees paid by the taxpayer, the amount of INR 1.48 million would be disallowed under Section 40(a)(i) of the Act.

• The Commissioner of Income Tax Appeal [CIT (A)] relying on the decision of Cochin Refineries Ltd.2 confirmed the disallowance made by the AO.

2 Cochin Refineries Ltd. v. CIT [1996] 222 ITR 354 (Ker)


3 GE India Technology Centre P Ltd v. CIT [2010] 327 ITR 456 (SC)


4 Titan Industries Ltd v. ITO [2007] 11 SOT 206 (Bang)


5 Ishikawajima–Harima Heavy Industries Ltd v. DIT [2007] 158 Taxman 259 (SC)

Taxpayer’s contentions

• The taxpayer contended that it had made exports to the USA and the fees in question had been paid to earn income from the USA, i.e. from a source outside India. Therefore, the fees paid to CSA could not be deemed to accrue or arise in India under Section 9(1)(vii) of the Act and tax was not required to be deducted at source on such payments under Section 195 of the Act.

• The taxpayer relied on the decision of GE India Technology Centre P Ltd3 where it was held that duty to withhold tax did not arise on a mere remittance to a non-resident, unless the remittance consisted of wholly or partly taxable income. Since the fees were payable in respect of services utilised outside India, the said income was not taxable and tax was not required to be deducted at source.

• The taxpayer relying on the decision of Titan Industries Ltd4 contended that provisions of Section 40(a)(i) of the Act had no applicability since services has been utilised outside India for earning an income from a source outside India. Accordingly, the payment was covered in the exception provided in Section 9(1)(vii)(b) of the Act, due to which, there was no need to deduct tax at source under Section 195 of the Act.

• The taxpayer further contended that the CIT(A) had failed to consider the decision of the Supreme Court in Ishikawajimi–Harima Heavy Industries Ltd5 where it had been held that income can be deemed to accrue or arise in India, only if the services were utilised in India as well as rendered in India; that in the taxpayer’s case, neither were the services rendered by CSA in India, nor were they utilised in India.

• The taxpayer further contended that services of CSA did not make available technical know-how to the taxpayer, therefore, it did not amount to FIS under the tax treaty and there was no obligation on the part of the taxpayer to deduct tax under Section 195 of the Act.

Tax department’s contentions

• The tax department contended that testing reports and certifications were obtained from CSA in respect of the manufacturing activity of the taxpayer in India and that the taxpayer did not deduct tax at source while making the payment to CSA.

• The tax department relying on the decision of Cochin Refineries Ltd contended that fees paid to CSA US was in the nature of FTS and it would fall under the definition of FTS within the provisions of Section 9(1)(vii) of the Act and the income was thus taxable in India.

• The tax department contended that the payment was covered as “Fees for Included Services” as referred to in Article 12(4)(b) of the tax treaty as the testing report and certification made available to the taxpayer were in the nature of technical knowledge, expertise and skill made available to the taxpayer. Further the same was utilised in the manufacture and sale of products in the business of the taxpayer in India.

• The tax department contended that if the assessment order was found to be deficient with regards to whether services was utilised in India or not, the matter should be referred to the AO for a fresh decision concerning this aspect of the matter.

Tribunals ruling

• The Tribunal observed that the testing and certification was necessary for the export of the product and was utilised for such export. The said services were rendered and utilised outside India. Therefore, the income fell outside the purview of Section 9(1)(vii) of the Act and did not deem to accrue or arise in India.

• The Tribunal observed that the tax department had failed to prove its contention that the testing and certification were utilised in the taxpayer’s production activity in India. The burden in this regard was entirely on the tax department, which the tax department had failed to discharge.


6 Raymond Ltd v. DCIT [2003] 86 ITD 791 (Mum)


Joint Accreditation System of Australia and New Zealand [2010] 326 ITR 487 (AAR)


Diamond Services P Ltd v. Union of India & Others [2008] 304 ITR 201 (Mum)


NQA Quality System Registrar Ltd v. DCIT [2005] 92 TTJ 946 (Del)


ICICI Bank Ltd v. DCIT [2008] 20 SOT 453(Mum)

• The tax department’s argument on remitting the matter to the AO was neither required, nor appropriate to be adopted. The Tribunal observed that it was not possible to remit the matter to the AO since the appellate authority examines whether the assessment had been framed in accordance with law and if the assessment was not framed in accordance with law it was not the responsibility of the authority to start investigation suo moto and in order to fill up the gap which was missing.

• The Tribunal further observed that the tax department did not bring anything on record to substantiate its observation of the testing and certification services provided to the taxpayer by CSA having been utilised for the taxpayer’s business activity in India. Accordingly, it was held that fees paid by the taxpayer did not deemed to accrue or arise in India and withholding of tax under Section 195 of the Act was not required and thus disallowance under Section 40(a)(i) of the Act was also not required.

Payment for Patent Infringement is allowable u/s 37(1)

[2011] 12 taxmann.com 373 (Delhi)

HIGH COURT OF DELHI--Commissioner of Income-tax v. Desiccant Rotors International (P.) Ltd.*

The assessee-company was engaged in the business of manufacturing of environmental control systems such as Rotors, Heat Recovery Wheels, Desiccant Rotors, etc. For the assessment year 2005-06, the assessee filed its income-tax return declaring certain income. Along with the return, necessary documents including profit and loss account was filed. On perusal of the profit and loss account, it was noticed by the Assessing Officer that the assessee had debited certain amount on account of compensation paid towards settlement of dispute. On being asked to clarify the position, the assessee-company furnished a note stating that it had been exporting its products to one of its customers, 'VENMAR', Canada for selling those products further in foreign countries. SEMCO Inc., USA had filed a suit against VENMAR for infringement of their registered patents in USA by selling the products of the assessee-company. VENMAR settled the dispute with SEMCO by paying certain compensation to it. Subsequently, SEMCO instituted the proceedings against the assessee company in the Court of USA alleging that sale of products by the assessee to VENMAR amounted to infringement of their registered patents. Since the cost of litigation was expected to be exorbitant, the assessee-company after considering the advice of its legal representative, settled the dispute with SEMCO by making payment of US $6,75,000. It was, thus, claimed by the assessee that the payment was compensatory in nature to compensate the loss incurred by SEMCO as a result of selling the product covered by patent held by SEMCO to VENMAR. The Assessing Officer opined that amount paid by the assessee to SEMCO was nothing but a 'penalty' or as something akin to penalty and the payment was made only due to infringement which would, in any way, result into a compensation. The Assessing Officer, further, observed that violation of the patents/trademark, etc., is always prohibited by law and, therefore, in view of the provisions contained in Explanation to section 37(1), the expenditure so incurred by the assessee was not allowable. The Commissioner (Appeals) confirmed the order of the Assessing Officer. On second appeal, the Tribunal, accepting the contention of the assessee that the payment was not in the nature of any penalty and no such violation of patent law was held to be proved, and it was only in the nature of compensation due to settlement arrived at between the parties, permitted it as allowable expenditure under section 37.

A.K. Sikri, J. - Before we reproduce the substantial questions of law, which are to be answered, we deem it appropriate to state the facts and circumstances under which these questions of law arise for consideration. The respondent-assessee was incorporated in the year 1984 and has been engaged in the business of manufacturing of environmental control system such as Rotors, Heat Recovery Wheels, Desiccant Rotors, etc. For the assessment year 2005-06, the assessee filed its Income-tax return on 31-10-2005 declaring total income at Rs. 2,49,28,630. Along with the return, necessary documents including Profit and Loss account was filed. Books of account were also produced at the time of assessment and were examined by the Assessing Officer. On perusal of the Profit & Loss account, it was noticed by the Assessing Officer that the assessee has debited an amount of Rs. 3,12,57,152 on account of compensation paid towards settlement of dispute. On being asked to clarify the position, the assessee company furnished a note with relevant documents, vide letter dated 26-12-2007. In the notice, it was stated that the assessee has been exporting its products to one of its customers, viz., M/s Venmar Ventilation Inc. (hereinafter referred to as 'VENMAR'), Canada for selling their products. SEMCO Inc. USA had filed a suit against VENMAR for infringement of their registered patents in USA by selling the products of the assessee company. VENMAR settled the dispute with SEMCO by paying certain compensation to it. Subsequently, SEMCO instituted the proceedings against the assessee company a swell in the Court of USA alleging that sale of products by assessee to VENMAR amounted to infringement of their registered patents. Since the cost of litigation was expected to be exorbitant, the assessee company after considering the advice of its legal representative, settled the dispute with SEMCO by making payment of US $6,75,000. It was, thus, claimed by the assessee that the payment was compensatory in nature to compensate the loss incurred by SEMCO as a result of selling the product covered by patent held by SEMCO to VENMAR. The assessee also filed certain documents along with its submissions.

2. The contention of the assessee, before the Assessing Officer, which has been remained consistent throughout, was that the assessee company had made the payment to SEMCO as a result of settlement arrived at and not on account of infringement of patent law, did not accept the Assessing Officer. The Assessing Officer was of the view that SEMCO had filed the Suit for damages and injunction due to infringement of SEMCO's United States Patent bearing No. 4769053 caused by the assessee company and its customers for manufacturing and marketing the Energy Recovery Wheel products. Further, SEMCO had sued VENMAR in the same Court for infringement of SEMCO's patent by selling the assessee company's product in their patented territory and in those proceedings, the VENMAR had acknowledged that the patent held by SEMCO was valid and enforceable and thus, agreed not to sell the products that would infringe the patent of SEMCO and accordingly compensated SEMCO for such infringement. In these circumstances, according to the Assessing Officer, the amount paid by the assessee to SEMCO was nothing but a "penalty" or as something akin to penalty and the payment was made only due to infringement which would, in any way, resulted into a compensation. The Assessing Officer, further, observed that violation of the patents/trademark, etc. is always prohibited by law and therefore, in view of the provisions contained in Explanation to section 37(1) of the Income-tax Act (hereinafter referred to as 'the Act'), the expenditure so incurred by the assessee was not allowable. The Assessing Officer further took the view that the payment was made to avoid any conviction by the Court of Law for infringement of patent which is not a normal incident of business and therefore, it is not allowable as business expenditure. On this reasoning, the Assessing Officer disallowed the payment of compensation paid by the assessee to settle the dispute and added the same to the assessee's total income.

3. Feeling aggrieved, the assessee preferred an appeal before the CIT(A). The case as pleaded before the Assessing Officer was reiterated before the CIT(A). It was exemplified by submitting that whatever allegations were levelled by SEMCO were denied and disputed in toto by the assessee and even the suit was defended for three years. However, keeping in view the cost of litigation and the advice given by its legal consultants, the assessee found it expedient and proper to reach an out-of-Court settlement. The assessee company emphatically argued before the CIT(A) that the settlement was not on account of any infringement of any law inasmuch as no Court of law held anything or given any finding against the assessee company. It was, therefore, contended that the assessee's case is not covered by Explanation to section 37(1) of the Act and therefore, the payment made in the course of carrying on assessee's business activity is to be allowed as business expenditure. The assessee also placed reliance on the decision of the Supreme Court in the case of Prakash Cotton Mills (P.) Ltd. v. CIT [1993] 201 ITR 684/67 Taxman 546. After considering the Assessing Officer's order and the assessee's submissions, the CIT(A) confirmed the Assessing Officer's order in disallowing the assessee's claim of deduction of payment to SEMCO as a result of out of Court settlement in respect of the proceedings initiated by M/s SEMCO against the assessee company for infringement of their patent rights.

