TaxTMI 
TaxTMI 
2009 (10) TMI 40
X X X X Extracts X X X X
X X X X Extracts X X X X
....executed in USA. Technology transfer Agreement was executed on 4th September, 2008 between the applicant and CEAT Limited. The applicant further states that the know-how would be transferred by the applicant to CEAT Limited in the shape of technical documentation and designs which amount to 'plant' and the sale of such plant has been made in USA and no part of the consideration was received in India. The applicant therefore submits that the income is not liable to taxation in India either under section 5(2) or Section 9(1)(i) of the Income-tax Act, 1961. Moreover, it is contended that clause (vi) or (vii) of Section 9(1) dealing with 'royalty' and 'fees for technical services' have no application. The applicant relies on clause (a) of para 5 of Article 12 of DTAA between India and USA in order to contend that the consideration received towards consultancy and assistance does not amount to 'fee for included services.' It is submitted that such services including deputation of technical personnel would take place next year after the machinery arrives. 2. The applicant has formulated the following questions for seeking advance ruling: 1. Whether on the stated facts in the "Techn....
X X X X Extracts X X X X
X X X X Extracts X X X X
....between India and USA. Technical assistance rendered or training imparted is not liable to be taxed by reason of Article 12(5)(a) of the Treaty. 4. The Revenue has taken the stand that the income received by the applicant is covered under para 3(a) and 4(b) of Article 12 of India-USA Treaty both as 'royalty' and 'fees for the Included Services' and therefore, the receipts are liable to be taxed in India irrespective of the existence or otherwise of PE. Alternatively, it is submitted that the applicant will have a service PE in India having regard to the activities contemplated to be undertaken in India under the Agreement for a period of more than 100 days. Therefore, the business profits attributable to the PE are taxable in India. Applicability of Article 12(5)(a) is disputed by the Revenue. The Revenue also disputes the proposition that the transaction under the Agreement tantamounts to sale of plant outside India and therefore, no income or deemed income accrues or arises in India. 5. We shall now go through the relevant clauses in the agreement titled as "Technology Transfer Agreement" and note the salient features thereof. 5.1 First, we will notice the recitals in th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... manufacture and testing of products) in accordance with the Know-how for the manufacture of products by using the manufacturing process described in Annexure IC. 5.3 Clause 2 speaks of "TRANSFER OF KNOW-HOW AND RIGHT TO USE". It says : "in consideration for the payment as herein for the Technology transfer… on and from the effective date, the transferor shall transfer and the transferee will acquire a non-exclusive, irrevocable, perpetual, royalty-free right to use… : (a) the know-how in the Plant and Facilities, (b) the know-how to manufacture and sell the products in the territory (i.e. anywhere in the world) and (c) to adopt the know-how contemplated in (a) above in products that the transferee may manufacture and/or design, develop at any other facility owned or controlled by the transferee. It is then clarified that save as provided in cl.3, the transferor is not alienating the Intellectual Property Rights in the know-how. Cl.2.2 states that the transferee shall have the right to sell Products with no restriction and for this purpose, grant license to any affiliate-entity. In Cl.2.3, the transferor declares that it will not grant know-how and documentation or consul....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee in respect of such services are provided for by Clauses 7 and 8 of the Agreement. The method of calculation of fee for consultancy services based on man-day rates and actual number of days worked is given in Cl.8.1. The time and manner of payment is specified in Cl.8.3. As per clause 8.2, the transferor has agreed to arrange training for transferee's employees in a radial tyre manufacturing plant in China or some other country. Clause 8.4 says that all expenses for the transferee's personnel deputed in relation to rendering the Training and Supervision services under the Agreement shall be borne by the transferor except the expenses specified therein. The obligations of transferor in regard to supervision of installation, commissioning, product quality tests and acceptance of plant are laid down in Cl.10. The warranties and representations of both the parties are contained in Cl.10. 5.8 The term of the Agreement is specified to be 8 years from the 'effective date' and the said term may be extended at the option of the transferee on mutually agreed terms (vide Cl.13.1). Notwithstanding the termination of the Agreement other than material breach by the transferee, the transfere....