Full Text of Ruling - Allindiantaxes

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                      (INCOME TAX) NEW DELHI

                              30th Day of November, 2009

                            Mr. Justice P. V. Reddi (Chairman)
                                 Mr. J. Khosla (Member)

                        F. No. AAR/811/2009 dated 01/12/2009
                                  A.A.R. No.811 of 2009

Name & address of the applicant               Federation of Indian Chambers of Commerce
                                              and Industry (FICCI) Federation House,
                                              Tansen Marg, New Delhi – 110 001
Commissioner concerned                        Director of Income-tax(Exemption)
                                              New Delhi
Present for the applicant                     Mr. R.P. M. Tripathi, Income-tax Practitioner
                                              Mr. Nirankar Saxena, (Director-FICCI)
                                              Mr. Chander Shekhar Sharma, CA
Present for the Department                    Mr. Sushil Kumar, Addl. DIT(IT), R-3

Date of Ruling: 30th November, 2009.

AIT Head Note: Advance Ruling-Whether on the facts and circumstances of the case,
the IC2 Institute of University of Taxes, Austin, USA executing the agreement
between FICCI and UT(IC2) is covered by the Double Taxation Avoidance Agreement
(DTAA) between India and USA?
ii. Whether on the facts and circumstances of the case UT(IC2) is not liable to pay
income-tax in India out of the payments received by it from FICCI in installments?
iii. Whether on the facts and circumstances of the case, FICCI is not required to
deduct tax under the provisions of Section 195 of the Income-tax Act, 1961 in
respect of the payments made by it to UT(IC2) for execution of the agreement?
iv. If the answers to questions (ii) & (iii) above are in the negative, which are the
amounts liable to tax and what rate would be applicable to such payments?
(1) The first question is answered in the affirmative. The Tax Treaty (DTAA) between
India and USA governs.
(2) The second question is answered in the affirmative and it is ruled that UT(IC2) is
not liable to pay income tax in respect of the payments received by it from FICCI as
per the Agreement entered into between FICCI and the University of Texas.

www.allindiantaxes.com                                                                    1
(3) The third question is also answered in the affirmative. That means FICCI is not
required to deduct tax under Section 195 as the payments made by FICCI to UT(IC2)
are not liable to be taxed under the Income Tax Act, 1961

                                   (By Hon’ble Chairman)

1. The applicant is a non-profit company registered under the Companies Act, 1956. It is
also registered under section 11A and 80G of the Income-tax Act, 1961 (hereinafter
referred to as ‘the Act’). Hence, it is stated that its income is not taxable in India. The
applicant has entered into a Memorandum of Understanding (MOU) with Defence Research
Development Organisation (DRDO) on 25th July, 2008. As per the MOU, the applicant has
to assist DRDO laboratories in identification and business development of competitive
global technologies from its inventory of existing defence-related innovations. In order to
implement the MOU, the applicant and DRDO have jointly initiated a programme known as
“Accelerated Technology Assessment and Commercialization” (”ATAC”). The programme, it
is stated, is for a period of 24 months. The applicant states that a major part of the
programme has to be completed by the applicant and the rest with the help of UT (IC2) of
University of Texas (for short ‘UT’).

1.1 The applicant entered into an agreement with the University of Texas which is effective
from 26th January, 2009. It is recited therein that the applicant (FICCI) desires UT to
perform certain work and services for the “IC2-FICCI-DRDO Innovation programme” and
that FICCI agreed to provide the facilities and assistance during the course of the
programme and that UT was willing to perform such services as outlined in attachment A. It
is stated that UT(IC2) which is a wing of the University of Texas is a globally recognized
Institute with a mission to engage in cutting edge research to enhance the solving of
unstructured problems related to market economics, wealth creation and growth through
entrepreneurial activity and commercialization of technological innovation. It is further
stated that UT(IC2) Institute offers its 29 years of experience to regions and enterprises
interested in technology commercialization.

1.2 The ATAC, according to the applicant is divided into three major areas; (i) awareness of
ATAC programme; (ii) technology assessment; and (iii) business development. The second
area i.e., technology assessment is essentially a screening and assessment process i.e.,
quantitative and qualitative evaluation of the submitted technologies. The applicant states
that there are four steps in it : (i) Laboratory nomination (ii) Global screening of nominated
technologies (iii) Quikscan and (iv) Commercial assessment.