4. Still aggrieved, the assessee went in appeal before the Tribunal. In this appeal, the assessee has been able to convince the Tribunal. Accepting the contention of the assessee that the payment was not in the nature of any penalty and no such violation of patent law was held to be proved, and it was only in the nature of compensation due to settlement arrived at between the parties, the Tribunal has permitted it as allowable expenditure under section 37 of the Act.

5. Section 37, which is a residuary provision, allows the expenditure as deductable while computing the income on the satisfaction of the following conditions:

"(a) Expenditure must not be governed by the provisions of sections 30 to 36 of the Act;

(b) The expenditure must have been laid out wholly and exclusively for the purposes of the business of the assessee:

(c) The expenditure must not be personal in nature; and

(d) The expenditure must not be capital in nature."

6. The Explanation to sub-section (1) of section 37 of the Act has been inserted by the Finance (No. 2) Act, 1988 with full retrospective effect from 1-4-1962 and provides:

"For removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purposes, which is an offence or which is prohibited by law, shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure."

7. The dispute revolves around the issue as to whether the aforesaid expenditure incurred by the assessee was for a purpose which would be treated as an "offence" or which is prohibited by law. If this be so, the expenditure is not allowable. The Tribunal has held that the expenditure incurred is not for a purpose which is an offence or which prohibited by a law. As there was no dispute that the expenditure was, in fact, incurred which is neither personal in nature nor capital in nature and it was incurred wholly and exclusively for the purposes of business of the assessee, the Tribunal permitted the said expenditure thereby allowing the appeal of the assessee.

8. Against this order, present appeal is preferred which was admitted on the following substantial questions of law:

"(i) Whether learned ITAT erred in holding that the payment by the assessee to SEMCO vide Settlement Agreement is not hit by the provisions in Explanation 1 to section 37 of the Income-tax Act, 1961?

(ii) Whether learned ITAT erred in deleting the addition of Rs. 3,12,57,152 paid on Settlement of Dispute which was incurred wholly and exclusively for the purposes of business?"

9. Since the counsel for the parties were ready to finally argue the matter, the arguments were heard simultaneously with framing of aforesaid questions of law. On the conclusion of arguments, request from both the sides was made for filing the written submissions within one week. The same was granted. Though the learned counsel for the assessee has filed the written submissions, the learned counsel for the revenue has not availed of this opportunity. In these circumstances, we proceed to decide the questions of law framed, on the basis of oral submissions of both the parties as well as written submissions tendered by the learned counsel for the assessee.

10. Mr. Sanjeev Sabharwal, learned counsel for the revenue, argued that no doubt, the payment was made by the assessee to M/s SEMCO under the settlement before the judgment could be pronounced by the United States District Court, but the tenor of the said settlement would clearly reveal that such a settlement was arrived at accepting the fact that the assessee had violated/infringed the patent of SEMCO. Damages were paid by the assessee because of this infringement and such a payment, submitted the counsel, was for a purpose which is prohibited by law. His argument was that the law mandates not to infringe patent right of any person and once it is found that the assessee had violated the patent rights of SEMCO thereby compelling SEMCO to institute proceedings against the assessee, it would be a clear case where the payment was made for a purpose which is prohibited by law. Thus, the Explanation was fully applicable and expenses could not be treated as having been incurred for the purpose of business and no deduction is to be allowed on such expenses in the nature of penalty.

11. Learned counsel also took support from the reasons given by the Assessing Officer as well as the CIT(A) in their respective orders. He pointed out that the CIT(A) had clearly held that it was a case where there was an infringement of United States Patent Law by the assessee. The goods were manufactured and sold by the assessee to VENMAR for sale in US and Canada markets and as a manufacturer, the assessee could not escape the primary responsibility by stating that it was not directly involved in infringement. Further, for making a disallowance under section 37 in respect of penalty, etc. finding by a competent Court was not a condition precedent to attract the Explanation to section 37(1). According to the CIT(A), the Explanation simply states that if expenditure is incurred for any purpose, which is an offence, or which is prohibited by law, such expenditure will not be deeded to have been incurred for the purpose of business. The Explanation does even imply that there must be a finding of a Competent Authority or Court that an offence was committed or that any law was infringed. In fact, there may be numerous situations where expenditure is incurred for a purpose, which is prohibited by law, but there may not necessarily be any order of any authority or Court to this effect. Payment of protection money, hafta money, ransom, etc. are examples of such expenditure. There may not be any order prohibiting a person from making payment of protection money but nonetheless the payment will be for a purpose prohibited by law and would not be allowable under section 37 of the Act.

12. Mr. Sabharwal further submitted that the expenditure was not compensatory in nature. It was incurred to avoid the penal consequence of the aforesaid infringement.

13. Ms. Shashi M. Kapila, learned counsel appearing for the assessee countered the aforesaid submission and sought to justify that the reasons given by the Tribunal in spite of its decision. Her first submission was that the provisions of the Explanation were not attracted per se as the expression "prohibited by law" occurring in the said Explanation is limited to law of land alone, i.e., Indian Law. Dilating on this submission, she argued that the expression "offence" and "prohibited by law" occurring in Explanation to section 37(1) of the Act are not defined in the Act. However, section 3(38) General Clauses Act, 1897 defines "offence" to mean "any act or omission made punishable by law for the time being in force". The Calcutta High Court in the case of Susanta Mukherjee v. Union of India [1975] 94 CWN 412 after referring to section 3(38) of the General Clauses Act read with Articles 13(3), 366(10) and 372(1) of the Constitution of India and the decision of the Supreme Court in the case of Edward Mills Co. Ltd. v. State of Ajmer AIR 1955 SC 25 observed in paragraph 13 of the judgment:

"13. It is abundantly clear from the foregoing references to various provisions of the Constitution that a person cannot be convicted of an offence except for violation of law in force at the time of commission of the act charged as an offence. Therefore, in my opinion, the word "any law for the time being in force" as occurring in section 3(38) of the General Clauses Act, 1997 must be construed as "any law for the time being in force" in India. Obviously it has no reference to any law of other countries of the world."

14. According to her, similarly, the expression "prohibited by law" can only mean prohibited by law in force in India. The expression "prohibited by law" as used in the Explanation to section 37(1) has the same contextual import as the expression "forbidden by law" as used in section 23 of the Indian Contract Act, 1872. This came up for the consideration of the Full Bench in the case of Abdul Hameed v. Mohd. Ishaq AIR 1975 All. 166 wherein the Allahabad High Court observed as under:

"12. The expression 'law' has not been defined in the Contract Act, nor in the U. P. General Clauses Act, 1904, but in the Central General Clauses Act, 1897, 'Indian Law' is defined in section 3(29) as below:—

"'Indian law' shall mean any Act, Ordinance, Regulation, rule, order, bye-law or other instrument which before the commencement of the Constitution had the force of law in any Province of India or part thereof, or thereafter has the force of law in any Part A State or Part C State or part thereof, but does not include any Act of Parliament of the United Kingdom or any Order in Council, rule or other instrument made such Act."

This definition is applicable to all the Central Acts and Regulations made after the commencement of the General Clauses Act. The Contract Act was enacted in 1872 before the commencement of the General Clauses Act, 1897. Therefore, this definition is not directly applicable to the Contract Act, but there appears to be no reason why the principles contained in the above definition be not made applicable to even the earlier enactments. 'Law' must, therefore, include not only an Act and Ordinance but also Regulations, rule, order, bye-Law or other instrument which has the force of law. Similar inference can be drawn from the provisions of the Constitution also. For the purposes of Article 13 of the Constitution the term law' includes any Ordinance, order, bye-law, rule, regulation, notification, custom or usage having in the territory of India the force of law.

13. Consequently, where any agreement is forbidden by an order of the competent authority having the force of law, it shall be an agreement forbidden by law as contemplated by section 23 of the Contract Act."

Ms. Kapila, thus, emphatically put that in view of the above, it is clear that the phrase "prohibited by law" as used in the Explanation to section 37(1) of the Act contemplates law in force in India. Her submission was that in the present case, it is an undisputed fact that there is no violation of any patent laws within the territory of India. Section 2(m) of Indian Patent Act, 2005 defines patent as "patent for any invention granted under this Act". Patent right is a statutory right and this right can be applicable only in such states which recognise this right. Patent is valid only in the country of registration. Therefore, a patent registered in USA, Canada, etc. is not a patent recognised by the Indian Patent Act. It is for this reason that the respondent/assessee still continues to manufacture and sell the impugned energy recovery wheel desiccant in India.

15. Without prejudice to the above, her alternate submission was that there was no infringement of even US laws and on the facts of this case, no such finding was recorded by any Court. The payment was made as a result of settlement which payment was compensatory in character. The reason for settlement was explained to the authorities below, viz., in order to buy peace and not to face litigations in US Courts, which is costly. She argued that no damages had been paid under the Indian Patent Act or under the US Patent Laws and there was no evidence to show the infringement. She also argued that in absence of any violation of the provisions of Indian Patent Act, the payment under settlement with SEMCO does not fall within the meaning and scope of expression 'offence' and 'prohibited by law' used in Explanation to section 37(1) of the Act. The assessee still manufactures the energy saving wheel using the impugned desiccant and sells it in India as well as exports it to other countries without any restrictions and no suit has been filed by SEMCO for infringement of its patent in India. However, exports to USA and Canada, past settlement is as per the Settlement Agreement.

16. Ms. Kapila further submitted that even if it is presumed that the payment was made for infringement of patent, that entails only civil damages, which are compensatory in nature and it cannot be said that the payment made was in the nature of penalty. She pointed out that the averments in the plaint filed by SEMCO as per which the only civil damages were claimed and criminal suit was scored out in the plaint. Once the payment is treated as purely compensatory in nature, the same could not be disallowed as per the law settled by the Supreme Court in the case of Prakash Cotton Mills (P.) Ltd. (supra) which principle was reaffirmed by the Apex Court in the case of Mrs. Rajalakshmi Narayanan v. Mrs. Margret Kathleen Gandhi 211 ITR 244 (sic).

17. After giving our thoughtful consideration to the respective submissions, we are of the view that the order of the Tribunal does not call for any interference and both the questions of law set out above need to be answered in negative, i.e., in favour of the assessee and against the revenue.

