Dr.Reddy's Research Foundation, Hyderabad V. DCIT, Hyderabad

ITA 147/HYD/2005

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7683 (ITAT-HYDERABAD)
• Duration Of Justice: 9 year(s) 8 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-11-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 01-02-2011
• Assessment Year: misc
• Appeal Filed On: 25-02-2005
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: Y V S T SAI
• Keywords: Business income; Double taxation relief; Permanent establishment
• Section: 133A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA.NO.147/HYD/2005 ASSESSMENT YEAR 2002-03 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. PAN AABCR1733M VS. THE DCIT, CIRCLE 14(3) HYDERABAD. (ASSESSEE) (RESPONDENT) ITA.NO.1163/HYD/2014 ASSESSMENT YEAR 2003-04 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. PAN AABCR1733M VS. THE DCIT, CIRCLE 14(3) HYDERABAD. (ASSESSEE) (RESPONDENT) FOR ASSESSEE : MR. PSRVV. SURYA RAO FOR REVENUE : MR. YVST SAI DATE OF HEARING : 22.09.2014 DATE OF PRONOUNCEMENT : 12.11.2014 ORDER PER B. RAMAKOTAIAH, A.M. THESE TWO APPEALS ARE BY ASSESSEE AGAINST THE COMMON ORDER OF LD. CIT(A)-III, HYDERABAD DATED 5 TH DECEMBER, 2004 PERTAINING TO ORDERS OF A.O. UNDER SECTION 201 (1) READ WITH SECTION 201(1A) OF THE I.T. ACT, ON THE PAYMEN TS MADE TO FOREIGN ENTITIES WITHOUT DEDUCTION OF TAX AT SOURCE . 2. ASSESSING OFFICER PASSED COMMON ORDER DATED 05.03.2003 AND LD. CIT(A) ALSO PASSED A COMMON ORDE R FOR A.YS. 2002-03 AND 2003-04. ACCORDINGLY, ASSESSEE FI LED A 2 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. COMMON APPEAL IN RESPECT OF BOTH THE ASSESSMENT YEA RS. WHEN IT WAS POINTED OUT ASSESSEE FILED REVISED FORM FOR THE YEAR 2002-03 WHICH WAS ORIGINALLY NUMBERED AS ITA.NO.147 /2005 AND FRESH APPEAL FOR A.Y. 2003-04 WHICH WAS LISTED AS ITA.NO.1163/2014. SINCE IN SECOND MEMO IN FORM NO.3 6 WAS FILED WITH A DELAY OF 3656 DAYS, ASSESSEE PRAYED FO R CONDONATION AND CONSIDERING THE FACTS OF THE CASE, WE CONDONE THE DELAY AND ADMIT THE APPEAL. 2.1 ASSESSEE HAS RAISED THE FOLLOWING COMMO N GROUNDS FOR BOTH THE ASSESSMENT YEARS I.E., 2002-03 AND 200 3-2004. 1. THE LEARNED COMMISSIONER OF INCOME TAX APPEALS ERRED IN LAW AND AS TO THE FACTS AND CIRCUMSTANCES OF THE CASE IN CONSIDERING THE AGREEMENTS INVOLVED APPROPR IATELY AND IN APPLYING THE PROVISIONS OF THE RELEVANT DOUB LE TAXATION AVOIDANCE AGREEMENTS WITH RESPECTIVE COUNT RIES TO THE CONCERNED AGREEMENTS. 2. THE LEARNED COMMISSIONER OF INCOME TAX APPEALS ERRED IN LAW AND AS TO THE FACTS AND CIRCUMSTANCES OF THE CASE IN HOLDING THAT THE PAYMENT MADE BY THE ASSESS EE COMPANY TO THE FOREIGN PARTIES WERE FEES FOR TECHNI CAL SERVICES WHICH WAS SUBJECTED TO TAX IN INDIA. 3. THE LEARNED COMMISSIONER OF INCOME TAX APPEALS ERRED IN LAW AND AS TO THE FACTS AND CIRCUMSTANCES OF THE CASE IN HOLDING THAT THE CLAIM OF THE PAYMENTS WERE BUSINESS INCOME EARNED BY THE FOREIGN PARTIES IS OF THE NO RELEVANCE BECAUSE THE BUSINESS INCOME OF THE FOREIG N PARTY MAY BE TAXED IN THEIR COUNTRY AS PER THE LAWS OF TH EIR RESPECTIVE COUNTRIES. 4. THE LEARNED COMMISSIONER OF INCOME TAX APPEALS ERRED IN LAW AND AS TO THE FACTS AND CIRCUMSTANCES OF THE CASE IN HOLDING THAT THE FEES FOR TECHNICAL SERVICE S ARISING OUT OF THE AGREEMENTS ACCRUED AND ARAISED IN INDIA AND HENCE TAXABLE IN INDIA. 5. THE LEARNED CIT ERRED AS TO THE FACTS IN HOLDING THAT THERE IS NO DISPUTE TO THE ACCRUAL OF THE FEES PAID TO THE FOREIGN PARTY AS INCOME ACRUING TO THE FOREIGN PART Y IN INDIA 3 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. AND THAT THE PROVISIONS TO SECTION 5(2)(B) ARE NOT CONTESTED BY THE ASSESSEE. 6. THE LEARNED CIT ERRED IN LAW AND AS TO THE FACTS AND CIRCUMSTANCES OF THE CASE IN HOLDING THAT THE R ELEVANT CLAUSES HIGHLIGHTED IN PARA 16 OF HIS ORDER CLEARLY PROVIDED THAT ALL INTELLECTUAL PROPERTY INCLUDING RIGHTS TO PATENTS WILL BE GENERATED AND THAT THEY BELONG TO ASSESSEE ONLY. 7. THE LEARNED COMMISSIONER OF INCOME TAX APPEALS ERRED IN LAW AND AS TO THE FACTS AND CIRCUMSTANCES OF THE CASE IN HOLDING THAT THE PAYMENTS ALSO SATISFY THE DEFINITION OF FEES FOR TECHNICAL SERVICES AS GIVEN IN THE DOUBLE TAXATION AVOIDANCE AGREEMENTS AND FAILED TO TAKE NOTE OF THE AMENDMENT TO THE SAID DEFINITION THEREI N. 8. THE LEARNED COMMISSIONER OF INCOME TAX APPEALS ERRED IN LAW AND AS TO THE FACTS AND CIRCUMSTANCES OF THE CASE IN HOLDING THAT FEES FOR TECHNICAL SERVICES AR E IN OPEN AREA OF TAXATION AND THAT THE SERVICES CAN BE TAXED IN BOTH THE COUNTRIES WITH REFERENCE TO OPENING CLAUSES OF THE RELEVANT ARTICLE BUT FAILED TO NOTE THAT SUCH OPENI NG CLAUSES ARE APPLICABLE ONLY IF THE PAYMENTS FIT INTO THE DE FINITION FOR FEES FOR INCLUDED SERVICES THERE UNDER. 9. THE LEARNED COMMISSIONER OF INCOME TAX APPEALS ERRED IN LAW AND AS TO THE FACTS AND CIRCUMSTANCES OF THE CASE IN HOLDING THAT, WITH REFERENCE TO THE ARTICLE 13(7) WITH UK AND THE ARTICLE 12(8) WITH NETHERLANDS, FEES FOR TECHNICAL SERVICES SHALL BE DEEMED TO ARISE IN THE STATE IN WHICH THE PERMANENT ESTABLISHMENT OR THE FIXED BASE OF THE PAYER BUT FAILED TO NOTE THAT THE APPLICATION OF TH E AFORESAID ARTICLES ARISES ONLY IF THE PAYMENTS FIT INTO THE D EFINITION FOR THE TERM GIVEN UNDER ARTICLE 13 AND 12 RESPECTIVELY , 10. THE LEARNED COMMISSIONER OF INCOME TAX APPEALS ERRED AS TO THE FACTS AND CIRCUMSTANCES OF THE CASE IN HOLDING THAT THE ASSESSEE HAD NOT SUBMITTED ANY WRI TTEN SUBMISSION AND THEREFORE HE FINDS IT REALLY DIFFICU LT TO UNDERSTAND THE ARGUMENT CONTRARY TO THE FACT THAT T HE RELEVANT AGREEMENTS WITH THE CONCERNED PARTIES AND THE DOUBLE TAXATION AVOIDANCE AGREEMENTS AND ARGUMENTS FILED BEFORE THE LEARNED ASSESSING OFFICER ARE A PA RT OF THE RECORD TO WHICH HE HIMSELF REFERRED TO AND THE ASSE SSEES ARGUMENTS DID NOT GO BEYOND. 4 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. 11. THE LEARNED COMMISSIONER OF INCOME TAX APPEALS ERRED IN LAW AND AS TO THE FACTS AND CIRCUMSTANCES OF THE CASE IN HOLDING THAT THE ASSESSEE IS RELYING ON A L EGAL PROVISION WHICH IS NOT APPLICABLE TO THE FACTS OF T HE CASE. 12. THE LEARNED COMMISSIONER OF INCOME TAX APPEALS ERRED IN LAW AND AS TO THE FACTS AND CIRCUMSTANCES OF THE CASE IN HOLDING THAT WHEN THE KNOWLEDGE GENERATED I N THE COURSE OF RENDERING OF TECHNICAL SERVICES WILL BE T RANSFERRED TO THE SPONSOR OF THE RESEARCH AND WILL BE HIS SOLE PROPERTY INCLUDING THE RIGHTS OVER THE PATENTS, WHICH ARE LI KELY TO BE GENERATED IN THE COURSE OF THE TECHNICAL SERVICES. 