TII Instant Update - 2017-TII-INSTANT-ALL-465

CAES LAWS

2017-TII-39-HC-DEL-TP

BACARDI INDIA PVT LTD Vs DCIT: DELHI HIGH COURT (Dated: May 24, 2017)

Income Tax - Advertisement, marketing and promotion (AMP) - remand - Arms Length Price (ALP)

The assessee is a private limited company. This appeal was filed by the Assessee u/s 260A against an order of the Tribunal. The assessee raised a question as to whether the Tribunal ought to have itself dealt with the issue concerning the existence of the international transaction concerning the advertisement marketing and promotion (AMP) expenses and the determination of ALP thereof instead of remanding the issues to the TPO for a fresh consideration.

Having heard the parties, the High Court held that,

Whether merely because TPO did not have the benefit of considering some decided cases relating to the matter, can the Tribunal remand such matter to TPO particularly when the case has been argued at length and views of the TPO & DRP were already available to the Tribunal - NO: HC

+ the case before the ITAT was argued at length and the views of the TPO as well as the DRP were already available to the ITAT. Arguments were advanced on the strength of judgments of this Court in Sony Ericsson Mobile Communications India Pvt. Ltd. vs. Commissioner of Income Tax as well as a string of subsequent judgments beginning with Maruti Suzuki India Ltd v. CIT, (2016) 381 ITR 117. The main reason that weighed with the ITAT to remand the matter to the TPO was that the TPO did not have the benefit of the above decisions of this Court when the order was initially passed by the TPO. That can hardly be a ground for remanding the entire matter to the TPO. In the present case, all the facts necessary for the ITAT to form an opinion on the issues before it concerning the AMP expenditure were already before it. In the circumstances, the remand to the TPO of the entire matter for a decision afresh appears to be unwarranted.

Case remanded

2017-TII-92-ITAT-MUM-INTL

DDIT Vs SIEMENS LTD: MUMBAI ITAT (Dated: April 27, 2017)

Income tax - Sections 9(1)(vii) & 195 - India-Netherlands DTAA - Article 12(5)

Keywords - foreign remittance - fee for technical services - transformer testing services - hiring equipment on rental basis - TDS obligation

The assessee, a manufacturer of transformers in India, had submitted a bid for supply of transformers to various customers viz. .M/s. Power Grid Corporation India Ltd. etc. One of the requirements of power Grid was that the transformers should be type tested in a lab' of an International Standard. For pure logistic convenience these transformers' were physically sent from India to Netherlands in CKD condition and reassembled on a quay in Netherlands, where KEMA Testing Laboratory carries out the tests and gives the required certificate based on which Siemens Sells the transformers to Power Grid. Accordingly, the Assessee filed application u/s.195(2) for making remittance to KEMA Testing Laboratory. The AO held that the payments to be made by the applicant would qualify as "Fees for technical services" as per section 9(1)(vii) of I-T Act, as well as per DTAA between India and Netherlands. Hence, AO directed to deduct tax @ 10% on the gross amount of payments to be made to KEMA Testing Laboratory. The CIT(A) however on appeal held that fees paid by assessee to Netherlands company was not taxable in India, as Netherlands Company had not rendered any technical services within the scope of Article 12(5) of the treaty.

Similarly, for testing the transformer, the assessee had taken on rent oil with equipments from SMIT Transformatoren BV and made a payment of EUR 135112.60. In respect of the same, the CIT(A) held that equipment royalty was not provided in the treaty between India and Netherland. As far as taxability of same under Article 12(5) of the treaty was concerned, the CIT(A) observed that by hiring oil and other equipment on rental basis for the purpose of testing of transformer no technology was made available to the assessee. Thus this income was also held to be not taxable even under clause 5 of the Article 12 of the treaty.

