BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI

Transcription

1 BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI 8 th Day of November, 2017 A.A.R. No 1330 of 2012 PRESENT Mr. R.S. Shukla, Incharge-Chairman Mr. Ashutosh Chandra, Member (Revenue) Name & address of the applicant: Production Resource Group, Avenue Edison, Wavre, Belgium Present for the applicant: Present for the Department: Mr. F.V. Irani, AR Mr. P.K. Aggarwal Mr. M.H. Motiwal Mr. Neeraj Gupta MsKavitaPandey, CIT(DR) Mr. C. Srinivas Reddy, ACIT(IT)3(3), Mumbai Mr. A.K. Verma, DCIT RULING (byashutosh Chandra) Production Resource Group (the Applicant), is a company registered in Belgium and is engaged in the business of providing technical equipment and services for events including lighting, sound, video and LED technologies. It entered into a Service Agreement dated with the Organizing Committee of the Commonwealth Games, Delhi, (OCCG), for a term commencing on 9 July 2010 and expiring on 30 October 2010, to provide, on a turnkey basis, the services set out in the Schedule 2 thereto, on the terms and conditions stated therein. 1 AAR/1330/2012

2 2. In substance and effect, the foregoing agreement envisages that PRG will furnish, on a turnkey basis, lighting and searchlight services during the opening and closing ceremonies of the Commonwealth Games Delhi, As a consideration, OCCG agreed to pay fees of USD 3.5 million, inclusive of the withholding and service tax, in installments. Four invoices were raised, of which payments have been made against three after withholding tax at source, and issued a certificate under section 203, on 9 February 2011, in form number 16A. 3. PRG rendered the services in conformity with the agreement dated for two days, namely 3 October 2010, at the opening ceremony, and on 14 October 2010 at the closing ceremony. Its employees and equipments were in India for a period of only 66 days for preparatory, installation and dismantling of equipment from to On the above facts, the applicant has raised following questions: 1. Whether on the facts and in the circumstances of the case, the payments received/to be received by the Applicant for rendering, lighting and searchlight services to the Organizing Committee, Commonwealth Games 2010, Delhi (hereinafter referred to as ÖCCG ) under the Agreement dated 9 th July, 2010 would be taxable in India under the provisions of the Income tax Act, 1961 ( the Act )? 2. If the payments received by the Applicant for rendering lighting and searchlight services to OCCG, are taxable in India under the provisions of the Act, whether the same would not be taxable in India in view of the Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income between the Government of India and the Government of Belgium read with the Protocol between the Government of India and Kingdom 2 AAR/1330/2012

3 of Belgium ( the India-Belgium Tax Treaty ) read together with the Agreement for Avoidance of Double Taxation and Prevention of fiscal between the Government of Portuguese Republic ( the India-Portugal Tax Treaty )? 3. The Applicant craves leave to add, modify or withdraw any questions after admission of the application or at the time of hearing and each of the questions raised are independent and without prejudice to one another. 5. With regard to its interpretation on each of the questions posed before us, it is submitted with respect to question number one that the payments received or to be received by it are not taxable in India under the Act, for the following reasons: 5.1 The specific category of payments into which the said payments could, if at all, be slotted under the act is Fees for Technical Services, as defined in Explanation 2 to section 9(1)(vii) of the Act. It is submitted that the undertaking of a given task on a turnkey basis, as in its case, cannot come within the expression rendering of any managerial, technical or consultancy services, because the word rendering connotes that the recipient of the service desires a continued provision of specified, identified services and not merely an end result. 5.2 Further, without prejudice, in any event, the applicant submits that the services supplied by it are of standard nature involving operation of a normal facility and not a technical service as postulated in Explanation 2 to section 9(i)(vii). In other words, it encompasses routine and mechanical processes in the premises, which do not constitute technical service as such, within the meaning of the said explanation.in any event, even if 3 AAR/1330/2012

4 technology is regarded as having been used by the applicant, this shouldnot make it fees for technical services. In support, the applicantrelies, inter alia, on the decision of the Madras High Court in the case of SkycellCommunication Ltd. Vs CIT, 251 ITR It is submitted that if the said payments cannot be brought within a specific head,they cannot be brought to tax under any other general provision. In view of this position it is submitted that the said paymentsmade to PRG are not taxable under the provisions of the Act. 5.4 With reference to question number 2, it is submitted in any case, even if rendering of lighting and searchlight services to OCCG were to be taxable in India under the provisions of the Act, the same would not be taxable in view of the Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to taxes on income,between the Government of India and the Government of Belgium, read with the Protocol between the Government of India and Kingdom of Belgium, read together with the Agreement foravoidance of Double Taxation and Prevention of Fiscal Evasion between the Government of India and the Government of Portuguese Republic. 5.5 It is submitted that Article 12 of the DTAA between India and Belgium, bereft of the protocol, broadly has the same definition of fees for technical services as the Act. The applicant relies upon the submissions made by it in the context of the Act to contend that the said payments are not Fees for Technical Services. 5.6 However, the protocol, which is part of the DTAA, provides that if India enters into a Convention or Agreement with athird State, being a member of the OECD, which enters into force after , under which India limits 4 AAR/1330/2012

