TaxTMI 
TaxTMI 
2026 (7) TMI 1973
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....ical Services (FTS) under Article 13(4) of the India-UK DTAA (hereafter as "the DTAA"). The assessee is a company incorporated in the United Kingdom and is engaged in the business of providing services regarding large infrastructure and engineering projects. There is an Associated Enterprise (AE) of the assessee in the name and style of M/s Bechtel Engineering & Construction India Private Limited (BECI). This BECI engaged the assessee during the year under consideration for rendering certain support services to BECI, which in turn has entered into a contract for certain infrastructure projects in India pertaining to M/s Reliance Industries Limited (RIL). It is gleaned from the documents before us that the composite support services rendered by the assessee to BECI includes - engineering services, procurement support services, and technical advisory services. The assessee has claimed that the receipts from the supply of services under the agreement with BECI were not taxable in India as per the DTAA. Initially the Ld. AO had proposed that the impugned amount be brought to tax as FTS since it allegedly satisfied the "make available" clause under Article 13 of the DTAA. Thereafter, th....
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.... under Article 13 of the India-UK DTAA. 7. That on the facts and circumstances of the case and in law, the DRP has erred in not appreciating that the protective and substantive additions of an income can be made only when the identity of the real owner of the income is unclear and have no applicability in the present case where both substantive and protective additions have been made on the same person. 8. That on the facts and circumstances of the case and in law, the Ld. AO has erred in computing the total income of the appellant in computation sheet attached to the assessment order passed u/s 143(3) of the Act, wherein the computation sheet the business income has been determined at Rs. 62,11,01,636 and other income at Rs. 62,19,31,052 resulting in incorrect total income of Rs. 1,24,30,32,688 for Appellant. However, in the assessment order, only an addition amounting to Rs. 62,11,01,636 has been made to returned taxable income of Rs. 8,29,416. 9. That on the facts and circumstances of the case and in law, the Ld. AO has erred in computing the total income of the Appellant in computation sheet attached to the assessment order passed u/s 143(3) of the Ac....
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....s of providing services under the said agreement (effective from 01.01.2020). It was pointed out that the Ld. AO has noted this fact in the shape of the assessee submissions in para 3 at page 2 of his order and also as a finding in para 6.3 at page 18 of his order. It was the argument that on this basis alone, following the order in the case of Clifford Chance Pte. Ltd. reported in 160 taxmann.com 424 (Delhi - Trib), there cannot be any "virtual PE". It was the submission that even in the absence of any discussion by the authorities below about the contents of agreement effective from 01.01.2020, the mere fact that no employee physically visited India to give effect to any aspect of the agreement between M/s BECI and the assessee, would itself negate the possibility of any PE's existence and thereby there can be no business income attributable to the same. 2.1 Regarding protective and substantive assessments being made on the same assessee for the same receipt it was averred that the same may not be permissible under law following these cases: i. Lalji Haridas vs. ITO [1961] 43 ITR 387 (SC); ii. Jagannath Hanumanbox vs. ITO 31 ITR 603 (Cal); iii. Samsu....
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....nt of the same is enabled to perform such services in future on its own without recourse to the service provider. The Ld. AR concluded his arguments by saying that as incidental to the overall scope of services under the Service Agreement, certain engineering design services are also provided to BECI by the assessee (i.e., certain mechanical/engineering drawings, with respect to the specific projects, are shared with BECI). Even if the development of design and its transfer is to be viewed separately, the condition of "make available" is not satisfied with respect to the development and transfer of any design(s) as part of the composite services under the Service Agreement. It was averred that BECI cannot utilize the drawings/designs received from the appellant for applying the underlying technology in future independently, rather it has to go back to the appellant each time it requires any drawing/design for its clients. 3. Per contra, the Ld. DR brought to our notice the fact that the assessments for AY 2016-17, 2017-18, 2018-19 and 2020-21 have all been set aside by the ITAT for violating the provisions of section 144C(10) of the Act. It was the submission that in none of the....
