TaxTMI 
TaxTMI 
2024 (7) TMI 287
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.... FTS ISSUE 84 - 101 H. ARTICLE 13 (6) AND EFFECTIVE CONNECTION 102 - 108 I. THE SECTION 9 (1) (vii) EXCEPTION 109 - 119 J. CONCLUSIONS 120 - 124 K. DISPOSITIF 125 A. PREFACE 1. This set of appeals instituted by the International Management Group (UK) Limited [hereinafter to be referred as "IMG"], impugn the decisions rendered by the Income Tax Appellate Tribunal [ITAT] on appeals spanning Assessment Years [AY] 2010-11 to 2018-19. The appeals had been formally admitted on the following three principal questions of law: - "(i) Did the ITAT err in holding that the business income was divisible under the India-UK DTAA, though it arose out of a single contract having regard to Articles 7 and 13 of India-UK DTAA? (ii) Whether the ITAT erred in holding that services provided by IMG to BCCI under the Service Agreement dated 24.9.2009 qualify as fee for technical services in terms of Article 13 (4) (c) of the DTAA between India and UK? (ill) Alternatively, in case answer(s) to above two questions are in negative; whether the income determined as FTS can be deemed to accrue or arise in India in terms of Section 9 (vii) (....
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....nsistently taken the stand before the authorities below that the income earned by it and in terms of the Services Agreement would constitute business income and thus be taxable to the extent envisaged under Article 7 of the India United Kingdom Double Taxation Avoidance Agreement [DTAA]. It appears to have been asserted that only such of the receipts as would be attributable to a Permanent Establishment [PE] in India would be taxable. It appears to have been the admitted position between the parties that IMG had a Service PE as contemplated under Article 5 (2) (k) of the DTAA in all the relevant AYs'. The attribution of income to the PE was explained by way of the following table: - "AY ITA No. Total Receipts Receipt attributed to PE Treated as FTS (INR) Amount (INR) % 2010-11 218/2017 33,00,00,000 9,22,49,819 28 23,77,50,181 2011-12 986/2018 27,00,00,000 19,58,26,586 73 7,41,73,414 2012-13 993/2018, 28,00,00,000 21,48,45,495 77 6,51,54,505 2013-14 1013/2018 28,00,00,000 20,99,17,301 75 7,00,82,699 2014-15 1055/2018 28,00,00,000 21,16,65,9....
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....ble to be taxed in accordance with Article 7 or Article 15 of the DTAA as the case may be. 9. Dealing with the aforesaid submissions, the DRP upon a consideration of the terms and stipulations comprised in the Services Agreement came to hold that the income of INR 7,00,82,699/- was liable to be treated as FTS. While dealing with this aspect, it held as under: - "To our mind even a bare perusal of the provisions of the agreement supra will show that the requirements of Article 13 are more than met as spelled out in greater detail hereunder. i) IMG having carried out the research has advised the BCCI in connection with the formation and governance of the League and IPL, thus making available to it technical knowledge, experience, skill know-how or processes. ii) IMG has assisted the BCCI in connection with and made available to it technical knowledge, experience, skill, know-how or processes for formulating the structure of the League; the League rules and regulations; the Franchise agreements and any necessary franchise regulations; the League implementation budget; and the Media Rights agreements. All of these have made available technical knowledge, e....
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....istration, trading and auction of Players; the creation of and advice and assistance with the "look and feel" elements in relation to the BCCI Marks generally and, in particular, at any relevant Stadia the provision of hospitality guidelines in relation to the League and implementation of hospitality in the latter case in a manner to be mutually discussed and agreed; • the provision of a league handbook; • advice and assistance in connection with the Player contracts; • the establishment and maintenance of the Player registration system; • the management of the annual Player trading window; (v) Advice and assistance in connection with Anti-Doping and WADA Compliance Regulations; Assistance in the creation / development of new intellectual properties relating to the League and all such properties created will be the sole property of BCCI; and will vest with BCCI. (vi) Carrying out research in consultation with BCCI each year to ascertain improvements in various areas of management and execution of the League; Development of the strategic brand framework for BCCI and manage brand IPL working with the BCCI team; and....
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....t for the purposes of revenue being taxable in India, it was incumbent for the authorities to have found on fact that service had been rendered in India. The aforesaid argument, however, came to be negated by the DRP which took note of the Explanation which had come to be inserted in Section 9(1) by virtue of Finance Act, 2010 with retrospective effect from 01 June 1976 and which, according to it, had erased the requirement of actual rendition of service in India being a prerequisite for the purposes of taxation. 11. Insofar as this aspect is concerned, the DRP observed as follows:- "2.7 Whether Services being performed by non-resident taxpayers outside India and having been rendered from outside India are taxable as FTS Taxpayers Arguments 1. However, the Hon'ble DRP made a patent error of low by attributing such receipts to the PE though the same to pertained to work outside India. Further, the taxation of the receipts as FTS was only directed on a protective basis in the direction passed by the Hon'ble DRP. 2. While dealing with the interpretation of Article 7 of the India-UK DTAA, the Special Bench of Income 1ox Appellate Tribunal ....
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....shable on fact. This question regarding taxability of FTS rendered from abroad is now unequivocally answered in favour of Revenue by the Apex Court in Supreme Court decision in GVK Industries Ltd & Anr [TS-61-SC-2015]. Apropos the reliance placed by the taxpayer on the direction issued by the DRP is not only the subject matter of an appeal, as pointed out by the AO at para 13 of the Draft Assessment order but is superceded by the decision of the Hon'ble Supreme Court. Taxpayers arguments in GVK Industries Ltd & Anr [TS-61-SC-2015] In its affidavit, taxpayer GVK Industries Ltd contended that the NRC was an independent unit and was, in a way, subsidiarised by ABB. That apart, merely because expert advice was obtained, it could not be said that it pursued the application for loan/financial assistance on behalf of NRC and further the advisory services were rendered from outside India. The assessee also contended that 'the NRC did not render any technical or consultancy service to the company but only rendered advise in connection with payment of loan by it and hence, it would not amount to technical or consultancy service within the meaning of Sec. 9 ....
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....-SC-2011] wherein it was held that the Parliament is constitutionally restricted from enacting legislation with respect to extraterritorial aspects or causes that did not have, nor expected to have any, direct or indirect, tangible or intangible impact(s) on or effect(s) in or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well-being of, or security of inhabitants of India, and Indians. SC also reiterated observations of the Constitution bench where the Constitution bench held that where Parliament itself posited a degree of relationship between the extra-territorial aspect or cause and something in India or related to India and Indians, beyond the constitutional requirement that it be real and not fanciful, then the courts would have to enforce such a requirement in the operation of the law as a matter of that law itself, and not of the Constitution. Hon'ble SC also relied on co-ordinate bench ruling in 'CIT. vs. Aggarwal and Company' ((1965) 56 ITR 20], CIT vs. TRC [(1987) 166 ITR 1993] and Birendra Prasad Rai vs. ITC [(1981) 129 ITR 295]. SC further relied on 'the Introduction i....
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.... be said to be effectively connected to the PE and consequently the same would not escape taxability under Article 13. 13. Pursuant to these directions of the DRP, a final assessment order came to be framed. IMG, thereafter, challenged the aforesaid assessment order before the Tribunal. The Tribunal dismissed the appeal essentially following its decision pertaining to AY 2010-11 and which forms the subject matter of ITA 218/2017. 14. Insofar as AY 2010-11 is concerned, it related to the revenues earned by IMG for the IPL event which was held in South Africa in 2009. For IPL 2009, IMG earned a total service fee of INR 33,00,00,000/-. Out of the aforesaid, it attributed INR 9,22,49,819/- to the Indian PE and a net profit of INR 3,28,04,660/- computed in accordance with the transfer pricing regulations was asserted to be attributable to the Indian PE and offered to tax. 15. The AO while drawing up a draft order, however, held that the balance receipt of INR 23,77,50,181/- was liable to be taxed as FTS. It was the aforesaid order which was assailed before the DRP. While dealing with those objections, the DRP held that the aforesaid revenue was liable to be taxed as FTS. This i....