13. FOR THESE AND ANY OTHER GROUNDS THAT MAY BE TAK EN UP WITH THE PERMISSION OF THE HON'BLE MEMBERS. 3. BRIEFLY STATED, DR. REDDY'S RESEARCH FOUNDATION (DRF) IS ONE OF THE LEADING PHARMACEUTIC AL RESEARCH COMPANIES CARRYING OUT RESEARCH AND DEVELOPMENT ACTIVITIES IN DRUG DISCOVERY. THE R & D ACTIVITIES AT DRF ARE CENTERED ON NEW MOLECULE DISC OVERY INVOLVING RELATED BIOLOGICAL PROCESS AND CHEMICAL RESEARCH. NEW MOLECULAR DISCOVERY RESEARCH IS FOCUS ED ON THE THERAPEUTIC AREAS OF METABOLIC DISORDERS (IN SULIN RESISTANCE AND ASSOCIATED DISORDERS IN PARTICULAR), CANCER INFLAMMATION, BACTERIAL INFECTIONS ETC. THUS , DRF IS MAINLY INVOLVED IN DRUG DISCOVERY RESEARCH. BEFO RE DISCUSSING THE ISSUES INVOLVED, THE FOLLOWING IS A BRIEF SUMMARY OF THE PROCESS INVOLVED IN DRUG DISCOVERY, AS NOTED BY LD.CIT(A). 3.1. TO BEGIN WITH, A COMPANY INVOLVED IN DRUG DISCOVERY IDENTIFIES A POTENTIALLY USEFUL CHEMICAL COMPOUND AND FILES AN APPLICATION FOR PATENT OF THA T MOLECULE, AFTER A POTENTIALLY USEFUL CHEMICAL COMPO UND HAS BEEN IDENTIFIED IN A LABORATORY WHICH IS EXTENS IVELY TESTED IN ANIMALS USUALLY FOR A PERIOD OF MONTHS OR EVEN 5 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. YEARS. THESE ARE USUALLY TERMED AS PRE-CLINICAL STU DIES AND THE COMPOUND IS KNOWN AS IND (INVESTIGATIONAL N EW DRUG). FEW DRUGS MAKE BEYOND THIS POINT. IF THE TES TS ARE SATISFACTORY, THE DECISION MAY BE MADE FOR TEST ING THE DRUG IN HUMANS. IT IS THIS ACTIVITY THAT FORMS THE BASIS OF MUCH CLINICAL RESEARCH, WHICH IS USUALLY D ONE IN FOUR PHASES. IN MOST COUNTRIES, THE FIRST PHASE IS THE STUDY OF ITS EFFECTS IN A SMALL NUMBER OF HEALTHY VOLUNTEERS. THE RESPONSE, EFFECT ON METABOLISM AND POSSIBLE TOXICITY ARE CAREFULLY MONITORED AND HAVE TO BE COMPLETELY SATISFACTORY BEFORE THE DRUG CAN BE PASS ED FOR FURTHER STUDIES, NAMELY WITH PATIENTS WHO HAVE THE DISORDER FOR WHICH THE DRUG IS TO BE USED. IN PHASE -II, TESTS ARE ADMINISTERED AT FIRST TO A LIMITED NUMBER OF THESE PATIENTS TO DETERMINE EFFECTIVENESS, PROPER D OSAGE AND POSSIBLE ADVERSE REACTIONS. THESE SEARCH STUDIE S ARE SCRUPULOUSLY CONTROLLED UNDER STRINGENT CONDITIONS. LARGER GROUPS OF PATIENTS ARE SUBSEQUENTLY INVOLVED TO GAIN A WIDER SAMPLING OF THE INFORMATION. FINALLY I N PHAGE-III, A FULL-SCALE CLINICAL TRIAL IS SET UP. A T THE END OF PHASE-III, THE COMPANY CAN FILE FOR NDA (NEW DRUG APPLICATION). IF THE REGULATORY AUTHORITY IS SATISFIED ABOUT DRUG'S QUALITY, SAFETY AND EFFICACY, THE INNOVATOR COMPANY RECEIVES A LICENSE TO PRODUCE THE DRUG AND SELL IT. IN THE PHASE-IV, STUDIES POST-MARKETING SURVEILLANCE IS DO NE, WHEREIN FEEDBACK IS GATHERED FROM A VARIETY OF PATI ENTS. AS THE DRUG BECOMES WIDELY USED, IT EVENTUALLY FINDS ITS PROPER PLACE IN THERAPEUTIC PRACTICE, A PROCESS THA T MAY TAKE YEARS. 6 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. 3.2. THE PATENT FOR A NEW DRUG IS USUALLY GIVEN FOR TWENTY YEARS, DUR ING WHICH THE INNOVATOR COMPANY HAS TO CONDUCT PRECLINICAL STUDIES AND ALSO PHASE-I, PHASE -II AND PHASE-III STUDIES. AFTER TAKING THE NECESSARY APPRO VALS, ONCE THE DRUG IS INTRODUCED IN THE MARKET BY THE INNOVATOR COMPANY, THE COMPANY HAS THE EXCLUSIVE MARKETING RIGHTS TILL THE END OF THAT 20 YEAR PERIOD. SINCE PRE-CLINICAL AND OTHER STUDIES TAKE ON AN AVERAGE O F 14 TO 15 YEARS, THE INNOVATOR COMPANY TRIES TO RECOUP ALL THE EXPENSES INCURRED FOR THE RESEARCH AND DEVELOPMENT OF THE DRUG. SINCE THE COSTS INCURRED ON BASIC RESEARCH IS VERY HIGH, AND THE TIME FOR EXCLUSIVE MARKETING IS LESS, THE TIME FACTOR IS VERY CRUCIAL IN DRUG DISCOVERY. EARLIER A DRUG IS INTRODUCED IN THE MARKET, THE BETTER IT IS FOR THE INNOVATOR COMPANY AS IT INCREASES THE TIME FOR EXCLUSIVE MARKETING RIGHTS. TO INCREASE THIS TIME AND ALSO TO REDUCE THE COST OF RESEARCH, APPROPRIATE PARTS OF RESEARCH ARE ALLOCATED BY THE PATENT HOLDING INNOVATOR COMPA NY TO OTHER RESEARCH ORGANIZATIONS. THE PAYMENT TO TWO SU CH RESEARCH ORGANIZATIONS IS SUBJECT MATTER OF THESE PROCEEDINGS. 3.3. ASSESSEE-COMPANY NAMELY DRF HAS ENTERED INTO AGREEMENT WITH AN UK COMPANY M/S. SIMBEC RESEARCH LTD. AND A NETHERLANDS COMPANY M/S. NDDO ONCOLOGY BV FOR CONDUCTING PRE-CLINICAL RESEARCH ST UDIES. DRF HAS MADE THE FOLLOWING PAYMENTS TO M/S. SIMBEC RESEARCH LTD. AND M/S. NDDO ONCOLOGY BV DURING THE ASST YEARS 2002-03 AND 2003-04. 7 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. NAME OF THE COMPANY A.Y. 2002-03 (RS.) A.Y. 2003- 04 (RS.) TOTAL (RS.) M/S. SIMBEC RESEARCH LTD., 2,90,45,207 27,39,88 31,785,095 M/S. NDDO ONCOLOGY BV 10,91,679 2,23,999 1,315,678 TOTAL 3,01,36,886 29,63,887 33,100,773 3.4. THE FACT OF THE ABOVE PAYMENTS TO THE FOREIG N PARTIES WAS DISCOVERED DURING THE COURSE OF A SURVE Y ACTION UNDER SECTION 133A CONDUCTED AT ASSESSEES PREMISES ON 17.12.2002. ASSESSING OFFICER WAS OF TH E OPINION THAT ASSESSEE HAD MADE PAYMENTS TO THE FORE IGN PARTIES, WHICH COULD BE CONSIDERED AS 'FEES FOR TEC HNICAL SERVICES'. ASSESSING OFFICER CONSIDERED THAT SUCH PAYMENTS WERE CHARGEABLE TO TAX IN INDIA AS PER THE PROVISIONS OF SECTION 5(2)(B) READ WITH SECTION 9(1 )(VII) OF THE IT ACT. FOR THE SAKE OF EASY RE-CAPITULATION, T HESE PROVISIONS ARE RE-PRODUCED AS UNDER. 'SECTION 5(2): SUBJECT TO THE PROVISIONS OF THIS ACT, THE TOTAL INCOME OF ANY PREVIOUS YEAR OF A PERSON WHO IS A N ON-RESIDENT INCLUDES ALL INCOME FROM WHATEVER SOURC ES 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 ARISES OR IS DEEMED TO ACCRUE OR ARISE TO HIM IN INDIA DURING SUCH YEAR; EXPLANATION (1) : INCOME ACCRUING OR ARISING OUTSID E 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 TAKEN INTO ACCOUNT IN A BALANCE SHEET PREPARED IN INDIA. EXPLANATION (II) : 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 HAS ACCRUED 8 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. OR ARISEN OR IS DEEMED TO HAVE ACCRUED OR ARISEN TO HIM SHALL NOT AGAIN BE SO INCLUDED ON THE BASIS THAT IT IS RECEIVED OR DEEMED TO BE RECEIVED BY HIM IN INDIA. SECTION 9(I)(VII) INCOME BY WAY OF FEES FOR TECHNICAL SERVICES PAYABLE BY- (A) THE GOVERNMENT; OR (B) A PERSON WHO IS A RESIDENT, EXCEPT WHERE THE FEES A RE PAYABLE IN RESPECT OF SERVICES UTILISED IN A BUSINE SS OR PROFESSION CARRIED ON BY SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY S OURCE OUTSIDE INDIA; OR (C) A PERSON WHO IS A NON- RESIDENT, WHERE THE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILISED IN A BUSINESS OR PR OFESSION CARRIED ON BY SUCH PERSON IN INDIA OR FOR THE PURPO SES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE IN IND IA. PROVIDED THAT NOTHING CONTAINED IN THIS CLAUSE SHAL L APPLY IN RELATION TO ANY INCOME BY WAY OF FEES FOR TECHNICAL SERVICES PAYABLE IN PURSUANCE OF AN AGREEMENT MADE BEFORE TH E 1ST DAY OF APRIL, 1976 , AND APPROVED BY THE CENTRAL GOVERNMENT.] EXPLANATION 1- FOR THE PURPOSES OF THE FOREGOING PR OVISO, AN AGREEMENT MADE ON OR AFTER THE 1ST DAY OF APRIL, 19 76 , SHALL BE DEEMED TO HAVE BEEN MADE BEFORE THAT DATE IF THE AGREEMENT IS MADE IN ACCORDANCE WITH PROPOSALS APPR OVED BY THE CENTRAL GOVERNMENT BEFORE THAT DATE. EXPLANATION 4 2.