5 taxation on royalties or fees for technical services to a rate lower or a scopemorerestricted than the rate or scope provided in the present agreement on the said items of income, the same rate or scope shall also apply under the present agreement with effect from the date from which the present agreement or the said convention or agreement is effective, whichever date is later. India has executed a DTAA with Portugal, an OECD member on , which has entered into force with effect from 30 April 2000, wherein Article 12 confines the domain of fees for technical services to cases where the service is made available to the recipient to enable the latter to apply the technology. Relevant portions of Article 12 of the India- Portugal have been quoted. 5.7 However, such royalties and fees will include services that 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 and fees for included services is a resident of the other contracting State, the tax so charged should not exceed 10% of the gross amount. The competent authorities of the contracting States shall by mutual agreement settle the mode of application of this limitation. 5.8 The term royalties as used in this Article means payment for any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or tapes or any other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial, or scientific experience. 5 AAR/1330/2012

6 5.9 For the purpose of this Article, fees for included services means payment of any kind, other than those mentioned in Article 14 and 15 of this Convention, to any person in consideration of the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) if such services: (a) Are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in para 3 is received, or (b) Make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design which enables the person acquiring the services to apply the technology contained therein. The Applicant has quoted the other provisions contained in the DTAA, regarding the exclusions, if earned through a PE, etc It is submitted that the phrase make available has been adjudicated and deliberated by the Hon ble Authority for Advance Ruling in several judicial precedents. The crux of the aforementioned expression is that the mere rendering of service is not enough to attract Article 12, but it goes further and mandates that the service should be aimed at and result in transmitting the technical knowledge, etc.so that the payer could derive an enduring benefit and utilise the knowledge or know-how in future on his own without the aid and assistance of the giver. IntertechTesting Services India Pvt. Ltd. (2008)307 ITR 418 (AAR) has been referred to. In this case, the lighting and searchlight services are not imparted to and absorbedby the OCCG so that it could deploy the same in future, independent of PRG. No technical knowledge, experience, skill or processes are made available or 6 AAR/1330/2012

7 imparted by the applicant to OCCG which would enable OCCG to apply the same on its own. Indeed the equipment, wherewithal, know-how and paraphernalia necessary to provide the turnkey service have not been transferred by the applicant and continue to be owned by it. In that view of the matter, the services under consideration are not hit by Article 12 of the DTAA The said payments, not being fees for technical services under Article 12, can only be business profits under Article 7 of the treaty. Business profits of the applicant can be taxed in India only if the applicant can be regarded as having a Permanent Establishment, PE,in India and carrying on business through that PE. The Applicant has quoted the provisions contained in Article 5 of the DTAA, to say that the fact that a company which is resident of a Contracting state controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in the other contracting State shall not by itself constitute either company, a PE of the other Article 5 defines PE as a fixed place of businessthrough which the business of an enterprise is wholly or partly carried on. In CIT versus Visakhapatnam Port Trust (1983), 144 ITR 146, the Andhra Pradesh High Court propagated that PE posits the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in acountry which can be attributed to a fixed place of business in that country and should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another. The applicant neither has office, branch, establishment, or other fixed placeof business in India nor can it as a matter of right or otherwise enter and make use of the premises of the OCCG in relation to the rendition of contracted services. There is no projection at all of the applicant into the soil of India. It has also never been 7 AAR/1330/2012

