TaxTMI 
TaxTMI 
2016 (11) TMI 1249
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....of Rs. 22,57,89,998 2. The learned AO/DRP erred in law and in facts, in holding that the management service fees received by the Appellant are taxable as "Royalty" under Article 12(4) of the Double Taxation Avoidance Agreement between India and Netherlands ('India -Netherlands Treaty''), thereby making an addition of Rs. 22,57,89,998 to the income of the Appellant. 3. The learned AO/DRP failed to appreciate the fact that the services provided by the Appellant are in the nature of business support and administration services and are not in nature of sharing of information concerning industrial, commercial and scientific experience. 4. The learned AO/DRP failed to appreciate that services rendered by the Appellant are in the nature of business support and administration services and not in the nature of technical or consultancy services. 5. The learned AO/DRP failed to appreciate that the services rendered by the Appellant do not "make available" any technical knowledge, experience, ski, know-how or processes and hence is not taxable in view of the India - Netherlands Treaty. 6. The learned AO/DRP failed to appreciate the fact that business support and administration s....
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.... the fact that no deductions and allowances under section 28 to 44C and section 57(1) are allowed against the income taxable under section 115A of the Act, on gross basis as Royalty and fees for technical services. 16. The learned AO failed in appreciating that brought forward depreciation allowance for the current year by virtue of section 32(2) of the Act and hence as per section 115A(3), cannot be absorbed/set-off against Royalty and fees for technical income taxable on gross income basis. Set-off brought forward business losses of Rs. 5,55,14,086 against the additions made in the income of the Appellant 17. The learned AO erred in law in facts in adjusting the brought forward business losses of Rs. 5,55,14,086 against the additions made as Royalty and fees for technical services income. 18. The learned AO failed to appreciate the fact that income earned by the Appellant from rendering management services to its group entities or reimbursement of salary received will be classified under the head 'Income from other sources'. Accordingly, the learned AO erred in setting off brought forward losses against the income earned by the Appellant under the head 'Income from other....
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....3. Brief facts and the background of the case are that, the assessee, (hereinafter referred to as VODMC) is a company incorporated in Netherlands and is eligible for benefits of Indo-Netherland DTAA as per Article 4. VODMC is primarily international Dredging contractor and is engaged in the business of undertaking capital dredging, maintenance of dredging projects and other dredging related activities. However, during the year under consideration, i.e. AY 2009- 10 there were no dredging contracts executed by VODMC in India. Thus, assessee had not earned any income from contractual operations in India in the relevant assessment year except for recovery of bad debts of Rs. 50,00,068/-. VODMC had entered into "Services Agreement" with 'Van Oord India Private Limited' (VOIPL), under which it has provided certain assistance and support on continuous basis to VOIPL in the field of personnel and organization, operation support, quality, health, safety and environment, designated personnel offshore, information technology, estimation and engineering, marketing and administrative services in connection with the operations of their business of marine construction and related activities. VODM....
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....ated activities. The services to be performed under this agreement shall include but not limited to:- Personnel and Organization • Assistance and support in crew management, planning and administration functions and assistance in development of policies in respect of human resource; Operations support • Assistance in ensuring that qualifying projects are commenced correctly through project co-ordination and costly errors are avoided or limited; • Assistance in project execution and related activities; Quality, health, safety and environment • Assistance in formulating business processes for organizational and project matters; Designated Personnel ashore • Designating a person ashore to maintain contract the crew of the ship and the Service Recipient Company; Information Technology • Providing information technology support during the performance of a project, support with respect to hardware and software and transformation of information; Estimating and Engineering • Assistance in cost budgeting and engineering; Marketing • Advice and support on marketing eff....
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....ccessful implementation as well. During the course of assessment proceedings, the assessee was asked to furnish the documentary evidences in support of the business management services, in response to which the assessee vide letter dated 18.11.2011 has furnished all the evidences. On going through the same he observed that it is providing "user manual" having instructions along with technical design as to how the folders are to be maintained regarding logon instructions, work place securities, accessing network drives, how to open an archive along with technical designs and diagrams, etc. It also contains the standard procedures for inspection, checklist of main equipments, project plan, safety walk, safety work report, drawing solution along with drawing have also been given. The literature regarding marine engineering solutions, main equipments and dredging solutions have also been given in detail along with the terms and designs. This he inferred that it is nothing but sharing of experience of industrial, commercial and scientific in nature and hence payments received by the assessee are to be treated as "royalty" under Article 12(4) of India-Netherland DTAA. He further held tha....