18. At the outset, we are inclined to accept the submission of the assessee that the paramount and governing consideration behind such a settlement/agreement can be to avoid the expenses and uncertainty of further litigation. It is a matter of common knowledge that litigation can turn out to be quite expensive and it cannot be even possible, what to talk of feasible, for a small time/middle level company in India like the assessee to litigate in US Court. Furthermore, the settlement agreement contains a specific recital to this effect inasmuch as it records "whereas, in order to avoid the expenses or uncertainty or further litigation, the parties desired to settle and adjust all differences and controversies among themselves subject to the terms of this Agreement." No doubt in the Agreement, the assessee accepted the patent of SEMCO. That by itself would not mean that the assessee also accepted that it was infringing the said patent. Secondly, payment is made by the assessee to SEMCO for "loss of goodwill and damages to its capital and for terminating of case US Courts" as is clearly mentioned in clause (3) of the Agreement. No finding is given by any Court that the assessee had violated the patent right of SEMCO. With the aforesaid payment, the "Covenants to Release" recorded in clause (2) is as under:

"2. Covenants to Release

2.1 SEMCO hereby releases, remises and forever discharges the Settling Entities and their agents, attorneys, consultants, offices, employees, representatives, heirs, successors and assigns and their Customers form any and all claims, demands, or causes of action that arise out of or relate to the Action, and any and all obligations, actions, causes of action, suits, debts, contracts, controversies, agreements, promises, damages, judgments, awards, executions, claims and demands whatsoever in law or in equity, and any and all claims for damages (and attorneys' fees and costs) based upon the violation of a federal, state or other statute, regulation or law or arising out of any conduct, contract, employments, action, event or circumstance, under the law of any and all nations, whether known or unknown, which occurred at any time up to an including the date of the execution of this Agreement, except obligations created by this Agreement, any associated licence Agreement and/or by the Consent Judgment to be filed in accordance with this Agreement."

19. It would be pertinent to highlight that the Agreement is applicable within the area defined as "territory". This territory mentions some specific countries in Europe as well as Japan, Australia and Korea. There is no mention of 'India' at all. That clearly implies that SEMCO has no objection if the assessee continues to manufacture the goods in the same manner using same patent which it has been using and marketing it in India or any other countries, which are not stipulated in the 'territory' with respect to which only restraint is provided in the agreement. It is for this reason the assessee even today continues to manufacture those goods and is selling the products in this country. Once we find that the settlement has arrived at under the aforesaid circumstances, there is no room to hold that it was because of the reason that the assessee was violating the patent laws or the payment was made for an objective prohibited by law. This is our view even when we presume that the expression 'prohibited by law' would include US laws and would not be confined to law in India.

20. Moreover, we also agree with the contention of the learned counsel for the assessee that the payment under the settlement is compensatory in nature. The remedy for infringement of patent involves civil action for compensating the damage to private properties. It may be noted that in the plaint filed by it, SEMCO has sought civil damages under sections 284 and 285 of the US Patent Code (US 35). Criminal Suit is scored out in the plaint. The relevant provisions of US 35 (Patent Code) read as follows:

"284. Damages.—Upon finding for the claimant the Court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the sue made of the invention by the infringer, together with interest and costs as fixed by the Court.

"285. Attorney fees.—The Court in exceptional cases may award reasonable attorney fees to the prevailing party."

21. It will be seen from the above that the damages are calculated for compensating the owner of the patent rights for the loss of profit/royalty even under the laws of USA. There is no element of penalty even in USA. Even the Indian Patents Act, 1970 (as amended by the Act of 2005) does not prescribe any penalty or fine for infringement of a patent registered under that Act. This is clear from the section 108 of the Indian Patent Act, which reads as under:

"108 Reliefs in suit for infringement.—The reliefs which a Court may grant in any suit for infringement include an injunction (subject to such terms, if any, as the Court things fit) and, at the option of the plaintiff, either damages or an account of profits."

22. Therefore, any payment for infringement of patent, being purely compensatory in nature, cannot be disallowed as per the law settled by the Supreme Court in the case of Prakash Cotton Mills (P.) Ltd. (supra), where the Apex Court observed as under:

"…Therefore, whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under section 37(1) of the Income-tax Act, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal in nature. The authority has to allow deduction under section 37(1) of the Income-tax Act, wherever such examination reveals the concerned impost to be purely compensatory in nature. Wherever such impost is found to be of a composite nature, that is, partly of compensatory nature and partly of penal nature, the authorities are obligated to bifurcate the two components of the impost and give deduction to that component which is compensatory in nature and refuse to give deduction to that component which is penal in nature."

23. It was an expenditure which was motivated purely by commercial purpose and would be allowable under section 37(1) of the Act as held by the Apex Court in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co. v. CIT [1997] 223 ITR 101.

24. As regards consent judgment passed by the US District Court in accordance with clause 2 read with clause 3 of the Settlement Agreement, the law is well-settled by the Supreme Court in the case of Pulavrathi Venkata Subba Rao v. Valluri Jagannadha Rao AIR 1967 SC 591, wherein the Court held that:

"A compromise decree is not a decision of the Court. It is the acceptance by the Court of something to which the parties had agreed. A compromise decree merely sets the seal of the Court on the agreement of the parties."

25. Since questions formulated are answered on the aforesaid reasoning, it is not necessary to go into the issue as to whether the expression 'prohibited by law' would confine to law in force in Indian only. We leave that question open.

26. We, thus, do not find any merit in this appeal, which is dismissed with costs.

Use of Disk Space--Not Taxable as Royalty

Amount received by the assessee, a tax resident of Singapore, from SCB India for use of disk space in the hardware of the assessee at its data centre in Singapore is not taxable as royalty, as held by MumTrib in Atos Origin IT Services Singapore (P) Ltd v ADIT — In favour of: The assessee; ITA No 2428 (Mum) of 2009: (AY 2005–2006).


Atos Origin IT Services Singapore (P) Ltd. v ADIT ITAT, Mumbai
ITA No. 2428 (Mum.) of 2009 Assessment Year: 2005-06
Decided on: 27 May 2011

1. This appeal by the assessee is directed against the order dated 30-1-2009 for the assessment year 2005-06. The only dispute raised by the assessee is regarding taxability of Rs.12,92,68,070 receivable from the assessee from Standard Chartered Bank (SCB) as royalty.


2. Briefly stated facts of the case are that the assessee who was tax resident of Singapore had entered into a hubbing agreement for providing data processing support to Standard Chartered Bank (SCB) a non-resident company engaged in the business of banking in India. The Assessing Officer on perusal of agreement noted that SCB India though it was not in physical possession of infrastructure owned by the assessee for the purpose of data processing, it did have constructive control over the same because it could utilize the same as per terms of agreement. It was also observed by him that these equipments were at the disposal of SCB India and it was a case of renting out of disc space in hardware system and therefore, the payment made by SCB was royalty as per Article 12(3)(a) of
DTAA between India and Singapore. The Assessing Officer further observed that use of embedded secret software provided by the assessee for processing raw data also fell within the ambit of Article 12(3)(a) of DTAA. The Assessing Officer accordingly taxed payment as royalty.


3. The assessee disputed the decision of the Assessing Officer and submitted before CIT(A) that providing services for processing of data of customers was part and parcel of normal business activity of the assessee and, therefore, fee payable by assessee was per se business profit of the assessee. Thus, under the provisions of Article 7(1) of DTAA, the business profit could be taxed in India only if the assessee had permanent establishment (PE) in India. Since assessee did not have a PE in India, income was not taxable. CIT(A) however, did not accept the contentions raised. He agreed with the finding of Assessing Officer that it was a case of renting out of disc space in the hardware system and
embedded software by the assessee in favour of SCB India and therefore, the income earned by the assessee was of the nature of royalty within the meaning of Article 12(3) of DTAA and also within the meaning of clause (iii) of Explanation (2) below section 9(vi) of the Income-tax Act. He therefore confirmed the order of Assessing Officer assessing the amount as royalty. Aggrieved by said decision the assessee is in appeal before Tribunal.


4. Before us ld. AR for the assessee at the very outset pointed out that the same issue had already been decided by the Tribunal in assessee's own case in ITA No. 1457/Mum./2008 for assessment year 2004-05 in which Tribunal allowed the case of the assessee holding that the amount receivable by assessee was not taxable as royalty. The ld. Departmental Representative fairly conceded that the issue was covered by the said decision of the Tribunal.


5. We have perused the records and considered the matter carefully. The dispute is regarding taxability of the amount received by assessee from SCB India for use of disc space in the hardware of the assessee at its data centre in Singapore. The authorities below have held that it was a case of renting out of disc space along with embedded software of the infrastructure of the assessee and therefore, the income was of the nature of royalty under the provisions of Article 12(3) of DTAA between India and Singapore. We find that the same issue has already been considered by the Tribunal in assessee's own case in assessment year 2004-05 in which the Tribunal noted that as per definition in Article 12(3)(b), royalty meant payment of any kind received as a consideration for useor right to use any industrial, commercial or scientific equipment, other than payments received from
activity described in para-4(b) of Article 8. The Tribunal observed that in the context and collocation of 2 expressions 'use' and 'right to use' followed by the word "equipment" indicated that there must besome positive use or employment of equipment for the desired purpose. The customer must come face to face with the equipment, operate it or control it or control its functions in some manner. If an advantage was taken from sophisticated equipment installed and provided by another person it could not be said that the recipient/customer used the equipment as such. Even where an earmarked circuit
was provided for offering the facility, unless there was material to establish that the circuit/equipment could be accessed and put to use by means of some positive acts, it did not fall within the category of royalty. The Tribunal held that in this case, the assessee did not have the right to access the computer hardware except for transmitting raw data for further processing. The assessee had no control over computer hardware or physical access to it. Therefore, there was nothing to show any positive act of utilization, application or employment of equipment for the desired purpose. The Tribunal

accordingly held that payment was not royalty within the meaning of Article 12(3)(b). Facts, in this year are identical. Therefore, respectfully following the decision of the Tribunal in assessment year 2004-05 in assessee's own case (supra), we set aside the order of the CIT(A) and deleted the addition made.


6. In the result, the appeal of the assessee is allowed.

Advisory services and opinion for improvement of existing facilities--No 'FIS'

[2011] 11 taxmann.com 216 (Hyd. - ITAT)

  

IN THE ITAT HYDERABAD BENCH 'A'
Assistant Commissioner of Income-tax, Circle 15(1), Hyderabad v. Viceroy Hotels Ltd.