8 PRG s intention to stay in India to pursue other business. Mere business relations with the enterprise or other customers is insufficient for the existence of a PE. In that view of the matter, the applicant urges that its activities, when tested on thisforegoing anvil, does not give rise to a PE. Moreover, the import and purport of the phrase Permanent Establishment inherently and intrinsically carries with it the characteristics of continuity, regularity, stability and sufficient duration of an activity, and applying these yardsticks the transient presence of the Applicant cannot be regarded as a PE. Besides, none of the characteristics and ingredients mentioned in the various clauses of Article 5 of the DTAA is present in the case of the applicant so asto form and constitute a PE. Further, norms of place of business, power of disposition, permanence, location, business activity and business connection which cumulatively and collectively are the sinequa non for drawing an inference of the existence of a PE, are absent in the applicant s case Thus, the activities of the Applicant do not vindicate a finding that there is a PE. As such, the said payments would not be taxable in India under Article 7 of the DTAA. It is submitted that the said payments are completely saved from Indian taxation by virtue of the provisions of the DTAA. Hence, by virtue of Section 90(2) of the Act, even if it is assumed, while denying, that the said payments are taxable under the provisions of the Act, they will not be liable toindian taxation by virtue of the more beneficial provisions of the DTAA. 6. The Revenue has opposed the above contentions of the Applicant. In an earlier report, Revenue had contended that the services are taxable under the Act as well as under the Indo Belgium DTAA, as fees for technical services. However, in a subsequent detailed report, the Revenue 8 AAR/1330/2012

9 has stated that the claim and contentions of the applicant are not correct. It has a PE and its income is also assessable as Royalty. 6.1 It is submitted that the Applicant installed its equipments at various sites in the JawaharLal Nehru Stadium, including laying of cables, erecting structures for the opening ceremony, the various victory ceremonies throughout the tournament, and closing ceremony. This was further added by the preparation period prior to the tournament.referring to various clauses of the Service Agreement dated 9 July 2010, attention has been drawn to clause 3(b) of the said agreement, according to which it was mandatory for the applicant to acquire all authorizations, permits and licenses required under law to perform the services in accordance with the instructions or directions given by Delhi 2010.As per clause 3(e), key personnel of the applicant are directly involved in the provision of the services at all times during the term of the agreement.from this it can be construed that the applicant provided the services during the whole period and not only for the opening and closing ceremony. It also shows that the applicant had comprehensive physical presence on the ground throughout the tournament. 6.2 As per clause 10(1) of the said agreement, during this period, the applicant was also responsible for ensuring that it had adequate insurance to cover all risks associated with the provision of the services. In this regard, Delhi 2010 did not have any liability. This means that the applicant was only responsible and liable for all risks associated with the provision of the services. This also meant that for the management of risks it was necessary for the applicant to be available at the site throughout. 6.3 As per Schedule 2 of the said agreement, sub-paragraph (b) of para1of the Scope of Work, it is seen that the Delhi 2010 will supply a 3 phase 9 AAR/1330/2012

10 supply with a line neutral voltage between 220 V and 250 V at a frequency of 50 Hz at each power distribution centre. The system will be powered by multiple synchronised generators for the ceremonies on a 24 hour basis.the applicant shall be responsible for supplying mains distribution, and mains cabling from the Delhi 2010 power supply locations to the equipment supplied by the service provider. Also, the service provider shall supply all appropriate wiring stalls,(including any necessary plugs or otherwise to suit the wiring locations), mains distribution, and mains cabling from the wiring or connection points to the fixtures and fittings as specified in the Schedule 2. Furthermore, the service provider shall provide a complete power turnkey solution for all areas of supply as detailed in this Scope of Works. 6.4 As mentioned above, as per Schedule 2, it is clear that the applicant is responsible for supplying mains distribution, and mains cabling from Delhi 2010 power supply locations to the equipment supplied along with appropriate wiring or connection points to the fixtures and fittings. It can be construed that the applicant provided the services through its personnel from to It is submitted that as per Schedule 2 of the said agreement, para(c) General considerations: Facilities An allowance has been made for limited space and on-site space for the Service Provider. Environmental considerations 10 AAR/1330/2012

11 Delhi 2010 is responsible for providing a suitable cover at the workplace to repair fixtures, and an empty key storage area as agreed between the Delhi 2010 and the service provider. Service, Support and Ongoing Maintenance The service provider shall provide an ongoing maintenance presence in Delhi that can service, rectify or repair any supplied item. This presence shall be available and/or on call at any given time from the supply to the final removal of the services. These personnel shall be backed up by a fullservice support team to assistif required in any complications that require additional assistance. Thus, it is argued by Revenue that the applicant has an office space or on-site space for the above services provided by it to Delhi As per Schedule 2 of the said agreement sub-paragraph (iv)para (b) of the Scope of Work, the service provider shall subcontract the Lighting Design Services and Lighting Operators as part of the supply. It is clear from this para of the agreement that the applicant has subcontracted the Lighting Design Services and Lighting Operators. Therefore, the applicant has conducted another important function of subcontracting from India. Subcontracting would necessarily create a site office or a fixed place. 6.7 Given the nature of the business of the applicant, the requirement is that for certain duration the applicant operates through its personnel, equipment, technical know-how, services, patents etc. at the given premises. The nature of business of the applicant is a peculiar one where the applicant performs on the site of client for the duration of the client s ceremony/program, which may be from a few hours to a few days irrespective of the place of performance, whether in resident state orsource state. Hence, the requirement of performance of business operation for 11 AAR/1330/2012

