R U L I N G (By Mr. A. Sinha )

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1 BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME-TAX) NEW DELHI Friday, the 29 th Day of May, 2009 P R E S E N T Mr. Justice P.V. Reddi (Chairman) Mr. A. Sinha (Member) Mr. Rao Ranvijay Singh (Member) AAR/Misc.03/2006 IN AAR/673/2005 Name of the applicant and : address Commissioner concerned Present for the Applicant Present for the Department Sri Ramachandra Educational and Health Trust (SREHT) No. 25, Sir C.V. Raman Road Alwarpet, Chennai CIT-Central-I, Chennai Mr. V. Jayaram, Chartered Accountant Mr. G.N. Pande, CIT, Chennai R U L I N G (By Mr. A. Sinha ) Sri Ramachandra Educational and Health Trust (SREHT), Chennai filed an application under section 245Q(1) of the Income-tax Act, 1961 ( the Act ) on It was stated in the application that SREHT was established in the year 1985 and it ran two institutions, namely, Sri Ramachandra Medical College and Research Institute which enjoyed the status of a deemed university, and Sri Ramachandra Hospital, a University hospital. The applicant entered into an agreement with the Harvard Medical International, Massachusetts, USA (HMI), for transfer of knowledge and experience in the field of medical sciences. The applicant stated that it was registered under section 12AA of the Act and HMI was 1

2 a tax exempt entity in USA. In the light of these facts, the applicant sought ruling of this Authority on the following question: Whether Tax is to be deducted by SREHT, India on the payments made on account of annual contract fee and additional fee to HMI, USA, when both the parties are exempt from tax in their respective countries. 2. Initially by an order dated , this Authority rejected the application at the stage of admission having regard to clause(i) of proviso to sub-section(2) of section 245R of the Act. Later, on a petition filed under Rule 19 of AAR(Procedure) Rules, 1996, the application was restored and the case has been heard on merits. 3. The question as reframed by the applicant after the restoration is as follows:- Whether, on the facts and circumstances of the case and having regard to the provisions of Article 12 para 5 of the Treaty for Avoidance of Double Taxation of Income and Prevention of Fiscal Evasion between India and the USA, the applicant is required to deduct tax at source U/s. 195 of the Annual Fees payable to Harvard Medical International, USA, especially when both the payer and payee are not liable to tax in their respective countries? The case of the applicant is that, HMI will be practically rendering all the services to the applicant from USA. Being a non-resident, HMI is not liable to tax under section 9 of the Act in respect of the services rendered in USA. It is also stated that HMI has no place of business in India. The applicant also relies on article 12 of the agreement for avoidance of double taxation of income between India and USA ( DTAA ). According to the applicant, para 5(c) of article 12 of DTAA excludes the amounts paid for teaching in or by educational institutions from the purview of included services. According to the applicant its case falls within the purview of article 12. 5(c). To substantiate this proposition, the applicant refers 2

3 to examples 10 and 11 given in the Memorandum of Understanding (MOU) appended to DTAA concerning fees for included services in article 12. The applicant states that since HMI is not liable to pay tax in India, the question of deduction of tax at source does not arise. 4. The Revenue states that though the applicant is exempt under section 12AA, HMI is not an exempt body under the Act. Further, the fees payable by the applicant to HMI falls within the purview of section 9(1)(vii) of the Act read with the explanation appearing below sub-section(2). It is pointed out that the annual fees payable to HMI is described as annual alliance development and administrative / maintenance fee which is not wholly for teaching in or by educational institution. As such, this payment shall be outside the purview of para 5(c) of article 12 of DTAA. It is also stated on the basis of a correspondence of HMI that tuition fee paid in respect of Dr. Sanjeeva Reddy in the role of observer/learner at the University and the tuition fee paid in respect of Dr. Bhaskara Reddy would be covered under the head Program Deliverables. This would show that the consideration is paid for making available technical knowledge, experience, skill, know-how or processes to the applicant and the same is covered by article 12(4) of the DTAA. According to Revenue, the examples no. 10 & 11 of the MOU are not at all applicable in the present case. 5. For giving ruling on the question put forth before us by the applicant, it will first be necessary to ascertain the taxability of the fees being paid to HMI. Section 195 requires that any person who is paying any sum chargeable under the Act, inter alia, to a foreign company, shall at the time of making payment deduct income tax thereon at the applicable rates. It is well settled that taxes are 3

