M/s Redcore India Private Limited , Bangalore V. The Income Tax Officer Ward-5(1)(4), Bangalore

ITA 226/BANG/2018

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 6775 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 2 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-04-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2014-2015
• Appeal Filed On: 29-01-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR P V PRADEEP KUMAR
• Keywords: Double taxation relief; Permanent establishment; TDS
• Section: 195

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN , VICE PRESIDENT AND SHRI B.R BASKARAN, ACCOUNTANT MEMBER ITA NO.226/BANG/2018 ASSESSMENT YEAR : 2014-15 REDCORE (INDIA) PVT. LTD., 1 ST FLOOR, 71, SRT CUNNINGHAM ROAD, BENGALURU. PAN: AAGCR 0132 B. VS. THE INCOME-TAX OFFICER, WARD - 5(1)(4), BENGALURU. APPELLANT RESPONDENT APPELLANT BY : SHRI M.P LOHIA, C.A RESPONDENT BY : DR. P.V PRADEEP KUMAR, ADDL. CIT (DR) DATE OF HEARING : 03-04-2019 DATE OF PRONOUNCEMENT : 24-04-2019 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE O RDER DATED 26-10-2017 OF THE CIT(APPEALS) - 5, BENGALURU PERTAINING TO ASSESSMENT YEAR 2014-15. 2. GROUND NO.1 IS GENERAL IN NATURE AND CALLS FOR NO ADJUDICATION. SO ALSO GROUND NO.8 WHICH IS RELATIN G TO LEVYING INTERSEST U/S 234D OF THE ACT IS CONCERNED, THE SAM E IS ITA NO.226/BANG/2018 PAGE 2 OF 22 CONSEQUENTIAL AND THE AO IS DIRECTED TO GIVE CONSEQ UENTIAL RELIEF. GROUND NO.9 RELATING TO INITIATION OF PENA LTY PROCEEDINGS U/S 271 CANNOT BE SUBJECT MATTER OF THE APPEAL. 3. GROUND NOS. 2 TO 4 RAISED BY THE ASSESSEE READS AS FOLLOWS:- DISALLOWANCE OF MANAGEMENT FEES OF RS 71,36,414 2. ERRED IN UPHOLDING THE ACTION OF THE AO IN MAKING DISALLOWANCE OF MANAGEMENT FEES OF RS.71,36,414 UNDER SECTION 40(A)(I) OF THE ACT FOR NOT WITHHOLDING TAXES ON PAYMENTS MADE TO REDCORE (ASIA) PTE. LTD; BY TREATING SUCH PAYMENT AS 'FEES FOR TECHNICAL SERVICES' UNDER THE PROVISIONS OF THE ACT AS WELL AS INDIA SINGAPORE DOUBLE TAXATION AVOIDANCE AGREEMENT; 3. ERRED IN UPHOLDING THE CONTENTION OF THE AO THAT THERE IS TRANSFER OF KNOWLEDGE, SKILL AND ADVICE THAT IS MADE AVAILABLE TO THE APPELLANT AND HENCE, THE PAYMENT QUALIFIES AS 'FEES FOR TECHNICAL SERVICES' UNDER ARTICLE 12 OF THE INDIA SINGAPORE DOUBLE TAXATION AVOIDANCE AGREEMENT; AND 4. ERRED IN UPHOLDING THE CONTENTION OF THE AO THAT THE SERVICES PROVIDED BY REDCORE (ASIA) PTE. LTD. QUALIFY AS 'FEES FOR TECHNICAL SERVICES', WITHOUT APPRECIATING THE FACT THAT THE SAID PAYMENTS ARE TOWARDS REIMBURSEMENT/ COST ALLOCATION OF EXPENSES AND THERE IS NO ELEMENT OF INCOME, WHICH REQUIRE TAX WITHHOLDING UNDER SECTION 195 OF THE ACT. ITA NO.226/BANG/2018 PAGE 3 OF 22 4. THE ASSESSEE IS A COMPANY INCORPORATED UNDER THE IN DIAN COMPANIES ACT 1956. IT IS PRIMARILY ENGAGED IN THE BUSINESS OF PROVISION OF SOFTWARE RELATED SERVICES I.E SUPPLYIN G MAN POWER FOR SOFTWARE INDUSTRY TO CLIENTS IN INDIA. THE ASS ESSEE FILED A RETURN OF INCOME FOR ASST. YEAR 2014-15 DECLARING A TOTAL INCOME OF RS.95,86,280/-. DURING THE RELEVANT PREVIOUS YE AR, THE ASSESEE AVAILED CERTAIN SERVICES FROM REDCORE ASIA PVT. LTD. ( READCORE ASIA) A TAX RESIDENT OF SINGAPORE. THERE WAS AN AGREEMENT DATED 1/4/2013 BETWEEN THE ASSESSEE AND R EDCORE ASIA WHEREBY REDCORE ASIA AGREED TO PROVIDE CERTAIN SERVICES TO THE ASSESSEE REMOTELY THROUGH (E-MAIL., TELECONF ERENCING, VIDEO CALLS ETC.) IF REQUIRED ALSO DEPUTING PERSONN EL FOR SHORT VISIT TO INDIA FOR RENDERING CERTAIN SERVICES. THE SERVICES LISTED IN THE AFORESAID AGREEMENT ARE AS FOLLOWS:- SUPPORT SERVICES 1 . FINANCIAL CONTROLLER & SECRETARIAL SUPPORT SERVICES OVERSEEING AND MANAGING THE FINANCE AND SECRETARIAL FUNCTIONS LIKE BOOK KEEPING, ACCOUNTING, ETC IN