Shell Global Solutions International ... vs Assessee on 10 November, 2015

[Cites 18, Cited by 0]

Income Tax Appellate Tribunal - Ahmedabad

Shell Global Solutions International ... vs Assessee on 10 November, 2015

I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 1 of 41 IN THE INCOME TAX APPELLATE TRIBUNAL, AHMEDABAD B BENCH, AHMEDABAD [Coram: Pramod Kumar AM and Kul Bharat JM] I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Shell Global Solutions International BV ......................Appellant Care of: S R Batliboi & Co, 2 nd floor, Shivalik Ishaan Ambawadi, Ahmedabad 380015 [PAN: AAICS 3589JH] Vs. Income Tax Officer Ward 1(4)), Baroda ...................Respondent Appearances by:

S N Soparkar for the appellant S C Tiwari and A K Khandelwal for the respondent Date of concluding the hearing : August 13, 2015 Date of pronouncing the order : November 10 th , 2015 O R D E R Per bench:

1. This is an appeal filed by the assessee and is directed against the order dated 29 th January 2010 passed by the CIT(A), in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2005-06.

2. Grievances raised by the assessee appellant are as follows:

"On the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals)-Gandhinagar, Ahmedabad [CIT (A)] erred on the following grounds, which are independent, separate/alternative and without prejudice to one another:

1. The learned Commissioner of Income-tax (Appeals), Gandhinagar, Ahmedabad [hereinafter referred to as CIT(A)] erred in holding that the revenues I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 2 of 41 earned by the Appellant for provision of commercial services are in the nature fees for technical services and taxable in India.

2. The learned CIT(A) has erred in rejecting appellant's claim to seek non-

taxability of 50% of the receipts in respect of Basic Refinery Package ('BRP') as exempt from tax for the following reasons:

§ The learned CIT(A) erred in holding that the agreement for BRP has to be read as a composite one.

§ The learned CIT(A) erred in holding that the appellant has no basis to claim that 50% of the services rendered were commercial. § The learned CIT(A) erred in holding that the appellant's attempt to bifurcate its service into technical and non-technical part is devoid of any basis, logic and is self-contradictory.

§ The learned CIT(A) erred in holding that the argument of 'make available' either does not apply or cannot be pinpointed by the appellant. § The learned CIT(A) erred in holding that the neither there is any relevance of Memorandum of Understanding ('MOU') to Indo-US DTAA in facts of the case nor can this MOU in that context extendable to Indo-Netherlands DTAA.

3. The learned CIT(A) has erred in rejecting the appellant's claim (which has been upheld in various judicial pronouncements), that a composite contract ought to be broken up, to determine the appropriate taxability of various components of supply and/ or services which have been covered in a single contract.

4. The learned CIT(A) has erred in holding that, for interpreting the term 'make available' the Indo-Netherland DTAA has to be applied as such and interpreted in itself without any extraneous help, such as referring to the MOU of the India-US DTAA which explains the said term.

5. The learned CIT(A) has erred in rejecting the law laid down by various judicial pronouncement wherein it has been held that in interpreting the language of a treaty, reliance can be placed on other tax treaties where identical language is used, since the Government can be considered to have contemplated the same meaning to be assigned to the same term in the other tax treaties.

6. The learned CIT(A) has erred in rejecting the appellant's claim, that 50% of the services rendered under the BRP would be commercial in nature, as per the provisions of the India-Netherlands DTAA read with MOU to the India-US DTAA.

7. The learned CIT(A) has erred in rejecting the appellant's claim that various services rendered under the BRP were divided into technical and non-technical component, ignoring the various documentation produced before the learned CIT(A) substantiating the various non-technical services rendered by the appellant under the BRP.

8. The learned CIT(A) has erred in interpreting Clause 1.1 of Article 1 of the Technical Service Agreement to conclude that the total time spent for service I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 3 of 41 rendered in connection with BRP cannot exceed 3,600 manhour i.e 1,200 manhour per contract yea. This is because, the aforesaid limit applied to services rendered by the appellant under the category of 'Help desk services' which were to be rendered within the BRP and not for the various services to be rendered under the BRP.

9. The learned CIT(A) has erred in rejecting, the appellant's documentary evidence which were filed to substantiate that services rendered under the BRP were commercial in nature, without providing any reasoning for the same and refuting the claim of the assessee

10. The learned CIT(A) has erred in charging interest under Section 234B and Section 234C of the Act for shortfall / deferment in payment of advance tax The appellant prays that in view of the provisions of Section 209(1 )(d) read with section 195 of the Act, interest under Section 234B and Section 234C of the Act should not be charged.

11. Your appellant reserves the right to add, amend , alter or vary all or any of the above grounds of appeal as they or their representative may think fit".

3. The issue in appeal lies in a rather narrow compass of material facts. The assessee before us, i.e. Shell Global Solutions International BV, is a company incorporated in, and tax resident of, the Netherlands. During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that while the assessee has duly accepted taxability of its receipts aggregating to Rs 65,21,62,165 as fees for technical services, the assessee has claimed receipts aggregating to Euros 16,75,781, i.e. Rs 17,26,50,194, as non taxable in nature.

The non taxable receipts included reimbursement of expenses, aggregating to Rs 1,78,40,156, received from Hazira Port Pvt Ltd, Hazira LNG Pvt Ltd and Welspun Gujarat Stahl Rohren Limited, in addition to fees for commercial services aggregating to Rs 7,69,29,360 received from Reliance Industries Limited. So far as the reimbursements receipts are concerned, the matter was decided in favour of the assessee, in principle, by the CIT(A) and the matter rests there. We are, therefore, concerned with the second aspect, i.e. receipts for commercial services aggregating to Rs 7,69,29,360. As far as this receipt is concerned, the Assessing Officer required the assessee to show cause as to why this receipt was not offered to tax in the hands of the assessee. It was, inter alia, explained by the assessee that the related "services rendered by the assessee are not I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 4 of 41 technical services in nature and do not fall within the purview of FTS as defined under Article 12 of the (India Netherlands) tax treaty", and that "without prejudice to the above, even if, for the sake of argument, it is assumed that the commercial services under TSA are technical in nature, they would still not qualify as FTS as they do not 'make available' any technical knowledge, experience, skill, know-how, or process, or consist of the transfer of technical plan or technical design as per the definition under the tax treaty". Reliance was placed on the decisions of this Tribunal in the cases of Raymonds Limited Vs DCIT [(2003) 86 ITD 791 (Mum)] and CESC Limited Vs DCCIT [(2003) 86 ITD TM 653 (Kol)]. None of these submissions, however, impressed the Assessing Officer. The Assessing Officer took note of the Article 12 of the India Netherlands Double Taxation Avoidance Agreement [(1989) 177 ITR (Statute) 72 read with (1999) 155 CTR (Statute) 22; 'Indo Dutch tax treaty', in short], as also of the nature of services provided by the assessee to its Indian client, and concluded that "the services which are being provided by the assessee to the companies (in India) are technical in nature and it has made the expertise and technical experiences available with it to these companies". It was also held that these services are "in the nature of technical or consultancy services and, therefore, taxable @ 10% as per (Indo Dutch) DTAA". As for the judicial precedents cited by the assessee in respect of connotations of "make available", the Assessing Officer brushed aside the same. He was of the view that this expression is "not defined in the Income Tax Act or the DTAAs signed by India with various countries", and, therefore, "one has to look forward for its meaning in the general dictionary or legal enactments". He then observed that "it is found that this expression has been used in various enactments in the United States" and added that "The expression 'make available' has been used in enactment 'Terrorism Risk Insurance Act' of United States and in 'Copyright Infringement Act' of the United States, and, on these Acts, there are number of decisions have come up regarding meaning of the expression 'make available' which means offer or make accessible or provide, furnish things in this context". The Assessing Officer then referred to I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 5 of 41 some more google searches justifying the meaning as "making accessible". He then proceeded to summarize his findings, at page 12 of the assessment order, as follows:

This clearly suggests that the words 'make available' which were used in treaty in that context, and the treaty too suggests that these services in the nature of technical knowledge, skill etc were offered or made accessible to the other party, and it never meant that that the other party should be trained or made expert in such technical knowledge. It will be absurd on the part of a person to make other person expert of its own competency which will result in a situation that the recipients of the services will not look again to him when these services are needed in future. Teaching/ educational services have been separately dealt elsewhere in the treaty. In view of the above, meaning of expression 'make available' has to be read in the present context.