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.... "5.4 In view of the above, it is evident that the intention of the legislature clarified by the Explanatory circular on the introduction of the amendment in the Income Tax Act has been to consider "such person" appearing in section 9 (1) (vii) (b) with reference to the resident payer for the said amount because the expression "if the payment is relatable to a business of profession carried on by him outside India" refers to the business or profession carried out by him viz. resident payer in this context and not the non-resident payee. In view of the clear disposition of the relevant provisions of the I.T. Act, we hold that the provision of section 9 (1) (vii) (b) are also satisfied and the case of the assessee is not covered by the exceptions." 17. It ultimately came to hold that the income although constituting FTS would be liable to be taxed as business income in terms of Article accepting the contention based on Article 13 (6) of the DTAA. However, it also proceeded to direct the AO to frame an order treating the said income as FTS on protective basis. It was the final assessment order drawn pursuant to those directions which led to appeals being filed by both IMG a....
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....activities performed by the permanent establishment in India and another limb deals with respect to the performance of the services by the IMG UK directly for which the India PE has nothing to do. Admittedly the issue is concerned with respect to the fees for technical services. It is also admitted position that while the effective connection of royalties with a permanent establishment has to be evaluated by applying the 'assets test', and for the purpose of fees for technical services the 'activity test? or 'functional test' should be applied as held in case of Nippon Kaiji Kyokoi V ITO 47 SOT 41 (Mum). Therefore to "effectively connect' the whole income with the PE, contending party i.e. assessee, should establish that PE is engaged in the performance of all those services or should be involved in actual rendering of such services, or (2) it should arise as a result of the activities of the PE, or (3) The PE should, at least, facilitate, assist or aid in performance of such service irrespective of the other activities PE performs. Therefore according to article 7, for attribution of the profits to the permanent establishment the activity carried out by the....
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....pposedly a contract of Rs. 100 crore is awarded to an overseas entity for rendering of the management services and if such: overseas entity establishes a permanent establishment by just deputing its staff for more than 90 days, it creates a service permanent establishment of that for an entity in India. On the basis of the minimum activities performed by that particular staff which 1s deputed in India 10% of the gross receipt say 10 crores is attributed to permanent establishment and after claiming deduction of expenses there from of say 60% of the income attributed, assessee offered balance amount as profit of the permanent establishment for taxation. In transfer pricing study report, based on FAR analysis such attribution of the profit is considered to be at arm's length by the assessee and as well as by the transfer pricing officer, it cannot be said that the balance sum of Rs. 90 crores be taxed in India as the whole contract was 'effectively connected' with the permanent establishment created by the petitioner of some staff for performing some of the activities and crossing the threshold duration. We do not subscribe to such a view and we are also of the view that ....
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....re paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 (Business profits) or Article 15 (Independent personal services) of this Convention, as the case may be, shall apply." [Underline supplied by us] 41. on reading of the above article it is apparent that the provisions of paragraph 1 and 2 of this article shall not apply if the beneficial owner of the royalty fees for technical service, being a resident of a contracting state, carries on business in other contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, and the right property or contract in respect of which the royalty fees for technical services are paid is effectively connected with that permanent establishment or fixed base. Then only the provisions of article 7 related to business profit shall apply. Therefore the above article provides for twin conditions, (1) that the royalty or fees for technical services should arise through a permanent establishment situated in the other State and (2) the right property or contract in respect of the royalty or fees for tec....
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....apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 (Business profits) or Article 15 (Independent personal services) of this Convention, as the case may be, shall apply." [Underline supplied by us]" 20. The Tribunal on due examination of the rival contentions further held that the 'make available' stipulation comprised in Article 13 of the DTAA also stood satisfied. This becomes evident from the following findings which came to be rendered: - "43. Now the next contention raised by the appellant is that as there is no 'make available' test satisfied in case of the services provided by the appellant, hence, acc....
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....chisee agreement, necessary franchisee regulation and the IPL implementation budget. According to the para No. 9 of the agreement that intellectual property rights remains with the board of control for Cricket in India. Even before us Ld. authorized representative could not point out that why 'make available test' has not been satisfied in this even by providing all the rules and regulations of IPL, standard operating procedures of matches, copies of the franchisee agreement, various documentation/contracts etc which shall remain with the BCCI. Therefore in the present case according to us the BCCI is enabled to absorb and apply the information and the advice provided by the appellant to it for conducting such sporting events. According to us when all this documentation and material is provided to the BCCI it is able to use such know-how and documentation generated from provision of the services of the appellant independent of the services of the appellant in future. It is too naïve to say that in absence of IMG services BCCI on its own IPL tournament cannot hold. Merely because the BCCI has entered into a contract for conducting further 9 events does not lead to the c....
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....s for technical services under section 9 (1) (vii) of the Income Tax Act as Fees for technical services." 22. On an overall consideration of the above, the Tribunal proceeded to dismiss the appeal of IMG and allow the appeal of the Department holding that INR 23,77,50,181/- would be governed by Article 13 of the DTAA and liable to be taxed as FTS on a substantive basis. B. IMG'S CHALLENGE 23. Appearing in support of the appeals, Mr. Vohra, learned senior counsel canvassed the following submissions for our consideration. Mr. Vohra submitted that a cumulative reading of the terms and conditions of the MoU as well as the Services Agreement would lead one to the irresistible conclusion that the receipts of IMG were liable to be viewed as business profits, and consequently entitled to be taxed only to the extent of income attributable to the Indian PE of IMG. Mr. Vohra submitted that it was the undisputed position that pursuant to the nature of services performed in India coupled with the visits of IMG employees to the country, the prescriptions of Article 5 (2) (k) of the DTAA stood satisfied and that consequently a Service PE had come into existence. Mr. Vohra underlined the ....
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....he following passages as appearing in the said Memorandum of Understanding: - "Generally speaking, technology will be considered 'made available' when the person acquiring the same 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. Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available." 26. Mr. Vohra also relied upon the following pertinent observations as rendered by the Karnataka High Court in CIT v. De Beers India Minerals P. Ltd 2012 SCC OnLine Kar 8858:- "13. Therefore, the clause in the Singapore agreement which explicitly makes it clear the meaning of the words "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 technica....
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....ing 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 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 that may require technical knowledge, skills, etc., does not mean that technology is 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. In other words, payment of consideration would be regarded as "fee for technical/included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied" 27. Our attention was also drawn to the decisio....
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....the Explanation, this definitely would come within the ambit of "technical and consultancy services" as defined under the Act. The first appellate authority has also relied on Continental Construction Ltd. v. CIT (1992) 195 ITR 81 (SC), CBDT v. Oberoi Hotels (India) P. Ltd. (1998) 231 ITR 148 (SC) ; (1998) 97 Taxman 453 (SC) and Dean, Goa Medical College v. Dr. Sudhir Kumar Solanki (2001) 7 SCC 645, wherein the ambit of the definition was examined by the hon'ble Supreme Court. xxxx xxxx xxxx 18. We are conscious of the fact that the DTAA as relevant in the present case, is not applicable even in the case of De Beers India Minerals (P.) Ltd. where the non-resident hailed from Netherlands. However, on facts we are of the opinion that when the definition clause in DTAA read along with the MOU specifically refers to transfer of technologies, the facts as available in the Karnataka decision are more similar to the present facts. Herein also there is no technology transfer; nor is there a plan or strategy relating to management, finance, legal, public relations or risk management transferred to the appellant. The services promised by the non resident company is only....
