R.S.Padvekar, Member (J) -
(1.) IN this appeal, the assessee has challenged the impugned order passed by the AO under s. 143(3) as per the directions of the Dispute Resolution Panel (DRP) given under s. 144C(5) of the IT Act for the asst. yr. 2007 -08. The assessee has taken the following ground in the appeal:
"The learned AO and learned Dispute Resolution Panel have erred in holding that the Management Service Fees ('MSF') of INR 5,92,97,919 received by the appellant, is taxable in India as 'fees for technical services' ('FTS') within the meaning of art. 12 of the India -Sweden Double Taxation Avoidance Agreement ('DTAA or 'the treaty') read with the protocol thereto."
The facts which are revealed from the record are as under. The assessee is a foreign company incorporated in Sweden. The assessee has received payment of Rs. 5,50,33,677 from Sandvik Asia (P) Ltd. (in short "SAPL") and Rs. 42,64,242 from Walter Tools India (P) Ltd. (in short "WTIPL"). The assessee stated before the authorities below, i.e. AO/DRP it has provided various management services to SAPL and WTIPL and towards the said services the assessee has received the above amounts from the two companies i.e. SAPL and WTIPL. The assessee filed the copy of agreement before the authorities below with SAPL. The AO has reproduced part of the agreement with SAPL which is in respect of the description of the services provided by the assessee company to its Indian subsidiaries.
(2.) AFTER examining the nature of the services, in the opinion of the AO, the assessee has provided the technical support and guidance to its customers and hence, the nature of the services rendered by the assessee to SAPL is a technical in nature but not a managerial service as claimed by the assessee. The AO held that as per the provisions of s. 5(2) r/w s. 9(1)(i) the nature of the services rendered by the assessee is a technical service and hence, the payment received (sic -made) by the SAPL to the assessee is towards the fees for technical service (FTS). The assessee claimed before the authorities below i.e. the AO/DRP, that it is a tax -resident of Sweden and hence, eligible to claim benefits under the India Sweden DTAA. The assessee took the stand that the nature of the services is not technical and the services rendered by it do not satisfy the 'make available' condition of the tax treaty. The assessee submitted before the AO that the services rendered by it do not satisfy the make available' condition of the tax treaty. The assessee also took the stand that the services rendered by it do not make available any technical knowledge, experience, skill, know -how, process to either SAPL, or WTIPL, enabling it to apply the technology contained therein, which is a prerequisite for the payment to be categorized as 'FTS' under art. 12 of the India -Sweden tax treaty read with the protocol thereto. The assessee also relied on the following decisions:
"(i) Intertek Testing Services India (P) Ltd. In re : (2008) 220 CTR (AAR) 540 : (2008) 16 DTR (AAR) 93 : (2008) 307 ITR 418 (AAR).
(ii) Anapharm Inc., In re, AAR No. 746 of 2008 [reported at : (2008) 219 CTR (AAR) 209 : (2008) 13 DTR (AAR) 74 - -Ed.].
(iii) Invensys Systems Inc., In re : (2009) 225 CTR (AAR) 113 : (2009) 27 DTR (AAR) 26 : (2009) 317 ITR 438 (AAR).
(iv) Bharati AXA General Insurance Co. Ltd., In re : (2010) 234 CTR (AAR) 62 : (2010) 43 DTR (AAR) 105 : (2010) 326 ITR 477 (AAR).
(v) Ernst & Young (P) Ltd., In re : (2010) 230 CTR (AAR) 355 : (2010) 36 DTR (AAR) 313: (2010) 323 ITR 184 (AAR).
(vi) Bharat Petroleum Corp. Ltd. v. Jt. Director of IT (International Taxation) : (2007) 111 TTJ (Mumbai) 375."
