IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : "E" NEW DELHI
BEFORE SHRI I.C. SUDHIR, JUDICIAL MEMBER
AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER
ITA No:1941/Del/2012
Asstt. Year : - 2006-07
Income Tax Officer, TDS vs. Nokia India Pvt. Ltd.
Ward-2(1), International Taxation 5th Floor, Tower-A&B
Drum Shaped, Cyber Green DLF City
New Delhi. Gurgaon, Haryana.
(PAN ALJPK6448A)
(Appellant) (Respondent)
Appellant by : Shri Salil Kapoor, Advocate,
Shri Vikas Jain, Advocate
Respondent by :Shri P. Dam Kanunjna Sr. DR
Date of Hearing :14.5.2015
Date of pronouncement : 8.7.2015
ORDER
PER INTURI RAMA RAO, AM
This is an appeal filed by the revenue against the order of
Commissioner of Income Tax (Appeals) XXIX New Delhi dated 28.2.2012
raising the following grounds of appeal :-
1. "Whether on the facts and circumstances of the case, the CIT(A) has erred in
holding that the consultancy fee paid to Ms Olaf Grandlund OY Finland, was not
chargeable to tax in India and thus that there was no requirement to withhold
ITA No.1941/Del/2012
ITO vs. Nokia India Pvt. Ltd.
tax on the impugned payments, even though these had been characterized as
FTS taxable on source basis.
2. Whether on the facts and circumstances of the case, the CIT(A) has erred in
ignoring the decision of the Hon'ble Supreme Court in the case of 239 ITR 587
& 327 ITR 456 wherein it was held that it was incumbent upon the deductor to
apply and seek a certificate for lower withholding tax order so as not to invite
the provisions of section 40(a).
3. Whether on the facts and circumstances of the case the CIT(A) has erred in
adjudicating that the services rendered by Ms Olaf Grandlund OY Finland, as
per Para 5 of the ITO TDS's order were not squarely covered in the definition of
FTS under Article 13(4)(c) of the India Finland DTAA and S 9(1)(vii), without
any requirement for "make available" conditionality.
4. Whether on the facts and circumstances of the case the CIT(A) has erred in
adjudicating that the services rendered by Ms Olaf Grandlund OY Finland, as
per "scope of work" laid down in its agreement with assessee dated 01.02.2005,
was not squarely covered in the definition of FTS under Article 13(4)(c) of the
India Finland DTAA by relying upon the terms of an agreement entered into with
Leighton Contractors (India) P Ltd which agreement does not find any mention
in ITO TDS's order and thus constituted fresh evidence under Rule 46A.
5. Without prejudice to the foregoing ground, whether the CIT(A) has erred in
accepting ration decidendi of case laws that applied the MOU accompanying
the Indo-US DTAA to understand the terms of the Indo-Finland DTAA and
"make available" especially since a treaty is unique for two nations that are a
party to it having been negotiated and entered in to at a political level and has
several considerations at their base.
6. Whether on the facts and circumstances of the case the order of the CIT(A) is
perverse and liable to be quashed.
7. The appellant prays for leave to add, amend, modify or alter any grounds of
appeal at the time or before the hearing of the appeal. "
2. Briefly stated the facts of the case are as under :-
The respondent-assessee company i.e Nokia India Private Ltd. is a
wholly owned subsidiary of Nokia Corporation. It is a company
incorporated under the provisions of the Companies Act, 1956. During
the year under consideration, it is in the process of setting up a
manufacturing facility at Chennai. For this purpose, the contract for
design, manufacturing and completion for the manufacturing facilities
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ITO vs. Nokia India Pvt. Ltd.
was given to Leighton Contractors India Pvt. Ltd.. Olof Granlund Oy is
a company incorporated in Finland and is engaged in the business of
providing consulting services in relation to HVAC, electrical and fire
protection systems and this company was engaged by the respondent-
assessee company for the purpose of reviewing the design, construction
plans prepared by the Leighton Contractors India Pvt. Ltd. This was to
ensure that Nokia's global standards for the manufacturing facility are
met. These services are rendered outside India only.
3. In consideration for the services rendered during the year under
consideration the respondent-assessee company paid Euro 2,208421
(Rs. 11,869,359 approx) to Olof Granlund . Since the respondent
assessee company took a view that the said payments are not liable to
taxation in India under the provision of Double Taxation Avoidance
Agreement entered between India and Finland. No taxes were withheld
by the respondent- assessee company on said payments.
4. However, on the basis of information received from the authorised
dealer, the Income Tax Officer TDS Ward-2, Intl. Taxation (hereinafter
called TDS Officer) had called for the information and details and
reasons for not deducting TDS on the said payments. After receipt of
this information from the respondent-assessee company, a show cause
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ITO vs. Nokia India Pvt. Ltd.
notice dated 28th September 2006 was issued to the respondent-
assesee to explain as to why it should not be treated as an assessee in
default under section 201 (1)and 1(A) of the Act for non deduction of
tax u/s 195 of the Act in respect of the above payments made to the
Olof Granlund Oy Finland. The respondent- assessee company
responded to the show cause notice vide its letter dated 20th December,
2005 wherein the nature of services provided by M/s Olof to Nokia was
brought to the notice of TDS Officer. The submissions made by the
respondent- assessee company before the TDS Officer are as under :
"Olof Granlund Qy, company tax resident in Finland, is providing design
control and quality control services in relation to HVAC, Electrical and
Fire protection systems to be installed in Nokia India's manufacturing
facility in Chennai. These services are being rendered by Olof Granlund
Oy primarily from outside India and its employees are required to
make intermittent visits to India only to attend meetings with Nokia
India.