Non-resident company incorporated in USA provided to assessee advisory services and opinion for improvement of existing facilities, fees paid by assessee to non-resident company would not fall within ambit of 'fees for included services'

The assessee-company was engaged in the business of running a hotel at Hyderabad. The said hotel was converted into a 'Marriott Chain Hotel' under a franchise granted by International Licensing Company SARL (Marriott), USA. In order to meet the standards set by Marriot group, the assessee embarked upon an expansion programme by way of adding new blocks in the hotel and also upgradation by way of bringing about interior and exterior changes, landscaping, etc. For this purpose, the assessee had entered into four separate and independent agreements with the following four non-resident companies, namely, 'A', 'M', 'B' and 'L', incorporated in UK, U.S.A., Thailand and Singapore respectively. During the relevant previous years, the assessee made payments to the above companies for consultancy without deduction of tax at source under section 195. The assessee on being asked by the Assessing Officer to show cause as to why it should not be treated as an assessee in default within the meaning of section 201(1) for its default to deduct tax at source furnished detailed explanation contending that the services rendered by the aforesaid companies constituted professional services, which were outside the scope of tax in India, and that the payments made for the interior designer consultancy, landscape architectural services, etc., were not part of 'included services' or 'technical services' in accordance with the relevant DTAA entered into by India with the respective countries of the payees and, as such, withholding tax was not permissible in respect of the payments made by it. The Assessing Officer not finding merit in the explanation of the assessee passed order under section 201(1) treating the assessee as an assessee in default and raised demand of tax against it. He observed that 'M' was in the business of design and construction consultancy and the assessee had engaged it for rendering technical services in various fields. He further referring to the DTAA between India and USA, wherein technical service was covered under 'fees for included services' which could be taxed both in the Contracting State and the other Contracting State, concluded that the services provided by 'M' fell under the definition of 'included services' as per article 12(4)(a) or 12(4)(b) of the DTAA. Therefore, the payment made to 'M' was liable to be taxed in India. The Assessing Officer with regard to the payment made to 'A', U.K. observed that 'A' had been assigned the work of design, documentation, preparation of floor plan, lighting layouts, and this nature of work required technical knowledge and application of technical knowledge, experience and skill. Therefore, it would fall within the definition of 'fees for technical services' as per the article 13(4) and 13(4)(c) of the DTAA between India and UK and would not fall under article 15 of the DTAA. Hence, the assessee was required to deduct tax at source at the time of making payment to 'A'. The Assessing Officer with regard to the payment made to 'B'. Thailand, which was engaged in the business of landscape architectural consultancy, was of the opinion that though the DTAA between India and Kingdom of Thailand did not clearly spell out the taxation of fees for technical services, the amount paid by the assessee to 'B' would fall within the purview of article 22 of the DTAA, which is residuary clause dealing with other income not expressly dealt in other articles of DTAA. The agreement between 'B' and the assessee and invoices showed that 'B' was engaged for conceptual design, design development services, construction documents and construction of administration. The services rendered covered a wide spectrum of activities and constituted an integrated package of technical and management services and could neither be regarded as professional services or independent services covered under article 14 of DTAA and the exemption or exclusion contained thereunder. He further observed that even if the payment made to 'B' was treated as fees for professional services or independent activities within the meaning of article 14 of the DTAA, then also such fees could be taxed in India under the provisions of the Income-tax Act, because the exemption provided under article 14 was available only to such payments, which were not borne by an enterprise or a permanent establishment situated in India. In the instant case, the payment to 'B' had been made by an enterprise situated in India and, accordingly, the non-resident company 'B' was not entitled to claim any exemption on the strength of article 14 of the DTAA. He also stated that the instruction contained in CBDT Circular No. 333 (F. No. 506/42/81-FTD), dated 2-4-1982 was in effect complementary to article 22 on the DTAA. He, therefore, invoked the provisions of section 9(1) read with section 115A(1)(b)(B) and held that the entire payment made to 'B' was chargeable to tax in India.

On appeal, the Commissioner(Appeals) held that the payment made to 'M' did not come with the ambit of 'fees for included service' inasmuch as 'M' had only reviewing the existing facilities available in the hotel of the assessee and to suggest further improvement so as to bring it to the level of an International standard. Hence, the services rendered by 'M' were nothing but in the nature of advisory and review services so that the existing facilities available in the hotel could be elevated to the Marriot's standards. Therefore, there was no application of provisions of section 195 in respect of payment to 'M'. He further held that insofar as the payment made to 'L', Singapore was concerned, the services rendered by 'L' were in the nature of independent personal services and for this reason and in view of the DTAA between India and Singapore, according to which the payment made by the assessee was taxable in the other Contracting State i.e., Singapore and not in India, TDS provisions were not applicable in respect of the payment made to 'L'. He, however, upheld the action of the Assessing Officer in treating the assessee as an assessee in default with regard to payment made by it to 'A', U.K. He with regard to the payment made to 'B', Thailand held that the payment relating to construction/administration amounting to US $ 30,000 was not in the nature of fees for technical services, because as per the agreement between 'B' and the assessee this part of the job required the contractor only to attend and inspect as well as review periodically the work in progress. This part of the job did not envisage making available any technical knowledge or design, drawings, documents, etc. The other three areas of work required application of technical knowledge, certain amount of technical input and also preparation of drawings and designs and making available of the same. Accordingly, the amount being paid for conceptual design, design development and construction documents would come within the purview of fees for technical services. As regards mobilization fee, this fee being a sort of advance payment for starting the work could be distributed under the four heads and the proportionate amount should be allocated to construction observation/administration and the proportionate amount should be excluded for the purpose of TDS for fees for technical services.

On cross appeals :

HELD

Sub-section (2) of section 5 provides that the total income of a non-resident of any previous year shall, subject to the provision of the Act, include all income, from whatever source derived, which (a) is received or is deemed to be received in India by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. The expression 'accrues or arises or deemed to accrue or arise in India, is defined in section 9. [Para 26]

On going through the agreement between 'M' and the assessee, it appeared that 'M' was to review the existing facilities available in the hotel of the assessee at Hyderabad and to suggest further improvement so as to bring it to the level of an international hotel and to be more precise to bring it to the level of Marriot's standards. From the details furnished in the scope of work attached to the agreement, it was clear that the services provided by 'M' were in the nature of advisory and review services so that the existing facilities available in the hotel of the assessee could be elevated to Marriot's standards. [Para 29]

On going through the definition of 'included services' in the DTAA between India and USA so as to find out whether the services rendered by 'M' would fall under the purview of 'included services' as enumerated in article 12(4)(a) and 12(4)(b) of the DTAA, it is clear that article 12(4) emphasizes on rendering any technical or consultancy services which are ancillary and subsidiary to the application or enjoyment of any right, property or information for which a payment is received or make available technical knowledge, experience, skill, know-how or processes or consist of development and transfer of technical plan or technical design. The services rendered by 'M' did not fit into either of the categories defined in article 12(4)(a) or 12(4)(b), since the services did not involve technical expertise, nor did it make available any technical know-how plan, design, etc. What was being done by 'M' was basically inspection of the hotel, reviewing the facilities, comparing the same with Marriot's standards and suggesting improvements/change wherever required to meet the Marriot's standard. [Para 31]

In view of the above, it was clear that what was made available by 'M' to the assessee was advisory services and opinion for improvement of the existing facilities. It was also mentioned by the Assessing Officer in the assessment order that the services rendered by 'M' included advisory services and reviewing of the design documents prepared by the owner or owner's consultant to verify compliance with Marriot's standards. It was thus clear that 'M' itself was not preparing and transferring any drawing, designs, technical plan, etc. It was simply reviewing, what was being done by the parties engaged for designing upgrading the hotel. Therefore, the payment made to 'M' would not fall within the ambit of 'fees for included services'. [Para 33]

The payment of US$ 30,000 made to 'B', which was relating to construction administration/conservation, was not in the nature of 'fees for technical services', because as per the agreement between 'B' and the assessee this part of the job required the contractor only to attend and inspect as well as review periodically work-in-progress. This part of job did not envisage making available any technical knowledge or design, drawings, documents, etc. Therefore, the payment of US$ 30,000 to 'B' was not in the nature of 'fees for technical services'. [Para 34]

The services rendered by 'A' and 'B' to the assessee were of similar nature as rendered by 'M'. The services rendered by 'A' were in the nature of advisory services and not of technical services, as there was no transfer of technology but only installation of electrical fittings. Hence, the payment made to 'A' was not liable to be taxed in India. Similarly, the payment made to 'B' for rendering services of landscape architectural consultancy was not covered as per the DTAA between India and Kingdom of Thailand, since there is no article in the relevant DTAA dealing with this nature of payment. There is only one article dealing with royalties and another dealing with business profit. Under article 7 of the DTAA, income earned by a non resident in India under the head 'business' can be taxed in India only if the non resident has a Permanent Establishment (PF) in India. Permanent establishment means branch or permanent office located in India. However, the business was carried on by 'B' through employees and there was no record that these employees stayed in India for more than 180 days. Accordingly there was no PE of 'B' in India. Therefore, the business profit of 'B' could not be taxed in India. Hence, the provisions of section 195 were not applicable to the instant case. Therefore, the assessee could not be treated as an assessee in default within the meaning of section 201(1) . [Para 42]

CASE REVIEW

Raymond Ltd. v. Dy. CIT [2003] 86 ITD 791 (Mum.) (para 32) and Dy CIT v. Boston Consulting Group Pte. Ltd. [2005] 94 ITD 31 (Mum.) (para 32) followed.

CASES REFERRED TO

Carborandum Co. v. CIT [1977] 108 ITR 335 (SC) (para 12), CIT v. Toshoku Ltd. [1980] 125 ITR 525/4 Taxman 1 (SC) (para 12), Raymond Ltd. v. Dy. CIT [2003] 86 ITD 791 (Mum.) (para 17), Dy CIT v. Boston Consulting Group Pte. Ltd. [2005] 94 ITD 31 (Mum.) (para 17), C.E.S.E. Ltd. v. Dy. CIT [2005] 275 ITR (AT) 15 (Kol.) (para 17), Tekniskil (Sendirian) Berhard v. CIT [1996] 222 ITR 551/88 Taxman 439 (AAR - New Delhi) (para 43), Horizontal Drilling International v. CIT [1999] 237 ITR 142/103 Taxman 447 (AAR - New Delhi) (para 43), Software Technology Parks of India v. ITO [2005] 3 SOT 529 (Bang.) (para 43), Royal Airways Ltd. v. Addl. DIT [2006] 98 ITD 259 (Delhi) (para 43), Skycell Communications Ltd. v. Dy. CIT [2001] 251 ITR 53/119 Taxman 496 (Mad.) (para 43), CIT v. Neyveli Lignite Corpn. Ltd. [2000] 243 ITR 459/109 Taxman 369 (Mad.) (para 43), ITO v. Sriram Bearings Ltd. [1997] 224 ITR 724 (SC) (para 44), CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146/15 Taxman 72 (AP) (para 44), Asstt. CIT v. Malayala Manorama Co. Ltd. [2005] 1 SOT 739 (Coch.) (para 44), National Organic Chemical Industries Ltd. v. Dy. CIT [2006] 5 SOT 317 (Mum.) (para 44) and Royal Airways Ltd. v. Addl. DIT [2006] 98 ITD 259 (Delhi) (para 44).

Amlan Tripathy for the Appellant. P. Murali Mohan Rao for the Respondent.

