[By Honble Chairman]
1. In the application for advance ruling filed under section 245Q of the Income-tax Act, 1961 (for short âthe Act), the following facts are stated:
1.1. The applicant, Joint Accreditation System of Australia and New Zealand is a not for profit, self funding organization established under the Treaty between Government of Australia and New Zealand on 30.10.1991. It has been accorded the status of an international organization by virtue of the law made by both the nations. The applicant is a tax resident of Australia and to confirm this, a certificate issued by the Australian Revenue Authority has been enclosed.
1.2. The applicant provides accreditation to CABs (Conformity Assessment Bodies) in several countries including India. The applicant accredits organizations which provide third party certification and/or inspection services. The main function of the applicant is to accredit, following the successful assessment, those bodies considered competent and impartial to provide an effective service in various spheres. The applicant offers accreditation mainly for the following programmes:
âManagement Systems Certification â AS/NZS ISO 9001, AS/NZS ISO 14001;
Production certificate â codemark, watermark;
Personnel certification;
Inspection; and
Greenhouse Gas validation and verification
1.3. The applicant has furnished a summary of the complete accreditation process as follows:
| Application Receipt and Processing | Formal applications are received and processed |
| Systems Assessment | A review of the applicants documentation is undertaken against the appropriate criteria |
| Compliance Assessment Stages 1 and 2 | An assessment to ensure that the documented procedures are being adhered to. Stage 1 â the assessment of the applicants offices; and Stage 2 â the witnessing of an applicant undertaking activities for which they are seeking accreditation |
| Approval of accreditation | The audit report is reviewed by the Accreditation Review Panel for decision on whether accreditation is to be granted |
| Surveillance Assessments | When accredited, the body will be subjected to surveillance audits to ensure ongoing compliance with the appropriate accreditation criteria |
| Re-assessment | The body is subjected to re-assessments where their quality system is comprehensively re-assessed. The periodicity is generally four years however this may vary from program to program. |
The adequacy of the CABs management to run its systems and reach proper conclusions as to awarding certification;
The range of knowledge and experience on the part of the CAB, relevant to the proposed scope of accreditation;
The number and seriousness of the individual non- conformities found during the assessment stage;
The effectiveness of the system in meeting the requirements of the accreditation criteria; and
Reliance that can be placed on the internal assessment function with the CAB.
1.5. If the accreditation is approved, a certificate of accreditation is issued to the CAB; otherwise the reasons for rejection are communicated. The Accreditation vouchsafes the independence of a CAB in performing the certification and such accreditation further assists the CAB in the fields of certification and inspection. Once accreditation is granted to CAB, the applicant issues a certificate which is valid for four years and on expiry of four years, the re-assessment takes place. Post accreditation, regular surveillance visits are carried out by the applicants auditors to ensure that CAB maintains and operates its procedures in accordance with the requirements of the accreditation criteria.
1.6. The accredited CABs provide certification and inspection services to the concerned organizations. Common schemes that CABs certify are â quality management systems and environmental management systems.
1.7. In consideration of the accreditation work done by the applicant, it receives fee from CAB in the form of application fee, programme fee, certificate fees and fee for conducting surveillance audit, witnessing audit and re-assessment visits. Sample invoices raised by the applicant for various activities as stated above have been enclosed to the application.
1.8. If an Indian CAB wishes to get accreditation from the applicant it has to undergo the entire procedure as outlined above and the revenues would flow from such Indian CAB to the applicant.
2. Having regard to the above facts presented by the applicant, the following questions are formulated in order seek advance ruling:
1. Whether the consideration received/receivable by Joint Accreditation System of Australia and New Zealand (applicant) from the Conformity Assessment Bodies (CABs) can be classified as âfees for technical services as defined under section 9(1)(vii) of the Income-tax Act, 1961 (âAct)?
2. If the answer to the above question is in the negative, whether Article 12 of the Double Taxation Avoidance Agreement between India and Australia (âIndia-Australia Tax Treaty) can impose a liability for taxation on the applicant?