The AO rejected all the decisions relied on by the assessee by observing that the facts are distinguishable in all the above decisions. The AO finally held that the amounts received by the assessee from SAPL and WTIPL to the extent of Rs. 5,92,97,919 are in the nature of the fees for technical services within the meaning of s. 9(1)(vii) of the IT Act, 1961 as well as within the meaning of art. 12 of DTAA between India and Sweden. The reasons given by the AO in the draft assessment order in support of the above findings are as under:
"6.2 This clearly suggests that words 'make available' were used in treaty in that context, that treaty too suggest these services in the nature of technical knowledge, experience, skill, etc. were offered or made accessible to the other party and it never meant that the other party should be trained or made expert in such technical knowledge etc. It will be absurd on part of a person to make other person expert of its core competency, which will result in situation that the recipients of service will not look again to him when these services are again needed in future. Teaching/educational services have separately dealt elsewhere in the treaty. In view of above the meaning of expression 'Make available' has to be read, in the present context. In the present case, service provider has provided or made accessible the services of its technical knowledge, experience..... 'Enabled to apply' phrase used in same MOU does not mean, that service provider also has to teach technology embedded in the service provided. A small example can explain this contention, if someone is enabled to apply/use Microsoft Windows programme in its work, it does not mean that one has been taught about source code or technology of creating Windows software. He has been enabled merely to use Window programme without understanding technology/know -how behind it.
6.3 In OECD commentary on art. 12 in para. 11.3, while distinguishing transfer of know -how from provision of services it is mentioned 'in the case of contracts for the provision of services, the supplier undertakes to perform services which may require the use, by the supplier, of special/knowledge, skill and expertise but not the transfer of such special knowledge, skill or expertise to the other party, The above clarification clearly differentiate between transfer of such special knowledge, skill or expertise, which is covered in the definition of royalty under 12(3)(a) of India -US DTAA and fee for included services covered under art. 12(4)(b) of India -US DTAA.
6.4 By this act, supplier of services has enabled the recipient to use the technology of the subject -matter without transfer of know -how or technology. This is precisely explained in memorandum of understanding concerning fees for included services in art. 12 of India -US tax treaty dt. 15th May, 1989. The explanation clearly focuses on the fact that a person acquiring the services should be enabled to apply technology and not related to transfer of the technology. It further goes on to explain typical category of services which generally involves either the development and transfer of technical plants or designs, or making technology available as described in para 4(b) which includes:
1. Engineering services (including the sub -categories of bio -engineering and aeronautical, agricultural, ceramics, chemical, civil, electrical. mechanical metallurgical and industrial engineering)
2. Architectural services, and
3. Computer software development,
6.5 Under para 4(b), technical and consultancy services could make technology available in a variety of settings, activities and industries. Such services may, for example, relate to any of the following:
1. Bio -technical services
2. Food processing
3. Environmental and ecological services
4.COMMUNICATION through satellite or otherwise
5.ENERGY conservation Exploration or exploitation of mineral oil or natural gas
7.SCIENTIFIC services and
7. Accordingly, assessee's contention is not acceptable. These receipts from technical services are in the nature of fees for technical services (FTS) within the meaning of s. 9(1)(vii) of the IT Act, 1961 and FTS within the meaning of art. 12 of the DTAA between India and Sweden read with the protocol thereto. Hence, the amount received by the assessee from its Indian affiliates for rendering these services is taxed as fees for technical services @ 10 per cent as provided under DTAA. From the above discussion, it is clear that the assessee has failed to offer such income which is clearly taxable under both IT Act and under the provisions of DTAA."
(4.) The assessee filed the objection before the DRP against the draft assessment order but without success. The main thrust of the argument of the assessee before the DRP is that the assessee has received the fees towards rendering the management services and not for the fees for technical services within the meaning of art. 12 of the India -Sweden DTAA and the AO should have allocated the total fee between FTS and managerial service specially when he has not disputed the nature of services provided by the assessee which comprises of administration, marketing and HR support. The assessee submitted before the DRP that the protocol to India -Sweden DTAA provides that in case India enters into any agreement or convention with a third State, which is a member of OECD and India limits its taxation at source on dividends, interest, royalties, or fees for technical service to a rate lower or a scope more restricted than the rate or scope provided for in this convention on the said items of income, the same rate or scope as provided for in that convention, agreement or protocol on the said items of income shall also apply under this convention. The assessee submitted before the DRP that in the DTAA between India and Portugal, the "fees for technical services" has been defined in art. 12(4) and definition of the India -Portuguese DTAA purports to restrict the scope of taxability of FTS. It was argued before the DTAA that as per the India -Portuguese DTAA, any payment for services would be considered as FTS only if the services are:
"(i) Technical in nature; and
(ii) When such services make available technical knowledge, experience, skill, know -how. processes to the recipient enabling it to apply the technology contained therein.";