Justification for Non withholding of taxes on payments made to Olof Granlund Qy
As per section 195 of the Act, taxes are required to be withheld on payments
made to non-residents where such payments are chargeable to tax in India.
Accordingly, in order to justify why no taxes have been withheld by Nokia
India on payments made to Olof Granlund Qy for provision of design control
and quality control services. It is pertinent to outline the technical position as
regards taxability of Finnish enterprises in India.
As per the provisions of section 90(2) of the Act, a foreign comp[nay has the
option of being taxed in India under the provisions of the Act or the
provisions of the Agreement for Avoidance of Double Taxation between India
and the country of residence of such foreign company, whichever is more
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ITO vs. Nokia India Pvt. Ltd.
beneficial. Taxability of payments made to Olof Granlund Qy (being a tax
resident of Finland) has therefore been determined under the beneficial
provisions of the India-Finland tax treaty (`tax treaty').
Under the provisions of Article 13(4)(c) of the India-Finland tax treaty, the
term ` fees for technical services' (`FTS') has been defined to include
payments of any kind to any person in consideration for the rendering of any
technical or consultancy services (including the provision of services of
technical or other personnel) which make available technical knowledge,
experience, skill, know-how or processes, or consist of the development and
transfer of a technical plan or technical design.
The term `make available' has not been defined under the India-Finland tax
treaty. However, reliance can be placed on the `Memorandum of
Understanding concerning Fees for Included Services in Article 12' (`MOU') of
the India-US tax treaty, which has clarified that :
"Generally speaking, 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 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."
5. The main contention of the respondent-assessee company before
the Ld. TDS Officer was that the above services do not come within the
purview of Article 13(4) (c) of the DTAA between India and Finland as
technical services. It was further contended that the services rendered
cannot be even be taxed under Article 7 read with Article 5 of the
DTAA in the absence of PE of Olof in India. However, the TDS Officer
had not agreed with the above submissions and held that the services
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rendered by Olof Granlund are in the nature of technical services and
further held that the respondent-assessee company is deemed to be
assessee in default u/s 201(1) for non deduction of tax at source u/s
195 of the Act at source u/s 195 of the Act and while coming to this
conclusion the AO had placed heavy reliance on the basis of Hon'ble
Supreme Court in the case of Transmission Corporation of AP Ltd. vs.
CIT (1999) (239 ITR 587) and demanded a tax of Rs. 13,34,198/- +
interest of Rs. 1,47,263/- u/s 201(IA) of the Act vide his order dated
28.11.2006.
6. Being aggrieved with the above order respondent-assessee filed an
appeal before Commissioner of Income Tax XXIX, New Delhi ,who vide
his order dated 28th February, 2012 allowed the appeal. It was
contended before the CIT(A) that the scope of services rendered by M/s.
Olof Grandlund Oy, Finland is limited to design review and other related
services and no technical knowledge skill, know how had been made
available to the respondent-assessee company and further submitted
that no technical plan design had been transferred by the said Olof
Granlund Oy to the respondent-assessee company and therefore the
services rendered does not qualify as FTS for technical services under
the India Finland Tax Treaty and it was further submitted that the
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services were rendered from outside India and the payments are in the
nature of business receipts and are not liable to taxable in India in the
absence of permanent establishment of Olof Granlund Oy and this fact
had not been disputed by the TDS Officer. In view of these, it was
submitted that the subject payments are not liable to tax in India and
therefore there was no liability for deduction of tax at source under
provision of section 195 of the Act. In support of the above contention
and for the purpose of definition of the term "make available" the
reliance was placed on the decision of Raymond Limited vs. DCIT in 80
TTJ 120 (Mum) . The Ld. CIT(A) after considering the submissions made
on behalf of the assessee- respondent company allowed the appeal vide
para 5.2 to 5.4 of his order by holding as under :-
~5.2 "As per provisions of section 195, if a person pays to a non-resident
any sum chargeable under provisions of IT Act, then payer has to
deduct tax at source as per prescribed rates. Therefore, the trigger
for applicability of section 195 is that the sum paid to a non-resident
should be chargeable to tax in India as per provisions of IT Act. In
the present case, the services provided by non-resident company are
technical by nature as per provisions of section 9(l)(vii) of IT Act.
Now, we have to see whether these services could be termed as
technical services as per Article 13(4) as reproduced above.
According to AO, these services are in nature of technical services as per
Article 13(4)(c) of the treaty. It is seen that clause (c) of Article 13(4)
consists of two limbs, and there is a word "or" between two limbs. The
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ITO vs. Nokia India Pvt. Ltd.
services should fall in category of either of two limbs before these could
be termed as technical services. The appellant has furnished copy of
proposal / agreement with Olof Granlund Oy and Leighton Contractors
(India) Private Ltd. The services provided by Olof Granlund Oy are
mentioned in clause I or proposal dated 01-02-2005, which is scope
of work. Further, clause C 1 of the agreement entered into by the
appellant with Leighton Contractors (India) Private Ltd. is
Contractor's obligations. Combined reading of the relevant clauses
of these two agreements indicate that designs and technical plans
are provided by Leighton Contractors (India) Private Ltd. and design
review services are provided by Olof Granlund Oy. Therefore, the
nature of services provided by non- resident OlofGranlund Oy do not
fall in second limb of article 13(4)(c). In the first limb of the said
article, the words 'make available' qualify the technical services and
unless this qualification is satisfied, the services which are otherwise
technical in nature can not be termed as technical services under
the said article of treaty. The meaning of the qualification i.e. make
available has been provided by various case laws as relied upon by
the appellant. I have gone through those case laws carefully. The
ratio decidendi of various case laws as relied upon by the appellant
and mentioned supra has been clearly laid in case of Rayrnond Ltd
Vs DCIT reported in 86 ITD 761 (Mumbai) as below :-
..... mere rendering of services is not roped in unless the person utilizing
the service is able to make use of the technical knowledge etc by himself
in his business or for his own benefit and without recourse to the
performer of the services in future. The technical knowledge, experience,
skill etc .must remain with the person utilizing the services even after the
rendering of the services has come to an end. A transmission of the
technical knowledge, experience, skills etc from the person rendering the
services to the person utilizing the same is contemplated by the article ...
