TaxTMI 
TaxTMI 
2011 (11) TMI 484
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....lty and 10% as fees for included services held by the Assessing Officer" The above ground of appeal can be conveniently decided together with Gr.No.1 to 3 raised by the Assessee in its cross objection, which reads as follows: "1. On the facts and circumstances of the case, and in law, the learned Commissioner of Income Tax (Appeals) - XXXIII, Mumbai ['the CIT(A)'] erred in holding that the fees of USD 2,00,000 received by the Respondent from MAX India Ltd. ('MAX') during the year are fees for included services ('FIS') under Article 12(4) of the Double Taxation Avoidance Agreement between India and USA ('the DTAA') and thus, liable to tax. It is prayed that the learned Assessing Officer ('AO') be directed to hold that the fees from MAX for services rendered by the Respondent are outside the scope of Article 12 of the DTAA and further in the absence of a Permanent Establishment in India, be held to be not taxable in India. 2. On the facts and circumstances of the case and in law, the learned CIT(A) erred in taxing USD 465,000, 50% of the fees of USD 9,30,000 received by the Respondent from Wockhardt Hospitals Limited ('WHL'), as 'royalties' under Article....
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....ia Ltd. (Max)US $ 2,00,000 For services rendered in relation to health care. 2. Wockhardt Hospital Ltd. (WHL) US$ 9,30,000 For services rendered in relation to health care. The issue that requires consideration in this appeal is as to whether the aforesaid receipts are chargeable to tax in India in the hands of the Assessee. The AO after considering the nature of services rendered by the Assessee for which it received the aforesaid payments was of the view that 90% of the aforesaid payments was in the nature of Royalty taxable under Article 12(3) of the DTAA between India and USA and 10% of the aforesaid payments was in the nature of Fees for Included Services(FIS) taxable under Article 12(4) of the DTAA between India and USA. On appeal by the Assessee, the CIT(A) held that the 50% of the fees received by the Assessee from WHL was in the nature of Royalty and the remaining 50% was not taxable because it was payment to the Assessee for teaching in or by educational institutions within the meaning of Article 12(5)(c) of the DTAA between India and USA. As far as payment received from Max is concerned, the CIT(A) held that the entire payment was "Fees for Included Services" (FIS)....
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....rams and clinical protocols for the clinical services to be provided by the facility and will advise in the development of information systems for the facility. (c) HMI will advise in the development of the facility to be owned managed and/or operated by Max and the company, including equipment choice and planning procurement (if requested), site selection, and architectural consultation. (d) HMI will provide consultation and technical advice on management administration and operations of the company and the facility, including rendering of advice and determining the criteria for selection of key personnel and medical partners and a human resources needs assessment for the company. (e) HMI shall provide to Max the deliverables/inputs as specified in Exhibit A hereto and shall organize, structure and implement critical education and training programs for key personnel to the extent specified in the said Exhibit A. Such training will be conducted in India or elsewhere as is deemed necessary by both parties. Clause-8 of the Agreement lists out the obligations of MAX like giving its business plans, finance, capital, budgets etc. In consideration of rendering the aforesaid s....
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....ific Deliverable (new Cardiac and Women's Hospitals) - Review and give feedback to WHL on various aspects for the new cardiac hospital i.e. in respect of clinical programs, evaluation of the site plans reviewing and providing feedback on the design prepared by WHL of the hospital facility, etc. - Provide recommendations on the amount and type of on-site orientation and - education & training programs required for each type of personnel. - Review and provide recommendation on the planned patient care delivery system. - Provide programs to assist WHL in the development of clinical program plan, for the new women's hospital and plan for hospital site." 8. The consideration payable for services to be rendered by the Assessee to WHL has been set out in clause-2 of the Agreement. Clause-3 of the Agreement provides for use of the name of the Assessee by WHL. The relevant portions thereof are as follows: "3. USE OF NAMES; INTELLECTUAL PROPERTY:- (a) Subject to the terms of this MOA, and for the duration thereof WHL, the Existing Cardiac Hospital and the Existing Kidney Hospital, and, when developed, the Propose ....
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....e and its logo in the agreement and has given only limited rights to MAX and WHL to use them. Thus the consideration received by the Assessee to the extent of 90% can be attributed to the right to use the logo and therefore 90% of the payments received by the Assessee has to be construed as Royalty. The remaining 10% was to be considered as FIS. The sums received by the Assessee as aforesaid were accordingly brought to tax by the AO. 10. On appeal by the Assessee the CIT(A) held that the 100% of the receipts by the Assessee from MAX has to be considered as FIS and in this regard followed the order of his predecessor in A.Y. 01-02. As far as receipts from WHL is concerned, the CIT(A) held as follows: "5. I have gone through the facts of the case very carefully. The services rendered to WHL is entirely different from services rendered to MAX. In the case of WHL, the main emphasize is on Education & Training. The Exhibit 'A' and Exhibit 'B' clearly shows that the main emphasis is on Education and Training. Further the appellant has also brought out the summary of certain Educational Activities undertaken by HMI for WHL. Further, undoubtedly HMI is an educational Institution. As ....
