Citation Codes

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Case Number

IT Appeal Nos. 2723 and 2724 (Mum.) of 1998

Advocates

P.K. Das

Judges

R.V. EASWARPramod Kumar

Acts

provisions of article 12(1)
provisions of article 12(4)

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Smart Summary

Concise Analytical Summary of the Tribunal's Opinion (Two Consolidated Appeals)

Factual and Procedural Background

Two appeals (ITA No. 2723/Mum./98 and ITA No. 2724/Mum./98) by the same assessee were heard together and disposed of by a consolidated order. No representative appeared in court for the assessee, although papers filed by the assessee were perused. The learned Commissioner (DR) appeared for the revenue.

ITA No. 2723/Mum./98 concerns a payment of CHF 8,000 made by the assessee to M/s RCC Registration & Consulting Company Limited, Switzerland, for the "preparation of 22 MSDS (material safety data sheets) in EU format." The CIT(A) had held that this payment was covered by the expression "fees for included services" under article 12(4) of the Indo-Swiss Tax Treaty and therefore liable to tax in India at 20% of the gross amount. The Tribunal considered whether the payment fell within the scope of article 12(4).

ITA No. 2724/Mum./98 concerns a remittance of US$ 330,000 to M/s Techniship SA, France. The authorities below held that the remittance was liable to tax in India under article 12/13 of the Indo-French Tax Treaty at a 20% rate. The assessee contended that the correct withholding rate was 15% by virtue of the protocol clauses and the more favourable provisions of the Indo‑US Tax Treaty as applied through the Indo‑French protocol recognized by CBDT.

Legal Issues Presented

Whether the payment of CHF 8,000 for preparation of material safety data sheets (MSDS) to a Swiss company constitutes "fees for included services" under article 12(4) of the Indo‑Swiss Tax Treaty (i.e., whether the services "make available" technical knowledge, experience, skill or know‑how).
Whether the remittance of US$ 330,000 to a French company for technical services is subject to withholding at 20% or at the lower rate of 15% by application of the protocol to the Indo‑French Tax Treaty and the more favourable provisions of the Indo‑US Tax Treaty (article 12(2) of Indo‑US Treaty), as recognized by CBDT notification No. 650E.

Arguments of the Parties

Assessee's Arguments

In ITA No. 2723, the assessee contended (by written papers) that the CHF 8,000 payment for preparation of MSDS did not amount to "making available" technical knowledge, experience, skill or know‑how, and therefore was not covered by article 12(4) of the Indo‑Swiss Treaty; consequently no tax deduction at source was required.
In ITA No. 2724, the assessee contended that the correct rate of withholding was 15% (not 20%) by virtue of the protocol to the Indo‑French Treaty and the more favourable rate under the Indo‑US Treaty effective from previous year 1996‑97, as recognized by CBDT notification No. 650E.

Revenue's Arguments

In ITA No. 2723, the revenue (learned Commissioner (DR)) relied upon the orders of the authorities below which treated the CHF 8,000 payment as falling within article 12(4) of the Indo‑Swiss Treaty and thus taxable at source. The revenue acknowledged the Tribunal's Raymond Ltd. decision favourable to the assessee but relied on the lower authorities' conclusions.
In ITA No. 2724, the revenue and the authorities below maintained that the remittance was liable to tax at 20% on the gross amount; they opposed the assessee's claim for the 15% rate.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Raymond Ltd. v. Dy. CIT [2003] 86 ITD 791 (Mum.)	Interpretation of "make available" — held that mere rendering of services does not amount to "making available" technology; "making available" requires that the recipient is enabled to use the technical knowledge independently in its business without recourse to the performer.	The Tribunal relied on this decision (authored by one of the members of the present Bench) to conclude that payment for preparation of MSDS was for a product and not for making technology available; therefore article 12(4) did not apply and TDS was not required.
CESC Ltd. v. Dy. CIT [2003] 80 TTJ (Kol.) (TM) 806	On the scope of "making available" (under article 13(4)(c) of Indo‑UK Treaty, in pari materia with Indo‑Swiss article 12(4)) — majority view that services must be such as to result in making technology available to the recipient; reference to protocol to Indo‑US Treaty that technology is "made available" when the acquirer is enabled to apply the technology.	The Tribunal cited this decision with approval to support the view that "making available" requires enabling the recipient to apply the technology; used to reinforce finding that MSDS preparation did not transfer such capability.
Maharashtra State Electricity Board v. Dy. CIT [2004] 83 TTJ (Mum.) 325	If the foreign recipient of an income is held not liable to tax in respect of a certain income, the payee cannot be saddled with tax deduction at source liability in respect of the related remittance.	The Tribunal invoked this authority to support the principle that where the foreign recipient is not taxable on the income, the payer cannot be forced to deduct tax at source; applied in allowing ITA No. 2723.
Dy. CIT v. ITC Ltd. [2002] 82 ITD 239 (Kol.)	Recognition of CBDT notification (No. 650E) and treatment of protocol clauses; and the view that benefit of lower rate or restricted scope under the Indo‑French DTAA is not dependent on further action by governments (unlike some other DTAA protocols).	The Tribunal relied on this decision to support the application of a lower 15% rate (from Indo‑US Treaty) to persons covered by the Indo‑French Treaty via protocol; used to conclude that lower rate is available without additional government action.

