Income Tax Appellate Tribunal - Ahmedabad
Income Tax Officer(Intl. Taxn.)- I, ... vs Cadila Healthcare Ltd.,, Ahmedabad on 3 January, 2017
ITA No.486/Ahd/2016 Assessment Year: 2010-11 Page 1 of 11 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD "I" BENCH, AHMEDABAD [Coram: Pramod Kumar AM and S S Godara JM] ITA No.486/Ahd/2016 Assessment Year: 2010-11 Income Tax Officer (International Taxation)-I, Ahmedabad. .........................Appellant Vs. Cadila Healthcare Limited .......................Respondent Zydus Tower, Opp. Iskcon Temple, Satellite Cross Road, Ahmedabad.
[PAN - AAACC 6253 G] Appearances by:
K. Madhusudan & Albinus Tirkey for the appellant Jigar M. Patel for the respondent Date of concluding the hearing: 04.10.2016 Date of pronouncing the order: 03.01.2017 O R D E R Per Pramod Kumar AM:
1. By way of this appeal, the Assessing Officer has challenged correctness of the order dated 15.12.2015, passed by the learned CIT(A)-13, Ahmedabad, in the matter of assessment under section 201(1) & 201(1A) r..w.s. 195 of the Income Tax Act, 1961, for the assessment year 2010-11.
2. In the first ground of appeal, the assessee has raised the following grievance:
The Id. CIT(A) has erred in law and on facts in holding that technical knowledge, experience, skill, know how as envisaged in Article 12(13) of respective Indo-US, Indo Canada and Indo UK DTAAs were not made available to the assessee company by the Non-Residents, viz. Algorithme Pharma Inc., USA, Anapharm Inc., Bio Reliance, UK, Gateway Medical Research Inc., MDS Pharma Services, USA, AAI Pharma Inc., USA, inspite of substantial evidences to the contrary.
3. So far as this grievance of the Assessing Officer is concerned, the relevant material facts are like this. During the course of proceedings before the Assessing ITA No.486/Ahd/2016 Assessment Year: 2010-11 Page 2 of 11 Officer, it was noticed that the assessee has made following payments to the non residents entities based in USA, Canada and UK:
Sr. Name of the Country of Nature of Date Amount Nature of No. Payee residence remittance (Rs.) services 1 ALGORITHME USA FTS 04.09.2009 11,35,398 Bioequivalence PHARMA INC 18.09.2009 11,35,398 study 2 ANAPHARM INC CANADA FTS 12.02.2010 24,46,032 Bio analysis Now PHARMANET CANADA INC 3 BIO RELIANCE UK FTS 15.10.2009 17,77,161 Bio analysis 23.12.2009 22,74,601 4 GATEWAY USA FTS 24.12.2009 12,55,400 Bio analysis MEDICAL and bio RESEARCH INC availability 5 MDS PHARMA USA FTS 22.03.2010 32,53,036 Bio analysis SERVICES, USA 6 AAIPHARMA USA FTS 11.09.2009 16,52,877 Bioequivalence INC, USA study
4. The Assessing Officer was of the view that the services so rendered by the non resident entities are highly technical in nature and are required to be taxed as such in the hands of the recipients of these payments. The Assessing Officer took note of the assessee's stand that in all the related tax treaties (i.e. with UK, USA and Canada), there is 'make available' clause in the provision for taxability of fees for technical services, and that mere provision of technical services is not enough to attract the taxability as "it additionally requires that the service provider should also make available his technical knowledge, experience, skill, know how etc, known to the recipient of the service as to equip him to independently perform the technical function himself in future, without the help of service provider". However, this plea was not and rejected. The Assessing Officer analyzed the nature of services in great detail and observed that "the tests are highly technical in nature and generate considerable technical information about the drugs being tested which are extremely valuable in subsequent phases of the drug commercialization". In addition to elaborate discussion about the nature of services and as to how technical these services are, the Assessing Officer also observed that "the 'make available' clause is not to be applied merely with respect to technical knowledge but also with respect to experience, skill and process" as well, and, therefore, "even if experience or skill is made available to the assessee, the make available clause would be satisfied and the nature of service would be liable to be treated as fee for included services". It was in this backdrop that the Assessing Officer proceeded to hold that the assessee had obligation to deduct tax at source from these payments, as these amounts were taxable in India in the hands of non-residents, under section 195 of the Act.