- FOR THE PURPOSES OF THIS CLAUSE,' FEES FOR TECHNICAL SERVICES' MEANS ANY CONSIDERATION (INCLUD ING ANY LUMP SUM CONSIDERATION) FOR THE RENDERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES (INCL UDING THE PROVISION OF SERVICES OF TECHNICAL OR OTHER PERSONN EL) BUT DOES NOT INCLUDE CONSIDERATION FOR ANY CONSTRUCTION , ASSEMBLY, MINING OR LIKE PROJECT UNDERTAKEN BY THE RECIPIENT OR CONSIDERATION WHICH WOULD BE INCOME OF THE RECIP IENT CHARGEABLE UNDER THE HEAD' SALARIES'. 3.5. BEFORE THESE ARE CONFRONTED TO ASSESSEE, THE ASSESSING OFFICER ALSO CONSIDERED THE PROVISIONS OF DTAA 9 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. WITH UK AND NETHERLANDS, THE COUNTRIES TO WHICH THE CONTRACTING COMPANIES BELONG TO. THE ASSESSING OFFI CER CONSIDERED THE ARTICLE 13 OF DTAA WITH UK AND ARTIC LE 12 OF DTAA WITH NETHERLANDS, WHEREIN, THE PROVISIONS FOR TAXING 'FEES FOR TECHNICAL SERVICES' WERE PROVIDED. THE COMMON FEATURE OF BOTH THE TREATIES WAS THAT 'FEES FOR TECHNICAL SERVICES' COULD BE BROUGHT TO TAX IN BOTH THE CONTRACTING STATES. THE ASSESSING OFFICER LAID SPEC IFIC EMPHASIS ON TO THE ARTICLE 13(4)(C) OF THE DTAA WIT H UK AND ARTICLE 12(5) OF THE DTAA WITH NETHERLANDS. BEC AUSE BOTH THESE PROVISIONS WILL BE REFERRED TO AGAIN, TH EY ARE RE-PRODUCED AS UNDER : '13. 4. FOR THE PURPOSES OF PARAGRAPH OF THIS ARTIC LE, AND SUBJECT TO PARAGRAPH 5 OF THIS ARTICLE, 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 PERSONN EL) WHICH : (A) ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION FOR WHICH A PAYMENT DESCRIBED IN PARAGRAPH 3(A) OF THIS ARTICLE IS RECEIVED; OR (B) ARE ANCILLARY AND SUBSIDIARY TO THE ENJOYMENT OF THE PROPERTY FOR WHICH A PAYMENT DESCRIBED IN PARAGRAPH 3(B) OF THIS ARTICLE IS RECEIVED ; OR (C) MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HOW OR PROCESSES, OR CONSIST OF THE DEVELOPMENT AND TRANSFER OF A TECHNICAL PLAN OR TECHNICAL DESIGN. 12.5. THE TERM 'FEES FOR TECHNICAL SERVICES' AS USED IN THIS ARTICLE MEANS PAYMENTS OF ANY KIND TO ANY PERSON, OTHER THAN PAYMENTS TO AN EMPLOYEE OF THE PERSON MAKING THE PAYMENTS AND TO ANY INDIVIDUAL FOR INDEPENDENT PERSONAL SERVICES MENTIONED IN 10 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. ARTICLE 14, IN CONSIDERATION FOR SERVICES OF A MANAGERIAL, TECHNICAL OR CONSULTANCY NATURE. 3.6. CONSIDERING THE ABOVE REFERRED PROVISIONS, ASSESSING OFFICER CAME TO THE CONCLUSION THAT THE PAYMENTS MADE BY THE ASSESSEE WERE 'FEES FOR TECHNI CAL SERVICES' AS DEFINED IN SECTION 9(I)(VII) AND ALSO AS PER THE DEFINITIONS AVAILABLE IN THE ABOVE REFERRED TWO DTA AGREEMENTS. ACCORDINGLY, A.O. CONSIDERED THAT THE F EES PAID FOR TECHNICAL SERVICES WERE TAXABLE INCOME AND THEREFORE, ASSESSEE WAS BOUND TO DEDUCT TAX. SINCE, ASSESSEE HAD MADE THE PAYMENTS WITHOUT DEDUCTION OF TAX, BECAUSE OF ITS AGREEMENT WITH THE FOREIGN PART Y, WHEREIN, IT HAD AGREED TO MAKE THE PAYMENT NET OF T AXES, ASSESSEE WAS LIABLE FOR THE CONSEQUENCES OF VIOLATI ON OF PROVISIONS OF SECTION 195A, WHICH ARE RE-PRODUCED A S UNDER. 'WHERE, UNDER AN AGREEMENT OR OTHER ARRANGEMENT, THE TAX CHARGEABLE ON ANY INCOME REFERRED TO IN THE FOREGOING PROVISIONS OF THIS CHAPTER IS TO BE BORNE BY THE PERSON BY WHOM THE INCOME IS PAYABLE, THEN, FOR THE PURPOSES OF DEDUCTION OF TAX UNDER THOSE PROVISIONS SUCH INCOME SHALL BE INCREASED TO SUCH AMOUNT AN WOULD, AFTER DEDUCTION OF TAX THEREON AT THE RATES IN FORCE FOR THE FINANCIAL YEAR IN WHICH SUCH INCOME IS PAYABLE, BE EQUAL TO THE NET AMOUNT PAYABLE UNDER SUCH AGREEMENT OR ARRANGEMENT. ' 3.7. ON THIS BASIS, THE ASSESSING OFFICER GAVE AN OPPORTUNITY TO EXPLAIN THE REASONS FOR WHICH ASSESS EE HAD FAILED TO DEDUCT TAX OR HAD AGREED TO MAKE THE PAYMENT NET OF TAXES. ASSESSING OFFICER WAS NOT SAT ISFIED WITH THE ARGUMENTS OF ASSESSEE AND THEREFORE THE SH ORT FALL IN TAX DEDUCTION ALONG WITH INTEREST WAS QUANTIFIED IN THE FOLLOWING MANNER. 11 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. AMOUNT ASST. YEAR 2002-03 ASST. YEAR 2003-04 SHORT DEDUCTION UNDER SEC.201(1) RS.43,56,132 RS.5,08,399 INTEREST UNDER SEC.201(1A) TILL 31.1.2003 RS.2,09,285 RS.37,507 TOTAL RS.50,65,417 RS.5,45,906 4. AGAINST THE ORDERS OF THE A.O. ASSESSEE FILED AN APPEAL BEFORE THE LD. CIT(A). THE LD. CIT(A) AFT ER CAREFULLY EXAMINING THE CLAIMS OF ASSESSEE, OBSERVE D AS UNDER : (A) THERE IS NO DISPUTE ABOUT THE AMOUNT OF MONEY, WHICH HAS BEEN PAID BY THE ASSESSEE TO THE FOREIGN PARTIES. (B) THERE IS NOT DISPUTE ABOUT THE DATE OF PAYMENT AND FINANCIAL YEARS INVOLVED IN WHICH PAYMENTS WERE MADE. (C) THERE IS NO DISPUTE TO THE ACCRUAL OF THE FEES PAID TO THE FOREIGN PARTY AS INCOME ACCRUING TO THE FOREIGN PARTY IN INDIA. THEREFORE, THE PROVISIONS TO SECTIO N 5(2)(B) ARE NOT CONTESTED BY THE ASSESSEE. (D) THERE IS NO DISPUTE ABOUT THE APPLICATION OF SECTIO N 9(L)(VII) AND THE EXPLANATION TO PROVISO TO THAT SECTION WHICH PROVIDES FOR THE DEFINITION OF 'FEES PAID FOR TECHNICAL SERVICES'. THE ASSESSEE AGREES WITH THE ASSESSING OFFICER THAT THE PAYMENT MADE BY THEM WILL CONSTITUTE 'FEES FOR TECHNICAL SERVICE S', AS PER THE PROVISIONS OF IT ACT., 1961. 4.1. LD. CIT(A) NOTED THAT THE CASE OF ASSESSEE I S THAT THERE IS DIFFERENCE BETWEEN THE DEFINITION OF FEES FOR TECHNICAL SERVICES AS GIVEN IN EXPLANATION TO SECT ION 9(1)(VII) AND AS THE CONCEPT OF FEES FOR TECHNICAL SERVICES, AS DEFINED IN THE DOUBLE TAXATION AVOIDA NCE AGREEMENT AND SO THE PAYMENTS ARE NOT COVERED BY TD S PROVISIONS. 12 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. 