Appeal Details
Counselvise Citation
[2018] 119 COUNSELVISE.COM (IT) 4473 (ITAT-KOLKATA)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
3 year(s) 6 month(s) 15 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
25-10-2018
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
C
Next Hearing Date
17-05-2017
Assessment Year
2010-2011
Appeal Filed On
09-04-2015
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL C, BENCH KOLKATA BEFORE SHRI S.S. GODARA, JM & DR. A.L. SAINI, AM ITA NO.1889/KOL/2012 (ASSESSMENT YEAR: 2008-09) KONINKLIJKE PHILIPS ELECTRONICS N.V. C/O DELOITTE TOUCHE TOHMATSU INDIA PVT. LTD., BENGAL INTELLIGENT PARK, BUILDING ALPHA, BLOCK EP & GP, 1 ST FLOOR, SECTOR V, SALT LAKE ELECTRONICS COMPLEX, KOLKATA 700 091. VS. DCIT(IT) 1(1), KOLKATA AAYAKAR BHAWAN POORVA, 110, SHANTI PALLY, KOLKATA 700 107. ./ ./PAN/GIR NO. : AACCK 0806 B ( /ASSESSEE ) .. ( / RESPONDENT ) & ITA NO.565/KOL/2014 (ASSESSMENT YEAR: 2009-10) KONINKLIJKE PHILIPS ELECTRONICS N.V. C/O DELOITTE TOUCHE TOHMATSU INDIA PVT. LTD., BENGAL INTELLIGENT PARK, BUILDING ALPHA, BLOCK EP & GP, 1 ST FLOOR, SECTOR V, SALT LAKE ELECTRONICS COMPLEX, KOLKATA 700 091. VS. DCIT(IT) 1(1), KOLKATA AAYAKAR BHAWAN POORVA, 110, SHANTI PALLY, KOLKATA 700 107. ./ ./PAN/GIR NO. : AACCK 0806 B ( /ASSESSEE ) .. ( / RESPONDENT ) & ITA NO.381/KOL/2015 (ASSESSMENT YEAR: 2010-11) KONINKLIJKE PHILIPS ELECTRONICS N.V. C/O DELOITTE TOUCHE TOHMATSU INDIA PVT. LTD., BENGAL INTELLIGENT PARK, BUILDING ALPHA, BLOCK EP & GP, 1 ST FLOOR, SECTOR V, SALT LAKE ELECTRONICS COMPLEX, KOLKATA 700 091. VS. DCIT(IT) 1(1), KOLKATA AAYAKAR BHAWAN POORVA, 110, SHANTI PALLY, KOLKATA 700 107. ./ ./PAN/GIR NO. : AACCK 0806 B ( /ASSESSEE ) .. ( / RESPONDENT ) KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 2 ASSESSEE BY : SHRI ARVIND SONDE, KETAN K. VED, AR REVENUE BY : SHRI G. MALLIKARJUNA, CIT(DR) / DATE OF HEARING : 14/08/2018 /DATE OF PRONOUNCEMENT: 25/10/2018 / O R D E R PER DR. A. L. SAINI, AM: THE CAPTIONED THREE APPEALS FILED BY THE ASSESSEE, PERTAINING TO ASSESSMENT YEARS 2008-09, 2009-10 AND 2010-11, ARE DIRECTED AGAINST THE FAIR ASSESSMENT ORDERS PASSED BY DDIT(I.T.)-1, KOLKATA (A.O.), UNDER SECTION 143(3) R.W.S 144C OF THE INCOME TAX ACT, 1961, WHICH INCORPORATE THE DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANEL, KOLKATA UNDER SECTION 144C(5) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT). 2. SINCE, THE ISSUES INVOLVED IN ALL THE APPEALS ARE COMMON AND IDENTICAL; THEREFORE, THESE APPEALS HAVE BEEN HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLIDATED ORDER. FOR THE SAKE OF CONVENIENCE, THE GROUNDS AS WELL AS THE FACTS NARRATED IN ITA NO.1889/KOL/2012, FOR ASSESSMENT YEAR 2008-09 HAVE BEEN TAKEN INTO CONSIDERATION FOR DECIDING THE ABOVE APPEALS EN MASSE. 3. HOWEVER, IN THESE APPEALS, THE ASSESSEE HAS RAISED MULTIPLE GROUNDS OF APPEAL, BUT AT THE TIME OF HEARING, WE HAVE CAREFULLY PERUSED ALL THE GROUNDS RAISED BY THE ASSESSEE. MOST OF THE GROUNDS RAISED BY THE ASSESSEE, ARE EITHER ACADEMIC IN NATURE OR CONTENTIOUS IN NATURE. HOWEVER, TO MEET THE END OF JUSTICE, WE CONFINE OURSELVES TO THE CORE OF THE CONTROVERSY AND MAIN GRIEVANCES OF THE ASSESSEE. WITH THIS BACKGROUND, WE SUMMARIZE AND CONCISE THE GROUNDS RAISED BY THE ASSESSEE AS FOLLOWS: GROUND NO.1 TAXABILITY OF RECEIPTS OF RS.242,653,150/- UNDER RESEARCH AND DEVELOPMENT CO-OPERATION AGREEMENT (RDCA) RECEIVED BY KONINKLIJKE PHILIPS KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 3 ELECTRONICS N.V (ASSESSEE), AS PER RDCA AGREEMENT BETWEEN ASSESSEE AND PHILIPS ELECTRONICS INDIA LIMITED (PEIL). GROUND NO.2 TAXABILITY OF RECEIPTS OF RS.112,90,58,312/- UNDER MANAGEMENT SUPPORT SERVICES AGREEMENT (MSSA) RECEIVED BY KONINKLIJKE PHILIPS ELECTRONICS N.V (ASSESSEE), AS PER MSSA AGREEMENT BETWEEN ASSESSEE AND PHILIPS ELECTRONICS INDIA LIMITED (PEIL). GROUND NO.3. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. A.O AND THE HONBLE DRP ERRED IN NOT APPRECIATING THE BONA FIDE CHANGE IN POSITION REGARDING NON- TAXABILITY OF RECEIPTS UNDER RDCA AND MSSA ADOPTED BY THE ASSESSEE FOR A.Y 2008-09, WHICH RESULTED FROM BETTER EVOLUTION/INTERPRETATION OF LAW THROUGH JUDICIAL PRECEDENTS. GROUND NO.4 . THAT ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CASE, THE AO ERRED IN NOT GRANTING FULL CREDIT FOR TAX DEDUCTED AT SOURCE AMOUNTING TO RS.163,028,554/- DESPITE THE FACT THAT THE COMPANY HAS FILED ALL THE ORIGINAL CERTIFICATES DURING THE COURSE OF THE PROCEEDINGS. DURING THE COURSE OF HEARING, OTHER GROUNDS WERE NOT PRESSED OR CONSEQUENTIAL IN NATURE THEREFORE, THEY DO NOT REQUIRE ADJUDICATION. 4. NOW, WE SHALL TAKE GROUND NO.1 RAISED BY THE ASSESSEE, WHICH IS REPRODUCED BELOW FOR READY REFERENCE: GROUND NO.1 TAXABILITY OF RECEIPTS OF RS.242,653,150/- UNDER RESEARCH AND DEVELOPMENT CO-OPERATION AGREEMENT (RDCA) RECEIVED BY KONINKLIJKE PHILIPS ELECTRONICS N.V (ASSESSEE), AS PER RDCA AGREEMENT BETWEEN ASSESSEE AND PHILIPS ELECTRONICS INDIA LIMITED (PEIL). 5. THE FACTS OF THE CASE, WHICH CAN BE STATED QUITE SHORTLY, ARE AS FOLLOWS. THE ASSESSEE FILED ITS ORIGINAL RETURN OF INCOME ON 30.09.2008 AND DECLARED A TOTAL INCOME OF RS.1,625,791,320/-. SUBSEQUENTLY, THE ASSESSEE FILED ITS REVISED RETURN OF INCOME ON 29.03.2010, SHOWING TOTAL INCOME OF RS.254,079,858/-. AS PER THE RETURN OF INCOME FILED AND THE NOTES ANNEXED WITH IT, THE ASSESSEE IS A FOREIGN COMPANY INCORPORATED IN KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 4 NETHERLANDS AND IS THE PARENT COMPANY OF THE PHILIPS GROUP WHICH OPERATES IN THE AREAS OF LIGHTING, CONSUMER ELECTRONICS, DOMESTIC APPLIANCES, COMPONENTS AND MEDICAL SYSTEMS. THE ASSESSEE DOES NOT HAVE A PERMANENT ESTABLISHMENT (PE) IN INDIA. THE ASSESSEE HAS BEEN FILING ITS RETURN OF INCOME IN INDIA FROM THE ASSESSMENT YEAR 2005-06. DURING THE F.Y 2004-05 RELEVANT TO A.Y 2005-06, THE ASSESSEE ENTERED INTO AGREEMENTS WITH THE RESPECTIVE PARTIES DETAILED BELOW FROM WHICH IT HAS SINCE BEEN RECEIVING REMUNERATIONS IN INDIA: (1). RESEARCH AND DEVELOPMENT COOPERATION AGREEMENT DATED 13.12.2004 WITH PHILIPS INDIA LTD ON ACCOUNT OF ROYALTY OR FEES FOR TECHNICAL SERVICES. (2). MANAGEMENT SUPPORT SERVICES AGREEMENT DATED 22.10.2001 WITH PHILIPS INDIA LTD ON ACCOUNT OF FEES FOR TECHNICAL SERVICES. SINCE THE A.Y.2005-06, THAT IS, THE YEAR IN WHICH THE ASSESSEE FIRST FILED ITS RETURN, THE ASSESSEE HAS NEVER QUESTIONED OR DOUBTED THE TAXABILITY OF ITS TOTAL RECEIPTS FROM THE ABOVE THREE AGREEMENTS AND HAS BEEN CONSIDERING ITS ENTIRE INCOME AS BEING TAXABLE IN INDIA. IT IS HOWEVER, PERTINENT TO NOTE THAT IN THE REVISED RETURN OF INCOME FILED FOR THE AY. 2008-09, THE ASSESSEE HAS FOR THE FIRST TIME ADOPTED THE NEW STAND OF TREATING ITS INCOME RECEIVED FROM THE RESEARCH AND DEVELOPMENT COOPERATION AGREEMENT ( RDCA) AND MANAGEMENT SUPPORT SERVICES AGREEMENT (MSSA), AS NOT BEING TAXABLE IN INDIA. FURTHER, DURING THE YEAR UNDER CONSIDERATION, NO APPLICATION OF SECTION 195 OF THE INCOME TAX ACT WAS MADE, RELATING TO SUCH PAYMENTS. 6. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS ASKED TO EXPLAIN THE NON- TAXABILITY OF THE INCOME UNDER RESEARCH DEVELOPMENT COOPERATION AGREEMENT (RDCA). IN RESPONSE, THE ASSESSEE SUBMITTED THAT PHILIPS ELECTRONICS (INDIA) LIMITED, INDIA (HEREAFTER REFERRED TO AS, PEIL) IS A SUBSIDIARY OF KONINKLIJKE PHILIPS ELECTRONICS, NV ( HEREAFTER REFERRED TO AS, KPENV). THE PEIL`S BUSINESS IS DIVIDED INTO VARIOUS DIVISIONS SUCH AS LIGHTING, CONSUMER ELECTRONICS, MEDICAL SYSTEMS, SOFTWARE. PHILIPS, BEING A LEADING PLAYER INTER ALIA IN THE CONSUMER ELECTRONICS, DOMESTIC APPLIANCES, LIGHTING PRODUCTS AND HEALTHCARE, CONDUCTS R&D ACTIVITIES FOR THE PURPOSES OF CONTINUOUSLY INNOVATING AND INTRODUCING NEWER RANGE OF PRODUCTS IN THE GLOBAL MARKET. PHILIPS HAS DEVELOPED A BUSINESS MODEL WHEREBY R&D ACTIVITIES CARRIED OUT AT VARIOUS R&D CENTERS OF PHILIPS HAVE BEEN POOLED INTO KPENV IN THE NETHERLANDS. THE PEIL (INDIAN CO.) HAD KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 5 ENTERED INTO RESEARCH & DEVELOPMENT CO-OPERATION AGREEMENT (RDCA') WITH KPENV ON 13 TH DECEMBER 2004. ON PERUSAL OF THE PREAMBLE OF THE AGREEMENT IT TRANSPIRES THAT KPENV IS CONTINUOUSLY ENGAGED IN RESEARCH AND DEVELOPMENT PROGRAMS AND THESE RIGHTS, KNOWHOW AND EXPERIENCE UNDER THE RESEARCH AND DEVELOPMENT PROGRAMS ARE GENERATED FOR THE BENEFIT OF THE INDIVIDUAL MEMBER COMPANIES OF THE PHILIPS GROUP. THE PEIL WISHES TO ENSURE CONTINUITY IN ITS BUSINESS OPERATIONS AND FOR THAT REASON IS INTERESTED TO TAKE ADVANTAGE OF THE RESEARCH AND DEVELOPMENT PROGRAMS AND SECURE ACCESS TO THE BENEFITS RESULTING THEREFROM. AS PER THE AGREEMENT, THE ENTIRE COSTS OF THE BASIC R&D ARE SHARED BETWEEN THE PHILIPS ENTITIES PARTICIPATING IN THE AGREEMENT, BASED ON AN ALLOCATION KEY. THE PARTICIPATING PHILIPS ENTITIES ARE ALLOWED A ROYALTY-FREE UNLIMITED ACCESS TO THE RESEARCH RESULTS INCLUDING ANY INTELLECTUAL PROPERTY RIGHTS GENERATED FROM THE BASIC R&D. IN LIEU OF SUCH R&D ACTIVITIES, KPENV WOULD BE REMUNERATED BY ALL ITS GROUP ENTITIES INCLUDING PEIL AS UNDER: (I). THAT PART OF THE CONCERN RESEARCH AND DEVELOPMENT SERVICES COST, EXCLUDING ANY COST IN RELATION TO BASIC RESEARCH SERVICES, PER PRODUCT OR GROUP OF PRODUCTS WHICH CORRESPONDS TO THE RATIO BETWEEN THE COMPANYS PRODUCTION OF SAID PRODUCT OR GROUP OF PRODUCTS AND THE PRODUCTION BY THE CONCERN COMPANIES OF SAID PRODUCT OR GROUP OF PRODUCTS, DETERMINED IN ACCORDANCE WITH PHILIPS ACCOUNTING PRINCIPLES; (II). THAT PART OF THE CONCERN RESEARCH AND DEVELOPMENT SERVICES COST IN RELATION TO BASIC RESEARCH SERVICES WHICH CORRESPONDS TO THE RATIO BETWEEN THE RELEVANT LOCAL TURNOVER AND THE RELEVANT WORLD TURNOVER; (III). A SURCHARGE OF 10% ON THE AMOUNTS AS CALCULATED ACCORDING TO THE ABOVE. THE SURCHARGE ESSENTIALLY STAND FOR VARIOUS RISKS SUCH AS CURRENCY RISK, NON-PAYMENT RISK ETC. NONE OF THE PERSONNEL OF KPENV IS REQUIRED TO VISIT INDIA FOR RENDERING ANY WORK. THE FEE RECEIVED BY KPFNV FROM SHARING THE R&D RESULTS UNDER THE AGREEMENT TO ANY OF THE GROUP ENTITIES OF PHILIPS INCLUDING PEIL, IS USED TO REDUCE THE OVERALL COSTS OF THE BASIC, R&D. THE KPENV IS CONTINUOUSLY ENGAGES IN RESEARCH AND DEVELOPMENT PROGRAMS AND THESE RESEARCH MATERIALS ARE GENERATED FOR THE BENEFIT OF THE INDIVIDUAL MEMBER COMPANIES OF THE PHILIPS GROUP AS WHOLE. THE MAIN PURPOSE OF THE AGREEMENT IS TO KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 6 ENSURE THAT ALL THE GROUP COMPANIES MANUFACTURE PRODUCTS OF PHILIPS GLOBAL STANDARDS. THE KPENV ON ACCOUNT OF SUCH RESEARCH ACTIVITIES INCURS COST, WHICH IS ALLOCATED AND RECOVERED FROM THE GROUP COMPANIES AND IT IS TOWARDS THE REIMBURSEMENT OF SUCH COSTS THAT IT HAS RECEIVED PAYMENTS FROM PEIL UNDER THE RDCA. 7. THE COMPANY WAS OF THE VIEW THAT THE PAYMENTS RECEIVED BY IT UNDER THE RDCA WERE NOTHING BUT REIMBURSEMENT OF COST INCURRED BY IT ON RESEARCH AND DEVELOPMENT WORK, FOR ITS GROUP COMPANIES. IT CANNOT BE SAID THAT THE COMPANY HAD RENDERED ANY SERVICE OF TECHNICAL OR CONSULTANCY NATURE TO PEIL OR TO ANY OF THE OTHER GROUP COMPANIES WHEN IT PROVIDES THE RESULTS OF CORPORATE RESEARCH TO THEM. THE COMPANY DOES NOT DEPLOY ANY PERSONNEL TO PERFORM ANY SERVICES IN INDIA. THEREFORE, THE PAYMENTS ARE NOT TAXABLE IN INDIA AS PER THE PROVISIONS OF ARTICLE 12 OF THE INDIA-NETHERLAND TAX TREATY. WHETHER THE PAYMENTS RECEIVED BY THE COMPANY WERE IN THE NATURE OF ROYALTY. IN THIS CONNECTION IT WAS SUBMITTED THAT THE COMPANY WAS NOT RECEIVING ANY CONSIDERATION FOR TRANSFERRING OR CONFERRING SUCH RIGHTS AND BENEFITS. ALL THE GROUP COMPANIES INCLUDING PEIL HAS A RIGHT FLOWING UNDER THE TERMS OF THE AGREEMENT ITSELF TO AVAIL OF THE FRUITS OF RESEARCH IN ITS OWN RIGHT. THOUGH THE LEGAL OWNERSHIP OF IPR RESTS WITH KPENV AS A MATTER OF CONVENIENCE AND BY MUTUAL AGREEMENT, THE BENEFIT OF PRODUCTS OF RESEARCH FLOWS TO ALL THOSE PHILIPS GROUP COMPANIES, WHICH HAVE SIGNED THE RESEARCH SHARING AGREEMENT. IT IS EXACTLY FOR THIS PURPOSE THAT THE PEIL AND OTHER GROUP COMPANIES WHO ALL ARE PARTIES TO THE AGREEMENT CONTRIBUTE TO THE COST OF THE RESEARCH ESTABLISHMENT SET UP FOR THE BENEFIT OF ALL OF THEM. THE RESOURCES ARE POOLED BY ALL THE ENTITIES, WHICH ARE PARTIES TO THE AGREEMENT TO PROMOTE CORPORATE R&D FOR COMMON BENEFIT. IN OTHER WORDS IN ESSENCE, THE AGREEMENT IS IN THE NATURE OF COST SHARING AGREEMENT. THE COST CONTRIBUTION FORMULA IS EVOLVED SO AS TO ENSURE THE DISTRIBUTION OF THE BURDEN OF ACTUAL COST AMONGST THE PARTICIPATING ENTITIES. THE FACT THAT R&D INFORMATION CAN ONLY BE ACCESSED BY THE PARTIES TO THE AGREEMENT AND THE FURTHER FACT THAT THE LICENSED INCOME DERIVED BY THE LIMITED COMMERCIAL EXPLOITATION OF IPR WOULD GO TO REDUCE THE AMOUNT WHICH THE PARTICIPANTS WOULD HAVE TO CONTRIBUTE ARE CLEAR POINTERS THAT AN INTERNAL ARRANGEMENT HAS BEEN EVOLVED BY THE PARTICIPATING GROUP ENTITIES THROUGH A JOINT ENDEAVOR TO REAP THE BENEFITS OF RESEARCH. THE AGREEMENT MAINLY POINTS OUT AS TO HOW THE CORPORATE FUNDING WOULD BE ARRANGED IN CONNECTION WITH THE R&D ACTIVITIES, THEREFORE THE PAYMENTS MADE BY PEIL ARE NOT IN THE NATURE OF ROYALTIES LIABLE TO BE TAXED IN INDIA KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 7 AS PER THE PROVISIONS OF ARTICLE 12 OF THE INDIA-NETHERLAND TAX TREATY. THE ASSESSEE HAS ALSO PLACED RELIANCE ON THE DECISION OF THE AAR IN THE CASE OF ABB LIMITED REPORTED IN 322 ITR 564 IN SUPPORT OF ITS CLAIM. 8. AFTER GOING THROUGH THE ABOVE SUBMISSIONS OF THE ASSESSEE COMPANY, THE ASSESSING OFFICER SUMMARIZED THE ASSESSEE`S CONTENTION REGARDING NON-TAXABILITY OF RDCA RECEIPTS, AS FOLLOWS: (I). THAT NONE OF THE PERSONNEL OF THE ASSESSEE IS REQUIRED TO VISIT INDIA FOR RENDERING ANY WORK. (II). THAT PAYMENTS RECEIVED BY THE ASSESSEE UNDER RDCA ARE IN THE MANNER OF REIMBURSEMENT OF COST INCURRED BY IT ON RESEARCH AND DEVELOPMENT WORK FOR ITS GROUP COMPANIES. (III). THAT NO CONSIDERATION IS BEING RECEIVED BY THE ASSESSEE FOR TRANSFERRING OR CONFERRING SUCH RIGHTS AND BENEFITS. (IV). THAT THE AGREEMENT IS IN THE NATURE OF COST SHARING AGREEMENT. IN THE LIGHT OF THE ASSESSEE'S SUBMISSION, THE ASSESSING OFFICER HAD DONE A THOROUGH EXAMINATION OF THE CONTENTS OF THE RESEARCH AND DEVELOPMENT COOPERATION AGREEMENT [RDCA], AND NOTICED THAT AS PER ARTICLE 2 OF THE RDCA THE ASSESSEE UNDERTAKES TO RENDER CONCERN RESEARCH AND DEVELOPMENT SERVICES TO PEIL AND MORE IN PARTICULAR AGREES: (A). TO PROVIDE THE COMPANY [I.E PEIL] WITH AN ACCESS TO THE BENEFITS AND INFORMATION, EXISTING AND FUTURE, RESULTING FROM UNDERTAKING THE RESEARCH AND DEVELOPMENT PROGRAMMES TO THE EXTENT TO WHICH PHILLIPS [I.E THE ASSESSEE] HAS THE FREE RIGHT TO DO SO AND ADVISE AND ASSIST THE COMPANY IN APPLYING THE SAME. (B). TO GRANT THE COMPANY REQUISITE AUTHORIZATION INCLUDING GRANTING A NON-EXCLUSIVE, NON-TRANSFERABLE AND INDIVISIBLE LICENSE, AS MAY BE NECESSARY FOR APPLYING THE BENEFITS OF THE RESEARCH AND DEVELOPMENT PROGRAMMES IN THE COUNTRY UNDER WHICH PHILIPS IS OR WILL BE ENTITLED TO GRANT SUCH LICENSE, KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 8 ARTICLE 3 OF THE RDCA REFERS TO THE CONCERN RESEARCH AND DEVELOPMENT SERVICES WHICH SHALL BE PROVIDED BY THE ASSESSEE, IN AS FAR AS THEY ARE REASONABLY REQUIRED FOR THE MANUFACTURE AND/OR SALE OF SUCH TYPES OF PRODUCTS AS WILL BE MANUFACTURED AND/OR SOLD BY THE COMPANY FROM TIME TO TIME.' THE CONCERN RESEARCH AND DEVELOPMENT SERVICES, WHICH PHILLIPS SHALL RENDER TO THE COMPANY, MAY INCLUDE: A. PROVIDING TO THE COMPANY SUCH RESULTS AND DOCUMENTATION FROM PHILIPS RESEARCH AND DEVELOPMENT LABORATORIES AS ARE RELEVANT TO THE BUSINESS OF THE COMPANY, INCLUDING RESULTS OF TEST INSPECTIONS AND OF INVESTIGATIONS OF PRODUCTS AND THEIR CONSTITUENT PARTS, B. PROVIDING TO THE COMPANY SUCH INFORMATION RESULTING FROM THE RESEARCH AND DEVELOPMENT PROGRAMMES UNDERTAKEN BY PHILIPS AS THE COMPANY MAY REASONABLY NEED RELATING TO PRODUCTS, MANUFACTURING PROCESSES, WORKING METHODS AND THE RENDERING OF AFTER SALES SERVICE, C. PROVIDING THE COMPANY WITH INFORMATION RESULTING FROM THE RESEARCH AND DEVELOPMENT PROGRAMMES UNDERTAKEN BY PHILIPS CONCERNING THE ESTABLISHMENT AND MAINTENANCE AND INSTALLATION OF FACTORIES, LABORATORIES AND OFFICE BUILDINGS OF THE COMPANY AND CORNING THE ENVIRONMENTALLY HYGIENIC AND ECONOMICAL USE OF NATURAL RESOURCES SUCH AS WATER, LIVING SPACE, AIR, RAW MATERIALS AND ENERGY, D. PROVIDING THE COMPANY WITH INFORMATION GENERATED FROM RESEARCH AND DEVELOPMENT PROGRAMMES RELATING