Court's Reasoning and Analysis

The Tribunal's analysis proceeded in two distinct parts corresponding to the two appeals.

ITA No. 2723 (CHF 8,000 for MSDS):

The Tribunal examined the text of article 12(4) of the Indo‑Swiss Tax Treaty, which defines "fees for included services" and explicitly states that such services include those which "make available technical knowledge, experience, skill, know‑how or processes."
The Tribunal relied on its earlier decision in Raymond Ltd. that interpreted "make available" to mean that services must enable the recipient to independently use the technical knowledge or process in its own business without recourse to the service provider; mere rendering of services or delivery of a product does not constitute "making available."
The Tribunal also referred approvingly to CESC Ltd., which reached a similar conclusion that services must result in making technology available to the recipient to fall within the treaty provision.
Applying this interpretive framework to the invoice and accompanying MSDS documents, the Tribunal found no indication that any technology or capability to prepare MSDS was transferred to the assessee. The assessee received a deliverable (the MSDS documents) rather than the know‑how enabling it to prepare MSDS independently.
Consequently, the payment did not "make available" technical knowledge, and therefore did not fall within article 12(4); as a result the obligations to deduct tax at source under that treaty provision did not arise. The Tribunal further noted the principle from Maharashtra State Electricity Board that if the foreign recipient is not liable to tax, the payer should not be made liable to deduct tax at source.

ITA No. 2724 (US$ 330,000 remittance to France):

The narrow disputed point was the rate of tax to be applied: 20% (as held by authorities below) versus 15% (as claimed by the assessee).
The Tribunal accepted that the remittance was chargeable as fees for technical services under the Indo‑French DTAA, but examined the effect of the protocol clauses and the CBDT's notification No. 650E (dated 10 July 2000), which gives effect to benefits arising from other treaties (in particular Indo‑US Treaty) when the protocol provides so.
The Tribunal analysed article 12(2) of the Indo‑US Tax Treaty which prescribes a phased rate (15% in certain circumstances after five taxable years and thereafter 15%). The Indo‑US Treaty was notified on 20 December 1990 and its effective operation for Indian "taxable years" made the 15% rate applicable from previous year 1996‑97 onward.
The Tribunal applied the principle that taxation in the source country under the relevant treaty requires both accrual and payment. The remittance in question corresponded to invoice No. 08‑25181 dated 25 May 1996; the Tribunal concluded that, irrespective of when services were rendered, the payment became taxable in the previous year 1996‑97 (the taxable year relevant for the Indo‑US Treaty rate calculation).
Consequently, by virtue of protocol clause 7 of the Indo‑French Treaty and the CBDT notification, the more favourable 15% rate (as in the Indo‑US Treaty effective from previous year 1996‑97) applied to the remittance. The Tribunal also relied on the ITC Ltd. decision to note that the benefit of the lower rate under the Indo‑French DTAA is not dependent on any further governmental action beyond recognition of the protocol.

