Income Tax Appellate Tribunal - Delhi
M/S Outotec India Pvt. Ltd.,, New Delhi vs Dcit, New Delhi on 27 March, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHE 'F', NEW DELHI
Before Sh. Bhavnesh Saini, Judicial Member
And
Sh. N. S. Saini, Accountant Member
ITA No. 4511/Del/2015 : Asstt. Year : 2010-11
Outotec India Pvt. Ltd., Vs Dy. Commissioner of Income
507, 5th Floor, Copia Corporate Tax, Circle-13(1),
Suites, 9, Jasola Commercial New Delhi-110002
Complex, Jasola,
New Delhi-110025, Delhi
(APPELLANT) (RESPONDENT)
PAN No. AAACO9433A
Assessee by : Sh. G. C. Srivastava, Adv. &
Sh. Suvinay Kumar Dash, Adv.
Revenue by : Sh. Surender Pal, Sr. DR
Date of Hearing : 12.03.2019 Date of Pronouncement : 27.03.2019
ORDER
Per N. S. Saini, Accountant Member:
Thi s i s an appeal filed by the assessee agai nst the orde r of l d. Commi ssi oner of Income T ax (Appeal s)-7, Del hi dated 30.04.2015.
2. The assessee has rai sed foll owi ng grounds of appeal :
"1.0 That in the facts and circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) [hereinafter referre d t o as L d. CIT( A)] erred in upholding the action of Ld. Deputy Commissioner of Income Tax [hereinafter referre d to as Ld. AO] in making disall owance u/s 40(a)(i) of the Income Tax Act, 1961 ('Act') amounting to Rs.2 ITA No.4511/Del/2015
Outotec India Pvt. Ltd.
95,95,363/- representing pa yment of management service fees to Out otec Oyj.
1.1 That in t he facts and c irc ums tances of the case and i n law , t he Ld. CIT(A) erre d in upholdi ng the action of the Ld. AO in co ncl udi ng that the payment of management servi ce fees of Rs. 95,95,363/- to Outotec Oyj would come wit hi n the purview of technica l services as per A rticle I 3(4)(c) of the Indo Finland Tax T reaty ('Tax Treaty') . 1.2 That in t he facts and c irc ums tances of the case and in la w, t he Ld. CIT(A) as well as Ld. AO erred in misinterp reti ng the make availab le clause as present in Artic le I3(4)(c) of Tax Treaty and concl udi ng that the management services received by Appella nt f rom Outotec Oyj wo uld be taxable as fee for technical services ('FTS') unde r t he Tax T reaty w itho ut p ro vidi ng any cogent reaso ns to s uppo rt the s ame. 2.0 That in t he facts and c irc ums tances of the case and i n law , t he Ld. CIT(A) erre d in upholdi ng the action of Ld . AO i n maki ng di sallo w ance u/s 40(a)(i) of the Act amounti ng to Rs . 6,89,025/- and Rs. 4,81,308/- representing payment of consultanc y fees to Inte rnati onal Project Service s OY ('IPS') and Outotec Researc h OY ('ORY') respectively. 2.1 That in t he facts and c irc ums tances of the case and i n law , t he Ld. CIT(A) erre d in upholdi ng the action of the Ld. AO in co ncl udi ng that the payment of consultanc y fees of Rs . 6,89,025/- and Rs . 4,81,308/- to IPS and ORY respectivel y woul d come within t he purview of technical services as per Article 13(4)(c) of the Tax Treaty.
2.2 That in t he facts and c irc ums tances of the case and in la w, t he Ld. CIT(A) as well as Ld. AO erred in misinterp reti ng the make availab le clause as present in A rticle 13(4)(c) of Tax T reaty a nd co ncl uding that the cons ulta ncy services recei ved by Appella nt from IPS and ORY would be taxable as FTS under the Tax Treaty w itho ut p ro vidi ng any c ogent reaso ns t o support the same.
3. That the appella nt c raves lea ve to add, amend , modify, resci nd, supp lement or alter any of the grounds stated hereinab ove eithe r before or at the time of heari ng the appeal."3 ITA No.4511/Del/2015
Outotec India Pvt. Ltd.
3. The Assessi ng Offi cer has made the di sall owance by observi ng as under:
"3. Disallow ance of Service Fees Paid to Ouotec Ovi and Consultan cy charges paid to International Pr ojects Services OY and Outotec Resear ch OY:-
During the assessment proceedings, it was observed that the assessee has paid a n amount of Rs. 95,95,363/- to Outotec Oyj a s service fees to company. Further the assessee company has made payments to International Project s Services OY and Outotech Research OY amounting to Rs. 6,89 ,025/- and Rs. 4,81,308/- respectively and booke d the above expenses under consulta ncy charges. The assessee wa s requi red to show whether tax was deducted at sou rce on such payment. In response t o this the assessee submitted in its reply dated 19 t h March 2013 that Tax was not deducted on these payments. Further in the same l etter the asse ssee company also filed a detailed su bmission providing reasons for non deducti on of tax. The relevant porti on of the submissions are reproduce d as under: ......................................................... ......... .....................................
"I have considered the arguments and submission of the assessee and they are n ot accept able on following grounds:-
a. The assessee's contention that the service rendered by Outotec OyJ, is not taxable in India as the services did n ot satisfy the definition of fees for technical se rvices as per Art icle 13 of India Finland Treaty is not acceptable because the services provided by Outotec Oyj, international projects services OY and Outotec Research OY is very well covere d under the f ee for technical services as defined in the India-Finland Treaty. The meaning of the phrase "make-available" used in the India Finland Tre aty was imported by the assessee from the India U SA DTAA and so I am of view that by doing so the a ssesse e is trying to get away with the liability under section 195 of the Income Tax Act The DTAA are country specific an d 4 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
the Import of the meaning from DTAA treaties made with other countries is not permissible.
b. Further the assessee is contention that as per provisi ons of section 90 (2) of the Act Outotec Oyj, international projects se rvices OY and Outote c Research OY are allowe d to take t he benefit of the beneficial provisions of DT AA also doe s not hol d good. As it is explained in the preceding para gra ph that the service provided to the assessee company is falling within the purview of the definition of technical services as envisaged in Article 13 of the DTAA and a s per India Finland DTAA the tax on such services would be levied @20%.
c. Secti on 195 of the I.T Act states that any person responsible for paying a ny non-resident, not being a company, or to a forei gn company, any interest or any other sum cha rgeable under the provisi on of this Act (not being in come chargeable under the head " Salaries") shall, at the time of credit of such Income to the account of the payee or at the time of payment thereof in cash or by the Issue of a cheque or draft or by any other mode, whichever is earlier, de duct incom e tax thereon at the rates in force. The payments made to Outotec Oyj, international proje cts se rvices OY an d Out otec Research OY are fee for technical services and such services are chargeable to t ax as per source rule within the meaning of section 9 of the Act. Therefore the a ssessee w as liabl e to de duct TDS on this payment under the provision of section 195 of the Act.
In view of the foregoing discussi on it is clear that the payment of Rs 95,95,363 made to Outotec Oyj, Rs. 6,89,025/- to International Projects Se rvices OY and Rs. 4,81,308/- to Outote c Research OY are chargeable t o tax in India and is li able for TDS unde r the provisions of secti on 195. The assessee has failed to deduct T DS u/s 195 of th e I.T Act theref ore the provisions of secti on 40a(i) are hereby invoked,. So the aforesaid expenditure is di sallowed under the provisi on of section 40a(i) read with section 9 and 5 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
section 195 and added ba ck to the income of the assessee."
4. On appeal , before the Commi ssi oner of Income Tax (Appeal s), the assessee submi tted as under:
"Ground No. 1 (a), (b ), (c) These grounds are d irected ag ainst disallowan ce of Service Fees p aid amounting to Rs.95,95,363/- u/s 40(a)(i).
3.0 Our Submission 3.1 The allegations of the AO may be rebutted as under:
3.2 The appellant company was set up in the financial year 2007-08, for the purpose of providing supervisory services to various Indian parties. The management of the company felt that the company should adopt the gl obal pra ctices and standards in its business operations. With such an aim the appellant company entered into an agreement with Outotec Oyj effective from July 1, 2009. As per the terms of the agreement, Outotec Oyj will provide assistance to the appellant company in areas that include communications; finance and treasury, t ax, accounting, huma n resou rce, legal, business development, busin ess intelligence, marketing development, support services etc. 3.3 Outotec Oyj over a pe riod of time has developed ce rtain standard practices for efficient business ope rations. Thus, for the purposes of achieving global standardization of operations and assisting the a ppellant Com pany so as t o better carry out its business operat ions, during the financial year ("FY") 2009-10, the appellant company entered into an agreement with Outotec Oyj.
Further, Outotec Oy j has highly experienced personnel an d kn owledge f or providing such services.
6 ITA No.4511/Del/2015Outotec India Pvt. Ltd.
3.4 No services we re rendere d by Outotec Oyj to the appellant to enable the appellant to conduct such activity in future without recourse to Outotec Oyj.
3.5 For the purpose of dete rmining the taxability of a non-resident in India, covered by a tax treaty; there are two approaches that ca n be adopted. The first approach is to deci de whether the income of the non-resident is taxable under the provisions of the Act. If the income i s found t o be taxable under the provisi ons of the Act , then one needs to look at the provisi ons of the tax treaty to con sider the taxability of the income under the treaty. The result which is more favourable then needs to be adopted.
3.6 Alternatively, before proceeding to conside r taxability of a non-resident, covered by the provisi ons of a tax treaty, in term s of the provisions of the domestic tax laws of the source jurisdiction, it may be useful to first check whether source jurisdiction ha s a right to tax tha t income at all. In case such right is so establish ed then one can proceed t o examine whether or n ot the domestic tax laws of the source country provide for taxation of such an income, and if so, to w hat extent and in what manner. If the right to tax income under the treaty is not established, the re is n o further requirement to examine the provisi ons of the domestic law. This approach of first determining the taxability of income under the provisions of the tax treaty has been affirmed in the case of Hon'ble Jabalpur ITAT in the case of Bi rla C orporation vs ACIT(TDS) [I.T .A. No.: 251 and 252/JAB/13].
3.7 Although both the approaches would yield the same result, the secon d approach however a ppea rs to be much more logical espe cially when in this case, the AO himself has first examined the previsions of the India-Finland DTAA before examining the provisi ons of the Act.
3.8 Needless to say, if the income of the non- resident is n ot taxable under the provisions of the tax treaty, there would be n o re quirement to 7 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
examine the taxability of such payments under the provisi ons of the Act . Simila rly, if the income is taxable, then the provisions under the Act would be required to be examined, where t he payments would be consi dered as "fees for techn ical services" and hence be liable to tax withholding.