4.2. THE ARGUMENTS OF ASSESSEE BEFORE THE LD. CIT(A) ARE THAT WHILE THERE IS A CONFLICT BETWEEN T HE DOMESTIC TAX PROVISIONS AND THE DTAA, THEN THE PROVISIONS OF DTAA SHOULD PREVAIL UPON. ACCORDINGLY , IT WAS SUBMITTED THAT THE PAYMENTS MADE BY THEM WERE NOT SUCH 'FEES FOR TECHNICAL SERVICES', WHICH SHOUL D BE BROUGHT TO TAX UNDER SECTION 9(1)(VII) OF THE IT AC T. 4.3. THE SECOND ARGUMENT OF ASSESSEE WAS THAT THE PAYMENTS MADE BY THEM TO THE FOREIGN PARTIES REPRESENTED BUSINESS INCOME EARNED BY THE FOREIGN P ARTIES WHICH WAS NOT TAXABLE IN INDIA AS PER THE PROVISION S OF ARTICLE 7 OF THE DTAA WITH UK AND ARTICLE 12 OF THE DTAA WITH NETHERLANDS. ASSESSEE ARGUED THAT UNLESS THE I NCOME OF THE FOREIGN PARTY WAS EARNED IN INDIA, ASSESSEE WAS NOT DUTY BOUND TO DEDUCT TAX AND THEREFORE, THERE WAS N O CASE OF APPLICATION OF SECTION 195A AND ITS CONSEQUENCES. 4.4. THE THIRD ARGUMENT WAS THE CLAIM OF ASSESSEE THAT THE FEES PAID TOWARDS CLINICAL TRIAL STUDIES W ERE FEES FOR INCLUDED SERVICES AS PER THE PROVISIONS OF DTAA BETWEEN INDIA AND UK AND INDIA AND NETHERLANDS AND ACCORDINGLY, FEES FOR INCLUDED SERVICES COULD NOT BE BROUGHT TO TAX IN INDIA. 5. THE ABOVE REFERRED ISSUES WERE DISCUSSED BY LD. CIT(A) IN THE FOLLOWING MANNER. 5.1. THE FIRST ISSUE DECIDED WAS THE CONCEPT OF 'F EES FOR TECHNICAL SERVICES'. ASSESSEE COMPANY RAISED TH IS ARGUMENT VIDE ITS LETTER DATED 04.02.2003. THE LD. CIT(A) REPRODUCED THE ARGUMENTS OF ASSESSEE AS ALSO CONSID ERED 13 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. BY THE ASSESSING OFFICER IN HIS ORDER AS UNDER. 'SIMBEC WILL CONDUCT CLINICAL TEST ON CATS AND DOGS WITH THE COMPOUNDS DEVELOPED BY DRF AND DRF WILL MAKE PAYMEN TS TO SIMBEC AGAINST THE STUDY REPORTS OF INVESTIGATIO N. THESE PAYMENTS ARE TAXABLE AS PER THE PROVISIONS OF SEC. 9(I)(VII) OF THE INDIAN INCOME TAX ACT, 1961. HOWEVER, IN THIS CASE SIMBEC IS NOT GRANTING ANY PATENT OR TRADEMARK TO DRF. FUR THER, IT IS NOT TRANSFERRING ANY TECHNICAL KNOW-HOW OR ANY TECH NICAL PLAN OR TECHNICAL DESIGN TO DRF. IT IS ONLY CONDUCTING T ESTS FOR INVESTIGATION. 'NDDO WILL CONDUCT CLINICAL TRIALS O N CATS AND DOGS WITH THE COMPOUNDS DEVELOPED BY DRF AND DRF WI LL MAKE PAYMENTS TO NDDO AGAINST THE STUDY REPORTS OF INVESTIGATION. THESE PAYMENTS ARE TAXABLE AS PER TH E PROVISIONS OF SEC.9(I)(VII) OF THE INDIAN INCOME TA X ACT, 1961. HOWEVER IN THIS CASE, NDDO IS NOT GRANTING ANY PATE NT OR TRADEMARK TO DRF. IT IS ONLY CONDUCTING TESTS FOR INVESTIGATION'. AS SEEN FROM THE ABOVE SUBMISSIONS MADE BY ASSESSEE COMPANY, ASSESSEE IS ALSO IN AGREEMENT WITH THE FAC T THAT THE PAYMENTS ARE 'FEES FOR TECHNICAL SERVICES' UNDER SE CTION 9(I)(VII) OF THE IT ACT. HOWEVER, ASSESSEE PUTS FOR WARD MAINLY TWO ARGUMENTS TO STATE THAT THE PAYMENTS ARE NOT 'FEES FOR TECHNICAL SERVICES' AS ENVISAGED IN THE DTAA'S. THE FIRST ARGUMENT OF ASSESSEE IS THAT SINCE NEITHE R SIMBEC NOR NDDO IS GRANTING ANY PATENT OR TRADEMARK TO DRF , THE PAYMENTS MADE TO THEM DO NOT TAKE THE CHARACTER OF 'FEES FOR TECHNICAL SERVICES' UNDER DTAA. HOWEVER, THE QUESTI ON OF GRANTING PATENT OR TRADEMARK COMES, ONLY IF THE PAY MENTS ARE HELD AS ROYALTY UNDER SECTION 9(I)(VII) OF THE IT A CT 1961. THE PAYMENTS MADE BY ASSESSEE COMPANY IS NOT BEING HELD AS ROYALTY AND HENCE THE ARGUMENT OF ASSESSEE THAT NO PATENT OR TRADEMARK IS GRANTED TO DRF IS IRRELEVANT. ASSESSEE HIMSELF ADMITS THAT THE PAYMENTS ARE TAXABLE AS FEE FOR TEC HNICAL SERVICE AS PER THE PROVISIONS OF SECTION 9(I)(VII) OF THE IT ACT, WHICH IS CORRECT. THE SECOND ARGUMENT PUT FORWARD BY ASSESSEE IN THE ABOVE PARAGRAPH IS THAT M/S.SIMBEC RESEARCH LTD. AND M/S. NDDO ONCOLOGY BV ARE NOT TRANSFERRING ANY TECHNICAL KNOW -HOW OR TECHNICAL PLAN OR TECHNICAL DESIGN TO ASSESSEE. HOW EVER, THIS IS NOT CORRECT AND IT IS AMPLY EVIDENT FROM BOTH TH E AGREEMENTS OF ASSESSEE WITH M/S. SIMBEC RESEARCH LTD. AND T-T/S. NDDO ONCOLOGY BV. THE AGREEMENTS WITH M/S. SIMBEC RESEAR CH LTD. AND M/S. NDDO ONCOLOGY BV IS NOT THAT ONLY THE FINAL REPORT WILL BE GIVEN TO ASSESSEE AFTER THE STUDIES ARE COMPLETED. THERE IS REGULAR INTERACTION BETWEEN ASS ESSEE AND THE RESEARCH ORGANIZATIONS AND ASSESSEE IS MADE WAR E OF EACH AND EVERY HAPPENING DURING THE COURSE OF STUDY'. 14 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. 5.2 LD.CIT(A) CONSIDERED AND DECIDED AS UNDER: 16. IT IS INTERESTING TO NOTE THE EFFORT PUT IN BY THE ASSESSING OFFICER IN CHECKING THE CLAIMS OF ASSESSE E. THE ASSESSING OFFICER HAS BROUGHT IN THE FOLLOWING RELE VANT PORTIONS FROM THE AGREEMENTS MADE BY ASSESSEE COMPANY WITH ITS FOREIGN CONTRACTING PARTIES. THE IMPORTANT PARTS OF THEIR AGREEMENT ALONG WITH DISCUSSION ABOUT THE SAME BY T HE ASSESSING OFFICER ARE RE-PRODUCED AS UNDER: 'AGREEMENT WITH M/S. SIMBEC RESEARCH LTD., UK: 1. PAGE-1 OF PRE-CLINICAL RESEARCH MASTER AGREEMENT: 1.1: SIMBEC AGREE TO CONDUCT LIBERAL, ROUTINE COMMUNICAT ION WITH COMPANY (DRF) BY TELEPHONE, FACSIMILE, E-MAIL OR CORRESPONDENCE AND WILL PROMPTLY INFORM COMPANY OF ANY UNUSUAL OCCURRENCES IN THE CONDUCT OF THE RESEARCH. 2. PAGE-4 O F PRE-CLINICAL RESEARCH MASTER AGREEMENT : 6 : ALL INFORMATION/DATA/RESULTS COLLECTED DURING/DERIVED F ROM THE CONDUCT OF THE RESEARCH SHALL BE AND REMAIN THE EXCLUSIVE PROPERTY OF THE COMPANY (DRF). FURTHER, ANY IDEAS, KNOW-HOW, INVENTIONS, PROCESSES OR OTHER INTELLECTUAL PROPERT Y, WHICH ARE GENERATED UNDER OR IN CONNECTION WITH THE RESEARCH SHALL BELONG TO AND SHALL BE THE SOLE AND EXCLUSIVE PROPE RTY OF THE COMPANY AND SIMBEC WILL TAKE ALL REASONABLE STEPS R EQUIRED TO PROTECT SUCH OWNERSHIP RIGHTS FOR THE COMPANY. AGREEMENT WITH M/S. NDDO ONCOLOGY BV : 1. PAGE 4 OF PRE-CLINICAL RESEARCH AND DEVELOPMENT AGREEMENT : ARTICLE 4: ALL INFORMATION, DATA AND RESULTS DIRECTLY RELATED TO STUDY DRUG AND DERIVED FROM THE CONDUCT OF STUDIES UNDER THIS AGREEMENT, EXCLUDING KNOW-HOW OWNED BY OR DEVELOPED INDEPENDENTLY FROM THE CONDUCT OF SERVICES UNDER TH IS AGREEMENT BY NDDO ONCOLOGY OR DELEGATES (INCLUDING BUT NOT LIMITED TO DRUG DEVELOPMENT MASTER PLANS, MASTER PR OTOCOLS, STANDARD OPERATING PROCEDURES AND PROPRIETARY INFOR MATION) WILL BE INTELLECTUAL PROPERTY OF SPONSOR (DRF). SPO NSOR SHALL BE FREE TO USE AND EXPLOIT SUCH INFORMATION, DATA A ND RESULTS AT ITS DISCRETION (EMPHASIS SUPPLIED) . 2. PAGE 3 OF ANNEX A TO PRE-CLINICAL RESEARCH AND DEVELOPMENT AGREEMENT - CONSULTANCY: CONSULTANCY ACTIVITIES CONDUCTED BY NDDO ONCOLOGY MAY SERVE VARIOUS PURPOSES, INCLUD ING BUT NOT LIMITED TO ANALYSIS OF SCIENTIFIC, REGULATO RY OR STRATEGIC ISSUES AND THE DESIGN OR EVALUATION OF DRUG DEVELOP MENT PLANS (EMPHASIS SUPPLIED). 15 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. 