12 months or years together is irrelevant. The time period for which the applicant is operating cannot be a deciding factor for PE in such a scenario. The reliance has been placed on the decision of the Hon ble Supreme Court in the case of Formula One World Championship Limited (2017) 80 taxman.com It is stated that in this caseit was held, on the question whether fixed place of business in form of physical location was at the disposal of the assesseethroughout,fromwhich it conducted business, that a taxable event had taken place in India and the non-resident assessee was liable to pay tax in India on income it had earned in India, through the race track over which it had complete control during the period of the race. Whether the question of PE had to be examined keeping in mind the duration of the event, which was for limited days or for the entire duration,since ithad full access to its personnel, hence, number of days for which access was there would not make any difference. 6.9 In view of the above contentions, it is the claim of Revenue that the applicant had a PE in India during the period under consideration. 7. Revenue has further submitted that as per clause 3 (a) of Article 12 of the DTAA between India and Belgium, the term Royalties means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trademark, design or model, plant, secret formula or process or for information concerning industrial, commercial or scientific experience. 7.1 The applicant has entered into a Services Agreement with Delhi 2010 and the duration of agreement is from to that is for a 12 AAR/1330/2012

13 period of around114 days. The main work of the vendor/applicant is to provide lighting and searchlight services for the Commonwealth Games The technical scope of work includes installation, maintenance, dismantling and removal. The agreement, specifically Schedule2,contains the details of the work to be provided by the applicant and the equipment to be used and the details of various skilled personnel that are to be employed. The applicant shall provide lighting design services by using hardware and specific software. It is seen that the entire work is highly technical and sophisticated and carried out with the help of project manager, on-site crew, load-moving light technicians, lighting designers and several kind of operators. It is also seen that the nature of work is covered by intellectual property, includes all copyrights, patents, trademarks, designs, brand names, logos, data and confidential information. 7.2 The applicant has also entered into a Deed of Assignment in respect of Delhi 2010 on 7 July As per clause 3 of the deed, the applicant has assigned to Delhi 2010 all rights, title and interest throughout the world including but not limited to, past, present and future intellectual property rights in - (a) Any materials, works and other subject matter created or supplied by the company and/or its personnel for use in the games, and (b) The results and proceeds of all other activities undertaken by the company and/or its personnel in connection with the games, (together known as the works ) 7.3 As per clause 4, the applicant company agrees that Delhi 2010 may deal with the works in any manner it thinks fit, at no cost to Delhi 2010 or any other person. 13 AAR/1330/2012

14 As per Clause 5: (a) Disclose all works to Delhi 2010 on creation. (b) Provide the original versions of the works to Delhi 2010 upon request by Delhi (c) Execute all documents and do all other things as reasonably required by Delhi 2010, and (d) Not use the games IP or the works in any manner without the prior approval of Delhi It is stated that the above clauses clearly show that in fact intellectual property is created by way of specific design, patent, plan or process which is not known to others, and the same has been provided to the organisers of the games,i.e.delhi Further, in clause 6 of the Deed of Assignment, the applicant company warranted that: (a) It owns all rights, title, and interest, throughout the world in the intellectual property rights in the works; (b).. (c).. (d) The use of the works by Delhi 2010 and/or its nominees will not be the intellectual property rights and/or moral rights of any third party. 7.5 As per clause 3 of Schedule 7 which is a form/instructions to on-site personnel it is seen that this is the kind of information given by the applicant company to its employees/personnel employed by it in connection with the Delhi The saidclause reads as under: 14 AAR/1330/2012

15 4. Intellectual property You acknowledged that Delhi 2010 shall own all existing and future intellectual property rights in any material created, generated or contributed by you. You will waive all moral rights in respect of any existing or future intellectual property created by you or with others in the course of providing the service. Thus the applicant company has created an intellectual property which has been provided to Delhi Therefore this impugned transaction is clearly covered under the definition of royalty. 7.6 As seen from the definition of Royalty in the context of the agreement between the applicant company and Delhi 2010, the applicant company has charged USD 3.5 million from Delhi 2010 as a consideration for the use of or the right to use of its design or model or plan or process. The applicant company has also passed on all intellectual rights created, generated or contributed by its personnel to Delhi There is not an iota of doubt that the consideration received by the Applicant, is certainly covered under the head Royalty as per Article 12(3) of the India Belgium DTAA and hence is to be taxed in the contracting state i.e.india, that isthe country in which the same arises and according to the laws of India. However, if the beneficial owner of the royalties is a resident of the other contracting state, the tax charged shall not exceed 10% of the gross amount of the royalties. 15 AAR/1330/2012