4.0 Taxability under the India-Finland DTAA 4.1 The appellant humbly wishes to submit that the DTAA between India and Finland was first notified vide Notification No. G.S.R. 786(E) dated November 20 , 1984 reported in 152 ITR 57 (Statutes). Copy of the notification is enclosed herewith and marked as Annexure 1. This DTAA was then amended vide Notification No. G.S.R. 495(E), dated 13th August, 1998, where certain clauses including the clause relating to Article 13 - Royalties and fees for technical services was amended. Thereafter, this DTAA was revised vide Notification No. 36/2010, date d 20-5-2010where again there were changes in various clauses including Article 13.
4.2 Since, at this moment, the issue revolves around applicability of Article 13, the definition of "fees for technical services" is reproduced below as notified at various stages:
Vide Notification No. G.S.R. 786(E) dat ed November 20, 1984 reported in 152 ITR 57 (St) 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 individuals for independent pe rsonnel services mentioned in Articles 15, in considerati on for services of a manage rial, technical or consultancy nature, including the provision of services of technical or other personnel." (Emphasis Supplied) Vide Notificat ion No. G.S.R. 495(E), dat ed 13th August, 1998, reported in 233 ITR 84 (St) 8 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
For the pu rposes of pa ragraph 2 , and su bject t o paragraph 5, the term "fees for t echnical services means payments of any kind t o any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other pe rsonnel) which:
(a) are ancillary and subsidiary to the application or enjoyment of the right, propert y or information for which a payment described in sub-paragraph
(a) of paragraph 3 is received; or
(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in sub-para gra ph (b) of paragraph 3 is received; or
(c) make available technical knowledge, experience, skill, know-how or processe s, or consist of the development and transfer of a technical plan or technical design.
........................................"
Vide Notification No. 36/2010, dated 20-5- 2010, w.e.f 01.04.2011
(b) The term "fees for technical se rvices" as used in this Article means payments of any kind, other than those mentioned in Articles 14 and 15 of this Agreement as consi derati on for managerial or technical or consultancy service s, including the provisi on of services of tech nical or other personnel." (Emphasis Supplied) 4.3 On perusal of the above, it can be said that for the assessment year under consideration, for a payment to qualify as fee for technical services under the India - Finland DTAA, two conditions need to be satisfied (a) the se rvices should be of a "technical nature" and (b) such services should "make available" technology to the person acqui ring the services.
4.2 From a perusal of the Service Agreement, it can also be n oted that majorit y of the services rendered by the appellant are pri marily "managerial" in nature including but not limited to providing:
9 ITA No.4511/Del/2015Outotec India Pvt. Ltd.
a. Internal, external and ma rketin g communication services: drafting and pu blishing internal announcements / press releases globally, collecting custome r feedback, pre paring ma rketing presentations & ma rketing materia l;
b. Financial and treasury functions: consulting group companies in their financial risks, assistance in evaluation of funding alternatives, hedging and other transacti on services etc.;
c. Tax and Accounting Services; a ssistance in local tax audit processes / in tax matters, accounting services including book keeping, accounts receivables and payables;
d. Human resource arid Legal services:
establishment of global recruitment process, conduct employee satisfacti on and other surveys, assistance and coordination of local legal compliance;
e. Business Development and Busi ness Intelligence services: providing strategi c tool s, templates and guidelines, promoti on of sales, introducing new products in business portfolio; ma rket, customer & competitor reviews on a monthly basis;
f. Market development services: development of sales and ma rketing strategies, making ma rket area reports, etc. 4.3 Taking the above-mentioned services into consideration, it can be observed that the services rendered to the appellant in terms of the Service Agreement are primarily 'manage rial' in nature since the purpose of entering into the Agreement is to standardi ze the pra ctices globa lly of the group companies as a whole so that they adopt the standard procedure s with the object of achieving global standa rdizati on for the group as a whole and hence these services fall outside the scope of the definition of FTS provide under the India- Finland DTAA since the word mana gerial has been specifically excluded from the said definition.10 ITA No.4511/Del/2015
Outotec India Pvt. Ltd.
4.4 The appellant would al so like to bring to y our goodselfs attention that it was the intent of the countries to specifically exclude "managerial services" from the purview of the definition of FTS in the India-Finland Treaty. It i s pe rtinent to note that wherever the intention of the countries has been to use the term "managerial" the same has been explicitly used in the respective DTAAs, f or instance, the India-France DTAA or the India-Singapore DTAA. A copy of the extract of the India-France DTAA and India-Singapore DT AA where the term "managerial" has been specifically used has been reproduced below for your ready reference:-
India-Fr ance DTAA "ARTICLE 13 - R oyalties and fees for technical services and payments for the use of equipment -
1. Royalties, fees for technical services and payments for the use of equipm ent arising in a Contracting State and paid to a resident of the other Cont racting State may be ta xed in that other Contracting State.
2 ..............
3 ...............
4. The term "fees for technical se rvices" 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 service s mentioned in Article IS, in considerati on for services of a manage rial, technical or consultancy nature.
..................................."(Emphasis Supplied) India-Sing apor e DTAA "ARTICLE 12 : ROYALT IES AND FEES F OR TECHNICAL SERVICES - 1 . Royalt ies and fees for technical services a rising in a C ontracting St ate and paid to a resident of the other Contracting State may be taxed in that other State. 2 .....................
3 .....................
11 ITA No.4511/Del/2015Outotec India Pvt. Ltd.
4. The term "fees for technical services" as use d in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through 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 i s received; or
(b) make available technical knowledge , experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein; or
(c) consist of the development and transfer of a technical plan or technical desi gn, but excludes any service that does not en able the person acquiring the service to apply the technology contained therein."
.......................(Emphasis Supplied) 4.5 Further, on re ading of the re vised DTAA between India and Finland, whi ch has come into force with effect from April 1, 20 11, it can observed that the said DTAA also me ntions the term "managerial" in the revised definition of FTS. Extract is reproduced bel ow again for your perusal:
"Article 12 : ROYALTIES AND FEES FOR TECHNICAL SERVICES - 1.Royalties or fees for technical services arising in a Contracting State and paid to a re sident of the other Contracting State may be taxed in that other State.
2 ............................
3.(a) ....................
(b) The term "fees for technical se rvices" as used in this Article means payments of any kind, other than those mentioned in Articles 14 and 15 of this Agreement as conside ration f or manage rial or technical or consultancy services, including the provisi on of services of technical or other personnel." (Emphasis Supplied) 12 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
4.6 In this rega rd, we w ould like t o draw support from the ruling given by Hon'ble AAR in the matter of Invensys Systems Inc. Vs DIT [183 Taxman 81 (AAR)] wherein AAR on a substantially similar set of facts have held that the services do not qualify as 'technical' services since the sam e are 'manage rial' in nature. The relevant extracts of the Ruling are reproduced here-unde r:
"8. On an analysis of the nature of functions that are enumerated in the Agreement, it is fairly dear that many or most, of them are managerial in nature. The learned Counsel for the applica nt has drawn our attention to the dictionary mea nings of the word 'manage'. In Interte k Se rvices, In re (2008) 307 ITR 418 this Authority observed:
"First, a bout the connotati on of the term "managerial". The adjective "man agerial" relates to manager or management. Manage r is a pe rson who manages an industry or business or wh o deal s with administration or a person who organi zes other people 's activity. As pointed out by the Supreme Court in R. Dalmia vs. CIT [19 77] 106 ITR 895, "management" includes the act of managing by direction, or re gulation or supe rintendence. Thus, managerial service essentially involves controlling, directing or a dministering the business."
In some DTAAs, apa rt from the terms 'technical' and 'consultancy', 'manage rial' is also included within the FTS clause.
8.1. The contention of the learned counsel for the applicant is that almost all the services to be carried out by the applicant under the Agreement are not technical but are managerial nature and therefore they are out of purview of FTS provisi on. Learned counsel submits that the purpose of the activities undertaken under the Agreement is to give direction or guidance to the group compan ies as a whole so that they will adopt or follow standard procedure s or templates in various matters. By virtue of such managerial intervention, common benefit accrues to 13 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
the affiliated companies and their level of performance will consequently improve.
8.2. I find force in the contention of the learned counsel that the services are not really technical or consultancy services. No doubt , the expression "technical services" cannot be con strued in a narrow sense as held by this Authority i n Intertek Testing Services India Pvt. Ltd 317 ITR 41 8. It was observed therein that the term "technical" ought not to be confined only to technology relating to engineering, manufacturing or other a pplied sciences. Professi onal service imbued with expertise could be regarded as technical service It was further pointed out In Intertek that consultancy services could also be regarde d as 'technical' in nature and the two expressions "technical" and " consultancy" cannot be placed in water-tight compa rtments. Though some of the services required to be pe rformed under the agreement have the trappings of technical or consultancy services, looking at the substance and the predominant nature of the services, they primarily fall under the category of 'manage rial'. (Emphasis supplied by us) 4.7 Thus, in light of the overall submission and the judicial precedents, it is clear that the intention of the countries as per the earlier India-Finland DTAA, as applicable in the case of the appellant for the year under conside ration, w as not t o include managerial services within the purview of the definition of FTS. Therefore the observati on of the AO that the services are covered under the definition of technical se rvicers envisage d i n the India Finland Tax Treaty does not hold good.
4.8 Further, assuming that even if the management services / functions can be brought within the definition of technical or consultancy services, yet the same will not be taxable as FTS as the other element in clause (c) of Article 13(4) of the DTAA viz., "ma ke available" is not satisfied in the instant case which has been explained in detail in the paragraphs mentioned here in below.
14 ITA No.4511/Del/2015Outotec India Pvt. Ltd.
4.9 It is submitted that the India-Finland DTAA has hot defined what constitutes as 'make available technical knowledge, expe rience, skill etc'. H owever, the term has been explained by way of examples in the Protocol to the India-US DTAA (which has a similar provision). The Protocol attached to arid forming part of the India-US DTAA confirms that the MOU is intended to give guidance to both the tax payers and tax authorities (of both the contracting states) in interpreting Fees for Technical Services. The MOU states as under:
"Generally speaking, technology w ill be considered 'made availa ble1 when the person acqui ring the same is enabled to apply the tech nology. The fact that the provisi on of the se rvice may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc, are made availa ble to the person purchasing the se rvice within the meaning of paragraph 4(b) . Similarly, the u se of a product which embodies technology shall not per se be considere d to make the technology available."