TO THE MECHANICAL AND ELECTRO TECHNICAL REQUIREMENTS TO BE MET BY THE COMPANY'S PRODUCTS AS WELL AS INSTRUCTIONS CONCERNING THEIR OPTIMAL PACKAGING, E. PROVIDING ASSISTANCE TO THE COMPANY ON THE QUALITY OF THE PRODUCTS MANUFACTURED BY THE COMPANY, F. CHECKING FROM TIME TO TIME, AT THE COMPANY'S SPECIFIC REQUEST, AT THE RESEARCH AND DEVELOPMENT LABORATORIES OF PHILIPS, THE RESULTS OF THE COMPANY'S PRODUCTIONS, G. PROVIDING TO THE COMPANY, RESULTS FROM THE RESEARCH AND DEVELOPMENT LABORATORIES OF PHILIPS, THE RESULTS OF THE COMPANY'S PRODUCTIONS, H. PROVIDING TO THE COMPANY, RESULTS FROM THE RESEARCH AND DEVELOPMENT LABORATORIES OF PHILIPS ON THE PACKING, HANDLING, SHIPPING AND STORAGE OF ITS PRODUCTS, KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 9 I. PROVIDING TO THE COMPANY THE PHILIP'S COST ACCOUNTING, OPERATIONAL STATISTICS AND MANAGEMENT SYSTEMS, IN MATTERS OF PRODUCTION PLANNING AND RATIONALIZATION IN ORDER TO INCREASE THE EFFICIENCY IN ITS FACTORIES, J. PROVIDING TO THE COMPANY, IN SO FAR AS PHILIPS MANUFACTURING CAPACITY AND ITS OWN REQUIREMENTS PERMIT, SUCH SPECIAL MACHINERY, TOOLS, INSTRUMENTS, RAW MATERIALS, COMPONENTS AND SEMI-FINISHED PRODUCTS AS THE COMPANY MAY REASONABLY NEED FROM TIME TO TIME FOR USE IN THE DEVELOPMENT AND MANUFACTURE OF ITS PRODUCTS AND FOR THE RENDERING OF SERVICES, INCLUDING AFTER-SALES SERVICE; SUCH SUPPLIES SHALL BE PROVIDED AT PRICES AND CONDITIONS TO BE AGREED UPON BETWEEN THE PARTIES FROM CASE TO CASE; THE COMPANY SHALL ALSO BE ADVISED ABOUT THE MAINTENANCE OF SPECIAL MACHINERY, TOOLS AND INSTRUMENTS SUPPLIES BY PHILIPS, K. ADMITTING AT THE COMPANYS SPECIFIC REQUEST AND AT MUTUALLY AGREED TIMES, A REASONABLE NUMBER OF EMPLOYEES OF THE COMPANY TO FACTORIES AND OTHER WORKS PREMISES OF PHILIPS TO THE EXTENT TO WHICH PHILIPS HAS THE RIGHT TO DO SO, SO THAT SUCH EMPLOYEES OF THE COMPANY CAN FAMILIARIZE THEMSELVES WITH WORKING METHODS, MANUFACTURING PROCESSES AND SERVICES METHODS FOR PRODUCTS NOT YET KNOWN OR USED BY THE COMPANY, IT HAS BEEN AGREED THAT PHILIPS WOULD RENDER THE SERVICES MENTIONED ABOVE, TO THE COMPANY OUTSIDE THE COUNTRY. ANY SERVICES THAT WOULD BE REQUIRED TO BE RENDERED BY PHILIPS IN OR WITHIN THE COUNTRY, WHETHER BY WAY OF DEPUTATION OF EMPLOYEES/REPRESENTATIVE OR OTHERWISE, WOULD BE MUTUALLY AGREED AMONGST THE PARTIES HERETO AND THE SAME WOULD NOT FORM PART OF THIS AGREEMENT. ARTICLE 4 OF THE RDCA AUTHORIZES THE COMPANY I.E. PEIL TO USE THE BENEFITS ARISING FROM THE RESEARCH AND DEVELOPMENT PROGRAMMES UNDERTAKEN BY PHILIPS, IN THE MANUFACTURING, SALE AND USE OF PRODUCTS BY THE COMPANY IN THE COUNTRY. ARTICLE 5 DEALS WITH THE EXCLUSIVE USE OF ALL ASSISTANCE, INFORMATION AND ADVICE GIVEN UNDER THE TERMS OF THIS AGREEMENT WITHIN THE PHILIPS CONCERN UNLESS WITHOUT THE PRIOR CONSENT OF THE ASSESSEE. ARTICLE 6 REFERS TO THE REMUNERATION IN CONSIDERATION OF THE CONCERN RESEARCH AND DEVELOPMENT SERVICES RENDERED BY THE ASSESSEE TO PEIL. 9. THE ASSESSING OFFICER THEN ANALYZED THE PROVISIONS OF SECTION 9(1)(VI)(C) OF THE INCOME TAX ACT, 1961, WHICH STATES THAT: KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 10 SECTION 9(1) THE FOLLOWING INCOMES SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA: (I)........... (VI) INCOME BY WAY OF ROYALTY PAYABLE BY (A) THE GOVERNMENT ; OR (B) A PERSON WHO IS A RESIDENT, EXCEPT WHERE THE ROYALTY IS PAYABLE IN RESPECT OF ANY RIGHT, PROPERTY OR INFORMATION USED OR SERVICES UTILISED FOR THE PURPOSES OF A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA ; OR (C) A PERSON WHO IS A NON-RESIDENT, WHERE THE ROYALTY IS PAYABLE IN RESPECT OF ANY RIGHT, PROPERTY OR INFORMATION USED OR SERVICES UTILIZED FOR THE PURPOSES OF A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON IN INDIA OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE IN INDIA : THE EXPLANATION 2 TO THE SAID CLAUSE OF SECTION 9(1) OF THE INCOME TAX ACT DEFINES 'ROYALTY' AS CONSIDERATION INCLUDING ANY LUMP SUM CONSIDERATION BUT EXCLUDING SUCH CONSIDERATION CHARGEABLE UNDER THE HEAD 'CAPITAL GAINS') FOR (I) THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING THE GRANTING OF A LICENCE) IN RESPECT OF A PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY ; (II) THE IMPARTING OF ANY INFORMATION CONCERNING THE WORKING OF, OR THE USE OF, A PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY ; (III) THE USE OF ANY PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY; (IV) THE IMPARTING OF ANY INFORMATION CONCERNING TECHNICAL, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNOWLEDGE, EXPERIENCE OR SKILL; [(IVA) THE USE OR RIGHT TO USE ANY INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EQUIPMENT BUT NOT INCLUDING THE AMOUNTS REFERRED TO IN SECTION 44BB;] KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 11 (V) THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING THE GRANTING OF A LICENCE) IN RESPECT OF ANY COPYRIGHT, LITERARY, ARTISTIC OR SCIENTIFIC WORK INCLUDING FILMS OR VIDEO TAPES FOR USE IN CONNECTION WITH TELEVISION OR TAPES FOR USE IN CONNECTION WITH RADIO BROADCASTING, BUT NOT INCLUDING CONSIDERATION FOR THE SALE, DISTRIBUTION OR EXHIBITION OF CINEMATOGRAPHIC FILMS ; OR (VI) THE RENDERING OF ANY SERVICES IN CONNECTION WITH THE ACTIVITIES REFERRED TO IN SUB- CLAUSES (I) TO 25[(IV), (IVA) AND](V). IN VIEW OF THE ABOVE PROVISIONS OF THE ACT, THUS THE PAYMENT MADE TO THE ASSESSEE UNDER RDCA WOULD BE TAXABLE IN INDIA IN ITS HANDS AS PER THE PROVISIONS OF SECTION 9(1)(VI) OF THE ACT. THE LD AO NOTED THAT THE ASSESSEE IN ITS SUBMISSIONS, ADMITTED THE FACT THAT IT HAS THE LEGAL OWNERSHIP OF THE IPR. AFTER GOING THROUGH THE CONTENTS OF THE RDCA CONTRACT, THE LD AO OBSERVED THAT THE ASSESSEE HAS ACCORDED THE LICENCE TO USE THE SAME TO PEIL AND IN RETURN FOR WHICH IT RECEIVES REMUNERATION. THE CONTENTION OF THE ASSESSEE THAT NONE OF ITS EMPLOYEES IS REQUIRED TO VISIT INDIA FOR RENDERING ANY WORK AND HENCE, ITS RECEIPTS UNDER RDCA WOULD NOT BE TAXABLE IN INDIA IS NO LONGER A MATTER OF CONCERN ESPECIALLY IN VIEW OF INSERTION OF EXPLANATION TO SECTION 9 OF THE ACT WHICH READS AS UNDER- EXPLANATIONFOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT FOR THE PURPOSES OF THIS SECTION, WHERE INCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA UNDER CLAUSES (V) (VI) AND (VII) OF SUB-SECTION (1), SUCH INCOME SHALL BE INCLUDED IN THE TOTAL INCOME OF THE NON-RESIDENT, WHETHER OR NOT THE NON-RESIDENT HAS A RESIDENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTION IN INDIA. THE ABOVE EXPLANATION HIGHLIGHTS THE FACT THAT IRRESPECTIVE OF THE SITUS OF THE SERVICES, IT IS THE SITUS OF THE PAYER AND THE SITUS OF THE UTILISATION OF SERVICES WHICH WILL DETERMINE THE TAX JURISDICTION. HENCE, THE ASSESSEES VIEWPOINTS THAT THE PAYMENTS RECEIVED BY IT UNDER RDCA ARE NOTHING BUT REIMBURSEMENT OF COST INCURRED BY IT ON RESEARCH AND DEVELOPMENT WORK, NO CONSIDERATION IS BEING RECEIVED FROM THE TRANSFER OF RIGHTS AND THAT IN ESSENCE, THE AGREEMENT IS IN THE NATURE OF COST SHARING AGREEMENT WAS NOT ACCEPTED BY LD AO. THE REASON BEING THAT IF THE PAYMENTS RECEIVED BY IT UNDER THE RDCA WERE SIMPLY REIMBURSEMENT OF COST INCURRED THEN THE SAME SHOULD HAVE BEEN KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 12 SPECIFIED IN THE CONTRACT AS IT IS DUE TO THE EXISTENCE OF SUCH A CONTRACT THAT THE ASSESSEE HAS BEEN RECEIVING PAYMENTS IN THE VERY FIRST PLACE. ARTICLE 5 OF THE CONTRACT AGREEMENT CLEARLY HIGHLIGHTS THAT THE ASSESSEE IS LIABLE TO RECEIVE REMUNERATION IN CONSIDERATION OF THE CONCERN RESEARCH AND DEVELOPMENT SERVICES RENDERED TO PEIL. THE TERM REIMBURSEMENT HAS AT NO POINT OF TIME BEEN MENTIONED ANYWHERE IN THE RDCA. THESE TWO TERMS CAN BE EASILY DISTINGUISHED. AS FOUND IN THE CAMBRIDGE DICTIONARY, THE WORD REIMBURSEMENT MEANS TO PAY MONEY BACK TO SOMEONE. ON THE OTHER HAND, REMUNERATION HAS BEEN DEFINED AS WHEN SOMEONE IS PAID FOR THE WORK THEY HAVE DONE. IN CASE OF REIMBURSEMENT IT IS A CASE OF PERSON/ENTITY PAYING ANY SPECIFIED AMOUNT ON ONES BEHALF FOR SOME WORK AND THE SAME SPECIFIED AMOUNT BEING REPAID TO THAT PERSON/ENTITY AT COST. IN OTHER WORDS, IT WOULD NOT BE INCORRECT TO SUGGEST THAT THERE IS A TWO WAY MONETARY PROCESS INVOLVED. ON THE OTHER HAND, IN THE CASE OF REMUNERATION, IT IS ONE WAY MONETARY PROCESS WHERE ONE IS BEING PAID MONEY FOR WORK OR A SERVICE. IN THE RELEVANT CASE, THE ASSESSEE IS AND HAS BEEN RECEIVING REMUNERATION FROM PEIL, WHOM IT HAS LICENSED/AUTHORIZED TO USE THE BENEFITS AND THE RIGHTS ARISING FROM THE RESEARCH AND DEVELOPMENT PROGRAMMES UNDERTAKEN BY THE ASSESSEE. 10. TO ASCERTAIN THE APPLICABILITY OF CLAUSE ARTICLE 12(4) OF THE INDIA-NETHERLANDS DOUBLE TAXATION AVOIDANCE AGREEMENT [DTAA] IN THE ASSESSEES CASE, THE LD AO ANALYZED, THE ARTICLE 12(4), WHICH IS REPRODUCED AS UNDER: ARTICLE 12 ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. ....................... 2......................... 3........................ 4. THE TERM ROYALTIES AS USED IN THIS ARTICLE MEANS PAYMENTS OF ANY KIND RECEIVED AS A CONSIDERATION FOR THE USE OF OR THE RIGHT TO USE, ANY COPYRIGHT OF LITERARY OR ARTISTIC OR SCIENTIFIC WORK INCLUDING CINEMATOGRAPH FILMS, ANY PATENT, TRADEMARK, DESIGN OR MODEL PLAN, SECRET FORMULA OR PROCESS, OR FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE. KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 13 WITHOUT PREJUDICE TO THE ASSESSEES SUBMISSIONS, THOUGH THE PROVISION OF SECTION 245S(1) OF THE INCOME TAX ACT, 1961 SPECIFICALLY LAYS DOWN THAT THE RULING OF THE HONBLE AAR SHALL BE BINDING ONLY (A) ON THE APPLICANT WHO HAD SOUGHT IT; (B) IN RESPECT OF THE TRANSACTION IN RELATION TO WHICH THE RULING HAD BEEN SOUGHT; AND (C) ON THE COMMISSIONER, AND THE INCOME-TAX AUTHORITIES SUBORDINATE TO HIM, IN RESPECT OF THE APPLICANT AND THE SAID TRANSACTION. THE DECISION OF THE HONBLE AAR IN THE CASE OF ABB LIMITED REPORTED IN 322 ITR 564 HAS BEEN EXAMINED, WHERE IT IS LEARNT THAT THE ABB INDIA, PART OF THE ABB GROUP PROPOSED TO ENTER INTO A COST CONTRIBUTION AGREEMENT WITH ABB RESEARCH LTD., ZURICH (ABB ZURICH) FOR THE PURPOSE OF PARTICIPATING IN THE FUNDING OF CORPORATE RESEARCH AND DEVELOPMENT IN THE ABB GROUP IN ORDER TO MAKE OPTIMUM USE OF THE AVAILABLE RESOURCES AND TO INCREASE EFFICIENCY AND REDUCE, COST. MOREOVER, IT IS STATED THAT THE PARTIES WISH TO APPOINT A SEPARATE COMPANY WHICH ON BEHALF OF THE PARTIES WILL ADMINISTER THE CORPORATE R&D. THE ASSESSEES CASE IS EASILY DISTINGUISHABLE FROM THIS CASE AS THERE WAS NO SUCH COST CONTRIBUTION AGREEMENT ENTERED INTO BY THE ASSESSEE WITH PEIL AND THE PURPOSE OF THE RDCA WAS FOR THE USE OF THE BENEFITS ARISING FROM THE RESEARCH AND DEVELOPMENT PROGRAMMES UNDERTAKEN BY THE ASSESSEE IN THE MANUFACTURE, SALE AND USE OF PRODUCTS BY PEIL IN INDIA. BASED ON THE ABOVE FACTS AND ALSO THE PROVISIONS OF ARTICLE 12(4) OF THE DTAA, THE LD AO NOTED THAT THE PAYMENTS RECEIVED BY THE ASSESSEE UNDER RDCA ARE IN THE NATURE OF ROYALTY AND THESE WILL FALL WITHIN THE AMBIT OF THE SAID ARTICLE I.E. ARTICLE 12(4) OF THE DTAA. THE RECEIPTS IN THE HANDS OF THE ASSESSEE WOULD QUALITY FOR TAXATION AS ROYALTY EVEN AS PER THE TREATY LAW AS HAS BEEN VOLUNTARILY DONE BY THE ASSESSEE IN THE EARLIER ASSESSMENT YEARS. THUS, THE TOTAL AMOUNT OF RS.242,753,150/- RECEIVED BY THE ASSESSEE UNDER RDCA AND CLAIMED BY THE ASSESSEE AS NOT BEING TAXABLE IN INDIA IN THE NOTE TO THE REVISED COMPUTATION OF TOTAL INCOME, WAS ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 14 11. AGGRIEVED BY THE ORDER OF THE LD. ASSESSING OFFICER, THE ASSESSEE FILED AN APPLICATION BEFORE THE HONBLE DISPUTE RESOLUTION PANEL (DRP). THE HONBLE DRP OBSERVED THAT THE ASSESSEES CASE IS WEAKENED FROM THE OUTSET BY THE BURDEN OF AN ADVERSE LEGACY, IN THE FORM OF ITS OWN ADMISSION IN THE EARLIER YEARS THAT THE AMOUNT IN QUESTION WAS IN THE NATURE OF ROYALTY PAYMENTS. THE ASSESSEE HAS OFFERED THE PAYMENT TO TAX IN THIS MANNER IN THE EARLIER ASSESSMENT YEARS AS WELL AS IN THE ORIGINAL RETURN FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. THEREFORE, LD. DRP NOTED THAT NOTHING NEW HAS HAPPENED NOR HAS ANY FRESH FACT BEEN BROUGHT ON RECORD EXCEPT FOR THE RULING OF THE AAR IN THE CASE OF ABB LTD IN SUPPORT OF THE CLAIM THAT THE PAYMENTS WERE MERE REIMBURSEMENTS UNDER A COST SHARING AGREEMENT. THE DRP NOTED THAT U/S 245S(1) OF THE ACT, A RULING OF AAR IS BINDING ONLY ON THE APPLICANT AND ON THE CIT AND THE CONCERNED ASSESSING OFFICER AND THAT TOO ONLY IN RESPECT OF THE TRANSACTION IN QUESTION. THE ASSESSING OFFICER DISCHARGED HER BURDEN ON THIS COUNT ALSO BY DISTINGUISHING THE FACTS IN THE ASSESSEES CASE AND POINTING OUT THAT THERE IS NO COST CONTRIBUTION AGREEMENT IN THE CASE OF ASSESSEE AS WAS THERE IN THE CASE OF ABB. THE DRP OBSERVED THAT THE ASSESSEE HAD ON ITS OWN BEEN DECLARING THE PAYMENT IN QUESTION AS ROYALTY IN THE EARLIER YEARS AND THEREFORE THERE SEEMS TO BE NO NEED FOR THIS PANEL TO GO INTO THE QUESTION WHETHER THE CASE OF THE ASSESSEE IS COVERED BY THE DEFINITION OF THE TERM ROYALTY U/S 9(1)(VI) OR ARTICLE 12 OF THE INDIA-NETHERLANDS DTA AGREEMENT. THEREFORE, LD. DRP HELD THAT ASSESSING OFFICER IN THE DRAFT ORDER HAD DEALT WITH THIS ISSUE THAT THE PAYMENTS WERE IN THE NATURE OF ROYALTY AND IT CANNOT BE SAID TO BE A COST CONTRIBUTION AGREEMENT. THE LD. DRP ALSO EXPLAINED THE TERMINOLOGY OF COST CONTRIBUTION AGREEMENT AND HELD THAT IN THE INSTANT ASSESSEES CASE THE CONCEPT OF COST CONTRIBUTION AGREEMENT DOES NOT APPLY. THE LD. DRP NOTED THAT THE PRIMARY INGREDIENTS OF A COST CONTRIBUTION AGREEMENT ARE AS FOLLOWS: I) SHARING OF COST AND RISKS OF DEVELOPMENT OF PROPERTY. II. WELL IDENTIFIED EXPECTED BENEFIT TO EACH PARTICIPANT, WHICH IS COMMENSURATE WITH THE SHARE OF THE COST AND RISKS III. ENTITLEMENT TO EXPLOIT THE INTEREST IN CCA AS AN EFFECTIVE OWNER AND NOT A LIENCEE (EG. THOUGH LICENSING AGREEMENT OR SALES WHETHER TO AN AE OR TO AN INDEPENDENT ENTERPRISE). KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 15 THE LD. DRP IN THE LIGHT OF THE ABOVE NOTED INGREDIENTS OF COST CONTRIBUTION AGREEMENT, ANALYZED THE AGREEMENT OF RDCA BETWEEN THE ASSESSEE AND PEIL AND CAME TO THE CONCLUSION THAT THE ASSESSEE RETAINS ALL THE RIGHTS IN THE R &D AND WHAT IS GRANTED TO PEIL ARE ONLY NON-EXCLUSIVE, NON-TRANSFERABLE AND INDIVISIBLE RIGHTS. FROM A CONSIDERATION OF THE ABOVE PROVISIONS OF THE AGREEMENT IT IS CLEAR THAT NONE OF THE THREE INGREDIENTS OF A CCA ARE PRESENT IN IT. FIRST, THERE IS NO SHARING OF COST AND RISKS OF DEVELOPMENT OF PROPERTY. THE RESEARCH IS UNDERTAKEN BY THE ASSESSEE OR GOT UNDERTAKEN BY IT. IT MAY BE DONE IN SOME CASES FOR A PARTICULAR COMPANY OF A GROUP OR MORE THAN ONE COMPANY WHICH MAY BE INVOLVED IN THE PROJECT. BUT THE MODEL IS NOT THAT OF A COST SHARING WITH WELL IDENTIFIED, EXPECTED BENEFIT TO EACH PARTICIPANT WHICH IS COMMENSURATE WITH THE SHARE OF THE COSTS AND RISKS. THERE IS NO SHARING OF COSTS BUT A PAYMENT OF CONSIDERATION FOR THE BENEFIT DERIVED. FINALLY, THE PARTICIPANT IS NOT ENTITLED TO EXPLOIT THE INTEREST IN CCA AS AN, EFFECTIVE OWNER AND NOT A LICENSEE. WHAT PEIL IS GETTING UNDER THE AGREEMENT IS NON-EXCLUSIVE, NON-TRANSFERABLE AND INDIVISIBLE RIGHTS IN THE RESEARCH DONE BY ASSESSEE. IT DOES NOT GET THE RIGHT TO EXPLOIT SUCH RESEARCH THROUGH A LICENSING AGREEMENT OR SALES WHETHER TO AN AE OR TO AN INDEPENDENT ENTERPRISE, WHICH IS ENVISAGED IN A CCA. SUCH RIGHTS REMAIN WITH THE ASSESSEE AND WHAT PEIL IS GRANTED IS A RIGHT TO USE THE RESEARCH FOR ITS OWN PURPOSES. THEREFORE, LD DRP, NOTED THAT FROM THE ABOVE EXAMINATION OF THE CONCEPT OF CCA AS LAID DOWN IN THE OECD GUIDELINES AND THE AGREEMENT BETWEEN THE ASSESSEE AND PEIL, IT IS CLEAR THAT THE ARRANGEMENT BETWEEN THE TWO PARTIES IS BASICALLY AN INTRA GROUP SERVICES AGREEMENT OR INTRA GROUP ROYALTY AGREEMENT BUT NOT A COST CONTRIBUTION AGREEMENT. THEREFORE, THE SUBMISSIONS MADE BY THE ASSESSEE THAT THE PAYMENTS MADE BY PEIL ARE ONLY REIMBURSEMENTS OF EXPENDITURE CANNOT BE ACCEPTED. THE LD DRP NOTED THAT FROM THE TERMS OF THE AGREEMENT EXTRACTED ABOVE THAT THE PAYMENTS WERE IN THE NATURE OF CONSIDERATION FOR THE RIGHT TO USE OF THE RESEARCH UNDERTAKEN BY THE ASSESSEE AND THEREFORE, ADDITION RS. 242,653,150/- MADE BY THE ASSESSING OFFICER IN THE DRAFT ORDER WAS CONFIRMED BY THE LD DRP. 12. AGGRIEVED BY THE ORDER OF THE LD. DRP/ASSESSING OFFICER, THE ASSESSEE IS IN APPEAL BEFORE US. KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 16 13. MR. ARVIND SONDE, THE LD. COUNSEL FOR THE ASSESSEE, SUBMITTED BEFORE US THAT KPENV IS CONTINUOUSLY ENGAGED IN RESEARCH AND DEVELOPMENT PROGRAMS AND THESE RIGHTS, KNOWHOW AND EXPERIENCE UNDER THE RESEARCH AND DEVELOPMENT PROGRAMS ARE GENERATED FOR THE BENEFIT OF THE INDIVIDUAL MEMBER COMPANIES OF THE PHILIPS GROUP. THE PEIL WISHES TO ENSURE CONTINUITY IN ITS BUSINESS OPERATIONS AND FOR THAT REASON IT IS INTERESTED TO TAKE ADVANTAGE OF THE RESEARCH AND DEVELOPMENT PROGRAMS AND SECURE ACCESS TO THE BENEFITS RESULTING THEREFROM. AS PER THE AGREEMENT, THE ENTIRE COSTS OF THE BASIC R&D ARE SHARED BETWEEN THE PHILIPS ENTITIES PARTICIPATING IN THE AGREEMENT, BASED ON AN ALLOCATION KEY. THE PARTICIPATING PHILIPS ENTITIES ARE ALLOWED A ROYALTY-FREE UNLIMITED ACCESS TO THE RESEARCH RESULTS INCLUDING ANY INTELLECTUAL PROPERTY RIGHTS GENERATED FROM THE BASIC R&D. IN LIEU OF SUCH R&D ACTIVITIES, KPENV WOULD BE REMUNERATED BY ALL ITS GROUP ENTITIES INCLUDING PEIL. THE RESEARCH AND DEVELOPMENT RESULTS ARE USED TO REDUCE OVERALL COST OF THE BASIC RESEARCH AND DEVELOPMENT. THESE RESEARCH MATERIALS ARE GENERATED FOR THE BENEFIT OF THE INDIVIDUAL MEMBER COMPANIES OF THE PHILLPS GROUP AS WHOLE. THE MAIN PURPOSE OF THE AGREEMENT IS TO ENSURE THAT ALL THE GROUP COMPANIES MANUFACTURE PRODUCTS OF PHILIPS GLOBAL STANDARDS. THE KPENV ON ACCOUNT OF SUCH RESEARCH ACTIVITIES INCURS COST, WHICH IS ALLOCATED AND RECOVERED FROM THE GROUP COMPANIES AND IT IS TOWARDS THE REIMBURSEMENT OF SUCH COSTS THAT IT HAS RECEIVED PAYMENTS FROM PEIL UNDER THE RDCA. THE LD. COUNSEL BASED ON THE ABOVE FACTS PLEADED THAT UNDER RDCA, THE PAYMENT RECEIVED BY THE ASSESSEE IS ONLY REIMBURSEMENT OF COST INCURRED BY IT ON RESEARCH AND DEVELOPMENT WORK FOR ITS GROUP COMPANIES. THEREFORE, IT CANNOT BE SAID THAT THE COMPANY HAS RENDERED ANY SERVICE OF TECHNICAL OR CONSULTANCY IN NATURE TO PEIL OR TO ANY OF THE OTHER GROUP COMPANIES WHEN IT PROVIDES THE RESULTS OF CORPORATE RESEARCH TO THEM. THE COMPANY DOES NOT DEPLOY ANY PERSONNEL TO PERFORM ANY SERVICES IN INDIA. THEREFORE, THE PAYMENTS ARE NOT TAXABLE IN INDIA AS PER THE PROVISIONS OF ARTICLE 12 (4) OF THE INDIA-NETHERLAND TAX TREATY. 