1.3 The final phase of ATAC Project is ‘business development’. In this phase, UT with the
assistance of FICCI personnel works to “identify commercial partners for each authorized
technology in order that DRDO may select and enter into license negotiations with the
commercial partner. The business development activities are scheduled to take place
between April, 2009 and March, 2010. The programme management is the other component
of the programme according to which UT will provide the assistance of Programme Manager
to design and implement the programme This last step involves integration of several

www.allindiantaxes.com                                                                      2
  components with the help of the Project Manager so as to facilitate the implementation
  process without any problem.

  1.4 The functions assigned to the participants and the places where they have to be carried
  out are stated in the form of a chart as follows:

                       Activities                           To be performed by        Location

Website for DRDO-ATAC Project                               FICCI                       India
Introduction of ATAC programme and training to the          FICCI                       India
innovators for technology nomination
Technology Assessment Identification of Fast Track          FICCI                       India
Approval of the identified technologies                     FICCI                       India
Final approval of the identified technologies               UT(IC2)                     USA
Scoring sheet for each technology application               FICCI                       India
Final approval                                              UT(IC2)                     USA
Scan for each technology application to identify            UT(IC2)                     USA
uniqueness and novelty
Technology assessment by way of SME validation of           UT(IC2)                     USA
the selected technology in coordination with POCs,
innovators and industry experts

Preparation of Quick Look report for the selected          UT(IC2)                      USA
Defining and executing business            development     UT(IC2)                      USA
strategies for selected technologies

  1.5 The DRDO will pay consultancy fee of INR 4.5. crores to FICCI in various stages. The
  payment to be made to UT(IC2) by the applicant is 660,000 US dollars payable in 5
  installments starting from 15th December, 2008 and ending with 31st March, 2010. These
  payments will be made after the UT(IC2) raises its invoices. In the application filed on 23rd
  April, 2009, the applicant stated that the programme has already been initiated and the
  experts from UT(IC2) visited India to meet and discuss the relevant issues with DRDO
  officials and to collect information about their innovations and that UT(IC2) was processing
  the data for implementation.

  2. The applicant has sought ruling on the following questions:

          i.      Whether on the facts and circumstances of the case, the IC2 Institute of
                  University of Taxes, Austin, USA executing the agreement between FICCI
                  and UT(IC2) is covered by the Double Taxation Avoidance Agreement
                  (DTAA) between India and USA?

  www.allindiantaxes.com                                                                      3
       ii.     Whether on the facts and circumstances of the case UT(IC2) is not liable to
               pay income-tax in India out of the payments received by it from FICCI in

       iii.    Whether on the facts and circumstances of the case, FICCI is not required
               to deduct tax under the provisions of Section 195 of the Income-tax Act,
               1961 in respect of the payments made by it to UT(IC2) for execution of the

       iv.     If the answers to questions (ii) & (iii) above are in the negative, which are
               the amounts liable to tax and what rate would be applicable to such

3. As regards the first question, the Revenue has expressed a doubt whether UT(IC2) falls
within the scope of the term “resident” as defined in Article 4 of the “Convention between
the Government of United State of America and the Government of the Republic of India
for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to
Taxes on Income” (hereinafter referred to as “DTAA”). The concerned Commissioner has
commented that the applicant has failed to mention whether the income of UT(IC2)
Institute of the University of Texas is subjected to tax in the USA or not. In Article 4 of
the DTAA, the term “resident” has been defined thus:

       “for the purpose of this Convention, the term “resident” of a Contracting State”
       means any person who, under the laws of that State, is liable to tax therein by
       reason of his domicile, residence, citizenship, place of management, place of
       Incorporation or any other criterion of a similar nature ………………..”