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ticed already. The transfer of know-how i.e. the grant of right to use the know-how is the first part which is dealt with in clause 2 of the Agreement. The second part consists of the transfer of ownership of Tread and Sidewall design/patterns (TSD) which is covered by clause 3 of the Agreement. Both these items specified in clause 2 and 3 are described as 'technology transfer' as seen from clause 4 as well as clause 2.1. A lump sum amount of USD 710,220 has been stipulated as the consideration for both these items put together, as is clear from clause 4. However, clause 4 has to be read with Annexure IX. The details of consideration for technology transfer and the stages of payment are set out therein. The amount of 710,220 USD has been split up into two; (i) consideration for technical documentation - USD 343,425. This consideration is sub-divided into three parts (a) Raw-materials lists, Specifications and Test procedures, (b) Compound Line-ups/Mixing instructions, Testing Standards etc. (c) Standard Operating Procedures, Standards and Test Procedures. (They relate to radial truck tyres as well as PCR/SUV & Lt truck tyres) and, (ii) consideration for TSD and for product developm....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the issue and to ignore the plain realities. The Agreement speaks of transfer and acquisition of non-exclusive, irrevocable and perpetual right to use the 'know-how' as defined in clause 1.1.16 coupled with an undertaking that the applicant will not grant know-how and related documentation to any other person in India for the manufacture of same or similar products during the term of the Agreement. The expression 'non-exclusive' conveys the idea that the know-how the applicant owns and possesses is not transferred absolutely to CEAT and that the applicant is not divested of the proprietary right and interest in the technology know-how. The applicant can make use of the know-how for its own purposes or it can grant similar rights to other parties outside India. The last sentence in clause 2.1 makes it clear that the transferor (applicant) is not alienating its Property or Intellectual property rights in the know-how. That means, the applicant would still be the owner and holder of know-how pertaining to the manufacture and marketing of radial tyres. The irrevocable and perpetual nature of the right granted to CEAT may have the trappings of a sale, but legally speaking, it is not a ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the assumption or assertion of the applicant that the so-called transaction took place outside India is open to doubt. The Agreement dated 4.9.2008, it may be noted, was executed in India (in Mumbai). In this connection, Clauses 5.1., 5.2. and 5.3 deserve notice. There is a declaration in clause 5.3 that "the transferee shall be entitled to and shall have the right to the know-how documentation immediately on receipt of the same". Obviously, the documents which are sent through the Courier as per the preceding clause (5.2) are received in India. Moreover, going by the plain words of clause 5.3, the transferee i.e., CEAT will derive the rights under the Agreement only on that date. The transfer is not complete till then. The mere entrustment to the Courier for delivery to the transferee is not decisive especially in view of the qualification that the delivery will be effected to the transferee "against invoices and related documents". What exactly is meant by the phrase "against invoices and related documents" is not clear. However, one thing is clear i.e., the delivery is not automatic. The delivery seems to be conditional on the transferee/ addressee presenting certain documents ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nition of 'plant' and is, therefore, a depreciable asset and therefore the payment made by the assessee to the foreign collaborator who rendered the documentation service was attributable wholly towards the acquisition of a depreciable asset and depreciation claimed by the assessee was admissible'. We do not see how the principle laid down in that decision can be pressed into service for the purposes of this case. We are not called upon to construe the provisions relating to depreciation. 10. Now let us see whether the royalty provisions in the IT Act and the Treaty would come into play in the instant case. First we will notice the provisions dealing with royalty in the Act. Section 9 specifies the various categories of incomes which shall be deemed to accrue or arise in India. Under clause (vi) of section 9(1), income by way of royalty payable by a resident (of India) shall be deemed to be income that accrues or arises in India. In order to avoid the possible controversies focusing on territorial nexus, the royalty payable in respect of the business or profession carried on by a resident outside India or for the purpose of earning any income from a source outside India is exclu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... will provide to CEAT technical service assistance and train CEAT's personnel for making use of the know-how supplied by it on proper lines. Otherwise, the know-how and