ORDER

Chandra Pooiari, Accountant Member. - There are five appeals in all in this bunch. Besides the appeal of the Revenue for the assessment year 2003-04, which is directed against the order of the CIT(A)-II, Hyderabad dated 26.12.2006, there are cross appeals preferred by the assessee as well as the revenue for the assessment years 2003-04 to 2005-06, which are directed against the common order passed by the CIT(A)-II, Hyderabad dated 25-1-2007. Since common issues are involved, these appeals were heard together and are being disposed off by this common order for the sake of convenience.

2. The only issue involved in these appeals relates to the legality and validity of the orders passed by the Assessing Officer for the years under appeals under section 201(1) and 201(1A) of the Act, treating the assessee as an 'assessee-in-default' and raising a demand of Rs. 7,41,944 for the assessment year 2003-04 and of Rs. 25,95,736 for assessment year 2004-05 and of Rs. 73,14,584 for the assessment year 2005-06, representing the sum of tax, which according to the Assessing Officer the assessee was liable to deduct but failed to deduct, and the interest under section 201(1A) thereon.

3. Brief facts of the case are that the assessee, engaged in the business of running a Five Star Hotel in the name of "VICEROY", was being converted into Marriot Chain Hotel under the franchise granted by the International Licensing Company SARL (Marriot USA). To meet the standard for Marriot group the assessee embarked upon an expansion programme by way of adding new blocks in the hotel and also upgradation by way of bringing about interior and exterior changes, landscaping etc. And for this purpose the assessee has entered into four separate and independent agreement with :

1. Anthony Corbett & Associates UK

2. Marriot International Design & Constructions USA

3. Bensly Design Group international Construction Company Ltd., Thailand

4. Lim Hong Lian Singapore

4. During the course of survey operation u/s 133A of the Act, conducted on the business premises of the assessee it was found that the assessee had made payments to the above non resident consultants without deducting tax at source u/s 195 of the Act. Accordingly, the assessee was called upon to show cause as to why it should not be treated as an assessee in default within the meaning of section 201(1) of the IT Act for its default to deduct tax at source. The assessee has furnished detailed explanation containing inter alia that the services rendered by the above non resident consultants constitute professional services which are outside the scope of tax in India and that the payments made for the interior designer consultancy, landscape architectural services etc. are not part of 'included services' or 'technical services' in accordance with the relevant double taxation treaty entered into by India with the respective countries of the payees and as such withholding tax is not permissible in respect of the payments made by the assessee. Not finding merit in the explanation of the assessee, the Assessing Officer passed the impugned orders u/s 201(1) and 201(1A) read with section 195 of the IT Act dated 29-11-2005 raising a demand of Rs. 7,41,944 (which is inclusive of interest u/s 201(1A) of Rs. 1,43,592) for the assessment year 2003-04. Similarly, for the assessment year 2004-05 the Assessing Officer raised a demand of Rs. 25,95,736 (inclusive of interest u/s 201(1A) of Rs. 4,98,034) vide his order dated 29-11-2005 : and for the assessment year 2005-06, the Assessing Officer raised a demand of Rs. 73,14,584 (inclusive of interest u/s 201(1A) of Rs. 8,22,839) vide his order dated 29-11-2005. However, for the assessment year 2005-06, the Assessing Officer passed an order dated 6-3-2006 u/s 154 of the Act whereby demand payable was determined at Rs. 70,28,155(inclusive of interest u/s 201(1A) of Rs. 8,06,310) , which after adjusting the amount paid on 16-2-2006 of Rs. 1,62,320 , was determined at Rs. 68,65,835.

5. On appeal, as far as the assessment year 2003-04 is concerned, the CIT(A) vide his order dated 26-12-2006 holding that the payment made by the assessee to Marriot International Design and Construction Services does not come within the ambit of 'fees for included service' , concluded that the Assessing Officer was not justified in treating the assessee as an assessee in default and raising a demand of Rs. 7,41,944 and accordingly, cancelled the order of the Assessing Officer passed u/s 201(1) and 201(1A) of the Act. Aggrieved by the order of the CIT(A) for this year, the Revenue preferred appeal in ITA No.401/H/2007.

6. As far as the appeals for the assessment years 2004-05 and 2005-06 are concerned, the CIT(A), on appeal, held that in so far as the payments made by the assessee to M/s Marriot International, USA and M/s Lim Hong Lian, Singapore are concerned, the Assessing Officer was not justified in treating the assessee as an assessee in default. As for the payments made to Marriot International, USA, the CIT(A) following his order for the assessment year 2003-04 dated 26-12-2006 held that the services rendered by M/s Marriot International do not come within the ambit of 'fees for included services'. As for the payments made to M/s Lim Hong Lian, Singapore, he concluded that the services are in the nature of independent personal services and for these reasons and in view of the DTAA between India and Singapore, according to which the payment made by the assessee is taxable in the other contracting state i.e., Singapore and not in India, TDS provisions are not applicable. The CIT(A) however, upheld the action of the Assessing Officer in treating the assessee as an assessee in default with regard to payments made by it to M/s Anthony Corbett & Associates, UK. As per the payments made to M/s Bensley Design Group, Thailand the CIT(A) after a detailed discussion in Paras 2.3.4 and 2.3.4A, 4B, 4C ultimately concluded as follows :

"Thus, in the agreements itself the payment in respect of each segment of the scope of work has been clearly defined and allocated. After going through the scope of work in the agreement he is of the view that the payment relating to construction/administration amounting to US $ 30000 is not in the nature of fees for technical services because as per the agreement this part of the join required the contractor only to attend and inspect as well as review periodically the work-in-progress. This part of the job does not envisage making available any technical knowledge or design, drawings, documents etc. The other three areas of work required application of technical knowledge, certain amount of technical input and also preparation of drawings and designs and making available of the same. Accordingly, the amounts being paid for conceptual design, design development and construction documents would come within the purview of fees for technical services. As regards mobilisation fees, this fee being a sort of advance payment for starting the work can be distributed under the four heads and the proportionate amount should be allocated to construction observation/administration and the proportionate amount should be excluded for the purpose of TDS for fees for technical services".

7. Dealing with rate of tax deduction at source in para 2.3.4D of his order the CIT(A) noted that the Assessing Officer has adopted a rate of TDS at 40% + surcharge considering it as 'any other income'.

8. However, the CIT(A) is of the view that, if at all the income arising the non income to be taxed as 'fee for technical services' and the tax payable thereon would not exceed 20% as per the special provisions of the Act.

9. Thus, as far as the payments to Bensley Design Group, Thailand is concerned the CIT(A) held that it is only the payments which are in the nature of 'fee for technical services' are liable to deduction at source by the assessee and the rate of tax shall not exceed 20% .

10. Aggrieved by the action of the CIT(A) in upholding partly the orders of the Assessing Officer passed u/s 201 & 201(1A) read with section 195 of the Act, the assessee preferred its appeals in ITA Nos.436 & 437/H/2005, whereas contesting the relief granted by the CIT(A), the Revenue preferred its appeals in ITA Nos. 401, 482 & 483/H/2007.

First we will take up the Revenue appeals in ITA Nos. 401, 482 & 483/H/2007.

11. As per the Assessing Officer, during the accounting year under consideration, the assessee deductor had engaged a non-resident consultant, M/s. Marriott International Design & Construction Services, a company incorporated in USA, for rendering technical services in various fields. The company is in the business of design and construction consultancy. As no explanation was furnished by the assessee for non-deduction of tax from the payment made the Assessing Officer concluded that the assessee deductor had conceded the default. The Assessing Officer has referred to the DTAA between India and USA wherein technical services is covered under "fees for included services" which can be taxed both in the contracting state and the other contracting state. The Assessing Officer concluded that the services provided by Marriot fall under the definition of "included services" as per Articles 12(4) and 12(4)(b) of the DTAA. The Assessing Officer observed that the decision relied upon by the assessee is not applicable to the facts of the case. Accordingly, the Assessing Officer held that the payment made by the assessee was liable to be taxed in India and since the assessee had failed to discharge its statutory obligation, it should be treated as an "assessee in default" u/s 201(1) r.w.s. 195 of the Act. Since the assessee deductor had agreed to bear the tax payable by the non-resident, the Assessing Officer grossed up amount, included in the interest u/s. 201(1A) and raised a total demand of Rs. 7,41,944.

12. On appeal, the CIT(A) in his order dated 26-12-2006 for the assessment year 2003-04 held that Marriot International has only reviewing the existing facilities available in Viceroy Hotel and to suggest further improvement so as to bring it to the level of an International standard. He drew conclusion that Marriot International has given the advice relating to various areas in the hotel premises. The service rendered by Marriott International is nothing but in the nature of advisory and review services so that the existing facilities available in the hotel can be elevated to the Marriot standards. He relied upon a case law Carborandum Co. v. CIT [1977] 108 ITR 335 (SC) and CIT v. Toshoku Ltd. [1980] 125 ITR 525/4 Taxman 1 (SC) wherein it was held that if under an agreement between a non-resident and a resident, all the services are rendered by the non-resident outside India (as an agent of the resident), no part of the payment for such services would be deemed to accrue in India u/s 9(1)(i) even if the agreement gives rise to a business connection.

13. Further he observed that even if there is a business connection in India and some activities are carried out in India, the entire profit arising from that business connection will not be deemed to accrue in India. Explanation 1(a) to section 9(1)(i) expressly provides that only such part of the income as is reasonably attributable to the operation carried out in India shall be deemed to accrue in India and be taxable in India. In each case, the quantum has to be decided on the facts and circumstances of the case.

14. In view of the above, he held that provisions of section 195 are not applicable. Accordingly, he held that there is no application of provisions of section 201(1) and 201(1A) of the I.T. Act in respect of payment to Marriot International Design & Construction Services, USA in the assessment years 2003-04, 2004-05 and 2005-06. Against this finding the Revenue is in appeal before us. Further, for the assessment years 2003-04, 2004-05 and 2005-06, the Revenue is having a grievance against admission of crucial evidence in the form of agreement between Marriot International and the assessee company without giving opportunity to the Assessing Officer to examine this evidence in terms of Rule 46A of Income-tax Rules, 1962. For the assessment years 2004-05 and 2005-06 the Revenue is also in appeal before us with regard to finding of CIT(A) that the condition of making available of technical knowledge etc., is not satisfied in respect of US$ 30,000 payable to Bensley Design Group International Consulting Company, Thailand, though the CIT(A) having accepted that there is no specific article dealing with 'fee for technical services' in Indo-Thailand DTAA.

15. The learned DR submitted that the assessee company runs a five star hotel in the name of 'Hotel Viceroy'. This hotel was converted into a 'Marriott Chain Hotel' under a franchise granted by International Licensing Company SARL (Marriott), USA. In order to meet the standards set by Marriott Group the assessee company spent substantial amounts on civil works, interior decoration, furnishings, landscaping etc. To this effect the assessee company made payments to the following 4 parties.