4. The Assessing Officer then proceeded to deal with memorandum to the India United States Double Taxation Avoidance Agreement [(1991) 187 ITR (Statute) 102; Indo US tax treaty, in short] which provides that in the case of 'technical training', technology will be deemed to have been 'made available'. On the basis of this analysis, the Assessing Officer finally treated the entire amount as taxable @ 10% on gross basis under Article 12 of the Indo Dutch tax treaty by, inter alia, observing as follows:

In view of the above discussion it is clear that the services which the assessee is providing to RIL are arising out of the technical expertise that it has in the field and therefore, is in the nature of making available technical knowledge, experience, skill, know-how. The assessee could not have provided the various services described above to the other companies if it did not have the required technical skill, Expertise or experience in the field of Oil & Gas sector, which it does, and therefore, the consultancy services provided to RIL is not only technical in nature but is also making available technical knowledge, experience, skill, know-how which RIL is to benefit from such expertise. RIL has utilised these expertise for furthering its own business interest and therefore the remuneration paid would fall within the ambit of FTS of Indian Netherlands tax treaty. Hence it is clearly established that services are covered by definition of FTS under Indian Netherlands tax treaty and shall be taxed @ 10% as per DTAA I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 6 of 41

5. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. It was pointed out that the Assessing Officer has proceeded on gross misconception of facts. The assessee pointed out that the services rendered by the assessee to the RIL are divided in two parts- basic refinery package and certain optional services. The amount which has been considered to be non taxable is only 50% of the consideration for the basic refinery package, as it is, on an estimate basis, relatable to the commercial services rendered by the assessee. The other 50% of the consideration for basic refinery package services as also entire consideration for certain optional services has been considered, by the assessee himself, as taxable and the due taxes, as applicable under Article 12 of the Indo Dutch treaty, were paid thereon. As to the nature of commercial services rendered by the assessee, the assessee submitted as follows:

The scope of services to be rendered by Appellant under the aforesaid agreement is under:

2. Basic Refinery Package ('BRP')

2.1 Under this package Appellant would provide to RIL from outside India deliverables in the form of goods likes best practices, manuals, guidelines, standards, drawings, handbooks, training manual etc. developed by appellant based on their expertise and experience in running refineries all over the world. All these deliverables have been developed by appellant over a long period, as a result of their vast experience in commercial as well as technical matters relating to designing, engineering, installation, operation, maintenance and trouble shooting in refineries round the world and the same form a part of the existing library of Appellant. None of the deliverables have been specifically prepared for RIL and the same are also being provided to other members of the Royal Dutch Shell club.

2.2 RIL employee's who would be engaged in the day-to-day operations of the refinery would be referring to the above manuals etc. on a day-to-day basis in order to enable them to discharge their duties effectively in order to improve the reliability of operation and reduce the down time for our refinery and thus improve profitability.

I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 7 of 41 In the event RIL employee's after referring to the above manuals etc. require personal advice and assistance of Appellant, they will render the requisite consultancy services and assistance either though telephone, electronic media or by deputing their personnel to visit India for short periods. The agreement envisages that the above services to be provided by the personnel of Appellant would be in respect of various commercial as well as technical aspect of day to day operation of our refinery.

2.3 The various commercial aspects in respect of which services will be provided by the personnel of Appellant under the Basic Refinery Package are as under:

(i) RIL would be included in the mailing list of Appellant and accordingly, RIL would receive regular updates in the form of news letter, news forum, information through website i.e. details of any improvement, safety incident, accidents with cause and recommended precautions to avoid such accidents would all be available through this information sharing system. This information would enable RIL to reduce accidents and thereby reduce production losses.

(ii) Appellant also conducts conferences aimed at improving productivity and efficiency in refinery operations. Under the above agreement, RIL would be invited to attend these conferences to enhance RIL's vision of improving profitability and efficiency which can then be implemented in their refinery.

(iii) Appellant would benchmark RIL's refinery every year with reference to other refineries and give their findings as to where RIL's refinery stands and shall identify the areas for improvement. Since Appellant has an excellent record of operating the maintaining oil refineries all over the world, the benchmarking exercise would make a comparison of RIL's refinery with the best refineries in the world and thereby RIL would derive tremendous commercial benefit by way of identification for improvement in different areas of operation, maintenance, manpower, training, procurement, safety and environmental areas etc.

(iv) Appellant has accumulated a vast knowledge and has a database on the suppliers/manufactures for various inputs materials, catalyst and chemicals. Appellant will provide from time to time, relevant commercial data and information to RIL under the above agreement which can be used in our procurement activities for better negotiations, selection of I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 8 of 41 better products (alternative products), alternative sources of suppliers/manufacturers around the world with objective to minimise cost of input materials and thus improve profitability of RIL's refinery.

(v) The hydrocarbon management procedure contained in the abovementioned manual/guidelines can be used by RIL for analysing fuel and loss figures obtained in RIL's refinery during operation and identify the potential areas for reducing such loss and convert the hydrocarbons to more valuable products thus improving our overall profitability.

(vi) RIL would also obtain certain software packages developed by Appellant which are related to optimisation, catalyst performance analysis, planning and scheduling, oil improvement functions, plant optimisation etc., for improving the operational efficiency and profitability of RIL's refinery.

3. Optional services In addition to the deliverable and services to be provided by Appellant under the BRP, Appellant would also provide to RIL consultancy services and assistance in the various commercial and technical aspect of the day-to-day operations of our refinery which are not covered under the scope of BRP, as and when specifically requested by RIL from time to time. The services to be rendered by Appellant under the optional services would include review/audit of any part of the plant from the stand point of design, operability, revamp, debottleneck to increase throughput efficiency etc. and pace setting programs with the objective of improving profitability of our refinery. It would also include review like organisational preparedness review, fire and safety review, health safety and environmental review special on-site and off-site training programs, commissioning start-up assistance by specialists, assistance in handling emergency situations and disaster management etc.

6. It was also submitted that, under the arrangement with the Indian client, the assessee had also supplied certain goods in the form of deliverables under the basic refinery package. Since the consideration for basic refinery package included consideration for outright purchase of these deliverables, in the form of manuals etc, it is not taxable as fees for technical services. These deliverables, as also the explanation justifying that major portion of the services rendered under the BRP is commercial in nature, are as follows:

I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 9 of 41 Sr List of documents 1 Oil Movement Newsletter 2 Hydrocarbon Logistic Newsletter 3 Guidelines for Business travel and Office working 4 Business Continuity and Contingency Planning Action 5 Guide 6 Planning and Scheduling (Decision support) 7 Business Process Management guideline 8 Oil Movement and Product Quality 9 Shell Benchmarking 2001 Vol-1/2 10 Roads Transportation of goods, Equipment and Product 11 (HSE) 12 Incident Classification, investigation and reporting 13 (HSE) 14 Man made Vitreous Fibers(HSE) 15 Benchmarking training seminar 16 Fitness to work (HSE) 17 Repetitive strain injury in office environment 18 Group HSE Management System (Feb-2002) 19 TA Management Best Practice 20 M-122 Manufacturing Business Economics 21 Profits and principles - does there have to be a choice ? 22 Performance and Efficiency Conference Year 2002 23 Impact services and technology to improve margins Reliance Laboratory Efficiency - February 2003 Fuels Product Quality - June 2004 Help Desk Query Consolidated List Sr List of CD's 1 Performance and Efficiency conference 2 Oil movement, crude oil and product quality conference

1. Oil Movement Newsletter The Oil Movement News letter contains general information/articles on Oil and Gas industry, which are contributed by refineries from all over the world. Further this newsletter aims to maximise the synergy by bringing together the full range of specialism involved in Oil Movements.