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....of quality, health & safety, information technology, estimating and engineering, marketing, administration, personnel etc. to all its group affiliates. Accordingly, VOIPL, which is a subsidiary of VODMC in India, has entered into a service agreement dated 1, April 2004 with VODMC in respect of the said services which have been highlighted above. 8. After referring to the various clauses given in the "Services Agreement", which are appearing at page 1 to 5 of the paper book, he submitted that none of the services provided any kind of use of or right to use of knowhow to the Indian company. It was in the nature of 'Standard Services' and to ensure that there is a consistency in the approach world-wide and it meets the international standards of the assessee company. Though under the agreement, compensation was based on mark-up but in actual no markup has been received by the assessee nor has been claimed by the Indian Entity, VIOPL. This fact, he submitted can be corroborated from the certificate obtained from the Auditors (Earnest & Young) who have certified on the basis of actual verification of details and documents that only cost incurred by the assessee in rendering to the af....
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....r Netherland BV . Brochures (Please Refer page 67 to 75 Of the Paper book) 4 Quality, Health, Safety and Environment ('QHSE') . Conducting at regular intervals Internal audits to determine Adherence to QHSE procedures . Increasing safety awareness within Van Oord group . Updating health, safety and environment policy to be followed by the group. . Audit report for internal audit conducted (Please refer page 75 to 83 of the Paper book) 5 Estimating And Engineering VODMC provides need based support /assistance to VOIPL . Reports/study on the nature of Soil, nature of the dredger to be used etc. . Estimating the cost for the project . Carrying out the risk analysis. . Engineering support services And time to time technical advice in relation to the projects carried out . Copy of report from estimation and engineering department (Please refer to page 84 to 136 of the Paper book) 6 Personnel And Organisation Administration and Legal . VODMC assists in providing pre- Bid, performance and other Guarantees to the clients of VOIPL which assists BOIPL in obtaining contracts. . Assistance for finalizing the terms of the contract to ensure that VOIPL . Le....
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....edge, skill or experience by way of information concerning industrial, commercial or scientific is made available to VOIPL. These FAQ's; how to login to the system, charge the password etc can never amount to transfer of knowhow. b) Operational support: The Van Oord as a group operates at a high standard of safety, where ever it may operate. VODMC provides with the checklist (format) for project plans, safely work and inspection plans. The information in the checklist is completed in India, by a senior person working on project in India. It is not prepared/companied by VODMC. VIOIPL has to apply its own mind while filing up the information and no information has been passed by the VODMC. These checklists required to be continually updated form time to time on regular basis. No knowledge, skill or experience by way of information concerning industrial, commercial or scientific is made available to VOIPL to create or update the checklist themselves. There is no knowhow that is transferred to VOIPL. c) Marketing: The VOIPL for marketing support is provided with printed/ published brochures which can be distributed to its potential clients. VODMC updates and maintains the w....
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....e provided on continuous basis and constantly updated from time to time. These are pure services without any transfer of Knowledge, skill and experience concerning industrial, commercial or scientific is made available to VOIPL. 9. Mr. Kaka, summarizing his contentention submitted that, assessee while rendering business support services to VOIPL is not making available any kind of knowhow to the Indian entity and hence payment made by VOIPL to the assessee cannot be reckoned as "royalty". In support of his contention, he relied upon the following decisions:- Sr. No Case Law Citation 1 GECF Asia Limited v DDIT 65 SOT 257 2 Diamond Services International (P) Ltd Vs. Union of India [2008] 304 ITR 201 3 DDIT v Preroy AG [2010] 39 SOT 187 (Mumbai ITAT) 4 Spice Telecom v ITO [2008] 113 TTJ 502 (Bangalore ITAT) 10. Another limb of his argument on this aspect was that, the 'service fees' which has been received by the assessee for rendering of aforesaid services are without any markup and constitutes pure allocation of cost, which cannot be held to be taxable under the Act. For rendering of aforesaid services VODMC has charged a ....
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....embers sourced from VODMC, satisfied all the conditions prescribed under the provisions of section 10(6)(viii) of the Act and therefore, the salary income received by the crew members was not taxable in India. Further, VODMC has not charged any mark up on such salary payments. Accordingly, VOIPL has made reimbursement of the salary paid to VODMC to the crew members of the dredger, which by itself not taxable in India under the provisions of section 10(6)(viii) of the Act. In the light of the aforesaid facts, he submitted that the reimbursement was on account of salary of crew members provided on the dredgers by VODMC. Further, the provision of crew on dredgers has no connection or is not ancillary or subsidiary to the provision of services pursuant to the service agreement entered between VODMC and VOIPL. In any case, he submitted that, being reimbursement of expenses the same cannot be treated as income of the assessee and in support, he relied upon the same set of decisions which have been enlisted above. 12. On the other hand, Ld. DR strongly relying upon the order of the Assessing Officer and DRP submitted that ITAT Bench in the case of assessee in 'Van Oord ACZ Marine Contr....