4 deductible at source from income chargeable under the Act. Where the income is not chargeable to tax, the question of any deduction at source would not arise. 6. We may first look into the contractual arrangement between the applicant and HMI. The two entered into an agreement initially on for interinstitutional alliance with a validity period upto On the expiry of the said agreement, another agreement, namely the First Amended and Restated Memorandum of Agreement, was entered into on which also expired on Thereupon, the parties entered into the Second Amended and Restated Memorandum of Agreement on with a validity period of five years. As this agreement is said to be in force, its provisions are relevant for the present consideration. 7. As per article 1 of the agreement, HMI is to render educational and teaching services to the applicant. The specific services to be rendered during a year are to be decided in advance and an annual programme in this regard is to be drawn by a joint team comprising the representatives of the applicant and HMI. In case the applicant desires HMI to render additional services, that will also be worked out mutually by the parties. The services forming part of the annual plan are referred to as deliverables and the additional services, as additional deliverables. Article 2 obliges the applicant to pay an annual fee of US$ 250,000 in two equal instalments in January and June in respect of the deliverables. Apart from this payment, additional fee is payable for additional deliverables. While making these payments, the applicant shall not deduct taxes or any other levies. Article 4 deals with intellectual property. HMI owns copyright, trade-mark, trade secret, patent, etc., connected with the services it renders to the applicant. This 4

5 article states that HMI grants non-exclusive, non-transferable licence to the applicant for use of those rights, including use of HMI name, marks, logos and designs during the agreement period. Though it also states that such licence shall be royalty free, but as we shall see later, it is not so. The applicant has also filed copies of some invoices showing payments made to HMI under the agreement. The invoices show these payments to have been made towards annual alliance development and administrative fee. These are lump sum payments. No itemwise break-up of the services covered under the annual fee are indicated in the invoices. The invoices do not make reference to deliverables and additional deliverables. The amounts shown in the invoices thus cover consideration for the whole range of services. 8. We observed that the facts of the case as indicated in the application are very sketchy. We pointed this out, during the course of hearing, to the representative of the applicant and asked him to file additional statement of facts. In response, he filed written submission on The written submissions do not give a comprehensive picture and the precise nature of the relevant programmes. Though the agreement contemplates drawing up an annual programme plan it is not clarified whether such plan was actually drawn up and, if so, what are the details thereof. However, a list of activities that took place during in pursuant to the agreement has been given. This list is captioned Report of activities of Harvard Liaison Committee. We observe that the activities that took place during the said period are broadly classifiable into three categories, namely, CME Programmes, Faculty-Student Exchanges and Telemedicine. Under CME Programme the following events took place 5

6 Two day programme titled Practimed-2004 held on 13 & 14 March, This event was organized in association with HMI, New England Journal of Medicine and Association of Physicians of India. Two day workshop on Leaders in Medical Education (LME) held on 25 & 26 January, This was attended by 40 participants from various medical colleges across India including deans and curricular chairs across the nation. Course directors were teachers in HMI. Three day Faculty Development Workshop held on January, medical teachers from all over India attended the workshop. Course directors were teachers from HMI. One day CME Programme on Advances in Prevention of HIV/AIDS held in January, The speakers were from various U.S. Universities. Three day programme for Teaching and Learning Clinical Competency held on January, Three day Annual Workshop for Leaders in Medical Education held on January, 2005 which was attended by 34 participants from various medical colleges located in Southern India. The course directors were from HMI. Three day workshop on Leaders in Healthcare Management held on February, 2006, attended by 36 participants, including administrators and directors from various healthcare and medical institutes. Two day Annual Faculty Development Workshop held on 13 & 14 February, 2006 and attended by 43 participants from various medical colleges. Under the Faculty -Student Exchanges, Dr. Suresh, Principal, Sri Ramachandra Dental College visited the Harvard Medical School and interacted with the Dean in order to promote exchanges between the two institutions. Joan Anniee Della Jos Parambi, Vishnu Vardhan, Nisha Nahar, PSS Ghenslyan, Srikanth Sarkar, J.K. Ahuja and Dr. Aarti Sabanayagam went to the Harvard Medical School for doing clerkship. Telemedicine is described as a continuing programme of monthly tele-medical education. A list of speakers and the topics they spoke on during the period has also been given. The topics include pre-operative evaluation, advances in minimally invasive surgery, update on 6