"
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5.3 Therefore, unless the person receiving services is in a position to use that
technological knowledge in future on its own without resorting to the
initial service provider, it can not be said that the services have been
made available. In present case under consideration, Olof Granlund Oy
has provided mainly design review services. The AO has not established
that this technical knowledge, experience, skill, know-how or processes
has been transmitted to the appellant and the appellant is now equipped
to use it in future without resorting to the non-resident service provider.
In the absence of this key element, the services provided by the non-
resident do not fall within meaning of the first limb of artlcle 13(4)(c).
Therefore, it is held that services provided by Olof Granlund Oy to the
appellant can not be characterized as technical services and hence
payments made by the appellant do not bear the character of FTS.
Further, it is admitted position that non-resident Olof Granlund Oy do not
have any PE in India and therefore, these payments are not taxable as
business receipts under article 7 of the treaty.
5.4 As discussed supra, the payments made by the appellant to Olof
Granlund Oy are not chargeable to tax in India either as FTS or as
business income under relevant articles of India-Finland treaty.
Therefore, provisions of section 195 of IT Act, 1965 are not triggered. It is
consequently held that the appellant is not liable to deduct any tax on
payments made to Olof Granlund Oy and impugned order u/s 201 &
201(A) stand quashed. This dispose off the grounds of appeal no. 1 to 4."
7. Aggrieved by this above order the revenue had come up with the
present appeal. Ld. DR had relied upon on the order of TDS Officer. On
the other hand the Ld. Counsel for the assessee respondent company
had drawn our attention to the orders of Hon'ble Delhi High Court in the
case of Director of Income Tax vs. Guy Carpenter & Co. Ltd. and
decision of Karnataka High Court in the case of CIT vs. M/s. De Beers
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ITO vs. Nokia India Pvt. Ltd.
India Minerals Pvt. Ltd. where the term "make available" was
interpreted and he also placed heavy reliance on the orders of CIT(A).
8. We have heard the rival submissions and perused the material
on record. The undisputed facts of the case are that the nature of
services rendered by Olof Granlund Finland to the assessee respondent
company are as under :-
a) Review of systems description, diagrams, cost estimates, building
designs etc.
b) Review of preliminary system design and quality control
c) Review of equipment list/selections, lay out proposals, conducting
inspections etc.
9. Now we are called upon to examine whether the nature of above
services fall within the scope of the `fees for technical services'.
Undisputedly the recipient of the payment is a resident of Finland. And
therefore he is entitled to be governed by the provisions of DTAA of
India with Finland. The Term fees for technical services was defined in
Article 13 in DTAA to the extent relevant to the present case, is
reproduced below :-
"4. For the purpose of paragraph 2, and subject to
paragraph 5, the term `fees for technical services' means
payments of any kind to any person in consideration for the
rendering of any technical or consultancy services (including
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the provision of services of technical or other personnel)
which :
(a) 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 3 is
received: or
(b) are ancillary and subsidiary to the enjoyment of the
property for which a payment described in sub-paragraph
(b) of paragraph 3 is received : or
(c) make available technical knowledge, experience, skill,
know-how or processes, or consist of the development and
transfer of a technical plan or technical design.""
In the present case, clause (a) & (b) would not be applicable given that
Olof Granlund is providing consultancy services independent of supply of
any property, right or information in respect of which consideration had
been received by Olof Granlund.
In order to determine whether payments made to Olof Granlund fall
under Article 13(4)(c), it is imperative to determine whether these
services `make available' any technical knowledge, experience, skill, etc.
to the recipient of the service or involves development and transfer of
technical plan or design to the recipient of services.
The India-Finland tax treaty does not specifically define the term ` make
available'. Accordingly, in absence thereof reliance may be placed on the
meaning assigned to the said term under the MoU to India-USA Double
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Taxation Avoidance Agreement (hereinafter referred to as India-US
Treaty), which serves as an official guide to interpreting India-US tax
treaty and reflects the policies, understanding reached with respect to
the application and interpretation of India-USA Treaty.
In this regard, it is pertinent to mention the Mumbai Tax Tribunal in the
case of Raymond Limited Vs Deputy Commissioner of Income-tax
reported in 80 TTJ 120 (Mum), has clarified that meaning of the term
'make available' under India-UK Double Taxation A voidance Agreement
may be inferred from the MoU to India-US Treaty. This equally and
expressly follows that the Honorable Tribunal has accepted the concept
of parallel treaty interpretation. The ITA T held as under:
"The MOU appended to the DTAA with USA and the Singapore DTAA
can be looked into as aids to the construction of the UK DTAA. They
deal with the same subject (fees for technical services, referred to in the
US agreement as ''fees for included services''). As noted earlier, it
cannot be said that different meanings should be assigned to the US and
UK agreements merely because of the MOU despite the fact that the
subject-matter dealt with is the same and both have been entered into
by the same country on one side (lndia). The MOU supports the
contention of the assessee regarding the interpretation of the words
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ITO vs. Nokia India Pvt. Ltd.