14. MR. ARVIND SONDE, THE LD. COUNSEL FOR THE ASSESSEE, ALSO SUBMITTED THAT THE PAYMENTS RECEIVED BY THE COMPANY ARE NOT IN THE NATURE OF ROYALTY BECAUSE THE COMPANY IS NOT RECEIVING ANY CONSIDERATION FOR TRANSFERRING SUCH RIGHTS AND BENEFITS. ALL THE GROUP COMPANIES INCLUDING PEIL HAS A RIGHT FLOWING UNDER THE TERMS OF THE AGREEMENT ITSELF TO AVAIL OF THE FRUITS OF RESEARCH IN ITS OWN RIGHT. THE BENEFIT OF PRODUCTS OF RESEARCH FLOWS TO ALL THOSE PHILIPS GROUP COMPANIES, WHICH HAVE SIGNED THE RDCA SHARING AGREEMENT. KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 17 IT IS EXACTLY FOR THIS PURPOSE THAT THE PEIL AND OTHER GROUP COMPANIES WHO ALL ARE PARTIES TO THE AGREEMENT CONTRIBUTE TO THE COST OF THE RESEARCH ESTABLISHMENT SET UP FOR THE BENEFIT OF ALL OF THEM. THE RESOURCES ARE POOLED BY ALL THE ENTITIES, WHICH ARE PARTIES TO THE AGREEMENT TO PROMOTE CORPORATE R&D FOR COMMON BENEFIT. THE LD COUNSEL POINTED OUT THAT, IN ESSENCE, THE AGREEMENT IS IN THE NATURE OF COST SHARING AGREEMENT. THE COST CONTRIBUTION FORMULA IS EVOLVED SO AS TO ENSURE THE DISTRIBUTION OF THE BURDEN OF ACTUAL COST AMONGST THE PARTICIPATING ENTITIES. THE FACT THAT R&D INFORMATION CAN ONLY BE ACCESSED BY THE PARTIES TO THE AGREEMENT AND THE FURTHER FACT THAT THE LICENSED INCOME DERIVED BY THE LIMITED COMMERCIAL EXPLOITATION OF IPR WOULD GO TO REDUCE THE AMOUNT WHICH THE PARTICIPANTS WOULD HAVE TO CONTRIBUTE ARE CLEAR POINTERS THAT AN INTERNAL ARRANGEMENT HAS BEEN EVOLVED BY THE PARTICIPATING GROUP ENTITIES THROUGH A JOINT ENDEAVOR TO REAP THE BENEFITS OF RESEARCH. THE AGREEMENT MAINLY POINTS OUT AS TO HOW THE CORPORATE FUNDING WOULD BE ARRANGED, IN CONNECTION WITH THE R&D ACTIVITIES THEREFORE; THE PAYMENTS MADE BY PEIL ARE NOT IN THE NATURE OF ROYALTIES LIABLE TO BE TAXED IN INDIA AS PER THE PROVISIONS OF ARTICLE 12 (4) OF THE INDIA-NETHERLAND TAX TREATY. THE LD COUNSEL ALSO NARRATED THE VARIOUS ARTICLES OF THE RDCA AGREEMENT BEFORE THE BENCH, AND POINTED OUT THAT BY NO STRETCH OF IMAGINATION THE PAYMENTS MADE BY PEIL ARE IN THE NATURE OF ROYALTIES, THEREFORE, THE ADDITION OF RS.242,653,150/- MAY BE DELETED. 15. ON THE OTHER HAND, THE LD. DR FOR THE REVENUE SUBMITTED THAT THE ASSESSEE HAS BEEN FILING THE INCOME TAX RETURN SINCE A.Y. 2005-06, WHICH IS THE FIRST YEAR OF FILING THE INCOME TAX RETURN. SINCE, THEN THE ASSESSEE HAD ALWAYS BEEN FILING ITS RETURN OF INCOME DISCLOSING ITS TOTAL RECEIPTS UNDER THE HEADS, 'RESEARCH AND DEVELOPMENT COOPERATION AGREEMENT' (HEREIN AFTER REFERRED TO AS RDCA) AND 'MANAGEMENT SUPPORT SERVICES AGREEMENT'(HEREAFTER REFERRED TO AS MSSA) AND PATENT LICENSE AGREEMENT BEING TAXABLE IN INDIA. IT WAS FOR THE FIRST TIME DURING THE ASSESSMENT YEAR (A.Y.) 2008- 09, IN THE REVISED RETURN OF INCOME, THE ASSESSEE ADOPTED A NEW STAND BY CONSIDERING ITS INCOME RECEIVED FROM THE RDCA AND MSSA, AS NON- TAXABLE IN INDIA AND HAS ONLY ADMITTED THE INCOME UNDER THE HEAD PATENT LICENSE AGREEMENT AS BEING TAXABLE IN INDIA. THE LD. DR POINTED OUT THAT DURING THE A.Y.2008-09, THERE HAS BEEN NO AMENDMENT/ CHANGE TO THE RDCA AGREEMENT AND MSSA AGREEMENT. THEREFORE, THE TERMS AND CONDITIONS AS WELL AS THE OBJECTIVES ENVISAGED IN THE RDCA AGREEMENT DATED 13-12- 2004 AND MSSA AGREEMENT DATED 22-10-2004 WITH PEIL CONTINUED TO REMAIN THE SAME KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 18 IN THE ASSESSMENT YEAR IN QUESTION. DURING THE A.Y. 2008- 09 THE ISSUE OF TAXABILITY UNDER RDCA APPEARED FOR THE FIRST TIME, DURING THE COURSE OF ASSESSMENT PROCEEDINGS AND ACCORDINGLY THE ASSESSEE WAS DIRECTED TO SHOW CAUSE IN WRITING AS TO WHY THE RECEIPTS UNDER THE RDCA SHOULD NOT BE CONSIDERED AS TAXABLE IN THE HANDS OF THE ASSESSEE AS PER THE PROVISIONS OF SECTION 9(1)(VI) OF THE INCOME TAX ACT 1961, READ WITH ARTICLE 12(4) OF THE INDIA NETHERLANDS DTAA. THE ASSESSEE, ACCORDINGLY FILED ITS SUBMISSION FROM TIME TO TIME AND THE CONTENTION OF THE ASSESSEE CAN BE SUMMARIZED AS FOLLOWS: A) THAT NONE OF THE PERSONNEL OF THE ASSESSEE ARE REQUIRED TO VISIT INDIA FOR RENDERING ANY WORK. B) THAT PAYMENTS RECEIVED BY THE ASSESSEE UNDER RDCA ARE IN THE MANNER OF REIMBURSEMENT OF COST INCURRED BY IT ON RESEARCH AND DEVELOPMENT WORK FOR ITS GROUP COMPANIES. C) THAT NO CONSIDERATION IS BEING RECEIVED BY THE ASSESSEE FOR TRANSFERRING OR CONFERRING SUCH RIGHTS AND BENEFITS. D) THAT THE AGREEMENT IS IN NATURE OF COST SHARING AGREEMENT. ON EXAMINATION OF THE COPY OF THE RDCA AGREEMENT DATED 13-12-2004 ENTERED INTO BY THE ASSESSEE WITH PEIL, THE FOLLOWING POINTS EMERGES AND THE OBSERVATIONS MADE IN THIS REGARD ARE AS BELOW: THAT THE RECEIPTS UNDER RDCA IS IN THE NATURE OF 'REMUNERATION' AND NOT REIMBURSEMENT. IN THIS CONTEXT REFERENCE IS MADE BELOW TO THE CLAUSE OF THE AGREEMENT DATED 13-12-2004 WHICH READS AS FOLLOWS: WHEREAS, IT IS FINALLY RECOGNIZED THAT SUCH A SYSTEM OF SEPARATE PAYMENTS DOES NO JUSTICE TO THE CONTINUOUS EFFORTS OF PHILIPS TO UNDERTAKE SUCH RESEARCH AND DEVELOPMENT PROGRAMMES FOR THE BENEFIT OF THE COMPANY AND OTHER MEMBER COMPANIES OF THE PHILIPS CONCERN AND ACCORDINGLY, THE PARTIES HAVE AGREED ON A REMUNERATION SYSTEM WHICH IS BASED ON THE RELATION EXISTING FROM YEAR TO YEAR BETWEEN THE ACTIVITIES OF THE COMPANY AND THE ACTIVITIES OF PHILIPS AND ITS ASSOCIATED COMPANIES WORLDWIDE. THE LD DR POINTED OUT THAT THE 'REMUNERATION' UNDER ARTICLE 6 OF THE RDCA READS AS FOLLOWS: IN CONSIDERATION OF THE CONCERN RESEARCH AND DEVELOPMENT SERVICES MENTIONED AT ARTICLE 3, RENDERED BY PHILIPS UNDER THIS AGREEMENT THE COMPANY AGREES TO PAY PHILIPS A REMUNERATION BY AGGREGATING AMOUNTS CALCULATED AS FOLLOWS: A. THAT PART OF THE CONCERN RESEARCH AND DEVELOPMENT SERVICES COST, EXCLUDING ANY COSTS IN RELATION TO BASIS RESEARCH SERVICES, PER PRODUCT OR GROUP OF PRODUCTS KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 19 WHICH CORRESPONDS TO THE RATIO BETWEEN THE COMPANY'S PRODUCTION OF SAID PRODUCT OR GROUP OF PRODUCTS, DETERMINED IN ACCORDANCE WITH PHILIP'S ACCOUNTING PRINCIPLES; B. THAT PART IF THE CONCERN RESEARCH AND DEVELOPMENT SERVICES COST IN RELATION TO BASIC RESEARCH SERVICES WHICH CORRESPONDS TO THE RATIO BETWEEN THE RELEVANT LOCAL TURNOVER AND THE RELEVANT WORLD TURNOVER; AND C. A SURCHARGE IF 10% ON THE AMOUNTS AS CALCULATED ACCORDING TO A. AND B. ABOVE HAVING GONE THROUGH THE ARTICLE 6 OF RDCA, THE LD DR SUBMITTED BEFORE THE BENCH THAT THE RDCA AGREEMENT CONTAINS PROFIT MOTIVE, THAT IS, THE PROFIT @10% OF THE COST IS BEING EARNED BY THE KPENV. THEREFORE, RDCA IS NOT A COST SHARING AGREEMENT. THE LD DR THEN EXPLAINED THE ARTICLE 7 OF THE RDCA AGREEMENT IN RESPECT OF THE DETAILS OF 'PAYMENT' WHICH READS AS FOLLOWS: BEFORE THE BEGINNING OF EACH CALENDAR YEAR PHILIPS SHALL SUBMIT TO THE COMPANY A SURVEY OF THE ESTIMATED RATES FROM CONCERN RESEARCH AND DEVELOPMENT SERVICE COSTS TO ENABLE THE COMPANY TO CALCULATE APPROXIMATELY THE EXPECTED REMUNERATION FOR SUCH CALENDAR YEAR ACCORDING TO ARTICLE 6, SUBPARAS A. AND B, INCLUSIVE. THE COMPANY AGREES TO MAKE A PROVISIONAL PAYMENT FOR EACH MONTH TOWARDS THE REMUNERATION AS SPECIFIED IN ARTICLE 6, SUBPARAS A, B., AND C. INCLUSIVE, BASED ON THE ESTIMATED RELEVANT PRODUCTION FIGURES IF THE COMPANY IN SUCH MONTH. WITHIN SIX MONTHS AFTER THE CLOSE IF EACH CALENDAR YEAR PHILIPS SHALL SUBMIT TO THE COMPANY A STATEMENT SPECIFYING IN EUROS: A. THE CONCERN RESEARCH AND DEVELOPMENT SERVICE COSTS FOR EACH YEAR; AND B. THE REMUNERATION FOR SUCH YEAR ACCORDING TO ARTICLE 6, SUB-PARAS A, B., AND C INCLUSIVE, DUE BY THE COMPANY . WITHIN THIRTY DAYS AFTER RECEIPT IF SUCH STATEMENT, THE BALANCE SPECIFIED IN THAT STATEMENT SHALL BE SETTLED BETWEEN THE PARTIES. IF THE COMPANY IS UNABLE FOR REASONS BEYOND ITS REASONABLE CONTROL TO MAKE THE PAYMENTS ON THE BASIS OF THIS ARTICLE WITHIN THE AFOREMENTIONED THIRTY DAYS, PHILIPS SHALL BE ENTITLED TO CHARGE INTEREST AT AN APPROPRIATE RATE WITHOUT PREJUDICE TO ITS RIGHTS ARISING OUT OF NON-PERFORMANCE OF THIS AGREEMENT HAVING GONE THROUGH THE ABOVE MENTIONED ARTICLE 7, THE LD DR POINTED OUT THAT IT IS APPARENT FROM THE ABOVE PROVISIONS UNDER THE RDCA THAT THE RECEIPTS UNDER RDCA ARE BASICALLY 'CONSIDERATION' RECEIVED FROM PEIL FOR THE RIGHT TO USE OF THE RESEARCH AND DEVELOPMENT SERVICES UNDERTAKEN BY THE ASSESSEE. FURTHER, IN THE EVENT OF ANY FAILURE TO KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 20 MAKE PAYMENT BY PEIL TO THE ASSESSEE WITHIN THIRTY DAYS AFTER RECEIPT OF SUCH STATEMENT, AN INTEREST TO BE CHARGED AT AN APPROPRIATE RATE, THEREFORE, THE RDCA AGREEMENT IS IN THE NATURE OF ROYALTY AND ASSESSEE IS LIABLE TO PAY TAX ON THESE RECEIPTS. THE DR THEREFORE STATED BEFORE THE BENCH THAT THE RECEIPTS AS SPECIFIED IN THE RDCA AGREEMENT ARE IN THE NATURE OF REMUNERATION AND NOT MERE REIMBURSEMENT AS CLAIMED BY THE ASSESSEE. 16. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD, WE NOTE THAT ASSESSEE IS A TAX RESIDENT OF THE NETHERLANDS AND IS ENGAGED IN THE BUSINESS OF LIGHTING, CONSUMER ELECTRONICS, MEDICAL SYSTEMS, ETC. THE ASSESSEE DOES NOT HAVE A PERMANENT ESTABLISHMENT IN INDIA. DURING THE ASSESSMENT YEAR 2005-06, THE ASSESSEE HAD ENTERED INTO RESEARCH AND DEVELOPMENT COOPERATION AGREEMENT (RDCA) WITH PHILIPS INDIA (PEIL). THE ASSESSEE HAD OFFERED THE RECEIPTS UNDER THE RDCA FOR TAXATION, AS INCOME TAXABLE UNDER THE HEAD ROYALTY, TILL THE ASSESSMENT YEAR 2008-09. HOWEVER, THE ASSESSEE, FOR THE A.Y.2008-09, RELYING ON THE DECISION IN THE CASE OF ABB LIMITED 322 ITR 564, FILED A REVISED RETURN OF INCOME AND TOOK THE POSITION THAT THE SAID RECEIPTS ARE NOT TAXABLE IN INDIA IN VIEW OF ARTICLE 12 OF THE INDIA-NETHERLANDS DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA). THE ASSESSING OFFICER AS WELL AS DRP FOR A.Y. 2008-09 AND FOR SUBSEQUENT ASSESSMENT YEARS HAVE TAKEN THE VIEW THAT RECEIPTS FROM RDCA ARE TAXABLE IN INDIA, BOTH UNDER THE PROVISIONS OF THE ACT AS WELL AS THE INDIA-NETHERLANDS DTAA. THEREFORE, THE CORE CONTROVERSY IN THE ASSESSEE`S CASE UNDER CONSIDERATION IS WHETHER THE RECEIPTS FROM RDCA ARE TAXABLE IN INDIA, BOTH UNDER THE PROVISIONS OF THE ACT AS WELL AS THE INDIA-NETHERLANDS DTAA. BEFORE WE RENDER OUR VIEW AND OPINION ON THE SAID CORE CONTROVERSY, WE WOULD, FIRST OF ALL, ANALYZE THE TERMS AND CONDITIONS OF RDCA AGREEMENT. WE HAVE GONE THROUGH THE CONTENTS OF THE RESEARCH AND DEVELOPMENT COOPERATION AGREEMENT [RDCA], AND WE NOTE THAT AS PER ARTICLE 2 OF THE RDCA THE ASSESSEE UNDERTAKES TO RENDER CONCERN RESEARCH AND DEVELOPMENT SERVICES TO PEIL AND MORE IN PARTICULAR AGREES: (A). TO PROVIDE THE COMPANY [I.E PEIL] WITH AN ACCESS TO THE BENEFITS AND INFORMATION, EXISTING AND FUTURE, RESULTING FROM UNDERTAKING THE RESEARCH AND DEVELOPMENT PROGRAMMES TO THE EXTENT TO WHICH PHILLIPS [I.E THE ASSESSEE] HAS THE FREE RIGHT TO DO SO AND ADVISE AND ASSIST THE COMPANY IN APPLYING THE SAME. KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 21 (B).TO GRANT THE COMPANY REQUISITE AUTHORIZATION INCLUDING GRANTING A NON-EXCLUSIVE, NON-TRANSFERABLE AND INDIVISIBLE LICENSE, AS MAY BE NECESSARY FOR APPLYING THE BENEFITS OF THE RESEARCH AND DEVELOPMENT PROGRAMMES IN THE COUNTRY UNDER WHICH PHILIPS IS OR WILL BE ENTITLED TO GRANT SUCH LICENSE. WE NOTE THAT RESEARCH AND DEVELOPMENT SERVICES ARE BEING PROVIDED TO THE PHILIPS GROUP COMPANIES WITH AN ACCESS TO THE BENEFITS AND INFORMATION, EXISTING AND FUTURE RESULTING FROM UNDERTAKING, THE RESEARCH AND DEVELOPMENT. THE AGREEMENT ALSO GRANTS THE COMPANY REQUISITE AUTHORIZATION INCLUDING GRANTING OF NON-EXCLUSIVE AND NON- TRANSFERABLE LICENSE. THE SAID RESEARCH AND DEVELOPMENT ACTIVITIES ARE ONLY FOR THE BENEFIT OF THE PHILIPS GROUP COMPANIES. THE OUTSIDE BUSINESS ENTITIES ARE NOT ENTITLED TO TAKE THE BENEFIT OF THE SAID RDCA. 17. ARTICLE 3 OF THE RDCA, TO THE EXTENT RELEVANT FOR OUR ANALYSIS, READS AS FOLLOWS: THE CONCERN RESEARCH AND DEVELOPMENT SERVICES, WHICH PHILLIPS SHALL RENDER TO THE COMPANY, MAY INCLUDE: A. PROVIDING TO THE COMPANY SUCH RESULTS AND DOCUMENTATION FROM PHILIPS RESEARCH AND DEVELOPMENT LABORATORIES AS ARE RELEVANT TO THE BUSINESS OF THE COMPANY, INCLUDING RESULTS OF TEST INSPECTIONS AND OF INVESTIGATIONS OF PRODUCTS AND THEIR CONSTITUENT PARTS, B. PROVIDING TO THE COMPANY SUCH INFORMATION RESULTING FROM THE RESEARCH AND DEVELOPMENT PROGRAMMES UNDERTAKEN BY PHILIPS AS THE COMPANY MAY REASONABLY NEED RELATING TO PRODUCTS, MANUFACTURING PROCESSES, WORKING METHODS AND THE RENDERING OF AFTER SALES SERVICE, C. PROVIDING THE COMPANY WITH INFORMATION RESULTING FROM THE RESEARCH AND DEVELOPMENT PROGRAMMES UNDERTAKEN BY PHILIPS CONCERNING THE ESTABLISHMENT AND MAINTENANCE AND INSTALLATION OF FACTORIES, LABORATORIES AND OFFICE BUILDINGS OF THE COMPANY AND CORNING THE ENVIRONMENTALLY HYGIENIC AND ECONOMICAL USE OF NATURAL RESOURCES SUCH AS WATER, LIVING SPACE, AIR, RAW MATERIALS AND ENERGY, D. PROVIDING THE COMPANY WITH INFORMATION GENERATED FROM RESEARCH AND DEVELOPMENT PROGRAMMES RELATING TO THE MECHANICAL AND ELECTRO TECHNICAL REQUIREMENTS TO BE MET BY THE COMPANY'S PRODUCTS AS WELL AS INSTRUCTIONS CONCERNING THEIR OPTIMAL PACKAGING, E. PROVIDING, ASSISTANCE TO THE COMPANY ON THE QUALITY OF THE PRODUCTS MANUFACTURED BY THE COMPANY, F. CHECKING FROM TIME TO TIME, AT THE COMPANY'S SPECIFIC REQUEST, AT THE RESEARCH AND DEVELOPMENT LABORATORIES OF PHILIPS, THE RESULTS OF THE COMPANY'S PRODUCTIONS, G. PROVIDING TO THE COMPANY, RESULTS FROM THE RESEARCH AND DEVELOPMENT LABORATORIES OF PHILIPS, THE RESULTS OF THE COMPANY'S PRODUCTIONS, KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 22 H. PROVIDING TO THE COMPANY, RESULTS FROM THE RESEARCH AND DEVELOPMENT LABORATORIES OF PHILIPS ON THE PACKING, HANDLING, SHIPPING AND STORAGE OF ITS PRODUCTS, I. PROVIDING TO THE COMPANY THE PHILIP'S COST ACCOUNTING, OPERATIONAL STATISTICS AND MANAGEMENT SYSTEMS, IN MATTERS OF PRODUCTION PLANNING AND RATIONALIZATION IN ORDER TO INCREASE THE EFFICIENCY IN ITS FACTORIES, J. PROVIDING TO THE COMPANY, IN SO FAR AS PHILIPS MANUFACTURING CAPACITY AND ITS OWN REQUIREMENTS PERMIT, SUCH SPECIAL MACHINERY, TOOLS, INSTRUMENTS, RAW MATERIALS, COMPONENTS AND SEMI-FINISHED PRODUCTS AS THE COMPANY MAY REASONABLY NEED FROM TIME TO TIME FOR USE IN THE DEVELOPMENT AND MANUFACTURE OF ITS PRODUCTS AND FOR THE RENDERING OF SERVICES, INCLUDING AFTER-SALES SERVICE; SUCH SUPPLIES SHALL BE PROVIDED AT PRICES AND CONDITIONS TO BE AGREED UPON BETWEEN THE PARTIES FROM CASE TO CASE; THE COMPANY SHALL ALSO BE ADVISED ABOUT THE MAINTENANCE OF SPECIAL MACHINERY, TOOLS AND INSTRUMENTS SUPPLIES BY PHILIPS, K. ADMITTING AT THE COMPANYS SPECIFIC REQUEST AND AT MUTUALLY AGREED TIMES, A REASONABLE NUMBER OF EMPLOYEES OF THE COMPANY TO FACTORIES AND OTHER WORKS PREMISES OF PHILIPS TO THE EXTENT TO WHICH PHILIPS HAS THE RIGHT TO DO SO, SO THAT SUCH EMPLOYEES OF THE COMPANY CAN FAMILIARIZE THEMSELVES WITH WORKING METHODS, MANUFACTURING PROCESSES AND SERVICES METHODS FOR PRODUCTS NOT YET KNOWN OR USED BY THE COMPANY. WE NOTE THAT ARTICLE 3 OF THE RDCA REFERS TO THE CONCERN RESEARCH AND DEVELOPMENT SERVICES WHICH SHALL BE PROVIDED BY THE ASSESSEE. DURING THE PERIOD OF THIS AGREEMENT PHILIPS SHALL FURNISH CONCERN RESEARCH AND DEVELOPMENT SERVICES TO THE COMPANY AS IS DETERMINED IN AGREEMENT BETWEEN THE PARTIES AS BEING REQUIRED FOR THE ONGOING BUSINESS OF THE COMPANY IN TERMS OF PRODUCTS AND SERVICES WITH A VIEW TO MAINTAINING AT ALL TIMES A HIGH LEVEL OF EFFICIENCY AND QUALITY IN THE DEVELOPMENT, PRODUCTION AND SERVICING OF PRODUCTS TO BE SOLD AND SERVICES TO BE RENDERED BY THE COMPANY. THE SERVICES DESCRIBED IN THIS ARTICLE 3 SHALL BE GIVEN BY PHILIPS IN AS FAR AS THEY ARE REASONABLY REQUIRED FOR THE MANUFACTURE AND/OR SALE OF SUCH TYPES OF PRODUCTS AS WILL BE MANUFACTURED AND/OR SOLD BY THE COMPANY FROM TIME TO TIME. FROM ARTICLE 3 OF THE AGREEMENT IT IS EVIDENTLY CLEAR THAT RESEARCH AND DEVELOPMENT SERVICES WHICH THE PHILIPS GROUP COMPANIES ARE ENJOYING INCLUDES RESULTS OF TEST INSPECTIONS AND INVESTIGATION OF PRODUCTS AND THEIR CONSTITUENT PARTS. IT PROVIDES GUIDANCE FOR MANUFACTURING PROCESS, WORKING METHOD AND RENDERING OF PACKING, HANDLING, SHIPPING SERVICES ETC. APART FROM THIS IT PROVIDES INFORMATION IN RESPECT OF ENVIRONMENT HYGIENE AND ECONOMICAL USE OF NATURAL RESOURCES SUCH AS WATER, AIR, RAW MATERIALS AND ENERGY. THEREFORE, IT IS EVIDENTLY CLEAR THAT THESE SERVICES ARE ESSENTIAL FOR THE GROUP COMPANIES AND SINCE THE PARENT COMPANY IS PROVIDING THE SERVICES KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 23 TO VARIOUS GROUP COMPANIES, THEREFORE, WHATSOEVER COST INCURRED ON ACCOUNT OF RESEARCH AND DEVELOPMENT IS BEING SHARED AMONG THE GROUP COMPANIES. 