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2023 (6) TMI 176
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....sioner of Income Tax, International Taxation. - Circle 2(1). Bengaluru (*the learned AO'). has erred in assessing the total income of the Appellant in the assessment order passed under section 143(3) read with section 147 read with section 144C of the Income Tax Act. 1961 (" the Act") for the captioned Assessment Year ("AY"). Each of the ground is referred to separately, which may be kindly considered independent of each other. 1. Ground 1: Income earned by the Appellant erroneously characterized to be in the nature of Fees for Included Services/ Fees for Technical Services under the Act and the India - USA Tax Treaty ("Tax treaty") and is consequently subject to tax in India 1.1 On the facts and in the circumstances of the case, and in law, the learned AO erred in holding that the income earned by CRL Inc from its various customers in India is in the nature of Fees for Included Services ('FIS") / Fees for Technical Services ("FTS") and consequently liable to tax in India, without having due regard to Article 12(4) of the Tax Treaty. 1.2 The Hon'ble DRP/Iearned AO has failed to appreciate that the testing services provided by CRL Inc ....
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....ntaining a generic protocol of the test procedure and results to conclude the preclinical phase of testing. The assessee submitted that in rendering the above services, no technology / know-how / knowledge is transferred to the customers nor any right to access/ use of such property is granted. 3.2 For the year under consideration, the assessee received sum of Rs.9,77,31,642/- from its various Indian customers / clients including M/s. Syngene International Ltd. for the services rendered. The Ld.AO noted that the assessee had not offered the income in the return filed, and that, M/s. Syngene International Ltd. also failed to deduct TDS. Accordingly, notice u/s. 148 was issued to assessee on 31.03.2021. 3.3 In response to notice issued u/s. 148 of IT Act, the assessee filed its return of income for the A.Y. 2013-14 on 30.04.2021. Further, a notice u/s. 143(2) along with the reasons recorded for reopening was issued to the assessee on 25.06.2021 for furnishing details, documents, accounts, and other evidences in support of the return of income filed by the assessee. Thereafter notice 142(1) of the act was issued to the assessee on 09.02.2022 for furnishing details called for as ....
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....ppreciated the true import of the words "make available" used in Article 12(4)(b) while arriving at the conclusion. 3.8 The assessee filed various submissions in order to counter the observations of the Ld.AO during the assessment proceedings and also relied on various decisions of Coordinate Bench of this Tribunal as well as the decision of Hon'ble Karnataka High Court in case of CIT & Ors. vs. De Beers India Minerals (P.) Ltd. reported in (2012) 21 taxmann.com 214. The Ld.AO however dealt with the issue by observing as under: "11.4 Judicial Precedents 11.4.1 Legal issues are susceptible to interpretations and judicial precedents serve as guiding principles. Therefore, the decisions related to the issues on hand are also examined in the subsequent paras: 11.4.2 Hyderabad Tribunal ruling, in Dr Reddy's Research [TS-683-ITAT-2014(HYD)], Preclinical research studies conducted by the foreign companies make available skill knowledge, expertise etc. to the Indian Company. Therefore, such services are taxable as Fee for Technical Services under the Tax Treaty 11.4.3 In the case of Stempeutics Research Pvt. Ltd., the Bangalore Income Tax Appe....
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.... 12.3 The findings can be tabulated as under: Whether income is received in India or on behalf of the assessee in India Yes Whether the service rendered in the form of testing is technical Yes Whether the technical service rendered is ancillary Yes Whether the technical service makes available the skill, process or know how for further use Yes Whether the payment is by a resident Yes Whether it is in connection with its business in India Yes Whether such payment is in connection with the earning of income from ayes source in India Yes 12.4 Assessee Company also provides research models and other similar products and these products and services are largely catered towards customers in the pharmaceutical, medical device and biotechnology industries. Charles River Laboratory has provided laboratory services through test reports to various Indian entities. The business of the Indian companies is based on the reports provided by the Clients/Vendors or the service providers. Therefore, in the context of Business development of the Indian companies, the services rendered by Charles River which was made use by the Indian entities in busin....
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....nical knowledge, experience, etc. to its customers in India, which can be used by them independently in future; (iii) It is eligible to opt for beneficial provisions of the Treaty, as per Sec.90 of the I.T. Act; (iv) As the assessee does not have a business connection under Explanation 2 to Sec.9(1)(i) of the Act or a Permanent Establishment in India, the income arising to it is not taxable under Article 7 of the Treaty. 2.2.3 The AO did not accept the assessee's submissions and held that the consideration received by the assessee is Fee for Technical Services. He also held that the income arises and accrues in India and falls within the ambit of Sec.5 of the I.T. Act as the services are utilized for earning income in India and hence taxable in India. 2.2.4 After considering the submissions and materials on record, the Panel opines that the services rendered by the assessee become part and parcel of the technical knowhow of the client which will be further enhanced by future research. Thus we are of the view that knowledge transfer has happened in this case and article 12(4)(b) of the Indo- US DTAA is applicable in the case of this transactio....