3. PAGE 4 OF ANNEX A TO PRE-CLINICAL RESEARCH AND DEVELOPMENT AGREEMENT - QUALITY CONTROL/ASSURANCE : BY MEANS OF FORMAL AUDITS, THE SPONSOR CAN PERFORM INSPECTIONS TO ESTA BLISH THAT NDDO ONCOLOGY'S AND OR DELEGATES SERVICES. 4. PAGE 4 OF ANNEX C TO PRE CLINICAL RESEARCH AND D EVELOPMENT AGREEMENT - DETAILED STUDY PROTOCOLS WILL BE SENT TO SPONSOR FOR APPROVAL PRIOR TO THE START OF EACH STUDY. THUS, FROM A PERUSAL OF THE ABOVE, IT IS CLEAR THAT DURING THE COURSE OF PERFORMANCE OF THE STUDY, MLS.DRF HAS ACC ESS TO THE TECHNICAL INFORMATION, TECHNOLOGY, DOCUMENTATIO N, KNOW- HOW AND PROCESSES INVOLVED IN THE WHOLE PROCEDURE O F STUDY. IN VIEW OF THIS, IT CANNOT BE SAID THAT THE TECHNOL OGY WAS NOT MADE AVAILABLE BY THE FOREIGN COMPANY TO ASSESSEE. AS COULD BE SEEN FROM THE AVERMENTS MADE IN THE AGREEMENTS REPRODUCED ABOVE, SUCH TECHNOLOGY, TECHNICAL INFORM ATION, KNOWLEDGE, PROCESSES ARE INDEED MADE AVAILABLE BUT KEPT CONFIDENTIAL. SPECIFIC CLAUSES ARE THERE IN THOSE A GREEMENTS TO TRANSFER ALL KNOW-HOW AND PROCESSES DEVELOPED FROM THE STUDY TO ASSESSEE. SINCE THE TECHNOLOGY IS IMPLICIT LY MADE AVAILABLE, OBVIOUSLY THE RECIPIENT IS ENABLED TO AP PLY THE SAME. HENCE THE PAYMENTS TO M/S. SIMBEC RESEARCH LT D. AND M/S. NDDO ONCOLOGY BV CERTAINLY FALLS WITHIN THE PU RVIEW OF THE DEFINITION OF 'FEES FOR TECHNICAL SERVICES' AS DEFINED IN CLAUSE 4(C) OF ARTICLE 13 OF THE DTAA WITH UK AND CLAUSE 5(B) OF ARTICLE 12 OF THE DTAA WITH NETHERLANDS' 17. ON THE BASIS OF ABOVE FACTS HIGHLIGHTED BY THE ASSESSING OFFICER FROM THE AGREEMENT ENTERED INTO BY ASSESSEE WITH THE FOREIGN PARTIES AND THE ARGUMENTS OF THE ASSESSING OFFICER, IT IS CLEAR THAT THE SERVICES RE CEIVED BY ASSESSEE FULFILLED THE DEFINITION FOR 'TECHNICAL SERVICES' A S PER THE PROVISIONS OF SECTION 9(1)(VII) OF THE I.T. ACT AND ALSO THE DEFINITION FOR THESE TECHNICAL SERVICES AS DEFINED IN THE DTAA AGREEMENT ALSO. THE ARGUMENT TAKEN BEFORE THE LD. C IT(A) WAS THAT FOREIGN PARTY DOESN'T PART WITH ITS TECHNI CAL SKILLS, TECHNICAL KNOW-HOW WITH WHICH IT CONDUCTS THE FIELD TRIALS AND, THEREFORE ONLY THING WHICH THE LOCAL PARTY (ASSESSE E) GETS IS A FINAL REPORT ABOUT THE RESULTS AND THIS FINAL REPOR T CANNOT CONSTITUTE TRANSFER OF TECHNICAL KNOW-HOW. THE LD. CIT(A) OBSERVED THAT THIS ARGUMENT IS NOT CORRECT BECAUSE THE RELEVANT CLAUSES HIGHLIGHTED IN PRECEDING PARA NO.1 6 CLEARLY PROVIDE THAT ALL INTELLECTUAL PROPERTY INCLUDING RIGHTS TO PATENTS WHICH WILL BE GENERATED WILL BELONG TO ASSESSEE ONL Y. THE ENTIRE PROCESS BY WHICH THIS FIELD TRIAL RESEARCH I S CONDUCTED IS DEFINED AND CONTROLLED WITH ACTIVE PARTICIPATION OF ASSESSEE. ASSESSEE HAS COMPLETE CONTROL OVER THE KN OW- HOW , EXPERIENCE OF FIELD TRIALS AND SKILLS GENERATED IN THE FIELD 16 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. TRIAL. OTHERWISE, HOW WILL BE ASSESSEE BE IN A POSI TION TO CLAIM OWNERSHIP OVER THE KNOW-HOW GENERATED AND APP LY FOR PATENTS. THESE FACTS SHOW THAT FOREIGN PARTY HAD PR OVIDED TECHNICAL SERVICES TO SPEED UP THE 'FIELD TRIAL TIM E' SO THAT ASSESSEES TIME FOR EXCLUSIVE MARKETING RIGHTS' COU LD BE MAXIMIZED. THEREFORE, THE CLAIM OF ASSESSEE IS NOT UPHELD BY L D. CIT(A) AND HELD THAT THE FINDING GIVEN BY THE ASSESSING OFFICER THAT 'FEES ARE PAID FOR TECHNICAL SERVICES' IS FOUND TO BE CORRECT. 5.3 THE NEXT CLAIM OF ASSESSEE IS THAT THE PAYMENTS ARE ACTUALLY BUSINESS PROFITS EARNED BY TH E OTHER CONTRACTING PARTIES AND THEREFORE, THEY CANNO T BE BROUGHT TO TAX IN INDIA UNDER THE PROVISIONS OF DTA A. LD. CIT(A) CONSIDERED THIS ISSUE AS UNDER: 18. .............. THE PRECISE ARGUMENT OF ASSESSEE IS AS UNDER. 'THESE PAYMENTS ARE NOT HIT BY ARTICLE 13 OF DTAA, BUT MAY BE CONSIDERED AS BUSINESS PROFITS UNDER ARTICLE 7(1) OF THE DTAA BETWEEN INDIA AND UK. SINCE THE FOREIGN COMPANIES ARE NOT HAVING PERMANENT ESTABLISHMENTS IN INDIA, THE PAYMENTS ARE NOT TAXAB LE IN INDIA. HENCE, TAX AT SOURCE WAS NOT DEDUCTED FRO M THE REMITTANCE MADE TO SIMBEC RESEARCH LTD.' 19.1. THE ASSESSING OFFICER HAS DECLINED TO ACCEPT THE ABOVE ARGUMENT ON THE GROUND THAT ONCE ASSESSEE ACCEPTS THAT THE PAYMENT FOR DEVELOPMENT CHARGES ARE IN FACT, 'FEES FOR TECHNICAL SERVICES', AS PER THE DEFINITION IN EXPLANATION TO SECTION 9(1)(V II) OF THE IT ACT, THEN THE SAME CANNOT BE CONSIDERED AS BUSINESS INCOME EARNED BY THE OTHER CONTRACTING PARTIES OF THEIR RESPECTIVE COUNTRIES. 17 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. 19.2 MOREOVER, THESE PAYMENTS ALSO SATISFY THE DEFINITION OF FEES FOR TECHNICAL SERVICES AS GIVEN IN 'DTAA'. THESE PAYMENTS CANNOT BE CONSIDERED AS BUSINESS INCOME. THEREFORE, THERE IS NO APPLICATION OF ARTICLE 7(1) OF DTAA BETWEEN INDIA AND UK . ARTICLE 7(1) DOES NOT DEFINE OR DISTINGUISH BETWEEN 'BUSINESS INCOME' AND 'FEES FOR TECHNICAL SERVICES'. IT MEREL Y SAYS BUSINESS INCOME WILL BE TAXED IN THE STATE WHERE IT IS EARNED. THEREFORE, THERE IS NO CONFLICT BETWEEN DTA A AND INDIAN LAWS. THERE IS NO SCOPE OF ANY CONTROVER SY AND ITS RESOLUTION TO CLAIM THAT PROVISIONS OF DTAA SHOULD PREVAIL. IN ADDITION, THE LD. CIT(A) OBSERVE D THAT 'FEES FOR TECHNICAL SERVICES' ARE AN OPEN AREA FOR TAXATION. THESE SERVICES CAN BE TAXED IN BOTH THE COUNTRIES AS IS SEEN FROM THE OPENING SPECIAL CLAUS ES OF THE RESPECTIVE ARTICLE, WHICH PROVIDES FOR THEIR TAXATION IN BOTH THE DTAA. FOR THE SAKE OF EASY UNDERSTANDING, THE LD. CIT(A) REFER ONLY TO THE DTA A 'WITH UK. WE CAN REFER TO P ROVISIONS ARTICLE 13(1) AND (2) WHICH ARE RE-PRODUCED AS UNDER. '13(1): ROYALTIES AND 'FEES FOR TECHNICAL SERVICES' ARISING IN A CONTRACTING STATE AND PAID TO A RESIDENT OF THE OTHER CONTRACTING STATE MAY BE TAXED IN THAT OT HER STATE. 13(2): HOWEVER, SUCH ROYALTIES AND 'FEES FOR TECHNICAL SERVICES' MAY ALSO BE TAXED IN THE CONTRACTING STAT E IN WHICH THEY ARISE AND ACCORDING TO THE LAW OF THAT STATE; BUT IF THE BENEFICIAL OWNER OF THE ROYALTIES OR 'FEES FOR TECHNICAL SERVICES' IS A RESIDENT OF THE OTHER CONTRACTING STATE, THE TAX SO CHARGED SHALL NOT EXCEED'. ON THE BASIS OF ARTICLE 13(2), IT IS SEEN THAT FEE S FOR TECHNICAL SERVICES' CAN BE TAXED IN THE CONTRACTING STATE IN WHICH THEY ARISES SUBJECT TO A LIMITATION THAT THE TAX CHARGED WILL NOT EXCEED CERTAIN TERMS, WHIC H 18 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. ARE DEFINED THEREIN. 21 THEREFORE, THE CLAIM OF ASSESSEE THAT PAYMENTS MADE BY THEM ARE NOT 'FEES FOR TECHNICAL SERVICES' WHICH CAN BE TAXED IN INDIA BUT RATHER BUSINESS INCOME OF THE FOREIGN PARTY IS NOT SOUND AND NOT ACCEPTED. 