On appeal, the ITAT held that,

Whether testing laboratory which carries out 'type testing services' can be rearded as 'standard facility', when the 'type tests' on power transformers have not been carried out on some 'standard facility' by machines automatically without human intervention - NO: ITAT

+ it is seen that for carrying out type tests, separate instruments/equipments are required. These instruments/equipments have to be connected to the different parts of the transformer. Different kind of currents (AC/DC) have to be injected, at different voltages, for different time-periods and of different frequencies. The results of these tests have to be examined for acceptance within the margins of error stipulated by international bodies. A plain reading of the procedure laid down for short circuit withstand test by IEC makes it evident that this test cannot be carried out by the machine alone, automatically and without human intervention. Neither the assessee nor the Revenue has explained in what manner does the entire laboratory of KEMA qualifies for a 'standard facility'. In a general understanding, a 'standard facility' is something which performs predefined tasks for certain specified inputs or objects. It may also be understood to be something which performs 'standard service' for a given subject. In the parlance of Income Tax, the word has been used by way of illustration, such as a transponder of a satellite for uplinking/downlinking, mobile communication system including mobile towers (BTSs/MTSs) for providing roaming services to other mobile network subscribers, fibre optic cables etc. and the likes. It may be seen that such 'standard facilities' does not require any human intervention for performing out the pre-designed services. There is no human involvement once the systems, hardwares or softwares are 'programmed' for performing a particular service or services. The quality or quantity of the output or services cannot be influenced or altered in any way by human beings opposed to that, the 'type testing' of power transformers, as explained in the preceding paragraphs, requires continuous involvement of and monitoring by human beings. Physical observation is a crucial part of the type testing of transformers. It is but natural that sophisticated instruments / equipments are required for performing the tests, for how else a high voltage / current be generated for injecting into the transformers. However, there instruments/ equipments are by no means 'standard facilities'. Standard facilities can be used only for and on standard objects. A power transformer is not a 'standard object'. Each transformer is unique, having different specifications and designed for different physical, electrical, mechanical, geological and environmental situations and capable of handling/withstanding different level of mechanical, thermal, electrical or dielectric stress. A power transformer is, therefore, not a 'standard product' and cannot be tested by and on some 'standard facility'. The testing laboratory of KEMA, therefore, cannot be regarded as a 'standard facility'. To sum up, the 'type tests' on power transformers of Siemens have not been carried out on some 'standard facility' by machines automatically without human intervention. On the contrary, there is a constant human endeavour involved in testing of a power transformer. Therefore, the instant case of the assessee is not covered by the judgment of this Tribunal in ITA No. 4356/Mum/2010;

Whether the fact that the 'provision of service' may require technical input by the person providing the service, would per se mean that technical knowledge or skills are made available to the person purchasing the service - NO: ITAT

+ as regards the argument of assesse that the payments to KEMA shall not be taxable in India as the services have been performed outside India as well as the payments have also been made outside India, it is sufficient to say that after the amendments in Explanation 2 to section 9(1)(vii) the law is fairly settled in this aspect. The term 'make available' has not been defined in the India Netherlands DTAA. It, however, has been explained in the MoU of India USA DTAA. Paragraph 4(b) of Article 12 refers to technical or consultancy services that make available to the person acquiring the services, technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plant or technical design to such person. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. It is, therefore, imperative to find out whether KEMA has made available any technical service to the assessee which provide an enduring benefit to the assessee and the assessee is in a position utilize the knowledge or knowhow in future as well; whether the technical experience, knowledge or skill remain with the assessee remains with the assessee even after the rendering of services have come to an end; or, whether the technical information or advice given by KEMA remains at the disposal of the assessee for taking the benefit therefrom by use. It has been held by the Karnataka High Court in case of De Beers that "the question whether along with rendering technical services, whether the technical knowledge with which the services were rendered was also made available to the assessees/customers is purely a question of fact which is to be gathered from the terms of the contract, the nature of services undertaken and what is transmitted in the end after rendering technical services. For Siemens, manufacturing of power transformers is a continuous process, even though each transformer is to be designed new for the specific needs of the customers. In this backdrop, testing of transformers and its auxiliary systems including protective devices, play and crucial role in the product development cycle of a transformer. It is the test results, which indicate the performance of the transformers. A test result within the margins of acceptance provides an input to the manufacturer to calibrate and standardize its design and processes, whereas results outside the limits of acceptance initiate a review of the research and development (R&D). In either case, the test results give enduring benefits to the assessee which goes a long way in improvement of its manufacturing system. These benefits go much beyond the immediate need of the customer as the insight that the test results provide has universal and futuristic application. The results of the 'type tests' carried out by KEMA on a particular piece of transformer are, therefore, not services the effect of which are localized for that particular piece;

Whether standard facility provided by a foreign testing laboratory by using highly sophisticated equipment for carrying out the test, can be taxed in India in the form of FTS, when no human intervention was involved in carrying out the services - NO: ITAT

Whether remittances made for receipt of such testing services warrants TDS obligation, when the provider of service has no permanent establishment in India - NO: ITAT

+ as a result of the 'type tests' the assessee exactly knows the kind of amendment, innovation or improvisation that it is required to carry out for all future manufacturing of transformers. By means of these test results, the service provider (KEMA) makes available its technical experience, knowledge or skill which go a long way in designing, developing, calibrating, standardizing or even discarding a component, process, material or (in-house) testing equipments/systems of the assessee. Such experience, knowledge or skill help the assessee eliminate the possibility of committing an error in future. Thus the test results, which are nothing but physical manifestation of the services provided by KEMA on the transformers, provide the technical expertise, knowledge, skill or experience of KEMA to the assessee which remain at the disposal of the latter much after the services have been rendered. The assessee can utilize this knowledge or knowhow in its future operations and thus the testing services of KEMA provide an enduring benefit to the assessee. It is, therefore, submitted that KEMA carried out technical services which are 'made available' to Siemens Ltd. and, accordingly, the payments thereof are FTS within the meaning of Article 12(5) of the DTAA between India and the Netherlands. However, from the record, we found that assessee is a manufacturer of transformers in India which are required to be designed as per the requirement of Power Grid Corporation of India to whom these transformers are supplied. These transformers are required to be type tested in lab of an international standard, accordingly assessee entered into agreement with KEMA Testing Laboratory, Netherlands to carryout short circuit test and certify the transformers. Assessee filed application u/s.195(2) for making remittance to KEMA, however, AO directed to deduct tax at 10% on the gross amount payable to KEMA Testing Laboratory. Similarly for testing the transformer, assessee has taken on rent oil with equipment from SMIT Transformatoren BV. SMIT has provided crane and man lift on rental basis. On the amount so paid the AO directed to deduct tax at 10% on the gross payment. By the impugned order, CIT(A) held that Netherlands company has not "made available” any technical expertise, knowledge or skill to the assessee in India. Therefore fees paid to Netherland company for testing of transformer of assessee company was not for rendering any technical services within the scope of Article 12(5) of the treaty. Hence, fees paid to the Netherlands company is not taxable in India. Similar issue has been dealt by the Tribunal in assessee's own case vide order dated 12/02/2013, wherein for standard facility provided by laboratory by using highly sophisticated equipment for carrying out test was held to be not liable to tax in India in the form of fee for technical services. As per terms of agreement, we found that payment so made by the assessee is in the nature of business income of KEMA Testing Laboratory and since it does not have any permanent establishment in India, the same is not taxable in India as per DTAA. We also found that the payment to be made is for a standard facility provided by the laboratory which is run automatically by machines without human intervention. Similarly equipment royalty is not provided in the treaty between India and Netherlands. Thus, by hiring oil and other equipment on rental basis for the purpose of testing of transformer, no technology was made available to the assessee. In view of the above discussion, we do not find any infirmity in the order of CIT(A). As we have already dismissed the Revenue's appeal holding that assessee was not liable to deduct tax at source on the payment so made, we are not going to decide the cross objection filed by the assessee which have become infructuous.

Revenue's appeal dismissed