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.... This undisputed fact in itself demolishes the action of the Assessing Officer/Dispute Resolution Panel. The facts on record show that the recipient of the services is not enabled to provide the same service without recourse to the service provider, i. e, the assessee. In our humble opinion, mere incidental advantage to the recipient of services is not enough. The real test is the transfer of technology and on the given facts of the case, there is no transfer of technology and what has been appreciated by the Assessing Officer/learned Commissioner of Income-tax (Appeals) is the incidental benefit to the assessee which has been considered to be of enduring advantage. In our understanding, in order to invoke make available clauses, technical knowledge and skill must remain with the person receiving the services even after the particular contract comes to an end and 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." (emphasis is ours) 15. We tend to agree with the analysis and co....
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....lable. Advice and assistance in connection with Player Contracts Yearly activity. No Make available. Advice and assistance in connection with Anti-Doping and WADA Compliances Regulations There has been lot of development as far as anti-doping laws are concerned and accordingly guidelines need to be reviewed consistently. No make available. Creation of IPL match schedule Yearly activity. No make available. Bringing in global best practices in building and evaluating sporting properties and related aspects. BCCI is not expected to be an expert in global best practices." 32. It was then submitted by learned senior counsel in the alternative that even if one were to assume that the services rendered by IMG answer the description of FTS, the payments received by it would fall for consideration only under Article 7 of the DTAA since the same was indelibly connected to the contract that IMG had with BCCI, and which was concerned with the rendition of services and fees so received in consideration thereof being effectively connected with the Service PE of the appellant. According to Mr. Vohra, Article 13 (6) requires one to examine whether the contract is 'effect....
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....ticle 12 (5), a view can be taken that the contract as a whole was effectively connected with the PE though the particular services (offshore services) were not so connected. Apparently, for this reason, their Lordships have proceeded on the premise that the offshore services forming part of the contract though rendered outside India were effectively connected to the PE, though the PE had no role in playing the actual rendering of such services." 35. Our attention was also drawn to the following passage as appearing in Philip Baker's treatise on "Double Taxation Conventions": - "Article 7 (7): Specific articles override Article 7 (1) Article 7 (7) concerns both of the situations covered by art. 7 (1) (i.e. where the enterprise does or does not have a permanent establishment). Where an enterprise receives any type of income dealt with by any of the specific Articles of the Convention, the specific Articles are not affected by art. 7. Many of the other Articles specifically Articles 10 (4), 11 (4), 12 (3) and 21 (2) contain paragraphs which provide that, where the shareholding, indebtedness, etc., is "effectively connected with the permanent establishment, ar....
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.... of Section 9 (1) (vii) was explained as follows: - "25. The principal provision is sub-clause (b) of Section 9 (1) (vii) of the Act. The said provision carves out an exception. The exception carved out in the latter part of sub-clause (b) applies to a situation when fee is payable in respect of services utilised for business or profession carried out by an Indian payer outside India or for the purpose of making or earning of income by the Indian assessee i.e. the payer, for the purpose of making or earning any income from a source outside India. On a studied scrutiny of the said clause, it becomes clear that it lays down the principle what is basically known as the "source rule", that is, income of the recipient to be charged or chargeable in the country where the source of payment is located, to clarify, where the payer is located. The clause further mandates and requires that the services should be utilised in India." C. CONTENTIONS OF THE RESPONDENTS 37. For the respondents while oral submissions were addressed by Mr. Kunal Sharma and Mr. Sanjeev Menon, a detailed Note of Submissions had also been tendered under the pen of Mr. Zoheb Hossain, the learned senior st....
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.... (c) advice and assistance in the management of any future Franchise tender process; (d) advice and assistance in the management, of the sales processes in respect of the Rights; (e) the ongoing preparation and negotiation, subject to the final decision of the BCCI, of (i) contracts with the successful Franchisees; (ii) the Rights Agreements and any other contracts with Rights Holders; (f) the implementation and management of the sale and delivery of the Rights to Rights Holders; (g) the preparation of a television production specification provided IMG Media is not a bidder for this service; (h) the development of best practice match day guidelines for Franchisees and supervision in respect of their execution (i) the development of best practice match day media guidelines and supervision in respect of their execution; (j) advice and assistance in connection with the development of any relevant stadia and the finance which may be necessary in connection therewith and, jf requested, the introduction to the BCCI of third parties who are involved In the redevelopment of stadia; (k) advice and a....
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....rk for IPL event, etc from UK. To this end, the activities undertaken by the UK team from completely outside of India include: 1. Conducting research in respect of, and making recommendations to BCCI on, the appropriate structure for all aspects of the IPL 2. Preparation of the core/ key strategic framework for the IPL, including: constitution of the IPL, devising the structure of the tournament, creation of the sporting model to be adopted for IPL, devising/ suggesting the investment model (or the franchisee, creation of the media and sponsorship rights, key decisions relating to the event (like how many cities to be involved, no of matches), etc. 3. Preparation of the IPL foundation documents, including: rules and regulations, franchisee tender documents, franchisee agreements, franchisee regulations, IPL implementation budget, drafting tender documents relating to media and sponsorship rights, etc. 4. Assistance in respect of development of and advise relating to commercial rights management process with respect to franchise rights, media rights, sponsorship rights, licensing and merchandising rights, stadium signage rights, official vendor ri....
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....st practices in building and evaluating sporting properties and related aspects 26. Delivering a post event report at the end of each season 27. Preparation of marketing collaterals, press packs and appropriate presentation documentation for meetings/ events conducted in this regard. Accordingly, the conceptualization, strategy formulation, core process and know-how development, creation of framework for IPL, etc was done by IMG UK from the UK." 40. The functions of the India office were also noticed in the said report and the parts thereof which are relied upon by the respondents are extracted hereunder:- "4.4.2. Functions performed by IMG India PE As part of the execution of the contract, a certain set of activities were required to be undertaken in India. Accordingly, some of the discussions/ negotiation processes between BCCI and various other parties (like franchises, sponsors, media partners, etc.) happened in India since the 2009 event was scheduled to take place in India. For this purpose, IMG UK employees came to India from time to time for short term visits. Further, few freelancers were appointed/ engaged by IMG UK for undertaking t....
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.... 2. However, notwithstanding the provisions of Article 14 and subject to the provisions of Articles 8, 16 and 17, fees for technical services arising in a Contracting State may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the fees is a resident of the other Contracting State, the tax so charged shall not exceed per cent [the percentage is to be established through bilateral negotiations] of the gross amount of the fees. 3. The term "fees for technical services" as used in this Article means any payment in consideration for any service of a managerial, technical or consultancy nature, unless the payment is made: (a) to an employee of the person making the payment; (b) for teaching in an educational institution or for teaching by an educational institution; or (c) by an individual for services for the personal use of an individual. 4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the fees for ....
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....ce, profession or occupation. Therefore, fees received for services provided by regulated professions such as law, accounting, architecture, medicine, engineering and dentistry would be fees for technical services within the meaning of paragraph 3. Thus, if an individual receives payments for professional services referred to in Article 14, paragraph 2 from a resident of a Contracting state, those payments would be fees for technical services. If the payments arise in that Contracting State because they are made by a resident of that State or borne by a permanent establishment or fixed base in that State, the payments would be subject to tax by that State in accordance with paragraph 2 irrespective of the fact that the services are not performed in that State through a fixed base in that State. 65. Technical services are not limited to the professional services referred to in Article 14, paragraph 2. Services performed by other professionals, such as pharmacists, and other occupations, such as scientists, academics, etc., may also constitute technical services if those services involve the provision of specialized knowledge, skill and expertise. 66. The ordinary m....
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.... to reappreciate the factual position to arrive at a conclusion in the matter. Nevertheless, we noted the findings of the Assessing Officer as affirmed by the Commissioner of Income-tax (Appeals) and the Tribunal as well as the work order issued by the assessee to M/s. WFPL, Srilanka dated March 25, 2013. The assessee in their reply to the show-cause notice dated February 8, 2016 contended that they took the assistance of M/s. WFPL, Srilanka for construction scope to be performed in Srilanka. If we examine the terms and conditions mentioned in the work order, more particularly the scope of work and the various clauses contained therein, we have no hesitation to hold that the nature of activity done in Srilanka is not mere construction or assembly or mining like project. Admittedly, the installation of wind turbine is a highly skilled and technical work. The various clauses in the work order clearly demonstrates the scope of work and therefore, we cannot but hold that the Assessing Officer was right in concluding that the services rendered by M/s. WFPL is in the nature of fee for technical services. Similarly, with regard to the services rendered by M/s. WRS, Germany was stated by t....