"make available ". The portions of the MoU explaining para 4(b) of the
relevant article, which we have extracted earlier in our order while
adverting to the contentions of the assessee, fully support its
interpretation. Example (4) given in the MOU also supports it. This is of
a US company manufacturing wellboard for the assesee using
assessee's raw material but using its own Plant. No technical
knowledge, experience, skills, plan or design is held to have been made
available in such a case. However, in contrast, example (5) is of a US
company rendering certain services in connection with modifying the
software used by the Indian company to suit particular purpose. A
modified computer software programmme is supplied by the US
company to the Indian company. It is, therefore, held that there is a
transfer of a technical plan (i.e., computer software) which the US
company has developed and made available to the Indian company. The
fees are chargeable. These examples affirm the position taken by the
assessee-company before us as to the interpretation of the words "make
available".
In fact, it has been held by various courts that the principle of parallel
treaty interpretation is permissible where language of the two treaties is
similarly worded and one treaty clarifies meaning of the terms (or
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language) used. The above view has been affirmed by the subsequent
pronouncements in the following cases:
(a) National Organic Chemicals Industries Ltd vs DCIT (96 TTJ
765) (Mumbai IT AT)
(b) CESC vs CIT(80 TTJ 806) (Calcutta ITAT).
(c) DDIT v Preroy A.G. (2010) 39 SOT 187 (Mum)
(d) Intertek Testing Services India (P) Ltd., In re (2008) 307 ITR
418 (AAR)
MEANING OF THE TERM 'MAKE AVAILABLE'
Under the MoU to India-US tax treaty, it has been clarified that:
"Generally speaking, 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 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."
In other words, the MoU seeks to clarify that the services are considered
to be made available only where the services leads to transfer/
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ITO vs. Nokia India Pvt. Ltd.
imparting of technical knowledge, experience, ski 11, know-how, or
processes to the recipient which enables the recipient to apply the same
on his own.
Further, on page 790 of Klaus Vogel on Double taxation conventions -
Third edition, Vogel comments that the criterion used to distinguish the
provision of know-how from rendering advisory services is the concept
of imparting. The relevant extract of the commentary has been
reproduced below:
"Imparting of experience: Whenever the term royalties relates to
payments in respect of experience (know-how'), the condition for
applying Article 12 is that the remuneration is being paid for
'imparting' such know-how ....... .
..... in contrast, the criterion used to distinguish the provision of know-
how from rendering advisory services is the concept of 'imparting'. An
advisor or consultant, rather than imparting his experience, uses it
himself (BFH BstBl II 235 (1971),' Ministre des Relations exterieures,
Response a M Bockel, 36 Dr. Fisc. Comm. 1956 (1984)). All that he
imparts is a conclusion that he draws - inter alia - from his own
experience. His obligation to observe secrets, or even his own interest in
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retaining his 'means of production', will already prevent a consultant
from imparting his experience. In contrast to a person using his own
know-how in providing advisory services, a grantor of know-how has
nothing to do with the use the recipient makes of it.. ....
The term `make available' had come for interpretation before Hon'ble
Jurisdiction High Court in the case of Director of Income Tax vs. Guy
Carpenter & Co. Ltd. ITA No. 202/2012 dated 23.4.2012 which held as
under :-
"9. A plain reading of Article 13(4)(c) of the DTAA indicates that 'fees for
technical services' would mean payments of any kind to any person in
consideration for the rendering of any technical or consultancy services which,
inter alia, "makes available" technical knowledge, experience, skill, know-how
or processes, or consist of the development and transfer of a technical plan or
technical design. According to the Tribunal this "make available" condition has
not been satisfied inasmuch as no technical knowledge, experience, skill,
know-how, processes, have been made available by the assessee to the
insurance companies operating in India. It also does not consist of the
development and transfer of any technical plan or technical design.
10. The Tribunal examined the evidence available on record in order to return
a finding on the issue as to whether the payments received by the assessee
from the insurance companies operating in India would fall within the
expression 'fees for technical services' as appearing in article 13(4)(c) of the
DTAA read with section 9(1)(vii) of the said Act. While doing so the Tribunal,
inter alia, found that the assessee company was an international re insurance
intermediary (broker) and was a tax resident of United Kingdom. Further, that
it was a recognized broker by the financial service authority of United
Kingdom. It was also an admitted position that the assessee did not maintain
any office in India and that it had a referral relationship with J.B. Boda
reinsurance (Broker) Pvt. Ltd of Mumbai and that J.B. Boda was duly licenced
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by the Insurance Regulatory & Development Authority to transact re
insurance business in India.
11. The Tribunal also observed as under.-
"27. In the illustrative transaction, New India Insurance Co. Ltd. in India has
entered into an agreement to reinsure on an Excess Loss basis the
catastrophe risk arising from its primary insurance cover in conjunction with
lB. Boda and Alsford Page and gems Ltd. (the reinsurance brokers). The
terms of the agreement specifies that the assessee in conjunction with J.B.
Boda are recognized as intermediary, through whom all communications
relating to this agreement shall pass. The terms of the agreement further
provides that the assessee will provide all the details of agreed endorsements
to the re insurers bye-mail or facsimile and shall submit the slip policy to XIS
(Lloyd's processing market) for signing. The assessee will act as a claim
administrator and will submit claims advices to relevant . market systems. For
the services rendered, the assessee along with the other reinsurance brokers
acting as an intermediary in the reinsurance process for New India Assurance
Co. will be entitled to 10% brokerage. From the role played by the assessee
in the re insurance process as discussed above, it is evident to us that the
assessee was rendering only intermediary services while acting as an
intermediary/facilitator in getting the reinsurance cover for New India
Insurance Co. There exists no material or basis on the basis of which, it would
be said that the assessee was rendering any kind of technicall consultancy
service within the meaning of Article 13 of Indo-UK treaty. The consideration
received by the assessee acting as an intermediary in the reinsurance process
cannot, by any stretch of imagination, be qualified as a consideration received
for rendering any financial analysis related consultancy services, rating
agency advisory services, risk based capital analysis etc. as alleged by the
A.O."
