DDIT (Int’l Taxation) v. Scientific Allanta Inc.

Determination of taxability of an American company having a PE in India for rendering certain services overseas relating to Satellite Network Communication System

In order to be covered within the scope of para (b) of Article 12(4) of the Indo-US Tax Treaty it is sine qua non that the services must result into making available the technical knowledge etc. to the party of the other Contracting State; “make available” means to provide something to one, which is capable of use by the other; such use may be for once only or on a continuous basis; going by the clause (a) of Article 7(1), even if there is permanent establishment but no part of the business profits is attributable to such PE, then also there does not arise the question of taxability of business profits under Article 7.
ITAT, MUMBAI BENCHES ‘L’, MUMBAI

DDIT (Int’l Taxation)

v.

Scientific Allanta Inc.

ITA No. 9228/Mum/2004

July 3, 2009

RELEVANT EXTRACTS:

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7. We have heard the rival submissions in the light of the material placed before us and the precedents relied upon. There is no dispute on the fact that the assessee entered into agreement with TVCL to provide Satellite Network Communication System and also to provide certain installation and commissioning services associated with the initial installation and communications thereof. The split up of the total consideration has been extracted by us in an earlier para of this order. The assessee offered for taxation consideration from all other items except for supply of equipment and PMES&FT. The A.O. had not raised any question about the taxability of consideration for supply of equipment. Thus the present controversy rotates around the determination of taxability or otherwise in respect of Indian rupees equivalent to 15,000 and 2,51,083 US$ towards PMES&FT services. The case of the Assessing Officer is that such services are in the nature of FIS as per Article 12.

8. Before we proceed further it will be apt to consider the prescription of the relevant part of Article 12, which is as under:-

"ARTICLE 12 - Royalties and Fees for Included Services

1. royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2 …………

3. The term "royalties" as used in this article means:

(a) payments of any kind received as consideration for the use of or the right to use, any copyright of a literary, artistic, or a scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition thereof; and

(b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than payments derived by an enterprise described in paragraph I of article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of article 8.

4. For purposes of this article, "fees for included services " means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services:

(a) any ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or

(b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.

5,6,7,8 ..."

9. A bare perusal of this Article reveals that the FIS may be taxed in India and the existence or otherwise of any permanent establishment of the non-resident in India is not a relevant consideration. The fees for included services has been defined in Article 12(4) as per which the payments of any kind to any person in consideration for the rendering of any technical or consultancy services shall be brought within the ambit of the expression "fees for included services" if such services are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment is for the use of or right to use any copyright of a literary, artistic, or a scientific work including cinematograph films or work on film, etc. as mentioned in paragraph 3 of Article 12. Thus the application of para 4(a) of Article 12 is ruled out in the instant case because the assessee has not received any amount in the nature of royalty as per para 3 of this Article, with which the instant services could be correlated. Sub-para (b) of Article 12(4) states that the payment in consideration for the rendering of any technical or consultancy services shall be included within the purview of fee for included services if such services "make available" any technical knowledge, experience, skill, know-how, or processes etc. to the other party. Thus in order to be covered within the scope of para (b) it is sine qua non that the services must result into making available the technical knowledge etc. to the party of the other Contracting State.

10. In other words the services must result into making available the technical knowledge, experience or skill etc. to the other party so as to be covered within its scope of this Article and mere providing of such services without making available technical knowledge, experience etc. to the other party is not sufficient. The assessee has ab initio contended before the authorities below that even if the services rendered by the it were held to be technical services but those did not result into "making available" any technical knowledge or experience etc. to the TVCL. From the language of Article 12, we find that the expression "rendering of any technical or consultancy services" is followed by the expression "which make available technical knowledge, experience, skill, know-how". In this context it becomes imperative to understand the meaning of the expression "make available" as used in this Article, which is the bone of contention. "Make available' means to provide something to one, which is capable of use by the other. Such use may be for once only or on a continuous basis, in our context 10 make available uic technical services means that such technical information or advice is transmitted by the assessee to TVCL, which comes at its disposal for taking the benefit there from by its use. Even the use of such technical services by the recipient for once only will satisfy the test of making available the technical services to the assessee. If the first party uses all the technical services at its own end abroad, albeit the benefit of that directly and solely flows to the payer of the services in India, that cannot be characterized as the making available of the technical services to the recipient.

12. Similar view has been taken in the case of Mahindra & Mahindra Limited Vs. DCIT [(2009) 313 ITR 263 (AT) (Mum.) (SB).]. It, therefore, follows that making available the technical services to the recipient is of paramount importance for including the consideration paid for it as FIS under Article 12 of DTAA. Adverting to the facts of the instant case we find that the assessee put up a categorical claim before the AO that these services were provided overseas to facilitate the timely execution of the project and no part of such services was made available to TVCL, This specific contention raised before the Id. AO has not been controverted by him. On the contrary the Assessing Officer has made out a case that since the assessee was instructing TVCL and imparting education about the expertise in India and hence if the instructions through managerial services or technical input was provided, it should be considered as equivalent to making available the technical knowledge, experience, skill etc to TVCL. Thus it is apparent that the Assessing Officer misdirected himself by interpreting the expression "make available" in an erroneous manner.