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....m of league structure and work-flow as well as experience in conducting and organizing a large scale sports league. According to them, all of the above would have enabled BCCI to eventually organize the league on its own. 46. According to the respondents, the FTS Clause in the DTAA requires that the technical knowledge and skill remain with the person who was recipient of the services even after a particular contract had come to an end. This prescription, according to them, is also fulfilled since the technical knowledge comprised in the research would remain with the BCCI even after the contract had come to an end. Similar would be the position relating to know-how pertaining to commercial rights or for that matter structuring, organizing and management of a sports league. Viewed in light of the above, it was their submission that the 'make available' requirement erected by Article 13 clearly stood fulfilled. It was further argued that merely because the tenure of the Services Agreement spanned over ten years, the same would not detract from the 'make available' condition being fulfilled since Article 13 (4) does not prescribe a duration over the course of which knowledge, tech....
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....he necessary skill-set is acquired by the resident employee group. The activity of the secondees is thus to transfer their technical ability to ensure quality control vis-a-vis the Indian vendors, or in other words, "make available" their know-how of the field to CIOP for future consumption. The secondment, if viewed from this angle, actually leads to a benefit that transmits the knowledge possessed by the secondees to the regular employees. Indeed, any other reading would unduly restrict article 12 of the DTAA, which contemplates not only a formal transfer of intellectual property but also other techniques and skills ("soft" intellectual property, if it can be called as such) required for the operation of a business. The skills and knowledge required to ensure that the task entrusted to CIOP-quality control- is carried on diligently certainly falls within the broad ambit of article 12." 48. The respondents in this behalf also drew our attention to the following observations as appearing in the order of the Tribunal: - "43. Now the next contention raised by the appellant is that as there is no 'make available' test satisfied in case of the services provided by t....
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....tender document, the franchisee agreement, necessary franchisee regulation and the IPL implementation budget. According to the para No. 9 of the agreement that intellectual property rights remains with the board of control for Cricket in India. Even before us Ld. authorized representative could not point out that why 'make available test' has not been satisfied in this even by providing all the rules and regulations of IPL, standard operating procedures of matches, copies of the franchisee agreement, various documentation/contracts etc which shall remain with the BCCI. Therefore in the present case according to us the BCCI is enabled to absorb and apply the information and the advice provided by the appellant to it for conducting such sporting events. According to us when all this documentation and material is provided to the BCCI it is able to use such know-how and documentation generated from provision of the services of the appellant independent of the services of the appellant in future. It is too naïve to say that in absence of IMG services BCCI on its own IPL tournament cannot hold. Merely because the BCCI has entered into a contract for conducting further 9 even....
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....routine services relating to on-ground implementation/ running of the event to IMC India Branch. IMG India PE was involved in/ responsible for overseeing and managing the liaisoning and implementation support activities undertaken by IMC India Branch. All these aforesaid activities were undertaken by IMG India PE under the framework, guidelines and policies prepared by IMG UK (from outside India). Any significant divergence or variation from the framework required specific approval from the Project leader, who was based in UK. Further, it must be noted that all the activities were undertaken in India purely as a sub contracted support service to IMG UK and India was not responsible for its services to the end client/ BCCI." 50. It was thus sought to be emphasized that the Indian PE's role, quite apart from undertaking functions distinct from those performed by IMG UK, was essentially confined to 'subcontracted support service'. The respondents argued that the purpose underlying Article 13 (6) is to exclude from the scope of FTS income which is otherwise attributable to a PE and thus chargeable under the head of "business income". This aspect of Article 13 (6), ....
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....of which royalties are paid will be effectively connected with a permanent establishment, and will therefore form part of its business assets, if the "economic ownership of that right or property is allocated to that permanent establishment under the principles developed in the Committee's report entitled Attribution of Profits to Permanent Establishments [PE] (see in particular paragraphs 72-97 of Part I of the report) for the purposes of the application of paragraph 2 of Article 7. In the context of that paragraph, the "economic" ownership of a right or property means the equivalent of ownership for income tax purposes by a separate enterprise, with the attendant benefits and burdens (e.g. the right to the royalties attributable to the ownership of the right or property, the right to any available depreciation and the potential exposure to gains or losses from the appreciation or depreciation of that right or property)." 53. It would be pertinent to note that the expression 'effectively connected' also occurs in Article 12A (4) of the UN Model Convention. The commentary on that Convention explains the scope of Article 12A (4) in the following terms:- "106. The paragra....
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....lifying the services which would fall within that Article as being those which are otherwise not covered by Article 13. The submission in essence was that Article 5 (2) (k) is concerned with services furnished in a contracting state and which may be other than technical or consultancy. Viewed in that light, it was submitted that merely because an entity provided technical or consultant service from outside the territory of India, it would not mean that Article 5 (2) (k) would not apply to technical or consultant services performed or carried out from within. The respondents argued that the mere fact that they accepted the position of a Service PE having come into existence cannot possibly be viewed as an admission with respect to taxability of revenue earned from services performed from outside. 56. The written submission tendered by the respondents further asserts that the services provided by the appellant through its Service PE though performed in India were not of the nature envisaged by Article 13. In view of the above, they argued that the mere acceptance of the same cannot be viewed as services provided by IMG UK from outside India not being liable to tax under Article 13....
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.... of the commercial rights and assets of any kind arising out of the IPL/ BCCI (b) advice in respect of those of the Rights which may be 100% owned centrally and the division of the other Rights between BCCI and the Franchisees; (c) the preparation and execution of marketing strategies for: * the Franchise tender * the media Rights * the sponsorship Rights * the official supplier Rights * the licensing Rights * any other Rights; (d) the management of the Franchise tender process; (e) the management of the sales processes in respect of the Rights; (f) the preparation and negotiation of the contracts with: * the successful Franchisees * sponsors * the media * all other entities which acquire or may be interested in any of the Rights such contracts being, for the purposes of this MOU, "Rights Agreements" and all income of any kind generated therefrom being "Income" (g) the implementation and management of the centrally controlled/owned Rights on behalf of the relevant third parties (sponsors etc.) (h) the preparation of a television pr....
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....international expertise and resources. 4.1 Having carried out research and advised the BCCI in connection with the formation and governance of the League and IPL, IMG shall continue to advise and assist BCCI in connection with, the following: (a) the structure of the League; (b) the League rules and regulations; (c) the Franchise agreements and any necessary franchise regulations; (d) the League implementation budget; and (e) the Media Rights agreements. 4.2 In addition to the matters referred to in Clause 4.1 above, IMG shall continue its work in carrying out or providing (as appropriate) the following; (a) the ongoing execution of the management in respect of the Rights of BCCI and advice in connection therewith including, without limitation:- (i) Franchise Rights; (ii) Media Rights; (iii) sponsorship rights; (iv) official suppliership rights; (v) licensing and merchandising rights; (vi) stadium signage rights; and (vii) any other rights in relation to the League that may come up for leverage by BCCI in the future (b) the preparation and ....
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.... CUIH staffed, office to do the same, at the sole cost of MG; (s) the hiring of whatever resources are required to fully perform IMGs obligations under this Agreement at the sole cost of IMG; (t) advice and assistance in connection with Anti Doping and WADA Compliance Regulations; (u) assistance in the creation / development of new intellectual properties relating to the league. All such properties created will be the sole prop of BCCI (v) carrying out research in consultation with BCCI each year to ascertain un improvements in various areas of management and execution of the League (w) development of the strategic brand framework for BCCI and marriage brand IPL working with the BCCI team; (x) bringing-in global best practices in building and evaluating sporting properties and related aspects; (y) delivering a post event report at the end of each season and be subject to review on the performance and delivery of services rendered to BCCI." 63. The consideration for the provision of services by IMG was set out in Clause 6.1 which is extracted hereinbelow: - "6. Consideration 6.1 In consideration of t....