The Tribunal also noted the process by which the transaction takes place. It
has been pointed out that the originating insurer in India would contact J.B.
Boda/ M.B. Boda for placing identified risks/ class of risks with international
reinsurers. J.B. Boda, in turn, would contact one or more international firm(s)
of re insurance broker(s) like the assessee for competitive proposals from the
international reinsurer. Then, the international reinsurance brokers like the
assessee would contact other primary brokers and various syndicates in the
Lloyds market for competitive proposals. Based on the various offers or
proposals given by the international reinsurance brokers, like the assessee, to
J.B. Boda, the latter would present various options to the originating insurer
in India, which would take a final decision in the matter. Based on the
decision of the originating insurer in India, the policy terms would then be
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agreed upon and the risk would be placed with the international reinsurer. It
was also pointed out that as per the normal industry practice, the reinsurance
premium net of brokerage of 10% as per the policy contract is remitted to the
assessee, i.e., reinsurance brokers, for onward transmission to international
reinsurers. The intermediation fee which is another word for brokerage is paid
separately by the originating insurance in India to J.B. Boda, the international
re insurance brokers like the assessee and other intermediaries, based on a
mutually agreed ratio which accounts for their relative contribution in the
reinsurance process.
12. Based on this manner of transacting, the Tribunal came to a conclusion
that the payment received by the assessee could not be regarded as 'fees for
technical services'. Further, more, the Tribunal also held that such receipts
would not amount to fees for technical services as the "make available"
clause contained in article 13(4)( c) had not been satisfied in the facts and
circumstances of the present case.
13. In our view, the Tribunal has arrived at these conclusions purely on
assessing the factual matrix of the case at hand. The findings are in the
nature of factual findings and, therefore, according to us, no substantial
question of law arises for our consideration, particularly, because the learned
counsel for the Revenue was unable to point out any perversity in the
recording of such findings. As such no substantial question of law arises for
our consideration. The appeal is dismissed. There shall be no order as to
costs."
Even Hon'ble Karnataka High Court in the case of CIT vs. De Beers
India Minerals (P) Ltd. (2012) 346 ITR 467 (Kar.) had interpreted the
term `make available' as under :-
"22. What Is the meaning of "make available". The technical or
consultancy service rendered should be of such a nature that It
"makes available" to the recipient. Technical knowledge, know-how
and the like., The service should be aimed at and result in
transmitting technical knowledge, etc ..so that the payer of the
service could derive an enduring benefit and utilize the knowledge
or know how on his own in future without the aid, of the service
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provider. In other words, to fit into the terminology `making
available', the technical knowledge, skills, etc. must remain with the
person receiving 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. "
In view of the above, it can be concluded that rendering of technical
services leads to transfer/ imparting of technical knowledge, experience,
skill, know-how, or processes to the recipient which enables the
recipient to apply the same on his own. In other words, the recipient
acquires a means to an end, i.e he acquires the technical knowledge,
experience, skills, know-how or processes from the provider which acts
as a means and enables him to use the same for achieving a further
end. In a service which does not qualify as technical services, the
services itself serves as an end for the recipient since he does not
19
ITA No.1941/Del/2012
ITO vs. Nokia India Pvt. Ltd.
acquire any technical knowledge, experience, skill, know-how, or
processes from the service provider.
In light of the judicial pronouncements highlighted above (which have
affirmed the principle of parallel treaty interpretation, especially as
regards the meaning of the term 'make available'), considering the
interpretation provided in the MoU to India-US tax treaty,services can be
said to 'make available' technical knowledge etc, where such technical
knowledge is transferred to the person utilizing the service (Le the
appellant in the instant case) and such person is able to make use of the
technical knowledge etc, by himself in his business or for his own benefit
and without recourse to the performer of services (i.e OlofGranlund) in
the future. The mere fact that provision of service may require technical
knowledge by the person providing the service would not per se mean
that knowledge has been made available.
The learned assessing officer has in the impugned order accepted the
position that recourse should be made to the interpretation provided
under the MoU to India-US tax treaty to determine whether payments
made by the appellant qualify as FTS under the provisions of India-
Finland tax treaty. However, the learned assessing officer has
erroneously relied on certain examples provided under the MoU to
20
ITA No.1941/Del/2012
ITO vs. Nokia India Pvt. Ltd.
conclude that payments made by the assessee qualify as FTS under
provisions of India- Finland tax treaty.
Further, the term 'make available' in the context of consultancy services
has been subject matter of consideration before various appellate
authorities, which have concurred with the above position. In this
regard, the reliance can be made on the following decisions, which are
squarely applicable to the case on hand:-
· Mckinsey and Co. Inc. and Ors. Vs ADIT reported in 99 IT])
549 (Mumbai)
In the above case as well, Mckinsey and Co Inc was engaged
in providing strategic consultancy services, the Honorable
Tribunal has held as under: -
"Merely because the assessee have rendered certain
consultancy services to the McKinsey India does not by itself
can be reason enough to conclude that the consideration
(or such consultancy services is taxable in India under art.