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.... it was stated that to safeguard the interest of Revenue this method has been adopted and in case the substantive addition fails then the protective needs to be upheld as a substantive addition. 3.3 It was also argued that the assessee has got deduction of tax at source in India but has not mentioned whether the receipt from this contract has been offered to tax in the country where it is a tax resident of. 4. We have carefully considered the rival submissions and have gone through the documents before us. We have also perused the case laws relied upon by either of the parties. Right at the outset, it deserves to be mentioned that the Ld. DRP has based its directions to tax Rs. 62,11,01,636/- substantively as business income u/s 44DA of the Act, by holding that the finding of a PE's existence has already been established in earlier years. Furthermore, the basis for determining that the exact same amount held to be business income u/s 44DA of the Act is also, alternatively, to be taxed as FTS under Article 13 of the DTAA, albeit on a protective basis, is based on a discussion for AY 2016-17 which has been extracted in para 12 at page 24 of the Ld. AO's order. The relevant find....
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.... it has been observed that the very concept of protective addition is relevant only when an income is to be added in the hands of more than one taxpayer, in a situation in which there is an element of ambiguity as to in whose hands the said income can be rightly brought to tax. That is not the case before us. In our humble understanding, therefore, the concept of 'protective assessment', as is known to the Income Tax law, has no application in the cases like the one before us. However, it is observed that the matter before the ITAT, in the MSD Pharmaceutical case (supra), was that the application of the bright line test method for making arm's length adjustments in respect of AMP expenses needed to be kept alive, as per the contention of Revenue, in spite of a binding judgment of the Jurisdictional High Court, merely on the ground that said judgment had been challenged before the Hon'ble Supreme Court. The Revenue had made a protective addition simply to keep the issue alive. This action of Revenue had not been approved in the MSD Pharmaceutical case (supra) and thereafter the mandate for making protective assessments has been enunciated as extracted above. A review of judicial lit....
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....ear since the agreements have evolved and changed during the intervening period between AY 2016-17 and 2022-23. Also, while the assessee has given a clear statement to the effect that services were rendered to M/s BECI from outside India [last paragraph on page 2 of the impugned order where the assessee's submissions are extracted], the finding of the Ld. AO on page 18 para 6.3 (2nd part) is puzzling due to the language employed. It may be extracted as under: - "It is understood that the assessee is providing plant designs to BECI, consequent to which the contract is executed by BECI. In absence of these plant designs, the contract cannot be fulfilled by BECI. It is also to be noted that the assessee's employees do not visit the premises, and the technical inputs provided by the assessee are employed by BECI [sic]. The technical know-how is thus made available to the Indian customer, and is thus chargeable to tax under the DTAA." The exact nature of the arrangement between the assessee and M/s BECI cannot be readily understood from this finding, even though the absence of any employee of the assessee visiting M/s BECI pursuant to the agreement effective from 01.01.2020 ....
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.... the development and transfer of a technical plan or technical design. It was explained that the assessee provides engineering services, procurement support services and technical services to M/s BECI. M/s BECI provides details on the particular geographical area of the project and other details pertaining to materials, equipment and installations at the specific project sites. Based on inputs provided by M/s BECI the assessee prepares procurement schedules, engineering modules, technical documents, review reports and has provided other technical advisory services to M/s BECI in relation to the particular project. It was emphasized by the Ld. AR that the underlying bases for calculations, technical knowhow and skills required for rendering the requisite advisory is not imparted to M/s BECI at any stage. Notably the Ld. AR points out that the advisory provided to M/s BECI can be used by that entity only with respect to the project with M/s RIL, and thereafter M/s BECI cannot use such advisory for implementing any other project than the one under consideration. The ld. AR also drew our attention to the fact that the service agreement was a composite one and it would not be possible f....