14. It is settled legal position that the primary onus to produce the desired details/information, necessary for the purposes of assessment, is on the assessee. Once the needful is done and the relevant material is made available, then the onus- shifts on the assessing authority to controvert the assessee's stand. It becomes his duty to make out a case contrary to what has been stated, if he is not agreeable with the submissions and evidence advanced before him. He may also call for further detail or information from the assessee so as to satisfy himself as to the veracity of the material already placed on record. In that case the onus again shifts on the assessee to prove his case to the satisfaction of the AO. Thus the burden of prove is like a vacillating pendulum shifting from the assessee to the AO, depending on the facts, circumstances and stage of each case. If the AO does not call for any further corroboration from the assessee in support of what has already been furnished, then there arises a presumption that he is satisfied with the explanation tendered on behalf of the assessee. Thereafter he cannot allege die existence of a fact contrary to record without specifically disproving the material before him. However there may be a situation where the assessee does not furnish the desired information and the assessment order is passed drawing inference against the assessee. Subsequently if the assessee comes out with the relevant information and proves to the satisfaction of the appellate authorities the bona fide of the reasons for not producing such relevant information at the assessment stage, the authorities may consider the restoration of the matter to the AO for a fresh decision. There may be other situations necessitating the sending of matter back to the file of AO for fresh determination, like the AO deciding the controversy from one angle which does not stand the test of scrutiny by the higher authorities and at the same time it is found that he had a valid jurisdiction over the matter, in such a situation the matter may be directed to be examined from the other accurate angle which is alternatively available to him as per law ; or where the contention of the assessee is dismissed on threshold without going in to the further details but subsequently it transpires that such dismissal was unwarranted, in that situation also, the matter will require re-examination at the end of the AO. These are only the illustrative situations. There may be other circumstances requiring the fresh determination. But where the assessee has supplied the requisite detail/information, as required by the AO and it is found that the said information is relevant for the decision of the AO, then it is not open to the assessing authority to discard the same without putting any further query. Not raising any question on such material supplied by the assessee is deemed as its acceptance. Thereafter it becomes impermissible for the Revenue to urge before the further appellate authorities that the AO failed to examine the case properly and the same be sent back for a fresh adjudication. If such a course is allowed to prevail, then the assessment proceedings will never come to an end and the AOs will frame all the assessments half-heartedly with the tacit understanding that any laxity on their part will be made good by way of restoration of the matter. We are not convinced with this point of view canvassed by the Id. DR.

15. Adverting to the facts of the instant case it is noticed that the assessee specifically stated before the A.O. about the rendering of such services from overseas. Not only that, the detail of such services along with consideration which is part of VSAT Agreement was also made available. In such a situation it is too late in the day for the learned D.R. to contend that the matter be restored to the file of A.O. for a fresh determination of the nature of services and the resultant taxability. We, therefore, hold since the assessee did not make available any technical knowledge, experience or skill to TVCL by way of rendering PMES&FT services overseas, Article 12 of DTAA does not apply in the instant case and the consideration cannot be included in FIS.

16. Having held that the assessee did not receive fees for included services within the meaning of Article 12 of DTAA, it requires to be examined as to whether the case of the assessee is covered under Article 7 of “business profits”. This Article provides that the business profits of an enterprise of one Contracting State may not be taxed by the other Contracting State unless the enterprise carries on business in that other Contracting State through a permanent establishment situated there. There is no dispute on the fact that the assessee did have a permanent establishment in India in the previous year relevant to the assessment year under consideration. Now the only question which falls for determination is to decide as to whether income from any of the services rendered overseas, having no relation whatsoever with the PE, can be subjected to tax only on the ground that the assessee has a P.E. in India.

18. In the present case we are dealing with DTAA with USA. Business profits are the subject matter of Article 7, the language of para 1 of which is as under:-

  “ Article 7-Business profits

1. The profits of an enterprise of a Contracting State shall be taxed only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of a enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment; (b) sale in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment.”

19. On going through the mandate of the above Article, it boils down that the general rule is that the business profits of an enterprise of one contracting state may not be taxed by the other contracting state unless the enterprise carries on business in other contracting state though a permanent establishment. In a case where a PE exists, the other state may tax the income of the enterprise but only so much of the income as is attributable to :-

  i. That permanent establishment;

ii. Sales in that State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or

iii Other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment.

20. Thus it can be seen that going by the clause (a) of Article 7(1), the business profits can be taxed in India only to such extent which are attributable to the permanent establishment in India. In other words if there is no permanent establishment then the business profits of the non-resident cannot be taxed in India. Even if there is permanent establishment but no part of the business profits is attributable to such permanent establishment, then also there does not arise the question of taxability under Article 7. Here is a case in which the stated consideration was received for rendering of services outside India. In the present circumstances the assessee had categorically stated before the AO that such consideration was for rendering of overseas services, which position had not been disturbed by the Assessing Officer. That being the position even though the assessee has permanent establishment in India, no part of such services rendered overseas can be linked with the permanent establishment in India for the purposes of determination of income attributable to the P.E. in India. We, therefore, hold that the Id. CIT (A) was justified in coming to the conclusion that no portion of the revenue could be subjected to tax in India. This ground is, therefore, not allowed.



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