18. ARTICLE 4 OF THE RDCA, TO THE EXTENT RELEVANT FOR OUR ANALYSIS, PROVIDES AS FOLLOWS: ARTICLE 4 THE COMPANY SHALL BE AUTHORIZED TO USE THE BENEFITS ARISING FROM THE RESEARCH AND DEVELOPMENT PROGRAMMES UNDERTAKEN BY PHILIPS, IN THE MANUFACTURING, SALE AND USE OF PRODUCTS BY THE COMPANY IN THE COUNTRY. AS UNDERTAKEN UNDER ARTICLE 2, PHILIPS GRANTS AND CONTINUE TO GRANT IN FUTURE, TO THE COMPANY FOR THE PERIOD AND PURPOSES OF THIS AGREEMENT, A NON-EXCLUSIVE, NON-TRANSFERRABLE AND INDIVISIBLE LICENCE TO MANUFACTURE, USE AND/OR SELL PRODUCTS UNDER ALL PRESENT AND FUTURE PATENT RIGHTS IN THE COUNTRY UNDER WHICH PHILIPS IS OR WILL BE FREELY ENTITLED TO GRANT SUCH LICENCE, AS MAY BE NECESSARY FOR APPLICATION OF RESULTS OF RESEARCH AND DEVELOPMENT PROGRAMMES. THEREFORE, ARTICLE 4 OF THE RDCA PROVIDES LICENCE TO USE THE BENEFITS RESULTING FROM RESEARCH AND DEVELOPMENT PROGRAMMES. WE NOTE THAT THE COMPANY EXPRESSLY UNDERTAKES BOTH DURING THE PERIOD OF RDCA AGREEMENT AND THEREAFTER, NOT TO SELL TO THIRD PARTIES OR OTHERWISE PROVIDE INFORMATION SUPPLIED TO IT UNDER THIS AGREEMENT BY OR THROUGH PHILIPS WITHOUT PHILIPS PRIOR WRITTEN CONSENT. THIS INSTRUCTION IS MENTIONED IN ARTICLE 5 OF THE RDCA WHICH ARE GIVEN BELOW, TO THE EXTENT RELEVANT FOR OUR ANALYSIS: ARTICLE 5 ALL ASSISTANCE, INFORMATION AND ADVICE GIVEN UNDER THE TERMS OF THIS AGREEMENT IS FOR EXCLUSIVE USE WITHIN THE PHILIPS CONCERN AND MUST NOT BE GIVEN, SOLD OR MADE AVAILABLE TO ANY THIRD PARTY UNLESS THE PREVIOUS CONSENT OF THE PARTY SUPPLYING SAME HAS BEEN OBTAINED. WITH DUE REGARD TO WHAT HAS SO FAR BEEN PROVIDED HEREIN, IT IS UNDERSTOOD THAT ALL WRITTEN AND VERBAL INFORMATION SUPPLIED UNDER THIS AGREEMENT, SHALL BE KEPT STRICTLY CONFIDENTIAL BY THE RECIPIENT PARTY DURING THE PERIOD OF THIS AGREEMENT AND FOR A PERIOD OF FIVE YEARS THEREAFTER. THE PARTIES SHALL USE THEIR BEST ENDEAVOURS TO ENSURE THE DUE OBSERVANCE OF THE ABOVE PROVISIONS BY THEIR RESPECTIVE PRESENT AND FUTURE EMPLOYEES. KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 24 THE COMPANY EXPRESSLY UNDERTAKES BOTH DURING THE PERIOD OF RDCA AGREEMENT AND THEREAFTER, NOT TO SELL TO THIRD PARTIES OR OTHERWISE PROVIDE INFORMATION SUPPLIED TO IT UNDER THIS AGREEMENT BY OR THROUGH PHILIPS WITHOUT PHILIPS PRIOR WRITTEN CONSENT. WE NOTE THAT SO FAR, THE COST SHARING IS CONCERNED, WHICH IS MENTIONED IN ARTICLE 6 OF THE RDCA, WHICH PROVIDES THAT THE CONCERN RESEARCH AND DEVELOPMENT SERVICES MENTIONED AT ARTICLE 3, RENDERED BY PHILIPS UNDER THIS AGREEMENT THE COMPANY AGREES TO PAY TO PHILIPS A REMUNERATION BY AGGREGATING AMOUNTS CALCULATED AS FOLLOWS: (1) THAT PART OF THE CONCERN RESEARCH AND DEVELOPMENT SERVICES COSTS, EXCLUDING ANY COSTS IN RELATION TO BASIC RESEARCH SERVICES, PER PRODUCT OR GROUP OF PRODUCTS WHICH CORRESPONDS TO THE RATIO BETWEEN THE COMPANYS PRODUCTION OF SAID PRODUCT OR GROUP OF PRODUCTS AND THE PRODUCTION BY THE CONCERN COMPANIES OF SAID PRODUCT OR GROUP OF PRODUCTS, DETERMINED IN ACCORDANCE WITH PHILIPS ACCOUNTING PRINCIPLES. (2) THAT PART OF THE CONCERN RESEARCH AND DEVELOPMENT SERVICES COSTS IN RELATION TO BASIC RESEARCH SERVICES WHICH CORRESPONDS TO THE RATIO BETWEEN THE RELEVANT LOCAL TURNOVER AND THE RELEVANT WORLD TURNOVER. IT IS ABUNDANTLY CLEAR THAT THE PHILIPS GROUP COMPANIES AGREED TO PAY PHILIPS (KPENV) A REMUNERATION TO REIMBURSE COST OF THE RESEARCH AND DEVELOPMENT IN THE RATIO MENTIONED IN ARTICLE 6. THIS REMUNERATION IS KIND OF A REIMBURSEMENT ONLY. WE NOTE THAT AFTER GOING THROUGH THE VARIOUS ARTICLES OF THE RDCA AGREEMENT IT SEEMS TO US THAT IT IS NOTHING BUT A COST SHARING AGREEMENT. 19. AFTER GOING THROUGH THE TERMS AND CONDITIONS OF THE RDCA AGREEMENT, WE NOTE THAT THE ROYALTY PAYMENTS RECEIVED BY THE ASSESSEE FROM VARIOUS GROUP COMPANIES ARE IN THE NATURE OF REIMBURSEMENTS, AS IT IS EVIDENT FROM THE VARIOUS CLAUSE OF THE RDCA AGREEMENT. THESE PAYMENTS RECEIVED BY THE ASSESSEE COMPANY, BY NO STRETCH OF LOGIC COULD BE VIEWED AS PAYMENTS FOR RIGHT TO USE RESEARCH FINDINGS. W HERE THERE IS NO TRANSFER OF THE RIGHT TO USE, THEREFORE, THE PAYMENT MADE CANNOT BE TREATED AS ROYALTY. IN THE ASSESSEE`S CASE UNDER CONSIDERATION, THE ASSESSEE DOES NOT TRANSFER RIGHT TO USE. BY WAY OF RESEARCH AND DEVELOPMENT, THE GROUP COMPANIES ARE ENTITLED TO ENJOY CERTAIN SERVICES, SUCH AS PRODUCT DEVELOPMENTS, MAINTENANCE OF PRODUCT QUALITY, UNIFORM HANDLING, PACKING, STORAGE AND MARKETING METHODS, THEREFORE THESE SERVICES BY ITSELF DID KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 25 NOT RESULT IN ANY USE OF OR RIGHT TO USE AND THERE IS NO TRANSFER OF COPY RIGHT THEREFORE, THERE CANNOT BE ANY OCCASION TO HOLD IT AS ROYALTY. IN ANY EVENT, SO FAR AS THE TRANSACTION BETWEEN THE ASSESSEE AND PEIL INDIA IS CONCERNED, IT IS SIMPLY IN THE NATURE OF REIMBURSEMENT OF EXPENSES INCURRED BY KPENV, ON BEHALF OF THE GROUP COMPANIES AND IT IS NOT AN INCOME FOR THE KPENV. DURING THE COURSE OF HEARING BEFORE US, WHEN WE PUT THIS POSITION TO THE LD. DR, HE DID NOT HAVE MUCH TO SAY BEYOND PLACING RELIANCE ON THE STAND OF THE ASSESSING OFFICER. HENCE, THE PAYMENT RECEIVED BY THE ASSESSEE COMPANY FROM VARIOUS GROUP COMPANIES ARE IN THE NATURE OF REIMBURSEMENT AS EVIDENT FROM THE DETAILS TAKEN FROM VARIOUS TERMS AND CONDITIONS OF RDCA AGREEMENT. THE RDCA AGREEMENT HAS NO INCOME ELEMENT, HENCE A COST SHARING AGREEMENT CANNOT BE CONVERTED INTO THE TERMINOLOGY OF ROYALTY. 20. WE NOTE THAT IN THE ALTERNATIVE, ASSUMING, THAT THE AMOUNT RECEIVED UNDER RDCA IS NOT CONSIDERED TO BE A REIMBURSEMENT, WE NOTE THAT IT IS NOT ROYALTY UNDER SECTION 9(1)(VI) OF THE ACT, OR ROYALTY AS DEFINED UNDER ARTICLE 12 OF THE INDIA-NETHERLANDS DTAA. THE ARTICLE 12 OF THE INDIA-NETHERLANDS DTAA DEALS WITH TAXABILITY OF ROYALTIES AND FEES FOR TECHNICAL SERVICES. ARTICLE 12(4) DEFINES ROYALTY AS UNDER: THE TERM 'ROYALTIES' AS USED IN THIS ARTICLE MEANS PAYMENTS OF ANY KIND RECEIVED AS A CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE, ANY COPYRIGHT OF LITERARY, ARTISTIC OR SCIENTIFIC WORK INCLUDING CINEMATOGRAPH FILMS, ANY PATENT, TRADE MARK, DESIGN OR MODEL, PLAN, SECRET FORMULA OR PROCESS, OR FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE. THE ABOVE DEFINITION COVERS THREE CATEGORIES OF PAYMENTS RECEIVED: TO FALL WITHIN THE PURVIEW OF THE TERM 'ROYALTY'. THEY ARE CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE: (I) ANY COPYRIGHT OF LITERARY, ARTISTIC OR SCIENTIFIC WORK INCLUDING CINEMATOGRAPH FILMS; (II) ANY PATENT, TRADE MARK, DESIGN OR MODEL, PLAN, SECRET FORMULA OR PROCESS; OR (III) FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE. IN THE CASE OF THE ASSESSEE THE RESEARCH AND DEVELOPMENT SERVICES FOR WHICH THE ASSESSEE RECEIVES THE SHARED COSTS CLEARLY HAS TO BE CONSIDERED IN CATEGORY (III) AND CLAUSES(I) AND (II) PLAINLY DO NOT APPLY AND HAS NEVER EVEN BEEN DISPUTED/INVOKED BY THE TAX AUTHORITIES AS WELL. THIS CATEGORY OF THE ROYALTY DEFINITION DEALS WITH 'INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE'. THE MEANING AND AMBIT OF THE PHRASE 'INFORMATION CONCERNING TECHNICAL, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 26 KNOWLEDGE, EXPERIENCE OR SKILL' APPEARING IN ARTICLE 12 OF THE INDIA-USA DTAA DEFINING ROYALTY WAS DEALT WITH BY THE HON`BLE BOMBAY HIGH COURT IN DIAMOND SERVICES INTERNATIONAL (P.) LTD VS. UNION OF INDIA [2008] 169 TAXMAN 201 (BOM.). IN THAT CASE THE QUESTION THAT AROSE WAS THE ISSUE FOR CONSIDERATION WAS WHETHER THE ISSUANCE OF GRADING REPORTS BY GIA CAN BE TERMED AS IMPARTATION OR GRANTING OF RIGHT TO USE INFORMATION OF A TECHNICAL COMMERCIAL OR SCIENTIFIC EXPERIENCE TO THE CLIENTS/CUSTOMERS WHO SEND THEIR DIAMONDS FOR GRADING AND CERTIFICATION TO THE GIA LABORATORIES OUTSIDE INDIA. THE HON`BLE BOMBAY HIGH COURT HELD AS FOLLOWS: 8. THE GRADING REPORT BY GIA IS A STATEMENT OF FACT AS TO THE CHARACTERISTICS OF THE DIAMOND. DOES THIS REPORT AMOUNT TO TRANSFER OF ANY INDUSTRIAL OR COMMERCIAL EXPERIENCE OF GIA TO THE PETITIONER OR TO AN AGENT OF THE PETITIONER. THE REPORT GIVES THE ATTRIBUTES OF THE DIAMOND AND INCLUDES AN ANALYSIS OF THE DIAMONDS DIMENSIONS, CLARITY, COLOUR, POLISH, SYMMETRY AND OTHER CHARACTERISTICS. THERE IS NOTHING ON RECORD BEFORE US TO SHOW THAT GIA THROUGH ITS GRADE REPORT ASSIGNS OR TRANSFERS ANY INDUSTRIAL OR COMMERCIAL EXPERIENCE TO ITS CUSTOMERS. THEREFORE, THE QUESTION WOULD BE WHETHER THE GRADING REPORT WOULD AMOUNT TO ANY TRANSFER OF ANY EXPERIENCE BY GIA TO THE CLIENTS. THE TERM 'EXPERIENCE' IS NOT DEFINED EITHER UNDER THE ACT OR UNDER THE DTAA AND CONSEQUENTLY WE SHALL HAVE TO CONSIDER THE NORMAL DICTIONARY MEANING. THE EXPRESSION 'EXPERIENCE' IN THE OXFORD ENGLISH REFERENCE DICTIONARY HAS BEEN EXPLAINED AS 'KNOWELDGE OR SKILL RESULTING FROM ACTUAL OBSERVATION OF OR PRACTICAL ACQUAINTANCE WITH FACTS OR EVENTS.' IN THE CHAMBERS DICTIONARY THE EXPRESSION 'EXPERIENCE' HAS BEEN EXPLAINED AS 'KNOWLEDGE OR PRACTICAL WISDOM GAINED FROM WHAT ONE HAS OBSERVED, ENCOUNTERED OR UNDERGONE'. IN WEBSTERS ENCYCLOPEDIC UNABRIDGED DICTIONARY 'EXPERIENCE' IS EXPLAINED AS 'THE PROCESS OR FACT OF PERSONALLY OBSERVING, ENCOUNTERING OR UNDERGOING SOMETHING.' AS PER THE DICTIONARY MEANING OF THE TERM 'EXPERIENCE' IT IS CLEAR THAT 'EXPERIENCE' IS A CUMULATION OF KNOWLEDGE AND OBSERVATION GATHERED OVER A PERIOD OF TIME. TERM 'EXPERIENCE' HAS ALSO BEEN JUDICIALLY INTERPRETED BY THE SUPREME COURT IN SHESHARAO BAGDE VS. BHAIYYA (1991) SUPP. 1 SCC 367 AS UNDER : 'NORMALLY WHEN WE TALK OF AN EXPERIENCE UNLESS THE CONTEXT OTHERWISE DEMANDS, IT SHOULD BE TAKEN AS EXPERIENCE AFTER ACQUIRING MINIMUM QUALIFICATIONS REQUIRED AND WILL, THEREFORE, NECESSARILY HAVE TO BE POSTERIOR TO THE ACQUISITION OF THE QUALIFICATION.' THE GRADING CERTIFICATE WHICH IS ISSUED DOES NOT INVOLVE ANY TRANSFER OF COMMERCIAL INTEREST TO THE PARTY PAYING OR GETTING THE RIGHT TO USE THE EXPERIENCE OF GIA. THERE IS ALSO NO TRANSFER OF ANY SKILL OR KNOWLEDGE OF GIA TO THE CUSTOMERS IN THE ISSUANCE OF GRADING REPORTS. THE PAYMENTS RECEIVED IS NOT THE ONE FOR THE USE OR THE RIGHT TO USE EXPERIENCE, BUT IS INSTEAD ONE FOR THE APPLICATION OF EXPERIENCE TO A CERTAIN FACTUAL SITUATION I.E. GIA SHALL APPLY ITS EXPERTISE TO THE DIAMONDS SUBMITTED BY THE CLIENTS AND DETERMINE ITS TRUE FEATURE. FOR THAT PURPOSE WE MAY CONSIDER THE EXPRESSION 'USE' AS DEFINED IN VARIOUS DICTIONARIES. IN THE OXFORD ENGLISH REFERENCE DICTIONARY IT IS DEFINED AS 'EXPLOIT FOR ONES OWN ENDS, EMPLOY, APPLY. 'IN CHAMBERS DICTIONARY IT IS DEFINED TO MEAN 'USE TO EMPLOY FOR SOME PURPOSE. APPLY TO ONES OWN PURPOSE. THE ACT SO EMPLOYING, USING OR PUTTING INTO SERVICE'. THE NATURE OF THE TRANSACTION BETWEEN KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 27 GIA AND ITS CLIENT DOES NOT INVEST THE PARTY MAKING PAYMENT WITH ANY RIGHT AS REGARDS THE USE OF THE CUMULATED EXPERIENCE OF GIA. THE PAYMENT IN QUESTION DOES NOT INVOLVE A PAYMENT FOR THE USE OR THE RIGHT TO USE THE INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE OF GIA. THE ACTIVITY OF GRADING OR CERTIFICATION IS MERELY THE APPLICATION OF THIS KNOWLEDGE/EXPERIENCE IN A PROFESSIONAL STREAM AS APPLICABLE TO A PARTICULAR DIAMOND OR SET OF DIAMONDS WHICH ARE OFFERED FOR CERTIFICATION OR GRADING. THE DEFINITION OF ROYALTY UNDER THE DTAA UNDER ART. 12(3) AS DEFINED THEREIN, THAT USES THE EXPRESSION 'OR FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE'. THERE IS NO PARTING OF INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE BY GIA WHEN IT ISSUES THE GRADING CERTIFICATE. UNDER SUB-CL. (4) THE PAYMENTS RECEIVED MUST BE IN CONSIDERATION FOR SERVICES OF MANAGERIAL, TECHNICAL OR CONSULTANCY NATURE. THAT COULD INCLUDE TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION. THIS IS NOT THE CASE HERE. NEITHER IS IT MAKING AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, ETC., TO ENABLE THE PERSON ACQUIRING THE SERVICE TO APPLY THE TECHNOLOGY CONTAINED THEREIN. THE HON`BLE BOMBAY HIGH COURT THEN WENT ON TO CONSIDER WHETHER A SERVICE TENDERED FOR A PRICE COULD BE CONSIDERED AS IMPARTING OF INDUSTRIAL EXPERIENCE OR SKILL. IT NEGATED THIS CONTENTION IN THE FOLLOWING WORDS: 9. THE QUESTION THAT REMAINS TO BE ANSWERED IS WHETHER THERE IS IMPARTING OF SPECIFIC EXPERIENCE BY GIA TO THE PERSON. IMPART IN WEBSTER'S ENCYCLOPAEDIC UNABRIDGED DICTIONARY HAS BEEN DEFINED 'TO GIVE, TO BESTOW; COMMUNICATE; TO GRANT A PART OR SHARE OF. IN OXFORD ENGLISH REFERENCE DICTIONARY IT IS PRESCRIBED AS 'GIVE A SHARE OF (A THING)'. A PLAIN READING, THEREFORE, OF THE MEANING OF THE WORD 'IMPART' IMPLIES THAT IT MEANS TO GIVE, TO BESTOW, COMMUNICATE, TO GRANT A PART OR SHARE OF OR GIVE A SHARE OF A THING. CONSIDERING THAT THE TERM ROYALTY ENVISAGES GRANT OR SHARE OF INDUSTRIAL OR COMMERCIAL EXPERIENCE. IN OTHER WORDS THERE SHOULD BE A TRANSFER OF 'INDUSTRIAL OR COMMERCIAL EXPERIENCE' FROM ASSIGNOR TO THE ASSIGNEE FOR A CONSIDERATION. THEREFORE, TO FALL WITHIN THE MEANING OF THE TERM ROYALTY UNDER ARTICLE 12 OF THE DTAA IT MUST ENVISAGE THE PERSON WHO IS THE OWNER OF ANY INTELLECTUAL PROPERTY RIGHT, DESIGNS, OR MODEL, PLAN, SECRET FORMULA OR PROCESS, ETC. TO RETAIN THE PROPERTY IN THEM AND PERMIT THE USE OR ALLOW THE RIGHT TO USE SUCH PATENTS, DESIGNS OR MODELS, PLANS, SECRET FORMULA, ETC. TO ANOTHER PERSON. WHERE THERE IS NO TRANSFER OF THE RIGHT TO USE, PAYMENT MADE CANNOT BE TREATED AS ROYALTY IT THEN HON`BLE BOMBAY HIGH COURT CONSIDERED WHETHER USING EXPERIENCE KNOWLEDGE OR SKILL IN THE RENDERING OF A SERVICE IS TANTAMOUNT TO IMPARTING SUCH KNOWLEDGE EXPERIENCE OR SKILL. THIS TOO WAS REJECTED IN THE FOLLOWING WORDS: .AS DISCUSSED EARLIER IT IS TRUE THAT GIA MAY HAVE THE EXPERIENCE OF GRADING. HOWEVER, DOES IT IMPART ITS EXPERIENCE TO ITS CLIENT? IN OUR OPINION THERE IS NO IMPARTING OF ITS EXPERIENCE IN FAVOUR OF THE CLIENT. WHAT THE CLIENT RECEIVES IS THE REPORT WHERE THE GIA USES ITS COMMERCIAL OR TECHNICAL KNOWLEDGE TO GIVE A REPORT TO THE CLIENT. ILLUSTRATIVE EXAMPLE WOULD BE A LAWYER GIVING ADVISE TO HIS CLIENT, A DOCTOR GIVING HIS MEDICAL OPINION, A LABORATORY SUBMITTING BLOOD ANALYSIS REPORT AND THE LIKE. THESE CANNOT BE SAID TO BE IMPARTING OF INFORMATION BY THE PERSON WHO POSSESSES SUCH