22. THIS DISCUSSION CAN BE FURTHER EXTENDED BY REFERRING TO ARTICLE 13(7) OF DTAA WITH UK AND ARTI CLE 12(8) OF DTAA WITH NETHERLANDS, WHICH ARE RE- PRODUCED AS UNDER: ARTICLE 13(7) OF DTAA BETWEEN INDIA & UK : 'ROYALTIES, 'FEES FOR TECHNICAL SERVICES' OR PAYMENTS FOR THE USE OF EQUIPMENT SHALL BE DEEMED TO ARISE IN ON E OF THE STATE WHEN THE PAYER IS THAT STATE ITSELF, A PO LITICAL SUB-DIVISION, A LOCAL AUTHORITY OR A RESIDENT OF THAT STATE. WHERE, HOWEVER THE PERSON PAYING THE ROYALTIES, 'FEES FOR TECHNICAL SERVICES' OR THE PAYMENTS FOR THE USE OF EQUIPMENT, WHETHER H E IS A RESIDENT OF ONE OF THE STATE OR NOT, HAS IN ONE OF THE STATES A PERMANENT ESTABLISHMENT OR A FIXED BASE IN CONNECTION WITH WH ICH THE CONTRACT UNDER WHICH THE ROYALTIES, 'FEES FOR T ECHNICAL SERVICES' OR THE PAYMENTS FOR THE USE OF EQUIPMENT ARE PAID WAS CONCLUDED, AND SUCH ROYALTIES, 'FEES FOR TECHNICAL SERVICES' OR PAYMENTS FOR THE USE OF EQUI PMENT ARE BORNE BY SUCH PERMANENT ESTABLISHMENT OR FIXED BASE, THEN SUCH, ROYALTIES, 'FEES FOR TECHNICAL SER VICES' OR PAYMENTS FOR THE USE OF EQUIPMENT SHALL BE DEEMED T O ARISE IN THE STATE IN WHICH THE PERMANENT ESTABLISH ED OR FIXED BASE IS SITUATED':' ARTICLE 12(8) OF DTAA BETWEEN INDIA & NETHERLAND: 'ROYALTIES OR FEES FOR TECHNICAL SERVICES SHALL BE DEEMED TO ARISE IN ONE OF THE STATES WHEN THE PAYER IS THA T STATE ITSELF, A POLITICAL SUB-DIVISION, A LOCAL AUTHORITY OR A RESIDENT OF THAT STATE. WHERE, HOWEVER, THE PERSON PAYING THE ROYALTIES OR FEES FOR TECHNICAL SERVICES , WHETHER HE IS A RESIDENT OF ONE OF THE STATES OR NOT, TIES ILL ONE OF THE STATES A PER MANENT ESTABLISHMENT OR A FIXED BASE IN CONNECTION WITH WHICH THE CONTRACT UNDER WH ICH THE ROYALTIES OR FEES FOR TECHNICAL SERVICES ARE PA ID WAS CONCLUDED, AND SUCH ROYALTIES OR FEES FOR TECHNICAL 19 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. SERVICES ARE BORNE BY SUCH PERMANENT ESTABLISHMENT OR FIXED BASE, THEN SUCH ROYALTIES OR FEES FOR TECHNIC AL SERVICES SHALL BE DEEMED TO ARISE IN THE STATE IN W HICH THE PERMANENT ESTABLISHMENT OR FIXED BASE IS SITUAT ED.' 23. BOTH THE SPECIAL ARTICLES ARE CATEGORICAL ILL STATING THAT 'FEES FOR TECHNICAL SERVICES' SHAL L BE DEEMED TO ARISE IN THE STATE IN WHICH THE PERMANENT ESTABLISHMENT OR THE FIXED BASE OF THE PAYER OF THE 'FEES FOR TECHNICAL SERVICES' IS SITUATED. IN THIS CASE, THE PERMANENT ESTABLISHMENT/FIXED BASE OF ASSESSEE IS FIXED IN INDIA AND THEREFORE THE 'FEES FOR TECHN ICAL SERVICES' SHALL BE DEEMED TO ARISE IN INDIA ONLY. HENCE, THESE ARE TAXABLE IN INDIA. EVEN FROM THIS PERSPECTIVE, ASSESSEE DOES NOT HAVE ANY CASE. 5.4. LD. CIT(A) COME TO THE LAST ARGUMENT OF ASSESSEE, WHEREIN THEY HAVE REFERRED TO THEIR CLAIM THAT FEES PAID TOWARDS 'CLINICAL TRIAL STUDIES' ARE INCL UDED SERVICES AS PER ARTICLE 12 CLAUSE (2)(A)(II) OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND UK AND INDIA AND NETHERLANDS. ASSESSEE HAD NOT SUBMITT ED ANY WRITTEN SUBMISSIONS AND THEREFORE, THE LD. CIT( A) FOUND IT REALLY DIFFICULT TO UNDERSTAND THE ARGUMEN T OF ASSESSEE. THE LD. CIT(A) GONE THROUGH THE ENTIRE DT AA AGREEMENTS WITH BOTH UK AND NETHERLANDS AND HAVE NO T FOUND ANY SUCH ARTICLE NO,12(2)(A)(II) AS IS REFERR ED TO BY ASSESSEE IN GROUNDS OF APPEAL AS GROUND NO.5 BOTH T HE ASSESSMENT YEARS 2002-03 AND 2003- 04. 5.5. THE LD. CIT(A) HAS OPINED THAT HE WAS NOT ABLE TO UNDERSTAND EXACTLY WHAT WAS THE CLAIM OF ASSESSEE. HE FURTHER STATES THAT ASSESSEE IS CARRIED AWAY WITH I TS REPRESENTATION IN THE CASE OF 'REDDY'S LABORATORIES FOR THE A.YS. 2002-03 AND 2003-04, WHEREIN THE DTA AGREEMENTS BETWEEN INDIA AND USA WAS UNDER CONSIDERATION. IN THAT CASE, THE ISSUE FOR 'FEES FO R 20 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. TECHNICAL SERVICES' WAS CONSIDERED. IN THAT DTAA, T HERE IS A CLAUSE AVAILABLE IN ARTICLE NO.12(2)(A)(II) WH ICH REFERS TO 'FEES FOR INCLUDED SERVICES'. IT IS THEREFORE ES TABLISHED THAT ASSESSEE IS RELYING ON LEGAL PROVISION, WHICH IS NOT APPLICABLE TO THE FACTS OF THIS CASE AND THEREFORE THIS GROUND WAS ALSO REJECTED BY LD. CIT(A) AS IT WAS RA ISED WITHOUT ANY APPLICATION OF MIND. HE ACCORDINGLY HEL D THAT FEES PAID BY ASSESSEE COMPANY TO M/S.SIMBEC RESEARCH LTD., UK AND M/SUNDOG ONCOLOGY BV, NETHERLANDS IS 'FEES FOR TECHNICAL SERVICES'. THIS IS PROVED BY REFERENCE TO CLAUSE NO.6 AND CLAUSE NO.4 OF THEIR RESPECTIVE AGREEMENTS WITH ASSESSEE. 5.6 LD CIT(A) FURTHER WENT ON TO DISCUSS THESE CLAUSES AS NOTED VIDE ORDER SHEET ENTRY DATED 09.09.2004, WHICH IS RE-PRODUCED AS UNDER : 'SRI PSRVV SURYA RAO PRESENT. HIS ATTENTION WAS INVITED TO CLAUSE NO.6 IN THEIR AGREEMENT WITH SIMBEC AND CLAUSE NO.4 IN THEIR AGREEMENT WITH NDDO BV, WHEREIN IT IS PROVIDED THAT KNOWLEDGE WILL BE TRANSFERRED TO SPONSOR OF RESEARCH AND IT WILL BE SOLE PROPERTY OF SPONSOR, WHO WILL HAVE RIGHT TO SEEK PA TENTS ETC. AGAINST THE KNOWLEDGE GENERATED IN THE PROCESS OF SPONSORED RESEARCH. THE ASSESSEE MAY GIVE HIS ARGUMENT AS TO WHY THIS SHOULD NOT BE HELD AS INCLU DED SERVICES FOR WHICH FEES WERE PAID?' 5.7. HE RECORDS THAT ASSESSEE COMPANY HAS NOT RESPONDED TO THIS QUERY. LD. CIT(A) OPINED THAT THIS CLEARLY BRINGS OUT THE FACT THAT WHEN THE KNOWLEDGE GENERATED IN THE COURSE ON RENDERING OF TECHNICAL SERVICES WILL BE TRANSFERRED TO THE SPONSORER OF TH E RESEARCH AND WILL BE HIS SOLE PROPERTY INCLUDING TH E RIGHTS OVER THE PATENTS, WHICH ARE LIKELY TO BE GEN ERATED IN THE COURSE OF TECHNICAL SERVICES, THEN, THERE IS NO 21 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. DOUBT THAT SUCH TECHNICAL SERVICES IS A TRUE SUBJEC T MATTER OF CHARGE OF INCOME TAX, IN TERMS OF SECTION 5 AND SECTION 9 OF THE INCOME TAX ACT. 5.8 ACCORDINGLY, THE LD. CIT(A) CONCLUDED VIDE PARA 29 THAT THE ASSESSING OFFICER WAS RIGHT IN COMING TO THE CONCLUSION THAT THE PAYMENT BY ASSESSEE OF F EES BY ASSESSEE COMPANY TO THE FOREIGN PARTIES WERE 'FEES FOR TECHNICAL SERVICES' WHICH WAS SUBJECT TO TAX IN IND IA. THE CLAIM OF ASSESSEE THAT THESE PAYMENTS WERE BUSINESS INCOME EARNED BY THE FOREIGN PARTIES IS OF NO RELEVANCE BECAUSE THE BUSINESS INCOME OF THE FOREIGN PARTY MA Y BE TAXED IN THEIR COUNTRY AS PER THE LAWS OF THEIR RES PECTIVE COUNTRY. AS FAR AS THE ISSUE IS CONCERNED THE FEES PAID ARE 'FEES FOR TECHNICAL SERVICES' AS DEFINED IN SEC TION 9(I)(VII) AND ALSO AS DEFINED IN THE DOUBLE TAXATION AVOIDANCE AGREEMENTS. THIS IS ALSO BORNE OUT BY THE IMPORTANT CLAUSES OF THE AGREEMENTS BETWEEN ASSESSE E AND THE FOREIGN PARTIES. SUCH FEES ACCRUE AND ARISE IN INDIA AND, HENCE, TAXABLE IN INDIA. THEREFORE, HE HELD THAT THE ASSESSING OFFICER WAS RIGHT IN RAISING DEMAND UNDER SEC. 201 AND UNDER SEC. 201 (LA) AND ASSESSEE HAS NO CASE. 6. BEFORE THE TRIBUNAL, THE LD. COUNSEL RELIED ON THE COORDINATE BENCH DECISION IN THE CASE OF DR. REDDY LABS WHEREIN IN ITA.NOS. 867 AND 868/HYD/2003 FOR THE ASSESSMENT YEARS 2002-03 AND 2004-05 WHERE IN IT WA S HELD THAT PAYMENTS MADE TO CONTRACT RESEARCH ORGANISATIO NS ARE NOT TAXABLE IN INDIA. 