4.10 Therefore, some of the importa nt rules laid out in the interpretati on of make available a s evident from Prot ocol t o the India-USA DTAA are a s under:
Usually technology will be considered to be "ma de available" when the person acquiri ng the service is enabled to apply the technology. The fact that the provisi on of the service may require technical input by the person providing the service does not per se mean that technical knowl edge, skills, etc., are made available to the person purchasing the service.
Mere ren dering of services does not "ma ke available" the technology unless the person utilizing the services is able to make use of the technical knowledge , etc. by himself in his business or for his own bene fit and without recourse to the pe rformer of the services in future. The technical knowledge, expe ri ence, skill, etc. 15 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
must remain with the person utilizing the services even after the rende ring of the services has come to an end.
4.11 Reference may also be made to the example 4 as contained in the said MoU:
Facts:
A U.S. manufacturer operate s a wallboard fabrication plant outside India. An Indian builder hires the U.S. company to produce wallboa rd at that plant for a fee. The Indian company provide s the raw mate rials and the U. S. manufacture r fabricates the wallboa rd in its plant, using advanced technology. Are the fees in this example payments for included services?
Analysis:
The fees would not be for in cluded se rvices. Although the U. S. company is clearly performing a technical service, no technical knowledge , skill , etc., are made available to the Indian company, nor is there any development a nd transfer of a technical plan or design. The U. S. company is merely performing a contract manufacturing service."
4.12 There are a plethora of case decisions where the concept of "make availa ble" h as been explained.
The appellant would like to sight before you r hon our a few of the case decisions on this point.
4.13 The Hon'ble Karnat aka High cou rt in case of De Beers India Minerals (P.) Limited [2012] (346 ITR
467), had the occasion to deal w ith the concept of 'make available ' which was explained as under:
"It is not enough that the service s offered a re the product of intense technol ogical e ffort and a lot of technical knowledge and experience of the service provide r have gone into it . The technical knowledge or skills of the provider should be imparted to and a bsorbe d by the receiver so that 16 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
the receiver can depl oy simila r technology or techniques in the future without depending upon the provide r. Technol ogy will be considered "made available" when the person acquiri ng the service is enabled to apply the technology. The fact that the provisi on of the service that may require technical knowledge , skills, etc., does not mean that technology Is made availa ble to the person purchasing the service, within the meaning of paragraph (4)(b). Simila rly, the use of a product which embodies technology shall not per se be considere d to make the technology available."
4.14 it is respectfully submitted that the issue was also examined by the Authority f or Advance Rulings ("AAR") In the case of Interte k Testing Services India Pvt. Ltd. (175 Taxman 375). The AAR was examining the scope and meaning of the definition of the term FTS as contained in Article 12 of the DTAA between India and UK. While examining the issue the AAR held as follows-
"Rendering technical or consultancy service is followed by a relative pronoun "w hich" and it has the effect of qualifying the services. That means the technical or consultancy service rendere d should be of such a nature that " makes available "
to the recipient technical kn owl edge, kn ow-how and the like. The service should be aimed at and result in transmitting the technical knowledge, etc. so that the payer of se rvice could de rive an enduring benefit and utilize the knowledge or know-how in future on his own w ithout the aid of service provide r. By making availa ble the technical skills or know-how, the recipient of service will get equipped with that knowledge or expertise and be able to ma ke use of it in future, Independent of the service provide r. In other w ords, to fit into the terminology "make available", the technical knowledge , skills etc. must remain with the person receiving the services even after the particular contract comes to an end. The services offered may be the product of intense technological effort and lot of technical knowledge a nd experience of the service provider w ould have gone into it. But, 17 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
that is not en ough to fall within the descri ption of services which make available the technical knowledge , etc. The technical knowledge or skills of the provider sh ould be imparted to an d absorbed by the receiver so that the receiver can deploy similar technology or tech niques in future without depending on the provider."
4.15 Further, the connot ations of expression 'ma ke available' were considere d by the Hon'ble Income Tax Appellate Tribunal ("Tribunal") in the case of Raymond Ltd. vs. Dy. CIT (2 003) 86 ITD 791 (Mumbai). The Tribunal, after ela borate analysis of ail the related a spects, observe d that "Thus, the normal, plain and grammatical meaning of the language employed, in our unde rstanding, is that a mere rendering of se rvices not roped in unless the person utilizing the services is a ble to make use of technical knowledge, etc., by himself in his business and or for his own benefit and without recourse to the performer of services, in future". In Raymond's case (supra) , the Tribunal also hel d that rendering of technical services cannot be equated with making available the technical services. Later, in the case of CESC Ltd. vs. Dy. CIT (2003) 87 ITD 653 (Cal.)(TM) also, the question regarding the scope of expre ssion 'making availa ble' came up for th e conside ration. In that case also the view was that "not only the services sh ould be of technical in nature but such as to result in making the technology available to the person receiving the technical services. We also agree that merely because the provisi on of the service may require technical input by the person providing the service, it cannot be said that technical knowledge , skills, etc. are made available to the person purcha sing the service".
4.16 The Hon'ble Delhi High Cou rt in case of Guy Carpenter and C o. (ITA NO. 202/2012 dtd. 23.04.2012) has dismisse d the re venue's appeal and agreed with the finding of Delhi T ribunal that "make available" condition ha s not be en satisfied in as much as no technical knowledge, experience, skill, know-how , processes, have been made available by 18 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
Assessee to the insurance companies operating in India.
4.17 The Hon'ble Delhi Tribunal i n the case of NQA Quality Systems Registrar Ltd. v. Dy. CIT reported in 2 SOT 249 ( Del) while discussing the clause "make available" held that when the said term is used, if technology is transferred throu gh the technical service then alone it is taxable. Using technical input In order to provide consultancy service will not to making available technical knowledge , skill, expertise or know-how . The Hon'ble at Para 15 of the judgment also held that-
"In construing the provisions of India-UK DTAA, it Is possible to ma ke a reference to provisions of the analogous provisions in the India-US DTAA an d this is a permissible aid t o i nterpretation of treaties as held by the Hon'ble Mumbai Tribunal in the case of Raymond Ltd v DOT [2003] 86 ITD
791."
4.18 The Hon'ble Delhi Tribunal in ca se of Romer Labs Singapore Pte. Ltd. (ITA No. 3883/Del/2009 dated 24.01.2013) has also placed the reliance on judgments of AAR in case Anaph arm Inc. (305 ITR
394), Raymond Ltd. (supra) and Delhi High Court in case of Guy Ca rpenter and C o. (supra) and held that the amount received by the C ompany is not taxable in India as FTS since service rendered by Company do not make available technical knowledge , experience, skill, know how etc to assessee in above sited case so as t o enable it to a pply the technology contained therein.
4.19 The appellant wishes t o pla ce rel iance on the following further judgements in support of "make available" as have been decided by various Judici al Authorities from time to time:
(a) Mckinsey& C o., Inc. (Philippines) v. Asstt. DIT [2006] (99 ITD 549) (Mum. Tribunal)
(b) Worley Parsons Services Pty. Ltd [2008] (301 ITR 54) (AAR) 19 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
(c) ISRO Satellite Centre [2008] (307 ITR
59)(AAR)
(d) DCIT vs Boston C onsulting Group Pvt. Ltd. [2005] (94 ITD 31) (Mumbai Tribunal);
(e) National Organic Chemical Industries Ltd. vs DCIT [2006] (96 TTJ 765) (Mumbai Tribunal); and
(f) Bharat Petroleum C orporation L td vs JCIT [2007] (111 TTJ 375) (Mumbai Tribunal) 4.20 In view of the above discussi on, it is humbly submitted that the payment made by the appellant to Outotec Oyj being not taxable in India, there was no liability on the pa rt of the a ppe llant to deduct tax from such payments and accordingly the same cannot be disallowed u/s 40(a)(i) of the Act.
5.0 Without prejudice to the aforesaid, the appellant further wi shes to su bmit before your kindself that on pe rusal of the assessment order, it appears that the AO has n ot disputed the concept of "make available" vis-a-vis se rv ices rende red as contended by the appellant. How ever, the AO is of the view that the meaning of the phrase "ma ke-
available" used in the India-Finland Treaty which has been imported by the appellant from the India USA DTAA is n ot correct and theref ore the disallowed the expense on this ground.
5.1 In this rega rd, the appellant humbly wishes to submit before your kindself that the India-Finland DTAA has n ot interprete d the meaning of "make- available" and for this re ason the appellant company has resorted to MOU of India US DTAA whe re in the word "make- availa ble" has be en explicitly dealt with. The assessing officer h as objected the reference made to India US DTAA by the appellant company stating that the meaning assigned t o the word "ma ke-available" in the India-US DTAA-cannot be used to used to interpret the meaning of "make available" in India Finland Treaty.
5.2 The appellant would like t o subm it that none of the services received from Out otec OYJ unde r the Services Agreement make available any technology, know-how , process etc., since, Ou totec India will not 20 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
be able t o perform these se rvice s without recourse to the Outotec Oyj. The objective of the Agreement Is only to render services to Outotec India to adopt the standard practices with the object of achieving global standa rdizati on for the group as a whole and thus, it is submitted that the Ou totec Oyj ha s not transferre d any such technical kn owledge etc to the recipient during the course of provisi on of these services.
5.3 The Assessing Officer has alleged that the meaning of the term "make av ailable" cannot be imported from India-US T reaty as each treaty Is country specific. In this connection reference may be made to the Special Bench decision of the Hon'ble Kolkata Tribunal in the case of CESC Ltd v DCIT(supra). In this case the appellant had made payments to a foreign party i n connection with rendition of engineering se rvices in India. The foreign party was a tax resi dent of United Kingdom. The appellant contended that the amount paid to such foreign party wa s not taxa ble in India in view of the Article 13(4)(C) read with the definition of "make available" contained in the Memorandum of Understanding between India- US Treaty. The Tribunal while deliberating on the issue whether the MOU in India-US Treaty could be applied while interpreting the provisi ons of India-UK Treaty, held at para 18 as under
"A pertinent question that remain s to be consi dered is as to whether it is permissi ble to de rive any benefit from the explanatory memorandum in respe ct of the DTAA between India and USA in interpreting similar provision of DTAA between India and U.K. In this connection it is pertinent to point out that the DTAA between India and USA is dated 20- 12-1990, i.e., prior to DTAA between India and U.K. date d 11th February, 1994 in 206 ITR ( St.) 235. It i s well- settled principle of law that when an expression of doubtful meaning has received an authoritative interpretation from any Court of law and when the Legislature adopts the same w ord or expression, subsequently, It must be held that the Legislature 21 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
was conscious of the interpretation given by the Courts of such expressi on of doubt ful meaning."