INFORMATION. WHAT SUCH PERSON DOES IS USES HIS EXPERIENCE AND TECHNICAL KNOW-HOW FOR A CONSIDERATION WITHOUT PARTING WITH THAT INFORMATION. KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 28 THE HON`BLE BOMBAY HIGH COURT THEREFORE CONCLUDED THAT THE USING KNOWLEDGE, EXPERIENCE AND SKILL IS VERY DIFFERENT FROM IMPARTING KNOWLEDGE AND SKILL. IN THE ASSESSEES CASE UNDER CONSIDERATION, THE ASSESSEE USES KNOWLEDGE, EXPERIENCE AND SKILL BUT DOES NOT IMPART SUCH KNOWLEDGE, EXPERIENCE AND SKILL TO PHILIPS INDIA. THEREFORE, IT CANNOT BE CONSTRUED AS IMPARTING ANY INFORMATION CONCERNING TECHNICAL, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNOWLEDGE, EXPERIENCE OR SKILL OF THE SUPPLIER TO SATISFY THE DEFINITION OF ROYALTY LAID DOWN UNDER CLAUSE (IV) OF EXPLANATION 2 TO S. 9(L)(VI) OF THE ACT. THE SAID PRINCIPLE EQUALLY APPLIES TO ARTICLE 12(4) OF THE INDIA-NETHERLANDS DTAA SINCE IT COVERS PAYMENT FOR THE USE OF, OR THE RIGHT OF USE, INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE. WE NOTE THAT THE SERVICES UNDER RDCA PROVIDES VARIOUS TYPES OF INFORMATION AND RESULTS ARISING AND EMANATING FROM VARIOUS RESEARCH, PROGRAMS AND LABORATORIES, THE SAME DOES NOT RESULT IN THE ASSESSEE IMPARTING ANY OF ITS INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE. HENCE, THE PAYMENTS UNDER RDCA CANNOT BE CLASSIFIED UNDER THIS CATEGORY AS WELL. THEREFORE, WE ARE OF THE VIEW THAT THE PAYMENTS RECEIVED BY THE ASSESSEE FROM PHILIPS INDIA UNDER RDCA DO NOT QUALIFY, AS ROYALTY AS DEFINED UNDER ARTICLE L2(4) OF THE INDIA-NETHERLANDS DTAA AND ACCORDINGLY, THE SAME IS NOT TAXABLE UNDER ARTICLE 12 (4). THE CONTENTION OF THE DR REGARDING THE EXCLUSIVITY AND CONFIDENTIALITY OF THE RESEARCH SHARED IS FULLY EXPLAINED AS ARTICLE 4 CLEARLY SHOWS THAT THE USE OF THE BENEFITS ARISING FROM THE RESEARCH AND DEVELOPMENT PROGRAM UNDERTAKEN BY THE ASSESSEE ARE GRANTED TO ALL PHILIPS GROUP ENTITIES ON A NON- EXCLUSIVE, NON-TRANSFERRABLE AND INDIVISIBLE BASIS TO MANUFACTURE AND SELL PRODUCTS AT NO ADDITIONAL COST AS ALL SUCH PHILIPS GROUP ENTITIES AVAILING THE BENEFITS OF THE RESEARCH WHICH ARE ALSO SHARING THE COST OF DEVELOPMENT OF SUCH R&D PROGRAMS. ARTICLE 5 OF THE RDCA CLEARLY SHOWS THAT ALL THE ASSISTANCE, INFORMATION AND ADVICE GIVEN UNDER THE RDCA ARE FOR THE EXCLUSIVE USE ONLY BY ALL PARTICIPATING PHILIPS GROUP ENTITIES AND THE ONLY REASON FOR RESTRICTION ON SHARING WITH THE THIRD PARTIES IS TO PROTECT THE INTERESTS OF THE PHILIPS GROUP AS A WHOLE. THEREFORE, WE ARE OF THE VIEW THAT THE RECEIPTS UNDER RDCA ARE NOT TAXABLE AS THE SAME IS NOT ROYALTY UNDER ARTICLE 12(4) OF THE INDIA-NETHERLANDS DTAA, AND IT IS A COST SHARING AGREEMENT, IN NATURE OF REIMBURSEMENT, HENCE WE DELETE THE ADDITION OF RS.242,653,150/-. KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 29 21. NOW WE SHALL TAKE GROUND NO.2, WHICH RELATES TO TAXABILITY OF RECEIPTS OF RS.112,90,58,312/- UNDER MANAGEMENT SUPPORT SERVICES AGREEMENT (MSSA) RECEIVED BY KONINKLIJKE PHILIPS ELECTRONICS N.V (ASSESSEE), AS PER MSSA AGREEMENT BETWEEN ASSESSEE AND PHILIPS ELECTRONICS INDIA LIMITED (PEIL). 22. THE BRIEF FACTS QUA THE ISSUE ARE THAT PHILIPS ELECTRONICS INDIA LIMITED (PEIL) HAS ENTERED INTO A MANAGEMENT SUPPORT SERVICES AGREEMENT ('MSSA') WITH KONINKLIJKE PHILIPS ELECTRONICS N.V (KPNEV) ON 22 ND OCTOBER 2004. AS PER ARTICLE 2 OF THE AGREEMENT, THE KPENV SHALL PROVIDE TO PEIL SUCH RESOURCES IN COMMERCIAL, ACCOUNTING, AUDITING, FINANCIAL, FISCAL, SOCIAL AND LEGAL MATTERS AND IN OTHER FIELDS AS KPENV POSSESSES AND WOULD FURNISH THE SAME TO PEIL TO FACILITATE ITS BUSINESS OPERATION. THE ASSISTANCE MAY RELATE TO: A) THE DISTRIBUTION AND TRADING OF PRODUCTS, PARTICULARLY WITH RESPECT TO ADVERTISING, SALES PROMOTION, PUBLIC RELATIONS, MARKET RESEARCH, LABELLING, PACKAGING, SHIPPING AND FORWARDING, LONG-TERM EXPORT BUSINESS AND INTERNATIONAL PUBLIC TENDERING AND PURCHASE FROM THIRD PARTIES; B) ADVICE AND SUPPORT WITH RESPECT TO THE SUPPLY OF REQUIREMENTS OF THE COMPANY FROM OTHER SOURCES, IF KPENV IS PREVENTED FROM FULFILLING SUCH REQUIREMENTS OF THE COMPANY; C) FINANCIAL, ACCOUNTING AND AUDITING MATTERS RELATING TO SUCH SUBJECTS AS; (I) ACCOUNTING AND AUDITING PRINCIPLES AND METHODS; (II) BUDGETING METHODS; (III) CAPITAL STRUCTURE, LOANS, EXCHANGE RISKS, FINANCIAL RESEARCH, WARRANTIES AND GUARANTEES, CREDIT MANAGEMENT, THE ESTABLISHMENT AND MANAGEMENT OF FINANCE AND LEASE COMPANIES AND ALL FURTHER BANKING ACTIVITIES, INCLUDING LONG-TERM FINANCE PLANS ; (IV) DEVELOPMENTS OF DATA PROCESSING; D) FISCAL AND LEGAL MATTERS, INCLUDING PATENTS, TRADEMARKS AND CUSTOMS DUTIES, PARTICULARLY IN INTERNATIONAL TRANSACTIONS; E) PERSONNEL MATTERS KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 30 F) INSURANCES; AND G) ADMITTANCE AT THE COMPANY'S SPECIFIC REQUEST AND AT MUTUALLY AGREED TIMES OF A REASONABLE NUMBER OF EMPLOYEES OF THE COMPANY TO ITS PREMISES TO THE EXTENT TO WHICH KPENV HAS THE FEE RIGHT TO DO SO, SO THAT THEY CAN ACQUAINT THEMSELVES WITH COMMERCIAL AND OTHER KNOWLEDGE AS SPECIFIED ABOVE, FAMILIARIZE THEMSELVES WITH THE ORGANISATION OF THE PHILIPS GROUP AND WITH WORKING METHODS USED BY IT. DURING THE ASSESSMENT PROCEEDINGS THE ASSESSEE WAS ASKED AS TO WHY RECEIPTS UNDER MANAGEMENT SUPPORT SERVICES AGREEMENT (MSSA) SHOULD NOT BE SUBJECTED TO TAX IN INDIA. 23. IN RESPONSE, THE ASSESSEE HAD SUBMITTED BEFORE THE ASSESSING OFFICER THAT THE KPENV HAS IN ITS POSSESSION SUBSTANTIAL RESOURCES IN COMMERCIAL, FINANCIAL, ACCOUNTING, AND OTHER MATTERS WHICH COULD BE EMPLOYED FOR THE BENEFIT OF THE INDIVIDUAL GROUP COMPANIES. AS A PART OF SUCH INITIATIVE, THE COMPANY HAS ENTERED INTO AN AGREEMENT WITH ITS GROUP COMPANIES AND AS PART OF THE AFORESAID AGREEMENT HAS PROVIDED ASSISTANCE TO ITS GROUP ENTITIES IN INDIA IN COMMERCIAL, ACCOUNTING, AUDITING, FINANCIAL, FISCAL, SOCIAL AND LEGAL MATTERS. THE COMPANY RECOVERS THE COST INCURRED BY IT BY ALLOCATING IT AMONGST THE GROUP COMPANIES ALONG WITH A LIMITED MARK-UP (10%) ON COST WHICH ESSENTIALLY STAND FOR VARIOUS RISKS SUCH AS CURRENCY RISK, NON-PAYMENT RISK ETC. WHAT HAS BEEN ALLOCATED TO THE GROUP COMPANIES INCLUDING PEIL IN INDIA IS THE COST INCURRED BY THE ASSESSEE FOR RENDERING THE SERVICES AND THERE IS NO ELEMENT OF PROFIT INVOLVED THEREIN. THUS, THE AMOUNT RECEIVED BY THE ASSESSEE FROM PEIL BEING ESSENTIALLY COST RECHARGE, WHICH IS NOT TAXABLE. THE ASSESSEE ALSO SUBMITTED THAT THE PROVISIONS OF ARTICLE 12 OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT ('DTAA'), THAT INDIA HAS ENTERED WITH NETHERLANDS WHICH DEALS WITH TAXABILITY OF 'ROYALTIES AND FEES FOR TECHNICAL SERVICES' ARISING IN ONE OF THE CONTACTING STATE AND PAYABLE TO RESIDENT OF ANOTHER CONTRACTING STATE. ARTICLE 12 OF THE DTAA DEFINES THE EXPRESSION 'FEES FOR TECHNICAL SERVICES' TO MEAN PAYMENTS OF ANY KIND TO ANY PERSON IN CONSIDERATION FOR THE RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THROUGH THE PROVISION OF SERVICES OF TECHNICAL OR OTHER PERSONNEL), IF SUCH SERVICES ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION OR MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOWHOW OR PROCESSES, OR CONSIST OF THE DEVELOPMENT AND TRANSFER OF A TECHNICAL PLAN OR TECHNICAL DESIGN. KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 31 THE DEFINITION OF 'FEES FOR TECHNICAL SERVICES' AS PET ARTICLE 12 CONTAIN A TERM 'MAKE AVAILABLE' AND IT HAS TO BE SEEN WHETHER THE SERVICES RENDERED BY KPENV TO PEIL AS PER THE TERMS OF THE MSSA ACTUALLY 'MAKE AVAILABLE' ANY TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL KNOW-HOW OR PROCESSES. THE TERM 'MAKE AVAILABLE' IS NOT THAT DEFINED IN THE DTAA BETWEEN INDIA AND NETHERLANDS, HOWEVER IT HAS BEEN DEALT EXTENSIVELY IN VARIOUS JUDICIAL PRONOUNCEMENTS AND EVEN INDIA-USA DTAA. THE MEMORANDUM OF UNDERSTANDING CONCERNING 'FEES FOR INCLUDED SERVICES' IN ARTICLE 12 OF THE INDIA-USA DTAA EXPLAINS THE TERM 'MAKE AVAILABLE' AS UNDER:- 'GENERALLY SPEAKING, TECHNOLOGY WILL BE CONSIDERED 'MAKE AVAILABLE' WHEN THE PERSON ACQUIRING THE SERVICE IS ENABLED TO APPLY THE TECHNOLOGY, THE FACT THAT THE PROVISION OF THE SERVICE MAY REQUIRE TECHNICAL INPUT BY THE PERSON PROVIDING THE SERVICE DOES NOT PER SE MEAN THAT TECHNICAL KNOWLEDGE, SKILLS, ETC., ARE MADE AVAILABLE TO THE PERSON PURCHASING THE SERVICE, WITHIN THE MEANING OF PARAGRAPH 4(B). SIMILARLY, THE USE OF A PRODUCT WHICH EMBODIES TECHNOLOGY SHALL NOT PER SE BE CONSIDERED TO MAKE THE TECHNOLOGY AVAILABLE. THE ABOVE EXPLANATION REFERRED TO IN THE MEMORANDUM OF UNDERSTANDING CONCERNING 'FEE FOR INCLUDED SERVICES' IN ARTICLE 12 APPENDED TO THE DTAA BETWEEN INDIA AND USA MAKES IT ABUNDANTLY CLEAR THAT THE TECHNOLOGY WOULD BE CONSIDERED MADE AVAILABLE WHEN THE PERSON ACQUIRING THE SERVICES IS ENABLED TO APPLY THE TECHNOLOGY. THE MERE FACT THAT THE PROVISIONS OF THE SERVICE MAY REQUIRE TECHNICAL INPUT BY THE PERSON PROVIDING THE SERVICE DOES NOT PER SE MEAN THAT TECHNICAL KNOWLEDGE, SKILL, ETC., ARE MADE AVAILABLE TO THE PERSON PURCHASING THE SERVICE, WITHIN THE MEANING OF ARTICLE 12 PARA 4(B) BETWEEN INDIA AND USA WHICH IS IN PARI MATERIA WITH ARTICLE 12(5)(B) OF INDIA NETHERLANDS DTAA. THE ASSESSEE HAD ALSO RELIED ON SEVERAL JUDGMENTS SUCH AS THE DECISIONS OF AAR IN THE CASE OF WORLEY PARSONS REPORTED IN 313 ITR 74 (AAR), THE HON'BLE DELHI TRIBUNAL IN THE CASE OF NQA QUALITY SYSTEMS REGISTRAR LTD. V. DY. CIT AND THE DECISION OF THE AAR IN THE CASE OF INVENSYS SYSTEMS INC REPORTED IN 317 ITR 438(AAR). 24. HOWEVER, THE ASSESSING OFFICER REJECTED THE CONTENTION OF THE ASSESSEE COMPANY AND HELD THAT MAKE AVAILABLE CLAUSE ITSELF IS INSERTED IN THE MSSA AND THE SERVICES UNDER THE MSSA, AS HAD ALSO BEEN CONFIRMED BY THE ASSESSEE IN ITS SUBMISSION AS BEING TECHNICAL IN NATURE THEREFORE, THE PAYMENT RECEIVED BY THE ASSESSEE UNDER THE MSSA WOULD QUALIFY FOR TAXATION AS FEES FOR TECHNICAL SERVICES EVEN AS PER THE PROVISIONS OF THE TREATY LAW, THAT IS, ARTICLE 12(5)(B) OF INDIA-NETHERLAND DTAA. IN VIEW OF THE KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 32 MAKE AVAILABLE CLAUSE BEING EMBEDDED IN THE MSSA CONTRACT, THE JUDICIAL PRONOUNCEMENTS RELIED UPON BY THE ASSESSEE WOULD NO LONGER BE RELEVANT IN THIS CASE. THEREFORE, THE TOTAL AMOUNT OF RS. 1,129,058,312/- RECEIVED BY THE ASSESSEE UNDER MSSA SHOULD BE TAXABLE IN THE HANDS OF THE ASSESSEE, AND THIS WAY, THE LD AO MADE ADDITION TO THE TUNE OF RS. 1,129,058,312/-. 25. AGGRIEVED BY THE ORDER OF LD. A.O, THE ASSESSEE FILED AN APPLICATION BEFORE THE DISPUTE RESOLUTION PANEL (DRP) WHO HAS CONFIRMED THE ADDITION MADE BY THE LD ASSESSING OFFICER. BEFORE THE LD. DRP, THE ASSESSEE SUBMITTED THAT THE PROPOSAL OF A.O TO TAX THE RECEIPTS OF RS.1,129,058,312/- UNDER THE MSSA AS FEES FOR TECHNICAL SERVICES (FTS) UNDER SECTION 9(1)(VII) READ WITH ARTICLE 12 OF THE INDIA-NETHERLAND DTAA IS NOT TENABLE. THE MSAA WAS ENTERED INTO BY THE ASSESSEE IN OCTOBER 2004. THE RECEIPTS FROM THE MSSA WERE ALSO DECLARED BY THE ASSESSEE AS ITS INCOME IN EARLIER ASSESSMENT YEARS AND ALSO IN THE ORIGINAL RETURN. HOWEVER, IN THE REVISED RETURN THE ASSESSEE HAS CLAIMED THAT IT IS EXEMPT FROM TAX. BEFORE THE LD. DRP, THE ASSESSEE SUBMITTED THAT THE AMOUNT RECEIVED UNDER THE MSSA AGREEMENT ARE NOTHING BUT REIMBURSEMENT OF COSTS INCURRED BY THE ASSESSEE ON SERVICES PROVIDED TO PEIL AND THEREFORE NOT TAXABLE IN INDIA AS THERE IS NO PROFIT ELEMENT EMBEDDED THEREIN. IN THIS CONNECTION, THE ASSESSEE HAD RELIED ON ARTICLE 4 AND 5 OF MSAA AGREEMENT, WHICH PROVIDE THAT THE ASSESSEE SHALL SUBMIT TO PEIL A STATEMENT OF COSTS INCURRED BY IT ON SERVICES RENDERED TO PEIL AND PEIL HAS A RIGHT TO GET IT AUDITED BY AN EXTERNAL AUDITOR. THE ASSESSEE HAS ALSO REPLIED THAT THE RECEIPTS ARE NOT TAXABLE AS FEES FOR TECHNICAL SERVICES UNDER ARTICLE 12(5)(B) OF THE INDIA-NETHERLANDS DTAA. IT HAS BEEN SUBMITTED THAT THE SERVICES RENDERED BY THE ASSESSEE RELATE TO COMMERCIAL, AUDITING, FINANCIAL, SOCIAL AND LEGAL MATTERS AND IN OTHER FIELD IN WHICH PHILIPS HAS RESOURCES. IT HAS BEEN POINTED OUT BY THE ASSESSEE THAT THE DEFINITION OF THE TERM FTS IN THE DTAA COVERS ONLY TECHNICAL OR CONSULTANCY SERVICES AS THE WORD MANAGERIAL HAS BEEN EXCLUDED FROM THIS DEFINITION. ACCORDING TO THE ASSESSEE IT IS EVIDENT FROM THE NATURE OF SERVICES THAT THEY FALL UNDER THE CATEGORY OF MANAGERIAL SERVICES THOUGH SOME OF THEM MAY OVERLAP WITH TECHNICAL OR CONSULTANCY SERVICES. THE ASSESSEE ALSO SUBMITTED THAT VARIOUS SERVICES RENDERED BY IT DO NOT MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE SKILL ETC TO PEIL WITHIN THE MEANING OF ARTICLE 12(5)(B) OF THE DTAA. THE ASSESSEE HAS RELIED ON THE DEFINITION OF THE TERM MAKE AVAILABLE IN THE MOU TO THE INDIA USA- DTAA AND ON THE NOTIFICATION KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 33 NO.693(E) DATED 30.08.1999 AMENDING THE INDIA NETHERLANDS DTAA WHICH STATES THAT THE MOU TO THE INDIA-USA, DTAA WILL ALSO APPLY TO THE INDIA-NETHERLANDS DTAA. 26. HOWEVER, THE DRP REJECTED THE CONTENTION OF THE ASSESSEE. THE LD DRP NOTED THAT RECEIPTS UNDER THE MSSA IS TAXABLE IN INDIA BECAUSE THE TERMS AND CONDITIONS INCLUDED IN MSSA ARE SIMILAR TO RDCA AGREEMENTS. THE LD DRP OBSERVED THAT IF THE TESTS LAID DOWN IN THE OECD GUIDELINES IN RESPECT OF A CCA ARE APPLIED TO THE TERMS OF MSSA, IT BECOMES EVIDENT THAT IT IS NOT AT A COST CONTRIBUTION AGREEMENT (CCA) BUT A TYPICAL INTRA GROUP SERVICES AGREEMENT WHICH HAS A ONE WAY FLOW OF SERVICES FROM SERVICE PROVIDER TO THE RECIPIENT AND A SIMILAR REVERSE FLOW OF CONSIDERATION FOR SUCH SERVICES FROM THE RECIPIENT TO THE SERVICE PROVIDER. THERE IS NO SHARING OR POOLING OF RESOURCES TO GENERATE A PROPERTY, RIGHT, IPR ETC IN WHICH ALL THE PARTICIPANTS HAVE WELL DETERMINED SHARE OF RESOURCES TO BE POOLED AND BENEFITS TO BE DERIVED. THEREFORE, LD DRP NOTED THAT MSSA IS NOT MERELY A REIMBURSEMENT OF COSTS INCURRED BY KPENV. 27. THE LD DRP NOTED THAT IF THE SERVICES CAN BE SAID TO BE FEES FOR TECHNICAL SERVICES UNDER ARTICLE 12 OF THE DTAA, THEN A PERUSAL OF MSAA SHOWS THAT THE SCOPE OF SERVICES AS MENTIONED IN THE MSAA IS NOT EXHAUSTIVE AS IT REFERS TO: SERVICES IN COMMERCIAL, ACCOUNTING, AUDITING, FINANCIAL, FISCAL, SOCIAL AND LEGAL MATTERS AND IN ALL OTHER FIELDS IN WHICH PHILIPS HAS RESOURCES. AS PHILIPS IS A WORLD LEADER IN ELECTRONICS AND ELECTRICAL GADGETS, MEDICAL EQUIPMENTS ETC. THE FIELDS IN WHICH IT WOULD HAVE EXPERTISE WOULD SURELY ENCOMPASS SOPHISTICATED TECHNOLOGY. AS THE AGREEMENT LEAVES THE SCOPE OF SERVICES OPEN ENDED, IT IS NOT POSSIBLE TO AGREE WITH THE ASSESSEE THAT TECHNICAL SERVICES WOULD NOT BE INCLUDED. FURTHER, CLAUSE ( G) OF ARTICLE 2 PROVIDES THAT THE ASSESSEE WOULD ADMIT THE EMPLOYEES OF PEIL TO ITS PREMISES SO THAT THEY CAN ACQUAINT THEMSELVES WITH THE COMMERCIAL AND OTHER KNOWLEDGE IN THE AREAS IN WHICH SERVICES ARE TO BE RENDERED BY THE ASSESSEE. THIS KIND OF FACILITY IS NOTHING BUT MAKING AVAILABLE KNOWLEDGE IN THESE AREAS IN MANNER WHICH WOULD ENABLE THE EMPLOYEES OF PEIL TO FULFIL SUCH TASKS ON THEIR OWN. THEREFORE, THE LD. DRP HELD THAT THE ASSESSEES CONTENTION THAT THE MAKE AVAILABLE CONDITION IS NOT KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 34 FULFILLED, WAS REJECTED. THIS WAY, THE LD DRP HAS CONFIRMED THE ADDITION MADE BY THE ASSESSING OFFICER. 28. AGGRIEVED BY THE ORDER OF THE LD. DRP/A.O, THE ASSESSEE IS IN APPEAL BEFORE THIS TRIBUNAL. 