12(4)(b) as 'fees for included services".
" ... generally speaking. technology will be considered 'made
available' when the person acquiring the service is enabled
to apply the technology and various Benches of the Tribunal
have consistently taken that view of the matter. "
"..... When a patient visits a doctor and doctor advices him to
undergo various tests. The patient does so. In the course of
performing the scan tests, the scan centre used certain
equipment. The scan centre actually provided the service. The
patient, is interested in the end result i. e. report of the test
21
ITA No.1941/Del/2012
ITO vs. Nokia India Pvt. Ltd.
and not in technical know-how that is used in the scan report.
Such technical knowledge is not passed on to the patient. If
the patient requires the scan report again, he would require to
get the report done once again and he cannot do it by himself.
Technical skill, knowledge, know-how or experience is not
passed on, though it is utilized in preparing the report. "
The above propositions have been reiterated in the following cases also
:-
· CESC Ltd Vs DCIT reported in 275 ITR 15 (Cal);
· Raymond Ltd Vs DCIT reported in 86 ITD 761 (Mumbai);
· Deputy Commissioner of Income Tax vs Boston Consulting
Group Pte Limited (93 TTJ 293), Mumbai ITAT;
· JCIT vs Essar Oil Limited (7 SOT 216), Mumbai ITAT; and
· National Organic Chemical Industries Ltd vs DCIT reported in
96 TT J 765
Additionally, it can be seen that under the provisions of Article 13 of
India-Finland tax treaty, provision of services shall qualify as FTS where
the same consist the development and transfer of a technical plan or
technical design to the recipient of the services. For the services to
qualify as FTS the provider must itself develop the technical plan or
design and then transfers the same to the recipient of the services.
APPLYING THE ABVOE PRINCIPLES TO THE FACTS TO THE CASE ON
HAND
22
ITA No.1941/Del/2012
ITO vs. Nokia India Pvt. Ltd.
As extracted above , in the instant case, Olof Granlund merely provided
services to ensure that the HV AC, Electrical and Fire Protection systems
to be installed at the respondent's factory in Chennai are of the right
design and quality. The scope of work performed by Olof Granlund
clearly lays down that Olof Granlund shall be responsible for providing
following quality and design control services to the appellant:
a) Review of systems description, diagrams, cost estimates,
building designs etc;
b) Review of preliminary system design and quality control;
c) Review of equipment list/. selections, layout proposals,
conducting inspections etc;
and
d) Holding meetings in India and Finland, in connection with the
above.
As is evident from the above, Olof Granlund's services to the respondent
were not driven towards imparting any technical knowledge or
experience to the appellant that could be used by the respondent
independently in its business and without recourse to Olof Granlund.
These services were neither geared to nor did they 'make available' any
technical knowledge, skill or experience to the respondent or consisted
of development and transfer of a technical plan or technical design to
the appellant.
23
ITA No.1941/Del/2012
ITO vs. Nokia India Pvt. Ltd.
Given that the term 'make available' envisages a situation where the
service recipient (i.e the respondent) is able to make use of the
technical knowledge inherent in the services provided to him
independently in his business or for his own benefit and without
recourse to the service provider (i.e Olof Granlund), payments made by
the respondent to Olof Granlund for provision of above services do not
constitute FTS under narrower provisions of Article 13 of the India-
Finland tax treaty. Further, the services rendered by OlofGranlund are
restricted o the review of design, drawings, cost estimates etc prepared!
developed by the contractor of the assessee, to check whether the
same are as per Nokia group's standard. Olof Granlund 'as not
responsible for preparation of any design, diagram etc for the appellant
and accordingly the services provided by it does not involve
development and transfer of technical plan or design.
Accordingly, we hold that the payments made by the respondent to
Olof Granlund do not qualify as FTS under the provisions of India-
Finland tax treaty.
Further, as per the provisions of India-Finland tax treaty, where the
service do not qualify as FTS, Article 13 would not be applicable to the
24
ITA No.1941/Del/2012
ITO vs. Nokia India Pvt. Ltd.
Finnish enterprise and its taxability would need to be examined as per
Article 7 (read with Article 5) of the India-Finland tax treaty.
As per Article 7( 1) of the tax treaty, 'Business Profits' earned by a
Finnish Enterprise is taxable in India only if that Finnish enterprise
carries on business in India through a PE in India. The term PE has been
defined in Article 5 of the India-Finland tax treaty to include a branch,
office, factory, workshop, etc of the Finnish enterprise in India. Where
the Finnish enterprise does not have a PE in India under the provisions
of Article 5 of the India-Finland treaty, no portion of the income from
services provided to a customer in India are liable to taxation in India.
In the instant case, admittedly Olof Granlund did not have any office/
place of business in India. Further, the services were performed by Olof
Granlund primarily from outside India and its employees made
intermittent visits to India only for the purpose of attending meetings
with the respondent.
Accordingly, Olof Granlund Oy did not have a PE in India under the
provisions of Article 5 of the India-Finland tax treaty during the subject
period. Certificate obtained by the respondent from Olof Granlund in
this regard is on record.
25
ITA No.1941/Del/2012
ITO vs. Nokia India Pvt. Ltd.
In light of the above, we are of the considered opinion that the
payments received by Olof Granlund from the respondent for provision
of services are not liable to taxation in India under the narrower
provisions of the India-Finland tax treaty.
Now the issue that comes up for consideration is when the payment
made by respondent-assessee is not taxable under the provisions of
Income Tax Act 1961, whether he is still required to deduct the tax at
source on such payments. The issue is no more res integra and covered
by the decision of Hon'ble Supreme Court in the case of GE India
Technology Centre P. Ltd. Vs. CIT and another 327 ITR 456 (SC)
wherein the Hon'ble Supreme Court held that if payment is not
assessable to tax there is no question of tax at source being deducted.