16 7.7 In view of the above position revenue submits that the entire consideration of USD 3.5 million or the actual amount received as per the agreement is chargeable to tax in India. 8. During the course of these proceedings the applicant, represented by Mr. F.V. Irani, has vehemently opposed the above averments of Revenue. 8.1 It is reiterated that the payment is received by the Applicant but only for the supply of services as can be seen from the various schedules of the agreement and the same has been provided on a turnkey basis. Firstly, it did not have any PE in India as in view of article 5(2)(j) the period of its contract in India was less than six months. There was no fixed place of business. The applicant has made a reference to the commentary by Klaus Vogel to support its case. It is submitted that the case of Formula One World Championships as cited by the Revenue, was clearly distinguishable from the facts of the instant case, and in fact supports the case of the applicant, inasmuch as it did not have any or full control over the space provided to it by Delhi 2010, as referred to inparas 70 and 74 of this judgment. It is also submitted that the fact that it had an insurance cover in no way leads to the constitution of a PE. 8.2 With regard to the issue of Royalty, as claimed by the Revenue, the applicant has reiterated its earlier submissions, and also drawn attention to the case of Anapharm Inc. [(305 ITR 394)(AAR)]. 8.3 In response to the above the Revenue has again insisted that in terms of the decision in the case of Formula One, the space given to the applicant was fully controlled by it. Apart from this it had given subcontracts and taken insurance, which shows that it was doing its business from the space provided, and the same constituted a PE in India. MrIrani, however, submitted that fixing a light on a pole did not constitute a PE and the space 16 AAR/1330/2012

17 provided to it was not in any way controlled by it. He has again drawn attention to the case of Visakhapatnam Port Trust, to make the case that the project undertaken by it was not an enduring one and was done on a turnkey basis for a short duration only, and hence no PE was established on the premises of the Delhi We have considered the submissions of the applicant, the objections raised by the Revenue, as well as the details and agreements submitted with the application. 9.1 While the Applicant denies and the Revenue insists, that it has a PE in India, let us examine whether the conditions required for a PE are indeed met, keeping in mind the Agreement entered into and the activities undertaken by the Applicant. The decision in the case of Formula One World Championship Ltd. (FOWC) delivered by the Hon ble Apex court provides a good basis for making this evaluation, and has been referred to by both the Applicant as well as Revenue. The case of Visakhapatnam Port Trust has been cited by the Applicant to make out a case that none of the characteristics are present in the instant case. This case has also been considered by the Hon ble Supreme Court. Klaus Vogel in his commentary on Double taxation Conventions also gives a detailed and illustrative account on what factors should be taken into account. 9.2 First and foremost it has to be understood that the scheme of structuring the paragraphs in different Articles of any DTAA, is logically done and with a purpose, either to illustrate, expand, or limit the provisions of the preceding paragraph. This makes it necessary for us to go paragraph by paragraph, and not on to clause (j) of paragraph 2 of Art. 5 of the DTAA straightaway,as done by the Applicant. As per Article 5 paragraph 1, 17 AAR/1330/2012

18 For the purpose of this Agreement, the term permanent establishment means a fixed place of business through which the business of the enterprise is wholly or partly carried on. 9.3 It is an admitted position that the Applicant is engaged in the business of providing technical equipment and services for events including lighting, sound, video and LED technologies. In providing these services, it has to do all related activities, such as abiding by and obtaining all authorizations, permits and licenses; engaging personnel with the requisite skills, ensuring their availability; supply and / or procure all necessary equipment for its business; subcontracting; and shipping and loading, insurance etc. 9.4 For carrying on the above business and related activities, over which it has full right and power to perform, as per Sch. 2, the Applicant has been provided among other facilities, office space as well as on-site space. Further it is seen from paragraph 5 of Sch. 4 that Delhi 2010 provided the Applicant and its subcontractors lockablespace for storing its tools and equipments inside the Stadium. Thus it has, at its disposal, space which is lockable, implying that it has access to and control over this space, to the exclusion of every other of the numerous other providers engaged by the Delhi 2010, and even of the Delhi This space is not merely for storage alone, but looking into the nature of business, it is for carrying out the business itself, and hence cannot be discarded or excluded. And, it is not far removed but in the JawaharLal Nehru Stadium precincts itself, where the fruits of its income generating efforts will be on display. Paragraph 9 of Sch. 4 also stipulates that Delhi 2010 will provide a covered area for storage of equipment and the required security at all times. Looking into the expensive equipment, the time lines, the precision involved and the highly technical nature of the work involved, it is inconceivable that such facility would not be at its disposal with exclusive right to access and under 18 AAR/1330/2012