5. Anthony Corbett UK

6. Marriot International Design & Constructions USA

7. Bensley Design Group International Construction Company Ltd. Thailand

8. Lim Hong Lian Singapore

16. He submitted that the order passed u/s 201(1), the Assessing Officer held that an amount of Rs.23,93,407 has been remitted to M/s Marriott International Design and Construction Services Inc. USA without deduction of tax at source. The Assessing Officer held that the remittances constitute 'fees for included services' within the meaning of Article 12 of Indo US DTAA and worked out the short deduction together with interest u/s 201(1A) at Rs. 7,41,944. In the process, the Assessing Officer gross up the remittance vide adopting the rate of deduction at 20%. Later vide order u/s 154 passed on 6-3-2006 worked out the short deduction by adopting the tax rate of 15% + surcharge. The revised demand including interest u/s 201(A) and 220(2) was worked out at Rs. 5,60,356.

17. He submitted that the CIT(A) after going through the agreements signed by the assessee company with Marriott International held that the payment was made for the review of existing facilities available in the Viceroy Hotel by the team from Marriott International and to suggest necessary improvements to bring it to the level of an International Hotel as per Marriott standards. The CIT(A) further held that the services rendered by the Marriott do not fit into either of the categories defined in Article 12(4)(a) or 12(4)(b) since the services do not involve technical expertise or make available any technical know-how, plan, design, etc. According to DR the learned CIT(A) wrongly relied on the following case law :

1. The example given in MOU in the DTAA between India and USA

2. Raymond Ltd. v. Dy. CIT [2003] 86 ITD 791 (Mum.).

3. Dy. CIT v. Boston Consulting Group (P.) Ltd. [2008] 94 ITD 31 (Mum.).

4. C.E.S.E. Ltd. v. Dy. CIT [2005] 275 ITR (AT) 15 (Kol.).

18. He submitted that the CIT(A) wrongly concluded that no technology or technical skill was transferred to the assessee by the Marriott International. The CIT(A) erred in concluding that the Article 12(4) contemplates only 'transfer' of technology or technical skill. The words used in the Article are 'make available' of technical knowledge, experience, skill, know-how etc., the CIT(A) did not appreciate that 'make available' and 'transfer' are quite distinct.

19. He submitted that the CIT(A) erred in not appreciating that the scope of services rendered by Marriott International would fit into the definition of fees for included services as per Article 12 of DTAA. From the extracts of the agreement between the assessee company and Marriott International it can be noticed that the scope of work is not just review as sought to be made out by the CIT(A). The scope of work as extracted in the CIT(A) order includes technical review services including the following :

1. Determination of the condition, specification and status of FF&E, fixex assets supplies and inventories

2. Engineering, fee and life safety and environmental review by MIMCO, its affiliates and consultants

3. Specification of all signage changes

4. Advising VHL on the standards, aesthetics and systems necessary for the hotel to be operated as MHRS International Hotel

20. He submitted that the CIT(A) himself has mentioned that the consultant company has reviewed the present condition of the hotel and made number of suggestions in the form of a report which reads as follows :

"A number of suggestions have been given in that report relating to improvements in the property perimeter, hotel main reception and lobby, front desk, public rest room, elevator lobby, elevator cab, hotel assembly area, hotel food and beverage, hotel recreation facilities, guest room and suite, mechanical, electrical and plumbing design, etc."

21. He also submitted that suggestions have been made by Marriott International to the assessee company for reconfiguring the car parking to the main drive way, for new drive way lighting, for landscaping etc. Extensive works were carried out by the hotel to bring it to the Marriott's standards and it would not be incorrect to conclude that the works done was based on the review report submitted by the Marriott International. The Memorandum of Understanding dated 15-5-1989 concerning fees for included services in article 12 of DTAA between India and USA describes in some detail the category of services which would come within the meaning fee for included services. In this MOU the following services are mentioned in fall in this category.

(i) Engineering services including sub-categories of bio engineering and aeronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical and industrial engineering

(ii) Architectural services

(iii) …………

22. From the above he drew inference that the scope of work undertaken by the Marriott International would fit into the category of civil, electrical and architectural services mentioned in the MOU. Since the result of the review was made available to the assessee Company and substantial work based on the service given by Marriott International has been done in renovating the hotel and bringing into the standards required of Marriott chain, it satisfies the stipulation of making available the technical knowledge, skill, experience, etc. Mentioned in Article 12(4)(b).

23. He submitted that the agreement entered into between the assessee company and Marriott International (MIMCO) which was relied upon by the CIT(A) was not made available to the Assessing Officer, at the time of seeking the remand report. The Assessing Officer in his order passed u/s 201(1) on 29-11-2005 has in para 3.1., extracted certain clauses from an agreement entered into between the assessee company and Marriott International Design and Construction Services, Inc. (MIDCS). This agreement is titled as 'Interim Advisory Services Agreement' and was executed on 29-1-2003 copy of this agreement was available with the Assessing Officer. However, the agreement relied upon by the CIT(A) is titled as pre-conversion technical service agreement entered into between the assessee company and Marriott International Management Company BV (MIMCO) and was executed on 9-9-2003. This agreement was not made available to the Assessing Officer and as such the CIT(A) ought not to have considered this agreement without giving an opportunity to the Assessing Officer to examine the same. Therefore, the provisions of Rule 46A(3) are not satisfied. This agreement by the Assessing Officer subsequent to finalisation of appeal would show that the services rendered by MIMCO would definitely fit into the scope of 'fee for included services' defined in article 12(4) of Indo - US DTAA. The scope of services which are titled as 'Technical Review Services' in para 2.2. of CIT(A) have already been discussed in paras 5 and 6 above. He submitted that as per para 2.3 (iii) CIT(A)'s under Article 2 of this agreement, the MIMCO will 'make provisions to provide a task force of technical personnel on the conversion date to supervise and assist the pre-conversion and conversion operations. This clause proves that the services rendered by MIMCO was not limited to preparation of a review report alone as held by the CIT(A). The scope of work under this agreement is detailed in exhibit- A. The team which conducted the study included professionals such as Vice President of operations, Director of design management, senior interior design director, engineering consultant and a land scope specialist which also prove that the services rendered are of technical in nature. The report which is contained in exhibit - A annexed to the agreement suggested that major changes in the infrastructure of building, civil works, electrical and plumbing designs. This report was made available to the assessee company and the assessee company carried out extensive works based on the recommendations contained in this report. Therefore, the findings of the CIT(A) that the services rendered by the MIMCO was only to review is not based on facts. The CIT(A) has relied upon the decisions and observed that unless the services are technical in nature, it does not satisfy the provision in the article 12(4)(b) regarding transfer of technology or technical skill. The services rendered by the Marriott International squarely fit into the definition of fees for included services as defined in Article 12(4) of the Indo US DTAA. According to the DR, notwithstanding this that the reliance placed on the decision in case of M/s Raymond Ltd. and Boston Consulting Group (P.) Ltd. are not justified since the facts before the Tribunal in these cases are quite distinguishable. The facts in the case of CESE Ltd. quoted by the CIT(A) also quite distinguishable and are not applicable to the facts of the present case. He submitted that during the assessment proceedings, the assessee had only produced 'Interim Advisory Services Agreement' dated 29-1-2003 entered into between the assessee company and Marriott International Design and Construction Services, Inc. (MIDCS) which has been duly considered by the assessing officer in his order.

24. On the other hand the learned AR submitted that the assessee had entered into agreement with the Marriott International for rendering professional services in connection with the upgradation of the hotel. As per the agreement, Marriott was to provide advisory services for design, conversion, furnishing and equipping of the hotel including advising owners and owner's consultant on Marriott standards on the aesthetics and systems necessary for the hotel to be operated as a Marriott Hotel, and reviewing the design documents prepared by owner and owner's consultant to verify compliance with Marriott standards. The services were provided from outside the country and in view of the above; the assessee was not liable for tax deduction at source for the amount paid for such services. He relied on the judgment of Supreme Court in the case of Carborandum Co. (supra) and Toshuku Ltd. (supra) wherein it was held that if under an agreement between a non-resident and a resident, all the services are rendered by the non-resident outside India (as an agent of the resident) no part of the payment for such services would be deemed to accrue in India u/s 9(1)(i), even if the agreement gives right to a business connection.

25. He submitted that the payment made to M/s Marriott will not come within the purview of including services as defined in Article 12(4) of the India US Treaty. He drew our attention to the Memorandum of Understanding between India and USA in connection with the DTAA, he stated that the American Company is not making available its technical knowledge or experience to the Hyderabad Company nor is it transferring any technical plan to the Indian Company. It is simply giving advise to the Indian Company. He also stated that the services rendered by the American Company is part of their business activity, but there being no Permanent establishment in India that the same cannot be taxed in India. According to him, the amount received by the American Company Marriott International Design and Construction Services Inc., does not constitute fees from included services and is thus exempt from taxation in India and also exempt from the provisions of TDS. According to him the remittance made to the American Company do not fall within the scope of Article - 12(4)(a) or 12(4)(b) of the DTAA between India and USA and American Company had not made available any technical knowledge or experience or transferred any technical plan to the assessee company except giving advice to the assessee company.

26. We have heard both the parties and perused the materials available on record. We have also carefully gone through the case law cited by parties. Sub-section 2 of section 5 of the IT Act, provides that the total income of a non-resident of any previous year shall, subject to the provisions of the Act, include all income, from whatever source derived, which (a) is received or is deemed to be received in India by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. We are concerned herewith clause (b) of sub-section (2) of section 5. The expression "accrues or arises or deemed to accrue or arise in India" empowered in Clause (b) of sub-section (2) in section 9 of the Act. The relevant provisions of section 9, which need our attention, is clause (1) (i) which is extracted hereunder:

Income deemed to accrue or arise in India :

9 (1) The following incomes shall be deemed to accrue or arise in India:

(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India or through the transfers of a capital asset situate in India.

Explanation:

For the purposes of this clause:—

(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India.

(b) in the case of non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export.

(c) In the case of non-resident, being a person engaged in the business of running a new agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India

(d) In the case of non-resident being —

(1) an individual who is not a citizen of India or

(2) a firm which does not have any partner who is a citizen of India or who is resident in India or

(3) a company which does not have any shareholder who is a citizen of India or who is resident in India no income shall be deemed to accrue or arise in India to such individual, firm or company through or from operations, which are confined to the shooting of any cinematograph film in India

Explanation 2:

For the removal of doubts, it is hereby declared that 'business connection shall include any business activity carried out through a person who acting on behalf of the non-resident:

(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident or

(b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident or

(c) habitually secures order in India, mainly or wholly for the non-resident or for the non resident and other non-residents controlling, controlled by, or subject to the same common control, as the non resident.

Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business :

Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (herein after in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal non-resident he shall not be deemed to be a broker, general commission agent or an agent of an independent status.

