1 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 IN INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L , MUMBAI . . , , BEFORE SHRI G S PANNU, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER AND ITA No. : 7589/Mum/2012 (Assessment year: 2009-10) Van Oord Dredging and Marine Vs Addl. Director of Income-tax Contractors BV, (International Taxation)-Range-2, 2nd Floor, Central Plaza, First Floor, Room No.108, CST Road, Kalina, Scindhia House, Ballard Estate, Mumbai -400 098 Mumbai -400 038 .:PAN : AAACH 3500 M (Appellant) (Respondent) Applicant by : Shri Porus Kaka Respondent by : JShri N K Chand /Date of Hearing : 11-07-2016 /Date of Pronouncement : 07-10-2016 ORDER , : PER AMIT SHUKLA, J.M.: aforesaid appeal has been filed by assessee against final assessment order dated 30.10.2012, passed under section 143(3) r.w.s. 144C(13) in pursuance of direction given by Dispute Resolution Panel (DRP) under section 144C(5) vide order dated 29.09.2012, for assessment year 2009-10. In grounds of appeal, assessee has raised following grounds:- 1. On facts and in circumstances of case and in aw, learned AO, based on directions of DRP erred in making addition of Rs.24,80,29,144 (i.e. Management service fees of Rs.22,57,89,998 and reimbursement of 2 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 salary received Rs.2,22,39,146) to total income of Appellant. Taxability of Management service fees of Rs.22,57,89,998 2. learned AO/DRP erred in law and in facts, in holding that management service fees received by Appellant are taxable as Royalty under Article 12(4) of Double Taxation Avoidance Agreement between India and Netherlands ( India Netherlands Treaty ), thereby making addition of Rs.22,57,89,998 to income of Appellant. 3. learned AO/DRP failed to appreciate fact that services provided by Appellant are in nature of business support and administration services and are not in nature of sharing of information concerning industrial, commercial and scientific experience. 4. learned AO/DRP failed to appreciate that services rendered by Appellant are in nature of business support and administration services and not in nature of technical or consultancy services. 5. learned AO/DRP failed to appreciate that services rendered by Appellant do not make available any technical knowledge, experience, ski, know-how or processes and hence is not taxable in view of India Netherlands Treaty. 6. learned AO/DRP failed to appreciate fact that business support and administration service fees received by Appellant are without any markup and constitute pure allocation of cost which is not taxable as royalty nor Fees for Technical Services under Act. 7. learned AO/DRP failed to appreciate that for services rendered by Appellant to qualify as royalty, same should provide know-how to recipient. 8. learned AO/DRP erred in law and in facts, in holding that services rendered by Appellant involve development and transfer of technical pan or technical design. 9. learned AO/DRP erred in adopting approach based on unsubstantiated presumptions, surmises, allegations and without considering submissions (including case laws) put forth by Appellant, for 3 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 purpose of making addition to income of Appellant on account of management services fees. Taxability of reimbursement of salary received of Rs.2,22,39,146 10. learned AO/DRP erred in law and in facts in holding that reimbursement of salary expenses received by Appellant are taxable as fees for technical services under Article 12(5)(a) of India- Netherlands Treaty. 11. learned AO/DRP failed to appreciate fact that crew members provided on dredgers by Appellant is neither sharing of any experience and information concerning industrial, commercial and scientific knowledge and experience gathered over years by Appellant nor in furtherance of sharing such experience and information. 12. learned AO/DRP erred in appreciating fact that reimbursement of salary received by Appellant does not have any nexus with business support and administration services rendered by it. 13. learned AO/DRP erred in appreciate fact that reimbursement of salary received by Appellant are without any markup and constituted pure reimbursements which are not taxable as fees for technical services under Act. Set-off of unabsorbed depreciation of Rs.23,65,99,081 against additions made to income of Appellant 14. learned AO erred in law and in facts in adjusting unabsorbed depreciation of Rs.23,65,99,081 against additions made to income of Appellant being, Royalty and fees for technical services income taxable on gross basis without deduction of expenses and depreciation allowance. 15. learned AO failed to appreciate fact that no deductions and allowances under section 28 to 44C and section 57(1) are allowed against income taxable under section 115A of Act, on gross basis as Royalty and fees for technical services. 16. learned AO failed in appreciating that brought forward depreciation allowance for current year by 4 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 virtue of section 32(2) of Act and hence as per section 115A(3), cannot be absorbed/set-off against Royalty and fees for technical income taxable on gross income basis. Set-off brought forward business losses of Rs.5,55,14,086 against additions made in income of Appellant 17. learned AO erred in law in facts in adjusting brought forward business losses of Rs.5,55,14,086 against additions made as Royalty and fees for technical services income. 18. learned AO failed to appreciate fact that income earned by Appellant from rendering management services to its group entities or reimbursement of salary received will be classified under head Income from other sources . Accordingly, learned AO erred in setting off brought forward losses against income earned by Appellant under head Income from other sources . Initiation of penalty proceedings under section 271G of Act 19. learned AO erred in initiating penalty proceedings under section 271G of Act, which is applicable in cases of failure to furnish information or documents as required under section 92D of Act, without appreciating fact that international transaction entered by Appellant are not taxable in India. 20. learned AO erred in initiating penalty proceeding under section 271 G of act, without considering fact that no show cause notice for furnishing details with regard to appropriateness of documentation maintained for international transactions was issued to Appellant. Initiation of penalty proceedings under section 271BA of Act 21. learned AO has erred in initiating penalty proceedings under section 271BA of Act, which is applicable in cases of failure to furnish report under section 92E of Act, without considering fact that international transaction entered by Appellant are not table transactions. 