3. If the answer to the first question is in affirmative, whether the services rendered by the applicant fall within the ambit of âroyalties as defined under Article 12 of the India-Australia Tax Treaty?
4. If the answers to the first and third questions are in affirmative, whether the income of the applicant from Royalty or fees for technical service should be taxed in India according to the provisions of section 115A(1)(b)(AA) or (BB) (relatable to agreements made on or after 1st day of June of 2005) of the Act, in view of the provisions of Article 12(2) of the India-Australia Tax Treaty?
5. Whether the visits of the personnel of the applicant for conducting the On-site Assessment and Witness Audit constitutes/deems existence of applicants permanent establishment (âPEâ) in India in accordance with the provisions of Article 5 of the India-Australia Tax Treaty?
6. Where the services rendered by the applicant are not in the nature of âroyalties as defined under Article 12 of the India-Australia Tax Treaty and the applicant does not have a PE in accordance with Article 5 of the India-Australia Tax Treaty, are the payers required to withhold tax at source from the payments to be made to the applicant?
3. Question nos. 1, 3 and 5 are pressed before us. Regarding question no. 1, it is the contention of the applicant that no service is involved in the activities of the applicant and the receipts from the Indian CAB cannot be categorized as âfees for technical services within the meaning of Section 9(1)(vii) of the Act. It is further contended that the applicant does not in any case render any technical or consultancy services which make available technical knowledge, experience, skills, know-how or process within the meaning of clause (g) of Article 12.3 of the Tax Treaty between India and Australia. In the absence of permanent establishment in India or any business connection in India, it is contended that the applicant is not liable to pay tax in India.
4. Before proceeding further, it is relevant to refer to certain definitions and recitals in the Agreement entered between Australia and New Zealand concerning the establishment of the Joint Accreditation System (the applicant).
4.1. In the preamble it is recited that the parties (i.e. Australia and New Zealand) recognized the fact âthat their participation in a joint accreditation system will enhance trade between Australia and New Zealand and promote improved export opportunities and international trade for Australia and New Zealand producers of goods and services as well as improved national market opportunitiesâ.
4.2. âAccreditationâ is defined as:
âAccreditationâ means the procedure by which an authoritative body gives formal recognition that a body or person is competent to carry out specific tasksâ
The expression âassessmentâ means, all activities related to the accreditation of an organization to determine whether the organization meets all the requirements necessary for granting accreditation, and whether they are effectively implemented, including documentation review, accreditation audit, preparation and consideration of the accreditation audit report and other relevant activities necessary to provide sufficient information to allow a decision to be made as to whether accreditation shall be granted.â
4.3. The objective is stated to be that the maintenance of a joint accreditation system will give users in Australia and New Zealand, confidence that goods and services certified by accredited bodies meet established standards. Another object is to undertake or provide for conformity assessment (in various countries). The Agreement spells out the composition of the bodies managing the joint accreditation system and the functions of those bodies.
5. The expression fees for technical services is defined in the Explanation to Section 9(1)(vii) of the Income Tax Act which reads as under:
The term âfees for technical servicesâ means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provisions of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like projects undertaken by the recipient or consideration which would be income of the recipient chargeable under the head âsalariesâ.