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....f a technical plan or technical design' 7. The test reports generated by CRL Inc in the course of provision of its services, do not transfer any technology / knowhow / knowledge to the customers nor do they grant any right to access / use of the underlying technology used to perform these services. Therefore. CRL Inc does not make available any knowledge to qualify as FIS under the Treaty, and accordingly such income would not be chargeable to tax in India by applying the beneficial provisions of the Treaty in accordance with section 90(2) of the Act. in the absence of a PE in India. 8. In support of this, the Assessee also relied on a host of other judgements including DCIT v Dr Reddy Laboratories Ltd (IT Appeal Nos. 867 and 868 of 2003) (Hyderabad ITAT. 2013) in the submissions made during the course of assessment proceedings which have held that such receipts are not taxable which was not considered by the learned AO. The Ld.DR relied on the orders passed by the authorities below. 9. The Ld.DR reiterated the contentions as made out by the Ld.AO vide his detailed order and referred to S.9(1)(vii) and S.5 of the IT act besides Articles 12 and Article 7 of the DTAA,....
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....dies and submitting the reports in relation thereto. They are neither transfer of technical plan or technical design nor making available of technical knowledge, experience or know-how by the CROs to the assessee company. In fact, the assessee company did not get any benefit out of the said services in USA and assessee was only getting a report in respect of field study on its behalf, which would help it in getting registered with the Regulatory Authority. Since there is no making available of technical skill, knowledge or expertise or plans or designs in the present case, the amounts paid by the assessee do not fall under Article 12, but come within the purview of Article 7 of the DTAA. Therefore, the amounts paid are to be considered as business receipts of the said CROs and since they do not have any PE in India on which aspect there is no dispute, there is no need to deduct tax at source. Similar issue was analysed and considered by the AAR in the case of Anapharm INC (supra), which is one of the recipients in the assessee's case also. The AAR in that case held as under- "Mere provision of technical services is not enough to attract art. 12(4)(b). It addit....
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....vailable* to R. The agreement also states that R shall be the owner of all intellectual property rights resulting from the services. This would mean that, if on the basis of these results, the client is able to acquire patent or other intellectual property rights in respect of new generic drugs developed by it, then the applicant shall not claim any interest whatsoever in such right. It is altogether a different aspect. By agreeing to this provision, the applicant has not made its technical expertise, know-how, etc., available to R. It is only natural that R which has developed the generic drug should enjoy the intellectual property rights in relation thereto. The analytical test has not contributed to the development of new generic drug. The test has only shown whether that drug is as efficacious as the reference drug. Development of new drug and testing its efficacy are not one and the same thing. By merely acquiring knowledge of the testing methods one does not get any insight as to how a new drug could be developed. In the light of the above discussion interpreting the expression 'make available', it follows that c1. (b) of art. 12(4) relied upon by the Revenue does not....
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...., tax resident of Canada, only providing final results to its Indian clients by using highly sophisticated bio-analytical know-how, without providing any access whatsoever to the clients to such know-how, fee received by it is business income and not fee for technical/included services or royalty and applicant having no PE in India, such income would not be taxable in India by virtue of relevant provisions of DTAA between India and Canada. 12. We agree with the above opinion expressed by the AAR and accordingly, we uphold that the amounts paid by the assessee company to the CROs are not taxable in India. That being so, there is no need for the assessee to deduct tax at source. Consequently, the impugned order of the CIT(A) is confirmed and the grounds raised by the Revenue in these appeals are rejected." 11. Before us the assessee is a similar type of contract research organisation that carries out clinical trial and provides test reports to its Indian customers for which a fee is charged. The non-resident assessee before us has claimed it to be not taxable in India, in its return of income, as the services provided by it is not in the nature of "fee for included servic....
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....reason for such agreements between the assessee and its Indian clients for carrying out research and to issue reports is merely providing information for enabling the Indian client to use such data to perform its business. The fact that assessee has been called upon for such research time and again establishes the fact that there is no "make available" of such technical knowledge that is held by assessee through its employees to any of its Indian clients. 14. The various sample agreements placed in the paper book reveals that assessee has provided test reports based on the research carried out by its employees at the cost of the Indian clients but has not made available the technical expertise, skill, knowledge in respect of such research process which the Indian clients could independently apply without the assistance and undertake similar type of research independently without the assistance of the assessee. The authorities below have distinguished the decision of Hon'ble Karnataka High Court in case of CIT vs. De Beers India Minerals (P.) Ltd. (supra) and the decisions of Hon'ble Hyderabad Tribunal in case of DCIT vs. Dr. Reddy's Laboratories Ltd. (supra). On perusal o....