5 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 Initiation of penalty proceedings under section 271(1)(c) of Act 22. On facts and in circumstances of case and in law, learned AO erred in law by initiating penalty proceedings under section 271(1)(c) of Act, when Appellant had made full and true disclosures both, in Return of Income and during assessment proceedings . 2. Thus, main issues which have been raised by way of aforesaid grounds are: Firstly, taxability of Management Service Fees of Rs.22,57,89,998/- received by assessee from its Indian entity as royalty under Article 12(4) of Indian- Netherlands Treaty; Secondly, taxability of reimbursements of salary received by assessee from Indian entity which has been taxed as fee for technical services under Article 12(5) of DTAA; Thirdly, set off of unabsorbed deprecation of Rs.23,65,99,081/- and set off brought forward of business losses of Rs.5,55,14,086/- against additions made to income of assessee. Lastly, grounds (nos.19 to 22) relating to initiation of penalty proceedings under various sections. last set of grounds are pre-mature and does not warrant any adjudication at this stage, therefore, as admitted by both parties ground nos.19 to 22 are to be treated as infructuous. 3. Brief facts and background of case are that, assessee, (hereinafter referred to as VODMC) is company incorporated in Netherlands and is eligible for benefits of 6 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 Indo-Netherland DTAA as per Article 4. VODMC is primarily international Dredging contractor and is engaged in business of undertaking capital dredging, maintenance of dredging projects and other dredging related activities. However, during year under consideration, i.e. AY 2009- 10 there were no dredging contracts executed by VODMC in India. Thus, assessee had not earned any income from contractual operations in India in relevant assessment year except for recovery of bad debts of Rs.50,00,068/-. VODMC had entered into Services Agreement with Van Oord India Private Limited (VOIPL), under which it has provided certain assistance and support on continuous basis to VOIPL in field of personnel and organization, operation support, quality, health, safety and environment, designated personnel offshore, information technology, estimation and engineering, marketing and administrative services in connection with operations of their business of marine construction and related activities. VODMC also provided certain crew members to VOIPL. In notes to Computation of income filed along with return of India, assessee had given following note: During financial year ended March 31, 2009, Van Oord Dredging and Marine Contractor BV (VODMC), Netherlands has provided certain business management to Van Oord India Private above services have been rendered entirely from outside India and no role is played by VODMC s Project Office, in rendering said services. Since, VODMC s Project Office has not played any role in rendering above services to COIPL, amount charged to VOIPL India has not been included in its books of accounts. For above services, VODMC has charged Rs.225,789,998 on VOIPL . 7 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 assessee s main contention had been that, services rendered in pursuance of service agreement are not in nature of FTS under Indo-Dutch DTAA, because there is no make available of any technical knowledge, experience, skill, know how or process, etc. That apart, it was stated that VODMC s project office has not played any role in rendering of any of above services, therefore, same are not attributable to its project office also and thus, on this ground also same is not taxable in India. assessee was required to furnish details and nature of business management services provided and basis of allocation of cost of services to Indian entity and was further required to justify, as to why same should not be held taxable in India. In response to same, assessee filed its detailed reply vide letter dated 18.11.2011, content of which has produced by Ld. Assessing Officer from his order from pages 3 to 8 of assessment order. Assessing Officer examined content of Service Agreement entered by VODMC and VOIPL on 1st April, 2004 and noted following relevant portion:- Service to be performed: During term of this Agreement, Service Company shall on continuing basis, provide Service Recipient Company with assistance and support in field of personnel and organization, operation support, quality, health, safety and environment, designated personnel offshore, information technology, estimation and engineering, marketing and administrative services in connection with operations of their business of marine construction and related activities. services to be 8 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 performed under this agreement shall include but not limited to:- Personnel and Organization Assistance and support in crew management, planning and administration functions and assistance in development of policies in respect of human resource; Operations support Assistance in ensuring that qualifying projects are commenced correctly through project co-ordination and costly errors are avoided or limited; Assistance in project execution and related activities; Quality, health, safety and environment Assistance in formulating business processes for organizational and project matters; Designated Personnel ashore Designating person ashore to maintain contract crew of ship and Service Recipient Company; Information Technology Providing information technology support during performance of project, support with respect to hardware and software and transformation of information; Estimating and Engineering Assistance in cost budgeting and engineering; Marketing Advice and support on marketing efforts, product information and support in public relations programs, marketing of product; Administration 9 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 Assistance in financial, accounting, auditing and insurance matters; and Legal Provision of advice and assistance in fiscal and legal matters. 