The relevant portion of the judgment is reproduced as under :-
"If the contention of the Department that the moment there is
remittance the obligation to deduct TAS arises is to be accepted then we
are obliterating the words "chargeable under the provisions of the Act"
in section 195(1). The said expression in section 195(1) shows that the
remittance has got to be of a trading receipt, the whole or part of which
is liable to tax in India. The payer is bound to deduct TAS only if the tax is
assessable in India. If tax is not so assessable, there is no question of TAS
being deducted.
One more aspect needs to be highlighted. Section 195 falls in
Chapter XVII which deals with collection and recovery. Chapter XVII-B
deals with deduction at source by the payer. On analysis of various
26
ITA No.1941/Del/2012
ITO vs. Nokia India Pvt. Ltd.
provisions of Chapter XVII one finds use of different expressions,
however, the expression "sum chargeable under the provisions of the
Act" is used only in section 195. For example, section 194C casts an
obligation to deduct TAS in respect of " any sum paid to any resident".
Similarly, sections 194EE and 194F, inter alia, provide for deduction of
tax in respect of " any amount" referred to in the specified provisions. In
none of the provisions we find the expression " sum chargeable under the
provisions of the Act", which as stated above, is an expression used only
in section 195(1). Therefore this court is required to give meaning and
effect to the said expression. It follows, therefore, that the obligation to
deduct TAS arises only when there is a sum chargeable under the Act.
Section 195(2) is not merely a provision to provide information to the
Income tax Officer (TDS). It is a provision requiring tax to be deducted at
source to be paid to the Revenue by the payer who makes payment to a
non-resident. Therefore, section 195 has to be read in conformity with
the charging provisions, i.e section 4,5 and 9. This reasoning flows from
the words " sum chargeable under the provisions of the Act" in section
195 (1). The fact that the Revenue has not obtained any information per
se cannot be a ground to construe section 195 widely so as to require
deduction of TAS even in a case where an amount paid is not chargeable
to tax in India at all. We cannot read section 195, as suggested by the
Department, namely, that the moment there is remittance the obligation
to deduct TAS arises. If we were to accept such a contention it would
mean that on mere payment income would be said to arise or accrue in
India. Therefore, as stated earlier, if the contention of the Department
was accepted it would mean obliteration of the expression " sum
chargeable under the provisions of the Act" from section 195(1). While
interpreting a section one has to give weightage to every word used in
that section. While interpreting the provisions of the Income Tax Act one
can not read the charging sections of that Act de hors the machinery
sections. The Act is to be read as an integrated code. Section 195
appears in Chapter XVII which deals with collection and recovery. As
held in the case of CIT vs. Eli Lilly and Co. (India) (P) Ltd. (2009) 312 ITR
225 the provisions for deduction of TAS which are in Chapter XVII dealing
with collection of taxes and the charging provisions of the Income Tax
Act form one single integral, inseparable code and, therefore, the
provisions relating to TDS apply only to those sums which are "
chargeable to tax" under the Income-Tax Act. It is true that the judgment
in Eli Lilly (2009) 312 ITR 225 was confined to section 192 of the Income
Tax Act. However, there is some similarity between the two. If one looks
27
ITA No.1941/Del/2012
ITO vs. Nokia India Pvt. Ltd.
at section 192 one finds that it imposes statutory obligation on the
payer to deduct TAS when he pays any income "chargeable under the
head salaries". Similarly section 195 imposes a statutory obligation on
any person responsible for paying to a non-resident any sum "
chargeable under the provisions of the Act". Which expression, as stated
above, do not find place in other sections of Chapter XVII. It is in this
sense that we hold that the Income Tax Act constitutes one single
integral inseparable code. Hence, the provisions relating to TDS applies
only to those sums which are chargeable to tax under the Income tax
Act. If the contention of the Department that any person making
payment to a non-resident is necessarily required to deduct TAS then the
consequence would be that the Department would be entitled to
appropriate the moneys deposited by the payer even if the sum paid is
not chargeable to tax because there is no provision in the Income-tax Act
by which a payer can obtain refund. Section 237 read with section 199
implies that only the recipient of the sum i.e. the payee could seek a
refund. It must therefore follow, if the Department is right, that the law
requires tax to be deducted on all payments, the payer, therefore, has to
deduct and pay tax, even if the so-called deduction comes out of his own
pocket and he has no remedy whatsoever, even where the sum paid by
him is not a sum chargeable under the Act. The interpretation of the
Department, therefore, not only requires the words " chargeable under
the provisions of the Act" to be omitted, it also leads to an absurd
consequence. The interpretation placed by the Department would result
in a situation where even when the income has no territorial nexus with
India or is not chargeable in India, the Government would nonetheless
collect tax. In our view, section 195(2) provides a remedy by which a
person may seek a determination of the "appropriate proportion of such
sum so chargeable" where a proportion of the sum so chargeable is
liable to tax. The entire basis of the Department's contention is based on
administrative convenience in support of its interpretation. According to
the Department, huge seepage of revenue can take place if persons
making payments to non-residents are free to deduct TAS or not to
deduct TAS. It is the case of the Department that section 195(2) , as
interpreted by the High Court would plug the loophole as the said
interpretation requires the payer to make a declaration before the
Income tax Officer (TDS) of payments made to non-residents. In other
words, according to the Department, section 195(2) is a provision by
which the payer is required to inform the Department of the remittances
he makes to non-residents by which the Department is able to keep track
28
ITA No.1941/Del/2012
ITO vs. Nokia India Pvt. Ltd.
of the remittances being made to non-residents outside India. We find no
merit in these contentions. As stated hereinabove, section 195(1) uses
the expression " sum chargeable under the provisions of the Act". We
need to give weightage to those words. Further, section 195 uses the
word "payer" and not the word "assessee". The payer is not an assessee.