In order to clarify the position, the applicant has filed a certificate from the University of
Texas under the title “Statement of Federal Exempt Status”. It reads as follows:


       The University of Texas at Austin (“University”) is an agency of the State of Texas
       (“State”), is a resident of the United State of America for purposes of U.S.
       taxation, and is exempt from U.S. tax under the Internal Revenue Code (“IRC”).
       However, University is required to pay tax on certain unrelated business taxable
       income in accordance with IRC ss.511(a)(2)(B) and must annually file an income tax
       return with the Internal revenue Service.”

Having regard to this statement, we find that the applicant is liable to tax in USA as per
the criterion laid down in Article 4 and the mere fact that the University has been granted
exemption from tax under the provisions of Internal Revenue Code (IRC) does not take it
out of the category of tax resident. In fact, the University has stated in the Certificate
that it is statutorily bound to file Income-tax return. Moreover, it has to pay tax on the
non-exempt income. Hence, the first question has be answered in the affirmative by holding
that the DTAA would be applicable in the instant case.

www.allindiantaxes.com                                                                      4
2nd Question

4. The answer to this question depends on whether (i) the payments received by UT(IC2)
represents ‘fees for included services’ within para 4 of Article 12 of the DTAA read with
para 5 of Article 12. It is the contention of the Revenue that the income shall be deemed to
accrue or arise in India by reason of Section 9(1)(vii)(b) of the Income-tax Act, 1961. Under
the said provision, “income by way of fees for technical services payable by a resident shall
be deemed to accrue or arise in India. In the Explanation 2 to Section 9(1)(vii), the
expression “fees for technical services” has been defined to mean any consideration for the
rendering of any managerial, technical or consultancy services (including the provision of
services of technical or other personnel). If we go by this definition, the services rendered
by UT(IC2) might fall within the scope of the definition in Explanation 2. However, if the
non-resident recipient of the income is entitled to the benefit under a DTAA by reason of
any specific provision contained therein, the provisions of DTAA will prevail over the
provisions of domestic law i.e. Income-tax Act, 1961. Section 90(2) lays down that “where
the Central Government has entered into an agreement with the Government of any country
outside India under sub-section (1) for granting relief of tax, or as the case may be,
avoidance of double taxation, then, in relation to the assessee to whom such agreements
applies, the provisions of this Act shall apply to the extent they are more beneficial to that
assessee”. [emphasis supplied]. Therefore, in order to give rise to taxability under the
Indian Income-tax law, it is not enough if the services satisfy the definition of ‘fees for
technical services’, as defined in the Act. The Treaty provisions dealing with the same
subject matter take precedence over the provisions in Income-tax Act, if they are
advantageous to the tax payer. Coming to the DTAA between India and USA, Article 12
deals with ‘royalties and fees for included services’.

4.1 Paragraph 4 of Article 12 defines ‘fees for included services’ as follows:-

       4.      For the purpose of this Article, “fees for included services” means payments
               of any kind to any person in consideration for the rendering of any technical
               or consultancy services (including through the provision of services of
               technical or other personnel) if such services:

               (a)   are ancillary and subsidiary to the application or enjoyment of the
                     right, property or information for which a payment described in
                     paragraph 3 is received; or

               (b)   make available technical knowledge, experience, skill, know-how, or
                     processes, or consist of the development and transfer of a technical
                     plan or technical design.

The succeeding para 5 excludes certain activities/services from the purview of para 4. It
reads thus:

www.allindiantaxes.com                                                                      5
       “(5) Notwithstanding paragraph 4, “fees for included services” does not include
       amounts paid:

       (a) for services that are ancillary and subsidiary, as well as inextricably and
       essentially linked, to the sale of property other than a sale described in paragraph
       3(a) ;

       (b) for services that are ancillary and subsidiary to the rental of ships, aircraft,
       containers or other equipment used in connection with the operation of ships or
       aircraft in international traffic;

       (c) for teaching in or by educational institutions;

       (d) for services for the personal use of the individual or individuals making the
       payments; or

       (e) to an employee of the person making the payments or to any individual or firm of
       individuals (other than a company) for professional services as defined in Article 15
       (Independent Personal Services).

5. First we shall consider whether the payment falling within the purview of “fees for
included services” as defined in para 4 would get excluded by para 5(c). Is it a case of
teaching by an educational Institute? To answer this question, we must have regard to the
terms of the Agreement and the real nature and predominant purpose of the arrangement
under which the assistance is extended by UT(IC2) in collaboration with FICCI for the
implementation of ATAC programme.

