IN INCOME-TAX APPELLATE TRIBUNAL L BENCH MUMBAI BEFORE SHRI G.S. PANNU, VICE-PRESIDENT AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA No. 4136/Mum/2016 for (Assessment Year 2010-11) Van Oord Dredging and Marine Dy.CIT (International Contractors BV, 201, 2nd Floor, Taxation)-4(3)(1), Central Plaza, 166, CST Road, Vs. 1st Floor, Scindia House, Kalina, Mumbai-400098. Ballard Estate, PAN: AAACH3500M Mumbai-400038. Appellant Respondent Appellant by : Shri Nishant Thakkar (AR) Respondent by : Shri Samuel Daise (CIT-DR) And Sh. Manoj Kumar Singh Sr DR Date of Hearing : 04.09.2019 Date of Pronouncement : 05.09.2019 ORDER UNDER SECTION 254(1)OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER; 1. This appeal by assessee is directed against order of ld. Commissioner of Income-Tax (Appeals)-58 [for short ld. CIT(A)], Mumbai dated 28.03.2016 which arises from assessment order passed on 03.04.2014 under section 44C read with section 143(3) for Assessment Year 2010-11. assessee has raised following grounds of appeal: On facts and in circumstances of case and in law, Van Oord Dredging and Marine Contractors bv (hereinafter referred to as 'Appellant') craves leave to prefer appeal against order passed by Commissioner of Income Tax (Appeals) ['CIT(A)'] dated 28 March 2016 under section 250 of Income-tax Act, 1961 (hereinafter referred to as 'Act') on following grounds, each of which are without prejudice to one another: 1. On facts and in circumstances of case and in law, learned CIT(A) erred in upholding addition of Rs 34,49,00,936 on account of management ITA No. 4136/Mum/2016-Van Oord Dredging and Marine Contractors BV service fees made by learned Assessing Officer, to total income of Appellant. Taxability of Management service fees of Rs 34,49,00,936 On facts and in circumstances of case and in law, learned CIT(A) erred in upholding action of Assessing Officer: 2. in treating management service fees received by Appellant as "Royalty" under Article 12(4) of Double Taxation Avoidance Agreement ('DTAA') between India and Netherlands as well as fees for technical services under Article 12(5) of India - Netherlands DTAA, thereby making addition of Rs 34,49,00,936 to income of Appellant. 3. in not appreciating that for services rendered by Appellant does not provide any know-how to recipient and hence, same does not qualify as royalty. 4. in not appreciating that services provided by Appellant are in nature of business support and administration services and are neither in nature of sharing information concerning industrial, commercial and scientific experience nor in nature of technical or consultancy services; 5. in not appreciating that services rendered by Appellant do not "make available" any technical knowledge, experience, skill, know-how or processes and hence, is not taxable even as fees for technical services in view of Article 12(5) of India - Netherlands DT AA. 6. in not appreciating that management service fees received by Appellant are without any mark up and constitute pure allocation of cost which is neither taxable as Royalty nor taxable as Fees for Technical Services under Act as well as under India - Netherlands DTAA. Taxability of reimbursements of salary received of Rs 22,43,552 On facts and in circumstances of case and in law, learned CIT(A): 7. erred in giving observations which are not in connection with determination of total income of Appellant. 8. erred in holding that dredger Volvox Delta is not foreign ship by virtue of same being under control of Van Oord India Private Limited (,VOIPL') and therefore, erred in holding that salary paid by Appellant to employees which was subsequently reimbursed by VOIPL is not covered by provisions of section 10(6)(viii) of Act. 2 ITA No. 4136/Mum/2016-Van Oord Dredging and Marine Contractors BV 9. erred in holding that taxability of salary paid by Appellant to employees subsequently reimbursed by VOIPL under section 10(6)(viii) of Act needs to be examined, as employees are working under control and management of VOIPL. 2. Brief facts of case are that assessee is company incorporated in Netherlands and is eligible for benefit of India-Netherlands Double Taxation Avoidance Agreement (DTAA). assessee is engaged in dredging activities filed its return of income for Assessment Year 2010-11 on 15.10.2010 declaring loss of Rs. 38,15,40,242/-. assessment was completed on 03.04.2014 under section 143(3) r.w.s. 144C(3) of Act. Assessing Officer noted that during relevant period assessee executed dredging contract with Marg Ltd., Essar Bulk Terminal Ltd. and L&T Ship Building Ltd. in India. assessee provided business support services to Van Oord India Pvt. Ltd. (VOIPL) under management support agreement dated 01.04.2004. Pursuant to said agreement on going assistance and support is provided to VOIPL by assessee in field of information technology, operation, quality, health and safety, estimating engineering, marketing, administration personnel etc. assessee claimed in assisting VOIPL in achieving economies of scale and maintained uniformity within Van Oord group. assessee claimed that project office of assessee does not have any role to play in rendering these services. assessee charged from VOIPL consideration of Rs. 34,49,00,396/- for services rendered by assessee. assessee claimed that services were rendered outside India and 3 ITA No. 4136/Mum/2016-Van Oord Dredging and Marine Contractors BV no role was played by assessee project office in rendering said services. amount charged to VOIPL has not included in books of account. assessee also claimed that services are not in nature of make available and not taxable as fees for technical services as per