2. Hydrocarbon Logistics Newsletter I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 10 of 41 The hydrocarbon logistics newsletter is intended as a source of informal information on all matters in the field of planning and scheduling of interest to staff active in the area. Each of the news letter issue covers various topics in the field of planning and scheduling.

3. Guidelines for Business travel and Office working These guidelines are for the benefit and protection of the staff that are engaged in any type of business activity away from their primary work location.

4. Business Continuity and Contingency Planning Action Guide These provide guidelines in conducting a business continuity review and development of a Crisis Management Process.

5. Planning and scheduling (Decision support) This is short PPT presentation on integrated planning and scheduling and on processes, tools and organisation.

6. Business Process Management guideline This guideline

- Provide guidance for Quality Management Advisors, who will be involved with training for any facilitation in business processes selection and analysis

- Provide guidance for process owners who will be leading the management of their business processes

- Provide background information to management and senior staff involved in the continuous improvement of business process Accordingly this guideline covers the following commercial aspect of refineries in detail, namely

- How to select the critical business process

- How to analyse business process

- How to identify potential improvements and put in place measurement and controls so that the process owner can effectively manage the process.

7. Oil Movement and Product Quality I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 11 of 41 The commercial services under this category are aimed at providing integrated solutions to best meet both the challenges faced by refineries i.e. to reduce the cost and improve the product quality.

8. Shell Bench Making 2001 Volume-1 and 2 Benchmarking is one of the modules in the Shell Global Pacesetting programme. It is only the start to Operation Performance improvement. The objective to benchmarking is to allow client refineries to identify performance "Gaps" between their current position and the best performers in the industry. The main focus is to provide a basis of the improvement of Operational Performance. The information provided in the said document can be used for further analysis and benchmarking, a reference document and as guide for target setting.

9. Roads Transportation of goods, Equipment and Product (HSE) This guide sets outs the Group's requirements for effective safety management in Road Transport. It has been designed for use by Shell management and supervisory staff in developing safe driving policies and procedures for their Rod Transport operations and inclusions with HSSE case document.

10. Incident classification, investigation and reporting (HSE) This document provides guidance on the classification, investigation and reporting of incidents which results in injury or illness and in damage to assets, the environment or company reputation. It also addresses incidents that had no adverse outcomes (near misses). It sets out rules for the reporting of incident by Shell companies and joint ventures.

11. Man Made Vitreous Fibers ('MMVF')(HSE) MMVF include products containing refractory ceramic fibers, Fiberglass and mineral wool. This guideline establishes requirements for managing and working with MMVF because available toxicity information and recommendations from manufacturers support controlling exposures to these materials.

12. Benchmarking training seminar This is the material provided by Shell during "Benchmarking Training Seminar" conducted at their training centre "Leeuwenhorst", Netherlands.

I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 12 of 41

13. Fitness to work (HSE) The purpose of this document is to ensure that a lack of Fitness to Work (FTW) does not result in significant injury or illness, risks o the business or risk to the community or company reputation and to comply with the Group Minimum Health Management Standard.

14. Repetitive Strain Injury ('RSI') in office environment (HSE) RSI from personal computer use is a medical condition affecting the neck, upper back, shoulders, wrist or hand. RSI are the most commonly reported work related health problem. This document, one of the Shell Group HSE Advisor Panel's Yellow Guide (YG) series provides management tools and examples of best practices to address this issue.

15. Group HSE Management System (Feb-2002) The Group HSE Management System is a reference document that defined in one place the various HSE policies, standards and procedures that either operate at Group level or that are common across the Group.

16. TA Management Best Practice This document provides a PPT presentation of the better practices in Turnaround Management

17. M-122 Manufacturing Business Economics The aforesaid training course is intended to provide participant with

- a global perception of the refinery as a business segment with Oil products

- a working knowledge of the basic tools and techniques used for economics evaluations in refineries:

      -      short term for refinery optimisation
      -      medium/long term for options evaluations
-     a methodology to tackle economic evaluations and present
      results to assist business decisions

18. Profits and principles - does there have to be a choice ?

This is a report about values. It provides evidence of how the Statement of General Business Principles is put into practice, Shell's views on significant global issues affecting the society and the environment and Shell's contribution to the Society.

I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 13 of 41

19. Performance and Efficiency Conference Year 2002 This is a handout of the "Performance and Efficiency Conference held at Jamnagar Manufacturing Complex in India on 11 to 15 th March 2002".

20. Impact services and technology to improve margins This editorial provides an extensive portfolio of technical and business solutions that actively improve the operations and bottom line cost of companies in the following industries: additives, chemicals, gas and liquefied natural gas, hydrocarbon logistics, industrial markets, motorspirit, refining and oil marketing and upstream.

21. Reliance Laboratory Efficiency - February 2003 As a part of the process of continuous improvement, RIL wished to compare their laboratory with Shell facilities in terms of manpower efficiency and numbers of samples/tests. This document records the finding of Shell, based on the questionnaire which was developed to identify and gain insight into the factors that influence laboratory efficiency.

22. Fuels Product Quality Refinery News ('FPORN') - June 2004 EPQRN is a news letter which is issued up to 4 times a year and present tropical information in brief, easily accessible articles on fuel issues affecting refinery customers. I also provide information on developments in fields of automotive fuels (including non-traditional fuels like bio-fuels), aviation fuels, industrial gas oil and residual fuel oil.

23. Help Desk Query Consolidated List This document the consolidated list of closed query which were faced by the operating personnel and other personnel during the functioning of refinery. 1. Oil Movement Newsletter The Oil Movement News letter contains general information/articles on Oil and Gas industry, which are contributed by refineries from all over the world. Further this newsletter aims to maximise the synergy by bringing together the full range of specialism involved in Oil Movements.

2. Hydrocarbon Logistics Newsletter I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 14 of 41 The hydrocarbon logistics newsletter is intended as a source of informal information on all matters in the field of planning and scheduling of interest to staff active in the area. Each of the news letter issue covers various topics in the field of planning and scheduling.

3. Guidelines for Business travel and Office working These guidelines are for the benefit and protection of the staff that are engaged in any type of business activity away from their primary work location.

4. Business Continuity and Contingency Planning Action Guide These provide guidelines in conducting a business continuity review and development of a Crisis Management Process.

5. Planning and scheduling (Decision support) This is short PPT presentation on integrated planning and scheduling and on processes, tools and organisation.

6. Business Process Management guideline This guideline

- Provide guidance for Quality Management Advisors, who will be involved with training for any facilitation in business processes selection and analysis

- Provide guidance for process owners who will be leading the management of their business processes

- Provide background information to management and senior staff involved in the continuous improvement of business process Accordingly this guideline covers the following commercial aspect of refineries in detail, namely

- How to select the critical business process

- How to analyse business process

- How to identify potential improvements and put in place measurement and controls so that the process owner can effectively manage the process.

7. Oil Movement and Product Quality I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 15 of 41 The commercial services under this category are aimed at providing integrated solutions to best meet both the challenges faced by refineries i.e. to reduce the cost and improve the product quality.

8. Shell Bench Making 2001 Volume-1 and 2 Benchmarking is one of the modules in the Shell Global Pacesetting programme. It is only the start to Operation Performance improvement. The objective to benchmarking is to allow client refineries to identify performance "Gaps" between their current position and the best performers in the industry. The main focus is to provide a basis of the improvement of Operational Performance. The information provided in the said document can be used for further analysis and benchmarking, a reference document and as guide for target setting.