2. Nature and Extent of services a) b) All services to be rendered by Service Company will be advisory and consultative and Service Recipient Company shall have final authority for implementation of advice and assistance received. Further, in no case shall Service Company be held responsible for outcome of implementation emanating from any advise provided by Service Company . It was also submitted by assessee that, assistance to Indian company was given for following stages in dredging contracts namely:- (i) Pre-bid stage; (ii) Bidding stage; (iii) Project operation/Execution stage; (iv) Post project completion stage. It was further contended that, cost of rendering services is accounted by VODMC and is subsequently allocated to various group entities based on turnover of each entity vis- -vis total turnover of Van Oord Group. It was thus stated that services fees are charged as percentage of turnover carried out by VOIPL during year without any mark up. 10 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 4. Ld. Assessing Officer after analyzing Service Agreement and submissions of assessee, observed that, Indian entity/VIOPL is totally dependent upon foreign enterprise for its experience in industrial, commercial and scientific field. In fact, starting from pre-bid stage assessee company is providing full support services till post project completion stage. Indian company is engaged in highly technical business of dredging activities for which it is completely dependent on parent company i.e. assessee company from pre-bid stage till post-project completion stage. assessee company is world leader in this business of dredging and related services and is sharing its experience and information which it has developed over decades for successful execution of contracts and business of Indian Company. Indian company is also en-cashing on brand name and experience of assessee company not only for procuring business and for its successful implementation as well. During course of assessment proceedings, assessee was asked to furnish documentary evidences in support of business management services, in response to which assessee vide letter dated 18.11.2011 has furnished all evidences. On going through same he observed that it is providing user manual having instructions along with technical design as to how folders are to be maintained regarding logon instructions, work place securities, accessing network drives, how to open archive along with technical designs and diagrams, etc. It also contains standard procedures for inspection, checklist of main equipments, project plan, safety walk, safety work report, drawing solution along with drawing have also been given. literature regarding marine 11 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 engineering solutions, main equipments and dredging solutions have also been given in detail along with terms and designs. This he inferred that it is nothing but sharing of experience of industrial, commercial and scientific in nature and hence payments received by assessee are to be treated as royalty under Article 12(4) of India-Netherland DTAA. He further held that, once these services are taxable as royalty then it is not required whether services have been rendered in India or not. 5. Regarding second aspect of reimbursement of salary expenses, Assessing Officer noted that, assessee company has received certain payments on account of reimbursement of expenses which were mainly salary incurred on personnel and staff on behalf of VOIPL for sums aggregating to Rs.2,22,39,146/-. In response to show cause notice assessee submitted that, salary paid by assessee on behalf VOIPL outside India could be broadly classified under following heads:- Salary to crew members of dredger Volvox Delta-for Rs.16,214,187; and Salary to crew members of dredger Volvox Atlanta-for Rs.6,024,959. Thereafter, employee-wise break-up of salary along with respective days of stay in India for crew members of Volvox Delta and Volvox Atlanta in India was submitted. It was contended that, stay of employee in all cases did not exceeded 90 days and, therefore, in view of provision of section 10(6)(viii), such salaries would not be taxable in India. assessee s submissions in this regard have been incorporated in page 14 of assessment 12 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 order. However, Ld. Assessing Officer regarding services held that service of providing crew on dredgers is in furtherance to sharing industrial, commercial and scientific experience under service agreement between VODMC and VOIPL and hence, reimbursement of salary expenses received by BODMC is taxable in India as FTS under Article 12(5)(a) of India-Netherlands DTAA. Accordingly, he taxed reimbursement of salary of Rs.2,22,39,146/- as fee for technical services . 6. aforesaid observations and findings on both issues by Assessing Officer have been upheld by DRP also. 7. Before us Ld. Senior Counsel, Mr. Porus Kaka after explaining entire facts submitted that, Indian Subsidiary, VOIPL came into existence in year 1997 and before that assessee was performing its work directly in India. assessee is one of leading dredging company in world and with objective to achieve consistency of approach and economies of scale for various group entities across globe, it provides ongoing assistance and support on continuous basis in field of quality, health & safety, information technology, estimating and engineering, marketing, administration, personnel etc. to all its group affiliates. Accordingly, VOIPL, which is subsidiary of VODMC in India, has entered into service agreement dated 1, April 2004 with VODMC in respect of said services which have been highlighted above. 13 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 8. After referring to various clauses given in Services Agreement , which are appearing at page 1 to 5 of paper book, he submitted that none of services provided any kind of use of or right to use of knowhow to Indian company. It was in nature of Standard Services and to ensure that there is consistency in approach world-wide and it meets international standards of assessee company. Though under agreement, compensation was based on mark-up but in actual no mark- up has been received by assessee nor has been claimed by Indian Entity, VIOPL. This fact, he submitted can be corroborated from certificate obtained from Auditors (Earnest & Young) who have certified on basis of actual verification of details and documents that only cost incurred by assessee in rendering to aforesaid services has been allocated to VOIPL and same has been received by way of reimbursement from said entity. In support, he has referred to Auditors report and certificate given at pages 9 to 11 of Paper-book. Based on these documents, working of cost allocation was given in following manner:- S Particulars Amount No. (a) Total Group Turnover of BODMC EUR 1,53,60,56,000 (b) Total General Administrative expenditure EUR 10,27,13,000 (c) Overhead Percentage =(b)/(a) * 100 6.7% (d) Total Turnover of BOIPL for FY 2008-09 INR 3,28,48,01,955 (e) Cost allocation to BOIPL = (d) * (c) INR 22,00,81,731 (f) Invoice raised by VODMC on VOIPL EUR 32,99,576.18 Thereafter, he drew our attention to various documents placed in paper book highlighting details and nature of actual services provided by assessee to VOIPL. said details and nature of services are being summarized with help of paper-book in following manner:- 14 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 S. Particulars Name of services Reference No. 1 Information Centralized team renders IT . IT User guidelines Technology Support