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.... and regulations for the league, franchisee agreements as also the estimated implementation budget. Besides these core responsibilities, IMG was also obligated to prepare a comprehensive outline for the exploitation of commercial rights and assets. This included franchise agreements, media rights, official suppliership, sponsorship, licensing and merchandising rights. A review of Clause 1.4 of the MoU reveals that IMG by virtue of its expertise, skill and knowledge was granted the right to build the sports league from its foundation and to continue to advise and administer the same over ten league seasons. The diversity of the responsibilities placed upon IMG is indicative of the intent of BCCI to leverage the former's vast experience and knowledge in conceptualizing and curating a sporting league of eminence. This becomes evident from Clause 4 of the Services Agreement specifically acknowledging that a significant proportion of the service which IMG was to render constituted advice to be provided to BCCI from outside India using ".....IMG's international expertise and resources". Clause 4.1 significantly records that while IMG had carried out research and broadly advised the BCCI ....
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....se that once the revenue was accepted to fall within the ambit of Article 5 (2) (k), it would be impermissible for the respondents to treat that service as being FTS under Article 13. We, however, find ourselves unable to sustain the aforenoted submission for the following reasons. 68. It is essential to underscore that Article 5 of the DTAA neither serves as a head of taxation nor does it concern itself with a categorization or classification of income. Rather, Article 5 is specifically concerned with defining and delineating the concept of a "Permanent Establishment" and enumerating circumstances in which a PE could be said to have come into existence. The Article serves to enumerate the criteria and circumstances in which a non-resident entity's presence and activities in a Contracting State would be sufficient to constitute a PE. Thus, in terms of Article 5 (2) (k), the moment a resident of a Contracting State were to furnish services including managerial services within the other Contracting State through employees or other persons who had stayed in that State for a period or periods aggregating more than 90 days within a twelve month period, a Service PE would come into ex....
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....revenue to tax albeit under the head of Business Income. F. BIFURCATION OF INCOME-WHETHER SUSTAINABLE? 72. The argument of bifurcation of income being impermissible, a submission which was addressed in conjunction with the above, would also falter in light of Article 7 (9) of the DTAA. Article 7 reads thus: - "ARTICLE 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent, establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment. 2. Where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, the profits which that permanent establishment might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise ....
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....orce, after the date of entry into force of this Convention, the competent authority of that Contracting State shall notify the competent authority of the other Contracting State of the terms of the relevant paragraph in the Convention with that third state immediately after the entry into force of that Convention and, if the competent authority of the other Contracting State so requests, the provisions of this Convention shall be amended by protocol to reflect such terms. 7. Paragraph 5 of this Article shall not apply to amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, to by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on monies lent to the permanent establishment; nor shall account be taken in the determination of the profits of a permanent establishment of amounts charged (otherwise than towards reimbursement of actual expenses) by the permanent establis....
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....r elucidated in the detailed analysis which follows. 74. It is pertinent to note that Article 7 is clearly not intended to be an overriding, a non obstante or an umbrella provision which would eclipse all other independent Articles of the Convention. This is evident from para 9 of Article 7 which in unequivocal terms speaks of items of income dealt with separately under other Articles of the Convention being left untouched. Para 9 in unambiguous terms prescribes that in such a situation those other Articles shall not be affected by Article 7. Thus the Article while providing the framework for taxation of business profits respects the boundaries that the DTAA erects and the specific Articles of the Convention that address different categories of income. The structure of the DTAA ensures that each type of income is governed by the specific Article and thus preventing an overlap or conflict. 75. The language in which Article 7 (9) of the DTAA stands couched also stands resonated in Article 7(4) of the OECD Model Convention which reads as follows: - "4. Where profits include items of income which are dealt with separately in other Articles of this Convention, then the pr....
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....es (i.e. as business profits or as a specific category of income) provided that the tax treatment of that item of income is in accordance with the provisions of the Convention. It should also be noted that where an enterprise of a Contracting State derives income from immovable property through a permanent establishment situated in the other State, that other State may not tax that income if it is derived from immovable property situated in the first-mentioned State or in a third State (see paragraph 4 of the Commentary on Article 21 and paragraphs 9 and 10 of the Commentary on Articles 23 A and 23 B)." 76. A similar provision is found in the UN Model Convention and Article 7 (6) whereof is framed in the following words: - "6. Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article." 77. The official Commentary on the UN Model Convention makes the following pertinent observations: - "29. Paragraph 6 reproduces paragraph 7 of Article 7 of the 2008 OECD Model Tax Convention. The Committee considers that the following....
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...., interest etc. which under paragraph 4 of Articles 10 and 11, paragraph [4] of Article 12, paragraph 4 of Article 12A, paragraph 8 of Article 12B) and paragraph 2 of Article 21, fall within this Article [...]. It is understood that the items of income covered by the special Articles may, subject to the provisions of the Convention, be taxed either separately, or as business profits, in conformity with the tax laws of the Contracting States. 63. It is open to Contracting States to agree bilaterally upon special explanations or definitions concerning the term "profits" with a view to clarifying the distinction between this term and e.g. the concept of dividends. It may in particular be found appropriate to do so where in a convention under negotiation a deviation has been made from the definitions in the special Articles on dividends, interest [royalties, fees for technical services and income from automated digital services]. It may also be deemed desirable if the Contracting States wish to place on notice, that, in agreement with the domestic tax laws of one or both of the States, the term "profits" includes special classes of receipts such as income from the alienation o....
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.... 'items of income' (infra m.no. 179), dealt with [separately]' (infra m.no. 180) and 'in [other] Articles' (infra m.no. 181). 2. 'Items of Income' The language used by Article 7(4) OECD MC and Article 7(6) UN MC makes clear that the umbrella term 'profits' means the aggregate of two or more 'items of income', and that the subsidiarity rule affects these single items of income only. This is in line with the general requirement of both the distributive rules and the method Article to address single elements. At the same time, it reflects the understanding of 'business profits' as a concept which is based on the income-generating unit while other distributive rules focus on the economic character of a single payment or transaction. 3. 'Dealt with Separately' Items are 'dealt with' (French 'traité') in other Articles if they belong to any 'class of income' (cf. no. 1 OECD MC Comm. on Article 21) defined or described by other Articles and if the other preconditions of the respective special Article are met., most notably by Articles 6, 8, 10, 11, 12, 13 or 17 OECD a....
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....n the aggregate of two or more items of income and the subsidiarity rule affecting those singular items. It proceeds further to pertinently observe that while Business Profits and which is the subject of Article 7 is a concept pertaining to income generation, the special Articles of the Convention lay emphasis on the economic character of a transaction. It is in the aforesaid backdrop that it advocates the position that distributive rules embodied in the separate Articles of the Convention stand saved and preserved by virtue of Article 7 (4). In our considered opinion, the position in law so enunciated would equally apply to Article 7 (9) of the DTAA. 81. Furthermore, the bifurcation of income which is envisaged under Article 7 (9) itself and is in consonance with the scheme of the DTAA ensures that each type of income is subjected to the specific tax treatment it merits based on its intrinsic character and the particular circumstances under which it is earned. Bifurcation, where warranted would prevent an overgeneralization of income under a single category and which could potentially lead to inappropriate tax treatment. 82. As observed earlier, the concept of splitting a co....