CONJUNCTION WITH THE COMPANY AND CONSULTANTS OF THE COMPANY. ASSISTANCE IN RELATION TO FINANCIAL REPORTING AND MONITORING. SUPPORT IN RELATION TO MANAGEMENT ACCOUNTING AND REPORTING. ITA NO.226/BANG/2018 PAGE 4 OF 22 ASSISTANCE IN TREASURY MANAGEMENT. ADVISING THE COMPANY ON COMPLIANCE REQUIREMENTS IN INDIA POST DISCUSSIONS WITH 5. IN CONSIDERATION OF PROVIDING THE AFORESAID SERVICE S, THE ASSESSEE MADE A PAYMENT OF RS.71,36,414/-. THE NAT URE OF SERVICES AND PAYMENT MADE FOR SUCH SERVICES IS AS F OLLOWS:- 6. THE QUESTION BEFORE THE AO WAS AS TO WHETHER THE ASSESSEE OUGHT TO HAVE DEDUCTED TAX AT SOURCE ON TH E AFORESAID PAYMENT MADE TO REDCORE ASIA. ACCORDING TO THE ASSE SSEE PAYMENT MADE IN QUESTION WAS A MERE REIMBURSEMENT O F EXPENSES AND SINCE THE RE-IMBURSEMENT IS ON ACTUAL COST TO THE PAYEE AND THERE IS NO ELEMENT OF PROFIT EMBEDDED IN SUCH PAYMENT THERE WAS NO OBLIGATION TO DEDUCT TAX AT SO URCE. IT WAS THE PLEA OF THE ASSESSEE THAT THE PAYMENT WAS IN TH E NATURE OF BUSINESS PROFITS IN THE HANDS OF THE PAYEE AND SIN CE THE PAYEE ITA NO.226/BANG/2018 PAGE 5 OF 22 DID NOT HAVE A PERMANENT ESTABLISHMENT (PE) IN IND IA, THE SUM IN QUESTION IS NOT TAXABLE IN THE HANDS OF THE PAYE E IN INDIA. FURTHER CONTENTION OF THE ASSESSEE WAS THAT EVEN AS SUMING THAT THE PAYMENT IN QUESTION IS TO BE REGARDED AS FEES F OR TECHNICAL SERVICES, THE SAME CANNOT BE BROUGHT TO TAX IN INDI A IN VIEW OF ARTICLE 12 OF THE INDIA-SINGAPORE DTAA WHICH PROVID ES THAT FEES FOR TECHNICAL SERVICES CAN BE TAXED IN THE HANDS OF THE RECIPIENT WHEN SUCH TECHNICAL SERVICES MAKES AVAILABLE TECHNI CAL KNOWLEDGE SKILL ETC. TO THE RECIPIENT OF SERVICES. SINCE IN THE PRESENT CASE NO SUCH KNOWLEDGE OR SKILL WAS MADE AV AILABLE TO THE PAYEE THE SUM IN QUESTION CANNOT BE TAXED IN TH E HANDS OF THE PAYEE AS TDS. 7. THIS ARGUMENT WAS REJECTED BY THE AO AND HE HELD TH AT THE PAYMENT IN QUESTION WAS IN THE NATURE OF FEES F OR TECHNICAL SERVICES AND, THEREFORE, TAXABLE IN INDIA. HE ALSO HELD THAT BY PROVIDING SUCH SERVICES THERE WAS TRANSFER OF EXPER IENCE KNOWLEDGE SKILL ETC. BY THE PAYEE TO THE ASSESEE. 8. ON APPEAL BY THE ASSESEE, THE CIT(A) CONFIRMED THE ORDER OF THE AO FOR THE REASONS IN PARAGRAPH 5 OF HIS ORDER . ACCORDING TO THE CIT(A), SERVICES RENDERED BY THE SINGAPORE ENTI TY HELPED THE ASSESSEE IN IMPROVING ADMINISTRATION/FINANCE PROCES SES, GENERATING BETTER EFFICIENCIES/ STANDARDIZATION IN THEIR FUNCTION THE RESULT OF THESE SERVICES WAS THEREFORE NOTICEAB LE IN THE WAY THE EMPLOYEES FUNCTION MORE EFFICIENTLY. THE ADMINI STRATIVE AND ITA NO.226/BANG/2018 PAGE 6 OF 22 FINANCIAL EFFICIENCY IS ENSURED BY HAVING A WORKABL E SYSTEM IN PLACE. A SYSTEM WHICH HELPS IN ACHIEVING THE GOALS OF THE ORGANIZATION. THE GOALS OF THE ENTITY ARE INTERTWIN ED WITH THE GOALS OF THE GROUP CONSISTING OF ALL THE ENTITIES T HAT MAKE UP THE GROUP. HENCE, IN THE INTEREST OF THE GROUP, A SYSTE M HAS BEEN PUT IN PLACE BY WAY OF THE SERVICES AGREEMENT WHICH IS SHARED AMONG ALL THE GROUP ENTITIES THIS WAY EFFICIENCY IS AUTOMATICALLY ENSURED AND THE ROADMAP TO PROGRESS ENSURED. THE CI T(A) HELD THAT IN THE LIGHT OF THE FUNCTION. AND SERVICES MEN TIONED ABOVE, THERE IS CLEAR TRANSFER OF KNOWLEDGE, SKILL AND ADV ICE THAT TRANSFER THE EXPERIENCE AND THE EXPERTISE OF THE ADVISOR TO THE RECIPIENT. THE RECIPIENT WILL HENCEFORTH BE ABLE TO USE THE KN OWLEDGE SKILL AND EXPERTISE THAT IS TRANSFERRED TO CONDUCT HIS FU TURE BUSINESS. THE REPORTS THAT HAVE TO BE MAINTAINED, GENERATED A ND REPORTED TO THE HOLDING COMPANY HAVE TO BE COMPILED BY TEAM INDIA WHICH REQUIRE NECESSARY SKILLSET TO PREPARE THE REP ORTS. THE PROCEDURE TO BE FOLLOWED FOR SMOOTH CONDUCTING OF B USINESS, ETC ARE A RESULT OF THE TRAINING AND IMPARTING OF KNOWL EDGE SKILL AND EXPERIENCE THAT MAKES TEAM INDIA PERFORM AS PER THE DIRECTIONS OF THE GROUP. THIS DEFINITION PERFECTLY FITS INTO T HE FUNCTIONS AND THE ROLE PLAYED BY THE REDCORE ASIA RENDERING THE M ANAGERIAL SERVICES AS DISCUSSED IN THE PRECEDING PARAS. HENCE , IN CONCLUSION THERE IS NO DOUBT THAT THERE IS TRANSFER OF KNOWLEDGE AND SKILLS THAT IS MADE AVAILABLE BY THE REDCORE (A SIA) PTE LTD, TO THE ASSESSEE COMPANY. ITA NO.226/BANG/2018 PAGE 7 OF 22 9. AGGRIEVED BY THE ORDER OF THE CIT(A) ASSESSEE HA S RAISED GROUND NO.2 TO 4 BEFORE THE TRIBUNAL. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS. LD COUNSE L FOR THE ASSESSEE REITERATED SUBMISSION AS WERE MADE BEFORE THE REVENUE AUTHORITIES. LD DR RELIED ON THE ORDER OF THE CIT(A). 11. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISS IONS. THE RECIPIENT OF THE PAYMENT FROM THE ASSESSEE VIZ., RE DCORE ASIA IS A TAX RESIDENT OF SINGAPORE. THE OBLIGATION TO DED UCT TAX AT THE TIME OF MAKING PAYMENT TO A NON-RESIDENT IS DEPENDE NT ON THE QUESTION WHETHER THE SUM RECEIVED BY THE NON-RESIDE NT FROM THE ASSESSEE IS CHARGEABLE TO TAX IN INDIA. THIS WILL DEPEND UPON THE CHARACTER OF THE INCOME IN THE HANDS OF REDCORE ASIA WHICH IN TURN IS DEPENDENT ON THE DOUBLE TAXATION AVOIDAN CE AGREEMENT BETWEEN INDIA AND SINGAPORE (INDIA SINGAP ORE DTAA. THE CASE OF THE REVENUE IS THAT THE NATURE O F PAYMENT IN THE HANDS OF REDCORE ASIA IS FEES FOR TECHNICAL SER VICES (FTS). IT IS THEREFORE NECESSARY TO SEE THE DEFINITION OF FTS UNDER INDIA SINGAPORE DTAA. ARTICLE 12 (4) OF THE INDIA - SING APORE TAX TREATY DEFINES 'FEES FOR TECHNICAL SERVICES' ('FTS') T O MEAN: '(4) PAYMENTS OF ANY KIND TO ANY PERSON IN CONSIDERATION FOR SERVICES OF A MANAGERIAL, TECHNIC AL OR CONSULTANCY NATURE (INCLUDING THE PROVISION OF S UCH SERVICES THROUGH TECHNICAL OR OTHER PERSONNEL) IF S UCH SERVICES: ITA NO.226/BANG/2018 PAGE 8 OF 22 (A) ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION FOR WHICH A PAYMENT DESCRIBED IN PARAGRAPH 3 IS RECEIVED; OR (B) MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HOW OR PROCESSES, 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 DESIGN, HUT EXCLUDES AN Y SERVICE THAT DOES NOT ENABLE THE PERSON ACQUIRING T HE SERVICE TO APPLY THE TECHNOLOGY CONTAINED THEREIN.. .' [EMPHASIS SUPPLIED] 12. A PLAIN READING OF THE ABOVE CLAUSE MAKES IT C LEAR THAT ONLY SUCH TECHNICAL AND CONSULTANCY SERVICES ARE COVERED BY ARTICLE 12(4) AS EITHER (A) ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION REFERRED TO IN ARTICLE 12(3), OR (B) MAKE AVAILABLE TECHNICAL KN OWLEDGE, EXPERIENCE, SKILL KNOW-HOW ETC. IN THE PRESENT CASE , ONLY CLAUSE 12(4)(B) IS APPLICABLE BECAUSE THERE WAS NO RIGHT, PROPERTY OR INFORMATION THAT WAS TRANSFERRED. THE CASE OF THE REVENUE THEREFORE HINGES ON THE APPLICABILITY OF ARTICLE 12 (4)(B) WHICH APPLIES TO RENDERING OF ONLY SUCH TECHNICAL OR CONS ULTANCY SERVICES AS MAKE AVAILABLE TECHNICAL KNOWLEDGE, E XPERIENCE, SKILL OR KNOW-HOW ETC. IN OTHER WORDS, IN ORDER TO ATTRACT THE TAXABILITY OF AN INCOME UNDER ARTICLE 12(4)(B), NOT ONLY THE PAYMENT SHOULD BE IN CONSIDERATION FOR RENDERING OF TECHNICAL OR ITA NO.226/BANG/2018 PAGE 9 OF 22 CONSULTANCY SERVICES, BUT IN ADDITION TO THE PAYMEN T BEING CONSIDERATION FOR RENDERING OF TECHNICAL SERVICES., THE SERVICES SO RENDERED SHOULD ALSO BE SUCH THAT MAKE AVAILABL E TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HOW, OR PROCESSE S, OR CONSIST OF THE DEVELOPMENT AND TRANSFER OF A TECHNICAL PLAN OR TECHNICAL DESIGN. 