services to VOIPL (Pages 12 to 38 of And group affiliates such Paperbook) as: . Sample . Assisting by providing: Correspondence Logon instructions; Between BOIP and IT workplace security; service desk of VODMC archiving emails; which demonstrates accessing network drives troubleshooting/ workplace restore support services . Assisting in IT infrastructure provided (Network, email, etc.) . Software maintenance services, . Troubleshooting services, etc. 2 Operational Various operating checklists . Checklists provided Support (formats)Are provided by VODMC by BODMC (please which Assists VOIPL is operational refer page 44 to 66 of Efficiency. E.g. Standard quality, Paper book) Health and safety standards e.g. Standard quality, health and safety standards e.g. safety walk report for equipment, boat, crew, offices etc. 3 Marketing VODMC provides marketing . Brochures (Please Support to VOIPL in various Refer page 67 to 75 Ways Viz. Of Paper book) .e-marketing through its website www.vanoord.com, updating and maintaining website for group . Printing and publishing Brochures which could be Distributed by VOIPL to its Potential clients . Obtaining certificate of Approval From Lloyds Register Netherland BV 4 Quality, . Conducting at regular intervals . Audit report for Health, Internal audits to determine internal audit Safety and Adherence to QHSE procedures conducted (Please Environ- . Increasing safety awareness refer page 75 to 83 of ment within Van Oord group Paper book) ( QHSE ) . Updating health, safety and environment policy to be followed by group. 5 Estimating VODMC provides need based . Copy of report from And support /assistance to VOIPL estimation and Engineering . Reports/study on nature of engineering Soil, nature of dredger to be department (Please used etc. refer to page 84 to 136 . Estimating cost for of Paper book) project 15 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 . Carrying out risk analysis. . Engineering support services And time to time technical advice in relation to projects carried out 6 Personnel . VODMC assists in providing pre- . Legal support for Bid And Organ- Bid, performance and other Submission letter to be isation Guarantees to clients of Submitted by VOIPL Adminis- VOIPL which assists BOIPL in (Please refer page 137 tration obtaining contracts. To 146 of and Legal . Assistance for finalizing Paper book) terms of contract to ensure that VOIPL From these documents and nature of services, he submitted that there is no providing of any knowhow or information concerning industrial, commercial or scientific experience. None of services or activities falls within ambit of royalty as defined in para 4 of Article 12 of DTAA. In support of his contention that imparting of knowhow is prerequisite condition for treating any information concerning industrial, commercial or scientific experience as royalty , he relied upon OECD commentary and specifically drew our attention to para 11. He submitted that providing of knowhow to recipient means that person should be able to make use of information independently on its own account without recourse to provider in future. In other words, recipient would be enabled to utilize knowhow for his own purpose without taking any assistance from provider. In case of assessee, continuous services which have been provided to VIOPL do not fall in any manner in realm of providing of any kind of knowhow but are purely in nature of services. Thereafter, with respect to each and every service provided by assessee he highlighted nature of services and functions provided and contended that none of these services leads to imparting of any knowledge, skill or 16 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 experience by way of information concerning industrial, commercial or scientific experience which can be said to be made available to VOIPL. In his brief following aspects have been highlighted by him qua services provided by assessee:- a) Information Technology: services are provided for use of group companies computer systems. IT teams prepared manual providing information and not secret information, which is available over internet. information provided is on method of using computer system and not on method of design or create computer system. recourse of helpdesk/troubleshooting services for certain issues are required on regular basis. Appellant-assessee can provide knowhow only when receipt is able to replicate or create computer system by itself. With changing technology these information is required to be updated from time to time on regular basis. No knowledge, skill or experience by way of information concerning industrial, commercial or scientific is made available to VOIPL. These FAQ s; how to login to system, charge password etc can never amount to transfer of knowhow. b) Operational support: Van Oord as group operates at high standard of safety, where ever it may operate. VODMC provides with checklist (format) for project plans, safely work and inspection plans. information in checklist is completed in India, by senior person working on project in India. It is not prepared/companied by VODMC. VIOIPL 17 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 has to apply its own mind while filing up information and no information has been passed by VODMC. These checklists required to be continually updated form time to time on regular basis. No knowledge, skill or experience by way of information concerning industrial, commercial or scientific is made available to VOIPL to create or update checklist themselves. There is no knowhow that is transferred to VOIPL. c) Marketing: VOIPL for marketing support is provided with printed/ published brochures which can be distributed to its potential clients. VODMC updates and maintains website of group as VOIPL does not have its own website. It also helps VOIPL to obtain certificate of approval (ISO certificates) from concerned organization viz. Lloyds Register Netherland BV. These services help VOIPL in obtaining contracts on regular basis and hence need to be performed regularly. No knowledge, skill or experience by way of information concerning industrial, commercial or scientific is made available to VOIPL not is any knowhow transferred. These are pure support services. d) Quality, health, Safety and Environment ( QHSE ): assessee conducts internal audits on regular intervals to determine adherence to QHSE procedures. There is no knowledge or knowhow transferred to VOIPL at any stage; these audits are done on regular basis. These services are required to be carried per dredger or site. 18 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 e) Estimate and engineering: VODMC assists VOIPL during tendering process with regard to preparing estimates and bids. Based on template received from Netherlands, employee of VOIPL will prepare estimate. This is done individually