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....ficient. This since Para 4(c) places an added condition of the furnishing of such service, ultimately leading to technical knowledge, experience, skill, know-how or processes being made available. 85. Article 13 of the DTAA reads as under: - "1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed : (a) in the case of royalties within paragraph 3 (a) of this Articles, and fees for technical services within paragraphs 4 (a) and (c) of this Article,- (i) during the first five years for which this Convention has effect ; (aa) 15 per cent of the gross amount of such royalties or fees for technical services when the payer of the royalties or fees for technical services is the Government of the first-mentioned Contractin....
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....xtricably and essentially linked, to the sale of property, other than property described in paragraph 3(a) of this Article; (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships, or aircraft in international traffic; (c) for teaching in or by educational institutions ; (d) for services for the private use of the individual or individuals making the payment ; or (e) to an employee of the person making the payments or to any individual or partnership for professional services as defined in Article 15 (Independent personal services) of this Convention. 6. The provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respe....
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....yer. 87. The authoritative Commentary on the UN Model Convention while explaining the ambit of Article 12A carries the following instructive exposition on the meaning to be ascribed to the words "technical" and "consultancy": - Paragraph 3 "61. This paragraph specifies the meaning of the phrase "fees for technical services" for purposes of Article 12A. The definition of "fees for technical services" in paragraph 3 is exhaustive. "Fees for technical services" are limited to the payments described in paragraph 3; other payments for services are not included in the definition and are not dealt with in Article 12A (see the examples in paragraphs 87 to 103 below). 62. Article 12A applies only to fees for technical services, and not to all payments for services. Paragraph 3 defines "fees for technical services" as payments for managerial, technical or consultancy services. Given the ordinary meanings of the terms "managerial", "technical" and "consultancy"' the fundamental concept underlying the definition of fees for technical services is that the services must involve the application by the service provider of specialized knowledge, skill or expertise on b....
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....ng of "consultancy" involves the provision of advice or services of a specialized nature. Professionals usually provide advice or services that fit within the general meaning of consultancy services although, as noted in paragraphs 63 and 64 above, they may also constitute management or technical services. 67. The terms "management", "technical" and "consultancy" do not have precise meanings and may overlap. Thus, for example, services of a technical nature may also be services of a consultancy nature and management services may also be considered to be services of a consultancy nature." 88. Vogel explains the concept of technical services in the following terms (at page 1184):- "IV. Article 12A(3) UN MC 1. The Model a. Rule The term 'fees for technical services' is defined as: - any payment in consideration for - any service of managerial, technical, or consultancy nature, - unless the payment is made: a. to an employee of the person making the payment; b. for teaching in an educational institution or for teaching by an educational institution; or c. by an individual for s....
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....MC and Article 12A UN MC that explains some of the peculiarities of the definition of Article 12A UN MC and aids in its interpretation. Further context is scarce: The term 'service' can also be found in other provisions dealing with different types of services like Articles 5(3)(1), 14, and 19 UN MC. Article 14(2) suggests that any activity suffices, but there is no general definition. The General Agreement on Trade in Services also does not contain a definition (no. 83 UN MC Comm. on Article 12A). The category of technical services has developed from the problematic delimitation between IP licensing and service contracts. While the protected information that constitutes IP has to be divulged to the licensee as part of the licensing contract, there is often the need for further training of the licensee and the employees; this constitutes a service. Similar problems arise with consulting: The service provider does not transmit its special knowledge, skill, and expertise as such but uses them to make statements on customers' issues. These services are dubbed as 'technical' because they relate to the application of IP and not to fundamental resear....
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....e introduction of the category of 'technical services of a consultancy nature' besides the 'technical services of technical nature' shows that consulting that is not related to the traditional field of technique should also be covered. The UN Model Commentary confirms this wide understanding by defining services as activities carried out by one person for the benefit of another person in consideration for a payment whereas the manner of providing services was not decisive (no. 84 UN MC Comm. on Article 12A). Examples in the commentary also follow the wide understanding by, e.g., including a heart surgeon (no. 89 UN MC Comm, on Article 12A). Traditionally, technical services have been defined by the provisions of Special Knowledge, skill, and expertise to make statements on the special issues of the customer. The UN MC apparently draws on this understanding as it excludes services of a routine nature (no. 62 UN MC Comm. on Article 12A). Technical services have to be discerned from routine services with a case-by-case analysis. One important aspect is whether the service is individually customized to the specific needs of the customer. A standard sco....
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....d out to other persons, and these persons are not related to the enterprise (not directors, officers, employees) and, secondly, payments in consideration for advice of consultants related to the management or business of an enterprise. dd. Services of Technical Nature. "Technical services involve the application of specialized knowledge, skill, or expertise with respect to a particular art, science, profession, or occupation (no. 64 UN MC Comm. on Article 12A). The UN Comm. further refers to regulated professions such as law, accounting, architecture, medicine, engineering, and dentistry as examples covered by Article 12A (3) UN MC. These examples are not exhaustive." 89. It becomes apparent upon a consideration of the views expressed above that the word "technical" is no longer liable to be understood in its archaic sense as being confined to the traditional sciences. What authorities commend for consideration is an ascertainment of whether the services rendered involved the application of a specialised skill, knowledge or expertise. It is this shift in understanding which has led to the application of specialised knowledge, skill or expertise with respect to any art, ....
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....xability aspect is concerned. When the technical service is provided, that technical service is to be made use of by the recipient of the service in further conduct of his business. Merely because his business is dependent on the technical service which he receives from the service provider, it does not follow that he is making use of the technology which the service provider utilises for rendering technical services. The crux of the matter is after rendering of such technical services by the service provider, whether the recipient is enabled to use the technology which the service provider had used. Therefore, unless the service provider makes available his technical knowledge, experience, skill, know-how or process to the recipient of the technical service, in view of the clauses in the DTAA the liability to tax is not attracted. 14. The learned Additional Solicitor General relied on three judgments to point out that was the earlier view. Now, there is a departure supporting the Department. The first judgment on which reliance is placed is the judgment of the Advance Rulings Authority in the case of Perfetti Van Melle Holding B. V., In re (2012) 342 ITR 200 (AAR) where i....
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....e receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. 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 that may require technical knowledge, skills, etc., does not mean that technology is 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. In other words, payment of consideration would be regarded as "fee for technical/included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied." 91. Of equal significance are the observations of the Kerala High Court in US Technology Resources when their Lordships laid emphasis on the transfer of technology or know-how being a necessary ingredient of the "make available" condition which stands indelibly attached to FTS. To recall, the Kerala High Court in the aforenoted decision had held:- "18. We are conscious of the ....
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....lves by the different extent to which all or part of the property rights are transferred to the royalty payer. The main type are contracts that transfer 'the use or the right to use' to the payer. The payer himself can use the property, but does not get the full ownership rights of it. As the case may be, the owner might grant the use' to different persons at the same time. The IP is 'lent' (no. 1 OECD MC Comm. on Article 12) or 'rented out'. A special type are contracts in which the payment is for information concerning experience. This special case of property is also known as a 'know-how' contract. Its specific attribute is the lack of legal protection as an absolute right. When know-how is shared, it cannot be taken back and its use cannot be prohibited (at least to third persons, the receiver of know-how might be bound by contractual injunctive reliefs). Therefore, the transfer of the use cannot be distinguished from a transfer of full ownership. A third type of contracts contains the full transfer of ownership, alienation. Alienation is not included in the OECD and UN MC, and thus is covered by Article 13 OECD and UN MC (supra m.no. 20 e....
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....nd expertise being made available are conditions which must be concurrently and cumulatively satisfied. What we seek to emphasize is that Article 13 in unambiguous terms creates an enduring, unfading and imperishable link between the furnishing of service and a transmission or conferment of technical expertise, knowledge and skill. 95. It is also important to bear in mind that the mere usage or utilisation of technical or consultative material in aid of business would not be sufficient to attract Article 13 of the DTAA. If we were to accept the submission that handing over of research or advisory work were sufficient for the purposes of Article 13, it would render the "make available" condition comprised in Para 4 (c) wholly redundant and otiose since the mere rendering of service would have sufficed. As De Beers correctly holds "The tax is not dependent on the use of technology by the recipient." The make available prescription bids us to make a conscious distinction between a mere service provision and the impartation of lasting expertise. The offer of service or advise does not fundamentally alter the recipient's capabilities. These services, while potentially valuable, do no....