5.4 Reference in this connection could also be made to the decision of the Hon 'bl e Mumbai Tri bunal in the case of Raymond Ltd v DCIT(supra), In this case as well while interpreting the term "make available" as per Indi a-UK Treaty, the Tribunal held as under:
"94. The Memorandum of Understanding appended to the DTA with USA and the Singapore DTA can be looke d into as ai ds t o the construction of the UK DTA. They deal with the same subject (fees for technical services, referred t o in the US agreement as "fees for included services"). As noted earlier, it cannot be said that different meanings should be assigned to the US and UK agreements merely because of the MOU despite the fact that the subject matter dealt with is the same and both have been entered into by the same country on one side (India). The MoU supports the contention of the assessee regarding the inte rpretati on of the words "make availa ble". The port ions of the MoU explaining para 4(b) of the relevant article, which we have extracted earlier in our orde r while adverting to the contentions of the assessee, fully support its interpretation . Example (4) given in the MoU also supports it This is of a US company manufacturing wallboard for the assessee using assessee's raw material but using its own plant. No technical kn owledge, experience, skills, plan or design is held to have been made available in such a case. However, in contrast, exa mple (5) is of a US company rendering certai n services In connection with modifying the software used by the Indian company to suit a parti cular purpose. A modified compute r softwa re programme is supplied by the US company to the Indian company. It is therefore held that there Is a transfer of a technical plan (i.e., computer sof tware) which the US company has developed an d made available to the Indian company. The fees are chargeable . These examples affirm the position taken by the 22 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
assessee- com pany before us as to the interpretation of the words "make available"
95. Article 12.4(b ) of the DTA wit h Singapore was relied on by both side s -- by Mr. Dastur t o show that the words used therein, viz. "if such services........ma ke available tech nical knowledge , experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein..." merely ma ke it explicit what is meant by "make available" while Mr. Ka pila contended that the se words being absent in the DTA with UK, it indicates that the assessee-com pany need not be In a position t o apply the technology for its own use in future without recou rse to the person rendering the services. On a careful consideration of the matter, we are of opinion that the addition of these words in the Singapore DTA merely make it explicit what is embedded in the words "make available"
appearing in the DTA with UK an d USA. The MoU under the US DTA and the examples given thereunder, to which we have already referred, make it clear. The meaning of those words were expressly incorporate d in the Singapore agreement by adding the necessary words. What would be the use of coining the words "make available" if it is not intended, as contended by Mr. Kapila, that the person utilizing the se rvices should be in a position to apply the technology for his own use in his business in future without recourse to the person rendering the services? W ould it not be a contradicti on in terms t o say t hat though the technical knowledge etc. a re "made available", the person t o whom they a re made available cannot apply the same for his benefit? The treaties, in our opinion, could not have intended such a result. What was therefore implicit in the concerned articles in the UK and US DTAs was made explicit by adding the necessa ry words i n the Singapore agreements. As Mr. Dastur rightl y remarke d, It is a process of evolution guided by experience and what started in 1990 -- the DTA with the US -- as a MoU gradually crystallised and got incorporated in the article itself in the DTA with Singapore."23 ITA No.4511/Del/2015
Outotec India Pvt. Ltd.
5.5 In most of the case s cited a bove, the relevant treaty for which the decision has been en is a treaty other than the USA treaty. Few other ca ses where the treaty interpretation has been followed are:
- Deputy Director of Income-tax vs. Pre roy A.G .
[2010] 39 SOT 187 (MUM.)
- Permasteeiisa (India) (P.) Ltd. v s DCIT [2014] 51 taxmann.com 502 (Bangalore - Trib.) 5.6 In view of the above, the contention of the AO that the concept of "make availabl e" is limited to the USA DTAA and cannot be use d to interpret other DTAAs is not tenable.
Ground No. 2(a), (b ), (c) These grounds are d irected ag ainst disallowan ce of Consultancy Ch arges am ounting to Rs 6,89,025 and Rs 4,81,308 paid to International Projects OY and Outotec Research Oy respectively.
6.2 Submission 6.3 In this connection it is submitted that the appellant company was set up in the financial year 2007-08, for the purpose of providing supervisory services to various Indian partie s. However in the initial stage, it did n ot have enough technical expertise to supervise and undertake such large scale supervision as it was i n the process of recruiting the experts from India. Accordingly it was slowly building its market presence in India and hence did not want to risk in such a big project which could tamper the image, if something went wrong. Theref ore keeping in mind these commercial benefits and to better its brand Image in India, the project supe rvisory assignment was sub-contracted to IPS and ORY , resi dents of Finland who were experts in handling such large-scale integrated project. The fees we re settled at an hou rly rate for weekly mandays of se rvices actual ly rendered by the companies in India along with travelling and other 24 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
cost. Accordingly an agreement was entered Into by appellant com pany and IPS on 1st November 2008, to rende r supe rvisory services and execute the assignment on behalf of the a ppellant company as per the terms of the agreement with Sterlite Industries Ltd and the appellant. No similar agreement was entered betwe en the appellant company and ORY.
6.4 No part of the assi gnment was ex ecuted to the appellant which could have enabled the Indian company to learn and execute similar projects on its own in future.
6.5 The appellant further wishes t o submit before your kindself that on perusal of the assessment orde r, it a ppears that the AO ha s not disputed the concept of "ma ke available" vis-a-vis services rendered as contended by the a ppellant. However, the AO is of the view that the meaning of the phrase "make-available" used in the India-Finland Treaty which has been importe d' by the appellant from the India USA DTAA is not correct and therefore the disallowed the expense on this ground. [For det ailed submission on "make availab le concept, pleas e refer to the arguments taken under ground 1(a), (b) and (c)] 6.7 In this rega rd, the appellant humbly wishes to submit before your kindself that the India-Finland DTAA has n ot interprete d the meaning of "make- available" and for this re ason the appellant company has resorted to MOU of India US DTAA whe re in the word "make- availa ble" has be en explicitly dealt with. The assessing officer h as objected the reference made to India US DTAA by the appellant company stating that the meaning assigned t o the word "ma ke-available" in the Indi a-US DTAA cann ot be used to used to interpret the meaning of "make available" in India Finland Treaty.
6.8 In this connection reference is invited the decision of the Hon'ble Kolkat a T ribunal in the case of CESC Ltd v DCIT (supra) where in it is specifically stated that India-US treaty coul d be applied while 25 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
interpreting the provisions of, India UK treaty. A similar decision was also rendered by the Hon'ble Mumbai Tribunal in the case of Raymond Ltd v DCIT (Supra).
6.9 So in view of the above discussion and also the judicial precedence deliberated above it is humbly submitted that the payment made by the appellant company to IPS and OR Y being not taxable in India, there was no liability on the part of the appellant to deduct tax from such payments and accordingly the same cannot be disallowe d u/s 40(a)(i) of the Act.
7.0 On going through the submission of the appellant, it is amply clear that the concept of "make available" would be applicable under the treaty provisi ons not requi ring the appellant to withhold tax. Hence, the appellant humbly prays that the additions made by the AO be deleted."
5. The Commi ssi oner of Income Tax (Appeal s) confi rmed the orde r of the Assessi ng Offi cer by observi ng as under:
5. Ground No. 1 & 2 are in respect of addition of Rs.1,07,65,696/-. This amount was in respect of consultancy/management expenses claimed by the appellant. The AO had a pplied 40 (a)(ia) stating that no TDS w as de ducted u/s 195 on these payments and therefore the appellant could not claim these as a deduction.
5.1. During the year the appellant was engaged in the business of marketing, su pervising and support services for the mining, metallurgical A metals, mineral A chemical processin g industry. The company had paid Rs.95,95 ,363/- to Outotec Oyj a s service fees, Rs.6,89,029/- to In ternational Proje ct Services OV A Rs.4,81,308/- t o Outotech Resea rch OY as consultancy charges.
5.2. The appellant stated that these services given were in the nature of managerial services and do not make available any technical knowledge or skill.26 ITA No.4511/Del/2015
Outotec India Pvt. Ltd.
5.3. The AO however stated that the services provided by Out otec Oyj, OY and Outotec Resea rch OY were fees for technical servi ces as defined in Article 13 of the India Finland Treaty.
5.4. The AO further stated that the make available clause was not present in the India Finland treaty and was incorporated from India USA DTAA. Therefore, the appellant was requ ired to deduct TDS u/s 195 on these payments.
I have perused Article of the India Finland Treaty.
As per Article 13 of the India Finland DTAA:
Royalties and fees for technical services - 1. Royalties and fees for technical services arising in a Contracting State and pai d to a re sident of the other Contracting State may be taxed in that other State.
2..........................
3..........................
4. For the purposes of pa ragraph 2, and subject to paragraph 5, the term "fees for technical services"
means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other pe rsonnel) which:
(a) are ancillary and subsidiary to th e application or enjoyment of the right, property or information for which a payment described i n sub-paragraph
(a) of paragraph 3 is received: or
(b) are ancillary and subsidia ry to th e enjoyment of the prope rty for which a payment described in sub-para gra ph (b) of paragraph 3 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.
5.6. I have perused the agreement between the appellant and Outotec Oyj. Some services which the 27 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
service provider is require d to provide a re given below:
10. Information Technology se rvices--
· IT Infrastructure services
- Wide Area Network
- Outotec Active Directory
- Anti Virus Control
- Mail Lotus Notes
- Internet Access
- Remote Access
- Dial-up and Wireless service
- Push Mail
- Partner Vi rtual Private Network (VPN)
- PC support for the Finish group companie s located at Espoo campus · IT Infrastructure speci al services
- Disk space for Out otec Minerals Oy
- Wide Area Network (WAN) accelerati on systems for the group com panies
- Client administration system (CMS) service
- Virtual private network hardware site connection (VN HW site connection) · IT Application services
- SAP and SAP related services including licences for the use of SAP server hosting and maintenance obtained from a third party
- Project data a dministration syste ms including document administration and project collaboration and their maintenance
- Design applications support, such as CAD t ool s for the group companies' product data administration (PDM) and engineering dat a administration (EDM) systems
- Lotus Notes database s and applicati on development and support for the Finnish group companies
- Development and support of customer relationship administration (CRM) systems 28 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
· IT asset administration and purch asing services for the Finnish group companies
- IT asset purcha sing services, such as purchases of hardware and softwa re
- Telephone services, which a re acquired from a third party
11. Research and Technol ogy Development (RTD) services
- Research and techn ology development services for the group companies
- Improving and developing existing technologies and new technologies for the grou p companies
- Boosting and improving technol ogy innovation processes and ways of working
- Informing other group compani es about RTD activities within the group compan ies
- Obtaining of external funding for research projects
- Coope ration with universities and resea rch institutes (e.g. cooperation agreement with Geological Survey of Finland, fra me agreement with universities)
- Coordination of quality systems (e.g. ISO 9001), environmental, health and safety systems and sustainability analysis
- Funding and administering of explorative projects for the group companies
- Funding and administering of generic competences for the group compa nies
- Providing an d funding of comm on tools, softwa re applications and databases for the group companies
- Maintaining and coordinating technology portfoli o (own technologies, competitors) for the group companies
- Development of new business concepts (acquiring of new technol ogies) for the group companies
- Provisi on of Innomanage r tool for the group companies 29 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
- Funding of annual fees in training and quality organi zations
- Searching and activating cross divisional RTD cooperation (e.g. RTD Committee) for the group companies
- Arran ging Technology Awa rds rew arding for the group companies
12. After Sales services
- Developing new and long-te rm se rvice concepts and solutions for the group compa nies
- Increasing sha re of after-sales services sold globally
- Training of after-sales personnel
- Developing common global processes and tools, such as cust omer relationship administration (CRM), product data administration (PDM) and e- catalog 5.7. There is no doubt that the service provide r is making available technical know-how. From a perusal of the services to be rendered by Outotec OY, I am of the view that they are covered by clause 4 (c) of Article 13 of the India Finland DTAA. A perusal of se rvices to be rendered makes it very clear that technical knowledge has been made available to the appellant.