19 the control of the Applicant. The general Conditions also reveal that Delhi 2010 shallprovide the Applicant empty workplace and covered area. The word empty implies being placed at the disposal and exclusive access and control of the Applicant. Also, in the very nature of things in this case, the business had to be carried out on site, and as Klaus Vogel says, it is immaterial that the place of business is located in the business facilities of another enterprise who may be the owner Thus, as long as there is a space placed at its disposal with exclusive right of access, controlled by it and used for its business, it would form a PE. The degree of control need not exceed the level of what is required for this specific business. The Applicant s plea that it had no place where it could otherwise enter and make use of in the premises of Delhi 2010 and have control over, is not found to be correct. 9.5 The above facilities provided to the Applicant show that there was a clear link between the place of business and an identifiable geographical point, from where its business would be done. In fact, coupled with the space, the lightingfacilities created and erected by the Applicant would also be part of the place of business as it is not necessary that they may be fixed to the soil, as long as they form an intrinsic part of its income generating apparatus, and remain at a particular site, ie. thejawaharlal Nehru stadium, in the case at hand. 9.6 As regards the Applicant s plea that its presence was of a transient nature, and not an enduring one, as mentioned in the case of Vishakhapatnam Port Trust, the same cannot be accepted on the facts of this case. The establishment need not be enduring or permanent in the sense that it should be in its control forever. The context in which a business is undertaken, is relevant. The project consists of providing 19 AAR/1330/2012

20 technical equipment and services for events including lighting, sound, video and LED technologies in connection with the Commonwealth Games, as also all related cabling, wiring and point to point provision of electrical fittings. Hence this can obviously not last forever, a situation comparable to the FOWC, considered in great length by the Hon ble Supreme Court. The project per se and the nature of activities may be less cumbersome and complex as against the case of FOWC, but looking into the job assigned to the Applicant in the whole gamut of activities involved in conducting the Common Wealth games, the presence required would obviously be much lesser compared to FOWC in its own context. The complexity and length of time in two different sporting events in itself cannot weaken the argument that for carrying out the assigned business, it had an identifiable place of business at its disposal, and the duration itself and the degree of permanence was for as much time as its business required. The length of time has to be necessarily tied to the nature and requirements of the business under consideration. And, in this case the nature of the project required a continuous effort till the games were over and even later. 9.7 As pointed out by the Revenue, with reference to Sch. 2, that the various clauses therein indicate the tasks performed by the Applicant, including providing 3 phase supply, multiple synchronized generators, mains distribution and mains cabling, till its equipments were handed over or shipped. All these were part of the turnkey project, and hence to say that it provided services only during the opening and closing services is incorrect. All these services were an integral part of the project, and covered a much longer period. In fact the project continued to a much later date, when all the facilities were either handed over or shipped. Besides, Sch. 2, in the General Conditions also requires the Applicant to provide ongoing maintenance presence that can service, rectify or repair any supplied item. This presence shall be available on call at any time from the 20 AAR/1330/2012

21 supply to the final removal of the goods. It is also seen from Sch. 1, that Insurance was taken by it for the period from the date of signing the Agreement till 31 December 2010, that is the entire project was spread over a sufficiently long period of time comprised in the preliminary, preparatory, actual display, and winding up operations. 9.8 There are some other clauses in the Agreements also, which indicate that the Applicant had a PE in India. One is that the Applicant subcontracted some of its activities. In our view this is clearly indicative of the fact that the Applicant had an address, an office, from which it could call for and award subcontracts. It is difficult to assume that without any premises under its control, it could hire and house key technical and other personnel, who would need regular and ongoing instructions during the entire period. Besides, subcontracting its works, i.e. a foreign company entering into contracts for the purpose of its business in a contracting state, and employing technical and other manpower for use at its site, was an extension of the foreign entity on Indian soil, as referred to in the case of Vishakhapatnam Port Trust, mentioned by the Applicant As per certain clauses of the agreement, the Applicant was to take comprehensive insurance of its equipments. The Applicant says it is not understood as to how this would constitute a PE. In our view, this is surely indicative of the Applicant having a fixed place of business,that is where it keeps, assembles and creates the end products. No insurance company would insure any equipment, structures etc. against any risk of fire, damage or theft, unless the place was safe and in exclusive custody andat the disposal of the customer, and in a well-defined address or physical care. And even after installation, they are at its sole disposal and control so it could effectively and efficiently discharge its obligations of 21 AAR/1330/2012