9. Roads Transportation of goods, Equipment and Product (HSE) This guide sets outs the Group's requirements for effective safety management in Road Transport. It has been designed for use by Shell management and supervisory staff in developing safe driving policies and procedures for their Rod Transport operations and inclusions with HSSE case document.

10. Incident classification, investigation and reporting (HSE) This document provides guidance on the classification, investigation and reporting of incidents which results in injury or illness and in damage to assets, the environment or company reputation. It also addresses incidents that had no adverse outcomes (near misses). It sets out rules for the reporting of incident by Shell companies and joint ventures.

11. Man Made Vitreous Fibers ('MMVF')(HSE) MMVF include products containing refractory ceramic fibers, Fiberglass and mineral wool. This guideline establishes requirements for managing and working with MMVF because available toxicity information and recommendations from manufacturers support controlling exposures to these materials.

12. Benchmarking training seminar This is the material provided by Shell during "Benchmarking Training Seminar" conducted at their training centre "Leeuwenhorst", Netherlands.

I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 16 of 41

16. TA Management Best Practice This document provides a PPT presentation of the better practices in Turnaround Management

17. M-122 Manufacturing Business Economics The aforesaid training course is intended to provide participant with

- a global perception of the refinery as a business segment with Oil products

- a working knowledge of the basic tools and techniques used for economics evaluations in refineries:

      -      short term for refinery optimisation
      -      medium/long term for options evaluations
-     a methodology to tackle economic evaluations and present
      results to assist business decisions

18. Profits and principles - does there have to be a choice ?

I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 17 of 41

19. Performance and Efficiency Conference Year 2002 This is a handout of the "Performance and Efficiency Conference held at Jamnagar Manufacturing Complex in India on 11 to 15 th March 2002".

23. Help Desk Query Consolidated List This document the consolidated list of closed query which were faced by the operating personnel and other personnel during the functioning of refinery.

7. It was then submitted that in view of the limited scope of fees for technical services under the Indo Dutch tax treaty, only such services which did satisfy the 'make available' test, in the context of rendition of technical services, could be brought to tax in India. It was submitted that the services in the nature of commercial services stand excluded from the scope of 'fees from I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 18 of 41 technical services', as specifically elaborated in MoU to Indo US tax treaty which, as held in the case of Boston Consulting Group Pte Ltd [(2005) 94 ITD 31 (Mum)], would be equally applicable for similarly worded treaties with 'make available' clause. Reliance was also placed on the MOU entered into by India and US in the context of the Indo US tax treaty, as also on decisions of the coordinate benches in the cases of Raymond Limited (supra), CESC Limited (supra), DCIT Vs Boston Consulting Group Pte Ltd (supra) and a host of other decisions. It was also submitted that while there cannot be any hard and fast formulae for dividing consideration under the basic refinery package between the consideration for (a) sale of manuals, newsletters etc, (b) technical services which make available the technical knowledge, skill and know how etc, and (c) commercial services which are not taxable as fees for technical services, broadly the same can be divided on an equal basis. It was in this light that allocation of half of consideration for basic refinery package was justified as the minimum amount relatable to fees for commercial services which are not taxable in nature.

8. None of these submissions impressed the learned CIT(A). He rejected the grievances of the assessee, and thus upheld the stand of the AO, by justifying this action as follows:

5.10 We are concerned with payment covered under clause 2.1.2. Therefore, in context of above two Articles, the issue is whether we can split the payments for the Basic Refinery Package into two components, Technical and Commercial as the appellant has done or treat it composite payment as the Assessing Officer has assessed.

5.11 After due consideration, I am of the view that as the contract stands we cannot split the basic package into various components and like any civil contract between two parties it has to be seen in totality. Although it is Authorised Representative's argument that the basic package includes certain technical and commercial services that are independent of each other and can be provided on standalone basis and hence can be considered singly, I am afraid I do not agree to that. This is because-

I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 19 of 41

i) The various services are being offered as a package for which a single consideration is being charged.

ii) RPL or RIL has the option to use various services and hence imputing value to each of the service is not possible at the time of contract.

iii) Each service itself contains four or five components and clearly it will depend on the situation in real-time as to what component is utilized by RIL and to what extent, making it mathematically still more uncertain the pricing of each service.

iv) The underlying purpose of the package in RIL context is the is the operationalising the refinery of RIL. Obviously in such a scenario the various services are inter-dependent and complimentary and cannot be segregated.

5.12. Notwithstanding that contract has to be read as a whole, even the services offered in the Basic Package are technical in nature only. Although in its written submission the appellant has laid great emphasis on the newsletters, conference etc. if one were to look at the Annexure A, listing the services, it can be seen that each service has four or five components and providing newsletters or CDs are only a part of the dissemination of the information in the context, e.g. Primary distillation, Hydrotreating Sulphur Recovery, Cat craching are some of major and core process of an oil refinery where crude oil is refined into different components like petrol, diesel, kerosene etc. There is nothing commercial about the services offered. As per this contract, the appellant is to hand over its skill,, experience and its knowledge of the processes to R1L and also train the personnel of RIL to understand its purpose. It is a clear case of making available the technology to R1Land thereby falling in scope of Article 12(5) of DTAA between India and Holland.

5.13 As stated earlier, the appellant had got a certificate u/s.195 for deduction of tax on 50% of the receipt under the contract. The present action of it has been to a large extent based on that order. Needless to say, order u/s.195 was a summary order and the taxability or otherwise of a receipt has to be seen afresh at the time of assessment. Therefore, any finding contained therein or decision based thereupon is not material to the context.

5.14 Nevertheless, during the course of appellate proceedings, the Authorised Representative was asked to justify as how it claims 50% of the basic refinery package being commercial in nature, in terms of service included in the package and the services rendered. The information furnished by the appellant is I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 20 of 41 reproduced in Annexure B. It would be seen that instead of identifying each service a technical or non-technical, it has in fact gone- a step further to identify the percentage of component of that service as being technical or commercial. I think this is a rather preposterous attempt. A service has to be taken as such and cannot still be split further. The outlandish outcome of the same is that not a single service has been put as 100% technical in nature. The same is not acceptable. Hence the reason the chart is not acceptable is -

i) It splits up a service into further technical or non-technical part; not only this is conceptually incongruent with the scheme of Act, it is also in conflict with the contract under security.

ii) Total manhour listed for three years for the purpose are 52690.

This amount of time spent is not possible for Basic Refinery Package which was for 1200 hrs per year, i.e. at the most the RIL could have clocked in 3600 manhour. Obviously, items covered by other packages have been included in this chart.

iii) The splitting done has no basis and makes no sense. For example, the maximum amount of the (67.5%) has been claimed to have been spent inRefSim, NetSim etc. etc."

5.15 The activity would fall in the service Planning & Scheduling of Annexure A. As per the appellant's classification, it has 40% Technical component while 60% non-technical component. This split up would completely fail any logical test. If improvement and development of systems is treated as passing on the experience or skill or processes it has to be 100% technical. If because of any reason, it is thought otherwise, it has to be 100% non-technical or commercial. There can not be a middle ground. Similarly, service management is part of consultancy services, which forms 13.7% of time spent has been split into 10% technical and 90% non-technical on a basis best known to appellant but being not amendable to any logical reasoning.

5.16 Therefore, it is more than clear that the appellant had no basis for claiming 50% of the Basic refinery package for commercial services. Its attempt to provide some kind of bifurcation is technically fallacious, contradictory, lacks logical basis and is against basic scientific facts.