5.8. Some services rende red are quite clearly in the nature of technical services and technical knowledge made available for use by the recipients. As can be seen, the service provider was t o "develop maintain intranet platform". This ce rtainty cannot be termed as management or consultancy service. It is in the nature of technical se rvice. Fu rther the service provide r was to su pport a nd develop the technologies........by participating in IPR committee and Research and Technology Development Committee. These are definitely technical in nature.
5.9. Definition of the term "Fees for Technical Services" (FTS) has been a matter of controve rsy for quite some time because different interpretations 30 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
have been given by various courts with regard t o the true scope and meaning of FTS.
5.10. It is very important to decide whether the services rende red fall within FTS or n ot. This is because in case the service rende red by the foreign party is covered under FTS, then the foreign party shall be subject to t ax in India irrespe ctive of its Permanent Establishment (PE) in India.
5.11. On the other hand, if the services rendered are not FTS, then it would be taxable in India only if the foreign party has any PE or fixed base in India.
5.12. The expression "Fees for Technical Services"
is defined in Explanation 2 to sect ion 9(1)(vii) of the Income-tax Act as under:
"For the purposes of this clause, 'f ees for technical services' means any considerati on (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of service s of technical or other personnel)."
5.13. A perusal of the aforesaid definition clarifies that the term FTS would include service of the following three types:
• Managerial • Technical • Consultancy
5.14. Therefore, in order t o decide whether the service will fall within FTS or not, it is necessary t o determine the scope of the aforesaid three terms.
5.15. In the above context, refe rence may be made to a recent decisi on of the Mumbai Tribunal in the case of TUV Bayren (India) Ltd. dated 06.07.2012 in ITA No 4944/Mum/2002.
5.16. The Hon'ble Delhi High Court in the case of CIT vs. Bharti Cellular Limited (2 009) 319 ITR 139 held that the "technical services" would have reference to only technical services rendere d by 31 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
a human; it would not include any service provided by machine or robots.
5.17. Likewise, the scope of "manage rial service"
and "consultancy service" is that such services can be covered under FT S when the service is provided in the context of running and management of client's business.
5.18. In the case of CIT vs. De Beers India Minerals (P) Ltd., the Hon'ble High Court of Karnataka observed a s under:
"22 What is the meaning of "make available". The technical or consultancy service rendered should be of such a nature that it "make 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 se rvice could derive an enduring benefit and utilize the knowledge or kn ow -how on his own in future without the aid of the service provide r. In other words, to fit into the terminology "making available", the technical kn owl edge, 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 service offered a re the product of intense technological effort and a lot of technical knowledge and experience of the service provide r have gone into it. The technical knowledge or skills of the provide r 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. Technol ogy will be considere d "made available " when the person acquiring the se rvice is enabl ed to a pply the technology. The fact that the provision of the service that may require technical know ledge, skills, etc., does not mean that technol ogy is made available to the person purchasing the se rvice, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technol ogy shall per se be considere d to make the technol ogy available. In other words, payment of consideration would be regarded a s 'fee for technical/incl uded services" only 32 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
if the twin test of rendering services and making technical knowledge available at the same time is satisfied."
5.19. In the case of Direct or of Income -tax vs. Guy Carpenter & C o. Ltd., the Hon 'bl e Delhi High Court observed a s under:
"9. A plain reading of Article 13(4)(c) of the DTAA indicates that 'fees for technical services' w ould mean payments of any kind to any person in consideration for the rendering of any technical or consultancy services which, inter alia, ",make s available" technical knowledge , experience, skill, know-how or processes, or consist of the development and transfer of a t echnical plan or technical design. According to the Tribunal this "make available" condition ha s n ot been satisfied inasmuch as no technical knowledge, experience , skill, know-how, processe s, ha ve been made available by the assessee to the insurance companies ope rating in India. It also does not consist of the development and transfer of any technical plan or technical design."
5.20. In the case of NQA Quality Syste ms Registrar Ltd. vs. DC IT, the Hon'ble ITAT Delhi, Bench 'F ' observed a s under:
"15. A pe rusal of the aforesai d MoU together with the example cited in the said memorandum clea rly reveals that for a fee to be called fee for technical services rende red, it is essentia l that technical knowledge , skill, know-how should be ma de available to the assessee and the assessee shoul d be at liberty to use them in his own right. In construing the provisions of Indo-UK DTAA, it is possible to make a refe rence to provisi ons of the analogous provisions in the Indo- U5 DTAA and this is a permissi ble aid to interpretati on of treaties a s held by the Hon'ble Mumbai Bench in the case of Raymond Ltd. v Dy. CIT : (2003) 86 ITD 791......"
5.21. In case of Worley Pa rson s Se rvices Pty. Ltd., the Hon'ble Court obse rved as under:
33 ITA No.4511/Del/2015Outotec India Pvt. Ltd.
"5 The relevant clause is clause (g). It has no application in the present case i n as much as no technical knowledge, experience, skill or know-h ow is 'made available' to GAIL on account of rendering the services. Mere rendering of services is not sufficient to attract clause (g), but those services should result in technical knowl edge, etc. being made available to the other contra cting party."
5.22. It is clea r from the a bove de cisions that the person to whom fees for technica l services are paid make available not only technical knowledge but also skills, experience, process, know- how.
5.23. I shall now discuss Section 5 of the I. T. Act which talks of what the total income of a person who is a resident and non-resident is:-
"(1) Subject to the provisions of this Act, the total income of any previous yea r of a person who is a resident includes all income from whatever source derived which -
(a) is received or is deemed to be received in India in such year by or on behalf of such person: or
(b) accrues or a rises or is deemed to accrue or arise to him in India during such year: or I accrues or arises to him outside India during such year:
Provided that, in the case of a person not ordina rily resident in India within the meaning of sub-s. (6) of s. 6, the income which accrues or arises t o him outside India sh all not be so included unless it is derived from a business controlled in or a profession set up in India.
(2) Subject to the provisions of this Act, the total income of any previous yea r of a person who is a non-resident includes all income from whatever source de rived which -34 ITA No.4511/Del/2015
Outotec India Pvt. Ltd.
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or a rises or is deemed to accrue or arise to him in India during such year."
Explanation 1:- Income accruing or ari sing outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is ta ken into account in a balance sheet prepa red in India.
Explanation 2:- For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it ha s accrued or a risen or is deemed to have accrued or arisen to him shal l not again be so included on the basis that it is received or deemed to be received by him in India."
5.24. In view of this section therefore the payment made by the appellant to the non-resident was income as it was received and deemed to accrue in India.
5.25. I shall also now quote section 195:
"195. Other sums.-(1) Any pe rson responsible f or paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable unde r the provisions of this Act (not being income chargeable under th e head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.
Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the 35 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
time of payment thereof in ca sh or by t he issue of a cheque or draft or by any other mode.
Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O. Explanation.--For the purposes of this section, where any interest or other sum as aforesaid is cre dited t o any account, whether called "Interest paya ble account" or "Suspense a ccount" or by any other name, in the books of account of the person lia ble, to pay such income, such creditin g shall be deemed to be cre dit of such income t o t he account of the payee and the provisions of this section shall apply accordingly.
(2) Where the person responsible for paying any such sum chargeable under this Act **(other than salary) to a non- resident conside rs that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application t o the Assessing Officer t o dete rmine, by general or special order, the appropriate proporti on of such sum so chargea ble, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargea ble.
(3) Subject to rules made under sub-section (5) any person entitled to receive any interest or other sum on which income-tax ha s to be de ducted under sub-
section (1) may make an application in the prescribed f orm to the Assessing Officer for the grant of a certificate authorising h im to receive such interest or other sum without deduction of tax under that sub-section, and where any such certificate i s granted, every person responsibl e for paying such interest or other sum to the person to whom such certificate is granted shall, so lon g as the ce rtificate is in force , ma ke payment of such interest or other sum without deducting tax thereon under sub- section (1).
(4) A certificate granted under sub-section (3) shall remain in force till the expiry of the period specified 36 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
therein or, if it is cancelled by th e Assessing Officer before the expiry of such period, till such cancellation.
(5) The Board may , having regard to the convenience of assessee s and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an a pplication may be made for the grant of a ce rtificate under sub-secti on (3) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith. "
5.26. The main components of the section are that
1. any person
2. making payment of interest or any other sum (not being salary).
3. to a non resident or to a foreign company.
4. shall at the time of payment.
5. by any mode
6. deduct income tax.
5.27. The section applies to all pe rson 's resident or non-resident and the persons ma y or may not have residence or place of business in India or any other presence in any manner in Indi a. The secti on is squarely applica ble on the appella nt as it has made a payment to a non resident foreign company.
5.28. Further, I am of the view that the payment made by the appellant is for technical services made available to it and is covered by Article 13 of the DTAA.
5.29 The appellant was required to deduct TDS on the payments, which was not done. The addition made by the AO by invoking section 40(a)(ia) is confirmed. The grounds of appe al are thus ruled against the appellant."
6. Before us, the Authori zed Repre se ntative of the assessee submi tted that the i ssue i s covered i n favour of the asse ssee 37 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
by the deci si on of Delhi 'E' Bench of the Tri bunal in the case of the assessee i tsel f for assessment year 2009-10 reported i n (2015) 41 ITR(T) 449 (Del .) and by the deci si on of Kolkata Bech 'C ' of the Tri bunal in the case of Out otec Oyj Vs DCIT(IT)-2(1), Kolkata reported i n 162 ITD 541 (Kolkata-Tri b).