Holding and Implications

Holding: The Tribunal allowed both appeals. In particular:

ITA No. 2723/Mum./98: The payment of CHF 8,000 to M/s RCC Registration & Consulting Company Limited, Switzerland, for preparation of MSDS does not amount to "fees for included services" under article 12(4) of the Indo‑Swiss Tax Treaty; the assessee was not liable to deduct tax at source on that payment. The orders of the authorities below on this issue were set aside.
ITA No. 2724/Mum./98: The remittance of US$ 330,000 to M/s Techniship SA, France, is to be subject to withholding at the rate of 15% (not 20%), by application of the provisions of the Indo‑US Tax Treaty as made available through the Indo‑French protocol and recognized by CBDT notification No. 650E. The Assessing Officer was directed to apply the 15% rate and refund any excess collected.
Overall result: Both appeals were allowed.

Implications: The direct consequences for the parties are (i) the assessee need not deduct TDS on the CHF 8,000 payment for MSDS, and (ii) the Assessing Officer must apply a 15% withholding rate to the US$ 330,000 remittance and refund any excess tax collected. The opinion applies and interprets existing treaty provisions and precedents for the parties' benefit; it does not purport to lay down a novel general rule beyond the interpretative conclusions drawn from cited authorities and treaty texts.

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National Organic Chemical Industries Ltd. v. Deputy Commissioner of Income-tax

Pramod Kumar, Accountant Member - These two appeals pertain to the same assessee and were heard together. As a matter of convenience, therefore, both of these appeals are being disposed of by way of this consolidated order.

2. None appeared for the assessee, but we have carefully perused the papers filed by the assessee, and we have also heard the learned Commissioner (DR) appearing for the revenue at considerable length. We have also carefully perused the entire material before us and have duly considered factual matrix of the case as also the applicable legal position.

3. We will first take up the ITA No. 2723/Mum./98.

4. The assessee has raised as many as six grounds of appeal, but, in substance, only grievance of the assessee is that the CIT(A) erred in holding that the payment of CHF 8,000 paid to M/s. RCC Registration & Consulting Company Limited, Switzerland, is covered by the scope of the expression ‘fees for included services’ under article 12(4) of the Indo-Swiss Tax Treaty, and is, accordingly, liable to be taxed in India at the rate of 20 per cent of the gross amount.

5. On a perusal of material before us, and particularly a copy of invoice at page 4 of the compilation, we find that the payment is made for ‘preparation of 22 MSDS (i.e. material safety data sheets) in EU format in English’. These material safety data sheets contain the information required as per the norms of the European Union regulations including in Directive 93/112/EU. The copies of these MSDS are placed before us at pages 13 to 21. The short question before us is whether payment for preparation of such data sheets will be covered by article 12(4) of the Indo-Swiss Tax Treaty.

6. Shri Das, learned Commissioner (DR), very fairly accepted that as far as this issue is concerned, the same is covered, in favour of the assessee, by Tribunal’s order in the case of Raymond Ltd. v. Dy. CIT [2003] 86 ITD 791 (Mum.) authored by one of us (i.e. the Judicial Member). He, however, relied upon the orders of the authorities below.

6A. Article 12(4) of the Indo-Swiss Tax Treaty, which defines the expression ‘fees for included services’, provides as follows :

"4. For purposes of this article, the term ‘fees for included services’ means:

(a )payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel), if such services are ancillary and subsidiary to the application or enjoyment of the right, for which a payment described in sub-paragraph (b) of paragraph 3 is received;

(b)payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel), if such services;

(i )are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in sub-paragraph (a) of paragraph 8 is received; or

(ii)make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design."

It is thus clear that the ambit of article 12(4) of the Indo-Swiss Tax Treaty covers only such services as ‘make available’ technical knowledge, experience, skill or know-how.

7. The connotations of expression ‘make available’ were examined by the Tribunal in the case of Raymond Ltd. (supra), which was authored by one of us (the Judicial Member). The Tribunal, after elaborate analysis of all the related aspects, observed that "Thus, the normal, plain and grammatical meaning of the language employed, in our understanding, is that a mere rendering of services not roped in unless the person utilizing the services is able to make use of technical knowledge etc. by himself in his business and/or for his own benefit and without recourse to the performer of services, in future. The Tribunal also held that rendering of technical services cannot be equated with making available the technical services.