5.17 The Authorised Representative has also devoted quite a bit of time to argue about "make available" issue. Firstly, I think because the appellant has failed to even identify the services I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 21 of 41 which have been taken out of F.T.S. fold, the test of "make available" cannot be applied to such specified services. On the other hand, if we were to go by the appellant's chart in Annexure B, it is contradiction in terms of the same service being treated partly as having the test of "make available" while it fails partly. As already stated, it would still be the most irrational conclusion if we were to estimate even the percentage of "make- available" component, e.g. as per this chart, 70% of the services rendered for "corrosion" were "made available" about 30% of that service was "not made available". Hence all the arguments of Authorised Representative of "make available" does not materially affect the situation, as it fails at the threshold only.

5.18. Notwithstanding the total lack of basis of argument of "make available", I think something needs to be said about the appellant's attempt to correlate lndo-Netherlands DTAA with Jndo-US DTAA through the Memorandum of Understanding of the later DTAA.

5.19. With due respect to the decision of some benches of Tribunal and keeping in view that no High Court has given any ruling on the issue, much less the jurisdictional High Court; l think any two DTAA's can not be compared. This is because -

i) DTAA's arc negotiated instruments. These are not pieces of legislation. The quotation attributed to Lord Denning in Buhmer Ltd. Vs. S.A. Bollinger (1972) and the other decision cited by the Bench in DCIT Vs. Boston Consulting Group Pte Ltd. 94 ITO 31 Mum, a case relied upon by the appellant very clearly state that these treaties would not normally have the rigour and precise legislative language and hence should not be interpreted by technical laws or precedents.

It needs to be appreciated that it is different thing to compare and look for items which have been included or excluded in two treaties (as done by Karnataka High Court in case of AEG Telefunker Vs. CJT 151 1TR 222) but attributing meaning on the basis of language being para- materia when one of the treaty has a supplementary MOU and other not, is comparing uncomparable.

ii) MOU has been signed, in context of lndo-U.S. Treaty. Having not signed such a memorandum with U.K. Government for an instrument which is signed later, in fact shows the true intention of the parties, namely that the parties to this agreement did not want to restrict the meaning of word "fee for technical services".

I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 22 of 41

iii) Even if the two DTAAs can be compared, the fact that the title being used by the two are different would have its due significance. While the U K. Treaty uses the term "fee for technical services", the ITS. Treaty talks of "fee for included services"

If, as the various authors have stated, the provisions are para-materia, it needs to be sorted out why did the two treaties have used different nomenclature to describe such services. These can not be a case redundancy or usage in spirit. Clearly the intention in the U.S. Treaty was to cover the "included" services while the Holland Treaty was much wider; The presence of MOU in one case and absence in the other could thereby be explained in the context.

5.20. Therefore, in my view, the Indo-Netherland Treaty has to be applied as such and interpreted in itself, without any extraneous help.

5.21. Hence, considering all the facts and the legal angles, 1 think the appellant's claim to seek non-taxability of 50% of its receipts from the sale of Basic Refinery Package as exempt from taxation is rejected on the ground that --

i) The agreement for Basic Refinery Package has to be read as a composite one.

ii) The appellant has no basis to claim that 50% of the services rendered were commercial.

iii) The appellant's attempt to bifurcate its service into technical and nontechnical part is devoid of any basis, logic and is self-

contradictory.

iv) The argument of "make available" either do not apply or cannot be pinpointed by the appellant.

iv) Neither there is any relevance of Memorandum of Understanding to Indo- US DTAA in facts of the case nor can this Memorandum of Understanding in that context extendable to Indo-Holland Treaty."

9. The assessee is not satisfied by the stand so taken by the CIT(A) and is in further appeal before us.

I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 23 of 41

10. 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 position.

11. The fundamental question that comes up for our consideration is the scope of 'fees for technical services' which can be brought to tax under Article 12 of the Indo Dutch tax treaty. Article 12 (5), as it stood in the original text of the treaty, was on the pattern of the traditional model which represented broadly definition of technical services as given in the Indian Income Tax Act. The make available clause being read into this treaty is a result of the most favoured nation clauses embedded in the treaty and the subsequent Indian tax treaties with OECD countries on the 'make available clause' pattern. While on this aspect of the matter, it is important to bear in mind the fact that protocol to the Indo Dutch tax treaty, which was signed on the same day when the said treaty was signed i.e. on 13 th July 1988. It is in this backdrop that we need to take a look at the original Article 12 and the protocol to the Indo Dutch tax treaty.

ARTICLE 12 Royalties, fees for technical services and payments for the use of equipment

5. The term "fees for technical services" as used in this Article means payments of any kind to any person, other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 14, in consideration for services of a managerial, technical or consultancy nature.

V. Ad ARTICLE 12 It is understood that, in case India applies a levy, not being a levy covered by Article 2, such as the Research and Development Cess, on I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 24 of 41 payments meant in Article 12, and if, after the signature of this Convention under any Convention or Agreement between India and a third State which is a member of the OECD, India should give relief from such levy, directly, by reducing the rate or the scope of the levy, either in full or in part, or, indirectly, by reducing the rate or the scope of the Indian tax allowed under the Convention or Agreement in question on payments as meant in Article 12 of this Convention with the levy, either in full or in part, then, as from the date on which the relevant Indian Convention or Agreement enters into force, such relief as provided for in that Convention or Agreement shall also apply under this Convention.

(Emphasis, by underlining, supplied by us)

13. Vide agreement and protocol dated 12 th September 1989, Indo US tax treaty introduced a much narrower definition of fees for technical services. This definition, set out in Article 12(4) of the Indo US tax treaty, referred to the fees for technical services as 'fees for included services' and read as follows:

ARTICLE 12 Royalties 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 :

(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.

5. Notwithstanding paragraph 4, 'fees for included services' does not include amounts paid :

(a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a);

I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 25 of 41

(b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in international traffic;

(d) for services for the personal use of the individual or individuals making the payment; or

(e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent personal services).

14. Explaining the scope of this definition, an MoU of even date, which is integral part of the Indo US tax treaty as it is appended to the treaty itself, stated, inter alia, as follows:

U.S. INDIA TAX TREATY MEMORANDUM OF UNDERSTANDING CONCERNING FEES FOR INCLUDED SERVICES IN ARTICLE 12 Paragraph 4 (in general) This memorandum describes in some detail the category of services defined in paragraph 4 of Article 12 (Royalties and fees for included services). It also provides examples of services intended to be covered within the definition of included services and those intended to be excluded, either because they do not satisfy the tests of paragraph 4, or because, notwithstanding the fact that they meet the tests of paragraph 4, they are dealt with under paragraph 5. The examples in either case are not intended as an exhaustive list but rather as illustrating a few typical cases. For ease of understanding, the examples in this memorandum describe U.S. person providing services to Indian persons, but the rules of Article 12 are reciprocal in application.

Article 12 includes only certain technical and consultancy services. By technical services, we mean in this context service requiring expertise in a technology. But consultancy services, we mean in this context advisory services. The categories of technical and consultancy services are to some extent overlapping because a consultancy service could also be a technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in a technology is required to perform it.

I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 26 of 41 Under paragraph 4, technical consultancy services are considered included services only to the following extent : (1) as described in paragraph 4(a), if they are ancillary and subsidiary to the application or enjoyment of a right, property or information for which a royalty payment is made; or (2) as described in paragraph 4(b), if they make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. Thus, under paragraph 4(b), consultancy services which are not of a technical nature cannot be included services.

Paragraph 4(a) Paragraph 4(a) of Article 12 refers to technical or consultancy services that are ancillary and subsidiary to the application or enjoyment of any right, property, or information for which a payment described in paragraph 3(a) or (b) is received. Thus, paragraph 4(a) includes technical and consultancy services that are ancillary and subsidiary to the application or enjoyment of an intangible for which a royalty is received under a license or sale as described in paragraph 3(a), as well as those ancillary and subsidiary to the application or enjoyment of industrial, commercial, or scientific equipment for which a royalty is received under a lease as described in paragraph 3(b).