underlying technology will only remain on paper. In fact, it has been expressly stated in cl.7.1 is that the transferee will not be able to use the know-how unless the applicant trains CEAT's personnel at the plant. Thus, the crux and predominant feature of the transaction involving the transfer of know-how is to equip CEAT with all that is necessary to effectively put the know-how to use. The know-how and technology which was within the exclusive domain of the applicant is parted with in favour of CEAT by granting non-exclusive but perpetual right to use the know-how and by putting in place the requisite measures to enable the transferee to effectively utilize and absorb the same. It cannot be doubted that the technology/know-how transfer that is contemplated by clause 2 of the Agreement gets covered by more than one sub-clause of Explanation 2 to section 9(1)(vi), i.e., sub-clauses (i), (ii) and (iv). The services in the form of technical assistance and consultancy connected with those items fall under sub-clause ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se) and paid to a resident of the other contracting State (the applicant in the present case) may be taxed in that other State (i.e. USA which is the State of residence of the recipient of royalty). However, the next para preserves the power of taxation by the source State also by declaring that the royalty and fees for included services may also be taxed in the State in which they arise and according to the laws of that State; however, the resident of the other contracting State is entitled to avail the benefit of tax rates specified in clauses (a) & (b) of paragraph 2. Paragraph 6 of Article 12 excludes the application of paragraphs 1 and 2 in certain circumstances. 12.1 The definition of 'royalties' is given in paragraph 3 and the definition of 'fees for included services' is set out in paragraph 4. They are extracted hereunder: 3. The term "royalties" as used in this Article means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright or a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t.12 is not attracted. His emphasis was more on para 5 which has bearing on the consultancy and assistance services. We have no doubt that the consideration which the applicant receives for the right to use the know-how as per clause 2.1 read with clause 4 and Schedule IX to the Agreement amounts to 'royalties' within the meaning of clause (a) of para 3 of Article 12. We have already pointed out that it is not appropriate to describe the transaction as a pure and simple sale of technical documentation. Thus, the payment received by the applicant squarely falls within clause (a) of Art.12.3. The applicant has no better case under the Treaty. 13. We shall now refer to the decisions relied upon by the learned counsel for the applicant in support of his contention that the income has not accrued or arisen in India. In the case of ITO vs. Shri Ram Bearings Limited 164 ITR 419, there was a technical collaboration agreement with a Japanese company. The Agreement though a composite one was in two parts - under the first part the Japanese company agreed to sell to the respondent (Indian company), its trade secrets, that is to say the entire know-how relating to the manufacturing techniqu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....red into an agreement with Indian company for rendering technical and know-how services in the form of furnishing technical information and know-how with reference to manufacturing of certain products, providing factory and design layout, furnishing comprehensive technical information of all developments in the manufacture of special products, training Indian personnel and providing the services of a factory manager for starting the plant and supervising its operations during the initial stages. The question there was whether any part of the business operations were carried out in India so as to justify apportionment of the profits attributable to the part of operations carried out in India. Construing sub-section (1) & (3) of Section 42 of the Indian Income-tax Act, 1922 (corresponding to Section 9(1)(i) read with the Explanation of the Income-tax Act, 1961), the Supreme Court held, while disagreeing with the High Court, that the entire services were rendered by the foreign company in the foreign territory. The foreign company had made the services of its personnel available to the Indian company outside India and the Indian company took them as its own employees, paid their salar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ign/patterns, designed by the transferor and approved by the transferee. It should be noted that a part of that consideration is charged for supplying technology for full tyre development. The details are found in Annexure-IX. It has been clarified by the counsel for the applicant that Columns (C) and (D) concerning full tyre development does not involve out-right sale or transfer of ownership. 