and separately for each tender/ bid. At tendering stage, soil data is sent by VOIPL to VODMC and testing report is done which again assists in determining estimate for dredging time and hence, bid. No knowhow is transferred by VODMC to VOIPL at any stage and soil report is prepared individually for each site. It does not also transfer any know how since VOIPL cannot replicate/redo same in its own business at any stage. f) Personal and organization, administration and legal: assessee assists in finalizing bid submissions on legal, performance and other guarantees to client of VOIPL. Appellant-assessee has to carry out these services for each tender, per dredger or site. No knowledge, skill or experience by way of information concerning industrial, commercial or scientific is passed over to VOIPL. High lighting aforesaid services provided by VODMC, Mr. Kaka submitted that these are purely to achieve consistency of approach amongst group entities and economies of scale. VODMC and VOIPL being in dredging industry need to have high level of safety where ever it may operate. information provided by VODMC is general information and not any kind of secret information, which could be obtained 19 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 over internet. These services are provided on continuous basis and constantly updated from time to time. These are pure services without any transfer of Knowledge, skill and experience concerning industrial, commercial or scientific is made available to VOIPL. 9. Mr. Kaka, summarizing his contentention submitted that, assessee while rendering business support services to VOIPL is not making available any kind of knowhow to Indian entity and hence payment made by VOIPL to assessee cannot be reckoned as royalty . In support of his contention, he relied upon following decisions:- Sr. Case Law Citation No 1 GECF Asia Limited v DDIT 65 SOT 257 2 Diamond Services International (P) Ltd [2008] Vs. Union of India 304 ITR 201 3 DDIT v Preroy AG [2010] 39 SOT 187 (Mumbai ITAT) 4 Spice Telecom v ITO [2008] 113 TTJ 502 (Bangalore ITAT) 10. Another limb of his argument on this aspect was that, service fees which has been received by assessee for rendering of aforesaid services are without any markup and constitutes pure allocation of cost, which cannot be held to be taxable under Act. For rendering of aforesaid services VODMC has charged specified percentage of cost incurred by it for rendering services to VOIPL, said services is allocated at cost of rendering said services which is allocating by VODMC and is proportionately allocated to various group entities based on turnover of each entity vis- -vis total turnover of Van Oord group. Thus, services are charged as percentage of turnovers carried out 20 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 by VOIPL during year. With regard to aforesaid fact, he pointed out that same is corroborated from certificate received from auditors of VODMC which states that based on verification of various details and documents, it is observed that cost incurred by assessee in rendering aforesaid services has been allocated to VOIPL. In support he relied upon decision of ITAT C Bench, Mumbai in case of Cairn Energy India Pty Ltd v ACIT, reported in [2009] 126 TTJ 226 and catena of other decisions, list of which are as under: CIT v Siemens Aktiongeselschaft [2009] 310 ITR 320 (Bom High Court) DIT v P Moller Maersk AS [2015] 374 ITR 497 (Bom High Court) CIT v Expeditors International(India) (P) Ltd.[2012] 209 Taxman 18 (Delhi High Court) CIT v Industrial Engineering Products Pvt Ltd [1993] 202 ITR 1014 (Delhi High Court) CIT v Dunlop Rubber Co Ltd [1983] 142 ITR 493 (Calcutta High Court) 11. As regards issue and addition made on account of reimbursement of salary received by VODMC from VOIPL by treating it as FTS under Article 12(5), Mr. Porus Kaka submitted that, first of all said receipts are not taxable under section 10(6)(viii) because these are purely salary income earned by employee who is non-resident employee of foreign shipping company and stay of none of employees have admittedly exceeded 90 days. He submitted that, crew members were non-residents and working on foreign ships i.e. dredgers Volvox Atlanta and Volvox Delta and their stay in India did not exceed 90 days. same he pointed out that could be verified from break-up of number of days crew deputed on dredger Volvox Atlanta stayed in India and minimum Training requirement compliance certificate issued by Director 21 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 General Shipping dated 10 September, 2009 copy of which has been enclosed as page 149 of paper book. In light of above, he submitted that crew members sourced from VODMC, satisfied all conditions prescribed under provisions of section 10(6)(viii) of Act and therefore, salary income received by crew members was not taxable in India. Further, VODMC has not charged any mark up on such salary payments. Accordingly, VOIPL has made reimbursement of salary paid to VODMC to crew members of dredger, which by itself not taxable in India under provisions of section 10(6)(viii) of Act. In light of aforesaid facts, he submitted that reimbursement was on account of salary of crew members provided on dredgers by VODMC. Further, provision of crew on dredgers has no connection or is not ancillary or subsidiary to provision of services pursuant to service agreement entered between VODMC and VOIPL. In any case, he submitted that, being reimbursement of expenses same cannot be treated as income of assessee and in support, he relied upon same set of decisions which have been enlisted above. 12. On other hand, Ld. DR strongly relying upon order of Assessing Officer and DRP submitted that ITAT Bench in case of assessee in Van Oord ACZ Marine Contractors BV vs. ADIT , reported in [2012] 52 SOT 423 has rejected similar contention of assessee and submitted that, fees received from Indian entity for providing coordinating and facilitating services is in form of reimbursement of expenses and therefore not taxable, held that, it is in nature of fee for technical services . Thus 22 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 said decision of ITAT Chennai Bench should be followed as Ld. DRP has strongly relied upon said decision. relevant observation and finding of Tribunal, as incorporated in DRP s order is reproduced hereunder:- We find great force in argument of Revenue and conclusions arrived at by Assessing Officer as well as DRP. finding of Assessing Officer has to be considered not in light of contract assignment agreement, but also in light of cost allocation agreement entered into between assessee company and to its subsidiary has unequivocally declared that Indian company does not have any sort of technical expertise or resources and ability to carry out dredging contract assigned to it. It is in