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....s internationally. Notification from Internal Revenue Service, USA has also been; filed which has granted exemption to HMI for taxes as charitable and educational institution. 10. However, apart from the above, the point; which is to be noted in the facts of the case that the impugned agreement also provides that WHL for the existing Cardiac Hospital and the existing Kidney Hospital and the proposed Cardiac Hospital and Women 's Hospital may refer itself as receiving education and training services from HMI and designate themselves as a "Harvard Medical International associated Institution" (Refer para 3 (a) of the Agreement). Further, WHL has not only been authorised to uses the name and logo of HMJ but there is also a provision in the agreement whereby HMI is prohibited to grant any such right and facility to any other entity other than WHL in the Indian territories as specified in the Agreement ( see para 5(a) of the Agreement). Thus, it becomes evident that the impugned payment by WHL to HMI is not merely for rendering of educational and training services but I also for allowing usage of HMI's brand name and log. The argument that clause (c) of para 3 of the Agreement states....
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....are not relevant in respect of payments received by the Assessee from MAX because it was nobody's case that these receipts are for teaching in or by educational institutions and therefore not in the nature of FIS because of Article 12(5)(c) of DTAA between India and USA. The case of the AO was that 90% of these receipts are to be treated as Royalty and 10% FIS. The CIT(A) held that the entire receipts has to be considered as FIS. The revenue is not in appeal against the order of the CIT(A). Therefore what remains for consideration is as to whether the payments are Royalty to the extent of 90% and 10% FIS or the entire payment is to be considered as FIS. On this aspect the Tribunal on identical facts in the case of the Assessee for AY 00-01 and 01-02 held as follows: "10. We have heard the rival submissions. The issue for consideration is as to whether the receipt by the assessee from Max can be said to be in the nature of FIS. We have already set out the details of activities which the assessee was to provide Max India Ltd. The relevant articles in the treaty are as follows: ARTICLE 12: Royalties and fees for included services : (1) Royalties and fees for included services....
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.... is not even Revenue's case before us that the assessee's case has anything to do with Article 12(3). The case of the Revenue therefore hinges on the applicability of Article 12(4)(b) which applies to rendering of only such technical or consultancy services as 'make available' technical knowledge, experience, skill or know-how etc. In other words, in order to attract the taxability of an income under Article 12(4)(b), not only the payment should be in consideration for rendering of technical or consultancy services, but in addition to the payment being consideration for rendering of technical services., the services so rendered should also be such that 'make available' technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. 12. The learned CIT(A) has referred to the definition of 'fees for technical services' as given in Explanation 2 to section (1)(vii) of the I.T. Act, 1961 which is as follows :- "Explanation 2 : For the purposes of this clause, 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical ....
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....erson rendering services to the person utilizing the same is contemplated by the article. Some sort of durability or permanency of the result of the 'rendering services' is envisaged which will remain at the disposal of the person utilizing the services. The fruits of the services should remain available to the person utilizing the services in some concrete shape such as technical knowledge, experience skill etc. 13. In the Raymond's case (supra), the Tribunal also held that rendering of technical services cannot be equated with making available the technical services. In the case of CESC Ltd. v. DCIT (2003) 80 TTJ (Cal) (TM) 806: (2003) 87 ITD 653 (Cal)(TM) also the question regarding the scope of expression making available came up for the consideration of the Tribunal. In that case, the Tribunal was dealing with the scope of Article 13(4)(c) of the Indo-UK tax treaty which is admittedly in pari materia with Article 12(4) of the India-USA tax treaty with which we are presently concerned. The majority view was that in order to be attracted by the provisions of the said article of the tax treaty, not only the services should be technical in nature but should be such as to result....
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....mittedly there was a situation where technology was made available. So also in the case of Advance Ruling P.NO. 13 of 1995 228 ITR 487. The decision in the case of CESC Ltd. (supra) actually supports the plea of the assessee. For the reasons set out above, we are of the view that learned CIT(A) indeed erred in holding that the monies received by the assessee from Max India Ltd. constitute 'fees for included services' within the meaning of Article 12(4) of the India-US treaty, and are accordingly liable to be taxed in India. Since, the assessee does not have any permanent establishment in India, the incomes so arising to them in India cannot be taxed under Article 7 as 'business profits' either. Therefore, we direct the Assessing Officer to delete the impugned additions." 13. The learned D.R. submitted before us that once the Assessee gives material in the form of standard operating procedures, technical advice etc., it makes available to Max knowledge, experience, skill, know-how and in this regard brought to our notice certain clauses of the Agreement. In this regard our attention was drawn to Exhibit-A of the agreement dt.1.3.2000. He laid emphasis on the fact that there was r....
