TaxTMI 
TaxTMI 
2018 (11) TMI 201
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....he 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 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 cir....
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....irst 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 nontaxability 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....
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.... 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 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....
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.... 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, ....
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.... 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 Philip's 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 company's 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....
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.... (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;] (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 subclauses (i) to 25[(iv), (iva) and](v). In view of the above provisions of the Act, thus the payment made to the assessee under ....
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....'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 one's 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 assessee's 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....
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....ome, was added back to the total income of the assessee. 11. Aggrieved by the order of the ld. Assessing Officer, the assessee filed an application before the Hon'ble Dispute Resolution Panel ('DRP'). The Hon'ble DRP observed that the assessee's 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 assessee's case and pointi....
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....nd 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 dra....
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....ments 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. 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 t....
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....therlands 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 researc....
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....ifying 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 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 i....
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....zation 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 nontransferable 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 inspect....
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....cial machinery, tools and instruments supplies by Philips, k. Admitting at the company's 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 ....
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.... 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." 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 service....
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....e 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 ....
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....ford 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 Webster's 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 ri....
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....art 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 ....
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....lly 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/-. 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 Koninkli....
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....ssee 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 ....
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....., 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 '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. The....
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....as relied on the definition of the term 'make available' in the MOU to the India USA- DTAA and on the Notification 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....
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....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 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. ....
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....ia-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 knowle....
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.... 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 respe....
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....is 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; 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 stru....
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.... 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 possib....
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....cle 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 undivul....
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....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: "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 o....
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.... available technical knowledge, experience, skill, knowhow, or processes, or consist of the development and transfer of a technical plan or technical design. 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 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, knowhow, 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 invo....
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.... 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....
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.... 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: "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, makin....
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....nue, 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 Hon'ble DRP observed that the assessee's 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 rulin....
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....t of RDCA and MSSA. We note that PEIL ( Indian CO.) had entered into ("RDCA") and (MSSA) agreements, as noted above, with KPNEV on 13th 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, t....
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....as 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 oppor....
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....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." 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 woul....