13. THE DEFINITION OF FEES FOR TECHNICAL SERVICES AS GIVEN IN EXPLANATION 2 TO SECTION (1)(VII) OF THE ACT IS AS FOLLOWS :- EXPLANATION 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 PROVISIONS OF SERVICES OF TECHNICAL OR OTHER PE RSONNEL) BUT DOES NOT INCLUDE CONSIDERATION FOR NAY CONSTRUC TION, ASSEMBLY, MINING OR LIKE PROJECT UNDERTAKEN BY THE RECIPIENT OR CONSIDERATION WHICH WOULD BE INCOME OF THE RECIPIENT CHARGEABLE UNDER THE HEAD SALARIES. SECTION 9(1)(VII) EXPLANATION 2, STOPS WITH THE RE NDERING OF TECHNICAL SERVICES, THE INDIA SINGAPORE DTAA GOES F URTHER AND QUALIFIES SUCH RENDERING OF SERVICES WITH WORDS TO THE EFFECT THAT THE SERVICES SHOULD ALSO MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL ETC. TO THE PERSON UTILIZING THE SERVICES. THESE WORDS ARE WHICH MAKE AVAILABLE. 14. THE MEANING OF THE EXPRESSION MAKE AVAILABLE W ERE CONSIDERED BY THE TRIBUNAL IN THE CASE OF RAYMOND L TD. VS. ITA NO.226/BANG/2018 PAGE 10 OF 22 DCIT (2003) 80 TTJ (MUM) 120. THE TRIBUNAL AFTER EL ABORATE ANALYSIS OF ALL THE RELATED ASPECTS OBSERVED THAT : - THE WORDS MAKING AVAILABLE IN ARTICLE 13.4 REFER S TO THE STAGE SUBSEQUENT TO THE MAKING USE OF STAGE. THE QUALIFYING WORDS IS WHICH THE USE OF THIS RELATIV E PRONOUN AS A CONJUNCTION IS TO DENOTE SOME ADDITIONAL FUNCT ION THE RENDERING THE SERVICES MUST FULFIL. AND THAT IS T HAT IT SHOULD ALSO MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIEN CE, SKILL ETC. THE WORD WHICH OCCURRING IN THE ARTICLE AFTER THE WORD SERVICES AND BEFORE THE WORDS MAKE AVAILABL E NOT ONLY DESCRIBED OR DEFINES MORE CLEARLY THE ANTECEDE NT NOUN (SERVICES) BUT ALSO GIVES ADDITIONAL INFORMA TION ABOUT THE SAME IN THE SENSE THAT IT REQUIRES THAT T HE SERVICES SHOULD RESULT IN MAKING AVAILABLE TO THE U SER TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, ETC. THUS, THE NORMAL, PLAIN AND GRAMMATICAL MEANING OF THE LANGUA GE EMPLOYED IS THAT A MERE RENDERING OF SERVICES IS NO T ROPED IN 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 BENEFIT AND WITHOUT RECOURS E TO THE PERFORMER OF THE SERVICES IN FUTURE. THE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL ETC. MUST REMAIN WITH THE PERSON UTILIZING THE SERVICES EVEN AFTER THE RENDER ING OF THE SERVICES HAS COME TO AN END. A TRANSMISSION OF THE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, ETC. FROM T HE PERSON RENDERING SERVICES TO THE PERSON UTILIZING T HE SAME IS CONTEMPLATED BY THE ARTICLE. SOME SORT OF DURABI LITY OR PERMANENCY OF THE RESULT OF THE RENDERING SERVICES IS ENVISAGED WHICH WILL REMAIN AT THE DISPOSAL OF THE PERSON UTILIZING THE SERVICES. THE FRUITS OF THE SERVICES SHOULD REMAIN AVAILABLE TO THE PERSON UTILIZING THE SERVIC ES IN SOME CONCRETE SHAPE SUCH AS TECHNICAL KNOWLEDGE, EXPERIENCE SKILL ETC. ITA NO.226/BANG/2018 PAGE 11 OF 22 15. IN RAYMONDS CASE (SUPRA), THE TRIBUNAL ALSO H ELD THAT RENDERING OF TECHNICAL SERVICES CANNOT BE EQUATED W ITH MAKING AVAILABLE THE TECHNICAL SERVICES. IN THE CASE OF CE SC LTD. VS. DCIT (2003) 80 TTJ (CAL) (TM) 806: (2003) 87 ITD 65 3 (CAL)(TM) ALSO THE QUESTION REGARDING THE SCOPE OF EXPRESSION MAKING AVAILABLE CAME UP FOR THE CONSIDERATION OF T HE TRIBUNAL. IN THAT CASE, THE TRIBUNAL WAS DEALING WITH THE SCO PE OF ARTICLE 13(4)(C) OF THE INDO-UK TAX TREATY WHICH IS ADMITT EDLY IN PARI MATERIA WITH ARTICLE 12(4) OF THE INDIA-USA TAX TRE ATY. THE MAJORITY VIEW WAS THAT IN ORDER TO BE ATTRACTED BY THE PROVISIONS OF THE SAID ARTICLE OF THE TAX TREATY, NOT ONLY THE SERVICES SHOULD BE TECHNICAL IN NATURE BUT SHOULD BE SUCH AS TO RES ULT IN MAKING THE TECHNOLOGY AVAILABLE TO PERSON RECEIVING THE TE CHNICAL SERVICES IN QUESTION. THE TRIBUNAL ALSO REFERRED TO WITH APPROVAL THE EXTRACTS FROM PROTOCOL TO THE INDO-US TAX TREAT Y TO THE EFFECT THAT GENERALLY SPEAKING, TECHNOLOGY WILL BE CONSID ERED MADE AVAILABLE, WHEN THE PERSON ACQUIRING THE SERVICE IS ENABLED TO APPLY THE TECHNOLOGY. 