Further, for better understanding, it is necessary to go through the agreement signed by the assessee company with Marriott International. The relevant para of the article 2 of the agreement reads as follows:

27. We have also carefully gone through the Article 2.2(a) of the agreement between Marriott International and Viceroy Hotel which deals with the services have to be rendered by the Marriott International; Article 2.2(a) reads as follows:

Based on limited inspection and technical review conducted by Marriott prior to the effective date the requirements of converting the hotel to MHRS International Hotel as on the conversion date are anticipated to be set forth in the scope of works. To the extent no otherwise completed prior to effective date, however representatives of MIMCO and its affiliates have the right to conduct further inspections of the hotel at reasonable times upon prior notice to VHL in order to ascertain additional requirements, if any, to convert the hotel in accordance with Marriott Systems standards. Such technical review services may include without limitation, the following :

(1) Determination of the condition, specification and status of FF&E, fixed assets supplies and inventories

(2) Engineering, fire and life safety and environmental review by MIMCO, its affiliates and consultants

(3) Specification of all signage changes

(4) Advising VHL on the standards, aesthetics and systems necessary for the hotel to be operated as MHRS international hotel

28. Regarding pre conversion activities, it has been stated in Article 2.3. of the Agreement that MIMCO will review and approve existing concession contracts and leases for retail and lobby space within the hotel, review and consult with VHL on VHL's proposed pre-conversion promotion and related activities etc. Even in the scope of work, attached to the agreement, a copy of the survey conducted in March 2003, by the Marriott Team has been detailed. It is stated in that report that the primary objective of the survey is to review the present condition of Viceroy Hotel and to present a scope for its conversion to Marriott Hotel. A number of suggestions have been given in that report relating to improvements in the property perimeter, hotel main reception and lobby, front desk, public rest room, elevator lobby, elevator cab, hotel assembly area, hotel food and beverage, hotel recreation facilities, guest rooms and suite, mechanical electrical and plumbing design etc.

29. From the above, it is clear that Marriott International, the American Company was to review the existing facilities available in Viceroy Hotel at Hyderabad and to suggest further improvement so as to bring it to the level of an international hotel and to be more precise to bring it to the level of Marriott's standards. From the details furnished in the scope of work attached to the agreement, it is clear that Marriott has given the advice relating to various areas in the hotel premises. For example, it has suggested regarding car parking to reconfigure the main drive way to provide a wider drive way with only single length of car parking space. Similarly, it has suggested providing new drive way lighting. It has also advised to provide Marriott sign on the roof top. It has advised to enhance the existing outdoor landscaping by adding additional plants to give the garden a lusher fill. Similar suggestions have been given for Hotel Assembly area, Hotel Food and Beverage, Hotel Recreation etc. Thus, from the scoped of work it appears that the services provided by Marriott International is in the nature of advisory and review services so that the existing facilities available in the hotel can be elevated to Marriott standards. It is necessary to go into definition of included services in Indo US treaty so as to find out whether the services rendered by Marriott fit into the definition of included services in Articles 12(4)(a) and 12(4)(b) of the Treaty.

30. We have also gone through the definition of 'included services in Indo US Treaty so as to find out whether the services rendered by Marriott will fall under the purview of included services as enumerated in article 12(4)(a) and 12(4)(b) of the Treaty :

Article 12(4) of the Indo US Treaty reads as below:

For the purpose 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 and 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, knowhow or processes or consist of the development and transfer of a technical plan or technical design.

31. Thus Article 12(4) emphasises on rendering any technical or consultancy services which are ancillary and subsidiary to the application or enjoyment of any right, property or information for which a payment is received or make available technical knowledge, experience, skill, know how or processes or consist of development and transfer of technical plan or technical design. The services rendered by Marriott do not fit into either of the categories defined in 12(4)(a) or 12(4)(b) since the services do not involve technical expertise nor does it make available any technical know-how plan, design etc. What is being done by Marriott is basically inspection of the hotel, reviewing the facilities, comparing the same with Marriott's standards and suggesting improvements/change wherever required to meet the Marriott standard. Generally speaking technology will be made available when the person acquiring the service is enabled to apply the technology. The fact that the provision of service may require technical input by the person providing the service does not per se mean the technical knowledge, skill etc., are made available to the person acquiring the service within the meaning of Article 12(4)(a). An example (example 7) given in the Memorandum of Understanding will further elucidate the issue. In this example, an Indian Vegetable Oil Manufacturing firm wished to market its product worldwide for which it hired an American Marketing Consulting Firm to do a Computer Simulation of the World Market and advise the Indian company on the marketing strategy. On the issue whether the fees paid to the US Company will be for included services, it has been stated that the fees would not be for included services. The American Company is not making available to the Indian Company any technical knowledge, experience and skill nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. The fact that Technical skills were required by the performer of the service in order to perform commercial information service does not make the service a technical service within the meaning of Article 12(4)(b).

32. Further we find that similar issue has also been decided in the case of Raymond Ltd. (supra) wherein the ITAT, Mumbai has dealt in detail the concept of 'make available' and have opined that the technical knowledge, experience, skill etc. must remain with the person utilising the services even after rendering of the services comes to an end. Similar view was also expressed by Hon'ble Mumbai in the case of Boston Consulting Group (P.) Ltd. (supra) wherein the Tribunal observed that :

Unless the services are technical in nature, there cannot be any question of 'technology' being contained therein which the person acquiring the services can be enabled to apply. Therefore, so far as the provisions of India Singapore Tax Treaty as also the provisions of India US Tax Treaty are concerned, payment for services not containing any technology, are required to be treated as outside the scope of 'fees for technical services".

Rendering technical or consultant services or services make available means that technical or consultant services rendered should be of such nature that 'makes available' to the recipient technical knowledge, know-how and the like. The service should aimed at and result in transmitting the technical knowledge, etc. so that the payer of services could derive an enduring benefit and utilise the knowledge or know-how in future on its own without the aid of the service provider. By making available technical skills or know how, the recipient of service will get equipped with that knowledge or expertise and be able to make use of it in future, independent of the service provider. In other words, to fit into the terminology 'fees for included services', the technical knowledge and skills etc., must remain with the person receiving the services even after the particular contract comes to an end. The services offered may be the product of intense technological effort and a lot of technical knowledge and experience of the service provider would have into it. But that is not enough to fall within the description of 'fees for included services'. 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 future without depending on the provider. For example, a prescription and an advise given by the doctor after examining the patient and going through the clinical reports, the service rendered by the doctor cannot said to have made available to the patient, the knowledge and expertise possessed by the doctor. On the other hand, if the same doctor teaches or trains student on the aspect of diagnosis or techniques of surgery, that will amount to making available the technical knowledge and experience of the doctor.

In the case of Carborandum Co. v. CIT [1977] 108 ITR 335 (SC), a foreign company entered into an agreement with an Indian company for rendering technical and know how services to the Indian company. In lieu of those services, the foreign company was to receive from the Indian company an annual fee equal to three per cent of the net sale proceeds of the products manufactured by the Indian company every year. The question was how much of the money received by the foreign company would be taxable under the provisions of the Act. The Indian company employed personnel made available by the foreign company, who worked under the direct control of the Indian company. The Supreme Court held that the services of the foreign company in making the employees available were rendered wholly outside India and that the activities of the foreign personnel lent or deputed by the foreign company did not amount to a business activity carried on by the foreign company in India. It was further held that the fee did not accrue or arise in India nor could it be deemed to have accrued or arisen in India and that to rope in the income of the non resident under the deeming provision of section 42(1) of the 1922 Act it must be shown by the department that some of the operations were carried out in India in respect of which the income is sought to be assessed.

In the case of Addl. CIT v. New Consolidated Gold Fields Ltd. [1983] 143 ITR 599 (Pat.), the assessee company and the foreign company entered into an agreement under which the foreign company was to be technical adviser of the assessee company in the matter of exploration, mining and mineral dressing operations. The foreign company was to be paid a retainer's fee at the rate of $7,000 per annum in London. The Income Tax Officer treated the assessee company as the agent of the foreign company within the meaning of section 163 of the income tax act and treated $7,000 payable by the assessee company to the foreign company as its income accruing in the hands of the assessee company. On appeal, the Appellate Assistant Commissioner held that even if the assessee company was to be treated as an agent within the meaning of section 163(1), there was no business connection within the meaning of section 9(1) of the Act so the income accruing to the non resident foreign company could not be assessed through as agent. That order was affirmed by the Tribunal. On a reference to the High Court of Patna, it was held that the sum of $7,000 was not the income with the foreign company had received in India or an income which had accrued to the foreign company within the meaning of section 5(2) of the Act and that the sum paid to the foreign company at London for technical advice given from London could not be attributed to the operation carried on in India. It was further held that there was no continuity between the business of the non resident and the activity in the taxable territories in respect of the income and, therefore, there was no business connection between the foreign company and the assessee company and the income could not be deemed to accrue or arise to the foreign company in India within the meaning of section 9(1) as such, the said sum paid to the foreign company at London was not assessable in the hands of the assessee company even as agent of the foreign company.

In the case of C.E.S.E. Ltd. v. Dy. CIT [275 ITR (AT) 15], Hon'ble Calcutta Tribunal have held that, if the services provided was of mere reviewing and opining rather than designing and directing the project, no technical knowledge etc., is made available to the assessee. The decision was rendered in the context of Indo UK treaty, but the same can also be applied to interpretation of the phrase 'make available' appearing in Indo US Treaty. The fact of the present case is almost identical to the ones discussed above. As in the case of CESE Ltd., the present case what was being made available to the assessee company was advisory services and opinion for improvement of the existing facilities. Accordingly, in the light of the of ITAT Mumbai & Calcutta, no technology or technical skill is being transferred to the assessee company.

33. In view of the above, in our opinion, in the present case, what was made available to the assessee company was advisory services and opinion for improvement of the existing facilities. It is also noted by the assessing officer mentioned in his order that the services rendered by Marriott which includes advisory services and reviewing of the design documents prepared by the owner or owner's consultant to verify compliance with Marriott's standards. It is thus clear that Marriott themselves are not preparing and transferring any drawing, designs, technical plan etc. They are simply reviewing, what is being done by the parties engaged for designing upgrading the Hotel. In view of this, the fees paid to Marriott International will not fall within the ambit of fees for included services. As such, a provision of section 195 is not applicable. Accordingly, there is no question of application of provisions of section 201(1) and 201(1)(A) of the IT Act.

34. Regarding payment of US $ 30,000 which is relating to construction administration/conservation, it is not in the nature of 'fees for technical services' because as per the agreement this part of the job required the contractor only to attend and inspect as well as review periodically work-in-progress. This part of job does not envisage making available any technical knowledge or design, drawings, documents, etc. Being so, as held in earlier para, we do not find any infirmity in the order of the CIT(A) on this issue also and confirm the order of the CIT(A) on this issue.

35. Further, the grievance of the revenue is that the CIT(A) admitted the crucial evidence in the form of agreement dated 9-9-2003 titled 'Pre conversion technical service agreement' between Marriott International Management Company B.V. (MIMCO) and the see company without giving an opportunity to the assessing officer to examine this evidence in terms of 46A(3) of the IT Rules. The DR submitted that the assessee had produced only 'interim advisory services agreement' dated 29-1-2003 which is entered between the assessee company and Marriott International Design & Construction Services, Inc (MIDCS) which has been duly considered by the assessing officer in his order.