light of above declaration that assessee company has undertaken to provide all sorts of services to its Indian subsidiary, wherever necessary, to execute dredging contract. Such services include not only arranging dredgers from abroad, but also application of technical mind to select and choose appropriate parties to execute work entrusted to its Indian subsidiary. argument of assessee company that payments were made by Indian subsidiary only as reimbursement of expenses cannot be accepted at its face value. facilities arranged and coordinated or obtained by assessee to support operations of its Indian subsidiary. argument of assessee company that payments were made to its Indian subsidiary only as reimbursement of expenses cannot be accepted at its face value. facilities arranged and coordinated or obtained by assessee to support operations of its Indian subsidiary are not layman s activities. Even to choose best dredger, it is necessary to have adequate technical knowhow about nature and place of work to be carried out by its Indian subsidiary. It is not possible to simply say that assessee had only brought dredgers from outside India to Indian port for dredging and kept back once work is over. These are over- simplified statements. Apart from arguing that payments were in nature of reimbursement of expenses, assessee has not explained 23 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 anything about pricing of services, for which so-called reimbursements were made by Indian subsidiary to assessee company. It is case of assessee that expenses were reimbursed by Indian subsidiary at par with invoices issued by third parties. But there is nothing on record to show that price negotiated between assessee and third parties and amounts reflected in invoices issued by third parties are prices comparable to similar services provided by international parties. assessee has not established that it had offered services to subsidiary company on cost to cost basis at best reasonable and competent prices available at that point of time. Therefore, it is not proper to rule out element of profit in invoices raised by third parties themselves, even though what was paid by subsidiary company to assessee is same amount as reflected in invoices. Therefore, argument that what has been paid by subsidiary to assessee company was only amount reflected in invoices issued by third parties alone, does not go to support argument of assessee company that payments were only reimbursement of expenditure and there was no element of profit in those amounts. As assessee has not explained pricing factor with reference to services reflected in invoices issued by third parties, it is not possible to say that assessee had not rendered any service to its Indian subsidiary in India. Further, it is to be seen that original contract was awarded to assessee company itself. contact was thereafter assigned to its subsidiary on basis of assignment agreement. It is clear from order of Assessing Officer that subsidiary company does not have technical, organizational and managerial competence to carry out contract work by itself. Therefore, in fact, assessee company itself had, to great extent, execute contract work for and on behalf of its subsidiary. Therefore, in facts and circumstances of case, it is inevitable conclusion on part of Assessing Officer that assessee had rendered technical services to its subsidiary in India and payments were in nature of fee for technical services. Therefore, we hold that Assessing Officer is justified in bringing 24 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 sum of Rs.11,53,52,883/- to tax in hands of assessee company. issue of fee for technical services is also decided against assessee . 13. In rejoinder before us, Ld. Senior Counsel Mr. Porus Kaka submitted that said decision is not applicable on facts of present case for various reasons, which can be summarized as under:- (a) In case of Van Oord Acz, main contract was awarded to foreign company which was sub- contracted to Indian subsidiary; (b) assessee did not explain anything about pricing of services for which reimbursements were made; (c) assessee did not establish that it had offered services to Indian subsidiary on cost to cost basis; (e) fees in said were held to be in nature of fees for technical and not royalty. 14. We have heard rival submissions, perused relevant finding given in impugned orders as well as material referred and relied upon before us. first issue for our adjudication is, whether fees received by assessee from its Indian entity, VIOPL for management and support services is to be treated as royalty under Article 12(4) of India-Netherland-DTAA or not. entire gamut of facts and nature of services provided by assessee to VOIPL in terms of service agreement dated 1st April, 2004 has already been discussed above elaborately. revenue s case is that, VOIPL is completely dependent on assessee (VODMC) for its experience in industrial, commercial and scientific field. 25 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 Indian entity is engaged in highly technical business of dredging activities for which it requires information and experience of VODMC right from pre-bidding stage till post project completion stage. Thus, payment received by assessee-firm for rendering such kind of services falls within realm and ambit of royalty as defined in para (4) of Article 12 of DTAA. relevant definition of royalty as given in Article 12(4) of India-Netherlands-DTAA reads as under:- term royalties as used in this Article means payments of any kind received as consideration for use of, or right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark design or model, pan secret formula or process, or for information concerning industrial, commercial or scientific experience . Here, main emphasis of Revenue is on term for information concerning industrial, commercial or scientific experience . This term mainly alludes to concept of use of or right to use of providing of knowhow , where one party agrees to impart information on knowhow concerning industrial, commercial or scientific experience to other. OECD in its commentary has explained these terms in para 11 in following manner:- classifying as royalties payments received as consideration for information concerning industrial, commercial or scientific experience, paragraph 2 is referring to concept of know-how . Various specialized bodies and authors have formulated definitions of know-how. words payments for information concerning industrial, commercial or scientific experience are used in context of transfer of certain information that has not been 26 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 patented and does not generally fall within other categories of intellectual property rights. It generally corresponds to un-divulged information of