16. IN THE CASE OF DE BEERS INDIA MINERALS (P.) LT D (21 TAXMANN.COM 214) (KARNATAKA HC), THE HONBLE KARNAT AKA HIGH COURT HAD TO DEAL WITH IDENTICAL ISSUE OF FTS BEING MADE AVAILABLE. IN THIS CASE ASSESSEE IS A DOMESTIC COM PANY, ENGAGED IN THE BUSINESS OF PROSPECTING AND MINING F OR DIAMONDS ITA NO.226/BANG/2018 PAGE 12 OF 22 AND OTHER MINERALS. FOR THE PURPOSE OF CARRYING OUT GEOPHYSICAL SURVEY, ETC, ASSESSEE ENTERED INTO AN AGREEMENT WIT H FURGO, A COMPANY BASED IN NETHERLANDS. FURGO HAD A TEAM OF E XPERTS WHO WERE SPECIALIZED IN PERFORMING GEOPHYSICAL SURV EY, ETC. THE SAID EXPERTS PROVIDED TECHNICAL SERVICES TO ASSESSE E UNDER THE SAID AGREEMENT. THE LEARNED AO TREATED THE CONSIDER ATION PAID TO FURGO UNDER THE AFORESAID AGREEMENT AS FALLING W ITHIN THE DEFINITION OF FEES FOR TECHNICAL SERVICES UNDER IND IA NETHERLANDS TAX TREATY. HON'BLE JURISDICTIONAL KARN ATAKA HIGH COURT HELD THAT AS PER THE ARTICLE 12 OF THE INDIA NETHERLANDS TAX TREATY, FEES FOR TECHNICAL SERVICES MEANS THE PAYME NT OF ANY AMOUNT TO ANY PERSON IN CONSIDERATION FOR RENDERING OF ANY TECHNICAL SERVICES ONLY; IF SUCH SERVICES MAKE AVAI LABLE TECHNICAL KNOWLEDGE, EXPERTISE, SKILL, KNOW-HOW, ETC. IF THE TECHNICAL KNOWLEDGE, EXPERTISE, SKILL, KNOW-HOW, ETC. IS NOT MADE AVAILABLE BY THE SERVICE PROVIDER, WHO RENDERS TECHNICAL SERV ICES, IT WOULD NOT CONSTITUTE FEES FOR TECHNICAL SERVICES. ACCORDI NGLY, TO ATTRACT THE TAX LIABILITY, TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW- HOW, ETC. WHICH IS USED BY SERVICES PROVIDER TO REN DER THE TECHNICAL SERVICES SHOULD ALSO BE MADE AVAILABLE TO THE RECIPIENT OF THE SERVICES, SO THAT THE RECIPIENT ALSO ACQUIRE S TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HOW, ETC. SO AS TO RENDER SUCH TECHNICAL SERVICES. FURTHER, COURT HELD THAT M ERELY BECAUSE BUSINESS OF SERVICE RECIPIENT IS DEPENDENT ON TECHN ICAL SERVICE WHICH HE RECEIVES FROM SERVICE PROVIDER, IT DOES NO T FOLLOW THAT ITA NO.226/BANG/2018 PAGE 13 OF 22 HE IS MAKING USE OF TECHNOLOGY WHICH SERVICE PROVID ER UTILIZES FOR RENDERING TECHNICAL SERVICES. THE CRUX OF THE M ATTER IS AFTER RENDERING OF SUCH TECHNICAL SERVICES BY THE SERVICE PROVIDER, WHETHER THE RECIPIENT IS ENABLED TO USE THE TECHNOL OGY WHICH THE SERVICE PROVIDER HAD USED. THEREFORE, UNLESS THE SE RVICE PROVIDER MAKES AVAILABLE HIS TECHNICAL KNOWLEDGE, E XPERIENCE, SKILL, KNOW-HOW, ETC. TO THE RECIPIENT OF THE TECHN ICAL SERVICE, THE LIABILITY TO TAX IS NOT ATTRACTED. ACCORDINGLY, IF THE TECHNOLOGY IS NOT MADE AVAILABLE ALONG WITH THE TECHNICAL SERVICE S AND WHAT IS RENDERED IS ONLY TECHNICAL SERVICES AND THE TECHNIC AL KNOWLEDGE IS WITHHELD, THEN, SUCH A TECHNICAL SERVICE WOULD N OT FALL WITHIN THE DEFINITION OF TECHNICAL SERVICE IN TAX TREATY A ND NOT LIABLE TO TAX. BASED ON THE ABOVE REQUIREMENT OF TAXATION OF FTS AS ABOVE, COURT HELD THAT THERE IS NO DOUBT THAT THE S ERVICES PERFORMED BY FURGO ARE USING TECHNICAL KNOWLEDGE AN D EXPERTISE BUT SUCH TECHNICAL EXPERIENCE, SKILL OR K NOWLEDGE HAD NOT BEEN MADE AVAILABLE TO ASSESSEE AND ACCORDINGLY , THE SAID SERVICES ARE NOT TAXABLE AS FEES FOR TECHNICAL SERV ICES UNDER INDIA - NETHERLANDS TAX TREATY. THE RELEVANT EXTRAC T OF THE DECISION HAS BEEN REPRODUCED BELOW: '22. WHAT IS THE MEANING OF 'MAKE AVAILABLE'. THE TECHNICAL OR CONSULTANCY SERVICE RENDERED SHOULD BE OF SUCH A NATURE THAT IT 'MAKES AVAILABLE 'TO THE RECIPIENT TECHNICAL KNOWLEDGE, KNOW-HOW AND THE LIKE. THE SERVICE SHOULD BE AIMED AT AND RESULT IN TRANSMITTING TECHNICAL ITA NO.226/BANG/2018 PAGE 14 OF 22 KNOWLEDGE, ETC., SO THAT THE PAYER OF THE SERVICE COULD DERIVE AN ENDURING BENEFIT AND UTILIZE THE KNOWLEDGE OR KNOW-HOW ON HIS OWN IN FUTURE WITHOUT THE AID OF THE SERVICE PROVIDER. IN OTHER WORDS, TO FIT INTO THE TERMINOLOGY 