7. The Departmental Representati ve reli ed on the orde rs of the l ower authori ti es.
8. We fi nd that in the assessment year 2009-10, the Tri bunal hel d as under:
"2. The only issue raised in this a ppeal is a gainst the confirmation of disallow ance made by the Assessin g Officer (AO) for non-deducti on of tax at source in terms of section 195 of the Income-tax Act, 1961 (hereinafter also called 'the Act') on expenses incurred by the assessee amounting to Rs.1,92,86,815/- to International Project Se rvices Oy . (IPS)
3. Briefly stated, the facts of the case are that the assessee, an In dian company, is engaged in the business of providing marketing, supe rvision an d support services f or the mining metallurgical as well as metals, minerals and chemical processing industry .
A sum of Rs.1,92,86,815/-was cl aimed as deduction under the head 'Supervision cha rges.' On being called upon to explain as to why no deduction of tax at source was made in respect of such payments credited to non-resident, the assessee stated that such amount was not chargeable to tax in the hands of the recipient as per Article 13 of the Double Taxation Avoidance Agreement between India and Finland (hereinafter called 'DTAA') and as such there was no obligation to deduct tax at source. At the same time, the a ssessee admitted the taxability of the amount in the hands of the payee in terms of section 9 of the Act. The AO observed that the assessee sta rted deducting tax at sou rce afte r 1.4.2011 on payments made to this resident of 38 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
Finland, for similar services at the applicable rates of tax. The assessee's contention that deduction of tax at source was st arted after 1.4 .2 011 because of the later amendment in the DTAA, di d not persuade the AO. In the final analysis, the AO came to hold that the amount of Rs.1 .92 crore incu rred for supervisory services was deemed income accruing or arising in India to the resident of Finland and, hence, wa s chargeable to tax. In the absence of the assessee deducting tax at source u/s 195 of the Act, the AO held that the provisions of section 40(a)(i) were attracted. He, therefore, made an addition for the said sum of Rs.1.92 crore. The assessee reiterated similar submissions before the ld. first appellate authority in support of the contention that such expenses incurred by it were not chargeable to tax in India as income in the hands of IPS in terms of Article 13 of the DTAA. The ld. CIT(A) examined the Agreement dated 21.11.2008 bet ween the assessee and M/s Ste rlite, pursuant to which the assessee was to render su pervisory services for erecti on, commissioning and training for th e Dore metal plant of Sterlite in Tuticorin. He required the assessee to produce the Agreement dated 1 .11.2008 with IPS under which the services required to be rendered t o Sterlite were outsource d from IPS for a conside ration of Rs.1.92 crore . The ld. CIT(A) went through the Agreement between the assessee and Sterlite and noted the scope of services to be provided. He also took into conside ration a copy of the so-called Agreement dated 1.11.2008 between the assessee and IPS, under which the assessee claimed to have outsource d such services from IPS to be provided t o Sterlite. A copy of such four-page document claimed as Agreement, produced before t he ld. C IT(A), ha d first two page s which did not bear any signature , stamp or seal of the parties. He re quired the assessee to produce the original Agre ement, which the assessee failed to comply wit h. The ld. CIT(A) observed that the main terms and conditions of the Agreement were appea ring on the first two pages, which were unsigned plain papers without any page number, date, seal or stamp. He, therefore, refuse d to accept the authenticity and genuineness of such Agreement. The assessee was cal led upon to furnish 39 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
the weekly time sheets in respect of the services rendered by IPS, Finlay, which was supposed to be approved by the assessee. In vi ew of the fact that such weekly time sheets were the only pieces of evidence of rende ring of actual services, the ld. CIT(A) insisted on its production, which the assessee failed to submit. Then, the assessee was requi red t o furnish the details of payments made to IPS as pe r the terms of the so-called Agreement, which stipulated for the release of pay ment within 15 days from the date of recei pt of inv oice. The a ssessee submitted that no payment was made to IPS and the entire amount of Rs.1.92 crore wa s outstanding at the end of the year. In view of the fa ct that the so-called agreement provided for realizing payment within 15 days from the date of recei pt of invoices and the re was no payment whatsoever ma de by the assessee to IPS throughout the year, the ld. CIT(A), prima facie , inferred that there was no evidence of rendering of any services by IPS. Then, the ld. CIT(A) required the assessee to furnish copies of its correspon dence with IPS about the requirement of servi ces to be ren dered, nature of se rvices rendere d and the correspondence during and after the rendition of services. The assessee admitted that no such correspondence was available. The ld. CIT(A) n oticed that the aspect of rendition of a ctual services by IPS was n ot examined by the AO. He further noticed an inconsistency in the date of the so-called Agree ment between the assessee and IPS, being 1.11.20 08, which was prior to the Agreement between the assessee and Sterlite dated 21.11.2008 for providin g the supervisory services. The ld. CIT(A) w onde red as to how an Agreement between the assessee and IPS could be made much in advance on 1.11.2 008 for outsourcing the services which were to be re ndered in pursuance of Agreement with Sterlite, which itself was date d 21.11.2008. Under such circumsta nces, he refused t o accept the genuineness of the Agreement with IPS and treated it as a cam ouflage. T he contention of the assessee that the invoices were raised by IPS an d hence the assessee wa s absolve d from discha rging the burden cast upon it to establi sh that the services were rende red by IPS, was also held to be of n o substance. Consi dering the totality of the facts, it was 40 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
held that a copy of the so-called Agreement between the assessee and IPS wa s not genuine and it was simply a make-believe a rran gement aimed at defrauding the Revenue. Du ring th e course of hearing before the l d. C IT(A), the assesse e submitted a copy of the Certificate issued by IPS containing names of five engineers who were claimed t o have been sent by it to Sterlite f or rendering supe rvisory se rvices. Thi s certificate, again undated, was held to be self serving and hence unreliable. In the backdrop of such facts, the ld. CIT(A) reached a conclusion that no services were provided by IPS. Howeve r, from the weekly time sheets issued by the assessee and approved by Sterlite and the invoices raised by the assessee on Sterlite, he observed that the services were rendere d by these five engineers, residents of Finland, from 24.11.2008 to 24.04.2009. The fa ctum of rendering of actual supervisory services by the above five engineers from Finland and the absence of any services given by IPS, led the ld. CIT(A) to conclude that the services given by five engineers from Finland were in the nature of 'Independent personal se rvices' covered unde r Article 15 of the DTAA. As the service s were performed by these engineers in India by remaining present f rom 24 .11.2 008 to 24.04 .2009, being a period of more than 90 days, the ld. CIT(A) held that such income was chargeable to tax in India in their hands under Article 15 of the DTAA. As the income was chargea ble to tax in India, the assessee was held to be liable for withholdi ng of tax at source . In view of the non-deduction of tax at source, the ld. CIT(A) held that the provisions of section 40(a)(i) were attracted and, conse quently, the disallowance of Rs.1.92 crore w as upheld. The assessee is aggrieved against the sustenance of this addition.
4. We have heard the rival submissions and peruse d the relevant material on record. The short controve rsy in this appeal is the sustainability or otherwise of disallowance of Rs.1 .92 crore made u/s 40(a)(i) of the Act. The factual matrix in a nutshell is that the assessee received a sum of Rs.2.41 crore from Sterlite Industries (I) Ltd., for rendering of supervisory services in connection with erection , commissioning and training for their plant in 41 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
Tuticorin. Such services were provided by the assessee by outsou rcing the sa me and a sum of Rs.1.92 crore was paid for that. T he assessee claime d deduction for Rs.1 .92 crore, which the AO disallowed u/s 40(a)(i) as, in his opinion, the amount so paid was chargea ble to tax in the hands of the recipient and, on the failure of the assessee to deduct tax at source in terms of section 195 of the Act, the disallowance was called for u/s 40(a)(i).
5. At this juncture , it is relevant to note the mandat e of section 40(a)(i), which provides that notwithstanding anything to the contra ry in sections 30 to 38, no deduction shall be allowed to an assessee in the computation of income under th e head 'Profits and gains of busine ss or professi on' in respect of interest, royalty, fees f or technical se rvices or other sum charge able under this Act, which is payable outside India or in India to a non-resident , not being a company or to a foreign com pany, on which tax is deductible at sou rce under Chapter XVII- B and such tax has not been deducted or afte r deduction, has not been paid during the previous year or in the subsequent year before the expiry of the time prescribed u/s 200(1) of the Act. Clause (B) of the Explanation to this provision states that: 'Fees f or technical services' shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9. The crux of this provision is that if any interest, royalty, fees for technical services or any other sum cha rgea ble under this Act is payabl e outside India or in India to a non-resident on which tax has not been deducted at source, etc., then, no deduction for such expenditure shall be allowed in the computation of Business income of the payer.
6. Section 195(1) provides t hat: 'Any person responsi ble for paying to a non-resident, not being a company, or to a foreign company, any interest ... .. or any other sum chargeable under t he provisions of this Act (not being income charge able under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode , whichever is earlier, deduct 42 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
income-tax thereon at the rates in force....'. A conjoint reading of sections 40(a )(i) and 195 brings to the fore that it is a duty of the person responsible for paying, to deduct income-tax at source from any amount paid/payable to a non-re sident or a foreign company which is 'chargeable under the provisions of this Act.' If the person respon sibl e fails to deduct tax at source on any such amount pai d/payable to a non- resident or to a foreign company without deduction of tax at sou rce or fails to deposit the same after due deduction, then, the amount of expenditure incurre d by such person re sponsi ble, cea ses to be deductible in the computation of his total income under the hea d 'Profits and gains of business or profession.'
7. Coming back to the facts of the instant case, it is observed that the assessee did credit a sum of Rs.1.92 crore payable outside In dia without deduction of tax at source for which the AO invoked the provisi ons of secti on 40(a)(i) of t he Act. The claim of the assessee is that the expense so incurred payable in Finland is not chargeable to tax in the hands of IPS. On the other hand, the AO has made out a case that the amount in question is income of the Finland resident by way of 'fees for technical services' in terms of se ction 9(1)(vii) read wi th section 5 of the Act. In orde r to appre ciate the rival claims, it is befitting to take note of the prescription of section 9(1)(vii) of the Act, which provides that any income by way of fees for technical se rvices payable, inter alia, by: '(b) a pe rson wh o is a resident, except where the fees are payable in respect of service s utilized in a business or profession carried on by such person outside Indi a or for the pu rposes of ma king or earning any income from any source outside India ' shall be deemed to accrue or a rise in India.