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.... for dredging and kept back once the work is over. These are oversimplified statements. Apart from arguing that the payments were in the nature of reimbursement of expenses, the assessee has not explained anything about the pricing of the services, for which the so-called reimbursements were made by the Indian subsidiary to the assessee company. It is the case of the assessee that expenses were reimbursed by the Indian subsidiary at par with the invoices issued by third parties. But there is nothing on record to show that the price negotiated between the assessee and the third parties and the amounts reflected in the invoices issued by the third parties are prices comparable to similar services provided by international parties. The assessee has not established that it had offered services to the subsidiary company on cost to cost basis at best reasonable and competent prices available at that point of time. Therefore, it is not proper to rule out an element of profit in the invoices raised by third parties themselves, even though what was paid by the subsidiary company to the assessee is the same amount as reflected in the invoices. Therefore, the argument that what has been pa....
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....ore us. The first issue for our adjudication is, whether the fees received by the assessee from its Indian entity, VIOPL for management and support services is to be treated as "royalty" under Article 12(4) of India-Netherland-DTAA or not. The entire gamut of facts and nature of services provided by the assessee to VOIPL in the terms of service agreement dated 1st April, 2004 has already been discussed above elaborately. The revenue's case is that, the VOIPL is completely dependent on assessee (VODMC) for its experience in industrial, commercial and scientific field. The Indian entity is engaged in highly technical business of dredging activities for which it requires the information and experience of the VODMC right from the pre-bidding stage till the post project completion stage. Thus, the payment received by the assessee-firm for rendering such kind of services falls within the realm and ambit of 'royalty' as defined in para (4) of Article 12 of the DTAA. The relevant definition of 'royalty' as given in Article 12(4) of India-Netherlands-DTAA reads as under:- "The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, ....
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.... The need to distinguish these two types of payments, i.e. payments for the supply of know-how and payments for the provision of services, sometimes gives rise to practical difficulties. The following criteria are relevant for the purpose of making that distinction: - Contracts for the supply of know-how concern information of the kind described in paragraph 11 that already exists or concern the supply of that type of information after its development or creation and include specific provisions concerning the confidentiality of that information. - In the case of contracts for the provision of services, the supplier undertakes to perform services which may require the u se, by that supplier, of special knowledge, skill and expertise but not the transfer of such special knowledge, skill or expertise to the other party. - In most cases involving the supply of know-how, there would generally be very little more which needs to be done by the supplier under the contract other than to supply existing information or reproduce existing material. On the other hand, a contract for the performance of services would, in the majority of cases, involve contractual obligations. For instan....
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....n its own account without recourse of the provider of the knowhow in future. For being regarded as "royalty" there has to be alienation or use of or right to use of any knowhow and without any transfer of any knowledge, experience or skill, it cannot be termed as "royalty". In the case of GECC Asia Ltd. vs. DDIT (supra) had occasion to deal with the term "information concerning to industrial, commercial or scientific experience" and after referring to various commentaries, observed and held as under: "The royalty payment received as consideration for information concerning industrial, commercial, scientific experience alludes to the correct of knowhow. There is an element of imparting of knowhow to the other, so that the other person can use or has right to use such knowhow. In case of industrial, commercial and scientific experience, if services are being rendered simply as an advisory or consultancy, then it cannot be termed as "royalty", because the advisor or consultant is not imparting his skill or experience to other, but rendering his services from his own knowhow and experience. All that he imparts is a conclusion or solution that draws from his own experience. The emine....
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....nd inspection plans etc. Similarly, for marketing, the assessee provides for emarketing through its website and maintaining it, printing and publishing brochures which can be distributed to its potential clients. It also helps VOIPL to obtain the certificate of approval from the concerned organizations and obtained the contracts on the regular basis. Regarding quality health and safety environment services, the assessee merely conducts internal audits on regular intervals so that proper adherence to such quality standard and procedures are valid/ should remain valid. Similarly, in the estimating an engineering services and other services also, the assessee is mainly providing tender process, helping and preparing (estimates) and bids and plan consisting in local performance and other guarantees to the client of VOIPL etc. For rendering of these services, there is no element of imparting of any "knowhow" or there is transfer of any knowledge, skill or experience. Thus, in our opinion, none of the services provided by the assessee in the term of "service agreement" falls within the scope and ambit of "royalty" as defined in Article 12(4) of the DTAA. 16. In any case, as pointed by....