India-Netherlands Tax Treaty (Treaty). Assessing Officer asked assessee to submit detail and nature of business management services and basis of allocation to services to Indian entity and as to why same is not taxable in India. assessee filed its reply dated 15.01.2014. assessee provided detail of nature of services consisting operational support, information technology, quality health safety and environment, marketing, estimating and engineering and personnel and organisation administration and legal. assessee also provides operational detail and cost break-up. assessee also contended that services rendered are not taxable as fees for technical services (FTS) under Treaty, same could be taxed in India as business profit of permanent establishment (PE) constituted in India. These services have been rendered directly by assessee Head Office to VOIPL and its does not have any PE in India to render such services. project office of assessee in India did not perform any activity/function in rendering said services. Accordingly, consideration directly received by assessee head office for providing management services, cannot be attributed to its Indian operation i.e. assessee s project in India. project office of assessee has not played any role in rendering above services. amount charged to VOIPL has not 4 ITA No. 4136/Mum/2016-Van Oord Dredging and Marine Contractors BV been included in its books of account. management feeds received by assessee head office is without any mark up and constituted for pure allocation of cost which is not taxable as fees for technical services. For rendering management services, assessee head office had specific percentage of cost incurred by it for rendering aforesaid services to VOIPL. said cost is allocated to all group companies of assessee based on turnover of each company. copy of certificate from Netherlands Auditor of assessee stating that cost allocated to VOIPL is verified and not mark up is charged by assessee. contention of assessee was not accepted by Assessing Officer holding that payment made by India company to assessee are clearly for use of information concerning industrial commercial or scientific experience in India. These payments are specifically covered under Circular-4 of Article-12 of Double Taxation Avoidance Agreement (DTAA) between India and Netherlands and are taxable as royalty. payments received by assessee- company are nothing but royalty as per Article-12 of Treaty. There is no dispute that these services are utilized in India by Indian entity. contention of assessee that services have been rendered outside India does not hold good and same is taxable in India. Assessing Officer by treating services rendered by assessee in nature of royalty and taxed @ 10%. On appeal before ld. CIT(A), action of Assessing Officer was confirmed. ld. CIT(A) while confirming action of Assessing Officer hold that concept of royalty and make available of technical knowledge are similar to 5 ITA No. 4136/Mum/2016-Van Oord Dredging and Marine Contractors BV some extent. Although requirement of are more stringent than concept of make available. In royalty, transfer of knowledge or transfer of right to use is contemplated. In term make available as used in Article-12(5)(b), transfer is not contemplated but mere making available is sufficient, no right is created while make available any technical knowledge, skill, experience of process in favour of recipient of service but technical knowledge is shared and recipient become more informed in area in which knowledge is shared to benefit of recipient. concept of make available can be taken to somewhere between concept of royalty and concept of fees for technical services as provided under section 9(1)(vii). Thus, concept of make available is wider than royalty, so far as requirement of transfer of technology is concerned. mere sharing of technical knowledge, experience, skill or process which enable recipient to apply this knowledge, experience like skill or process subsequently will be sufficient to conclude that knowledge, skill, process or skill has been made available. ld. CIT(A) also concluded in nomenclature cannot be relied to characterise transaction. reimbursement may be actually royalty or FTS or actual reimbursement depending on nature of services rendered. claim of assessee that amount represent reimbursement of expenditure and does not have element of income is not acceptable. Thus, further aggrieved by order of ld. CIT(A), assessee has filed present appeal before us. 6 ITA No. 4136/Mum/2016-Van Oord Dredging and Marine Contractors BV 3. We have heard submission of ld. Authorized Representative (AR) of assessee and ld. Departmental Representative (DR) for revenue and perused material available on record. Ground No.1 is general. Ground No.2 to 6 relates to taxability of managements fees of Rs. 34.49 Crore as Royalty . ld. AR of assessee submits that vide agreement dated 1st April 2004 assessee entered into service agreement with VOIPL which is subsidiary of assessee in India. Pursuant to said agreement, assessee provided services in field of information technology, operation, quality, health safety as provided in agreement. Copy of service agreement is filed at page no. 52 to 55. assessee provided standard services to ensure consistency in approach worldwide. payment received by assessee was treated as royalty. ld. AR further submits that on basis of same service agreement dated 1st April 2004 similar payment was treated as royalty in assessment for A.Y. 2009-10, which were confirmed by DRP, however, on appeal before ld. CIT(A), that payments received by assessee are reimbursement of cost and does not fall under realm of royalty . ld. AR further submits that by following decision of A.Y. 2009-10, similar relief was granted to assessee in appeal for A.Y. 2013-14 & 2014-15. ld. AR further submits that after treating management service fees as royalty in A.Y. 2009-10, assessment for A.Y. 2005-06 & 2007-08 was re-opened. However, on appeal before Tribunal, Tribunal by following order of A.Y. 2009-10, 2013-14 & 2014-15 held that management services fees received cannot be 7 ITA No. 4136/Mum/2016-Van Oord Dredging and Marine Contractors BV assessed as royalty in term of Article-12(4) India-Netherlands Treaty. ld. AR of assessee filed copy of decision of Tribunal for A.Y. 2005-06, 2007-08, 2009-10, 2013-14 & 2014-15. 4. On other hand, ld. DR for revenue supported order of lower authorities. ld. DR submits that order for A.Y. 2009-10 was passed on 07.10.2016 and impugned order was passed by ld. CIT(A) on 28.03.2016. ld. DR further submits that payments received on account of various services by assessee are in nature of royalty. 5. We have considered rival submission of parties and have gone through orders of authorities below. We have noted that on almost similar set of fact and on basis of same service agreement between assessee and VOIPL, Assessing Officer for A.Y. 2009-10 treated amount received on account of various services rendered by assessee as royalty, however, on appeal before Tribunal, same was held as reimbursement of cost vide order dated 07.10.02016 in ITA No. 7589/Mum/2012. We have further noted that co-ordinate bench of Tribunal for A.Y. 2013-14 & 2014-15 by following decision of Tribunal for A.Y. 2009-10, co-ordinate bench passed following order: 5. We heard parties and perused record. We notice that assessing officer had made identical disallowance in assessment year 2009-10 and Tribunal, vide its order referred supra, has held that none of services provided by assessee in terms of "service agreement" falls under scope and ambit of "royalty" as defined in Article 12(4) of DTAA. For sake of convenience, we extract below operative portion of order passed by co-ordinate bench of Tribunal in AY 2009-10:- 8 ITA No. 4136/Mum/2016-Van Oord Dredging and Marine Contractors BV 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. 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:- "The 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:- "The 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 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 9 ITA No. 4136/Mum/2016-Van Oord Dredging and Marine Contractors BV 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 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 subcontractors 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" 10 ITA No. 4136/Mum/2016-Van Oord Dredging and Marine Contractors BV 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 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: "The 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. 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; 11 ITA No. 4136/Mum/2016-Van Oord Dredging and Marine Contractors BV 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 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 emarketing 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. 6. co-ordinate bench of Tribunal has dealt with payment received by assessee pursuant to agreement dated 01-04-2004. In years under consideration also, assessee received payments pursuant to very same agreement. Ld A.R submitted that there is no change in facts between both years. Before us, revenue could not bring any material in order to compel us not to follow order passed by co-ordinate bench in AY 2009-10. Since particular view has already been taken by Tribunal on identical payments received by assessee, following same, we hold that payments received by assessee in terms of "service agreement dated 01-04- 2004" do not fall under definition of "royalty" as defined in Article 12(4) of India-Netherlands DTAA. Accordingly we set aside order passed by assessing officer in both years on this issue. 6. Considering decision of co-ordinate bench of A.Y. 2009-10 (ITA No. 7589/Mum/2012 dated 07.10.2016), which was followed in A.Y. 2013-14 & 2014-15 (ITA No. 6140 & 6141/Mum/2017 dated 11.10.2017) wherein similar payments received pursuant to same agreement was treated that payment received by assessee are on account of reimbursement and does not fall under definition of Royalty as defined in Article-12(4) of India- 12 ITA No. 4136/Mum/2016-Van Oord Dredging and Marine Contractors BV Netherlands Tax Treaty. Further, by following decision for A.Y. 2009-10, 2013-14 and 2014-15 similar payment was treated as Management Service Fees in appeal for A.Y. 2005-06 & 2007-08 in ITA No. 495 & 496/Mum/2016 dated 28.02.2018. Therefore, we find that ground of appeal raised by assessee is covered in favour of assessee and against revenue. Therefore, ground no.1 to 6 of appeal is allowed in favour of assessee. 7. Ground No. 7 to 9 relates to reimbursement of salary. During hearing, ld. AR of assessee made statement that he is not pressing these grounds of appeal. Considering submission of ld. AR of assessee, ground no. 7 to 9 are dismissed as not pressed. 8. In result, appeal of assessee is allowed. Order pronounced in open court on 05/09/2019. Sd/ Sd/- G.S. PANNU PAWAN SINGH VICE-PRESIDENT JUDICIAL MEMBER Mumbai, Date: 05.09.2019 SK Copy of Order forwarded to : 1. Assessee 2. Respondent 3. concerned CIT (A) 4. concerned CIT 5. DR L Bench, ITAT, Mumbai 6. Guard File BY ORDER, Dy./Asst. Registrar ITAT, Mumbai 13 Van Oord Dredging and Marine Contractors BV v. Dy. CIT (International Taxation)-4(3)(1), Mumbai