8. In the case of CESC Ltd. v. Dy. CIT [2003] 80 TTJ (Kol.) (TM) 806 also, the question regarding the scope of expression ‘making available’ came up for the consideration of the Tribunal. In that case, the Tribunal was dealing with the scope of article 13(4)(c) of the Indo-UK Tax Treaty which is in admittedly in pari materia with article 12(4) of the Indo-Swiss Tax Treaty with which we are presently concerned. The majority view was that in order to be attracted by the provisions of the said article of the tax treaty, "not only the services should be technical in nature but should be such as to result in making the technology available to person receiving the technical services in question". The Tribunal also referred to, with approval, extracts from protocol to the Indo-US Tax Treaty to the effect that "generally speaking, technology will be considered ‘made available’ when the person acquiring the service is enabled to apply the technology". The majority view in CESC’s case (supra) was also on the same lines.

9. In the case before us, there is not even whisper about a finding about the transfer of technology about making MSDS. It was never the case of the revenue that as a result of acquiring services from M/s. RCC Regis- tration & Consulting Company Limited, Switzerland, the assessee could be in a position to use the technology of making the MSDS on its own. All that the assessee gets is a product and not the technology itself. In view of the legal position elaborated upon above, this kind of a payment for preparation of MSDS cannot be considered to be payment for ‘making available’ the services. Therefore, the payment of CHF 8,000 cannot be said to be covered by the scope of article 12(4) of the Indo-Swiss Tax Treaty. The grievance of the assessee is quite justified. It is also an undisputed position that under the Indo-Swiss Tax Treaty, the payment in question can only be taxed in India in case the provisions of article 12(4) are held to be applicable. We may also mention that, as held by the Tribunal in the case of Maharashtra State Electricity Board v. Dy. CIT [2004] 83 TTJ (Mum.) 325, in a case the foreign recipient of an income is held to not liable to tax in respect of a certain income, the payee can also not be saddled with the tax deduction at source liability in respect of the related remittance.

10. For the reasons set out above, we hold that the assessee was not liable to deduct tax at source in respect of payment of CHF 8,000, for making the material safety data sheets, to M/s. RCC Registration & Consulting Company Limited, Switzerland. We, therefore, set aside the orders of the authorities below on this issue.

11. ITA No. 2723/Mum./98, is, therefore, allowed.

12. We now move on to ITA No. 2724/Mum./98.

13. In this appeal also the assessee has raised six grounds of appeal, but effectively only grievance of the assessee is that CIT(A) erred in holding that the assessee is liable to deduct tax at source at the rate of 20 per cent in respect of remittance of US$ 3,30,000 made to M/s. Techniship SA France liable to tax under article 12 of the Indo-French Tax Treaty.

14. There is no dispute about the fact that the remittance made by the assessee is liable to be taxed in India as a fees for technical services under article 13 of the Indo-French DTAA. The only dispute is the rate at which it is to be taxed. Revenue contends, and the authorities below have upheld that contention, that the fees for technical services are taxable at the rate of 20 per cent on the gross amount. On the other hand, assessee’s contention is that the correct rate of tax is 15 per cent. This is a neatly identified legal issue in a very narrow compass of facts. On this issue also, we have heard Shri Das, learned Commissioner (DR) but none appeared for the assessee. The material filed before us, as also the orders of the authorities below, have been carefully perused, and applicable legal position duly considered.

15. The applicability of protocol clauses is beyond any doubt or contro-versy. We find that the Central Board of Direct Taxes itself, vide notifica-tion No. 650E, dated 10th July, 2000 (reported in 244 ITR St. 134, and also reproduced in Tribunal’s decision in the case of Dy. CIT v. ITC Ltd. [2002] 82 ITD 239 (Kol.), has recognized the fact that by the virtue of protocol clause 7 in the Indo-French Tax Treaty, if after the 1st September, 1989, under any tax treaty with an OECD member country, India restricts its taxation at source, inter alia, in respect of royalties and fees for technical services, the same concession will also apply in the cases of persons covered by the Indo-French Tax Treaty. A reference is then also made to the provisions of the India-US Tax Treaty which are more favourable. It is, therefore, clear that the provisions of the Indo-US Tax Treaty will be applicable to the extent the same are more favourable to the assessee.