22 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. 7. LEARNED D.R. HOWEVER, SUBMITTED THAT THE FACTS IN THE CASE OF DR. REDDY LABORATORIES LTD., (SUPRA) AR E DIFFERENT WHEREAS THAT COMPANY PAID AMOUNTS TO CONTRACT RESEA RCH ORGANISATIONS WHEREAS, IN ASSESSEES CASE, AMOUNTS ARE PAID TO INDEPENDENT ORGANISATIONS AND REFERRED TO THE TERMS OF THE AGREEMENTS TO DISTINGUISH FROM THE SAID FACTS. HE R ELIED ON THE ORDERS OF LD. CIT(A). 8. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE FACTS ON RECORD. IT IS AN ADMITTED FACT THAT IN THE CASE OF DR. REDDY LABORATORIES P. LTD., (SUPRA) THE ISSUE WAS WHETHER THE PAYMENTS ARE TO BE TREATED AS FEES FOR TECHNICAL SERVICES UNDER ARTICLE 12 OF THE DTAA OR AS BUSINES S PROFITS IN TERMS OF ARTICLE 7 OF DTAA WITH USA AND CONSIDERED IN THOSE CASES THAT THE PAYMENTS ARE IN THE NATURE OF BUSINE SS RECEIPTS TO BE CONSIDERED UNDER ARTICLE 7 OF THE DTAA. THE F INDINGS ARE AS UNDER : 11. WE HAVE CONSIDERED THE ISSUE. KEEPING IN MIND THE DETAILED ORDER OF THE CIT(A), WHICH IS EX TRACTED ABOVE AND THE PROVISIONS OF THE INCOME-TAX ACT READ WITH DTAA WITH USA AND CANADA, WHICH ARE ALMOST SIMILAR, WE HAVE NO REASON TO DIFFER FROM THE ORDER OF THE CIT (A). EVEN THOUGH THE ASSESSING OFFICER CONSIDERED THAT THE P AYMENTS WERE MADE BY WAY OF FEE FOR TECHNICAL SERVICES AS PER ARTICLE 12 OF THE DTAA, THE SAME IS TAXABLE IN THE SOURCE COUNTRY ONLY IF SUCH SERVICES MAKE AVAILABLE ANY TE CHNICAL KNOWLEDGE, EXPERTISE, ETC. OR THERE IS TRANSFER OF TECHNICAL PLAN OR DESIGN. IN THIS CASE, AS RIGHTLY CONSIDERE D BY THE LEARNED CIT(A), ASSESSEE WAS CONDUCTING CLINICAL TR IALS THROUGH THE CROS IN USA TO COMPLY WITH THE REGULATI ONS THEREIN AND THE CROS WHO ARE EXPERTS IN THIS FIELD WERE ONLY CONDUCTING STUDIES AND SUBMITTING THE REPORTS IN RELATION THERETO. THEY ARE NEITHER TRANSFER OF TECH NICAL PLAN OR TECHNICAL DESIGN NOR MAKING AVAILABLE OF TECHNIC AL KNOWLEDGE, EXPERIENCE OR KNOW-HOW BY THE CROS TO ASSESSEE COMPANY. IN FACT, ASSESSEE COMPANY DID NO T GET ANY BENEFIT OUT OF THE SAID SERVICES IN USA AND ASS ESSEE 23 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. WAS ONLY GETTING A REPORT IN RESPECT OF FIELD STUD Y ON ITS BEHALF, WHICH WOULD HELP IT IN GETTING REGISTERED WITH THE REGULATORY AUTHORITY. SINCE THERE IS NO MAKING AVAI LABLE OF TECHNICAL SKILL, KNOWLEDGE OR EXPERTISE OR PLANS OR DESIGNS IN THE PRESENT CASE, THE AMOUNTS PAID BY ASSESSEE DO NOT FALL UNDER ARTICLE 12, BUT COME WITHIN THE PURVIEW OF ARTICLE 7 OF THE DTAA. THEREFORE, THE AMOUNTS PAID ARE TO B E CONSIDERED AS BUSINESS RECEIPTS OF THE SAID CROS AN D SINCE THEY DO NOT HAVE ANY PE IN INDIA ON WHICH ASPECT TH ERE IS NO DISPUTE, THERE IS NO NEED TO DEDUCT TAX AT SOURC E. SIMILAR ISSUE WAS ANALYSED AND CONSIDERED BY THE AAR IN THE CASE OF ANAPHARM INC (SUPRA), WHICH IS ONE OF THE RECIP IENTS IN ASSESSEES CASE ALSO. THE AAR IN THAT CASE HELD AS UNDER- MERE PROVISION OF TECHNICAL SERVICES IS NOT ENOUGH TO ATTRACT ART. 12(4)(B). IT ADDITIONALLY REQUIRES THA T THE SERVICE PROVIDER SHOULD ALSO MAKE HIS TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HOW ETC., KNOWN TO THE RECIPIENT OF THE SERVICE SO AS TO EQUIP HIM TO, INDEPENDENTLY PERFORM THE TECHNICAL FUNCTION HIMSEL F IN FUTURE, WITHOUT THE HELP OF THE SERVICE PROVIDER . IN OTHER WORDS, PAYMENT OF CONSIDERATION WOULD BE REGARDED AS 'FEE FOR TECHNICAL/INCLUDED SERVICES' O NLY IF THE TWIN TEST OF RENDERING SERVICES AND MAKING TECHNICAL KNOWLEDGE AVAILABLE AT THE SAME TIME IS SATISFIED. IN THE PRESENT CASE, THE APPLICANT RENDE RS BIOANALYTICAL SERVICES WHICH, NO DOUBT, ARE VERY SOPHISTICATED IN NATURE, BUT THE APPLICANT DOES NOT REVEAL TO ITS CLIENTS AS TO HOW IT CONDUCTS THOSE T ESTS OR THE INPUTS THAT HAVE GONE INTO IT, SO AS TO ENAB LE THEM TO CARRY OUT THOSE TESTS THEMSELVES IN FUTURE. A BROAD DESCRIPTION OR INDICATION OF THE TYPE OF TEST CARRIED OUT TO REACH THIS CONCLUSION DOES NOT ENABL E THE APPLICANT'S CLIENT TO DERIVE REQUISITE KNOWLEDG E TO CONDUCT THE TESTS OR TO DEVELOP THE TECHNIQUE BY ITSELF. THE MERE FACT THAT THE TESTS IN QUESTION AR E HIGHLY TECHNICAL IN NATURE WILL NOT MAKE A DIFFEREN CE. IN ITS AFFIDAVIT THE APPLICANT AFFIRMS THAT ONLY FI NAL RESULTS, CONCLUSION OF DATA OF BIOEQUIVALENCE TESTS ARE PROVIDED TO THE RECIPIENT. CLINICAL PROCEDURE, ANALYTICAL METHODS, ETC., WHICH ARE PROPRIETARY ITE MS OF THE APPLICANT, HAVE NEITHER BEEN NOR WILL THEY E VER BE TRANSFERRED, ASSIGNED OR HANDED OVER TO 5 OR ANY OTHER INDIAN CLIENT. FROM THE PERUSAL OF THE RELEVA NT AGREEMENTS, NO PROVISION IS FOUND WHICH WOULD ENTITLE THE CLIENTS TO KNOW THE DETAILS OF THE ANAL YTICAL 24 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. METHODS AND PROCEDURES EMPLOYED BY THE APPLICANT IN CARRYING OUT THE BIOEQUIVALENCE TESTS. THE ONLY DOUBT CAST BY C1. 15 OF THE AGREEMENT WITH 5 IS CLEARED BY S'S STATEMENT THAT THE SAID CLAUSE WHICH WAS PART OF STANDARD FORMAT WAS NEVER GIVEN EFFECT TO. IT SEEMS TO BE INAPPLICABLE ALSO HAVING REGARD TO THE ACTUAL MODALITIES OF THE TRANSACTION AS SET OUT IN THE APPLICATION. THEN AGREEMENT WITH R SAYS THAT R SHALL BE THE OWNER OF THE TESTED SAMPLES AND TEST COMPOUNDS. FURTHER, THE APPLICANT WILL STORE TESTED SAMPLES AND TEST COMPOUNDS FOR THREE MONTHS AND MAKE THESE AVAILABLE TO THE CLIENT AT THE EXPIRY OF THAT PERIOD. HANDING OVER TESTED SAMPLES AND TEST COMPOUNDS CANNOT BE EQUATED WITH MAKING TECHNOLOGY, KNOW-HOW, ETC., AVAILABLE TO R. THE AGREEMENT ALSO STATES THAT R SHALL BE THE OWNER OF ALL INTELLECTUAL PROPERTY RIGHTS RESULTING FROM THE SERVICES. THIS WOULD MEAN THAT, IF ON THE BASIS OF THESE RESULTS, THE CLIENT IS ABLE TO ACQUIRE PATENT OR OTHER INTELLECTUAL PROPERTY RIGHTS IN RESPECT OF NE W GENERIC DRUGS DEVELOPED BY IT, THEN THE APPLICANT SHALL NOT CLAIM ANY INTEREST WHATSOEVER IN SUCH