It is understood that, in order for a service fee to be considered "ancillary and subsidiary" to the application or enjoyment of some right, property, or information for which a payment described in paragraph 3(a) or (b) is received, the service must be related to the application or enjoyment of the right, property, or information. In addition, the clearly predominant purpose of the arrangement under which the payment of the service fee and such other payment are made must be the application or enjoyment of the right, property or information described in paragraph 3. The question of whether the service is related to the application or enjoyment of the right, property, or information described in paragraph 3 and whether the clearly predominant purpose of the arrangement is such application or enjoyment must be determined by reference to the 'facts and circumstances of each case. Factors which may be relevant to such determination (although not necessarily controlling) include :

1. the extent to which the services in question facilitate the effective application or enjoyment of the right, property, or information described in paragraph 3;

2. the extent to which such services are customarily provided in the ordinary course of business arrangements involving royalties described in paragraph 3;

3. whether the amount paid for the services (or which would be paid by parties operating at arm's length) is an insubstantial portion of the I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 27 of 41 combined payments for the services and the right, property, or information described in paragraph 3;

4. whether the payment made for the services and the royalty described in paragraph 3 are made under a single contract (or a set of related contracts); and

5. whether the person performing the services is the same person as, or a related person to, the person receiving the royalties described in paragraph 3 [for this purpose, persons are considered related if their relationship is described in Article 9 (Associated enterprises) or if the person providing the service is doing so in connection with an overall arrangement which includes the payer or and recipient of the royalties].

To the extent that services are not considered ancillary and subsidiary to the application or enjoyment of some right, property, or information for which a royalty payment under paragraph 3 is made, such services shall be considered "included services" only to the extent that they are described in paragraph 4(b) Paragraph 4(b) Paragraph 4(b) of the Article 12 refers to technical or consultancy services that make available to the person acquiring the service technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design to such person. (For this purpose, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person.) This category is narrower than the category described in paragraph 4(a) because it excludes any service that does not make technology available to the person acquiring the service. Generally speaking, 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 may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc. are 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.

Typical categories of services that generally involve either the development and transfer of technical plans or technical designs, or making technology available as described in paragraph 4(b), include :

1. engineering services (including the sub-categories of bio engineering and aeronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical, and industrial engineering);

2. architectural services; and

3. computer software development.

I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 28 of 41 Under paragraph 4(b), technical and consultancy services could make technology available in a variety of settings, activities and industries. Such services may, for example, relate to any of the following area:

1. bio-technical services;

2. food processing;

3. environmental and ecological services;

4. communication through satellite or otherwise;

5. energy conservation;

6. exploration or exploitation of mineral oil or natural gas;

7. geological surveys;

8. scientific services; and

9. technical training.

15. It is important to note that the MFN clause set out in the Indo Dutch tax treaty is a clause which does not need anything other than a greater relief, vis-à- vis the scope and rate of 'fees for technical services' in the Indo Dutch tax treaty, being given in any other tax treaty with another OECD country. Any such relief being extended automatically incorporates such beneficial arrangement being read into the Indo Dutch tax treaty as well. This MFN clauses clearly stipulates that in the event of India extending any benefits to another OECD country, inter alia, directly by reducing the rate or "indirectly, by reducing the rate or the scope of the Indian tax allowed under the Convention or Agreement in question on payments as meant in Article 12 of this Convention with the levy, either in full or in part" then, as from the date on which the relevant Indian tax treaty enters into force, "such relief as provided for in that Convention or Agreement shall also apply under this Convention". Unlike many other tax treaties, such as with Philippines and Switzerland, wherein where similar provisions, for incorporation of favourable provisions contained in other tax treaties, are existent, but with the exception that in order to make the incorporation effective, the Governments of two countries should first mutually decide of such incorporation in the form of amendment of tax treaty. That's not the case in Indo Dutch treaty. Therefore, whatever benefit is extended under Indo US tax treaty is, by the virtue of MFN clause, stands incorporated in Indo Dutch tax treaty as well. In other words, to decide the scope of 'fees for technical services', we have to see the scope of taxability of similar payments in I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 29 of 41 the Indo US tax treaty and unless that Indo Netherlands treaty is more beneficial to the assessee, the provisions of the Indo US tax treaty will apply here as well. As we hold so, we may also refer to the notification no. 11050 dated 30 th August 1999 [(1999) 155 CTR (Statute) 22] which categorically states that not only the provisions of Article 12 will stand amended accordingly, in the light of the Indo US tax treaty and other similarly worded subsequent treaties, but also "The Memorandum of Understanding and the Confirmation of Understanding, dated 12th September, 1989, with reference to paragraph 4 of Article 12 of the Indo-USA Double Taxation Avoidance Convention (DTAC), will apply mutatis mutandis for the purpose of paragraphs III, IV, V and VI above". In any event, as held by a coordinate bench of this Tribunal in the case of DCIT Vs ITC Limited [(2002) 82 ITD 239 (Kol)], even without this notification, this legal situation automatically prevails as a result of the MFN clause.

17. 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 Hon'ble Delhi High Court in the case of DIT Vs Guy Carpenter & Co Ltd ([(2012) 346 ITR 504 (Del)] and Hon'ble 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 Hon'ble jurisdictional High Court or by Hon'ble 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.

I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 30 of 41 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.

18. Learned CIT(A) was thus clearly in error in holding that the provisions of the Indo US tax treaty cannot be read into the provisions of Indo Dutch tax treaty. As clearly stated in the MoU to the Indo US tax treaty, which stands incorporated in the Indo Dutch tax treaty as well by the virtue of MFN clause, "under paragraph 4(b), consultancy services which are not of a technical nature" cannot be treated as technical services. Accordingly, fees for non technical consultancy services cannot be treated as covered by the scope of 'fees for technical services'. There are a large number of decisions by the coordinate benches which reiterate this proposition. In the case of Boston Consulting (supra), it was stated that "advising on "marketing strategies" is held to be outside the scope of technical services" and that as for the "business of rendering strategy consulting services, such as business strategy, marketing and sales strategy, portfolio strategy" carried on by the assessee "the nature of these services is materially similar". All these services were held to be outside the scope of fees for technical services taxable under the Indo US tax treaty. In the case of Bharat Petroleum Corporation Ltd vs JDIT [(2007) 14 SOT 307 (Mum)], another coordinate bench of this Tribunal, inter alia, held that market study covering study of supply and demand analysis, domestic refining capacity, price forecast etc did not constitute fees for technical services as it did not transmit the technical knowledge. In the case of Ernst & Young Pvt Ltd In Re [(2010) 189 Taxman 409 (AAR)], the Authority for Advance Ruling, inter alia, I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 31 of 41 observed that "some of the services enumerated have the flavor of managerial services" but "services of managerial nature are not included in Article 13 (of Indo UK tax treaty, which is in pari materia with the treaty provision before us) unlike many other treaties". We are in considered agreement with the views so expressed by the Authority for Advance Ruling. On the same lines are various decisions of this Tribunal in the cases of ICICI Bank Limited Vs DCIT [(2008) 20 SOT 453 (Mum)] and McKinsey & Co Inc Vs ADIT [(2006) 99 ITD 549 (Mum)]. What essentially follows, therefore, is that as long as the services rendered by the assessee are managerial or consultancy services in nature, which do not involve or transmit the technology, the same cannot be brought to tax as fees for technical services. An example of this type is a service is set out in example no. 7 to the MoU appended to the Indo US tax treaty, which is adopted in respect of Indo Dutch tax treaty as well- as noted earlier in this order, as follows:

Example (7) Facts:

The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol-free oil and wishes to market the product world- wide. It hires an American marketing consulting firm to do a computer simulation of the world market for such oil and to advise it on marketing strategies. Are the fees paid to U.S. company for included services?