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....es but those were not "made available" to the assessee. "Rendering of any technical or consultancy services" is followed by "which make available technical knowledge, experience, skill, know-how". In this context it becomes imperative to understand the meaning of the expression "make available" as used in this Article. Make available means to provide something to one, which is capable of use by the other. Such use may be for once only or on a continuous basis. In our context to make available the technical services means that such technical information or advice is transmitted by the non-resident to the assessee, which remains at its disposal for taking the benefit there from by use. Even the use of such technical services by the recipient for once only will satisfy the test of making available the technical services to the assessee. If the non-resident uses all the technical services at its own end, albeit the benefit of that directly and solely flows to the payer of the services, that cannot be characterized as the making available of the technical services to the recipient. 19.19 The meaning of the expression "make available" has been aptly considered in the case of Int....
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....possessed By the doctor. On the other hand, if the same doctor teaches or trains students on the aspects of diagnosis or techniques of surgery, that will amount to making available the technical knowledge and experience of the doctor." Furthermore, in the case of Tungsten Automation England Limited reported in 480 ITR 93 (Del), the Hon'ble Delhi High Court has given a ruling as under to explain what could, or not, constitute as FTS: - "33. This brings us to the central controversy - whether the services rendered by the Assessee "make available" any technical knowledge, experience, skill or know-how to GIPL and/or its customers.------- 36. On the tests as expounded by the Division Bench of the Karnataka High Court for determining whether the technical or consultancy services qualify the 'make available criteria' is whether the rendering of services results in technical knowledge or skill being imparted to the recipient in order for the recipient to deploy the same technology or techniques in future on its own without any recourse to the service provider. The fact that the services rendered by the service provider requires high degree of technical knowledge or sk....
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....olved in rendering of the technical services on its own. The ability of the service recipient to perform the services or use the technical knowledge as involved in rendering of the services on its own in future, is vital and the 'make available' condition is sine qua non for FTS under the India-UK DTAA. The consideration paid for development and transfer of technical plan or technical design should also transfer the right to use the technical plans or design, which is provided by service provider, to the recipient." Furthermore, in the case of Foster Wheeler France S.A. reported in 157 ITD 793 (Chennai - Trib) it has been held as under: - "14. It is an admitted position that the assessee-company also engaged in the business of engineering and construction contract, engineering equipment and power equipment supplier. For the purpose of carrying out the business in India, the assessee received the above services from Foster Wheeler USA. In fact, the assessee has received execution plans with schedules, specifications, etc. Foster Wheeler USA reviewed the working of the assessee in respect of its plans, execution and also provided time schedule with emphasis on key milesto....
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.... and technology adopted by the Netherland company for locating the diamonds and other minerals was not transferred. Locating diamonds cannot be done by the assessee-company independently. The assessee-company before the Karnataka High Court is expertise only in excavation and not in performing air borne survey or locating the availability of the minerals. In this case, the assessee is also an expertise company in engineering and construction works. Therefore, when the specifications and other procedures are made available to the assessee-company and the foreign company is reviewing and tracking the execution plans periodically, not only the execution but also the project budget and client satisfaction, this Tribunal is of the considered opinion that Foster Wheeler USA has made available its technical knowledge, expertise, knowhow in execution of the contract by the assessee in India. Therefore, this judgment of Karnataka High Court is not applicable to the facts of the case.------ 21. In view of the above discussion, this Tribunal is of the considered opinion that the technical knowledge, expertise, knowhow, provided by Foster Wheeler USA were very much made available to t....
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....sue or the issue of taxability as FTS for these earlier years. 5.0 As a result of the discussion above, the following is held as under: i. There cannot be substantive and protective assessments on the same assessee. Accordingly, the Revenue would need to hold firm to one method only. ii. From a reading of the facts regarding the PE it is seen that the directions of Ld. DRP are outdated since they are based on facts prevailing prior to 1.1.2020. In this regard the Ld. AO's findings that the services have been rendered by the assessee to M/s BECI from remote locations outside India only would tilt the balance of convenience in favour of the assessee regarding the claim that no PE exists in India, as the concept of virtual PE has not been approved as per the case of Ernst & Young (supra). Thus, it is held that business income cannot be taxed u/s 44DA of the Act as there is no PE in existence. iii. Regarding the nature of services rendered, it deserves to be held that there is not enough material in the orders of authorities below, specifically in the impugned order, that the services rendered would satisfy the "make available" clause in the UK-DTAA, espec....