5.1. The clause corresponding to Section 9(1)(vii) is found in clause (g) of Article 12.3 of DTAA between Government of India and Government of Australia dealing with royalties. The relevant portion of Article 12.3 is extracted hereunder:
5.2. The term âRoyalties â in this Article means payments of credits, whether periodical or not, and however described or computed, to the extent to which they are made as for consideration for:
(a) the use of, or the right to use any copyright, patent, design or model, plan, secret formula or process, trade mark or other like property or right;
(b) the use of, or the right to use, any industrial, commercial or scientific equipment;
(c ) the supply of scientific, technical, industrial or commercial knowledge or information;
(d) the rendering of any technical or consultancy services (including those of technical or other personnel) which are ancillary and subsidiary to the application or enjoyment of any such property or right as is mentioned in sub-paragraph (a), or any such equipment as is mentioned in sub-paragraph (b) or any such knowledge or information as is mentioned in sub-paragraph (c);
(e) the use of, or the right to use;
(i) motion picture films;
(i) films or video tapes for use in connection with television; or
(ii) tapes for use in connection with radio broadcasting;
(f) total partial forbearance in respect of the use or supply of any property or right referred to in sub-paragraphs (a) to (e);
(g) the rendering of any services (including those of technical or other 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 design;
but that term does not include payments or credits relating to services mentioned in sub-paragraphs (d) and (g) that are made;
(h) for services that are ancillary and subsidiary and inextricably and essentially linked, to a sale of property;
(i) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the ope5ration of ships or aircraft in international traffic;
(j) for teaching or by an educational institution;
(k) for services for the personal use of the individual or individuals making the payments or credits; or
(l) to an employee of the person making the payments or credits or to any individual or firm of individuals (other than a company) for professional services as defined in Article 14.â
6. The contention of the applicants authorized representative is that the accreditation fee cannot be characterized as fee for technical services (FTS) within the meaning of the expression in Section 9(1)(vii) of the Act or as royalty within the meaning of the clause (g) of Article 12.3 of the Tax Treaty. With reference to FTS in the Act, it is contended that the applicant has not rendered any service to the customer (CAB). The job undertaken by the applicant is not in the nature of assistance provided to CAB and moreover the applicant does not act according to the instructions or modalities set by the recipient of the so called service. The issuance of the certificate after the applicant is satisfied that the CAB will be able to perform the relevant function (of certification and inspection) competently and independently and the discretion of the applicant to refuse the certificate for non-compliance with certain parameters would indicate that there is no contract of service between the applicant and the CAB.
Though we find considerable force in the above contention of the applicant, this Authority is inclined to rest its decision on the relevant treaty provision, i.e., Article 12.3(g) of the DTAA. If the case of the applicant does not fall under clause (g) of the Treaty dealing with the rendering of technical services, the applicant is entitled to take advantage of the same by reason of Section 90(2) of the Act coupled with the well settled principle that the treaty provision in the DTAA would prevail over the provision in the domestic enactment. Therefore, it has to be seen whether the applicant can be said to have rendered technical service of the description falling under clause (g) of Article 12.3 of the DTAA by issuing accreditation certificate to CAB. If the answer is in negative, the liability to tax can also not be fastened on the applicant in the absence of a permanent establishment or business connection in India. Therefore, the only aspect to be considered is whether applicant can be said to have undertaken any activity of the nature described in clause (g) of Article 12.3. There is no other clause in article 12.3 which can possibly be invoked by the Revenue.
7. On a deep consideration, we are of the view that the contention of the applicant has to be upheld and clause (g) of the Article 12.3 cannot be applied to the activity undertaken by the applicant. The scope and meaning of the Phrase âmaking available technical knowledge, experience, skill, etc. has been explained in more than one rulings of this Authority. We would like to quote the relevant passages in the case of Anapharm reported in 305 ITR 394.
âIt is, thus fairly clear that mere provision of technical services is not enough to attract Article 12(4)(b). It additionally requires that the service provider should also make his technical knowledge, experience, skill , know-how etc., known to the recipient of the service so as to equip him to independently perform the technical function himself in future, without the help of the se5rvice provider, in other words, payment of conside5ration would be regarded as Fee For Technical/included services only if the twin test of the rendering services and making technical knowledge available at the same is satisfiedâ.