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.... the agreements reproduced hereinabove very clearly states that all inventions / techniques for rendering of services by assessee would be the exclusive property of the assessee including documentation, scientific and technical data, test procedures etc as mentioned therein. We therefore are of the view that the view taken by Coordinate Bench of this Tribunal in case of Stempeutics Research Pvt. Ltd. (supra) cannot be applied to the present facts of the case. 17. Now coming to the decision of Hon'ble Hyderabad Tribunal in case of DCIT vs. Dr. Reddy's Laboratories Ltd. (supra), we have already reproduced in great detail hereinabove wherein the "make available" clause have been invoked and held the payments paid by the assessee therein to the non-resident to be not taxable in India. 18. We shall refer to the decision of Hon'ble Delhi High Court in the case of Guy Carpenter reported in (2012) 20 taxmann.com 807. Hon'ble Court in similar circumstances held as under: "9. A plain reading of Article 13(4)(c) of the DTAA indicates that 'fees for technical services' would mean payments of any kind to any person in consideration for the rendering of any technical o....
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....sed on a mutually agreed ratio which accounts for their relative contribution in the reinsurance process. 12. Based on this manner of transacting, the Tribunal came to a conclusion that the payment received by the assessee could not be regarded as 'fees for technical services'. Further, more, the Tribunal also held that such receipts would not amount to fees for technical services as the "make available" clause contained in article 13(4)(c) had not been satisfied in the facts and circumstances of the present case. 13. In our view, the Tribunal has arrived at these conclusions purely on assessing the factual matrix of the case at hand. The findings are in the nature of factual findings and, therefore, according to us, no substantial question of law arises for our consideration, particularly, because the learned counsel for the Revenue was unable to point out any perversity in the recording of such findings." 19. Hon'ble Karnataka High Court in the case of De Beers India Minerals (P.) Ltd. (supra) has, inter alia, held as under; 13. Under the Act if the consideration paid for rendering technical services constitutes income by way of fees for ....
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....pore agreement which explicitly makes it clear the meaning of the word 'make available', the said clause has to be applied, and to be read into this agreement also. Therefore, it follows that for attracting the liability to pay tax not only the services should be of technical in nature, but it should be made available to the person receiving the technical services. The technology will be considered 'made available' when the person who received service is enabled to apply the technology. The service provider in order to render technical services uses technical knowledge, experience, skill, know how or processes. To attract the tax liability, that technical knowledge, experience, skill, know how or process which is used by service provider to render technical service should also be made available to the recipient of the services, so that the recipient also acquires technical knowledge, experience, skill, know how or processes so as to render such technical Services. Once all such technology is made available it is open to the recipient of the service to make use of the said technology. The tax is not dependent on the use of the technology by the recipient. The recipie....
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....de to its subsidiary Company in India the licence to manufacture and sell products, the licence to use technology, technical marketing and commercial know-how in the manufacture, sales and advertisement and promotion of the products, offer technicians, marketers, salesman, in-house legal counsel and the experienced employees to assist in the activities mentioned above. Under the Service Agreement, specifically the Service recipient require the use of proprietary knowledge and processes belonging to Perfetti Group. Specified services such as Accounting budgeting, sales, marketing, forex management, loans, HR, legal support etc. and specified services are to be provided on continuous basis. Therefore, it was held in the aforesaid case, that the case falls within the purview of Article 12.5(a) of the DTAC on such service which are ancillary and subsidiary to the applicant or enjoyment of right property or information for which the payment prescribed in paragraph 4 of the Article is to be made. Therefore, it is a case of royalty and not fee for technical service. Even otherwise it is clear under the terms of the agreement the technical know-how in the manufacturing, sales, advertisemen....
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.... sites for proper installation of equipment by France telecom. It is to act as bailee of the equipment which is under its control and use for its business. The use of equipment is with the usual condition of warranty and the network could be managed by the applicant. The equipment installed is to be integrated into Areva Net Global Network which is managed and controlled by the French Company for equipment installation at gateway sites in Noida and Chennai constitute PE in India as the equipment has been used by the French Company in the course of its business in providing technical data to the group companies. 21. Therefore from the aforesaid Judgments it is not possible to hold that there is a departure by the advance Ruling Authority in respect of its earlier views. It is in this background one has to look at the facts of this case, in order to find out whether the service provider has made available the technical knowledge to the assessee so as to foist the liability of payment of tax. 22. 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 ....