29. MR. ARVIND SONDE, THE LD COUNSEL FOR THE ASSESSEE, BEGINS BY POINTING OUT THAT PHILIPS ELECTRONICS INDIA LIMITED (PEIL) HAS ENTERED INTO A MANAGEMENT SUPPORT SERVICES AGREEMENT ('MSSA') WITH KONINKLIJKE PHILIPS ELECTRONICS N.V (KPNEV) ON 22 ND OCTOBER 2004. AS PER ARTICLE 2 OF THE AGREEMENT, THE KPENV SHALL PROVIDE TO PEIL SUCH RESOURCES IN COMMERCIAL, ACCOUNTING, AUDITING, FINANCIAL, FISCAL, SOCIAL AND LEGAL MATTERS AND IN OTHER FIELDS AS KPENV POSSESSES AND WOULD FURNISH THE SAME TO PEIL TO FACILITATE ITS BUSINESS OPERATION. THE ASSISTANCE MAY RELATE TO: A) THE DISTRIBUTION AND TRADING OF PRODUCTS, PARTICULARLY WITH RESPECT TO ADVERTISING, SALES PROMOTION, PUBLIC RELATIONS, MARKET RESEARCH, LABELLING, PACKAGING, SHIPPING AND FORWARDING, LONG-TERM EXPORT BUSINESS AND INTERNATIONAL PUBLIC TENDERING AND PURCHASE FROM THIRD PARTIES; B) ADVICE AND SUPPORT WITH RESPECT TO THE SUPPLY OF REQUIREMENTS OF THE COMPANY FROM OTHER SOURCES, IF KPENV IS PREVENTED FROM FULFILLING SUCH REQUIREMENTS OF THE COMPANY; C) FINANCIAL, ACCOUNTING AND AUDITING MATTERS RELATING TO SUCH SUBJECTS AS; (I) ACCOUNTING AND AUDITING PRINCIPLES AND METHODS; (II) BUDGETING METHODS; (III) CAPITAL STRUCTURE, LOANS, EXCHANGE RISKS, FINANCIAL RESEARCH, WARRANTIES AND GUARANTEES, CREDIT MANAGEMENT, THE ESTABLISHMENT AND MANAGEMENT OF FINANCE AND LEASE COMPANIES AND ALL FURTHER BANKING ACTIVITIES, INCLUDING LONG-TERM FINANCE PLANS ; (IV) DEVELOPMENTS OF DATA PROCESSING; D) FISCAL AND LEGAL MATTERS, INCLUDING PATENTS, TRADEMARKS AND CUSTOMS DUTIES, PARTICULARLY IN INTERNATIONAL TRANSACTIONS; KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 35 E) PERSONNEL MATTERS F) INSURANCES; AND G) ADMITTANCE AT THE COMPANY'S SPECIFIC REQUEST AND AT MUTUALLY AGREED TIMES OF A REASONABLE NUMBER OF EMPLOYEES OF THE COMPANY TO ITS PREMISES TO THE EXTENT TO WHICH KPENV HAS THE FEE RIGHT TO DO SO, SO THAT THEY CAN ACQUAINT THEMSELVES WITH COMMERCIAL AND OTHER KNOWLEDGE AS SPECIFIED ABOVE, FAMILIARIZE THEMSELVES WITH THE ORGANISATION OF THE PHILIPS GROUP AND WITH WORKING METHODS USED BY IT. 30. MR. ARVIND SONDE, THE LD COUNSEL FOR THE ASSESSEE, ALSO POINTED OUT THAT THE KPENV HAS IN ITS POSSESSION SUBSTANTIAL RESOURCES IN COMMERCIAL, FINANCIAL, ACCOUNTING, AND OTHER MATTERS WHICH COULD BE EMPLOYED FOR THE BENEFIT OF THE INDIVIDUAL GROUP COMPANIES. AS A PART OF SUCH INITIATIVE, THE COMPANY HAS ENTERED INTO AN AGREEMENT WITH ITS GROUP COMPANIES AND AS PART OF THE AFORESAID AGREEMENT HAS PROVIDED ASSISTANCE TO ITS GROUP ENTITIES IN INDIA IN COMMERCIAL, ACCOUNTING, AUDITING, FINANCIAL, FISCAL, SOCIAL AND LEGAL MATTERS. THE COMPANY RECOVERS THE COST INCURRED BY IT BY ALLOCATING IT AMONGST THE GROUP COMPANIES ALONG WITH A LIMITED MARK-UP (10%) ON COST WHICH ESSENTIALLY STAND FOR VARIOUS RISKS SUCH AS CURRENCY RISK, NON-PAYMENT RISK ETC. WHAT HAS BEEN ALLOCATED TO THE GROUP COMPANIES INCLUDING PEIL IN INDIA IS THE COST INCURRED BY THE ASSESSEE FOR RENDERING THE SERVICES AND THERE IS NO ELEMENT OF PROFIT INVOLVED THEREIN. THUS, THE AMOUNT RECEIVED BY THE ASSESSEE FROM PEIL BEING ESSENTIALLY COST RECHARGE, WHICH IS NOT TAXABLE. THE LD COUNSEL ALSO SUBMITTED THAT THE PROVISIONS OF ARTICLE 12 OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT ('DTAA'), THAT INDIA HAS ENTERED WITH NETHERLANDS WHICH DEALS WITH TAXABILITY OF 'ROYALTIES AND FEES FOR TECHNICAL SERVICES' ARISING IN ONE OF THE CONTACTING STATE AND PAYABLE TO RESIDENT OF ANOTHER CONTRACTING STATE. ARTICLE 12 OF THE DTAA DEFINES THE EXPRESSION 'FEES FOR TECHNICAL SERVICES' TO MEAN PAYMENTS OF ANY KIND TO ANY PERSON IN CONSIDERATION FOR THE RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THROUGH THE PROVISION OF SERVICES OF TECHNICAL OR OTHER PERSONNEL), IF SUCH SERVICES ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION OR MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOWHOW OR PROCESSES, OR CONSIST OF THE DEVELOPMENT AND TRANSFER OF A TECHNICAL PLAN OR TECHNICAL DESIGN. THE DEFINITION OF 'FEES FOR TECHNICAL SERVICES' AS PET ARTICLE 12 CONTAIN A TERM 'MAKE AVAILABLE' AND IT HAS TO BE SEEN WHETHER THE SERVICES RENDERED BY KPENV KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 36 TO PEIL AS PER THE TERMS OF THE MSSA ACTUALLY 'MAKE AVAILABLE' ANY TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL KNOW-HOW OR PROCESSES. THE TERM 'MAKE AVAILABLE' IS NOT THAT DEFINED IN THE DTAA BETWEEN INDIA AND NETHERLANDS, HOWEVER IT HAS BEEN DEALT EXTENSIVELY IN VARIOUS JUDICIAL PRONOUNCEMENTS AND EVEN INDIA-USA DTAA. THE MEMORANDUM OF UNDERSTANDING CONCERNING 'FEES FOR INCLUDED SERVICES' IN ARTICLE 12 OF THE INDIA-USA DTAA EXPLAINS THE TERM 'MAKE AVAILABLE' AS UNDER:- 'GENERALLY SPEAKING, TECHNOLOGY WILL BE CONSIDERED 'MAKE AVAILABLE' WHEN THE PERSON ACQUIRING THE SERVICE IS ENABLED TO APPLY THE TECHNOLOGY, THE FACT THAT THE PROVISION OF THE SERVICE MAY REQUIRE TECHNICAL INPUT BY THE PERSON PROVIDING THE SERVICE DOES NOT PER SE MEAN THAT TECHNICAL KNOWLEDGE, SKILLS, ETC., ARE MADE AVAILABLE TO THE PERSON PURCHASING THE SERVICE, WITHIN THE MEANING OF PARAGRAPH 4(B). SIMILARLY, THE USE OF A PRODUCT WHICH EMBODIES TECHNOLOGY SHALL NOT PER SE BE CONSIDERED TO MAKE THE TECHNOLOGY AVAILABLE. THE ABOVE EXPLANATION REFERRED TO IN THE MEMORANDUM OF UNDERSTANDING CONCERNING 'FEE FOR INCLUDED SERVICES' IN ARTICLE 12 APPENDED TO THE DTAA BETWEEN INDIA AND USA MAKES IT ABUNDANTLY CLEAR THAT THE TECHNOLOGY WOULD BE CONSIDERED MADE AVAILABLE WHEN THE PERSON ACQUIRING THE SERVICES IS ENABLED TO APPLY THE TECHNOLOGY. THE MERE FACT THAT THE PROVISIONS OF THE SERVICE MAY REQUIRE TECHNICAL INPUT BY THE PERSON PROVIDING THE SERVICE DOES NOT PER SE MEAN THAT TECHNICAL KNOWLEDGE, SKILL, ETC., ARE MADE AVAILABLE TO THE PERSON PURCHASING THE SERVICE, WITHIN THE MEANING OF ARTICLE 12 PARA 4(B) BETWEEN INDIA AND USA WHICH IS IN PARI MATERIA WITH ARTICLE 12(5)(B) OF INDIA NETHERLANDS DTAA. THE LD COUNSEL HAD ALSO RELIED ON SEVERAL JUDGMENTS SUCH AS THE DECISIONS OF AAR IN THE CASE OF WORLEY PARSONS REPORTED IN 313 ITR 74 (AAR), THE HON'BLE DELHI TRIBUNAL IN THE CASE OF NQA QUALITY SYSTEMS REGISTRAR LTD. V. DY. CIT AND THE DECISION OF THE AAR IN THE CASE OF INVENSYS SYSTEMS INC REPORTED IN 317 ITR 438(AAR). 31. ON THE OTHER HAND, SHRI G.MALLIKAARJUNA, CIT-DR, FOR THE REVENUE, VEHEMENTLY SUBMITTED BEFORE US THAT THE RECEIPTS FROM THE MSSA WERE DECLARED BY THE ASSESSEE AS ITS INCOME IN EARLIER ASSESSMENT YEARS AND ALSO IN THE ORIGINAL RETURN OF INCOME FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. HOWEVER, IN THE REVISED RETURN THE ASSESSEE HAS CLAIMED THAT IT IS EXEMPT FROM TAX. THE LD DR STATED BEFORE THE BENCH THAT THE ASSESSEE SHOULD FOLLOW THE CONSISTENCY APPROACH AND SHOULD PAY THE TAX ON THE RECEIPTS FROM THE MSSA AGREEMENT. THE STAND TAKEN BY THE ASSESSEE THAT RECEIPTS FROM THE MSSA IS NOT TAXABLE FROM THE CURRENT ASSESSMENT YEAR ONWARDS, IS BASELESS AND MOTIVE OF THE KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 37 ASSESSEE IS TO EVADE THE TAX WILLFULLY, WHICH IS NOT ACCEPTABLE AT ALL. THE ISSUE OF NON- TAXABILITY OF THE INCOME FROM MSSA IN INDIA, SIMILAR TO THAT OF THE RECEIPTS UNDER RDCA ALSO AROSE FOR THE FIRST TIME IN THE A.Y.2008-09. THE LD DR POINTED OUT THAT DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS REQUESTED TO SHOW CAUSE IN WRITING AS TO WHY THE RECEIPTS AGGREGATING 1,129,058,312/- FROM MSSA SHOULD NOT BE TREATED AS BEING TAXABLE IN INDIA AS PER THE ARTICLE 12(4)/12(5) OF THE INDIA NETHERLAND DTAA. THEN THE LD DR SUMMARIZED THE CONTENTION OF THE ASSESSEE AS FOLLOWS: A) THAT PAYMENTS RECEIVED BY THE ASSESSEE UNDER MSSA ARE IN THE NATURE OF REIMBURSEMENT OF COST INCURRED BY IT ON RESEARCH AND DEVELOPMENT WORK FOR ITS GROUP COMPANIES AND THERE IS NO PROFIT ELEMENT EMBEDDED THEREIN. B) THE AO ERRED IN HOLDING THAT THE PAYMENT RECEIVED BY THE COMPANY UNDER MSSA IS TAXABLE IN INDIA AS FEES FOR TECHNICAL SERVICES (FTS) UNDER ARTICLE 12 (5) OF THE INDIA NETHERLANDS DTAA WITHOUT APPRECIATING THAT THE PREDOMINANT NATURE OF THE SERVICES FALLS UNDER THE CATEGORY OF 'MANAGERIAL SERVICES' AS OPPOSED TO 'TECHNICAL OR CONSULTANCY SERVICES'. C) THE AO ERRED IN HOLDING THAT THE PAYMENT RECEIVED BY THE COMPANY UNDER MSSA IS TAXABLE IN INDIA AS FEES FOR TECHNICAL SERVICES (FTS) UNDER ARTICLE 12(5)(B) OF THE INDIA-NETHERLAND DTAA WITHOUT APPRECIATING THAT THE ASSESSEE DOES NOT MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL ETC. TO PEIL. ON EXAMINATION OF THE COPY OF THE MSSA AGREEMENT DATED 22-10-2004 ENTERED INTO BY THE ASSESSEE WITH PEIL, THE LD DR POINTED OUT THAT THE TERMS AND CONDITIONS INCLUDED IN THE MSSA ARE SIMILAR TO RDCA AGREEMENTS. THE ASSESSEE'S ARGUMENT THAT THE RECEIPTS UNDER THE MSSA IS NOT TAXABLE IN INDIA AS THESE REPRESENT MERE 'REIMBURSEMENTS' CANNOT BE ACCEPTED. MERELY THE FACT THAT THE ASSESSEE PROVIDES A STATEMENT OF COST INCURRED BY IT AT THE END OF THE YEAR TO PEIL, WHICH CAN BE EXAMINED BY AN 'EXTERNAL AUDITOR', WOULD NOT CONSTITUTE A 'COST CONTRIBUTION AGREEMENT'. THE HON.BLE DRP IN THE ASSESSEE'S OWN CASE FOR THE INSTANT ASSESSMENT YEAR I.E. 2008-09 ON THIS ISSUE REGARDING CLAIM OF RECEIPTS UNDER MSSA BEING THAT OF REIMBURSEMENTS/SHARING OF COSTS CONTENDED THAT: IF THE TESTS LAID DOWN IN THE OECD GUIDELINES IN RESPECT OF A CCA ARE APPLIED TO THE TERMS OF MSSA, IT BECOMES EVIDENT THAT IT IS NOT A CCA BUT A TYPICAL 'INTRA GROUP SERVICES AGREEMENT' WHICH HAS A ONE WAY FLOW OF SERVICES FROM SERVICE PROVIDER TO THE RECIPIENT AND A SIMILAR REVERSE FLOW OF CONSIDERATION FOR SUCH SERVICES FROM THE RECIPIENT TO THE SERVICE PROVIDER. THERE IS NO SHARING OR POOLING OF RESOURCES TO GENERATE A PROPERTY, RIGHT, IPR ETC. IN WHICH ALL THE PARTICIPANTS KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 38 HAVE WELL DETERMINED SHARE OF RESOURCES TO BE POOLED AND BENEFITS TO BE DERIVED. FOR THE REASONS MENTIONED IN DETAILS WHILE DEALING WITH THE OBJECTION NO.1, THE CONTENTION THAT THE AMOUNTS REPRESENT MERE 'REIMBURSEMENTS' WHICH DO NOT HAVE ANY NATURE OF PROFIT IS REJECTED. IN LIGHT OF THE ABOVE, THE HON'BLE DRP, KOLKATA IN THE ASSESSEE'S CASE FOR THE A.Y.2008- 09, HAD REGARDED THE ASSESSEE'S CLAIM 'NOT A TENABLE PROPOSITION.' AS SUCH, THE CONTENTION OF THE ASSESSEE THAT RECEIPTS UNDER THE MSSA BEING IN THE NATURE OF 'REIMBURSEMENT/SHARING OF COSTS' HAS NOT BEEN ACCEPTED. 32. THE LD DR FOR THE REVENUE POINTED OUT THAT THE RECEIPTS UNDER MSSA ARE TAXABLE AS FEES FOR TECHNICAL SERVICES ('FTS') UNDER ARTICLE 12 (5)(B) OF THE INDIA-NETHERLANDS DOUBLE TAXATION AVOIDANCE AGREEMENT. FOR PURPOSES OF THIS ARTICLE, 'FEES FOR TECHNICAL SERVICES' MEANS PAYMENTS OF ANY KIND TO ANY PERSON IN CONSIDERATION FOR THE RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THROUGH THE PROVISION OF SERVICES OF TECHNICAL OR OTHER PERSONNEL) IF SUCH SERVICES: (A) ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION FOR WHICH A PAYMENT DESCRIBED IN PARAGRAPH 4 OF THIS ARTICLE IS RECEIVED; OR (B) MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HOW OR PROCESSES, OR CONSIST OF THE DEVELOPMENT AND TRANSFER OF A TECHNICAL PLAN OR TECHNICAL DESIGN. IN THIS CONTEXT, LD DR FOR THE REVENUE STATED THAT THE ARTICLE 2 OF THE MSSA BETWEEN THE ASSESSEE AND PEIL DATED 22-10-2004 MAY BE REFERRED TO. FOR REFERENCE THE RELEVANT PORTION IS REPRODUCED AS UNDER- SERVICES IN COMMERCIAL, ACCOUNTING, AUDITING. FINANCIAL, FISCAL, SOCIAL AND LEGAL MATTERS AND IN ALL OTHER FIELDS IN WHICH PHILIPS HAS RESOURCES. PHILIPS SHALL FURNISH THE COMPANY CONCERN SERVICES AS FAR AS THEY ARE REASONABLY REQUIRED FROM THE BUSINESS OF THE COMPANY. IN THIS CONTEXT THIS MAY BE MENTIONED THAT PHILIPS SHALL MAKE AVAILABLE TO THE COMPANY SUCH RESOURCES IN COMMERCIAL; ACCOUNTING, AUDITING, FINANCIAL; FISCAL; SOCIAL AND LEGAL MATTERS AND IN OTHER FIELDS AS PHILIPS NOW AND IN THE FUTURE MAY POSSESS AND MAY FREELY AND UNCONDITIONALLY FURNISH TO THE COMPANY, AND RENDER ASSISTANCE IN THIS CONNECTION, ALL TO THE EXTENT REASONABLY REQUIRED TO FACILITATE THE COMPANY'S BUSINESS OPERATION. THIS ASSISTANCE MAY RELATED TO: A) THE DISTRIBUTION AND TRADING OF PRODUCTS, PARTICULARLY WITH RESPECT TO ADVERTISING, SALES PROMOTION, PUBLIC RELATIONS, MARKET RESEARCH (IN PARTICULAR, INFORMATION AND TRENDS ON THE WORLD MARKET), LABELING, PACKAGING, SHIPPING AND FORWARDING, LONG-TERM EXPORT BUSINESS AND INTERNATIONAL PUBLIC TENDERING AND PURCHASE FROM THIRD PARTIES; KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 39 B) ADVICE AND SUPPORT WITH RESPECT TO THE SUPPLY OF REQUIREMENTS OF THE COMPANY FROM OTHER SOURCES, IF KPNV IS PREVENTED FROM FULFILLING SUCH REQUIREMENTS OF THE COMPANY; C) FINANCIAL; ACCOUNTING AND AUDITING MATTERS RELATING TO SUCH SUBJECTS AS: (I) ACCOUNTING AND AUDITING PRINCIPLES AND METHODS; (II) BUDGETING METHODS; (III) CAPITAL STRUCTURE, LOANS, EXCHANGE RISKS, FINANCIAL RESEARCH, WARRANTIES AND GUARANTEES, CREDIT MANAGEMENT; THE ESTABLISHMENT AND MANAGEMENT OF FINANCE AND LEASE COMPANIES AND ALL FURTHER BANKING ACTIVITIES, INCLUDING LONG-TERM FINANCE PLANS; (IV) DEVELOPMENTS OF DATA PROCESSING; D) FISCAL AND LEGAL MATTERS, INCLUDING PATENTS, TRADEMARKS AND CUSTOMS DUTIES, PARTICULARLY IN INTERNATIONAL TRANSACTIONS; E) PERSONNEL MATTERS PARTICULARLY WITH RESPECT TO: I) THE SELECTION AND TRAINING OF PERSONNEL; II) AN ADEQUATE PERSONNEL POLICY; F) INSURANCE; AND G) ADMITTANCE AT THE COMPANYS SPECIFIC REQUEST AND AT MUTUALLY AGREED TIMES OF A REASONABLE NUMBER OF EMPLOYEES OF THE COMPANY TO ITS PREMISES TO THE EXTENT TO WHICH KPNV HAS THE FREE RIGHT TO DO SO, SO THAT THEY CAN ACQUAINT THEMSELVES WITH COMMERCIAL AND OTHER KNOWLEDGE AS SPECIFIED ABOVE, FAMILIARISE THEMSELVES WITH THE ORGANIZATION OF THE PHILIPS GROUP AND WITH WORKING METHODS USED BY IT OR RECEIVE ADVICE ON SPECIFIC MATTERS IN THE FIELD DESCRIBED ABOVE. THE LD DR FOR THE REVENUE, THEREFORE, POINTED OUT THAT THE ARTICLE 2 OF THE MSSA BETWEEN THE ASSESSEE AND PEIL DATED 22-10-2004, CLEARLY AND ABUNDANTLY PROVIDES FIRST AND FOREMOST THAT THE MAKE AVAILABLE CLAUSE ITSELF IS IN-BUILT IN THE MSSA AGREEMENT, THEREFORE RECEIPTS UNDER MSSA ARE TAXABLE IN INDIA. THE LD DR FOR THE REVENUE FURTHER STATED THAT THE SAID RECEIPTS ARE TAXABLE AS BOTH ROYALTY TO THE EXTENT THEY ARE IMPARTING COMMERCIAL KNOW HOW AND COMMERCIAL EXPERIENCE AND FTS TO THE EXTENT THEY ARE MAKING AVAILABLE SERVICES. RELIANCE WAS PLACED ON THE DECISION OF SHELL INDIA MARKETS PVT. LTD. [2012] 342 ITR 223 (AAR) IN SUPPORT OF THE ABOVE CONTENTION. THE LD DR FOR THE REVENUE PRIMARILY PLACED RELIANCE ON THE ORDER OF THE DRP FOR A.Y. 2008-09 TO CONTEND THAT MSSA IS A TYPICAL INTRA GROUP SERVICE AGREEMENT. THERE IS NO SHARING OR POOLING OF RESOURCES TO GENERATE PROPERTY, RIGHT, IPR, ETC. IN WHICH ALL THE PARTICIPANTS HAVE WELL DETERMINED SHARE OF RESOURCES TO BE POOLED AND BENEFITS TO BE DERIVED. THE DR CONTENDED THAT MSSA IS NOT IN THE NATURE OF REIMBURSEMENT OR SHARING OF COSTS. THE DR REFERRED TO THE PROVISIONS OF ARTICLE 3 OF THE MSSA DEALING WITH 'EXCLUSIVE USE' AND CONTENDED THAT UNDER THE MSSA KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 40 THE ASSESSEE IS IMPARTING TO PHILIPS INDIA ITS SPECIALISED KNOWLEDGE AND EXPERIENCE WHICH REMAINS UNDIVULGED TO THE PUBLIC HENCE THE MSSA IS MOSTLY AN AGREEMENT FOR 'PROVISION FOR COMMERCIAL KNOW-HOW OR COMMERCIAL EXPERIENCE' AND THE PAYMENTS RECEIVED THEREUNDER CONSTITUTE 'ROYALTY' AS PER ARTICLE 12(4) OF THE DTAA. THE DR PLACED RELIANCE ON THE PROVISIONS OF ARTICLE 2 OF THE MSSA DEALING WITH THE SCOPE OF SERVICES, TO CONTEND THAT THE 'MAKE AVAILABLE' CLAUSE IS IN-BUILT IN THE MSSA. THE DR CONTENDED THAT AS THE SERVICES PROVIDED BY THE ASSESSEE CLEARLY REQUIRE SUBSTANTIAL EXPERTISE, SKILL AND RESOURCES IN THE FIELD OF LIGHTING, CONSUMER ELECTRONICS, MEDICAL SYSTEMS, ETC. THE MSSA IS MOSTLY AN AGREEMENT FOR 'PROVISION OF COMMERCIAL KNOW-HOW OR COMMERCIAL EXPERIENCE' AND THE PAYMENTS RECEIVED UNDER IT WOULD CONSTITUTE 'ROYALTY'. TO THE EXTENT THAT THE PAYMENTS RELATE TO TRAINING OF PERSONNEL TO ENABLE THEM TO PERFORM TASKS ON THEIR OWN, THEY WOULD SATISFY THE 'MAKE AVAILABLE' CLAUSE AND WOULD QUALIFY AS FTS UNDER THE INDIA-NETHERLANDS DTAA. THE DR REFERRED TO THE PROVISIONS OF ARTICLE 2 OF THE MSSA DEALING WITH THE SCOPE OF SERVICES AND CONTENDED THAT AS THE AGREEMENT LEAVES THE SCOPE OF SERVICES OPEN ENDED, HENCE IT IS NOT POSSIBLE TO AGREE THAT 'TECHNICAL' SERVICES WOULD NOT BE INCLUDED. IT WAS CONTENDED THAT THE DESCRIPTION OF SOME OF THE SERVICES REFLECTED THAT THEY WERE 'CONSULTANCY' SERVICES. ACCORDINGLY, THE CONTENTION THAT THE SERVICES DO NOT FALL IN THE DOMAIN OF 'TECHNICAL AND CONSULTANCY' SERVICES COULD NOT BE ACCEPTED AND HENCE EVEN THOUGH THE WORD 'MANAGERIAL SERVICES' WAS NOT INCLUDED IN THE DEFINITION OF THE TERM FTS IN THE INDIA-NETHERLANDS DTAA, IT COULD NOT BE SAID THAT THE SERVICES RENDERED BY THE ASSESSEE UNDER MSSA WERE NOT FTS UNDER THE SAID DEFINITION. IN SUPPORT OF THE AFORESAID CONTENTION, THE DR PLACED RELIANCE ON RULING OF THE AAR IN THE CASE OF SHELL INDIA MARKETS PVT. LTD. [2012] 342 ITR 223 (AAR). 33. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD, WE NOTE THAT THE MAIN GRIEVANCE OF THE LD DR FOR THE REVENUE IS THAT IN ARTICLE 2 OF THE MSSA BETWEEN THE ASSESSEE AND PEIL DATED 22-10- 2004, THE MAKE AVAILABLE CLAUSE ITSELF IS IN-BUILT IN THE MSSA, THEREFORE RECEIPTS UNDER MSSA ARE TAXABLE IN INDIA. WE NOTE THAT THE SCOPE OF SERVICES UNDER MSSA ARE SET OUT IN ARTICLE 2 OF THE MSSA. THE ARTICLE 2 OF MSSA IS MENTIONED IN PARA 30 OF THIS ORDER THEREFORE, FOR THE SAKE OF BREVITY THE SAME IS NOT BEING REPEATED HERE. AS PER ARTICLE 2, THE ASSESSEE IS REQUIRED TO PROVIDE SERVICES IN COMMERCIAL, ACCOUNTING, KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 41 AUDITING, FINANCIAL, FISCAL, SOCIAL AND LEGAL MATTERS AND IN OTHER FIELDS. THE REMUNERATION TO BE PAID TO THE ASSESSEE UNDER THE MSSA IS PROVIDED FOR IN ARTICLE 4 OF THE MSSA. IT PROVIDES FOR THE MANNER OF COMPUTATION OF THE CONSIDERATION PAYABLE FOR THE MANAGEMENT SUPPORT SERVICES. THE PAYMENTS TO BE MADE BY TO KPNV ON AN ANNUAL BASIS WOULD BE AN AMOUNT ARRIVED AT BY USING THE FOLLOWING FORMULA: CONSIDERATION = TOTAL COSTS INCURRED IN RENDERING MANAGEMENT SUPPORT SERVICES * TURNOVER OF PHILIPS INDIA/COMBINED TURNOVER OF ALL PHILIPS GROUP ENTITIES UTILIZING SUCH SERVICES * 110%. THE PLEA OF THE ASSESSEE IS THAT THE RECEIPTS UNDER MSSA ARE TOWARDS REIMBURSEMENT OF EXPENSES AND IN THE NATURE OF SHARING OF COST INCURRED BY THE ASSESSEE ON SERVICES PROVIDED TO AND THEREFORE NOT TAXABLE AND IN ANY EVENT, THE SAID RECEIPTS ARE ALSO NOT TAXABLE AS ROYALTY UNDER ARTICLE 12(4) OF THE INDIA - NETHERLANDS DTAA OR AS FEES FOR TECHNICAL SERVICES ('FTS') UNDER ARTICLE 12(5)(B) OF THE INDIA-NETHERLANDS DTAA. WE NOTE THAT THE LD AO AND THE LD DRP HELD THAT THE RECEIPTS UNDER THE MSSA ARE IN THE NATURE OF 'REMUNERATION' AND NOT 'REIMBURSEMENT'. FURTHER, THE SAID RECEIPTS ARE TAXABLE AS BOTH ROYALTY TO THE EXTENT THEY ARE IMPARTING COMMERCIAL KNOW HOW AND COMMERCIAL EXPERIENCE AND FTS TO THE EXTENT THEY ARE MAKING AVAILABLE SERVICES. RELIANCE WAS PLACED ON THE DECISION OF SHELL INDIA MARKETS PVT. LTD. [2012] 342 ITR 223 (AAR) IN SUPPORT OF THE ABOVE CONTENTION. THE LD DR FOR THE REVENUE PRIMARILY PLACED RELIANCE ON THE ORDER OF THE DRP FOR A.Y. 2008-09 TO CONTEND THAT MSSA IS A TYPICAL INTRA GROUP SERVICE AGREEMENT. THERE IS NO SHARING OR POOLING OF RESOURCES TO GENERATE PROPERTY, RIGHT, IPR, ETC. IN WHICH ALL THE PARTICIPANTS HAVE WELL DETERMINED SHARE OF RESOURCES TO BE POOLED AND BENEFITS TO BE DERIVED. THE DR CONTENDED THAT MSSA IS NOT IN THE NATURE OF REIMBURSEMENT OR SHARING OF COSTS. THE DR REFERRED TO THE PROVISIONS OF ARTICLE 3 OF THE MSSA DEALING WITH 'EXCLUSIVE USE' AND CONTENDED THAT UNDER THE MSSA THE ASSESSEE IS IMPARTING TO PHILIPS INDIA, ITS SPECIALIZED KNOWLEDGE AND EXPERIENCE WHICH REMAINS UNDIVULGED TO THE PUBLIC HENCE THE MSSA IS MOSTLY AN AGREEMENT FOR 'PROVISION FOR COMMERCIAL KNOW-HOW OR COMMERCIAL EXPERIENCE' AND THE PAYMENTS RECEIVED THEREUNDER CONSTITUTE 'ROYALTY' AS PER ARTICLE 12(4) OF THE DTAA. THE DR PLACED RELIANCE ON THE PROVISIONS OF ARTICLE 2 OF THE MSSA DEALING WITH THE SCOPE OF SERVICES, KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 42 TO CONTEND THAT THE 'MAKE AVAILABLE' CLAUSE IS IN-BUILT IN THE MSSA. THE DR CONTENDED THAT AS THE SERVICES PROVIDED BY THE ASSESSEE CLEARLY REQUIRE SUBSTANTIAL EXPERTISE, SKILL AND RESOURCES IN THE FIELD OF LIGHTING, CONSUMER ELECTRONICS, MEDICAL SYSTEMS, ETC. THE MSSA IS MOSTLY AN AGREEMENT FOR 'PROVISION OF COMMERCIAL KNOW-HOW OR COMMERCIAL EXPERIENCE' AND THE PAYMENTS RECEIVED UNDER IT WOULD CONSTITUTE 'ROYALTY'. TO THE EXTENT THAT THE PAYMENTS RELATE TO TRAINING OF PERSONNEL TO ENABLE THEM TO PERFORM TASKS ON THEIR OWN, THEY WOULD SATISFY THE 'MAKE AVAILABLE' CLAUSE AND WOULD QUALIFY AS FTS UNDER THE INDIA-NETHERLANDS DTAA. THE DR REFERRED TO THE PROVISIONS OF ARTICLE 2 OF THE MSSA DEALING WITH THE SCOPE OF SERVICES AND CONTENDED THAT AS THE AGREEMENT LEAVES THE SCOPE OF SERVICES OPEN ENDED, HENCE IT IS NOT POSSIBLE TO AGREE THAT 'TECHNICAL' SERVICES WOULD NOT BE INCLUDED. IT WAS CONTENDED THAT THE DESCRIPTION OF SOME OF THE SERVICES REFLECTED THAT THEY WERE 'CONSULTANCY' SERVICES. ACCORDINGLY, THE CONTENTION THAT THE SERVICES DO NOT FALL IN THE DOMAIN OF 'TECHNICAL AND CONSULTANCY' SERVICES COULD NOT BE ACCEPTED AND HENCE EVEN THOUGH THE WORD 'MANAGERIAL SERVICES' WAS NOT INCLUDED IN THE DEFINITION OF THE TERM FTS IN THE INDIA-NETHERLANDS DTAA, IT COULD NOT BE SAID THAT THE SERVICES RENDERED BY THE ASSESSEE UNDER MSSA WERE NOT FTS UNDER THE SAID DEFINITION. IN SUPPORT OF THE AFORESAID CONTENTION, THE DR PLACED RELIANCE ON RULING OF THE AAR IN THE CASE OF SHELL INDIA MARKETS PVT. LTD. [2012] 342 ITR 223 (AAR). 34. AFTER GOING THROUGH THE VARIOUS ARTICLES OF MSSA, IT SEEMS TO US THAT MSSA AGREEMENT IS A COST SHARING MUTUAL BENEFIT ARRANGEMENT THAT DOES NOT INVOLVE TRANSFER OF ANY RIGHTS. THE ACTUAL COST INCURRED BY THE ASSESSEE IS DISTRIBUTED AMONG THE PARTICIPATING ENTITIES I.E. VARIOUS ENTITIES OF THE GROUP. ANY AMOUNT RECEIVED FROM THIRD PARTIES IS REDUCED FROM THE COST, WHICH ALSO CLEARLY DEMONSTRATES THAT IT IS A COST SHARING ARRANGEMENT/REIMBURSEMENT. THEREFORE, THE REIMBURSEMENT CANNOT BE TAXED AS ROYALTY. WE NOTE THAT THE ARGUMENT LAID OUT BY THE LD. DR FOR THE REVENUE SHOULD NOT BE ACCEPTED AS RECEIPTS UNDER MSSA ARE IN THE NATURE OF SHARING OF COSTS AND HENCE SHOULD NOT BE TAXED AS ROYALTY OR FEES FOR TECHNICAL SERVICES. WE NOTE THAT EVEN OTHERWISE, RECEIPTS UNDER MSSA ARE NOT TAXABLE AS ROYALTY, AS THE MSSA IS AN AGREEMENT FOR SERVICES AND NOT IMPARTING COMMERCIAL KNOW HOW AND COMMERCIAL EXPERIENCE. ARTICLE 12 OF THE INDIA-NETHERLANDS DTAA DEALS WITH TAXABILITY OF ROYALTIES AND FEES FOR TECHNICAL SERVICES. ARTICLE 12(4) DEFINES ROYALTY AS UNDER: KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 43 THE TERM 'ROYALTIES' AS USED IN THIS ARTICLE MEANS PAYMENTS OF ANY KIND RECEIVED AS A CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE, ANY COPYRIGHT OF LITERARY, ARTISTIC OR SCIENTIFIC WORK INCLUDING CINEMATOGRAPH FILMS, ANY PATENT, TRADE MARK, DESIGN OR MODEL, PLAN, SECRET FORMULA OR PROCESS, OR FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE. WE NOTE THAT ROYALTY DEFINITION, CITED ABOVE, DOES NOT APPLY TO THE ASSESSEE UNDER CONSIDERATION, BECAUSE THE ESSENCE OF THE MSSA IS NOT TO GRANT ANY PATENT, TRADE MARK, DESIGN OR MODEL, PLAN, SECRET FORMULA OR PROCESS. WE NOTE THAT THE AFORESAID DEFINITION OF 'ROYALTY' UNDER ARTICLE 12(4) OF THE INDIA-NETHERLANDS DTAA IS IDENTICAL TO THAT CONTAINED IN ARTICLE L2(2) OF THE OECD MODEL TAX CONVENTION (VERSION 2014) ON INCOME AND ON CAPITAL. WE ALSO NOTE THAT THE RECEIPTS UNDER MSSA ARE ALSO NOT TAXABLE AS FEES FOR TECHNICAL SERVICES (FTS) UNDER ARTICLE 12(5)(B) OF THE INDIA NETHERLANDS DTAA, AS ARTICLE 12(5) OF THE INDIA NETHERLANDS DTAA DOES NOT COVER MANAGERIAL SERVICES. SIMILAR TO THE DEFINITION OF FEES FOR INCLUDED SERVICES/FEES FOR TECHNICAL SERVICES UNDER INDIA-USA AND INDIA-UK DTAA, THE INDIA NETHERLANDS DTAA DOES NOT COVER MANAGERIAL SERVICES WITHIN THE DEFINITION OF TECHNICAL SERVICES. IT ONLY COVERS TECHNICAL OR CONSULTANCY SERVICES. A BRIEF COMPARATIVE POSITION OF INDIA-UK DTAA, INDIA-USA DTAA, AND INDIA-NETHERLANDS DTA ARE GIVEN BELOW: INDIA-UK DTAA ARTICLE 13 ROYALTIES AND FEES FOR TECHNICAL SERVICES INDIA-USA DTAA ARTICLE L2 ROYALTIES AND FEES FOR INCLUDED SERVICES INDIA-NET'ANDS DTA ARTICLE L2 - ROYALTIES AND FEES FOR TECHNICAL SERVICES 4. FOR THE PURPOSES OF PARAGRAPH 2 OF THIS ARTICLE, AND SUBJECT TO PARAGRAPH 5, OF THIS ARTICLE, THE TERM FEES FOR TECHNICAL SERVICES' MEANS PAYMENTS OF ANY KIND OF ANY PERSON IN CONSIDERATION FOR THE RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISION OF SERVICES OF A TECHNICAL OR OTHER PERSONNEL) WHICH 4. FOR PURPOSES OF THIS ARTICLE, 'FEES FOR INCLUDED SERVICES MEANS PAYMENTS OF ANY KIND TO ANY PERSON IN CONSIDERATION FOR THE RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THROUGH THE PROVISION OF SERVICES OF TECHNICAL OR OTHER PERSONNEL) IF SUCH SERVICES : 5. FOR PURPOSES OF THIS ARTICLE, FEES FOR TECHNICAL SERVICES' MEANS PAYMENTS OF ANY KIND OF ANY PERSON IN CONSIDERATION FOR THE RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISION OF SERVICES OF A TECHNICAL OR OTHER PERSONNEL) WHICH SERVICES: (A) ARE ANCILLARY AND KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 44 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. (A) ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION FOR WHICH A PAYMENT DESCRIBED IN PARAGRAPH 3 IS RECEIVED ;OR (B) MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW- HOW, OR PROCESSES, OR CONSIST OF THE DEVELOPMENT AND TRANSFER OF A TECHNICAL PLAN OR TECHNICAL DESIGN. SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION FOR WHICH A PAYMENT DESCRIBED IN PARAGRAPH 4 OF THIS ARTICLE IS RECEIVED ;OR (B).MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW- HOW, OR PROCESSES, OR CONSIST OF THE DEVELOPMENT AND TRANSFER OF A TECHNICAL PLAN OR TECHNICAL DESIGN. FROM THE ABOVE COMPARATIVE POSITION OF INDIA-UK DTAA, INDIA-USA DTAA, AND INDIA-NETHERLANDS DTA AND HAVING REGARD TO THE NATURE OF THE SERVICES UNDER THE MSSA, IT IS CLEAR THAT THEY FALL UNDER THE CATEGORY OF 'MANAGERIAL' SERVICES AND NOT TECHNICAL OR CONSULTANCY SERVICES. FOR THAT WE RELY ON THE DECISION OF AAR IN THE CASE OF INVENSYS SYSTEMS INC.. IN RE 317 ITR 438 (AAR) WHEREIN THE NATURE OF SERVICES INVOLVED IN THE CASE OF INVESYS WERE AS FOLLOWS: ENVIRONMENTAL HEALTH SAFETY; HUMAN RESOURCE SUPPORT AND LEARNING AND DEVELOPMENT INITIATIVES; ASSISTANCE ON KEY PROJECTS; ASSISTANCE IN RELATION TO FINANCE, INTERNAL AUDIT, TREASURY AND TAX: CORPORATE SECRETARIAL AND LEGAL SUPPORT: THE AAR, INTER-ALIA HELD AS UNDER: THOUGH SOME OF THE SERVICES REQUIRED TO BE PERFORMED 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 'MANAGERIAL'.' KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 45 HENCE IT IS ABUNDANTLY CLEAR THAT THE SERVICES PROVIDED BY THE ASSESSEE UNDER MSSA ARE MANAGERIAL IN NATURE. THOUGH THE SCOPE OF SERVICES IN THE AGREEMENT IS OPEN ENDED, THE RESIDUARY PROVISIONS CLEARLY STATE THAT ONLY SERVICES SIMILAR IN NATURE TO THE DEFINED SCOPE SHALL BE RENDERED UNDER THE AGREEMENT I.E. THE RESIDUARY SERVICES WOULD ALSO BE 'MANAGERIAL' IN NATURE LIKE THE PRIMARY SERVICES. AS SUCH, CONSIDERING THE NATURE OF SERVICES AND IN ABSENCE OF THE WORD 'MANAGERIAL SERVICES' IN THE DEFINITION OF FTS IN THE INDIA-NETHERLANDS DTAA, SERVICES RENDERED BY THE ASSESSEE UNDER MSSA CANNOT BE TAXED AS FEES FOR TECHNICAL SERVICES FTS. 35. WE NOTE THAT EVEN OTHERWISE, RECEIPTS UNDER THE MSSA ARE NOT TAXABLE AS FEES FOR TECHNICAL SERVICES (FTS) UNDER ARTICLE 12(5)(B) OF THE INDIA NETHERLANDS DTAA AS THE ASSESSEE DOES NOT MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL ETC., TO PHILIPS INDIA. THE ARTICLE 12(5) DEFINES FTS AS UNDER: FOR PURPOSES OF THIS ARTICLE, 'FEES FOR TECHNICAL SERVICES' MEANS PAYMENTS OF ANY KIND TO ANY PERSON IN CONSIDERATION FOR THE RENDERING OF ANY TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THROUGH THE PROVISION OF SERVICES OF TECHNICAL OR OTHER PERSONNEL) IF SUCH SERVICES: ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION FOR WHICH A PAYMENT DESCRIBED IN PARAGRAPH 4 OF THIS ARTICLE IS RECEIVED; OR MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HOW OR PROCESSES, OR CONSIST OF THE DEVELOPMENT AND TRANSFER OF A TECHNICAL PLAN OR TECHNICAL DESIGN. THE MEANING TO BE ATTRIBUTED TO THE PHRASE MAKE AVAILABLE HAS BEEN DISCUSSED IN A DECISION OF THE HON`BLE KARNATAKA HIGH COURT IN CIT VS. DE BEERS INDIA MINERALS (P) LTD. (SEE 21 TAXMANN.COM 214 (KAR). THE RELEVANT EXTRACT OF THE SAID JUDGMENT IS REPRODUCED BELOW: '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, KNOWHOW, AND THE LIKE. THE SERVICE SHOULD BE AIMED AT AND RESULT IN TRANSMITTING TECHNICAL KNOWLEDGE, ETC., SO THAT THE PAYER OF THE SERVICE COULD DERIVE AN ENDURING BENEFIT AND UTILIZE THE KNOWLEDGE OR KNOWHOW 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, SKILLS, 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 KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 46 OF THE SERVICE THAT MAY REQUIRE TECHNICAL KNOWLEDGE, SKILLS, ETC., DOES NOT MEAN THAT TECHNOLOGY IS MADE AT AVAILABLE TO THE PERSON PURCHASING THE SERVICE, WITHIN THE MEANING OF PARAGRAPH (4)(B). SIMILARLY, THE USE OF A PRODUCT WHICH EMBODIES TECHNOLOGY SHALL NOT PER SE BE CONSIDERED TO MAKE THE TECHNOLOGY AVAILABLE. IN OTHER WORDS, PAYMENT OF CONSIDERATION WOULD BE REGARDED AS FEE FOR TECHNICAL/INCLUDED SERVICES' ONLY IF THE TWIN TEST OF RENDERING SERVICES AND MAKING TECHNICAL KNOWLEDGE AVAILABLE AT THE SAME TIME IS SATISFIED. [PARA 22] WE NOTE THAT COORDINATE BENCH OF ITAT, MUMBAI IN THE CASE OF RAYMONDS LIMITED (86 ITD 791) HELD THAT MERE RENDITION OF SERVICES DOES NOT FALL WITHIN THE GAMUT OF THE TERM MAKE AVAILABLE UNLESS THE RECIPIENT OF SERVICES IS ENABLED AND EMPOWERED TO MAKE USE OF THE TECHNICAL KNOWLEDGE BY ITSELF IN ITS BUSINESS OR FOR ITS OWN BENEFIT WITHOUT RECOURSE TO THE ORIGINAL SERVICE PROVIDER IN THE FUTURE. 36. WE NOTE THAT THE TERM 'MAKE AVAILABLE' IS NOT DEFINED IN THE INDIA-NETHERLANDS DTAA. HOWEVER, THE TERM 'MAKE AVAILABLE' HAS BEEN EXPLAINED IN THE MEMORANDUM OF UNDERSTANDING ('MOU') CONCERNING 'FEES FOR INCLUDED SERVICES' IN ARTICLE 12 OF THE INDIA- USA DTAA. THE DEFINITION OF FTS UNDER INDIA-NETHERLANDS DTAA IS IN PARI MATERIA TO THAT UNDER THE INDIA-US DTAA. THEREFORE, THE MEANING OF THE EXPRESSION 'MAKE AVAILABLE' AS PER THE MOU TO THE INDIA-USA DTAA EQUALLY APPLIES TO ARTICLE 12(5)(B) OF THE INDIA-NETHERLANDS DTAA. THE AMENDING NOTIFICATION NO. SO 693 (E) DATED 30 AUGUST 1999 ISSUED BY THE GOVERNMENT OF INDIA SPECIFICALLY PROVIDES THAT THE MOU AND THE CONFIRMATION OF UNDERSTANDING, DATED 12 SEPTEMBER 1989, WITH REFERENCE TO PARAGRAPH 4 OF ARTICLE 12 OF THE INDIA - USA DTAA WILL APPLY MUTATIS MUTANDIS THE DEFINITION OF FTS UNDER ARTICLE 12 OF INDIA-NETHERLANDS DTAA. IN ANY CASE IT IS NOW A WELL-SETTLED PROPOSITION THAT MOU TO THE INDIA-USA DTAA CAN BE USED WHILE INTERPRETING OTHER DTAAS WHICH HAVE SIMILAR 'MAKE AVAILABLE' CLAUSE UNDER FTS ARTICLE. [ CIT VS. DE BEERS INDIA MINERALS (P.) LTD. 21 TAXMANN.COM 214 (KAR), C.E.S.C LTD. VS. DCIT 87 ITD 653 (KOL - TM), RAYMOND LTD. VS. DCIT 86 ITD 791 (MUM)] THE MOU EXPLAINS MAKE AVAILABLE AS FOLLOWS: GENERALLY SPEAKING, TECHNOLOGY WILL BE CONSIDERED 'MADE AVAILABLE' WHEN THE PERSON ACQUIRING THE SERVICE IS ENABLED TO APPLY THE TECHNOLOGY. THE FACT THAT THE PROVISION OF THE SERVICE MAY REQUIRE TECHNICAL INPUT BY THE PERSON PROVIDING THE SERVICE DOES NOT PER SE MEANS THAT TECHNICAL KNOWLEDGE, SKILLS, ETC. ARE MADE AVAILABLE TO THE PERSON PURCHASING THE SERVICE, WITHIN THE MEANING OF PARA 4(B). SIMILARLY, THE USE OF A PRODUCT WHICH EMBODIES TECHNOLOGY SHALL NOT PER SE BE CONSIDERED TO MAKE THE TECHNOLOGY AVAILABLE. EXAMPLE 7 GIVEN IN THE MOU READS AS FOLLOWS: KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 47 FACTS : THE INDIAN VEGETABLE OIL MANUFACTURING FIRM HAS MASTERED THE SCIENCE OF PRODUCING CHOLESTEROL-FREE OIL AND WISHES TO MARKET THE PRODUCT WORLD WIDE. IT HIRES AN AMERICAN MARKETING CONSULTING FIRM TO DO A COMPUTER SIMULATION OF THE WORLD MARKET FOR SUCH OIL AND TO ADVISE IT ON MARKETING STRATEGIES. ARE THE FEES PAID TO THE US COMPANY FOR INCLUDED SERVICES ? ANALYSIS : THE FEES WOULD NOT BE FOR INCLUDED SERVICES. THE AMERICAN COMPANY IS PROVIDING A CONSULTANCY SERVICE WHICH INVOLVES THE USE OF SUBSTANTIAL TECHNICAL SKILL AND EXPERTISE. IT IS NOT, HOWEVER, MAKING AVAILABLE TO THE INDIAN COMPANY ANY TECHNICAL EXPERIENCE, KNOWLEDGE OR SKILL, ETC. NOR IS IT TRANSFERRING A TECHNICAL PLAN OR DESIGN. WHAT IS TRANSFERRED TO THE INDIAN COMPANY THROUGH THE SERVICE CONTRACT IS COMMERCIAL INFORMATION. THE FACT THAT TECHNICAL SKILLS WERE REQUIRED BY THE PERFORMER OF THE SERVICE IN ORDER TO PERFORM THE COMMERCIAL INFORMATION SERVICE DOES NOT MAKE THE SERVICE A TECHNICAL SERVICE WITHIN THE MEANING OF PARA 4(B).' WE NOTE THAT IF WE APPLY THE AFORESAID WELL SETTLED MEANING OF THE TERM MAKE AVAILABLE TO THE FACTS OF THE ASSESSEE`S CASE UNDER CONSIDERATION, THE NATURE OF SERVICES COVERED UNDER ARTICLE 2 OF THE MSSA ARE IN THE AREA OF COMMERCIAL, ACCOUNTING, AUDITING, FINANCIAL, SOCIAL AND LEGAL MATTERS, HUMAN RESOURCES, INSURANCE ETC. AND IT CAN BE SEEN THAT THE SERVICES PROVIDED DO NOT MAKE AVAILABLE TECHNICAL KNOWLEDGE/SKILL/EXPERTISE, ETC. THEREFORE, BY PROVIDING THESE SERVICES THE ASSESSEE CANNOT BE SAID TO HAVE BEEN MAKE AVAILABLE ANY KNOWLEDGE, SKILL, ETC. IN OTHER WORDS, THE ASSESSEE, THROUGH THE PROVISION OF SAID SERVICES, CANNOT BE SAID TO EQUIP THE RECIPIENT IN A MANNER SUCH THAT CAN INDEPENDENTLY PERFORM THESE FUNCTIONS ITSELF IN FUTURE, WITHOUT RECOURSE TO THE ASSESSEE. 