Accordingly, tax withholding demand under section 201 r.w.s 195 was raised on the assessee. Aggrieved, assessee carried the matter in appeal before the CIT(A) who held that none of these services satisfied the 'make available' clause under the tax ITA No.486/Ahd/2016 Assessment Year: 2010-11 Page 3 of 11 treaties, and, accordingly, deleted the impugned demand. While doing so, learned CIT(A) reasoned as follows:
"7. I have carefully considered the facts of this case, the reasoning as contained in the order of the AO and the factual and legal submissions of the appellant. In the present case the key issue to be decided under appeal is whether the payments made to the non-residents attract liability for withholding tax in India under the provisions of Sec. 195 of the Income-tax Act.
8. With reference to the payments made by the appellant to the six non- resident parties viz. Algorithms Pharma Inc., Anapharm Inc., Bio Reliance U.K., Gateway Medical Research, MDS Pharma Services and AAI Pharma Services, the AR has contended that the same were not in the nature of 'fees for technical services.' The AR stated that Article 12 of the DTAAs with USA and Canada and Article 13 of the DTAA with U.K. is not applicable since the non-resident parties did not 'make available' any technical knowledge, skill, experience, know-how or process.
9. It is a matter of record that even the AO has not disputed the fact that none of the non-resident parties have any PE in India. Considering the facts of the case and the submissions and decisions as relied upon by the appellant, I am of the view that the services rendered in this case, although technical in nature, can be said to be 'fees for included services', only if they "make available" technical knowledge or skill to the recipient of the service or where the recipient can apply the same on its own in future, without recourse to the service provider. In this connection, the ratio as laid down by the ITAT Hyderabad in the case of Dr. Reddy's Laboratories Ltd. 35 taxmann.com 339 squarely applies to the facts of the appellant's case, since it relates to rendering of Bio-Analytical services by the non-resident party and under the framework of the same language of Article 12(4)(b) of the India-USA and India-Canada DTAAs:
"In this case, as rightly considered by the learned CIT(A), the assessee was conducting clinical trials through the CROs in USA to comply with the regulations therein and the CROs who are experts in this field were only conducting studies and submitting the reports in relation thereto. They are neither transfer of technical plan or technical design nor making available of technical knowledge, experience or know-how by the CROs to the assessee company. In fact, the assessee company did not get any benefit out of the said services in USA and assessee was only getting a report in respect of field study on its behalf, which would help it in getting registered with the Regulatory Authority. Since there is no making available of technical skill, knowledge or expertise or plans or designs in the present case, the amounts paid by the assessee do not fall under Article 12, but come within the purview of Article 7 of the DTAA. Therefore, the amounts paid are to be considered as business receipts of the said CROs and since they do not have any PE in India on which aspect there is no dispute, there is ITA No.486/Ahd/2016 Assessment Year: 2010-11 Page 4 of 11 no need to deduct tax at source. Similar issue was analysed and considered by the AAR in the case of Anapharm Inc. (supra), which is one of the recipients in the assessee's case also."
10. The appellant has also placed reliance on a recent decision of the ITAT Ahmedabad Bench in the case of AO International Taxation II vs. B.A. Research India Pvt. Ltd. ITA No. 3106/Ahd/2011, decided on 30-11-2015, wherein in respect of bio-analytical services and clinical trials payments, as in the case of the appellant, the jurisdictional ITAT has decided this issue in favour of the assessee, by holding as under:
"From the above, it is evident that the Id.CIT(A) have given a finding on fact that the service which is technical in nature can be said to be "fees for included services" only when it has "made available" technical knowledge or skills to the recipient of services, i.e. recipient of services can apply the same on his own. We are in full agreement of the above view of the Id.CIT(A). In the present case, the assessee had sent samples to the experts outside India and those experts submitted their report. There is nothing on record suggesting that the services rendered to the assessee were made available to the assessee and also the assessee was able to apply the same of his own. In the absence of the same, such service would not fall within the ambit of the included service in the light of decision of the Authority for Advance Rulings (Income-tax), New Delhi in the case of Anapharm Inc., In re (supra), the decision of the Coordinate Bench in the case of Wockhardt Ltd. vs. ACIT (supra) and the decision of Hon'ble High Court of Karnataka in the case of CIT vs. De Beers India Minerals (P.) Ltd. (supra). The Revenue has not placed any material on record to rebut the findings of the Id. CIT(A) that the services were actually made available to the assessee and would be taxable. Under these facts, we do not see any reason to interfere with the findings of the Id.CIT(A), same is hereby upheld. Thus, ground raised by the Revenue is rejected."