7 osteoporosis, childhood epilepsy, modes of ventilation, etc. It is stated that this low-cost educational event has benefited many practitioners, post-graduates and students. E-learning has been stated in the application as one of the activities. Apart from this, HMI also helps the applicant in institution building through programmes in education, clinical care and research. 9. A letter dated 26 th May, 2005 of Internal Revenue, Department of Treasury, USA addressed to HMI has been filed. This letter states that HMI is currently exempt from federal tax under section 501(c)(3) of the Internal Revenue Code and is also classified as public charity under section 509(a)(3) of the said Code. We find that HMI is an incorporated entity which has been specifically exempt from tax in USA. As such, it can invoke the provisions of DTAA. Revenue has also not disputed this position. The case of the Revenue is that the income derived by HMI under the contract would attract article 12.4 as it would be in the nature of fees paid for making available technical knowledge, experience, skill, know-how or process. Revenue says that paragraph 5(c) of article would not be attracted, as annual alliance development and administrative/maintenance fee is not purely for teaching in or by an educational institution The relevant provisions of article 12 of DTAA are given below: ARTICLE 12 - Royalties and fees for included services 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed : 7

8 (a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article [other than services described in sub-paragraph (b) of this paragraph] : (i) during the first five taxable years for which this Convention has effect, (a) 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub-division or a public sector company ; and (b) 20 per cent of the gross amount of the royalties or fees for included services in all other cases ; and (ii) during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services ; and (b) in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services as defined in this Article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this Article, 10 per cent of the gross amount of the royalties or fees for included services. 3. The term royalties as used in this Article means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof ; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article For purposes of this Article, fees for included services means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 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. 5. Notwithstanding paragraph 4, fees for included services does not include amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a) ; (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic ; (c) for teaching in or by educational institutions ; (d) for services for the personal use of the individual or individuals making the payments ; or 8

9 (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services). 6 to 8 xx xx xx xx xx xx xx Article 12 deals with Royalties and fees for included services. Fee for included services has been defined in paragraph 4 of this article to mean payments made in lieu of technical or consultancy services. Paragraph 5 excludes certain items from the purview of fee for included services. The amounts paid for teaching in or by educational institution is one such item under clause(c). Thus the fees paid for teaching by or in an educational institution will not be regarded as fee for included services and, as such, will go out of the scope of article Teach has been defined in Black s Law Dictionary(6 th Edition) as follows: Teach. To impart knowledge by means of lessons; to give instruction in; communicating knowledge; introducing into or impressing on the mind as truth or information, and may be done as well through written communications, personal direction, through the public press, or through any means by which information may be disseminated, or it may be done by the adoption of sentiment expressed or arguments made by others which are distributed to others for their adoption and guidance. In the New Shorter Oxford English Dictionary, teaching has been defined as The action of teaching; the imparting of information or knowledge; the occupation, profession, or function of a teacher. Teach and teaching have been defined above in their widest sense. Teaching in an educational institution is conducted in connection with some course run by that institution and it leads to award of certificate, diploma or degree at the end of the course. Teaching is done by and large in accordance with the syllabus of such course through appropriate methodology. Teaching by an educational institution connotes that knowledge is imparted or instruction is given through the media of another educational institution which has specialized knowledge and resources. It 9