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.... the agreement dated 14/12/2000 is the essence of the agreement and all the other services rendered are only incidental. According to him it is only the use of the assessee's name and logo that gives benefit to WHL and, therefore, the provisions of Article 12(3)(a) and Article 12(4)(a) will make it either a royalty or a fees for included services. In this regard it was also submitted by the ld. D.R that the assessee in clause 5 of the agreement has agreed not to establish any alliance similar to the one entered into with WHL. This clause according to the ld. D.R also shows that it is only the right to use the logo and name of the assessee was the prime consideration for the payment of consideration to the assessee by WHL. 16. The ld. Counsel for the assessee in this regard submitted that the right to use the logo and name of the assessee by WHL was only incidental. In this regard he drew our attention to clause 3(c) of the agreement dated 14/12/2000, wherein it has been made clear that there are no economic consideration for right to use the name or logo of the assessee. Our attention was also drawn to the decision of Hon'ble Delhi Bench of the ITAT in the case of Sheraton Inter....
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....payment cannot be said to be FIS for the reason that nothing is made available by the Assessee to WHL and in this regard, the observations while deciding payments received by the Assessee from MAX would be equally applicable to the payments received from WHL also. We are of the view that the entire payment received by the assessee from WHL is in the nature of business profits and since the assessee does not have a PE in India the same cannot be brought to tax in India. Consequently, Ground No.2 & 3 of the Cross Objection of the assessee are allowed. 18. Ground No.2 raised by the revenue in its appeal reads as follows: "On the facts and circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition on account of reimbursement of expenses of Rs. 45,34,096/-." 19. The material facts in respect of this ground of appeal are as follows: During the previous year the assessee received a sum of US$ 93,371 from WHL, Max and Shri Ramachandra Medical College and Research Institute (SRMCRI). According to the assessee this payment was reimbursement of actual expenses incurred by the assessee on behalf of WHL, Max & SRMCRI. According to the assessee reimburse....
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....m for the purpose of defining the working relationship, role of the assessee and to create comprehensive programmes for achieving provision of services by the assessee. WLSL agreed to reimburse the assessee for all direct and indirect cost relating to such visits by the team of professional of the assessee. A Sum of US$ 75,000 received by the assessee during the previous year from WHL was reimbursement of such expenses. The aforesaid sum of US$ 75,000 was in the nature of an interim payment and in the event of regular agreement being entered into between Wockhardt and the assessee, the same has to be adjusted towards consideration payable by the Wockhardt to the assessee under the agreement for providing various services. It appears that later on, the assessee and Wockhardt entered into a contractual agreement and this sum of US$ 75,000 was adjusted against travel related and administrative direct expenses incurred by the assessee prior to the date of agreement. In course of assessment proceedings, the Assessing Officer wrote to WHL regarding above payment. It appears that the payment was made by Wockhardt Pharmaceutical Division of Wockhardt group and subsequently made over by Woc....
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....ement with Wockhardt Ltd. & Max and subject to further proof that these expenses were incurred by the assessee; but were to be incurred by Wockhardt & Max, the assessee will be entitled to claim deduction. We deem it fit and appropriate to restore this issue to the Assessing Officer with liberty to the assessee to let in appropriate evidence in this regard before the Assessing Officer. For statistical purposes Ground No. 4 of the assessee is treated as allowed. In the result, appeal by the assessee is partly allowed." 22. The ld. D.R submitted before us that neither the AO nor the CIT(A) has given any finding about the nature of reimbursement of expenses and the agreement between the parties as to how and when WHL, Max or SRMCRI has to reimburse the expenses to the assessee. In this regard ld. D.R drew our attention to an invoice raised by the assessee on SRMCRI, wherein the description of the expenses was in relation to air fare of the assessee's personnel to visit the 3rd convocation of SRMCRI in Chennai, India. According to him the nature of expenses cannot be considered as having been incurred in the course of rendering services to SRMCRI. His plea was that this aspect must ....
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....is partly allowed. ITA 1559/M/07 & CO No.146/M/07: 28. ITA No.1559/M/07 is an appeal by the revenue against the order dated 26/10/2006 of CIT(A) 33, Mumbai relating to A.Y 2003-04 and C.O No.146/M/07 is a cross objection by the assessee against the very same order of the CIT(A). The ground raised by the revenue in its appeal and Ground No.1 to 3 raised by the assessee in its Cross Objection are identical to the Grounds 1 & 2 raised by the revenue in its appeal ITA 1558/M/07 and Ground No.1 to 3 in the Cross Objection No.145/M/07 raised by the assessee in tis Cross Objection for A.Y 2002-03. For the reasons given while deciding identical grounds in A.Y 2002-03, we dismiss the grounds raised by the revenue and allow Ground No.1 to 3 raised by the assessee in its Cross Objection. Both the parties agreed that the facts and circumstances prevailing in both the A.Ys are identical. Ground No.4 raised by the assessee in Cross Objection No.146/M/07 relating to charging of interest is academic and does not require any adjudication. ITA NO.3610/MUM/2005- REVENUES'S APPEAL: 29. This is an appeal by the revenue against the order dated 4/2/2005 of CIT(A)-31, Mumbai passed in an appea....