15.1 It is clear from clause 3 of the Agreement that the TSD for the sizes specified in Annexure I-A designed by the transferor and approved by the transferee would vest exclusively with the transferee (CEAT). The second part of clause 3 entitles the transferee to have the TSD registered in its name and declares that it will constitute the proprietary intellectual property of the transferee. The learned counsel for the applicant has made it clear that technology extended for full tyre development does not involve sale of TSD. The details of activities involved in full tyre development are set out in the Note furnished by CEAT Limited, Mumbai. Having regard to the fact that the ownership in tread and side wall designs/patterns is transferred absolutely to CEAT Limited, the consideration re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sonnel in the plant "in order to be capable of designing, developing and manufacturing the products in accordance with the Know-how". 'Consultancy Services' include the supervision service and training service (vide cl.1.1.6). Annexure V details the scope of consultancy services. The consultancy and assistance to be provided by the transferor relate to lay out and set up of the plant and manufacture of the products in the plant with the Know-how provided by the transferor, guidance regarding the product quality tests and testing of raw materials, semi finished and finished products, conforming to and fulfilling the Project Master Schedule etc. Then, the matters relating to which the supervision services should extend are set out in Annexure V. Inter alia the supervision services are to be provided at various stages of assembly, installation and commissioning of the machines as well as start up of the plant in conformity with the Know-how. It also extends to products quality tests, supervision of the transferee's personnel in relation to the set up of the plant and Know-how implementation. Then, the third item in Annexure V is 'Training Services'. It is stated under the head 'Traini....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ge. The "transferor acknowledges that the transferee will not be able to use the Know-how unless the transferor trains the transferee's personnel in the plant in order to be capable of designing, developing and manufacturing the products in accordance with the Know-how." In the MOU concerning fees for included services appended to US-India Treaty, it is clarified: "generally speaking, technology will be considered 'made available' when the person acquiring the service is unable to apply the technology. The fact that the provision of 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)". This test is satisfied in the instant case.The fee received by the applicant under clause 8 of the Agreement, therefore, falls within the scope of fee for included services as defined in para 4 of the Art.12 of the Treaty. The position in regard to the liability under the Act is equally clear. The definition of fee for technical services in Explanation 2 to clause (vii) of Section 9(1) is even wider in its scope and amplitude that the corresponding provision in the Treaty. The restrictive ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lowing prefatory remarks: "Paragraph 5 of Article 12 describes several categories of services which are not intended to be treated as included services even if they satisfy the tests of paragraph 4. Set forth below are examples of cases where fees would be included under paragraph 4, but are excluded because of the conditions of paragraph 5". 17.2 One of the examples given i.e. No.9 may be noticed. "Example 9 Facts: An Indian hospital purchases an X-ray machine from a U.S. manufacturer. As part of the purchase agreement, the manufacturer agrees to install the machine, to perform an initial inspection of the machine in India, to train hospital staff in the use of the machine, and to service the machine periodically during the usual warranty period (2 years). Under an optional service contract purchased by the hospital, the manufacturer also agrees to perform certain other services throughout the life of the machine, including periodic inspections and repair services, advising the hospital about developments in X-ray film or techniques which could improve the effectiveness of the machine, and training hospital staff in the application of those new developments. The cos....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ments received by the applicant towards consultancy and assistance and training could be taxed as business profits under Art.7 even if they are not fees for included services. In fact, such alternative argument has not been addressed before us. 18. Our answer to the second question, therefore, is that the consideration received for consultancy, assistance and training as per Clauses 7 and 8 of the Agreement is liable to be taxed as fee for included services under the Treaty and as fee for technical services under the Income-tax Act, 1961. 19. The third question relates to deduction of tax at source. Section 195(1) of I.T.Act reads thus : "Section 195 (1) - Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force." The expression 'rates in force' is defined ....