10 is to be noted that the teaching contemplated by the treaty need not be confined only to class-room teaching or practical demonstrations provided to the students. It can extend to seminars, workshops, video conferencing and electronic media in which the students of institution are primarily associated Examples 10 and 11 of the MOU to the treaty may be usefully referred to: Example 10 Facts : An Indian automobile manufacturer decides to expand into the manufacture of helicopters. It sends a group of engineers from its design staff to a course of study conducted by the Massachusetts Institute of Technology (MIT) for two years to study aeronautical engineering. The Indian firms pays tuition fees to MIT on behalf of the firm s employees. Is the tuition fee a fee for an included service within the meaning of Article 12? Analysis : The tuition fee is clearly intended to acquire a technical service for the firm. However, the fee paid is for teaching by an educational institution, and is, therefore, under paragraph 5(c), not an included service. It is irrelevant for this purpose whether MIT conducts the course on its campus or at some other location. Example 11 Facts : As in example 10, the automobile manufacturer wishes to expand into the manufacturer of helicopters. It approaches an Indian university about establishing a course of study in aeronautical engineering. The university contracts with a U.S. helicopter manufacturer to send an engineer to be a visiting professor of aeronautical engineering on its faculty for a year. Are the amounts paid by the university for these teaching services fees for included services? Analysis : The fees are for teaching in an educational institution. As such, pursuant to paragraph 5(c), they are not fees for included services. In example 10, the engineers are sent to a 2 year course in aeronautical engineering conducted by Massachusetts Institutes of Technology (MIT). The tuition fee paid is regarded as fee paid for teaching in MIT and falling under paragraph 5(c). In example 11, the fee is paid to the visiting professor for 10

11 teaching in an Indian university in connection with a course of aeronautical engineering. Both the above examples deal with a course in aeronautical engineering in an institution/university, which will lead to award of degree to the successful candidates. In one case tuition fee is paid, and in the other case, fee is paid to the visiting professor, both of which have been regarded as falling in paragraph 5(c) and so excluded from fees for included services. 11. From the facts made available by the applicant, a clear picture of the activity and payments does not emerge. We will, therefore, lay down some broad guidelines. So far as the activities of workshops and seminars are concerned, these are shown to be conducted from time to time. The speakers are generally, but not always, from HMI. Medical teachers, professionals, etc., from different places come and participate in these events. It is not known whether these workshops and seminars are connected to a particular course of study run by the medical college of the applicant and whether they are meant to benefit the students. These activities could be regarded as teaching in or by an educational institution as contemplated in paragraph 5(c) of article 12 if only there is participation of the faculty from HMI and some of the participants who benefit by it are pursuing medical courses in the applicant s institution and the seminar/workshop is substantially connected with the course of studies in the college. As regards tuition fees paid in respect of scholars sent to do some course in MIT, it is clearly covered by example 10 of the MOU. As such, it falls under paragraph 5(c) of article 12 and is excluded from the purview of fees for technical services. Regarding teleconferencing and e-learning, as it appears to be part of teaching methodology, the payments made for them would qualify for exclusion 11

12 under paragraph 5(c) of article 12. Similarly, the payment made to faculty members for teaching through teleconferencing and other modes of e-learning will also come under paragraph 5(c)of article 12. If the fee paid includes consideration for intellectual property, if any, made available to the applicant, the same is not covered by article 12.5(c). As the applicant makes lump sum payment for various services rendered by HMI, it is not possible for us to say what amount relates to which particular service. On the whole, we would like to observe that the fee paid to HMI at least partly is relatable to the teaching in or by educational institution. 12. In the light of the above discussion, we cannot give ruling that the applicant is not at all liable to deduct any tax at source in respect of the payments made to HMI. It depends on further scrutiny by the appropriate authority in the light of observations made herein. The applicant may make an application to the assessing officer in terms of sub-section(2) of Section 195 of the Act for determination of the appropriate proportion of such payment which would be chargeable to tax. Upon such determination, the applicant shall deduct tax on that portion of the payment which is chargeable to tax. th Pronounced on this the 29 day of May, Sd/- Sd/- Sd/- (A. SINHA) (P.V. REDDI) (RAO RANVIJAY SINGH) MEMBER CHAIRMAN MEMBER F.No. AAR/Misc.03/2006 Dated: This copy is certified to be a true copy of the advance ruling and is sent to: 1. The Applicant. 2. The CIT-Central-1, Chennai 3. The Joint Secretary (FT &TR-I), M/o Finance, CBDT, Bhikaji Cama Place, New Delhi 4. The Joint Secretary (FT &TR-II), M/o Finance, CBDT, Bhikaji Cama Place, New Delhi 5. Guard File. (Batsala Jha Yadav) Addl. Commissioner of Income-tax (AAR) 12

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