22 lighting etc. at the ceremonies. Goods are not ordinarily insured when lying at a third person s premises Similarly, the fact that it was mandatory for the applicant to acquire all authorizations, permits and licenses is indicative of the fact that it had a definite place at its disposal, as it could otherwise not be made liable for any default in the absence of the same. Again, it is inconceivable, in fact impossible that the Applicant could have carried out fabrication, maintenance and repair functions, or even operate the same at the opening and closing ceremonies at / from a premises in someone else s control and custody. 9.9 In conclusion it has to be said that the Applicant had indeed met each of the criterion for establishing a PE, as enumerated by itself, namely place of business, power of disposition, permanence of location, business activity and business connection which cumulatively and collectively are the sine qua non of a PE. In view of this position, the Applicant s income arising from this PE was chargeable to tax in India as business income, and will be dealt with as per the provisions of Article 7 of the India Belgium DTAA. 9.10The above income is also covered within the meaning of section 9(1)(i) of the Income tax Act 1961, since the same has arisen and accrued from a business connection, which is wider in scope than a PE, and from a source in India. 10. Since we have held above that the income of the Applicant is taxable in India having been earned through a PE, as also under the Income tax Act, yet, it is important to know, whether the same would be taxable in India as Business Profits, or as Royalty and FTS earned through that PE. The same is dealt with in answer to the averments of both the Applicant and the 22 AAR/1330/2012

23 revenue, as put forth in their written submissions and during the course of these proceedings The term royalties as used in clause (a) of paragraph 3 of Article 12 of the India Belgium DTAA, means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trademark, design or model, plan, secret formula or process, or scientific equipment or for information concerning industrial, commercial, or scientific experience. Referring to Model Conventions, Klaus Vogel in his Double Taxation Conventions, states that in principle, royalties in respect of licences to use patents and similar property and similar payments are income to the recipient from a letting. This implies that the intangible asset, the IPR remains with the service provider, but the right to use the same may be granted or let to someone for a consideration, which would be receipt in the nature of Royalty We find that this matter has been dealt with by us at length in the case of AnapharmInc, in an earlier ruling, as relied upon by the Applicant. In that case the applicant had carried out various tests and prepared a final report which was transferred to the client for a consideration. However, the information concerning the scientific or commercial experience of the applicant or relating to the method, procedure or protocol used in conducting these bio-equivalence tests was not imparted to the clients and the consideration was not paid for that purpose. From the final report, the client could not find out the method, procedure or protocol used in conducting the tests. Hence, the payment received could not be termed as royalty. Citing Klaus Vogel, it was clarified that a contract for provision of know how was different from that of providing services. 23 AAR/1330/2012

24 10.3 Revenue has missed this vital distinction between a consideration received for assigning the rights for the use of the final product on the one hand, and for assigning the rights to use the knowhow, technical experience, skill, processes and methodology, ie. the intellectual component involved in creating the final product on the other hand. Giving the right to use the final product would lead to business income, and not royalty In the case at hand, as per Sch. 2: Scope of Work, the Applicant is providing services of lighting/searchlight and also earns rental for the supplied items, installation, maintenance, dismantling etc. Vide the Deed of Assignment, clause 3, the Applicant assigns to Delhi 2010, all the rights, title and interest, etc. in (a) any materials, works and other subject matter created or supplied by it, and / or by its personnel for use in the Games; and also (b) the results and proceeds of all other activities (together known as the Works ) undertaken in connection with the games. Clause 4 allows Delhi 2010 to deal with the Works in any manner. In Clause 5 the Applicant agrees to disclose all the Works and provide the same to Delhi 2010, as also transfer the title to the same to Delhi Thus what has been assigned are the rights to use the final product, the Works, ie.providing equipment and services, including lighting, sound, video and LED etc., for use of the Delhi 2010, and for which the consideration has been received by the Applicant.There is no assignment of any right to usethe knowhow, technical experience, skill, processes and methodology, or even the copyright, patent, trade mark, design or model, or any intellectual input comprised therein. These have only been used by the Applicant itself in creating the final product, the equipment andservices. Delhi 2010 cannot and does not get to know how they were designed or developed, or acquires any knowledge of any intellectual input, nor is it enabled or empowered to do that work by itself in future. It may be 24 AAR/1330/2012