Analysis:

The fees would not be for included services. The American company is providing a consultancy service which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc., 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 the commercial information service does not make the service a technical service within the meaning of paragraph 4(b).

19. In this light, let us now take a look at a few deliverables set out in Annexures to the Technology Services Agreement, a copy of which is filed before us at pages 1 to 57 of the compilation of papers, set out below:

I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 32 of 41 Activities and deliverables In the earlier mentioned three main areas that require specific managerial attention of the Service Manger the following activities and deliverables are identified:

Service provision · Stay closely abreast of customer needs. Categorise and evaluate customer need and document. Value the customer needs in terms of contribution and required service levels.

· Determine by "walking around" and staying in direct contact with the Site (amongst others by attending site and operational meetings) what other service needs could be beneficial to the customer and take stock of the service needs as seen by other Shell Global Solutions staff. Value these service needs with Shell Global Solutions staff and consolidate.

· Present to customer a prioritised valuation of service needs. Discuss and reach agreement with the customer on service actions to be taken and consolidate these in a comprehensive service plan. Document important decisions taken.

· Allocate and align service requirements in Shell Global Solutions home bases and facilitate delivery.

· Make sure that service deliveries are of a quality as promised.

· Handle customer complaints.

· Resolve conflicts (commercial, technical, staff matters, safety).

· Administer the service accounts (status of delivered services versus plan, outstanding services etc.).

· Set up and take part in a regular and joint review and appraisal process by the customer and Shell Global Solutions of service progress and quality. To this end ensure the required management information is available in terms of services delivered versus service plan and feedback related to quality of individual service contributions. The review process will include operational-, systems-, organisational- and training progress, and staff performance.

· Promote implementation of the aged corrective actions produced by the review and appraisal process.

Communications and relations I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 33 of 41 · Familiarise with the Site, its organisation and policies. Stay abreast of economic and other drivers of the decision making process of Reliance Petroleum Limited · Ensure rapid familiarisation of Reliance Staff with Shell Global Solutions organisation,- people, and - information sources.

· Ensure full participation by Reliance Staff in Shell Global Solutions workshops, seminars, conferences etc. · Put in place a communication and reporting structure between Shell Global Solutions staff at Site, Reliance, and Shell Global Solutions' home bases. Stay in good contact with other stake holders at site. The main purposes of these communication structures are to enhance concerted on-going activities, maximum pro-activity and effective determination of service needs, to provide efficient progress-monitoring and- administering and provide basis for review and appraisal.

· Ensure the communication structure stays effective.

· Send monthly progress reports to Shell Global Solutions and keep the business groups in Shell Global Solutions fully informed on developments in their respective areas.

· Pay regular visits to Shell Global Solutions to ensure that the business unit stay fully clear about required service levels.

Personnel matters · Promote and assist in maintaining goal-oriented direction of advisory and seconded staff of Shell Global Solutions. Hence, ensure that:

Shell Global Solutions staff are and stay clear bout overall objectives Shell Global Solutions staff have clear job descriptions with defined and clear individual responsibilities, tasks, targets and objectives Shell Global Solutions staff sty abreast of customer needs and wishes, overall developments and anything that my require adjustments to their job requirements Shell Global Solutions staff are clear bout service reporting systems vis a vis Reliance staff, the Service Manager and the Shell Global Solutions home bases I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 34 of 41 Ensure an efficient reporting system and efficient templates are in place for Shell Global Solutions staff so as to maintain maximum time available for their core-activities.

Sty in active contact with Shell Global Solutions staff, structurally allocate time for sound-boarding and stay easily accessible o them.

Organise quarterly staff review and appraisal sessions with Reliance and Shell Global Solutions.

Ensure fair performance rating Shell Global Solutions staff receives regular (at least quarterly or more frequently if so required) feedback on individual performance.

· Godfather the seconded Shell Global Solutions staff at site and assist in taking care of their well-being.

· Godfather the assigned staff of Reliance Petroleum Limited at other operating sites PRE-START-UP ORGANISATIONAL REVIEW OBJECTIVE The objective of a pre-start-up organisational review is to check the readiness of the entire organisation for start-up. This includes general management, start-up and operations management, HSE management, engineering management (i.e. maintenance, electrical, instrumentation, projects), training management, and technical and laboratory management. This review is always done for a Shell-owned facility and experience shows that it allows the refinery to eliminate a significant number of problems and achieve a smoother start up (yielding in effect the equivalent of a minimum of two weeks additional profitable processing time).

DELIVERABLES The review team, consisting of professionals with extensive refining experience, will deliver a report which includes prioritised list of recommendations for change based on the review findings. This list is developed in a consensus manner between Reliance management and the review team. TERMS OF REFERENCE I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 35 of 41 Typical terms of reference are given below. These should be adopted to include specific items, such as limitations to scope, and agreed with Reliance prior to the review.

1. SIOP will carry out a review of all appropriate facilities (including the marine terminal, outside plot and inside plot).

SIOP will report the finding of the review to Reliance and will seek an understanding on the action items with Reliance prior to departure of the review team.

2. The review will be carried out and will encompass an examination of any "Operations Implementation Plan" which has already been developed by Reliance. Areas to be covered will include organisation, management system, decision- making, communications channels, training plans and pre- commissioning/start-up plans.

3. The review will seek to identify any deficiencies which could impact on a successful start-up and initial period of operation of the new facilities.

4. The results of the review are intended to assist Reliance in constructive manner to improve the readiness of is organisation to operate the new facilities.

5. Reliance is responsible for following-up on the list of action items.

PRE-START-UP TECHNICAL HSE REVIEW OBJECTIVE The objective of a technical pre-start-up HSE review is to ensure that all possible operating conditions, including start-up, shutdown, as well as maintenance, can be handled in a safe healthy and reliable manner, with minimum environmental impact. Shell experience shows that this review will minimise production loss by at least week's operation in the life time of the plant DELIVEABLES The review team, consisting of professionals with extensive refining experience, will deliver a report which includes a prioritised list of recommendations for change based on the review findings. This list is developed in a consensus manner between Reliance management and the review team.

TERMS OF REFERENCE I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 36 of 41 Typical terms of reference are given below. These should be adapted to include specific items, such as limitations to scope, and agreed with Reliance prior to the review.

1. A desk study will be performed on location to:

· Carry out a limited review of the latest revision of Process and Utility Engineering Flow Schemes and Process Safeguarding Memoranda (including Safeguarding Flow Schemes). His review focuses on the main technical safety and operability features to ensure that the plants will handle all foreseeable operating conditions, including start-up, shutdown (both normal and emergency), in a safe and reliable manner, with minimum environmental impact.

· Identify deviations from current SIOP design practices, guideline and recommendations on technical IISE, fire safety and operability issues and analyse the implications of those deviations on plant integrity, operability and environment. It will not address fire safety issues; these may be covered by a separate fire safety review if Reliance wishes.

· Review the interfaces between the various plants to ensure that the safety and environment integrity of the interconnected plants (including utility systems) is not violated by the interconnections.

2. A site inspection will be carried out to:

· Ensure that the safety and environmental integrity of the design is reflected in the as-built facilities.

· Review by inspection operability aspects, safe exists and accessibility, with reference to process engineering flow schemes or design drawings when required.

· Review general safety equipment and safety facilities (e.g. safety showers, gas detectors and alarms).

Note: The site inspection does not replace the final and detailed P&I check.

3. A check will be carried out on the availability and status of start-up/shutdown and emergency procedures, standing instructions, operating manual and start-up planning and training programmes (with detailed spot checks as considered appropriate).

I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 37 of 41

4. A list will be prepared showing the deficiencies identified and placing them in one of two categories:

· A items - which would lead to an unacceptably hazardous situation if the installation was to be started up without modifications.

· B items - which, even if not implemented before start-up, would leave an acceptable level of safety and general technical HSE features on a short-term basis. Implementation should be at first opportunity but not later than during the first planned shutdown.

5. A formal report of the findings and recommendations of the review will be prepared. While at the draft stage, the report is discussed and agreed with the relevant site management representatives (preferably immediately at the end of the review visit). The report will include a record of the discussions and consensus on key issues, such as accepted deviations from standards and guidelines.

20. None of the above deliverables involve any transfer of technology even though certainly these deliverables are crucial for success of the client's business. The consideration for these services is included in the consideration for the basic refinery package. Similarly, so far as physical deliverables by way of manuals and newsletters (as set out in paragraph 6 earlier in this order) are concerned, consideration for such deliverables cannot be brought to tax as fees for technical services either. The fact that these services or physical deliverables are interlinked with certain technical services, in our considered view, does not alter the basic character of these services and physical deliverables.

21. As a matter of fact, learned CIT(A) has not even seriously disputed the above position. His primary objection, however, is that these services cannot be segregated as these services are given as a package and are interlinked anyway, and as the assessee has not set out an acceptable basis for division of consideration for these services. As for the fact that these services are interlinked, as we have noted above, the mere fact that commercial or I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 38 of 41 managerial services are linked with the technical services does not change the character of commercial or managerial services. That's what the MoU to Indo US tax treaty, as noted earlier, also states. Whether the technical and non technical services can be segregated or not, we find guidance from Hon'ble Supreme Court's judgment in the case of Continental Services Limited Vs CIT [(1992) 195 ITR 81 (SC)]. Speaking through Hon'ble Justice Ranganathan, one of the most distinguished former Presidents of this Tribunal adorning the office of Hon'ble Supreme Court judges at the relevant point of time, Hon'ble Supreme Court had observed as follows:

An assessee cannot claim deduction under s. 80-O in respect of certain receipts merely on the basis that they are described as royalty, fee or commission in the contract between the parties. By the same token, the absence of a specific label cannot be destructive of the right of an assessee to claim a deduction, if, in fact, the consideration for the receipts can be attributed to the sources indicated in the section. The second proposition is equally untenable. Contracts of the type envisaged by s. 80-O are usually very complex ones and cover a multitude of obligations and responsibilities. It is not always possible or worthwhile for the parties to dissect the consideration and apportion it to the various ingredients or elements comprised in the contract. The cases referred to by the Tribunal and Sri Ahuja as to the indivisibility of a contract arose in an entirely different context. For purposes of income-tax, a principle of apportionment has always been applied in different contexts. Consolidated receipts and expenses have always been considered apportionable in the contexts: (a) of the capital and revenue constituents comprised in them; (b) portions of expenditure attributable to business and non-business purposes; (c) of places of accrual or arisal; and (d) of agricultural and non-agricultural elements in such receipts or payments. This is a point that does not need much elaboration and it is sufficient to refer to decided cases cited under the passages on this topic at pp. 47, 137, 264, 621 and 677 of Kanga & Palkhivala's the Law and Practice of Income Tax (Volume I, eighth edition). We are, therefore, of the opinion that, if, as we have held, the contracts in the present case oblige the assessee to make available information and render services to the foreign Government of the nature outlined in s. 80-O, it is the duty of the Revenue and the right of the assessee to see that the consideration paid under the contract legitimately attributable to such information and services is apportioned and the assessee given the benefit of the deduction available under the section to the extent of such consideration (Emphasis, by underlining, supplied by us) I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 39 of 41

22. Clearly, therefore, the consideration for basic refinery package is to be apportioned between the various deliverables under the overall package. The mere fact that the overall package is considered as a whole and the services are interlinked cannot be excuse enough for not apportioning the consideration.

The overall consideration is for a package as a whole which, as noted above, consists of several physical deliverables and several commercial services which cannot be brought to tax as fees for technical services. It is, to borrow the words of Hon'ble Supreme Court, "duty of the revenue, and right of the assessee" to see that the consideration paid for the package attributable to such services and deliverables is apportioned and the assessee is given the benefit of non taxability in respect of the same.

23. We have noted that the Assessing Officer, at the time of issuing order under section 195(2) in respect of the remittances of consideration under the basic refinery package to the assessee, had held that fifty percent of consideration for basic refinery package can be treated as attributable to the services which are not taxable as 'fees for technical services'. However, during the assessment proceedings, this aspect of the matter was not examined at all. In the course of the appellate proceedings, learned CIT(A) has rejected the apportionment on the ground that it is not possible to do so. He has observed that "the underlying purpose of the package is operationalising the refinery " and " obviously in such a scenario the various services are inter- dependent and complimentary and cannot be segregated". We are, for the detailed reasons set out above, unable to see any merits in this approach. We have also noted that the learned CIT(A) was in error in rejecting the apportionment by observing that "total man-hours listed for three years for the purpose are 52690, and that "this amount of time spent is not possible for Basic Refinery Package which was for 1200 hrs per year, i.e. at the most the RIL could have clocked in 3600 man-hours" and thus coming to the conclusion that "Obviously, items covered by other packages have been included in this chart". He was in error in concluding the total time spent for I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 40 of 41 service rendered in connection with BRP cannot exceed 3,600 man-hours i.e 1,200 man-hours per contract yea. The aforesaid limit applied to services rendered by the appellant under the category of 'Help desk services' which were to be rendered within the BRP and not for the various services to be rendered under the BRP. The action of the CIT(A) cannot, therefore, be sustained in law. We have also noted that there is no specific discussion about the values to be assigned to the consultancy services which are non technical in nature and to the physical deliverables. We have also noted that in the 195(2) order, the Assessing Officer has categorically observed that "only a part of the total services under the agreement are taxable on account of its being a composite contract and also because the commercial services rendered by the assessee are saved from taxation in view of Article 12 of the Indo Dutch DTAA read with protocol to DTAA between India and USA" and then proceeded to adopt 50% of total payment under basic refinery package as non taxable, on a best judgment basis. No doubt this order does not bind the Assessing Officer but then it cannot be open to him to simply brush it aside, without any cogent material, to come to a conclusion directly opposed to the stand taken therein. As long as the Assessing Officer can demonstrate, after collecting necessary details from the assessee, that the non taxable consideration component (i.e. consideration for physical deliverables, consideration for services other than technical services and consideration for services which donnot transmit the technical know how etc) is less than fifty percent of the overall consideration paid by the assessee for basic refinery package, he can certainly come to that conclusion. It is, therefore, necessary that all the requisite details, as may be available to the assessee and as may be requisitioned by the Assessing officer, must be taken into account to facilitate this apportionment. We are, however, not inclined to conduct this exercise directly at the stage of second appeal. We, therefore, remit the matter to the file of the Assessing Officer by upholding the plea of the assessee in principle and directing the Assessing Officer to apportion the consideration for basic refinery package on the above lines.

I.T.A. No.: 1283/Ahd/2010 Assessment year: 2005-06 Page 41 of 41

24. As the matter is being remitted to the file of the Assessing Officer with the directions as above, we see no need to deal with other issues raised in this appeal.

25. In the result, the appeal is allowed for statistical purposes in the terms indicated above. Pronounced in the open court today on 10 th day of November, 2015.

   Sd/-                                                                  Sd/-
Kul Bharat                                                        Pramod Kumar
(Judicial Member)                                            (Accountant Member)

Ahmedabad; November 10 th 2015.

Copies to:    (1)    The appellant       (2)    The respondent
              (3)    CIT                 (4)    CIT(A)
              (5)    DR                  (6)    Guard File

                                                                           By order etc


                                                                Assistant Registrar
                                                     Income Tax Appellate Tribunal
                                                   Ahmedabad benches, Ahmedabad

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