16. Article 12(2) of the Indo-US Tax Treaty, which is relevant for our purposes, provides as follows :

". . . such royalties and fees for included services 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 royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed :

(a )in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this article [other than services described in sub-paragraph (b) of this paragraph] :

(i )during the first five taxable years for which this Convention has effect,

(A)15 per cent of the gross amount of the royalties or fees for included services as defined in this article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub-division or a public sector company; and

(B)20 per cent of the gross amount of the royalties or fees for included services in all other cases; and

(ii)during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services; and

(b)in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services as defined in this article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this article, 10 per cent of the gross amount of the royalties or fees for included services."

The Indo-US Tax Treaty was notified on 20th December, 1990 and, therefore, in view of the article 30(2)(a)( ii), the same was effective the taxable year beginning 1st April, 1991 i.e. the taxable year immediately after the calendar year in which the treaty is notified. The Indo-US Tax Treaty defines the ‘taxable year’ as ‘previous year’ so far Indian laws are concerned. Therefore, the applicability of the rate of 15 per cent, which is effective after five taxable years after the treaty coming into force, is relevant from previous year 1996-97. In other words, the rate of tax, so far as royalties and fees for technical services earned by the persons covered by the Indo-French DTAA after 1st April, 1996 are concerned, is to be applied at the rate of 15 per cent. We need not go beyond this point so far as the impact of protocol clause is concerned.

17. We further find that the remittance in question was for payment of invoice No. 08-25181, dated 25th May, 1996. In terms of the provisions of article 12(1) of the Indo-Swiss Tax Treaty, "royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State" are to be taxed in the source country. It is, therefore, clear that so far as taxability of royalties and fees for technical services are concerned, twin conditions of ‘accrual’ as also the ‘payment’ are to be satisfied. In other words, even if fees for technical services has accrued, or has arisen, but the same is not paid, the taxability under article 12 in the source country does not come to play. In view of this legal position, irrespective of the fact whether the payment in question for the fees for technical services is in respect of the services provided by the foreign company is for the services rendered before or after 1st April, 1996, the said payment is taxable in the hands of the recipient only in the previous year, or ‘taxable year’ as is the expression used in Indo-US Tax Treaty, 1996-97. As we have already noted, as far as previous year 1996-97 and subsequent years are concerned, the correct rate of tax is 15 per cent. By the virtue of protocol clause 7, which is recognized by and given effect to by the CBDT itself, the same rate should also apply on the Indo-French DTAA. The grievance of the assessee is quite justified.

18. We may clarify that even though we have referred to the CBDT notification earlier in this order, it is also necessary to add that, as the Tribunal held in the case of ITC Ltd. (supra), "the benefit of lower rate or restricted scope of ‘fees for technical services’ under the Indo-French DTAA is not dependent on any further action (e.g. notification referred to by us) by the respective Governments, unlike the situation envisaged in, for example, para 4 of protocol to India-Philippines DTAA or para 3 of protocol to Indo-Swiss DTAA". Since we have concluded that on merits the lower rate of 15 per cent in the Indo-US Tax Treaty was applicable with effect from previous year 1996-97, the same benefits are also available to the persons covered by the Indo-French Tax Treaty.

19. For the detailed reasons set out above, we uphold the grievance of the assessee. We, accordingly, direct the Assessing Officer to apply the tax rate of 15 per cent as claimed by the assessee. The excess amount collected will be refunded by the Assessing Officer.

20. In the result, ITA No. 2724/Mum./98, is also allowed.

21. In the result, both the appeals are allowed.

National Organic Chemical Industries Ltd. v. Deputy Commissioner of Income-tax

Concise Analytical Summary of the Tribunal's Opinion (Two Consolidated Appeals)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Revenue's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

National Organic Chemical Industries Ltd. v. Deputy Commissioner of Income-tax

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