11. Considering the above, the issue under consideration has been elaborately dealt with, I see no reason to take a different view in the matter. Accordingly, I hold that the payments made to non-resident parties are not liable to TDS u/s. 195 of the I.T. Act, since they are not in the nature of fees for technical services as per the relevant articles of the DTAAs with USA, U.K. and Canada.
12. Another contention raised by the AO in her Order is that since the Memorandum to the DTAA with USA makes reference to certain services, which may make technical knowledge etc. available to the recipient and includes bio-technical services as one of them, technical knowledge etc. has been made available to the appellant. In this connection, the appellant has relied on the ratio of ITAT Delhi in DCIT vs. PanAmSat International Systems Inc. 103 TTJ 861, wherein the ITAT has held as under:
ITA No.486/Ahd/2016Assessment Year: 2010-11 Page 5 of 11 "What the MOU does is to give examples of areas or fields in which it is possible for the parties to agree to transfer technology. Communication through satellite or otherwise is one such area, given as example, in which transfer of technology is possible...
The example given in the MOU cannot be understood to mean that wherever a satellite is used in relation to the rendering of a service, it must be assumed that there is a transfer of technology relating to the area of communication through satellite. Thus the payment does not fall within art. 12(4) (b) as 'fees for included services'."
The appellant has contended that the Memorandum is merely providing a suggestive list of examples of the areas in which, depending on the actual facts, it is possible for the parties to agree to transfer technology and that on the clear facts of its case the same is not applicable. I find merit in the appellant's argument and the reliance place on the aforesaid ITAT decision, which has effectively dealt with this issue. Therefore, the appellant succeeds on the issue of chargeability of tax under the provisions of Sec. 201(1).
13. The AO has further held that the aforementioned payments are also covered under the wider meaning of fees for technical services as per the provisions of Sec. 9(1)(vii) of the I.T. Act. The appellant has contended that the provisions of Sec. 9(1) (vii) are not applicable to the facts of the appellant's case. As per the clear language of the provisions of Section 90(2), where there is a DTAA between India and any country outside India, the more favourable of the two provisions, viz., under the DTAA or under the I.T. Act, are to be applied in case of the assessee. However, in my view, the point as to whether the payments are in the nature of fees for technical services as per the provisions of section 9(1)(vii), does not require adjudication, since the appellant is in any case entitled to the benefit of the relevant articles as per the DTAAs, as discussed hereinbefore."
5. Aggrieved by the relief so granted by the CIT(A), the Assessing Officer is in appeal before us.
6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal positon.
7. We find that the relevant provisions in the relevant tax treaties, which govern the taxability of fees for technical services, are as follows:
India UK tax treaty Article 13: Royalty and fees for included services
4. For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term "fees for technical services" means payments of any ITA No.486/Ahd/2016 Assessment Year: 2010-11 Page 6 of 11 kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which :
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received; or
(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or
(c) make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design.
India Canada tax treaty Article 12: Royalty and fees for included services
4. For the purposes of this Article, 'fees for included services' means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services :
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or
(b) make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design.
Indo US tax treaty Article 12- Royalty and fees for included services
4. For purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services:
ITA No.486/Ahd/2016Assessment Year: 2010-11 Page 7 of 11
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or
(b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.
8. We find that the common thread in all these tax treaties is the requirement of 'make available' clause. As learned counsel rightly puts it, its not simply the rendition of a technical service which is sufficient to invoke the taxability of technical services under the make available clause. Additionally, there has to be a transfer of technology in the sense that the user of service should be enabled to do the same thing next time without recourse to the service provider. The services provided by non residents did not involve any transfer of technology. It is not even the case of the Assessing Officer that the services were such that the recipient of service was enabled to perform these services on its own without any further recourse to the service provider. It is in this context that we have to examine the scope of expression 'make available'.