36. We have also carefully considered the argument relating to violation of Rule 46A of the I.T. Rules. Admittedly, in these cases, the CIT(A) called for remand report from the assessing officer and he has submitted his remand report dated 29-11-2005 for the assessment year 2003-04. Similarly, the CIT(A) has called for remand report for the assessment years 2004-05 and 2005-06 which is evident from the Para 2.3.2A of CIT(A) order dated 25-1-2007. Being so, we cannot hold that there is any violation of 46A(3) of the IT Rules. Accordingly, the revenue appeals in ITA Nos.401/H/2007, 482 & 483/H/2007 are dismissed.

37. Now we will take the assessee's appeal in ITA Nos.436 & 437/H/2007. The first common ground in ITA Nos.436 & 437/H/2007 is with regard to non TDS of payment to Anthony Corbett & Associates. According to the assessing officer M/s Anthony Corbett & Associates have been assigned the work of design, documentation, preparation of floor plan, lighting layouts and the lower authorities was of the opinion that this nature of work requires technical knowledge and application of technical knowledge, experience and skill and as such , it will fall within the definition of fees for technical services as per the Article 13(4) and 13(4)(c) of the DTAA between India and UK and will not fall under article 15 of the DTAA and assessee shall require to deduct TDS at the time of making payment and failure to do so, the assessee became an assessee in default in terms of section 201(1) of the Act.

38. The learned AR submitted that the services, which had been rendered by Anthony Corbett & Associates, are of advisory in nature and not of technical services as there is no transfer of technology but only installation of electrical fittings.

39. According to the learned AR, this service is covered by articles 7 and 5 of DTAAs. Under article 7 of the DTAAs, income earned by a non resident in India under the head 'business' can be taxed in India only if the non resident has a permanent establishment in India. Permanent establishment itself is defined in article 7 and it means a permanent branch or a permanent office location in India. If the business is carried on through employees and if those employees stay in India for less than 90 days in the case of UK, there will be no PE in India and the corresponding business profit of the non resident becomes non taxable. In this case, the contract between the assessee and the British company, it was specifically stated that the consultant is engaged in the business of providing professional and consultancy services in architectural lighting design for the proposed renovation and rebuilding of the hotel, as defined in appendix 'A' attached to this contract. As per section 10(6A)(a) where in the case of a foreign company deriving income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31st day of March, 1976 (but before the 1st day of June, 2002) and in any other case where the agreement relates to a matter included in the industrial policy, for the time being in force of the Government of India, such agreement is in accordance with that policy, then the tax on such income is payable, under the terms if the agreement, by an Indian concern to the Central Govt. According to the AR, there is no transfer of any technology from UK company to the assessee company and the service rendered by the UK company does not fit into the scope of Article 13(4)/13(4)(c) of DTAA between India and UK.

40. The next common ground in ITA Nos. 436 & 437/H/2007 is with regard to non deduction of TDS on the amount paid to M/s. Bensly Design, Thailand. This company is engaged in the business of landscape architectural consultancy. The lower authorities were of the opinion that though the DTAA does not clearly spell out the taxation of fees for technical services, the amount paid by the assessee to M/s Bensly group would fall within the purview of article 22 of the Agreement which is residuary clause dealing with other income not expressly dealt in other articles of DTAA. According to lower authorities, the services rendered by Bensly group do not constitute to professional or independent personnel services under article 14 of the DTAA between India and Kingdom of Thailand. According to assessing officer, the agreement and invoices show that the non resident is engaged for conceptual design, design development services, construction documents and construction of administration. The service rendered cover a wide spectrum of activities and constitute an integrated package of technical and management services and can neither be regarded as professional services or independent services and can neither be regarded as personnel service or independent services covered under article 14 of DTAA and the exemption or exclusion contained there under. Without prejudice to this the assessing officer has observed that even if the payments made to the non resident is treated as fees for professional services or independent activities within the meaning of article 14 of the DTAA with Kingdom of Thailand, then also such fees can be taxes under the IT Act. It is because, the exemption provided under article 14 is available only to such payments which are not borne by an enterprise or a permanent establishment situated in India. In the present case, the payment has been made by an enterprise situated in India and accordingly, the non resident company is not entitled to claim any exemption on the strength of Article 14 of the DTAA. The assessing officer also stated that the instruction contained in CBDT circular No.333 (F.506/42/81-FTD) dated 2-4-1982 is in effect complementary to article 22 of the DTAA which provide that where there is no specific provision under the DTAA, it is the basic law which will govern the taxation of the income of the non resident. Following the aforesaid stand, the assessing officer invoked provision of section 9(1) r.w.s. 115A(1)(b)(B) of the IT Act and treated the entire fees as income chargeable to tax in India since all the expenses of the non resident were reimbursed by the assessee deductor. The assessing officer further stated that the agreement under which the technical services are rendered is neither approved by the Central Government nor does it relate to a matter included in the industrial policy and hence the deductor should have deducted tax at source at the rate of 40% surcharge as prescribed in the relevant finance Act for any other income arising to a non resident company in India and since the deductor had failed to discharge its statutory obligation, the assessee was treated as an assessee in default.

41. The learned AR submitted that, the nature of services rendered by M/s Bensly Design, Thailand is for landscape architectural consultancy.

42. According to him, the CIT(A) erred while passing the order, as there is no permanent establishment for M/s Bensly Design, Thailand in India, and no foreign employee stayed in India for more than 90 days should have exempted the business profit of the companies from taxation in India. This service covered by Article 7 and 5 of DTAAs. Under Article 7 of the DTAAs income earned by non resident in India under the head business, can be taxed in India only if the non resident has a permanent establishment in India. Permanent establishment itself is defined in article 7 and it means a permanent branch or a permanent office located in India. If the business is carried on through employees and if those employees stay in India for less than 180 days in the case of Thailand, there will be no PE in India and the corresponding business profit of the non resident becomes non taxable. The CIT(A) wrongly considered only $30,000 payment for both the assessment years put together i.e. assessment years 2004-05 and 2005-06 made to Bensly design, Thailand as fees for advisory services and considered the balance payment as fees for technical services for the assessment 2004-05 and held that the applicable rate of TDS is 20%. Since the assessee being the industry and providing the advisory services the same cannot be covered for the purpose of taxation at the rate of 20% and the same should not be applied to the income which has been received by Bensly design, Thailand. According to the AR, as per Indo Thai Agreement signed on 22-3-1985, there is no article in the relevant DTAA dealing with fees for technical services, there is only an article dealing with royalties, and of course, there is an article dealing with business profits. The assessing officer wrongly applied the residuary article 22 and taxed the income arising in India for the Thai company at the rate of 40% in accordance with the Finance Act 2005, first schedule part I Paragraph E. As per section 115A(1)(b)(B) of the IT Act 1961, a non resident of foreign company includes any income by way of royalty or fees for technical services received from the govt. or an Indian concern in pursuance of an agreement made by the foreign company with govt. or the Indian concern after 31st day of March, 1976 and where such agreement is with an Indian concern, the agreement is approved by the central govt. or where it relates to a matter included in the industrial policy, for the time being in force, of the govt. of India, the agreement is in accordance with that policy, then the tax payable shall be aggregate of the amount of income tax calculate on the income by way of fees for technical services, if any, included in the total income, at the rate of thirty per cent if such fees for technical services are received in pursuance of an agreement on or before the 31st day of May 1997 and twenty per cent where such fees for technical services are received in pursuance of an agreement made after the 31st day of May, 1997. Since the assessee being the industry and providing the advisory services the same cannot be covered for the purpose of taxation at the rate of 20% and the same should not be applied to the income which has been received by foreign company.

43. Finally, the learned AR relied on the following judgments :

1. Tekniskil (Sendirian) Berhard v. CIT [1996] 222 ITR 551/88 Taxman 439 (AAR-New Delhi)

2. Horizontal Drilling International v. CIT [1999] 237 ITR 142/103 Taxman 447 (AAR-New Delhi)

3. Software Technology Parks of India v. ITO [2005] 3 SOT 529 (Bang.)

4. Royal Airways Ltd. v. Addl. DIT [2006] 98 ITD 259 (Delhi)

5. Skycell Communications Ltd. v. Dy. CIT [2001] 251 ITR 53/119 Taxman 496 (Mad.)

6. CIT v. Neyveli Lignite Corpn. Ltd. [2000] 243 ITR 459/109 Taxman 369 (Mad.)

44. He also relied on the following circulars, wherein the CBDT clarified that when the income arising to a non resident in India is exempt from taxation there will be no need for tax deduction at source :

1. Circular No.786 dated 7-2-2000 reproduced in [2000] 241 ITR 132

2. Circular No.4 of 2002 dated 16-7-2002 reproduced in [2002] 256 ITR 22

3. Circular No.10 of 2002 dated 9-10-2002 reproduced in [2002] 258 ITR 9

4. Circular No.728 dated 30-10-1995 reproduced in [1995] 216 ITR 141

5. ITO v. Sriram Bearings Ltd. [1997] 224 ITR 724 (SC)

6. CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146/15 Taxman 72 (AP)

7. Asstt. CIT v. Malayala Manorama Co. Ltd. [2005] 1 SOT 739 (Coch.)

8. National Organic Chemical Industries Ltd. v. Dy. CIT [2006] 5 SOT 317 (Mum.)

9. Royal Airways Ltd. v. Addl. DIT [2006] 98 ITD 259 (Delhi)

45. The learned DR relied on the order of the lower authorities.

46. We have heard both the parties and perused the materials available on record. In these cases, the service rendered by Anthony Corbett & Associates, UK & Bensly Design Group, Thailand is of similar nature as rendered by Marriott International Design & Construction Services, USA and we have already held while deciding the Revenue appeals in earlier Paras that the services rendered by those non residents do not fit within the ambit of 'fees for included services' as defined in Article 2 of Indo US DTAA or technical services. Similarly, in the case of services rendered by Anthony Corbett Associates, UK, is in the nature of advisory services and not of technical services as there is no transfer of technology but only installation of electrical fittings, and as such, section 195 is not applicable. Accordingly, the assessee cannot be considered as assessee in default u/s 201(1) and 201(1A) of the IT Act. Similarly, the fees paid to M/s Bensly Design, Thailand for rendering services of landscape architectural consultancy is not covered as per the Double Taxation Avoidance Agreement since there is no article in the relevant DTAA dealing with this nature of payments. There is only one article dealing with Royalties and another dealing with business profit. Under Article 7 of the DTAA, income earned by a non resident in India under the head 'business' can be taxed in India only if the non resident has a permanent establishment in India. Permanent establishment means branch or permanent office located in India. In this case, the business was carried on through employees and there is no record that these employees stayed in India for more than 180 days. Accordingly there is no PE in India and corresponding business profit of non resident cannot be taxed in India and provision of section 195 is not applicable. In view of this, provisions of section 201(1) and 201(1A) of the IT are not applicable. In the result, the assessee appeals in ITA Nos.436 & 437/H/2007 are allowed.

47. In the result, the appeals of the Revenue are dismissed and the assessee appeals are allowed.