The relevant passages in Intertek Testing Services India (Pvt) Ltd. (307 ITR 418)
âRendering technical or consultancy service is followed by a relative pronoun âwhichâ and it has the effect of qualifying the services. That means, the technical or consultancy services rendered should be of such a nature that âmakes availableâ to the recipient technical knowledge, know-how and the like. The services offered may be the product of intense technological effort and lot of technical knowledge and experience of the service provider would have gone into it. But, that is not enough to fall within the description of services which make available the technical knowledge, etc. 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 future without depending on the provider.â
âThe definition of FTS in India-UK DTAA is similar to one contained in India-USA DTAA. Paragraph 4(b) of Article 12 is similar to Article 13.4(c) of Indo-UK Treaty. The MOU appended to India-USA DTAA explains the scope of phrase âmake availableâ in the context of technical services as follows:
âGenerally speaking, technology will be considered âmade availableâ 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 provid8ing 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 product which embodies technology shall not per se be considered to make technology available.â
âTrue, the MOU relating to India-US Treaty in terms does not apply to the Indo-UK Treaty but when a similar expression found in another Treaty is interpreted and explained in a particular manner consistent with one shade of meaning that can be attributed to it, there is no reason why that interpretation shall be eschewed. In our view, the explanatory memorandum becomes a valuable aid in interpreting the phrase âmake availableâ. It reflects the Government of Indias viewpoint on the true connotation of the expression. It stands on a higher pedestal than the principle of contemporania expositio applied in several cases. Hence, the interpretation given in the MOU can be usefully adopted while dealing with a provision similarly worded.â
8. In the decision of Diamond Services International Ltd. Vs UOI (304 ITR 201), the High Court of Bombay held that the job of grading the diamonds in the laboratory and furnishing grading certificate did not amount to transferring any (technical) skill or knowledge to the customers. Nor did it amount to transfer of any industrial or commercial experience of the Company which issued the certificates.
9. Having regard to the view that has been consistently taken in various rulings, we accept in principle the contention of the applicant on the point of interpretation of the expression âmake availableâ occurring in Art. 13.4 of the Tax Treaty.
10. In the light of the above exposition of legal position concerning the scope of the relevant Article in the Treaty dealing with FTS, we are inclined to accept the contention of the applicant that there is no transfer of any skills or technical knowledge or experience, or process or know-how to the CABs on account of grant of accreditation to those entities. The skills, expertise or know-how possessed by the applicant for the grant of accreditation certificate cannot be said to have been made available to the CAB who gets the accreditation. What the applicant does is to evaluate and assess the capabilities, competence, potential and infrastructure possessed by the CAB in the light of certain set standards and parameters. The fact that the CAB is apprised of its shortcomings and deficiencies, if any, and that the CAB is given an opportunity to rectify, if possible, does not reasonably lead to the inference of âmaking available the skills, technical knowledge etc. possessed by the applicant to the CAB. CAB will, of course, be benefited by the accreditation certificate issued by the applicant but that fact has hardly any bearing on the point whether âmake availableâ criterion has been satisfied or not. Viewed from any angle, it cannot be said that the applicant is imparting any knowledge or skills to the CABs which are utilized by the CAB in conducting its business. The nature of activity undertaken by the applicant clearly rules out any such inference.
11. When once the application of âroyalty clause in Article 12 of the Treaty is excluded, the only possibility is to treat the income as business profits. But, on the facts presented by the applicant, it has no permanent establishment in India; therefore, by virtue of Article 7.1 of the Treaty, such profits cannot be subjected to taxation in India.
12. For the reasons aforesaid, the answer to the questions are as follows:
Question No.1: Need not be answered in view of the answer to question no.2.
Question No.2 and 3 are answered in the negative. The income derived does not fall within the âroyalty clause (which includes âfees for technical services) under Article 12 of the Treaty.
Question No.4: Need not be answered.
Question No.5: The answer is in the negative. No permanent establishment can be inferred on account of occasional visits of the applicants personnel for the purpose of on-site assessment and also in view of the fact that the applicant does not have a fixed place of business or PE in India and the visits of the applicants personnel were of less than 90 days in a 12 month period.
Question No.6: Answer is in the negative.
Question No.7: Need not be answered.
Accordingly, the Ruling is given and pronounced on this 6th day of August, 2010.