The payer becomes an assessee-in-default only when he fails to fulfil the
statutory obligation under section 195(1). If the payment does not
contain the element of income the payer cannot be made liable. He
cannot be declared to be an assessee-in-default. The above-mentioned
contention of the Department is based on an apprehension which is ill-
founded. The payer is also an assessee under the ordinary provisions of
the Income Tax Act. When the payer remits an amount to a non-resident
out of India he claims deduction or allowances under the Income Tax Act
for the said sum as an ` expenditure' . Under Section 40(a)(i), inserted,
vide Finance Act, 1988, with effect from April 1, 1989, payment in respect
of royalty, fees for technical services or other sums chargeable under the
Income Tax Act would not get the benefit of deduction if the assessee
fails to deduct TAS in respect of payments outside India which are
chargeable under the Income-tax Act. This provision ensures effective
compliance with section 195 of the Income tax Act relating to tax
deduction at source in respect of payments outside India in respect of
royalties, fees or other sums chargeable under the Income Tax Act. In a
given case where the payer is an assessee he will definitely claim
deduction under the Income-tax Act for such remittance and on inquiry if
the Assessing Officer finds that the sums remitted outside India come
within the definition of royalty or fees for technical service or other sums
chargeable under the Income-tax Act then it would be open to the
Assessing Officer to disallow such claim for deduction. Similarly, vide the
Finance Act, 2008, with effect from April 1, 2008, sub-section (6) has
been inserted in section 195 which requires the payer to furnish
information relating to payment of any sum in such form and manner as
may be prescribed by the Board. This provision is brought into force only
from April 1, 2008. It will only apply for the period with which we are
concerned in these cases before us. Therefore, in our view, there are
adequate safeguards in the Act which would prevent revenue leakage.
Applicability of the judgment in the case of Transmission Corporation
(supra)
In Transmission Corporation's case (1999) 239 ITR 587(SC) a non-
resident had entered into a composite contract with the resident party
29
ITA No.1941/Del/2012
ITO vs. Nokia India Pvt. Ltd.
making the payments. The said composite contract not only comprised
supply of plant, machinery and equipment in India, but also comprised
the installation and commissioning of the same in India. It was admitted
that the erection and commissioning of plant and machinery in India
gave rise to income taxable in India. It was, therefore, clear even to the
payer that payments required to be made by him to the non-resident
included an element of income which was exigible to tax in India. The
only issue raised in that case was whether TDS was applicable only to
pure income payments and not to composite payments which had an
element of income embedded or incorporated in them. The controversy
before us in this batch of cases is, therefore, quite different. In
Transmission Corporation case (1999) 239 ITR 587 (SC) it was held that
TAS was liable to be deducted by the payer on the gross amount if such
payment included in it an amount which was exigible to tax in India. It
was held that if the payer wanted to deduct TAS not on the gross amount
but on the lesser amount on the footing that only a portion of the
payment made represented ` income chargeable to tax in India' then it
was necessary for him to make an application under section 195(2) of the
Act to the Income Tax Officer (TDS) and obtain his permission for
deducting TAS at lesser amount. Thus, it was held by this court that if the
payer had a doubt as to the amount to be deducted as TAS he could
approach the Income-tax Officer (TDS) to compute the amount which
was liable to be deducted at source. In our view , section 195(2) is based
on the "principle of proportionality"". The said sub section gets attracted
only in cases where the payment made is a composite payment in which
a certain proportion of payment has an element of `income' chargeable
to tax in India. It is in this context that the Supreme Court stated, `if no
such application is filed, income tax on such sum is to be deducted and it
is the statutory obligation of the person responsible for paying such
'sum' to deduct tax thereon before making payment. He has to discharge
the obligation to TDS". If one reads the observation of the Supreme
Court, the words ` such sum' clearly indicate that the observation refers
to a case of composite payment where the payer has a doubt regarding
the inclusion of an amount in such payment which is exigible to tax in
India. In our view, the above observations of this court in Transmission
Corporation case (1999) 239 ITR 587 (SC) which are put in italics have
been completely, with respect misunderstood by the Karnataka High
Court to mean that it is not open for the payer to contend that if the
amount paid by him to the non-resident is not at all ' chargeable to tax in
India'., then no TAS is required to be deducted from such payment. This
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ITA No.1941/Del/2012
ITO vs. Nokia India Pvt. Ltd.
interpretation of the High Court completely loses sight of the plain words
of section 195(1) which in clear terms lay down that tax at source is
deductable only from " sums chargeable" under the provisions of the
Income Tax Act, i.e. chargeable under sections 4,5 and 9 of the Income
Tax Act."
10. Following the ratio laid down by the Hon'ble Apex Court in the
above case, we hold that the question of deduction of tax at source on
the impugned payments does not arise. The CIT(A) on the same parity
of reasoning allowed the appeal. Therefore, we dismiss the grounds of
appeal filed by the revenue.
11. In the result appeal filed by the revenue is dismissed.
Order pronounced in the open court on 8th July, 2015.
sd/- sd/-
(I.C. SUDHIR) (INTURI RAMA RAO)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: the 8th July, 2015
`veena'
Copy of the Order forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
6. Guard File By order
Dy. Registrar
31
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