9. As for the connotations of make available clause in the treaty, this issue is no longer res integra. There are at least two non-jurisdictional High Court decisions, namely Honble Delhi High Court in the case of DIT Vs Guy Carpenter & Co Ltd ([(2012) 346 ITR 504 (Del)] and Honble Karnataka High Court in the case of CIT Vs De Beers India Pvt Ltd [(2012) 346 ITR 467 (Kar)] in favour of the assessee, and there is no contrary decision by Honble jurisdictional High Court or by Honble Supreme Court. In De Beers case (supra), Their Lordships posed the question, as to "what is meaning of make available", to themselves, and proceeded to deal with it as follows:
The technical or consultancy service rendered should be of such a nature that it "makes available" to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology "making available", the technical knowledge, skill?, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it.ITA No.486/Ahd/2016
Assessment Year: 2010-11 Page 8 of 11 The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as "fee for technical/included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied.
10. As we have noted earlier, it is not even the case of the Assessing Officer that the assessee, i.e. recipient of services, was enabled to use these services in future without recourse to the service providers. The tests laid down by Hon'ble Court were clearly not satisfied. There mere fact that there were certain technical inputs or that the assessee immensely benefited from these services, even resulting in value addition to the employees of the assessee, is wholly irrelevant. The expression 'make available' has a specific meaning in the context of the tax treaties and there is, thus, no need to adopt the day to day meaning of this expression, as has been done by the Assessing Officer. We also find that the issue regarding taxability of these services is also covered, in favour of the assessee, by the order dated 30th November 2015 passed by a coordinate bench. In view of these discussions, and as we concur with the well reasoned findings of the learned CIT(A), we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter on this count as well. The order of the CIT(A) stands confirmed.
11. Ground no. 1 is thus dismissed.
12. In ground no. 2, the Assessing Officer has raised the following grievance:
The Id. CIT(A) has erred in law and on facts in holding that the payment made to Non-Resident, viz. Chemical Abstract Services USA, for online access to the database system "SciFinder" was not 'Royalty' as envisaged by article 12 of Indo US DTAA, in spite of the fact that the AO has demonstrated how the license granted by the non resident amounts to use of, or the right to use the copyright embedded in the software. The Id. CIT(A) has ignored High Court decisions in favour of revenue, on identical facts.ITA No.486/Ahd/2016
Assessment Year: 2010-11 Page 9 of 11
13. So far as this ground of appeal is concerned, the relevant material facts are as follows. During the course of proceedings before the Assessing Officer, it was noticed that the assessee has made a payment of Rs 16,30,690 to a US based entity by the name of Chemical Abstract Service for access to database. The Assessing Officer was of the view that this payment is for exploitation of copyrighted database, through licence, and, accordingly, taxable as royalty. It was noted that 'royalty' has been defined as "payment of any kind received as a consideration for the use of, or right to use of, any copyright of literary, artistic or scientific work" and that the expression "literary work", under section 2(o) of the Copyright Act, includes 'literary database'. It was also noted that the non resident, to whom the payment in question was made, holds rights/ copyrights which are granted under non exclusive and non transferable basis, for access to licensed material. It was in this background that the Assessing Officer held that the assessee ought to have deducted tax at source from the payments so made to the non residents as these were taxable as 'royalty' under the related tax treaties. Accordingly, tax withholding demand under section 201 r.w.s 195 was raised on the assessee. Aggrieved, assessee carried the matter in appeal before the CIT(A) who held the payment in question was not in the nature of royalty as it was not use of the copyright but a copyrighted material, and, accordingly, deleted the impugned demand. While doing so, learned CIT(A) reasoned as follows:
"14 . In relation to the payment made to Chemical Abstract Service USA, the AO has held that the same is in the nature of royalty and has cited certain judicial pronouncements. The appellant has on facts distinguished the decisions that have been cited by the AO in her Order. In the appellant's contention, the payment made by it is only for access to online publication or database, the access of which is publicly available to any person interested in availing of such information, upon payment of requisite fee. Accordingly, the same cannot in any manner be considered as in the nature of royalty, either under the provisions of Sec. 9(1)(vi) of the I.T. Act or under Article 12 of the DTAA with USA. In support, the appellant has also placed reliance on the decisions of the AAR in the case of Factset Research Systems, 317 ITR 169 (AAR) and Dun & Bradstreet Espana, 272 ITR 99 (AAR) and the Bombay High Court in the case of Dun & Bradstreet Information Services, 20 taxmann.com 695.