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....e handbook and discharge various other functions enumerated therein. The enumeration of functions in Clause 4.2(a) was merely illustrative as that clause used the expression "including, without limitation:". 98. Of equal significance was the obligation of IMG to provide the requisite manpower to carry out activities connected with the league so as to ensure successful running of the league and the matches which were to be held. This obligation which stands incorporated in Clause 4.2 (r) also required it to establish a fully staffed office at its own cost. The Services Agreement required IMG to carry out research each year to ascertain improvements warranted in various areas pertaining to the management and execution of the league as well as the development of BCCI's brand framework. 99. On an overall consideration of all of the above, we come to the firm conclusion that there was no expertise, skill or know-how which could be said to have been made available to BCCI. The various functions which IMG was called upon to discharge was to be aided by the appellant drawing upon its expertise and special knowledge in the creation and conduct of leagues of the stature of the IPL. The....
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....ntract in respect of the same is effectively connected with such PE, Article 13 would cease to apply and the income would then be taxable in accordance with Articles 7 or 15 of the DTAA, as the case may be. It was in the aforesaid context that learned counsels had addressed elaborate submissions on the meaning to be ascribed to the phrase "effectively connected". Mr. Vohra had contended that it is the contract which must be found to be effectively connected as opposed to the activity that may have been undertaken by the PE. It was in the aforesaid backdrop that Mr. Vohra had relied upon the following observations as appearing in the decision of the Supreme Court in Ishikawajima Harima:- "79. Since the appellant carries on business in India through a permanent establishment, they clearly fall out of the applicability of Article 12 (5) of DTAA and into the ambit of Article 7. The Protocol to DTAA, in para 6, discusses the involvement of the permanent establishment in transactions, in order to determine the extent of income that can be taxed. It is stated that the term "directly or indirectly attributable" indicates the income that shall be regarded on the basis of the extent....
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....under the Article. The foregoing explanations accord with those in the Commentary on Article 7. 21. It has been suggested that the paragraph could give rise to abuses through the transfer of rights or property to permanent establishments set up solely for that purpose in countries that offer preferential treatment to royalty income. Apart from the fact that such abusive transactions might trigger the application of domestic anti-abuse rules, it must be recognised that a particular location can only constitute a permanent establishment if a business is carried on therein and, as explained below, that the requirement that a right or property be "effectively connected" to such a location requires more than merely recording the right or property in the books of the permanent establishment for accounting purposes. 21.1 A right or property in respect of which royalties are paid will be effectively connected with a permanent establishment, and will therefore form part of its business assets, if the "economic" ownership of that right or property is allocated to that permanent establishment under the principles developed in the Committee's report entitled Attribution of Pr....
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....ices are effectively connected with: (a) such permanent establishment or fixed base, or (b) business activities referred to in (c) of paragraph 1 of Article 7. In such cases the provisions of Article 7 or Article 14, as the case maybe, shall apply. 5. For the purposes of this Article, subject to paragraph 6, fees for technical services shall be deemed to arise in a Contracting State if the payer is a resident of that State or if the person paying the fees, whether that person is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the obligation to pay the fees was incurred, and such fees are borne by the permanent establishment or fixed base. 6. For the purposes of this Article, fees for technical services shall be deemed not to arise in a Contracting State if the payer is a resident of that State and carries on business in the other Contracting State through a permanent establishment situated in that other State or performs independent personal services through a fixed base situated in that other State and such fees are borne by that permanent establishm....
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....e relevant facts and circumstances of each case. In general, fees for technical services would be considered to be effectively connected with a permanent establishment or fixed base if the technical services are closely related to or connected with the permanent establishment or fixed base. Also, fees for technical services would be effectively connected with business activities referred to in paragraph l (c) of Article 7 where the technical services are provided by an enterprise as part of that enterprise's business activities carried on in a Contracting State where a permanent establishment of that enterprise is situated and these activities are of the same or similar kind as the business activities performed through that permanent establishment. 107. Where paragraph 4 applies, fees for technical services are taxable by the State in which the fees arise as part of the profits attributable to the permanent establishment in accordance with Article 7 or the income attributable to the fixed base in accordance with Article 14.Thus, paragraph 4 relieves the State in which the fees for technical services arise from the limitations on its taxing rights imposed by Article 12A....
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....resident of a Contracting State, Article 12A does not apply to the fees for technical services unless the payer has a permanent establishment or fixed base in the Contracting State and there is a clear economic link between the technical services and the permanent establishment or fixed base. Otherwise there would be, in effect, a force-of-attraction principle for fees for technical services, which would be inconsistent with other provisions of the United Nation Model Tax Convention. 111. Paragraph 5 is subject to paragraph 6, which provides an exception to the source rule in paragraph 5. Paragraph 6 deems fees for technical services paid by a resident of a Contracting State not to arise in that State where that resident (the payer) carries on business through a permanent establishment in the other Contracting State or performs independent personal services through a fixed base in the other Contracting State and the fees for technical services are borne by that permanent establishment or fixed base. As a result, in these circumstances, the Contracting State in which the payer is resident is not allowed to tax the payments for technical services under paragraph 2. ....
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....arned by and was liable to be remitted to IMG. The Service PE was undoubtedly not a separate legal entity which could have been possibly called upon to satisfy the test of economic ownership as suggested. While Conventions do accord an independent identity upon a PE, they do so for the purposes of taxation alone. A PE, however, need not in all circumstances be a juridical entity as is recognised in law. It is perhaps these and other limitations which constrained Vogel to express the following reservations with respect to the test of "economic ownership" (at page 893):- "The effectively connected rule is not based on the force of attraction rule (no. 31 OECD MC 2014 Comm. on Article 10; no. 24 OECD MC 2014 Comm. on Article 11; no. 20 OECD MC 2014 Comm. on Article 12; no. 15 UN MC 2011 Comm. on Article 10). This means that dividends, interest and royalties flowing to a resident of a Contracting State from a source situated in the other State must not, by a kind of legal presumption, or fiction even, be related to a PE or a fixed base, as the case may be, which that resident may have in the source State, so that this State would not be obliged to limit its tax jurisdiction in....
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....abuse rules can be an adequate weapon. According to the OECD, shares, debt claims, rights or property form part of the assets of a PE if the 'economic' ownership of these is allocated to that PE (no. 32.1-32.2 OECD MC 2014 Comm. on Article 10; no. 25.1-25.2 OECD MC 2014 Comm. on Article 12; no. 21.1-21.2 OECD MC 2014 Comm. on Article 12). 'Economic' ownership means the equivalent of ownership for income tax purposes by a separate enterprise, with the attendant benefits and burdens, such as the right to the dividends, interest or royalty attributable to the ownership of a holding, debt claim, right or property, as the case may be, and the potential exposure to gains or losses from the appreciation or depreciation of that holding, debt claim, right or property. In the opinion of this author, the term 'economic' ownership is not appropriate for the allocation of assets to a PE. A PE itself can never be owner of an asset because it is not a separate legal entity. As a result, it can never be the 'economic' owner of an asset as well. The term is therefore misleading. It also guides away attention from what is actually relevant for answering the question ....
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....ere the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government. Explanation 1.-For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. Explanation 2.-For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy ....
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....t to note that the Tribunal had in this regard held as follows: - "48. According to provisions of section 9 (1) of the Income tax Act the income by way of fees for technical services payable by a person who is resident to a non-resident shall be deemed to accrue or arise in India and shall be chargeable to tax u/s. 5 of the Income Tax Act in the hands of a non-resident. The claim of the appellant is that receipt of Rs. 237750181/- falls within the exception provided under clause (b) of the above section which says that where the fees for technical services are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India, it shall not be considered as fees for technical services as income deemed to accrue or arise in India in terms of the provisions of section 9 (1) (vii) (b) of the Income Tax Act. The main reason to say so by the appellant is that the IPL 2009 event has been held outside India and therefore the BCCI has utilized those services outside India and therefore they fall into the exception and cannot be taxed in India. We have carefully ....