25 mentioned that in events of this nature, it is usual to assign the exclusive rights to the client to use the equipment and services, to keep intact the element of uniqueness and noveltyin experiencing the lighting display. But how this experience was created remains a trade secret with the creator of the same. Hence, the payment received as a consideration for the services rendered and equipment etc. supplied does not constitute Royalty. 11. As regards fees for included services, both the Applicant and the Revenue agree that the consideration received did not constitute fees for included services, although for different reasons. We do not agree with the Applicant that the services rendered were of a standard nature, since they were one of a kind, customized for use by a particular customer, Delhi We also do not agree that they were not technical in nature. As against the use of telephony and cell phone services for use of the public at large, as referred to in the case of Skycell Communications, from which the Applicant has taken support, here is a case where the services of lighting, search lights, LED technology etc. were provided by the Applicant along with technical personnel to operate the same during the opening and closing ceremonies of the games. The same did not involve mere pressing of a button and receiving the service, but were complex and could not be availed without the assistance of highly trained technical personnel, as they were not routine and mechanical, as stated by the Applicant. Also, rendering does not necessarily imply going on forever. As long as the Applicant was present in India it was rendering these services, till the events, starting with the preparatory work, since the laying of cables, switching systems etc. were also highly technical in nature, and were part and parcel of the project. Even if we consider the final product, and the lighting display itself, the same were highly technical, complex and not such that the Delhi 2010 officials and staff could operate them on their own. 25 AAR/1330/2012

26 Hence, the services rendered were in the nature of technical services, as contemplated under the Act. 11.1However, when we consider the Applicant s submission with regard to the provisions of the India Belgium DTAC, read with its Protocol and also read with the DTAC between India and the Portuguese Republic, an issue separately raised by it in question number 2, we cannot escape from limiting the scope of Article 12, as applicable in this case. Since the Treaty with Portugal speaks of make available, in the context of the definition of fees for technical services, the same needs to be imported into the India Belgium Treaty, and the definition of fees for technical services needs to be re-examined in this light. 11.2In view of the above, we have to agree with the contention of the Applicant. Taking a restricted view of the term, it cannot be said that the Applicant had made available technical knowledge, experience, skill, knowhow or processes, which enable the development and transfer of a technical plan or technical design, and which enable the person acquiring the services to apply the technology contained therein. The services were not made available to Delhi 2010, in a manner that it acquired the knowhow or the ability to use it, or that the service rendered enabled or empowered it to carry out the task in future all by itself. Make available connotes that it should result in transmitting the technical knowledge such that the recipient could derive an enduring benefit and utilise the same in future on his own without the aid and assistance of the provider. In this case Delhi 2010 only utilised the services for its events during the Common Wealth Games, and the consideration was paid for the same. 11.3Hence, we have to agree that the consideration received by the Applicant for the technical services rendered could not be considered to be in the nature of fees for technical services as referred to in the India 26 AAR/1330/2012

27 Belgium DTAC and the Protocol thereto, as read with the DTAC between India and the Portuguese Republic, which would have otherwise been taxable under Article 12 and Article 7, as the Applicant has a PE in India. 12. In conclusion, since it has been held that the Applicant has a PE in India, within the meaning of paragraph 1 of Article 5 of the DTAC between India and Belgium, and further that the same was not in the nature of Royalty or Fees for included services, the consideration received by the Applicant forrendering lighting and searchlight services todelhi 2010, can only be held to be taxable in India as Business Profits, as per the provisions of Article 7, as also under section 9(1)(i) of the Income tax Act 1961, having accrued and arisen from its business connection and source in India. 13. The questions posed to us seeking an Advance Ruling, are accordingly answered as under, keeping in view the findings in the foregoing paras: 13.1Question number 1: Yes. The payments received by the Applicant for rendering lighting and searchlight services to OCCG, would be taxable in India, under the provisions of the Income tax Act Question number 2: Yes. The payments received by the Applicant for rendering lighting and searchlight services to the OCCG, earned through its PE in India, would be taxable as Business Profits under Article 7 of the India Belgium DTAC. The Ruling is accordingly given and pronounced on this 8 th day ofnovember, Sd/- (Ashutosh Chandra) Member(Revenue) Sd/- (R.S.Shukla) In-charge Chairman 27 AAR/1330/2012