37. WE NOTE THAT THE DECISION IN THE CASE OF SHELL INDIA MARKETS PVT. LTD. [2012] 342 ITR 223 (AAR) CITED BY THE LD DR FOR THE REVENUE CANNOT BE FOLLOWED FOR SEVERAL REASONS. FIRSTLY, IT IS PER INCURIAM AS IT IS CONTRARY TO EARLIER DECISIONS OF THE AAR ITSELF IN ABB LIMITED 322 ITR 564 (AAR) AND INVESYS 317 ITR 438(AAR). SECONDLY, IT RELIES ON ITS OWN DECISION IN PERFETTI VAN MELLE HOLDING B.V., IN RE (AAR NO. 869 OF 2010 DATED 9 DECEMBER 2011) WHICH HAS NOW BEEN REVERSED BY THE HON`BLE DELHI HIGH COURT IN [(2014) 52 TAXMANN.COM 161 (DELHI)]; THIRDLY, IT IS CONTRARY TO SEVERAL KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 48 DECISIONS OF THE ITAT AND THE HON`BLE KARNATAKA HIGH COURT. THEREFORE, THE SAID DECISION IN SHELL'S CASE (SUPRA) CITED BY LD DR FOR THE REVENUE, CANNOT BE FOLLOWED. THEREFORE, THE RECEIPTS UNDER MSSA ARE NOT TAXABLE AS FTS UNDER ARTICLE L2(5)(B) OF THE INDIA-NETHERLANDS DTAA AS THE ASSESSEE DOES NOT 'MAKE AVAILABLE' TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL ETC., TO PHILIPS INDIA, HENCE WE DELETE THE ADDITION MADE BY DRP/AO TO THE TUNE OF RS. 1,129,058,312/- 38. NOW, WE ADDRESS THE OTHER MAIN GRIEVANCE OF MR.G. MALLIKAARJUNA, LEARNED DR APPEARING FOR THE REVENUE, AND THE OBJECTION RAISED BY THE LD AO/DRP, IS THAT, THE RECEIPTS FROM THE RDCA AND MSSA WERE DECLARED BY THE ASSESSEE AS ITS INCOME IN EARLIER ASSESSMENT YEARS AND ALSO IN THE ORIGINAL RETURN OF INCOME FOR THE ASSESSMENT YEAR 2008-09, UNDER CONSIDERATION. THAT IS, THE HONBLE DRP OBSERVED THAT THE ASSESSEES CASE IS WEAKENED FROM THE OUTSET BY THE BURDEN OF AN ADVERSE LEGACY, IN THE FORM OF ITS OWN ADMISSION IN THE EARLIER YEARS THAT THE RECEIPTS UNDER RDCA AND RECEIPTS UNDER MSSA IN QUESTION WERE IN THE NATURE OF ROYALTY AND FTS RESPECTIVELY. THE ASSESSEE HAD OFFERED THE RDCA RECEIPTS AND MSSA RECEIPTS FOR TAXATION, IN THIS MANNER IN THE EARLIER ASSESSMENT YEARS AS WELL AS IN THE ORIGINAL RETURN FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. HENCE, ASSESSEE CANNOT CHANGE ITS STAND SUDDENLY THAT THE RDCA RECEIPTS AND MSSA RECEIPTS ARE NOT TAXABLE IN INDIA. THE ASSESSEE HAS BEEN OFFERING THE RDCA RECEIPTS AND MSSA RECEIPTS FOR TAXATION IN INDIA SINCE INCEPTION, THEREFORE, THE ASSESSEE SHOULD FOLLOW THE CONSISTENCY. THEREFORE, LD. DRP NOTED THAT IN ASSESSEE`S CASE UNDER CONSIDERATION, NOTHING NEW HAS HAPPENED NOR HAS ANY FRESH FACT BEEN BROUGHT ON RECORD EXCEPT FOR THE RULING OF THE AAR IN THE CASE OF ABB LTD 322 ITR 564, IN SUPPORT OF THE CLAIM THAT THESE BOTH PAYMENTS WERE MERE REIMBURSEMENTS UNDER A COST SHARING AGREEMENT. KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 49 WE NOTE THAT THE ASSESSEE HAS ALSO RAISED GROUND NO.3 ON THE SAID ISSUE, WHICH READS AS FOLLOWS: 3.THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. A.O AND THE HONBLE DRP ERRED IN NOT APPRECIATING THE BONA FIDE CHANGE IN POSITION REGARDING NON-TAXABILITY OF RECEIPTS UNDER RDCA AND MSSA ADOPTED BY THE ASSESSEE FOR A.Y 2008-09, WHICH RESULTED FROM BETTER EVOLUTION/INTERPRETATION OF LAW THROUGH JUDICIAL PRECEDENTS. WE NOTE THAT AS PER THE RETURN OF INCOME FILED AND THE NOTES ANNEXED WITH IT, THE ASSESSEE IS A FOREIGN COMPANY INCORPORATED IN NETHERLANDS AND IS THE PARENT COMPANY OF THE PHILIPS GROUP WHICH OPERATES IN THE AREAS OF LIGHTING, CONSUMER ELECTRONICS, DOMESTIC APPLIANCES, COMPONENTS AND MEDICAL SYSTEMS. THE ASSESSEE DOES NOT HAVE A PERMANENT ESTABLISHMENT (PE) IN INDIA. THE ASSESSEE HAS BEEN FILING ITS RETURN OF INCOME IN INDIA FROM THE ASSESSMENT YEAR 2005-06. DURING THE F.Y 2004-05 RELEVANT TO A.Y 2005-06, THE ASSESSEE ENTERED INTO AGREEMENTS WITH THE RESPECTIVE PARTIES DETAILED BELOW FROM WHICH IT HAS SINCE BEEN RECEIVING REMUNERATIONS IN INDIA: (1). RESEARCH AND DEVELOPMENT COOPERATION AGREEMENT DATED 13.12.2004 WITH PHILIPS INDIA LTD ON ACCOUNT OF ROYALTY OR FEES FOR TECHNICAL SERVICES. (2). MANAGEMENT SUPPORT SERVICES AGREEMENT DATED 22.10.2001 WITH PHILIPS INDIA LTD ON ACCOUNT OF FEES FOR TECHNICAL SERVICES. SINCE THE A.Y.2005-06, THAT IS, THE YEAR IN WHICH THE ASSESSEE FIRST FILED ITS RETURN, THE ASSESSEE HAS NEVER QUESTIONED OR DOUBTED THE TAXABILITY OF ITS TOTAL RECEIPTS FROM THE ABOVE ( RDCA AND MSSA) AGREEMENTS AND HAS BEEN CONSIDERING ITS ENTIRE INCOME AS BEING TAXABLE IN INDIA. IT IS HOWEVER, PERTINENT TO NOTE THAT IN THE REVISED RETURN OF INCOME FILED FOR THE AY. 2008-09, THE ASSESSEE HAS FOR THE FIRST TIME ADOPTED THE NEW STAND OF TREATING ITS INCOME RECEIVED FROM THE RESEARCH AND DEVELOPMENT COOPERATION AGREEMENT ( RDCA) AND MANAGEMENT SUPPORT SERVICES AGREEMENT (MSSA), AS NOT BEING TAXABLE IN INDIA. WE NOTE THAT WITH EFFECT FROM ASSESSMENT YEAR 2008-09 DUE TO BETTER UNDERSTANDING OF THE PROVISION OF THE ACT VIS-A-VIS INDIA-NETHERLAND DTAA, THE ASSESSEE CHOSE NOT TO OFFER FOR TAX THE SUBJECT MENTIONED RECEIPTS ON ACCOUNT OF RDCA AND MSSA. WE NOTE THAT PEIL ( INDIAN CO.) HAD ENTERED INTO (RDCA) AND (MSSA) AGREEMENTS, AS NOTED KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 50 ABOVE, WITH KPNEV ON 13 TH DECEMBER 2004. ON PERUSAL OF THE PREAMBLE OF THE AGREEMENT IT TRANSPIRES THAT KPENV IS CONTINUOUSLY ENGAGED IN RESEARCH AND DEVELOPMENT PROGRAMS AND THESE RIGHTS, KNOW-HOW AND EXPERIENCE UNDER THE RESEARCH AND DEVELOPMENT PROGRAMS ARE GENERATED FOR THE BENEFIT OF THE INDIVIDUAL MEMBER COMPANIES OF THE PHILIPS GROUP. THE PEIL WISHES TO ENSURE CONTINUITY IN ITS BUSINESS OPERATIONS AND FOR THAT REASON IS INTERESTED TO TAKE ADVANTAGE OF THE RESEARCH AND DEVELOPMENT PROGRAMS AND SECURE ACCESS TO THE BENEFITS RESULTING THEREFROM. WE HAVE ALREADY ADJUDICATED IN THIS ORDER THAT RDCA RECEIPTS AND MSSA RECEIPTS ARE NOT IN THE NATURE OF ROYALTY AND FEES FOR TECHNICAL SERVICES BUT THESE ARE KIND OF COST SHARING ARRANGEMENTS AND COST CONTRIBUTION AGREEMENTS AND NO PROFIT ELEMENT IS EMBEDDED AND IT IS ONLY REIMBURSEMENT OF COSTS. THE RDCA RECEIPTS AND MSSA RECEIPTS ARE ALSO NOT TAXABLE IN INDIA AS PER THE PROVISIONS OF ARTICLE 12 OF THE INDIA- NETHERLAND TAX TREATY, HENCE THESE RECEIPTS ARE NOT TAXABLE IN INDIA. IN THE LIGHT OF THE ABOVE DISCUSSIONS, THE PAYMENTS MADE TO KPENV TOWARDS PEIL'S SHARE OF THE COST INCURRED IN RESPECT OF RDCA AND MSSA ACTIVITIES ARE NOT LIABLE TO BE TAXED UNDER THE ACT AS BUSINESS INCOME IN THE ABSENCE OF PERMANENT ESTABLISHMENT IN INDIA, HAVING REGARD TO ARTICLE 7 OF THE INDIA-NETHERLANDS TAX TREATY, NOR CAN IT BE SUBJECTED TO TAX AS ROYALTY OR FEES FOR TECHNICAL SERVICES UNDER ARTICLE 12 OF THE SAID TREATY. 39. WE NOTE THAT BECAUSE OF SUBSEQUENT DEVELOPMENT IN LAW AND COURT DECISIONS, THE ASSESSEE CHOSE NOT TO OFFER THE RECEIPTS ON ACCOUNT OF RDCA AND MSSA AGREEMENTS. IT IS WELL-SETTLED PRINCIPLE OF LAW THAT THERE IS NO ESTOPPEL AGAINST LAW AND IN THIS REGARD RELIANCE IS PLACED ON THE DECISION OF THE HON`BLE JURISDICTIONAL HIGH COURT OF CALCUTTA IN THE CASE OF MAYNAK PODDAR (HUF) VS. WEALTH TAX OFFICER (2003) 262 ITR 0633, WHEREIN IT WAS HELD: '....... AN ASSESSEE IS LIABLE TO PAY TAX ONLY UPON SUCH INCOME AS CAN BE IN LAW INCLUDED IN HIS TOTAL INCOME AND WHICH CAN HE LAWFULLY ASSESSED UNDER THE ACT. THE LAW EMPOWERS THE ITO TO ASSESS THE INCOME OF AN ASSESSEE ACCORDING TO LAW AND DETERMINE THE TAX PAYABLE THEREON. IN DOING SO, HE CANNOT ASSESS AN ASSESSEE ON AN AMOUNT, WHICH IS NOT TAXABLE IN LAW, EVEN IF THE SAME, IS SHOWN BY AN ASSESSEE. THERE IS NO ESTOPPEL BY CONDUCT AGAINST LAW NOR IS THERE ANY WAIVER OF THE LEGAL RIGHT AS MUCH AS THE LEGAL LIABILITY TO BE ASSESSED OTHERWISE THAN ACCORDING TO THE MANDATE OF THE LAW (SIC). IT IS ALWAYS OPEN TO AN ASSESSEE TO TAKE KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 51 THE PLEA THAT THE FIGURE, THOUGH SHOWN IN HIS RETURN OF TOTAL INCOME, IS NOT TAXABLE IN LAW. ........' HENCE, THAT THERE IS NO ESTOPPEL AGAINST LAW. FROM THE PERUSAL OF THE VARIOUS CLAUSES OF RDCA AGREEMENT, AND MSSA AGREEMENT WE HOLD THAT THE ASSESSEE IS FULLY JUSTIFIED IN NOT TREATING THE SUBJECT MENTIONED RECEIPTS AS INCOME, THAT IS, THESE ARE COST SHARING ARRANGEMENTS. HENCE, THE INCOME SHOULD BE TAXABLE IN THE HANDS OF THE RIGHT PERSON AND IN RIGHT ASSESSMENT YEAR. BY 'RIGHT PERSON', WE MEAN THE PERSON WHO IS LIABLE TO BE TAXED, ACCORDING TO LAW, WITH RESPECT TO A PARTICULAR INCOME OR RECEIPTS. THUS, EVEN THE ASSESSEE HAD PAID TAXES IN PREVIOUS YEARS ON RDCA RECEIPTS AND MSSA RECEIPTS, THEN ALSO HE IS NOT PRECLUDED FROM RAISING THE CONTENTION BEFORE THE INCOME TAX AUTHORITIES OR BEFORE THE APPELLATE AUTHORITIES THAT HE IS NOT LIABLE TO PAY TAXES ON THESE RECEIPTS. IN PREVIOUS YEARS, THE ASSESSEE WAS PAYING TAXES ON THESE RECEIPTS BY MISTAKE OR HE WAS NOT PROPERLY GUIDED BY HIS COUNSELS, WHETHER THESE RECEIPTS ARE TAXABLE OR NOT. THE ULTIMATE AIM OF THE INCOME TAX ACT IS TO COLLECT REVENUE ON RIGHT INCOME AND FROM RIGHT PERSON. 40. WE NOTE THAT HON`BLE SUPREME COURT IN THE CASE OF NATIONAL THERMAL POWER CO.LTD, 229 ITR 383 (SC) HELD THAT THE PURPOSE OF THE ASSESSMENT PROCEEINGS BEFORE THE TAXING AUTHORITIES IS TO ASSESS CORRECTLY THE TAX LIABILITY OF AN ASSESSEE IN ACCORDANCE WITH LAW. IF, FOR EXAMPLE, AS A RESULT OF A JUDICIAL DECISION GIVEN WHILE THE APPEAL IS PENDING BEFORE THE TRIBUNAL, IT IS FOUND THAT A NON-TAXABLE ITEM IS TAXED OR A PERMISSIBLE DEDUCTION DENIED, IN THAT SITUATION THE ASSESSEE MAY RAISE THAT QUESTION BEFORE THE TRIBUNAL FOR THE FIRST TIME, SO LONG AS THE RELEVANT FACTS ARE ON RECORD IN RESPECT OF THAT ITEM. THE POWERS OF THE TRIBUNAL UNDER SECTION 254 OF THE ACT ARE NOT RESTRICTED ONLY TO DECIDE THE GROUNDS WHICH ARISE FROM THE ORDER OF THE CIT(A). THE RELEVANT OBSERVATIONS OF THE HON`BLE SUPREME COURT IN THE CASE OF NATIONAL THERMAL POWER CO. LTD (SUPRA) ARE GIVEN BELOW FOR READY REFERENCE: 3 . UNDER S. 254 OF THE IT ACT THE TRIBUNAL MAY, AFTER GIVING BOTH THE PARTIES TO THE APPEAL AN OPPORTUNITY OF BEING HEARD, PASS SUCH ORDERS THEREON AS IT THINKS FIT. THE POWER OF THE TRIBUNAL IN DEALING WITH APPEALS IS THUS EXPRESSED IN THE WIDEST POSSIBLE TERMS. THE PURPOSE OF THE ASSESSMENT PROCEEDINGS BEFORE THE TAXING AUTHORITIES IS TO ASSESS CORRECTLY THE TAX LIABILITY OF AN ASSESSEE IN ACCORDANCE WITH LAW. IF, FOR EXAMPLE, AS A RESULT OF A JUDICIAL DECISION GIVEN WHILE THE APPEAL IS PENDING BEFORE THE TRIBUNAL, IT IS FOUND THAT A NON-TAXABLE ITEM IS TAXED OR A PERMISSIBLE DEDUCTION DENIED, WE DO NOT KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 52 SEE ANY REASON WHY THE ASSESSEE SHOULD BE PREVENTED FROM RAISING THAT QUESTION BEFORE THE TRIBUNAL FOR THE FIRST TIME, SO LONG AS THE RELEVANT FACTS ARE ON RECORD IN RESPECT OF THAT ITEM. WE DO NOT SEE ANY REASON TO RESTRICT THE POWER OF THE TRIBUNAL UNDER S. 254 ONLY TO DECIDE THE GROUNDS WHICH ARISE FROM THE ORDER OF THE CIT(A). BOTH THE ASSESSEE AS WELL AS THE DEPARTMENT HAVE A RIGHT TO FILE AN APPEAL/CROSS-OBJECTIONS BEFORE THE TRIBUNAL. WE FAIL TO SEE WHY THE TRIBUNAL SHOULD BE PREVENTED FROM CONSIDERING QUESTIONS OF LAW ARISING IN ASSESSMENT PROCEEDINGS ALTHOUGH NOT RAISED EARLIER. 4. IN THE CASE OF JUTE CORPORATION OF INDIA LTD. VS. CIT (1990) 88 CTR (SC) 66 : (1991) 187 ITR 688 (SC) : TC 7R.343, THIS COURT, WHILE DEALING WITH THE POWERS OF THE AAC OBSERVED THAT AN APPELLATE AUTHORITY HAS ALL THE POWERS WHICH THE ORIGINAL AUTHORITY MAY HAVE IN DECIDING THE QUESTION BEFORE IT SUBJECT TO THE RESTRICTIONS OR LIMITATIONS, IF ANY, PRESCRIBED BY THE STATUTORY PROVISIONS. IN THE ABSENCE OF ANY STATUTORY PROVISION, THE APPELLATE AUTHORITY IS VESTED WITH ALL THE PLENARY POWERS WHICH THE SUBORDINATE AUTHORITY MAY HAVE IN THE MATTER. THERE IS NO GOOD REASON TO JUSTIFY CURTAILMENT OF THE POWER OF THE AAC IN ENTERTAINING AN ADDITIONAL GROUND RAISED BY THE ASSESSEE IN SEEKING MODIFICATION OF THE ORDER OF ASSESSMENT PASSED BY THE ITO. THIS COURT FURTHER OBSERVED THAT THERE MAY BE SEVERAL FACTORS JUSTIFYING THE RAISING OF A NEW PLEA IN AN APPEAL AND EACH CASE HAS TO BE CONSIDERED ON ITS OWN FACTS. THE AAC MUST BE SATISFIED THAT THE GROUND RAISED WAS BONA FIDE AND THAT THE SAME COULD NOT HAVE BEEN RAISED EARLIER FOR GOOD REASONS. THE AAC SHOULD EXERCISE HIS DISCRETION IN PERMITTING OR NOT PERMITTING THE ASSESSEE TO RAISE AN ADDITIONAL GROUND IN ACCORDANCE WITH LAW AND REASON. THE SAME OBSERVATIONS WOULD APPLY TO APPEALS BEFORE THE TRIBUNAL ALSO . THUS, THE PLEA OF THE LD DR THAT ASSESSEE CANNOT CHANGE HIS STAND AND CANNOT RAISE A NEW ISSUE BEFORE THE TRIBUNAL FIRST TIME IS NOT ACCEPTABLE IN VIEW OF THE SETTLED POSITION OF LAW AND PRINCIPLES LAID DOWN BY THE HON`BLE SUPREME COURT IN THE CASE OF NATIONAL THERMAL POWER CO. LTD (SUPRA). AT THIS JUNCTURE IT IS APPROPRIATE TO QUOTE THE PROVISIONS OF SUB-SECTION 2 OF SECTION 90 OF THE ACT, TO THE EXTENT RELEVANT FOR OUR ANALYSIS, WHICH READS AS FOLLOWS: SECTION 90 AGREEMENT WITH FOREIGN COUNTRIES OR SPECIFIED TERRITORIES. (2) WHERE THE CENTRAL GOVERNMENT HAS ENTERED INTO AN AGREEMENT WITH THE GOVERNMENT OF ANY COUNTRY OUTSIDE INDIA OR SPECIFIED TERRITORY OUTSIDE INDIA, AS THE CASE MAY BE, UNDER SUB-SECTION (1) FOR GRANTING RELIEF OF TAX, OR AS THE CASE MAY BE, AVOIDANCE OF DOUBLE TAXATION, THEN, IN RELATION TO THE ASSESSEE TO WHOM SUCH AGREEMENT APPLIES, THE PROVISIONS OF THIS ACT SHALL APPLY TO THE EXTENT THEY ARE MORE BENEFICIAL TO THAT ASSESSEE. KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 53 THEREFORE, AS PER SUB SECTION 2 OF SECTION 90 OF THE ACT DTAA ENTERED INTO WITH THE FOREIGN COMPANY IS A STATUTORY DOCUMENT RECOGNIZED UNDER THE INCOME TAX ACT AND BY SUB SECTION 2, THE PROVISIONS OF THE INCOME ACT WOULD APPLY ONLY TO THE EXTENT THAT THEY ARE MORE BENEFICIAL TO THE ASSESSEE. WE NOTE THAT AS PER ARTICLE 12 OF INDIA-NETHERLAND DTAA THESE RECEIPTS DO NOT FALL IN THE DEFINITION OF ROYALTY OR FEES FOR TECHNICAL SERVICES THEREFORE, THE ASSESSEE IS NOT LIABLE TO PAY TAX ON THESE RECEIPTS IN INDIA AND THIS WAY, THE DTAA PROVISIONS WILL PREVAIL. HENCE, ASSESSEE CAN CHANGE ITS STAND AT ANY POINT OF TIME IF IT SEEMS TO HIM THAT THE RECEIPTS ARE NOT TAXABLE IN HIS HAND AS PER THE PROVISIONS OF LAW. THEREFORE, WE DO NOT AGREE WITH LD DR FOR THE REVENUE, SO FAR THIS ISSUE IS CONCERNED. 41. THE ASSESSEE HAS RAISED THE GROUND NO.4 WHICH READS AS FOLLOWS: 4. THAT ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CASE, THE AO ERRED IN NOT GRANTING FULL CREDIT FOR TAX DEDUCTED AT SOURCE AMOUNTING TO RS.163,028,554/- DESPITE THE FACT THAT THE COMPANY HAS FILED ALL THE ORIGINAL CERTIFICATES DURING THE COURSE OF THE PROCEEDINGS WE NOTE THAT ASSESSEE HAS NOT BEEN GIVEN FULL CREDIT FOR THE TDS CERTIFICATES SUBMITTED BY HIM TO THE ASSESSING OFFICER. EVEN, LD DR FOR THE REVENUE HAS ALSO FAIRLY AGREED WITH US THAT LD ASSESSING OFFICER OUGHT TO HAVE GIVEN FULL CREDIT OF ALL THE TDS CERTIFICATES SUBMITTED BY THE ASSESSEE DURING THE ASSESSMENT PROCEEDINGS. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT ASSESSEE COMPANY HAS NOT BEEN GIVEN FULL CREDIT OF TDS CERTIFICATE SUBMITTED DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THEREFORE, PRAYED THE HONBLE BENCH TO GIVE A DIRECTION TO THE ASSESSING OFFICER TO CONSIDER THE TDS CERTIFICATE AND GIVE THE CREDIT TO THE COMPANY. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE AND WE NOTE THAT ASSESSEE IS ENTITLED TO TAKE THE CREDIT OF TDS CERTIFICATE SUBMITTED BY IT DURING THE ASSESSMENT PROCEEDINGS. THEREFORE, WE DIRECT THE ASSESSING OFFICER TO PROVIDE CREDIT FOR TAX DEDUCTED AT SOURCE AFTER VERIFICATION OF THE TDS CERTIFICATE FILED BY THE ASSESSEE, AS PER THE PROVISIONS OF LAW. THEREFORE, WE ALLOW THIS GROUND OF APPEAL RAISED BY THE ASSESSEE FOR STATISTICAL PURPOSES. KONINKLIJKE PHILIPS ELECTRONICS N.V. ITA NO.1889/KOL/2012 ITA NO.565/KOL/2014 ITA NO.381/KOL/2015 54 42. OTHER GROUNDS RAISED BY THE ASSESSEE IN ITS APPEAL MEMO HAVE NOT BEEN PRESSED DURING THE HEARING BEFORE US OR CONSEQUENTIAL IN NATURE, THEREFORE, THEY DO NOT REQUIRE ANY ADJUDICATION. 43. IN THE RESULT, THE APPEALS FILED BY THE ASSESSEE,( ON SUMMARIZED GROUND NO. 1, 2 AND 3) (IN ITA NO.1189/KOL/2012, ITA NO.565/KOL/2014 & ITA NO.381/KOL/2015) ARE ALLOWED, WHEREAS GROUND NO.4 RAISED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 25/10/2018. SD/- (S. S. GODARA) SD/- (A. L. SAINI) / JUDICIAL MEMBER / ACCOUNTANT MEMBER /KOLKATA; DATED: 25/10/2018 RS, SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE ASSESSEE- KONINKLIJKE PHILIPS ELECTRONICS N.V. 2. / THE RESPONDENT.- DCIT(IT) 1(1), KOLKATA 3. ( ) / THE CIT(A), 4. / CIT 5. , , / DR, ITAT, KOLKATA 6. [ / GUARD FILE. //TRUE COPY// BY ORDER SENIOR PRIVATE SECRETARY, HEAD OF OFFICE/D.D.O, I.T.A.T, KOLKATA BENCHES, KOLKATA .
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