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.... as mentioned under these clauses, income would be deemed to accrue or arise in India to the non-resident under the circumstances specified therein. The intention of introducing the source rule was to bring to tax interest, royalty and fees for technical services, by creating a legal fiction in section 9, even in cases where services are provided outside India as long as they are utilized in India. The source rule, therefore, means that the situs of the rendering of services is not relevant. It is the situs of the payer and the situs of the utilization of services which will determine the taxability of such services in India. This was the settled position of law till 2007. However, the Hon'ble Supreme Court, in the case of Ishikawajima-Harima Heavy Industries Ltd., vs. DIT (2007) [288 ITR 408], held that despite the deeming fiction in section 9, for any such income to be taxable in India, there must be sufficient territorial nexus between such income and the territory of India. It further held that for establishing such territorial nexus, the services have to be rendered in India as well as utilized in India. This interpretation was not in accordance with the ....
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....ident has in India. The issue has to be decided in the context of the law as applicable. 5.3 The Ld. ARs have also referred to provisions of clause (b) of section 9 (1) (vii). According to the said sections, Royalty/FTS payable by a resident are deemed to accrue or arise in India where the royalty/fee is payable to a non-resident except where these are payable in respect of any right, property or information used or services utilized: * for the purposes of a business of profession carried on by such person outside India, or * for the purpose of making or earning any income from any source outside India. Both these eventualities are not cumulative but are in the alternative to each other and therefore, on non satisfaction of any one, the deeming fiction shall come into play in the case. The issue for consideration is the meaning of the expression 'such person' appearing in section 9 (1) (vii) (b). In this context reference is made to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Havells India Ltd 352 ITR 376 wherein Hon'ble High Court held that in order to fall within the exception provided in section....
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.... carried on by him outside India" refers to the business or profession carried out by him viz. resident payer in this context and not the non-resident payee. In view of the clear disposition of the relevant provisions of the I.T. Act, we hold that the provision of section 9 (1) (vii) (b) are also satisfied and the case of the assessee is not covered by the exceptions." 115. In our considered opinion, this question is clearly liable to be answered in favor of the appellant for reasons which follow. Undisputedly, IPL in 2009 and 2014 though originally slated to be held in India, was, for exceptional reasons, shifted out and ultimately held in South Africa and UAE respectively. The services which were rendered by IMG in connection with those two events were clearly utilized outside India and were availed of for the purposes of earning income from a source outside India. The geographical shift meant that the services rendered by IMG were utilized outside India and were integral to earning income from sources outside India. The Tribunal clearly glossed over the significance of this relocation and which had fundamentally altered the context in which IMG's services were availed. The Tr....
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....ss fee would be deemed to be taxable in India under Section 9 (1) (vii) of the Act? As the factual matrix would show, the appellant has not invoked Double Taxation Avoidance Agreement between India and Switzerland. That being not there, we are only concerned whether the "success fee" as termed by the assessee is "fee for technical service" as enjoined under Section 9 (1) (vii) of the Act. The said provision reads as follows: "9. Income deemed to accrue or arise in India.-(1) The following incomes shall be deemed to accrue or arise in India- *** (vii) income by way of fees for technical services payable by- (a) the Government; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India: Provided tha....
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....xception. The exception carved out in the latter part of sub-clause (b) applies to a situation when fee is payable in respect of services utilised for business or profession carried out by an Indian payer outside India or for the purpose of making or earning of income by the Indian assessee i.e. the payer, for the purpose of making or earning any income from a source outside India. On a studied scrutiny of the said clause, it becomes clear that it lays down the principle what is basically known as the "source rule", that is, income of the recipient to be charged or chargeable in the country where the source of payment is located, to clarify, where the payer is located. The clause further mandates and requires that the services should be utilised in India. 26. Having stated about the "source rule", it is necessary to appropriately appreciate how the concept has developed. At the time of formation of "League of Nations" at the end of 1920, it comprised of only 27 countries dominated by the European States and the United States of America. The United Nations that was formed after the Second World War, initially had 51 members. Presently, it has 193 members. With the efflux of....
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....w. 28. The two principles that we have mentioned hereinabove, are also applied in domestic law in various countries. The source rule is in consonance with the nexus theory and does not fall foul of the said doctrine on the ground of extra-territorial operation. The doctrine of source rule has been explained as a country where the income or wealth is physically or economically produced. [See League of Nations, Report on Double Taxation by Bruins, Einaudi, Saligman and Sir Josiah Stan (1923)]. Appreciated on the aforesaid principle, it would apply where business activity is wholly or partly performed is a source State, as a logical corollary, the State concept would also justifiably include the country where the commercial need for the product originated, that is, for example, where the consultancy is utilised. 29. From the aforesaid, it is quite vivid that the concept of income source is multifaceted and has the potentiality to take different forms [See Klans Vogel, World-wide v. Source Taxation of Income - Review and Revision of Arguments (1988)]. The said rule has been justified by Arvid A. Skaar in Permanent Establishment; Erosion of Tax Treaty Principle on the ....
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....ternational covenants and conventions. In a case of this nature, interpretation with reference to the nexus to tax territories will also assume significance. Territorial nexus for the purpose of determining the tax liability is an internationally accepted principle. An endeavour should, thus, be made to construe the taxability of a non-resident in respect of income derived by it. Having regard to the internationally accepted principle and DTAA, it may not be possible to give an extended meaning to the words "income deemed to accrue or arise in India" as expressed in Section 9 of the Act. Section 9 incorporated various heads of income on which tax is sought to be levied by the Republic of India. Whatever is payable by a resident to a non-resident by way of fees for technical services, thus, would not always come within the purview of Section 9 (1) (vii) of the Act. It must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax. Whereas a resident would come within the purview of Section 9 (1) (vii) of the Act, a non-resident would not, as services of a non-resident to a resident utilised in India may not have much relevance in determining whether....
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.... in light of the reservations expressed in the body of the judgment, this decision is not liable to be construed as an affirmation of the view in law as expressed by the Tribunal. 122. That only leaves us to consider Question (i) as framed. It becomes apposite to note that the question is introduced with the appellant seeking our opinion on whether "business income" was divisible under the DTAA even though it arose out of a single contract having regard to Articles 7 and 13 of the Convention. We note that the Tribunal has founded its decision on what appears to be an admitted dichotomy between the functions performed and services rendered by the IMG UK as distinguished from those discharged by its Service PE. However, the Tribunal has while dealing with the functions performed by IMG UK linked it to the issue of "effectively connected" which was relevant for the purposes of Article 13. This becomes apparent from a reading of paragraph 38 of the impugned decision of the Tribunal which is extracted hereunder:- "38. Now the issue arises is whether the whole contract is 'effectively connected' with the permanent establishment or part of the services are 'effecti....
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.... least, facilitate, assist or aid in performance of such service irrespective of the other activities PE performs. Therefore according to article 7, for attribution of the profits to the permanent establishment the activity carried out by the permanent establishment is important and to that extent only the profits can be attributed to that particular permanent establishment. However if there are other activities, which are also incorporated in the agreement, which are not at all carried on with the help of, or through, or by, or under the control, or under the supervision of the permanent establishment such activities and income arising there from cannot be said to be 'effectively connected' with the permanent establishment and article 7 cannot be applied to those services. In the present case certain activities are carried out by the appellant which are not even concerned with the functioning . of the permanent establishment therefore in our view only the activities which are performed by the permanent establishment are effectively connected with the permanent establishment and activities which are not carried on by the permanent establishment but are carried out by the he....