'MAKING AVAILABLE', THE TECHNICAL KNOWLEDGE, SKILL?, ETC., MUST REMAIN WITH THE PERSON RECEIVING THE SERVICES EVEN AFTER THE PARTICULAR CONTRACT COMES TO AN END. IT IS NOT ENOUGH THAT THE SERVICES OFFERED ARE THE PRODUCT OF INTENSE TECHNOLOGICAL EFFORT AND A LOT OF TECHNICAL KNOWLEDGE AND EXPERIENCE OF THE SERVICE PROVIDER HAVE GONE INTO IT. THE TECHNICAL KNOWLEDGE OR SKILLS OF THE PROVIDER SHOULD BE IMPARTED TO AND ABSORBED BY THE RECEIVER SO THAT THE RECEIVER CAN DEPLOY SIMILAR TECHNOLOGY OR TECHNIQUES IN THE FUTURE WITHOUT DEPENDING UPON THE PROVIDER. TECHNOLOGY WILL BE CONSIDERED 'MADE AVAILABLE' WHEN THE PERSON ACQUIRING THE SERVICE IS ENABLED TO APPLY THE TECHNOLOGY. THE FACT THAT THE PROVISION OF THE SERVICE THAT MAY REQUIRE TECHNICAL KNOWLEDGE, SKILLS, ETC., DOES NOT MEAN THAT TECHNOLOGY IS MADE AVAILABLE TO THE PERSON PURCHASING THE SERVICE, WITHIN THE MEANING OF PARAGRAPH (4)(B). SIMILARLY, THE USE OF A PRODUCT WHICH EMBODIES TECHNOLOGY SHALL NOT PER SE BE CONSIDERED TO MAKE THE TECHNOLOGY AVAILABLE. IN OTHER WORDS, PAYMENT OF CONSIDERATION WOULD BE REGARDED AS ''FEE FOR TECHNICAL/INCLUDED SERVICES' ONLY IF THE TWIN LEST OF RENDERING SERVICES AND MAKING TECHNICAL KNOWLEDGE AVAILABLE AT THE SAME LIME IS SATISFIED. 17. FURTHER, THE AFORESAID DECISION IN THE CASE OF DE B EERS INDIA MINERALS (P.) LTD HAS BEEN FOLLOWED IN THE CASE OF SUN MICROSYSTEM INDIA (P) LTD (48 TAXMANN.COM 93) (KARN ATAKA), ITA NO.226/BANG/2018 PAGE 15 OF 22 WHEREIN SINGAPORE BASED COMPANY HAD PROVIDED SPARE MANAGEMENT SERVICES, PROVISION OF BUFFER STOCK, DEF ECTIVE REPAIR SERVICES, MANAGING LOCAL REPAIR CENTERS, BUSINESS P LANNING TO ADDRESS SERVICE LEVELS ETC TO THE INDIAN COMPANY. I T WAS HELD THAT SINGAPORE COMPANY HAS NOT MADE AVAILABLE ANY TECHNOLOGY OR TECHNOLOGICAL SERVICES TO THE INDIAN COMPANY WHICH ARE REQUIRED TO PROVIDE THE AFORESAID SERVICE S. 18. WE HAVE ALREADY SET OUT THE NATURE OF SERVICES TO BE RENDERED BY THE REDCORE ASIA TO THE ASSESSEE. A PE RUSAL OF THE CLAUSES OF AGREEMENT BETWEEN THE ASSESSEE AND REDCO RE ASIA CLEARLY SHOWS THAT THEY ARE PURELY IN THE NATURE OF MANAGERIAL AND ADVISORY SERVICES. DURING THE SUBJECT AY, THE A SSESSEE DID NOT HAVE ANY EMPLOYEES AND THUS, THE QUESTION OF TR ANSFER OF KNOWLEDGE, SKILL, AND EXPERIENCE DOES NOT ARISE. TH US, THE CASE OF THE REVENUE THAT THERE WAS TRANSFER OF KNOWLEDGE , SKILL, ETC. AND EFFICIENCY IN THE PROCESS OF RENDERING OF SERVI CES BY REDCORE TO THE ASSESSEE IS INCORRECT. THE FACT THAT THE ASSESSEE DID NOT HAVE ANY EMPLOYEES DURING THE SUBJ ECT AY IS EVIDENT FROM THE FINANCIAL STATEMENTS OF THE SUBJEC T AY, AS NO EMPLOYEE COST HAS BEEN INCURRED. FURTHER, THE MANA GEMENT SERVICE AGREEMENT, UNDER ARTICLE 2(2), CLEARLY STAT ES THAT NONE OF THE SERVICES PROVIDED BY REDCORE ASIA WILL MAKE AVA ILABLE ANY TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HOW, E TC. ON ITS OWN. FURTHER, SINCE THE ASSESSEE DOES NOT HAVE ANY EMPLOYEE, ITA NO.226/BANG/2018 PAGE 16 OF 22 THERE IS NO QUESTION OF ANY TRAINING BEING PROVIDED IMPARTING KNOWLEDGE, EXPERIENCE, ETC BY REDCORE ASIA TO THE E MPLOYEES OF THE ASSESSEE. FURTHER, THE MANAGEMENT SERVICE AG REEMENT AT ARTICLE 2(3) CLEARLY STATES THAT NO TRAINING SHALL BE PROVIDED BY REDCORE ASIA TO THE EMPLOYEES OF THE APPELLANT. 19. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE VIEW THAT NOTHING IS MADE AVAILABLE TO THE ASSESSEE BY THE REDCORE ASIA. EXAMPLE NO. 7 GIVEN IN THE MOU BETWEE N INDIA AND USA ON THE INDIA USA DTAA THROWS SOME MORE LIGH T ON THE UNDERSTANDING OF THE GOVERNMENT S OF INDIA AND THE USA ON THE SUBJECT. THE EXAMPLE GIVEN THEREIN IS AS FOLLOWS:- FACTS : THE INDIA VEGETABLE OIL MANUFACTURING FIRM HAS MASTERED THE SCIENCE OF PRODUCING CHOLESTEROL FREE OIL AND WISHES TO MARKET THIS PRODUCT WORLDWID E. IT HIRES AN AMERICAN MARKETING CONSULTANCY FIRM TO DO COMPUTER SIMULATION OF THE WORLD MARKET FOR SUCH OIL AND TO ADVISE IT ON MARKETING STRATEGIES. ARE T HE FEES PAID TO THE US COMPANY FOR INCLUDED SERVICES ? ANALYSIS : THE FEES WOULD NOT BE FOR INCLUDED SERVICES. THE AMERICAN COMPANY IS PROVIDING A CONSULTANCY WHICH INVOLVES THE USE OF SUBSTANTIAL TECHNICAL SKILL AND EXPERTISE. IT IS, HOWEVER, MAKI NG AVAILABLE TO THE INDIAN COMPANY ANY TECHNICAL EXPERIENCE, KNOWLEDGE OR SKILL ETC. NOR IS IT TRANSFERRING A TECHNICAL PLAN OR DESIGN. WHAT IS TRANSFERRED TO THE INDIAN COMPANY THROUGH THE SERVICE CONTRACT IS COMMERCIAL INFORMATION. THE FAC T THAT TECHNICAL SKILLS WERE REQUIRED BY THE PERFORME R OF THE SERVICE IN ORDER TO PERFORM THE COMMERCIAL ITA NO.226/BANG/2018 PAGE 17 OF 22 INFORMATION DOES NOT MAKE THE SERVICE A TECHNICAL SERVICE WITHIN MEANING OF PARA (4)(B). THIS EXAMPLE, SET OUT IN THE MOU BETWEEN THE INDIAN AND US GOVERNMENTS, ALSO MAKES IT CLEAR THAT NOT ALL CONSI DERATION PAID TO NON-RESIDENT IS FEES FOR TECHNICAL SERVICES. MA NAGERIAL OR ADVISORY SERVICES TO BE TREATED AS FTS SHOULD RESUL T IN TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL ETC. MUST REMAIN WITH THE PERSON UTILIZING THE SERVICES EVEN AFTER THE RENDERING OF THE SERVICES HAS COME TO AN END. A TRANSMISSION OF THE TECHNICAL KNO WLEDGE, EXPERIENCE, SKILL, ETC. FROM THE PERSON RENDERING S ERVICES TO THE PERSON UTILIZING THE SAME IS CONTEMPLATED BY THE AR TICLE. SOME SORT OF DURABILITY OR PERMANENCY OF THE RESULT OF T HE RENDERING SERVICES IS ENVISAGED WHICH WILL REMAIN AT THE DIS POSAL OF THE PERSON UTILIZING THE SERVICES. THE FRUITS OF THE SE RVICES SHOULD REMAIN AVAILABLE TO THE PERSON UTILIZING THE SERVIC ES IN SOME CONCRETE SHAPE SUCH AS TECHNICAL KNOWLEDGE, EXPERIE NCE SKILL ETC. THIS REQUIREMENT OF THE INDIA SINGAPORE DTAA FOR TAXING FTS IN THE SOURCE COUNTRY (INDIA) IS ABSENT IN THE PRESENT CASE AND THEREFORE THE PAYMENT BY THE ASSESSEE TO REDCOR E ASIA IS NOT TAXABLE IN INDIA AS FTS. 20. FOR THE REASONS SET OUT ABOVE, WE ARE OF THE V IEW THAT LEARNED CIT(A) INDEED ERRED IN HOLDING THAT THE MON IES PAID BY THE ASSESSEE TO REDCORE ASIA CONSTITUTE FEES FOR T ECHNICAL SERVICES WITHIN THE MEANING OF ARTICLE 12(4) OF TH E INDIA- ITA NO.226/BANG/2018 PAGE 18 OF 22 SINGAPORE DTAA AND ARE ACCORDINGLY LIABLE TO BE TAX ED IN INDIA. SINCE, THE ASSESSEE DOES NOT HAVE ANY PERMANENT ESTABLISHMENT IN INDIA, THE INCOMES SO ARISING TO T HEM IN INDIA CANNOT BE TAXED UNDER ARTICLE 7 AS BUSINESS PROFIT S EITHER. SINCE THE PAYMENT BY THE ASSESSEE TO THE NON-RESIDE NT IS NOT TAXABLE IN THE HANDS OF THE NON-RESIDENT IN INDIA, THERE EXIST NO OBLIGATION ON THE PART OF THE ASSESSEE TO DEDUCT TA X AT SOURCE ON THE PAYMENT IN QUESTION. THEREFORE THERE WAS NO OB LIGATION TO DEDUCT TAX AT SOURCE ON THE PART OF THE ASSESSEE WH ILE MAKING PAYMENT TO THE NON-RESIDENT. CONSEQUENTLY, THE SUM IN QUESTION CANNOT BE DISALLOWED U/S.40(A)(IA) OF THE ACT AND A DDED TO THE TOTAL INCOME OF THE ASSESSEE. THE ADDITION MADE IS THEREFORE DIRECTED TO BE DELETED. THEREFORE, WE DIRECT THE AS SESSING OFFICER TO DELETE THE IMPUGNED ADDITIONS. 21. THUS GROUND NOS.2 TO 4 ARE TREATED AS ALLOWED. 22. GROUND NOS.5,6 AND 7 RAISED BY THE ASSESEE READ S AS FOLLOWS:- ADDITION TOWARDS TRADE PAYABLE OF RS 9,19,435 5. ERRED IN UPHOLDING THE ADDITION OF RS 9,19,435 MADE BY THE AO, BEING CLOSING BALANCE OF A CREDITOR I.E. AURIONPRO SOLUTIONS LIMITED (INCORRECTLY MENTIONED AS REDCORE (ASIA) PTE. LTD IN THE ORDER) FOR NON-FURNISHING CONFIRMATION LETTE R FROM THE PARTY; ITA NO.226/BANG/2018 PAGE 19 OF 22 6. ERRED IN UPHOLDING THE ADDITION OF RS 9.19,435 WITHOUT APPRECIATING THE FACT THAT THE SAID AMOUNT HAS BEEN SUO MOTO WRITTEN BACK BY THE APPELLANT IN AY 2016-17 AND THE SAME HAS BEEN OFFERED TO TAX IN AY 2016-17 AS PER THE PROVISIONS OF SECTION 41 OF THE ACT; AND 7. WITHOUT PREJUDICE TO THE GROUND NO 6 AND 7 ABOVE, ERRED IN NOT APPRECIATING AND GRANTING CORRESPONDING RELIEF OF THE AFORESAID AMOUNT OF RS 9,19,435 IN AY 2016-17 WHICH WAS SUOMOTO OFFERED TO TAX IN THE SAID YEAR. 23. ON THE AFORESAID GROUND OF APPEAL, THE FINDINGS AND CONCLUSION OF THE CIT(A) WERE AS FOLLOWS:- 7. GROUND NOS. 8 AND 9 ARE ON THE ADDITION MADE BY THE ASSESSING OFFICER TOWARDS TRADE PAYABLES. THE APPELLANT SUBMITTED THAT THE ASSESSING OFFICER HAS ERRED IN MAKING ADDITION OF RS.9,19,435/- BEING THE CLOSING BALANCE OF A CREDITOR I.E., AURIONPRO SOLUTIONS LTD.(TRADE PAYABLE) AS AT 31 .03.2014 WITHOUT CONSIDERING THE DOCUMENTARY EVIDENCES SUBMITTED BY THE APPELLANT DURING THE COURSE OF ASSESSMENT PROCEEDINGS AND MERELY ON THE GROUNDS THAT CONFIRMATION LETTER WAS NOT SUBMITTED BY THE APPELLANT. THE ASSESSING OFFICER HAS OBSERVED THAT THE APPELLANT COMPANY HAS SHOWN TRADE PAYABLES TO THE EXTENT OF RS.9 19,435/- PAYABLE TO M/S. REDCORE (ASIA) PTE LIMITED. THE AR OF THE ITA NO.226/BANG/2018 PAGE 20 OF 22 APPELLANT COMPANY WAS ASKED TO SUBMIT CONFIRMATION LETTER FROM M/S. REDCORE (ASIA) PTE LIMITED, AS NO CONFIRMATION LETTER WAS PRODUCED THE SAID SUM OF RS. 9,19435/- WAS ADDED TO THE TOTAL INCOME OF THE APPELLANT COMPANY. EVEN DURING THE APPELLATE PROCEEDINGS THE AR OF THE APPELLANT EXPRESSED HIS INABILITY TO FURNISH THE CONFIRMATION LETTER FROM M/S, REDCORE (ASIA) PTE LIMITED. IN VIEW OF THE ABSENCE OF ANY COGENT EVIDENCE, THE ADDITION MADE BY THE ASSESSING OFFICER IS HEREBY UPHELD. 24. THE LD COUNSEL FOR THE ASSESSEE SUBMITTED BEFOR E US THAT IN ASST. YEAR 2016-17 THIS SUM WAS WRITTEN OFF AS A LIABILITY NOT PAYABLE BY THE ASSESSEE AND OFFERED TO TAX AS INCOM E IN ASST. YEAR 2016-17. HIS LIMITED PRAYER WAS THAT IF THE A MOUNT IS TAXED IN THIS YEAR THEN THE INCOME OFFERED TO TAX IN ASST . YEAR 2016-17 SHOULD BE DELETED AS OTHERWISE THERE WILL BE DOUBL E TAXATION OF THE SAME INCOME. IN THIS REGARD OUR ATTENTION WAS DRAWN TO THE FACT THAT THE INCOME WAS OFFERED TO TAX IN ASST. YE AR 2016-17 BY DRAWING OUR ATTENTION TO PAGE NOS.121, 123 AND 133 OF THE ASSESSEES PAPER BOOK. WE ARE OF THE VIEW THAT THE PLEA MADE BY THE LD COUNSEL FOR THE ASSESEE DESERVES TO BE A CCEPTED. THE AO IS DIRECTED TO VERIFY THE CORRECTNESS OF THE CLA IM OF THE ASSESSEE AND AMOUNT IN QUESTION WAS OFFERED TO TAX IN ASST. YEAR 2016-17. IF THE SAME IS FOUND TO BE TRUE THEN THE ADDITION MADE IN ASST. YEAR 2014-15 IS DIRECTED TO BE DELETE D. ITA NO.226/BANG/2018 PAGE 21 OF 22 25. IN THE RESULT, APPEAL BY THE ASSESSEE IS PART LY ALLOWED. ORDER PRONOUNCED ON THIS THE 24TH DAY OF APRIL, 2019 . SD/- SD/- ( B.R BASKARAN ) ( N.V. VASUDEVAN) ACCOUNTANT MEMBER V ICE PRESIDENT BANGALORE, DATED, THE 24 TH APRIL, 2019. VMS COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE. ITA NO.226/BANG/2018 PAGE 22 OF 22 1. DATE OF DICTATION 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER . 3. DATE ON WHICH THE APPROVED DRAFT COMES TO SR. P. S ... 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER .. 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. P.S. .. 6. DATE OF UPLOADING THE ORDER ON WEBSITE.. 7. IF NOT UPLOADED, FURNISH THE REASON FOR DOING SO .. 8. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 9. DATE ON WHICH ORDER GOES FOR XEROX & ENDORSEMENT.. 10. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 11. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER . 12. THE DATE ON WHICH THE FILE GOES TO DISPATCH SECTION FOR DISPATCH OF THE TRIBUNAL ORDER . 13. DATE OF DESPATCH OF ORDER. ..