5.1 The Agreement speaks of UT performing the work and services described in
attachment-A. In attachment-A, the Scope of Work is set out. The programme consists of
four components; (i) training, (ii) technology assessment, (iii) business development; and (iv)
programme management. The details thereof will be adverted to later. UT and FICCI will
collaborate and use reasonable best efforts to execute the programme. The consideration
of US $ 660,000 which FICCI will pay to UT in intalments is described as “fixed price
compensation”. Para 7.3 says that the “services under the agreement are provided on as is
basis without any warranties of any kind …………………” and “the entire risk arising out of the
use of any results remains with the user”. Para 8 states that the parties shall be and
deemed to be independent contractors and not agents or employees of the other party. As
per para 7.1, FICCI agrees to indemnify UT, their officers, agents and employees from any
liability or loss in India arising solely from the activities performed in India under the
Agreement including any tax liabilities that result from UT’s performance of its obligations
under the Agreement. The Agreement cannot be assigned by either party without prior
consent of the other party (vide para 12.1).

5.2 In our view, the nature of activities undertaken by UT in coordination with FICCI are
not essentially teaching activities but they are in the nature of services and assistance
extended to DRDO in identification, assessment and business development of competitive

www.allindiantaxes.com                                                                       6
technologies in the field of defence related innovations. The Agreement throughout refers
to services and the stipulations in the Agreement are such as are not usually related to
teaching. The phraseology used in the agreement, the nature of services and the tenor of
various clauses in the agreement do not support the inference of teaching by an educational
institute. UT(IC2) is, no doubt, a wing of the University of Texas which caters to the needs
of higher education. For that reason, it cannot be concluded that the activities undertaken
by UT are in the nature of teaching. Example 10 appended to the Protocol of DTAA
illustrates the inter-relation between teaching and the promotion of technology. The
example is quoted below:

       An Indian automobile manufacturer decides to expand into the manufacturer of
       helicopters. It sends a group of engineers from its design staff to a course of study
       conducted by the Massachusetts Institutes of Technology (MIT) for two years of
       study in aeronautical engineering. The Indian firms pays tuition fees to MIT on
       behalf of the firm’s employees. Is the tuition fee a fee for an included service
       within the meaning of Article 12?

       The tuition fee is clearly intended to acquire a technical service for the firm.
       However, the fee paid is for teaching by an educational institution, and is,
       therefore, under paragraph 5(c), not an included service. It is irrelevant for this
       purpose whether MIT conducts the course on its campus or at some other location.

5.3 The example gives an indicium of the teaching activity concerning a business concern,
but, the present case does not at all fit into the said example, or the criterion deducible
from that example. Though certain attributes of teaching are present in the process of
educating the participants at the workshop about the key principles and features of
technology commercialization, it is only incidental to the primary objective of business
promotion of technologies. We are, therefore of the view that clause (c) of Article 12.5
does not come to the aid of the applicant.

6. The next question is whether the services undertaken by UT fall within the scope of
‘fees for included services’ within the meaning of clause (b) of para 4 of Art.12. In other
words, whether technical or consultancy services rendered by UT “make available technical
knowledge, experience, skill etc”. The expression ‘make available’ is not employed in
Explanation 2 to Section 9(1)(vii), which defines “fees for technical services”. As pointed
out by this Authority in Anapharm Inc. (2008) 305 ITR 394 (AAR) , “mere provision of
technical and other services is not enough to attract Art.12(4)(b). It additionally requires
that the service provider should also make its 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 service provider.” The
interpretation of the expression “make available” is found in the MOU to the India-US
DTAA itself. The following passage in the MOU clearly brings out the meaning of that

www.allindiantaxes.com                                                                    7
       “Generally speaking, technology will be considered ‘made available’ 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 providing 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 a product which embodies technology shall not per se be considered to make
       the technology available.”