15. Having considered the reasoning of the AO and the contentions of the appellant, I am of the view that the ratio of the decisions as relied upon by the appellant is squarely applicable to the facts of the appellant's case. Payment made for access to online publication/database cannot be considered as being in the nature of royalty, liable to withholding tax, either under the Income-tax Act or under the DTAA with USA. Therefore, I hold that the payment made to Chemical Abstract Service USA was not liable to TDS under the provisions of Sec. 195 and accordingly, the appellant could not be held liable to pay tax as an assessee in default u/s. 201(1)."ITA No.486/Ahd/2016
Assessment Year: 2010-11 Page 10 of 11
14. Aggrieved by the relief so granted by the CIT(A), the Assessing Officer is in appeal before us.
15. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal positon
16. We find that under article 12(3) of the Indo US tax treaty, 'royalty' has been define as follows
3. The term 'royalties' as used in this Article means :
(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and
(b) payment of any kind received as consideration for the use of, or the right to use, the industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 or Article 8.
17. We find that as the treaty provision unambiguously requires, it is only when the use is of the copyright that the taxability can be triggered in the source country. In the present case, the payment is for the use of copyrighted material rather than for the use of copyright. The distinction between the copyright and copyrighted article has been very well pointed out by the decisions of Hon'ble Delhi High Court in the case of DIT Vs Nokia Networks OY [(20113) 358 ITR 259 (Del)]. In this case all that the assessee gets right is to access the copyrighted material and there is no dispute about. As a matter of fact, the AO righty noted that 'royalty' has been defined as "payment of any kind received as a consideration for the use of, or right to use of, any copyright of literary, artistic or scientific work" and that the expression "literary work", under section 2(o) of the Copyright Act, includes 'literary database' but then he fell in error of reasoning inasmuch as the payment was not for use of copyright of literary database but only for access to the literary database under limited non exclusive and non transferable licence. Even during the course of hearing before us, learned Departmental Representative could not demonstrate as to how there was use of copyright. In our considered view, it was simply a case of copyrighted material and therefore the impugned payments cannot be treated as royalty payments. This view is also supported by Hon'ble Bombay High Court's judgment in the case of DIT Vs Sun and Breadstreet Information Services India Pvt Ltd [(2011) 318 IITR 95 (Bom)].
ITA No.486/Ahd/2016Assessment Year: 2010-11 Page 11 of 11
18. In view of the above discussions, as also bearing in mind entirety of the case, we uphold the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter.
19. Ground no. 2 is also dismissed.
20. Ground no. 3 is general and does not call for any specific adjudication by us.
21. In the result, the appeal is dismissed. Pronounced in the open Court on this rd the 3 th day of January, 2017.
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Sd/- Sd/-
S S Godara Pramod Kumar
(Judicial Member) (Accountant Member)
Ahmedabad, the 3 rd day of January, 2017
Copies to: (1) The appellant
(2) The respondent
(3) Commissioner
(4) CIT(A)
(5) Departmental Representative
(6) Guard File
By order
TRUE COPY
Assistant Registrar
Income Tax Appellate Tribunal
Ahmedabad benches, Ahmedabad
1. Date of dictation: .directly dictated on PC, no dictation...........
2. Date on which the typed draft is placed before the Dictating Member:
02.01.2016..........
3. Date on which the approved draft comes to the Sr. P.S./P.S.: 02.01.2016
4. Date on which the fair order is placed before the Dictating Member for Pronouncement: .... 03.01.2016.......................
5. Date on which the file goes to the Bench Clerk : ...... 03.01.2016...................
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