RIG HT. IT IS ALTOGETHER A DIFFERENT ASPECT. BY AGREEING TO THIS PROVISION, THE APPLICANT HAS NOT MADE ITS TECHNICAL EXPERTISE, KNOW-HOW, ETC., AVAILABLE TO R. IT IS ON LY NATURAL THAT R WHICH HAS DEVELOPED THE GENERIC DRUG SHOULD ENJOY THE INTELLECTUAL PROPERTY RIGHTS IN RELATION THERETO. THE ANALYTICAL TEST HAS NOT CONTRIBUTED TO THE DEVELOPMENT OF NEW GENERIC DRUG. THE TEST HAS ONLY SHOWN WHETHER THAT DRUG IS AS EFFICACIOUS AS THE REFERENCE DRUG. DEVELOPMENT OF NEW DRUG AND TESTING ITS EFFICACY ARE NOT ONE AND T HE SAME THING. BY MERELY ACQUIRING KNOWLEDGE OF THE TESTING METHODS ONE DOES NOT GET ANY INSIGHT AS TO HOW A NEW DRUG COULD BE DEVELOPED. IN THE LIGHT OF THE ABOVE DISCUSSION INTERPRETING THE EXPRESSION 'MAKE AVAILABLE', IT FOLLOWS THAT C1. (B) OF ART. 1 2(4) RELIED UPON BY THE REVENUE DOES NOT COME INTO PLAY AND THE SERVICES IN QUESTION CANNOT BE CONSIDERED T O BE 'FEES FOR INCLUDED SERVICE' WITHIN THE MEANING O F THIS PROVISION. THE SECOND LIMB OF CL. (B) REFERS T O 'DEVELOPMENT AND TRANSFER OF A TECHNICAL PLAN OR TECHNICAL DESIGN'. OBVIOUSLY, THAT HAS NO APPLICATI ON HERE. 25 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. THE APPLICANT USES ITS EXPERIENCE AND SKILL ITSELF IN CONDUCTING THE BIOEQUIVALENCE TESTS, AND PROVIDES ONLY THE FINAL REPORT CONTAINING CONCLUSIONS, TO TH E CLIENT. THE INFORMATION CONCERNING SCIENTIFIC OR COMMERCIAL EXPERIENCE OF THE APPLICANT OR RELATING TO THE METHOD, PROCEDURE OR PROTOCOL USED IN CONDUCTIN G BIOEQUIVALENCE TESTS IS NOT BEING IMPARTED TO THE PHARMACEUTICAL COMPANIES AND THE CONSIDERATION IS NOT PAID FOR THAT PURPOSE. ON THE BASIS OF THE FINA L REPORT, THE PHARMACEUTICAL COMPANIES WILL NOT BE AB LE TO FIND OUT WHAT METHOD, PROCEDURE OR PROTOCOL WAS USED IN CONDUCTING THE TESTS. MOREOVER, THE TEST REPORTS ARE DRUG SPECIFIC. HENCE THE MATERIAL FURNISHED BY THE APPLICANT WILL NOT IN ANY WAY HELP THE CUSTOMERS TO FACILITATE FURTHER RESEARCH AND DEVELOPMENT OF NEW DRUGS AS CONTENDED BY THE REVENUE. AS SUCH, THE FEES RECEIVED BY THE APPLICAN T ARE TO BE TREATED AS BUSINESS INCOME AND NOT ROYALT Y INCOME. SINCE THE APPLICANT IS IN THE BUSINESS OF PROVIDING BIO-ANALYTICAL SERVICES TO VARIOUS PHARMACEUTICAL COMPANIES, THE CONSIDERATION RECEIVED BY IT FROM THEM WOULD BE ITS BUSINESS INCOME. IN VIEW OF ART. 7 R/W ART. 5, SUCH INCOME C AN BE TAXED IN INDIA ONLY IF THE APPLICANT HAS A PE IN THIS COUNTRY. THE APPLICANT HAS DENIED THE EXISTENC E OF ANY PE HERE AND THERE IS NOTHING ON RECORD TO INDICATE ANYTHING TO THE CONTRARY. ON THE FACTS STATED, THE EXISTENCE OF PE IN INDIA CANNOT BE INFE RRED ALSO. IT IS, THEREFORE, RULED THAT THE FEE PAID BY S AND R TO THE APPLICANT IN RESPECT OF BIOEQUIVALENCE TES TS CONDUCTED BY IT IS IN THE NATURE OF 'BUSINESS PROFI TS' UNDER ART. 7 AND THE SAME IS NOT TAXABLE IN INDIA A S THE APPLICANT DOES NOT HAVE A PE SITUATED IN THIS COUNTRY.-RAYMOND LTD. VS. DY. CIT (2003) 80 IT] (MUMBAI) 120 : (2003) 86 ITD 791 (MUMBAI), MCKINSEY & CO. INC. (PHILLIPPINES) & ORS. VS. ASSTT. DIRECTOR OF IT (2006) 99 IT] (MUMBAI) 857 CONCURRED WITH; DIAMOND SERVICES INTERNATIONAL (P) LTD. VS. UNION OF INDIA (2008) 216 CTR (BOM) 120 : (2008) 169 TAXMAN 201 (BOM) RELIED ON. CONCLUSION: APPLICANT, TAX RESIDENT OF CANADA, ONLY PROVIDING FINAL RESULTS TO ITS INDIAN CLIENTS BY USING HIGHLY SOPHISTICATED BIO-ANALYTICAL KNOW-HOW, WITHOUT 26 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. PROVIDING ANY ACCESS WHATSOEVER TO THE CLIENTS TO SUCH KNOW-HOW, FEE RECEIVED BY IT IS BUSINESS INCOM E AND NOT FEE FOR TECHNICAL/INCLUDED SERVICES OR ROYA LTY AND APPLICANT HAVING NO PE IN INDIA, SUCH INCOME WOULD NOT BE TAXABLE IN INDIA BY VIRTUE OF RELEVANT PROVISIONS OF DTAA BETWEEN INDIA AND CANADA. 12. WE AGREE WITH THE ABOVE OPINION EXPRESSED BY THE AAR AND ACCORDINGLY, WE UPHOLD THAT THE AMOU NTS PAID BY ASSESSEE COMPANY TO THE CROS ARE NOT TAXAB LE IN INDIA. THAT BEING SO, THERE IS NO NEED FOR ASSESSE E TO DEDUCT TAX AT SOURCE. CONSEQUENTLY, THE IMPUGNED O RDER OF THE CIT(A) IS CONFIRMED AND THE GROUNDS RAISED BY T HE REVENUE IN THESE APPEALS ARE REJECTED. 9. BUT IN THIS CASE, LD. CIT(A) WHO CONSIDERED TH E CASE OF DR. REDDY LABORATORIES ALSO EARLIER, DISTIN GUISHED THE FACTS TO STATE THAT THESE ARE NOT AGREEMENTS WITH C ONTRACT RESEARCH ORGANISATIONS BUT WITH INDEPENDENT RESEARC H ENTITIES. THE CLAUSE OF THE AGREEMENT ALSO INDICATE THAT ASSE SSEE HAS RIGHTS OVER THE PATENTS, SECRET KNOWLEDGE ETC., ATT AINED DURING THE COURSE OF CONDUCTING RESEARCH. IT WAS ALSO FURT HER OBSERVED THAT ASSESSEE ADMITS THAT THE PAYMENTS ARE TAXABLE AS FEES FOR TECHNICAL SERVICES (VIDE SUBMISSIONS MADE AND EXTRA CTED IN PARA 15 OF LD. CIT(A) ORDER), WHEREAS, IN THE CASE OF DR. REDDY LABORATORIES THE PAYMENTS ARE NOT ACCEPTED AS FEES FOR TECHNICAL SERVICES, EVEN UNDER THE PROVISIONS OF I. T. ACT. MOREOVER, AS RIGHTLY POINTED OUT BY THE LD. CIT(A), THE DTAA BETWEEN USA AND INDIA, CANADA AND INDIA ARE ENTIREL Y DIFFERENT WITH DTAAS OF UK AND NETHERLANDS. THESE I SSUES WERE CLEARLY ANALYSED BY LD. CIT(A) IN THE ORDER. A SSESSEE COMPANY IS ALSO SILENT ON THE ENQUIRY MADE BY LD. C IT(A) WITH REFERENCE TO TRANSFER OF KNOWLEDGE AS DETAILED IN P ARAS 26 AND 28 OF THE ORDER. NOTHING WAS BROUGHT ON RECORD BY A SSESSEE TO COUNTER THE FINDINGS OF LD. CIT(A) AND SIMPLY RELIE D ON THE COORDINATE BENCH DECISION IN THE CASE OF DR. REDDY 27 ITA.NO.147/HYD/2005 & 1163/HYD/2014 DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. LABORATORIES, WHICH WE NOTICE THAT THE FACTS ARE DI FFERENT. CONSIDERING THE SUBMISSIONS MADE BY ASSESSEE, THE O RDERS OF THE AUTHORITIES AND AGREEMENTS PLACED ON RECORD, WE AGREE WITH THE FINDINGS OF LD. CIT(A) THAT THE PAYMENTS M ADE ARE TAXABLE AS FEE FOR TECHNICAL SERVICES. SINCE ASSESS EE HAS NOT DEDUCTED TAX ON THE SAID PAYMENTS, AO IS CORRECT IN RAISING THE DEMANDS U/S 201 AND 201(1A). GROUNDS RAISED BY ASS ESSEE ARE DISMISSED. 10. IN THE RESULT, APPEALS OF ASSESSEE ARE DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT ON 12.11.201 4. SD/- SD/- (SAKTIJIT DEY) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 12 TH NOVEMBER, 2014 VBP/- COPY TO 1. DR. REDDYS RESEARCH FOUNDATION, HYDERABAD. C/O. A. RAMACHANDRA RAO & CO., 3-6-369/A/11, 1 ST FLOOR, STREET NO.1, HIMAYATNAGAR, HYDERABAD 500 029. 2. THE DCIT, CIRCLE 14(3), HYDERABAD. 3. CIT(A)-III, HYDERABAD. 4. CCIT-II, HYDERABAD 5. CIT-II, HYDERABAD 6. D.R. ITAT B BENCH, HYDERABAD.