6.1 In the case of Intertek Testing Services India P. Ltd. (2008) 307 ITR 418(AAR) also,
this Authority had occasion to explain the scope and meaning of a similar definition in
Art.13.4 of India-UK DTAA. “Fees for technical services” instead of ‘included services’ is
the expression used in India-UK treaty. The Authority explained the connotation of the
phrase “make available technical knowledge, experience, skill” etc. as follows:

       “The service should be aimed at and result in transmitting the technical knowledge,
       etc., so that the payer of service could derive an enduring benefit and utilize the
       knowledge or know-how in future on his own without the aid of the service provider.
       By making available the technical skills or know-how, the recipient of the service will
       get equipped with that knowledge or expertise and be able to make use of it in
       future, independent of the service provider. In other words, to fit into the
       terminology “make available”, the technical knowledge, skills, etc., must remain with
       the person receiving the services even after the particular contract comes to an
       end. The services offered may be the product of intense technological effort and a
       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 orskills 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

This Authority also relied on the clarification given in the MOU forming part of the India-

6.2 Example 3 given in the MOU to the India-US DTAA is quite apposite in the context of
the present case.

       “3. Facts: The Indian vegetable oil manufacturing firm has mastered the science of
       producing cholesterol-free oil and wishes to market the product worldwide. It hires
       an American market consulting firm to do a computer simulation of the world market
       for such oil and to advise it on marketing strategies. Are the fees paid to the US
       company for included services?

       Analysis: The fees would not be for included services. The American company
       provides a consultancy service which involves the use of substantial technical skills
       and expertise. It is not, however, making available to the Indian company any
       technical experience, knowledge or skill, etc., nor is it transferring a technical plan

www.allindiantaxes.com                                                                      8
       or design. What is transferred to the Indian company through the service contract
       is commercial information. The fact that technical skills were required by the
       performer of the service in order to perform the commercial information service
       does not make the service a technical service within the meaning of paragraph

6.3 The consistent view taken by the Income-Tax Appellate Tribunal in regard to the
interpretation of the same clause relating to technical / included services has been
approvingly referred to in Intertek case (supra).

7. Thus the interpretation and connotation of clause (b) of Art.12.4 of DTAA is fairly well-
settled. The question whether the services extended by UT to DRDO in collaboration with
FICCI would amount to ‘fees for included services’ will have to be judged in the light of the
above interpretation. It is the contention of the Revenue that the UT through its services
is clearly making available the technical expertise / knowledge and even transfers to FICCI
the technical plan i.e, Quicklook report which it has developed. It is therefore contended
that the services rendered by UT are covered by Art.12(4)(b) of the DTAA. In view of the
respective contentions, it is necessary to get into the details of the services and analyse
them so as to see whether clause (b) of Art.12.4 of the DTAA is attracted.

7.1 The scope of work is detailed in Attachment A to the Agreement. The applicant has
filed a set of documents to highlight the activities related to the four components of the
programme set out in Attachment A. The programme component No.1 as per Attachment A
is Training. A workshop is conducted for DRDO officers and scientists at management level
to provide a broad understanding of the key principles involved in the technology
commercialization process. FICCI will provide the classroom facility for this purpose and UT
will provide the instructor with training materials. Two training programmes were arranged
for 5 days and various aspects of ATAC were explained by means of power point
presentation. It is clarified by the applicant’s counsel that the training materials are
nothing more than customized modules. The other segment of training is “Technology
Commercialization Management Board Workshop”. It is stated that the said Workshop
which was to take place in USA was found to be unnecessary and therefore not conducted.

7.2 Explaining broadly the principles involved in technology commercialization and making
the participants familiar with various aspects of the programme does not prima facie
amount to making available technical knowledge or expertise possessed by the instructors
of UT. At any rate, it seems to be merely incidental to the implementation of the
programme which, as discussed hereinafter, does not fall within the definition of ‘included
services’. It is not possible to split up this segment of service and apportion a part of
consideration received for ‘training’, even if it has the flavour of ‘included services’. An
overall view of the entire transaction has to be taken.

8. Now we come to the second component of the programme which is ‘technology
assessment’. The screening and assessment process is done by evaluating the submitted
technologies to find out the unique and globally competitive technologies. There are four
steps involved in this. The assessment process begins at the DRDO laboratory leading to the

www.allindiantaxes.com                                                                     9
selection and nomination of technologies on the basis of the guidelines provided by ATAC
team. 200 technologies are selected for further processing. The second step is ‘global
screening’ which is done by ATAC team with which sometimes the representatives of UT
may also be associated. It involves the process of elimination of technologies that do not
score well enough from the point of view of commercialization. The third step is ‘Quickscan’
or ‘technology validation’. 70 technologies are selected for another round of screening. The
UT will conduct a two step market analysis to further study the technology’s overall
commercialization potential and for a qualitative evaluation of the technology. UT conducts
interviews with the US and other technologists to assess the technical and commercial
potential of the technologies selected. This is called “Validations by industry experts” (vide
2.3 of Attachment A). A Questionnaire is prepared by UT for technology validation. UT also
adopts selection guidelines for selecting the technologies which would qualify for further
assessment. UT will provide 70 reports based on ‘technology validators’. Then the fourth
step in the Technology Assessment process is ‘Commercial Assessment’ which is dealt with
in cl. 2.4 of Attachment A. The commercial assessment is an in-depth analysis of the
technology’s commercial potential. UT provides assessment reports of each of selected
technologies (40 in number) to the DRDO Technology Review Board. It contains an indepth
analysis of the commercial potential and recommends the appropriate commercialization
technologies to be adopted, best market opportunities that exist and potential industry
partners with whom further negotiations could be done for the commercialization of
technology. Each report contains Commercialization rating which helps the Management
Board make business decisions. Technologies selected by the Technical Review Board of
DRDO will move into the Business Development phase of the programme. The technologies
selected for Quicklook reports are furnished in Encl 9 of the Paper book. A sample of the
Quicklook report prepared by UT is given in Encl 10.

8.1 Evaluating the potential of technologies after interaction with the experts and passing
on the results of its interaction and furnishing relevant informations which are by and large
within public domain in order to enable DRDO to find potential customers do not fall within
the scope of services contemplated in paragraph 4 of Art.12 of the DTAA.

9. The business development phase is the third phase of the programme’s
commercialization process. In this phase, UT with the assistance of FICCI personnel
identifies 12 global and US partners and UT will also advise FICCI in their business
development activities for ‘8 engagements’ within the Indian market. UT/FICCI will
negotiate letters of intent with each potential partner and to create a framework for
completed licensing agreement. Thereafter UT/FICCI will continue to monitor and support
direct negotiations between DRDO and the potential partner for the purpose of concluding
the licensing agreement.

10. The fourth component in the programme is programme management. UT will provide
Programme Manager to design and implement the programming for its duration and to offer
the needed administrative assistance.

11. The expected results of the programme as summarized in Attachment A are as follows :

www.allindiantaxes.com                                                                     10
       •       200 screened technologies with results reports;

       •       70 technology validation reports to identify the top 40 technologies;

       •       40 Quicklook reports to identify the top 20 business development candidates;

       •       20 engagements for business development work to identify potential
               commercial partners for DRDO’s technology licensing agreements.

12. As per the Chart given by the applicant in para 7.1 of the application, the role of UT
(IC2) extends to the following activities:

       (i)     final approval of the identified technologies and the scoring sheet for each
               technology application;

       (ii)    scan for each technology application to identify uniqueness and novelty;

       (iii)   technology assessment by way of SME validation of the selected technology in
               coordination with innovators and industry experts.

       (iv)    preparation of Quicklook report for the selected technologies; and

       (v)     defining and    executing business development strategies for           selected

       These activities are all performed by UT (IC-2) from USA.