industrial, commercial or scientific nature arising from previous experience, which has practical application in operation of enterprise and form disclosure of which economic benefit can be derived. Since definition relates to information concerning previous experience, Article does not apply to payments for new information obtained as result of performing services at request of payer; In know-how contract, one of parties agrees to impart to other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to public. It is recognized that grantor is not required to play any part himself in application of formulas granted to licensee and that he does not guarantee result thereof. This type of contract thus differs from contracts for provision of services, in which one of parties undertakes to use customary skills of his calling to execute work himself for other party. Payments made under latter contracts generally fall under Article 7. need to distinguish these two types of payments, i.e. payments for supply of know-how and payments for provision of services, sometimes gives rise to practical difficulties. following criteria are relevant for purpose of making that distinction: - Contracts for supply of know-how concern information of kind described in paragraph 11 that already exists or concern supply of that type of information after its development or creation and include specific provisions concerning confidentiality of that information. - In case of contracts for provision of services, supplier undertakes to perform services which may require u se, by that supplier, of special knowledge, skill and expertise but not transfer of such special knowledge, skill or expertise to other party. - In most cases involving supply of know-how, there would generally be very little more which needs to be done by supplier under contract other than to supply existing information or 27 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 reproduce existing material. On other hand, contract for performance of services would, in majority of cases, involve contractual obligations. For instance, supplier, depending on nature of services to be rendered, may have to incur salaries and wages for employees engaged in researching, designing, testing, drawing and other associated activities or payments to sub- contractors for performance of similar services. Examples of payments which should therefore not be considered to be received as consideration for provision of know-how but, rather, for provision of services, include: - payments obtained as consideration for after-sales service; - payments for services rendered by seller to purchaser under warranty; - payments for pure technical assistance; - payments for list of potential customers, when such list is developed specifically for payer out of generally available information (a) payment for confidential list of customers to which payee has provided particular product or service would, however, constitute payment for know-how as it would relate to commercial experience of payee in dealing with these customers), - payments for opinion given by engineer, advocate or accountant, and - payments for advice provided electronically, for electronic communications with technicians or for accessing, through computer networks, trouble-shooting database such as database that provides users of software non=confidential information in response to frequently asked questions or common problems arise frequently . From above clarification, it can be ostensibly inferred that, to qualify as payment towards information concerning industrial, commercial or scientific experience, person must provide knowhow to recipient, that is, strong emphasis has been given to concept of knowhow . There is element of imparting of knowhow to other so that other can use or 28 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 has right to use such knowhow . In case of industrial, commercial or scientific experience, if services are being rendered simply as advisory or consultancy then it cannot be reckoned as royalty because advisory or assistance does not connotes imparting of skill or experience to other albeit person is rendering services from his own knowhow and what he is imparting is his conclusion based on his own skill and experience. imparting of knowhow envisages that recipient should be able to make use of such knowhow independently on its own account without recourse of provider of knowhow in future. For being regarded as royalty there has to be alienation or use of or right to use of any knowhow and without any transfer of any knowledge, experience or skill, it cannot be termed as royalty . In case of GECC Asia Ltd. vs. DDIT (supra) had occasion to deal with term information concerning to industrial, commercial or scientific experience and after referring to various commentaries, observed and held as under: royalty payment received as consideration for information concerning industrial, commercial, scientific experience alludes to correct of knowhow. There is element of imparting of knowhow to other, so that other person can use or has right to use such knowhow. In case of industrial, commercial and scientific experience, if services are being rendered simply as advisory or consultancy, then it cannot be termed as royalty , because advisor or consultant is not imparting his skill or experience to other, but rendering his services from his own knowhow and experience. All that he imparts is conclusion or solution that draws from his own experience. eminent author Klaus Vogel I his book Klaus Vogel On Double Tax Convention has reiterated this view on differenced between royalty and rendering of services. 29 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 thin line distinction which is to be taken into consideration while rendering services on account of information concerning industrial, commercial and scientific experience is, whether there is any imparting of knowhow or not. If there is no alienation or use of or right to use of any knowhow, then it cannot be termed as royalty . services may have been rendered by person from own knowledge and experience but such knowledge and experience has not been imparted to other person as person retains experience and knowledge or knowhow with himself, which are required to perform services to its clients. Hence, in such case, it cannot be held that such services are in nature of royalty . Thus, in principle we hold that if services have been rendered de-hors imparting of knowhow or transfer of any knowledge, experience or skill, then such services will not fall within ambit of Article -12. . If such services do not involve imparting of knowhow or transfer of any knowledge, experience or skill, then it cannot be held to be taxable as royalty 15. Thus, what we have to see is, whether various services provided by assessee to VOIPL can be reckoned as