Case of Authority for Advance Rulings, November 30, 2009 (case Federation of Indian Chambers of Commerce and Industry (FICCI) Vs Director of Income-tax (Exemption))
| President | P.V. Reddi, J. (Chairman) and J. Khosla, Member |
| Resolution Date | November 30, 2009 |
Judgment:
P.V. Reddi, J. (Chairman), (New Delhi)
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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 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 innovators for technology nomination FICCI India
Technology Assessment Identification of Fast Track Technology 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 uniqueness and novelty UT(IC2) USA
Technology assessment by way of SME validation of the selected technology in coordination with POCs, innovators and industry experts UT(IC2) USA
Preparation of Quick Look report for the selected technologies UT(IC2) USA
Defining and executing business development strategies for selected technologies UT(IC2) USA
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.
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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? 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?
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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:
TO WHOM IT MAY CONCERN:
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 Sections 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.
2nd Question
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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...
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