Explanation 2 to section 9(1)(vii) gives meaning to the expression 'fees for tech nical services', a s under:--
'Explanation 2.--For the purpose s of this clause, "fees for technical services" means any consideration (including an y lump sum consideration) for the rendering of any managerial, 43 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
technical or consultancy service s (including the provisi on of services of technical or othe r personnel) but does not include conside ration f or any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the reci pient chargeable unde r the head "Salaries".'
8. On circumspection of Explanation 2 to section 9(1)(vii), it transpires that 'fees for technica l services' means any conside ration for the rende ring of any manage rial, technical or consultancy services. When we consider the nature of services provided t o Sterlite by the non-resident, being the 'supervisory services for erection , commissi oning and training' f or setting up a plant of M/s Sterlite Industries, i t becomes patent that such servi ces fall within the ambit of Explanation 2 to secti on 9(1)(vii), thereby making the payment of Rs.1.92 crore as 'fees for technical services' covered u/s 9 (1)(vii) of the Act. Once an Indian enterprise pays fees for technical services to a non-resident, th e amount so paid becomes chargea ble to tax in the hands of such non- resident and the failure to withhold tax from such payment magnetizes the disallow ance u/s 40(a)(i) of the Act. The ld. AR was fair enough to candidly concede that the amount payable by the assessee to the non-resident is in the nature of 'fees for technical services' as per secti on 9(1)(vii) of the Act. He, however, contended that there wa s no liability of the assessee to deduct tax at source from such amount because of the a pplicability of DTAA which immunes from tax the amount towards fees for technical services as paid in the present ci rcumstances t o the non-resident.
9. Sub-section (1) of section 90 of the Act provide s that the Central Government may enter into an agreement with the Government of any other country for the granting of relief of tax i n respect of income on which tax has been paid in two different tax jurisdictions. Sub-secti on (2) of section 90 unequivocally provides that w here the Central Government has entered into an agreement with the Government of any country outside India under sub-
44 ITA No.4511/Del/2015Outotec India Pvt. Ltd.
section (1) for granting relief of tax or for avoidance of double taxation, then, in relati on to the assessee to whom such agreement applies, 'the provisi ons of this Act shall apply to the extent they are more beneficial to that assessee'. The crux of sub-section (2) is that where a DTAA has bee n entered into with another country, then the provisi ons of the Act shall apply only if they are more beneficial to the assessee . In simple words, if there is a conflict between the provisi ons under the Act and the DTAA on a point, the assessee will be entitled to be subjected to the more beneficial provisi on out of the two. If the provision of the Act on a particula r issue is m ore beneficial to the assessee vis-a-vis that in the DTAA, then such provisi on of the Act shall a pply and vice versa. The Hon'ble Supreme Court in the case of CIT v. P.V.A.L . Kulandagan Chettiar [2004] 267 ITR 654/137 Taxman 460 has held that the provisions of sections 4 and 5 are subject to the contrary provisi on, if any, in DTAA. Such provisions of a DTAA shall prevail over the Act and work as an exception to or modificati on of sections 4 and 5. Similar view has been taken by the Hon'ble Bombay High C ourt in CIT v. Siemens Aktiongesellschaft [2009] 310 ITR 320/177 Taxman
81. In the light of the foregoing discussion it is discernible that if the provisi ons of the Treaty are more beneficial to the assessee vis-a-vis its counterpa rt in the Act, then the assessee shall be entitled to be ruled by the provisions of the Treaty.
10. Now, the question arises as t o whether the 'fees for technical services' payable by the assessee t o the resident of Finland is chargeabl e to tax under the DTAA? Article 13 of the DTAA deals with 'Royalties and fees for technical services.' T he relevant part of the Article is reproduced hereunde r:--
ARTICLE 13 Royalties and fees for technical services
1. Royalties and fees for technica l services a rising in a Contra cting State and paid t o a re sident of the other C ontracting State may be taxed in that othe r State.45 ITA No.4511/Del/2015
Outotec India Pvt. Ltd.
2. However, such royalties and fees for technical services may also be taxed in the Contracting St ate in which they arise and according to the laws of that State, but the tax so charged shall not exceed........
3. ** ** **
4. For the purposes of para gra ph 2, and subject to paragraph 5 , the term "fees for technical services"
means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other pe rsonnel) which:
(a) are ancillary and su bsidia ry to the application or enjoyment of the right, prope rty or informati on for which a payment described in sub-paragraph (a) of paragraph 3 is received; or
(b) are ancillary and subsidia ry to the enjoyment of the property for which a payment described in sub- paragraph (b) of pa ragraph 3 is re ceived; 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.
5. The definitions of fees for technical services in paragraph 4 shall not include amounts paid:
(a) to (d) ** ** **
(e) to an employee of the person making the payments or to any individual or pa rtnership f or professi onal services as defined in Article 15".
6. ** ** ** .'
11. A perusal of the above Article deciphers that 'fee s for technical se rvices' a rising in India and paid to a resident of Finland may also be taxed in India. The term 'fees for technical se rvices', which is relevant for Article 13, ha s been defined in para 4 of the Article to mean payment in consideration for 46 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
rendering of any technical or consultancy services which: '(c) make available te chnical knowledge , experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.' It is n ot the case of the Revenue that clauses (a) and (b) of para 4 of Article 13 are attracted in this case . The abov e definition of 'fees for technical services' for the pu rposes of the DT AA makes it vivid that it refers to payment of any kind for rende ring of any technical or consultancy services which make available technical knowledge , skill or know how, etc. t o the payer.
12. The expression 'make availa ble' in the context of 'fees for technical se rvices' con templates that the technical services should be of su ch a nature that the payer of the services comes to possess the technical knowledge so provided which ena bles it to utilize the same thereafter. The H on'ble Ka rn ataka High C ourt in the case of CIT v. De Beers Indi a Minerals (P.) Ltd.
[2012] 346 ITR 467/208 Taxman 406/21 taxmann.com 214 has dealt with the concept of 'make available' in the context of fees f or technical se rvices. It has been held that : "The expression 'make available' only means that the reci pient of the se rvice should be in a positi on to derive an enduring benefit and be in a position t o utilise the knowledge or know- how in future on his own. By making available the technical skills or kn ow- how , t he recipient of the same will get equipped with that knowledge or expertise and be able to make use of it in future, independent of the service provi der .......". F rom the above enunciation of law by the Hon'ble Ka rnataka High Court, it is palpable t hat the technical knowledge will be considere d a s 'made available ' when the person acquiring such knowledge i s possessed of the same enabling him to a pply it in future at his own. If the services are consumed in the provisi on without leaving anything tangible with the payer for use in future, then it will not be characteri zed as 'ma king availabl e' of the technical services, notwithstanding the fact that its benefit flowed dire ctly and solely t o the payer of the services,. The Special bench of the tribunal in Mahindra & Mahindra Ltd. v. Dy. CIT [2009] 122 TTJ 47 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
577 (Mum.) has discussed the concept of 'make available'. In that case , the lead managers ha d rendered technical, manage ria l or consultancy services in the G DR issue , which services were not made available to the asse ssee ina smuch as the payer only derived the benefit from the technical services provided by the lead managers without getting any technical knowledge, expe rience or skill in its possession for use in future. In that view of the matter, it was held that the 'man agement and selling commission' could n ot be taxed i n India as pe r the DTAA because nothing was made available to the payer. It foll ows that in orde r to be covered within the expression 'ma ke available', what is necessary is that the service provide r sh ould transmit the technical knowledge etc. to the payer so that the payer may use such technical knowledge in future without involvement of the service provider.
13. Adverting to the facts of the instant case, we find that the technical services provided by the non- resident are simply in the nature of supervisory services by the engineers for erection, commissioning of the plant of M/s Sterlite in Tuticorin. By renderin g such services, nothing has been made available by the payee to the a ssessee/Ste rlite, which could be used in future without involvement of such residents of Finland. Once the plant is erected and commissioned, the supe rvisory e ngineering services rendered by the Finland resident s during the cou rse of such erection and commissioni ng get consumed in the process and there remains not hing capable of any use in future. Going by the scope of Article 13 vis-à- vis the nature of actual service s provided by the payees, it is manifested that such technical services do not fall within the purview of the definition of 'fee s for technical services' as given in para 4 of this Article, as nothing has been 'ma de available' by the rendition of technical services for any future use. If the provisions of Article 13 of DTAA are exhauste d and it is not the case of the AO that the amount be considere d under any other Article of the DTAA, it would mean that albeit the amount is chargeable to tax in the hands of the non-residents as per section 9(1)(vii) read with section 5(2) of the Act, but, the 48 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
chargeability will be waived because of the inapplicability of Article 13 of th e DTAA, which is a more beneficial provision than section 9 read with section 5 of the Act. In that view of the matter, the assessment order considering payment of Rs.1.92 crore to M/s IPS Finland for technical services as violating the provisions of section 195, thereby resulting into di sallowance u/s 40(a)(i), cannot be countenanced.
14. It is noticed that when the m atter was ca rried by the assessee in appeal bef ore t he ld. CIT(A), the latter opined that there wa s no genuine agreement between the assessee and the IPS Finland. In view of the fact that the assessee did incur Rs.1.92 crore t o certain pe rsons which was duly confirmed by M/ s Sterlite, the ld. CIT(A) attributed the amount to the five engineers of Finland, covered under Article 15 of the DTAA.
15. In principle, we do not find any infirmity in the orde r of the ld. CIT( A) in examining the genuineness of the Agreement with IPS Finland and then finally holding the amount payable by t he assessee t o the five engineers as covere d under Article 15 of the DTAA, thereby changing the point of the view of the AO on the same issue. It goes without saying that the powers of the CIT(A) are co-termi nus with that of the AO inasmuch a s he, while hea ring an appeal against the assessment order, has all the powe rs which vest with the AO on the issue before him. The Hon'ble Summit Court in Jute Corpn. of India Ltd. v. CIT [1991] 187 ITR 688/[1990] 53 Taxman 85 (SC) has held so. Even otherwi se, secti on 2 51 dealing with the powers of the CIT(A) provides t hrough sub-secti on (1) that : 'In disposing of an appeal, the Commissioner (Appe als) shall have the following powers-- (a) in an appeal against an order of assessment, he may confirm, reduce, enhance or annul the assessment.....'. As such, we do not see any embargo on the powe r of the CIT(A) in approaching the issue before him in a differen t manner from that of the AO.