providing of any kind of imparting of knowhow or information concerning industrial, commercial or scientific experience or not. As highlighted above, with regard to various streams of services like providing of information technology; operational support; marketing; quality, health, safety and environment; estimating and engineering; and personal and organization, administration and legal services, there is no imparting of any kind of knowledge, skill or experience by way of information concerning industrial, commercial or scientific which is made available to VOIPL. For instance, information technology services are provided for use of group companies computer system where IT teams providing manual general information without providing any information or method to design or create computer system. It is mainly kind of help desk and 30 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 trouble-shooting services which are required on regular basis. For operational support system also, it mainly provides for check-list for project plans, safety work and inspection plans etc. Similarly, for marketing, assessee provides for e- marketing through its website and maintaining it, printing and publishing brochures which can be distributed to its potential clients. It also helps VOIPL to obtain certificate of approval from concerned organizations and obtained contracts on regular basis. Regarding quality health and safety environment services, assessee merely conducts internal audits on regular intervals so that proper adherence to such quality standard and procedures are valid/ should remain valid. Similarly, in estimating engineering services and other services also, assessee is mainly providing tender process, helping and preparing (estimates) and bids and plan consisting in local performance and other guarantees to client of VOIPL etc. For rendering of these services, there is no element of imparting of any knowhow or there is transfer of any knowledge, skill or experience. Thus, in our opinion, none of services provided by assessee in term of service agreement falls within scope and ambit of royalty as defined in Article 12(4) of DTAA. 16. In any case, as pointed by Mr. Porus Kaka, it is admitted fact that, only actual mark-up has been charged by assessee and payment has been received purely on allocation of actual costs and working of cost allocation as reproduced above has not been disputed either by Assessing Officer or by Ld. DRP. assessee has charged specified percentage of cost incurred by it for 31 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 rendering aforesaid services which is based on turnover of each entity and turnover of Van Oord Group as highlighted above which has been certified by Auditors as given in paper book from pages 9 to 11. Once auditors have certified that, such allocation of costs represents actual expenditures then, we do not find any reason to hold that reimbursement of cost can be reckoned as payment towards royalty . As regards decision of ITAT Chennai Bench in Van Oord vs. DIT (supra), we agree with contention of Ld. Senior Counsel that said decision is not applicable for reasons highlighted by him and also, we ourselves have analyzed each and every aspect of services rendered by assessee in terms of service agreement and also analyzed definition of royalty as given in Article 12(4) and have reached to conclusion that said services and reimbursement of cost does not fall under realm of royalty . Moreover here in this case, revenue s main thrust is that payment received by assessee from VOIPL is royalty and here it is not case of FTS by department and, therefore, we are refraining ourselves from going into aspect of FTS qua services rendered in terms of service agreement. 17. Now, coming to issue of taxability of reimbursement of salary as FTS under Article 12(5), we find that assessee has paid salary for sums aggregating to Rs.2,22,39,000/- which has been classified under following heads:- Salary to crew members of dredger Volvox Delta- Rs.16,214,187; and Salary to crew members of dredger Volvox Atlanta- Rs.6,024,959. 32 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 On pages 147 and 148 of paper book, assessee has given employee-wise break-up of salary along with respective days of stay in India for crew members on Volvox Atlanta and it is amply evident that stay of none of crew members in India has exceeded 90 days. Similarly, with respect to reimbursement of salary of crew members Volvox Delta also it is seen that days of stay again does not exceed 90 days. Rather it is only for period of 35 days. This is evident from certificate issued by Director General of Shipping dated 10th September, 2009 given to VOIPL. Once that is so, then in terms of section 10(6)(viii) which reads as under:- (viii) any income chargeable under head Salaries received by or due to any such individual non-resident as remuneration for services rendered in connection with his employment on foreign ship where his total stay in India does not exceed in aggregate period of ninety days in previous year . salary paid to such non-resident cannot be taxed in India. Once salary cannot be taxed in India same cannot be brought in ambit of FTS under Article 12(5). Thus, on this ground alone, we are of opinion that reimbursement of salary paid to non-resident is exempt from taxability in India by virtue of section 10(6)(viii) and, therefore, same cannot be held to be FTS. Accordingly, addition made by Assessing Officer on this score stands deleted. 18. So far as issue of set off of unabsorbed depreciation and losses is concerned, now in light of our finding given above, we direct Assessing Officer to follow provision 33 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 of section 115A(3) and 32(2) after giving effect to our decision as above. As regards unabsorbed losses, same has not been pressed before us and accordingly, same is dismissed. 19. Lastly, regarding levy of penalty under various sections, as stated in starting of order, we have already held that these grounds are premature and, therefore, no adjudication is required. 20 In view of our finding given above, appeal of assessee is treated as partly allowed. 21. In result, appeal of assessee stands partly allowed. Order pronounced in open court on 7th October, 2016. Sd/- Sd/- (G S PANNU) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 7th October, 2016 /Copy to:- 1) /The Applicant. 2) /The Respondent. 3) DRP-I/ Concerned____, Mumbai, 4) CIT III/Dy. Director (Int. Tax)-30, concerned, Mumbai. 5) D.R. L Bench, Mumbai. 6) Copy to Guard File. /By Order 34 Van Oord Dredging and Marine Contractors Bv ITA No. : 7589/Mum/2012 // True Copy / / , Dy./Asstt. Registrar I.T.A.T., Mumbai * . . *Chavan, Sr.PS Van Oord Dredging and Marine Contractors BV v. Addl. Director of Income-tax (International Taxation)-Range-2, Mumbai