13. On a consideration and analysis of the various services and assistance rendered by UT,
we are unable to reach the conclusion that the payment received by UT under the
Agreement would amount to ‘fee for included services’ within the meaning of para 4(b) of
Art.12. Earlier, we have explained the true scope and meaning of the expression ‘make
available’ occurring in para 4(b). Most of the services no doubt answer the description of
technical and consultancy services. Few of them are managerial in nature. But, none of the
technical/consultancy services and related activities undertaken by UT would amount to
making available the technical knowledge, experience, skill, know-how or processes
possessed by UT. Acting as a facilitator and technical consultant for the purpose of
commercialization of identified technologies, screening and assessment of technologies by
deploying the expertise and resources which UT has, and preparing technical reports
including market analysis cannot be legitimately brought within the purview of para 4(b) of
Art.12. Expression of opinion, formulation of recommendation, and rendering assistance to
DRDO in connection with ATAC programme do not really make available the technical
knowledge or know-how to DRDO, except perhaps in an incidental or indirect manner. UT’s
services and the consideration received therefor cannot therefore be brought within the
ambit of Art.12.4 of DTAA.

www.allindiantaxes.com                                                                      11
14. The learned Departmental Representative has particularly drawn our attention to
Quicklook Report prepared by UT and contended that such report imparts technical
knowledge and valuable information to DRDO and therefore it amounts to transfer of
technology. We find no substance in this contention. There is no factual or legal basis to
support the inference that the technical knowledge, skill or experience of UT have been
passed on to the DRDO so as to enable the recipient to acquire and apply same on its own.
Nor can it be said by any process of reasoning that UT transferred technical know-how or
technical plan, as faintly contended on behalf of the Revenue at one stage.
14.1 As some emphasis has been laid by Revenue on the Quicklook Report prepared by UT,
we would like to advert to the contents of that report which has already been referred to
earlier briefly. A copy of the Quicklook Report relating to ELISA diagnostic test for
Japanese Encephalitis prepared by UT(IC2 Institute) under the heading of TECHNOLOGY
COMMERCIALISATION REPORT is found in Enclosure 10 of the Paper-book filed by the

14.2 The opening page is a synopsis of the Report in the form of ‘Executive Summary’. The
special features and utility of the kit, the status of intellectual property protection, the
primary and alternative markets that exist and a rough estimate of market size, the
competitors in the field and the estimated pricing per test are all furnished. Then, the
recommendation is made to the effect that the “special technology be further
commercialized. Given the market is primarily in South East Asia, it is not expected to be
highly profitable. But this might generate some positive cash flow for licensing over multiple
years. Therefore it is recommended that the innovators actively pursue a licensing model
with a company who has expertise in the manufacturing and distribution of ELISA based
test kits”. The Report was concluded with a suggestion to consult a patent attorney about
the viability of patenting the innovation. Then follows a summary of the ‘Key Findings of the
report’ “based upon interviews, analysis of potential markets and other research”. The
points noted in the Executive Summary are reiterated. The next heading is
‘Recommendations’/Next Steps which is only amplification/reiteration of what is stated in
the Executive Summary. Under the head ‘Commercialization Strategy’, it is stated: “Given
the small market size for this technology, it is recommended that a licensing model be
pursued”. It was suggested that “issues around the IP should be addressed quickly as well”.
Then, ‘Technology Description’ is given. ‘Potential benefits’ is the next item discussed. It has
been pointed out that the ELISA kit being assessed has superior accuracy. The greatest
benefit, according to those interviewed, is that the kit could reveal the result in 2 hours.
The cost of conducting the test is much lower when compared to others in the market.
‘Development Status’ is the next item discussed. It only contains the information provided
from discussions with the innovator. Then, under the heading ‘Market Analysis’, it is stated
that a total of two markets were studied and those are: (1) ELISA based test kits for JE
primarily in South East Asia and (2) ELISA based test kits for West Nile Virus. The points
mentioned are: (a) where the market exists and who are the competitors? (b) average
pricing per test; (c) key opportunities i.e. the test being superior to existing methods, one
of the major competitors likely to exit the market and the cost for the test {in terms of
manufacture and laboratory requirements} being much lower; and (d) key challenges i.e, the
market being quite small and the target market group in South East Asia belonging to

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poorer regions with limited access to healthcare and the likelihood of technology facing
some IP barriers. In the same manner, the ‘market’ relating to West Nile virus has been
analysed. The interview notes and the market base line reports are furnished among other
things as annexures to the Report.

14.3 We have also gone through another Quicklook Report (‘Commercialization of technology
report’) relating to explosive detection kit. That report too is on the same model and
pattern as the one relating to JE ELISA kit. It is sufficient to extract the recommendation
contained in the last two paragraphs of the Executive Summary which read thus:

               “One potential opportunity uncovered is that in the U.S. new regulations due
       to enact in a couple of years will require courier companies (Fed EX.UPS) to have x-
       ray machines and run packages through those. This might offer an opportunity to
       provide a low-cost kit for initial inspection of packages deemed suspicious.

               The recommendation of this report is to move forward with
       commercialization with a very targeted focus. Research uncovered a company in
       India which is very interested in discussions about licensing. Research has also
       uncovered two individuals who might have interest in a strategic alliance as a
       Product Representative for the DRDO in approaching law enforcement agencies
       around the world. All of these leads should be pursued with a next round of
       discussions to analyze potential fit for the DRDO in commercializing the kit.”

14.4 The Report is an end product of the technical knowledge possessed by UT coupled with
an intensive study and inputs gathered from such study. But, that is not sufficient to
impress it with the character of a document ‘making available’ technical knowledge and
experience by UT. The information and inputs are gathered from various sources. By and
large, such informations which are mostly in public domain are collected, collated and
presented to the recipient of services, with its own assessment and recommendation.
Moreover, the report is specific to the particular technology or innovation and the contents
of the reports are not such that they will be of continued use to the applicant in
commercializing future innovations of different nature. Evaluating the potential of
technologies after interaction with the experts and passing on the results of its interaction
or furnishing relevant informations which are mostly in public domain in order to enable
DRDO to find potential customers for the concerned technologies do not, in our view, fall
within the scope of services contemplated by paragraph 4 of Art.12 of the DTAA. We fail
to understand how such services amount to transfer of technical know-how or process or
transfer of a technical plan, as contended by the Revenue.

14.5 We may in this context usefully refer to the ruling of this Authority in Anapharm Inc,
in re (305 ITR pg.394). While reaching the conclusion that the bio-analytical services and
reports provided to the pharmaceutical companies by the applicant Anapharm Inc. cannot be
brought within clause (b) of Art.12(4) of the DTAA between India and Canada, the following
observations were made at p.407:

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       “We find that, in the present case, the agreements of the applicant fall in the latter
       category, as the applicant uses its experience and skill itself in conducting the bio-
       equivalence tests, and provides only the final report containing conclusions, to the
       applicant. The information concerning scientific or commercial experience of the
       applicant or relating to the method, procedure or protocol used in conducting bio-
       equivalence tests is not being imparted to the pharmaceutical companies and the
       consideration is not paid for that purpose. On the basis of the final report, the
       pharmaceutical companies will not be able to find out what method, procedure or
       protocol was used in conducting the tests. Moreover, the test reports are drug
       specific as stated at paragraph 4 above. Hence, the material furnished by the
       applicant will not in any way help the customers to facilitate further research and
       development of new drugs as contended by the Revenue.”

       More or less the same situation obtains here.

15. We are, therefore, of the view that the services/activities provided by UT(IC2) to
DRDO pursuant to the Agreement entered into between FICCI and UT(IC2) do not fall
within the purview of Art.12(4)(b) of the DTAA and the payments received under the
Agreement are not liable to be taxed as fees for technical services under the domestic law.
They cannot be subjected to tax as business profits in view of the undisputed and
undeniable fact that UT has no permanent establishment in India and the services were not
carried out through a PE in India.

16. Our conclusions are therefore as follows:

       (1)     The first question is answered in the affirmative. The Tax Treaty (DTAA)
               between India and USA governs.

       (2)     The second question is answered in the affirmative and it is ruled that
               UT(IC2) is not liable to pay income tax in respect of the payments received
               by it from FICCI as per the Agreement entered into between FICCI and the
               University of Texas.

       (3)     The third question is also answered in the affirmative. That means FICCI is
               not required to deduct tax under Section 195 as the payments made by
               FICCI to UT(IC2) are not liable to be taxed under the Income Tax Act,

       (4)     There is no need to answer the fourth question in view of the answers given
               for the first three questions.

Accordingly, the Ruling is given and pronounced on 30th November, 2009.

www.allindiantaxes.com                                                                    14

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