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16. As the assessee has assailed the findings gi ven b y the ld. CIT(A) with rega rd to the credibilit y of the Agreement with IPS , it becomes i mperative for us t o decide about the genui neness or otherw ise of the so- called Agreement between the asse ssee and IPS , a cop y of w hich has been placed on pages 119 to 122 in the paper book . It can be obse rved that thi s doc ument runni ng int o four pages is on plai n papers. First two pages of this document do not bear signat ure of any party. These pages, in fact , define t he scope of services and all ot her major te rms and co nd itions. G oing b y this so-called Agreement, Clause 3 with the caption 'Terms of payment' provides that: "All payments shall be released wit hi n 15 days from the date of receipt o f invoice." O n a specific query, it wa s accepted by the ld. AR that IPS Finland is a non- rel ated party. Despite there being a specif ic Clause fo r ma king pa yment wit hi n 15 days from t he date of rece ipt of invoice, the assessee admitted before the authorit ies below that no amount was paid to IPS d uring t he who le of t he yea r and the e nti re amount of Rs . 1.92 cro re was payab le. Page 153 of the paper book is a copy of a cert ificate allegedly iss ued by IPS Fi nland st ating that fi ve of it s employees were sent to I ndia at the insta nce of the assessee. This document has been purpo rtedly sig ned by one Mr. Erkko V irrankosk i, t he President of IPS , Finland . When we compare t he signat ure o n this supposed cert ificate with the s ignat ures made o n pages 3 and 4 of t he so-called ag reement, it ca n be easil y deduced that bot h the sig natures a re enti rely d ifferent . Apart from that , if IPS was to render services on a regula r basis to Sterlite at the insta nce of the assessee, it is b ut nat ura l that t he assessee would have as signed some duties in spec ific and mo nitored regularly b y interact ing wi th the Finland co nce rn. As against that , the assessee miserabl y failed t o place copies of any correspondence whatsoe ver w ith IPS. The assessee admitted before the ld . CIT( A) that no suc h correspondence i n the fo rm of letters or e-mails wa s available . We are at loss to appre ciate as to how i s it possible that a party to w hom the assessee was to allegedly pay a sum of Rs.1 .92 crore, did not correspond at all o n any aspect of t he wo rk a ssigned o r to ascertain t he prog ress of the work on a peri odic basis. There is anot her i nteresti ng aspect of the matter. The assessee entered into Agreem ent wit h M/s Sterlite for p rovidi ng supe rvi sory se rvice s for e rectio n and 50 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
commissio ning of thei r p lant . There is no reference whatsoeve r i n this Ag reement wi th Sterl ite that t he services to be pro vided by t he assessee could be sub- cont racted or out sourced from som e third part y. If s uc h services in erectio n a nd commiss i oni ng of p lant were actuall y to be pro vided by I PS to Sterlite, t hen, t here should ha ve been some t ripartite agreement amongst the assessee, Sterlite and IPS, w hic h is actuall y not t he case. There is one more aspect. The so-called four- paged Agreement between the assessee and IPS is dated 1.11.2008. We are at loss to comprehend as to how t he assessee could enter into agreement with IP S for rendering s uperviso ry services on 1.11.2008, whe n the agreement w ith Ste rlite was itself sig ned, m uc h later, o n 21.11.08. The ld. AR was specifically asked if he could p rod uce Agreement with I PS in origina l, whi ch was respo nded in negative . To be precise, t here is no documentary evidence di vulg ing the renderi ng of services by I PS Finla nd in the erectio n and commissio ning of plant of Sterlite. The above discussio n leads us to an irresi stible concl usio n that IPS was now here invol ved in p ro vidi ng sup erviso ry services t o Sterlite fo r and on behalf of the assessee. The vie w canvassed by the ld . CIT(A) on this aspect of t he matter is, e rgo, upheld .
17. Be that as it may, t here is no d enial of fact t hat the assessee, in fact, ca used to be pro vided services to M/s Sterlite fo r which it received a s um of Rs.2.41 c ro re. Discussi on in the immediately p receding para divulge s that no services were rendered b y I PS. From t he weekl y time sheets iss ued by the assess ee and appro ved b y M/s Sterlite, it is clea r t hat the services we re re ndered by five engineers f rom Finla nd duri ng the period 24.11.08 to 24.4.2009. Once it is establ ished that certain i ndi vidua ls from Finland rendered engineeri ng superviso ry se rvi ces in t he erectio n and commiss io ning of the plant in Tut ico ri n, t he amount payab le to suc h residents of Fi nland fa lls fo r co nsid eration unde r Artic le 15 of the DTAA, which reads as und er:--
ARTICLE 15 (Sic) Independent pers onal services
1. Income derived by a resident of a Contracting State in respect of p rofessio nal services or othe r independe nt 51 ITA No.4511/Del/2015 Outotec India Pvt. Ltd.
activit ies of a simila r cha racter m ay be taxed in tha t State. Such income may als o be taxed in the ot he r Contracti ng State if suc h se rvices are perfo rmed in tha t other State and if:
(a) he is present in t hat othe r St ate or a period o r periods agg regating to 90 days or mo re in the relevant f iscal year; o r
(b) he has a fixed base regularl y available to him i n that ot her State fo r t he purpose of perfo rmi ng hi s activit ies;
but in eac h case only s o muc h of the income as is attributab le to those services.
2. The term "professiona l servi ces" incl udes especiall y independent scie ntific , lite rary, a rt istic , educatio nal o r teaching activities as well as the independent activitie s of phys icia ns, s urgeo ns , law yers , engineers , a rchitect s , dentists and ac countants .'
18. On going thro ugh the mandate of Article 15 of the DTAA, it can be seen t hat it cove rs professio nal se rvices or ot her i ndependent acti vities of s i milar c haracter. The term 'professio nal services' , inter alia, i ncl udes independent acti vit ies of engi neers. Five engineers f ro m Finland rende red engineering services in the erecti o n and commissi oni ng of t he plant of Sterlite . Suc h services fa ll w ithin t he domain of the 'Professio nal services' of A rtic le 15 of the DTAA.
19. The ld. A R co ntended t hat since t he services cont racted for the by the assessee with non- resident s fall wit hin t he meaning of Artic le 13 but get excluded because of not 'making avai la ble' any technical know ledge etc., then suc h servic es cannot be onc e again cons idered unde r Arti cle 15. This argument wa s counte red by the ld. DR by co ntend ing that the amount in q uestio n di rectl y fall s under Arti cle 15 and he nce the same should be retained he re alone .
20. The argument of the ld . AR t ho ugh lo oks att racti ve at the fi rst b lus h b ut fall s to the gro und on a clo ser examinatio n. The precise questi on is that whi ch of the two Art icles, namely, 13 or 15, s hould have primacy i n the facts and ci rcumsta nces as are instant ly p revai ling ?
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In our co nsidered opi nio n, the ans wer to this q uestio n is not too far t o seek. Releva nt pa rt of Para 5 of A rticle 13, as reprod uced abo ve, unambig uousl y states t hat the definitio n of fees fo r technical se rvices i n parag raph 4 shall not inc lude amo unts paid ' ..... (e) to any ind ividua l ....fo r p rofessio nal services as def ined in A rtic le 15". When we read para 5 of A rticle 13 in conj uncti on wit h Article 15, there remains absol utel y no doubt that the amount payable by the assessee to certain i ndividua l residents from Finland is cove red only under Arti cle 15 and not A rtic le 13 of the DTAA.
21. Delving int o the mandate of para 1 of Article 15 of the DTAA, we find that the income derived b y a reside nt of Finland i n respect of p rofessio nal services o r othe r independent acti vit ies of a simi lar characte r perfo rmed in India can be taxed in Ind ia if he is p resent i n Indi a for a period o r periods aggregati ng to 90 days or more in the rele vant fisca l year o r has a fixed base regula rl y available to him in Ind ia for the purpose of perfo rming his ac tivities. It is not iced t hat the ld . CIT(A) has computed the peri od of 90 days by cons ideri ng the presence of these persons in India from 24.11.2008 to 24.4.2009. The ld. AR contended that the ld. CIT(A) has conside red total peri od of stay of all t he five perso ns taken together wit ho ut cons ideri ng it on ind ividua l basis. We find force in the subm is sion of the ld. AR i n this rega rd. Once it i s held that f ive indi vid uals from Finland we re not rep resenting I PS and, in fact , there was no val id agreement between the assessee and IPS , then, what remains t o be exa mined is s uch f ive residents of Finla nd o n ind ividual basis. The amo unt s payable to each of such f ive pe rsons satisf yi ng the durati on test on i ndividual bas is would enable the ultimate triggeri ng of Art icle 15 of the DTAA. In ot he r words , o nly t hose Finland residents out of s uch fi ve persons who independent ly a nd i ndivid uall y satisf y the condit ion ab out t heir presence i n I ndia fo r a period o f 90 days or more in the releva nt fis cal year o r havi ng a fixed place regula rly a vailable to t hem in India fo r the purpose of perf ormi ng the supervis ory functio ns, can be broug ht w ithin t he purvie w of A rti cle 15. If, ho wever, this cond itio n is fo und wa nting q ua some indi vid uals , then t he amount pa yable to s uch individ ual residents o f Finland , w ould cease to be c hargea ble to tax in terms of Article 15 of the DTAA notwithst anding its ta xabilit y under sectio n 9(1)(vii) read w ith s ection 5 of the Act .
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Since the releva nt i nfo rmation f or asce rtaining the durati on of stay of s uch residents of Finla nd i n I ndia is not a vailable on reco rd and, f urt her, it is not c lear whether they had a fi xed base re gularly a vailable t o them in India for perfo rming suc h servi ces, we cannot forthwit h ascertai n whethe r or not such a pre-req uisit e condit ion is f ulfi lled. U nder suc h ci rcumsta nces, we set aside the impug ned o rder a nd remit the matter to t he file of t he ld . CIT(A) fo r decidi ng this aspect of the matter and, the reafter, determi ni ng the questio n of disallo wance u/s 40(a)(i) of the Act. Needless to say, the assessee would be all owed a re asonable opp ort uni ty of heari ng i n suc h proceedings ."
9. Facts bei ng i denti cal , respectfull y foll owi ng the precedent, we set asi de the orde rs of the l ower authori ti es and remand the matter back to the fi le of the Assessi ng Offi cer for adjudi cati ng the same afresh in the li ght of the aforesai d deci si on of the Tri bunal i n the case of the assessee i tsel f for assessment year 2009-10.
10. In the resul t, the appeal of the assessee i s all owed for stati sti cal purposes.
(Orde r Pronounced i n the Open Court on 27/03/2019) Sd/- Sd/-
(Bhavnesh Saini) (N. S. Saini)
Judicial Member Accountant Member
Dated: 27/03/2019
*Subodh*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR