No income-tax is liable to be paid by IC2 Institute on the payments received by it from FICCI for impmentation of India Innovative Growth Programme and FICCI is not required to deduct tax at source from such payment.
AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI
Federation of Indian Chambers of Commerce and Industry (FICCI), In re
A.A.R. No.812 of 2009
March 5, 2010
R U L I N G
(By Hon’ble Chairman)
1. The applicant, Federation of Indian Chambers of Commerce and Industry (“FICCI”) is a company registered under the Companies Act, 1956. It is stated that for meeting several objects, the applicant maintains a liaison with the Government of India/State Governments on the one hand and several corporations and other members on the other. The applicant states that it received a letter dated 7 th January, 2009 from Indo-US Science and Technology Forum, New Delhi (hereinafter referred to as (“IUSSTF”) awarding a job contract for administering DST-Lockheed Martin India Innovation Growth Programme 2009” (“IIGP for short) as joint partners with IC 2 Institute of 1.University of Texas & IUSSTF. IUSSTF was appointed as coordinating agency on behalf of Department of Science and Technology, Government of India (hereinafter referred as DST). The objective of this programme is to identify, award and accelerate innovative new Indian technologies into the market space. IIGP will help Indian innovators to find markets globally. The participants of the programme will receive professional business development assistance to facilitate access to US, Indian and global markets.
1.1. The IIGP have two programme components:
I. India Innovation Growth Programme; and
II. Capacity Building on Technology Commercialization for Incubation Managers at IC institute of University of Texas (hereinafter referred to as “UT (IC 2 )”
1.2. In this application, we are not concerned with the II Part of Programme.
1.3. DST has allocated funds to the tune of Rs. 530.30 lakhs for implementation of the programme for a period of two years i.e., 2009 and 2010. The year-wise break-up of the said amount, the payment schedule etc. are set out in detail in the application. An amount of US$ 12,00,000 has been committed by Lockheed Martin Global Inc. to be paid to UT(IC 2 ) directly in USA for implementation of the programme. The applicant had to make payment to IC 2 Institute to meet their expenses incurred in technology assessment and for travel of their personnel to India to participate in commercialization workshop.
1.4. As per the schedule of payments, $ 400,000 is payable in four instalments by FICCI to UT(IC 2 ).
2.1. The following is the summary of the above activities:-
i. Application for the programme – Interested innovator should apply to participate in the programme using the on-line application form.
ii. First screening – Applications are evaluated to select the top 60 innovations.
iii. Commercialization Strategy workshop – Top 60 innovators/selectors are invited to attend a 3-day Commercialization Strategy Workshop at the FICCI campus in Delhi.
iv. Second Screening – The top 30 innovators are selected from the group of 60. These innovators will receive a professional assessment of their innovation, and will be invited to attend the Entrepreneurship Workshop. .v. Each innovator receives a QuickLook assessment report prepared by IC 2 Institute.
vi. Entrepreneurship Workshop – The top 30 innovators participate in this seven day programme to get professional assessment of their innovations by the experts deputed by IC 2 and a workshop will be conducted in which the instructors from IC 2 give a power
point presentation and interact with the innovators on commercialization strategies and guide them through 6 key areas of entrepreneurship.
vii. DST – Lockheed Martin Innovation Competition – The top 30 innovators present their innovations to a panel of judges made up of renowned technologies and commercialization experts. At the end of these presentations, Judges from the Panel of Indian and US experts select 15 most promising innovations and gold and silver medals will be presented to 6 of them.
viii. Business development – Gold and Silver Medal Innovators will receive professional business development services from the UT(IC2) and FICCI assist them to create partnerships in US and other global markets.
ix. Global markets – Innovators connect with new global partners.
2.2 Thus, there are five partners involved in this programme, namely, DST, LMC, IUSSTF, FICCI(applicant) and UT(IC 2 ). The IC 2 Institute “is a globally recognized “think and do” component of the University of Texas whose mission is 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 the commercialization of technological innovation.”
2.3 It is stated that the applicants who are selected to participate in the program can look forward to the following benefits:
i. Training in technology commercialization strategies and entrepreneurship;
ii. Analysis of commercial potential of their technology by US and Indian experts;
iii. Participation in a technology competition judged by an international panel of experts.
The programme finalists will receive the additional benefits like –
i. Professional business development assistance; and
ii. Access to US and global markets.
3. The applicant submits that the project parameters of this programme are almost similar to the programme involved in the agreements between DRDO-FICCI and UT(IC 2 ) which was the subject matter of another application-AAR No. 811 of 2008. The additional feature of this programme is the involvement of Lockheed Martin Corporation of USA (LMC), a premier systems integrator and global security enterprise which is principally engaged in research, design and development and integration and sustainment of advanced technology systems, products and services LMC has agreed to fund UTIC Institute to the extent of US $ 1,200,000 directly for the completion. The DST has committed to provide the sum of Rs.5.305 crores to the applicant as noted earlier.
3.1 The project is said to be non-commercial and not for profit, having the goal of making the innovators reach the global markets. The IIGP programme is a two year nation-wide project, created to enhance the growth and development of India’s entrepreneurial economy. The top selectors will also be eligible to receive professional business development support to assist them in entering into global
markets. The programme is open to all Indian researchers, innovators, entrepreneurs and corporate with early stage technologies that possess promising commercial potential. The programme is open to technologies from a wide range of fields. The programme offers the participants a number of training and educational opportunities designed to enhance their commercial potential.
4. The following questions are formulated by the applicant for seeking advance ruling:
. Whether on the facts and circumstances of the case, the IC Institute of University of Texas, Austin, USA executing the agreement between FICCI and UT (IC 2 ) is covered by the Double Taxation Avoidance Agreement (DTAA) between India and USA, therefore, the provisions of the Income-tax Act, 1961 will not be applicable?
ii. Whether on the facts and circumstances of the case UT (IC 2) is not liable to pay income-tax in India out of the payments received by it from FICCI in instalments?
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 (IC 2 ) for execution of the agreement?
iv. If the answers to questions (ii) and (iii) above are in the negative, which are the amounts liable to tax and what rate of tax would be applicable to such payments?
5. 1 st Question : As IC 2 Institute of University of Texas, USA, is located in USA and it is liable to pay tax by reason of place of incorporation and the place of management, the said Institute has to be treated as resident of USA within the meaning of Article 4 of DTAA. The fact that the University is exempt from payment of tax under the Internal Revenue Code of USA does not affect the residential status of the applicant in USA. The certificate of the University (filed by the applicant) shows that the University is required to pay tax on “certain unrelated business taxable income”. Thus, there is no general immunity from taxation. Incidentally, there is no controversy on the 1st issue.
2 nd Question: To resolve this question, the only issue that arises for consideration is whether the payment made by the applicant to UTIC Institute can be regarded as ‘fees for technical services’ as defined in Article 12.4 of the India-USA DTAA (tax treaty), as follows: Article 12.
For the purposes 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
(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.
6. If the payments received from the applicant-FICCI answer the description of ‘fees for technical services’ it can be subjected to tax in India wherein the income arises, subject to the restriction as to the rate of tax provided in by para 2 of Article 12. If it is not in the nature of FTS (royalty clause being not applicable), the non-resident
7.recipient of income would be taxable only if it has a PE 1 in India. It is not in dispute that UT IC 2 Institute has no PE in India. In the light of the services rendered by UT IC 2 in India under the IIGP, the question is whether it “make available” to the innovators/technologists technical experience, skills, know-how or process. The expression “make available” has been construed by this Authority in a number of cases. The import of that expression has been succinctly stated in the MOU to India-USA DTAA. It says:
”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 2 ., this Authority after extracting the relevant portion of MOU, clarified the meaning of the expression thus:
“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 or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in future without depending on the provider.”
6.2 It was also noted by this Authority that the Income-tax Appellate Tribunal has consistently placed the same interpretation on the said expression “make available”.
6.3 The legal position as to the scope and ambit of Article 12.4 (b) is, therefore, not in doubt. The question is whether the ‘make available’ criterion is satisfied in the instant case. The same issue was considered in a recent ruling of this Authority in the case of the applicant (vide AAR/811/2009). In AAR/811/2009, the project undertaken by FICCI in collaboration with the University of Texas (UT IC 2 Institute) was DRDO - FICCI ATAC project. In both the cases, FICCI has entered into an agreement with the University of Texas.
6.4 There are two programme cycles mentioned in the present Agreement. However, we are concerned only with the first part of the programme. Under the head “deliverables” of the 1 st programme cycle, it is stated thus:
“UTIC 2 will assist FICCI in the conduct and management of the programme by providing a number of professional and academic service deliverables. These will be accomplished by planning meetings, the conduct of academic course work and the professional assessment of technologies being considered for commercialization” .These deliverables will include (i) Management guidance and commercialization expertise to support FICCI for overall programme which involves process development, Screening of candidate technologies and Business development strategies for selected technologies. The second part is ‘Entrepreneurship training’. It is stated in the Agreement that UT(IC 2 ) will conduct a six-module Entrepreneurship Workshop in which the Instructors of the Institute will deal with the subjects of (a) commercialization principles (b) venture formulation (c) finance, (d) technology marketing strategy, (e)
technology commercialization strategy and (f) presentation skills. It
is stated in attachment-A that the length of the modules will range
from 2 to 2.5 days each and all instructions will be delivered in India
at facilities to be provided by FICCI.
6.5 The applicant has clarified that Commercialization of technologies/Innovations is the main aim of both the programmes i.e. DRDO and DST projects. The assessment process of the technologies, short-listing methods and preparation of Quick-look (technology assessment) reports are common to the two projects. In both the programmes, FICCI is responsible for the business development of the selected technologies in Asia and Africa. IC 2 looks after the same in America and European countries. 10.7. After the first hearing, the Director of the applicant has filed a note in which he explained the various steps involved in the programme. The item ‘Entrepreneurship Workshop’ and ‘Innovators’ competition’, i.e. steps 6 and 7 were not there in the DRDO project (which was considered in AAR/811/2009). Not much turns on innovators’ competition. Only step no. 6 i.e. Entrepreneurship Workshop has evoked some doubts whether the components of this programme contained an element of making available the technical knowledge and skills. The Departmental Representative also has laid stress on this item of the programme. Hence, we requested the applicant’s A.R. to furnish more details on the salient features and highlights of this programme. Accordingly, the applicant has furnished a detailed note as well as the documents evidencing the power point presentation made by IC 2 teachers/experts in the form of a booklet. It has been clarified that although the Agreement contemplates the total duration of 10-15 days, actually, the Entrepreneurial Workshop was curtailed to 7 days i.e. 2 days in Delhi for 60 innovators and one week (5 working days) in Goa for 30 innovators. Copies of course material presented through power-point have been furnished.
7.1 The summary of presentations is given as follows: • Commercialization strategy, which provided a broad overview of the programme, feedback from participants, focus areas etc. for the group of 60 at Delhi. (Enclosure-A) 11.• Commercialization workshop by Mr. Noman Kaderlan (discussion on presentation skills for the group of 30) at Goa (Enclosure-B). • Principles of technology commercialization to discuss some principles in short as a part of MS programme of IC 2 Institute (presented by Mr. Len Denton) (Enclosure-C). • Converting technology to wealth, i.e. Venture formation, financing etc. (presented by Mr. Dan Hanson) (Enclosure-D);
• Competitive Analysis discussing access to markets and competition (Mr. Len Denton) (Enclosure-E).
• Successful technology marketing, discussing issues and strategies for marketing (Mr.Michelle
7.2 It is the contention of the applicant that a perusal of the material in various enclosures would indicate that IC 2 Institute did not make over any know-how to Indian innovators by organizing a short session of entrepreneurship workshop, but the Instructors from IC 2 only provided, explained and disseminated informations on the subjects which are already a part of the study course available on the website of IC 2 Institute and other Universities. In this connection,
attention has been drawn to Enclosure G which is a copy of the contents of website of University of Texas relating to MS course in technology commercialization. It is contended that this type of exposure to the innovators simulating class-room teaching module cannot be said to have made available any technical knowledge, experience, or skills possessed by the Institute or its faculty. It is pointed out that the power-point presentations make it clear that the.exposure is of a general nature, the source of which is the University curriculum found on the websites.
7.3 Having regard to the clarifications given by the applicant and after having gone through the enclosures contained in the booklet, we find substance in the contention of the applicant. We do not find any distinguishing feature of substantial nature so as to persuade us to reach a conclusion different from that recorded in AAR/811/2009.
8. We may, for instance, analyze Enclosure-C. The representative of IC 2 Institute had made a power-point presentation of a “Short course on the Practical Principles of Technology Commercialization”. In the prefatory remarks, it is stated that the short course is 5 to 6 hours and covers only the real important points. The practical principles, it is indicated, are based on 100s of innovator stories in India, Poland and other countries. It is then stated that “it is all about getting new technologies to market”. Then follows the “Introductory Thoughts on Tech. Commercialization”. Then, under the head, “Why tech commercialization is so challenging”, three reasons are mentioned – one is tech commercialization gap, the other is difference in skill sets and the third one is the risk factor. Then it is emphasized that what is needed is a structured framework to help systematically think through the various issues i.e. technological readiness, competitive advantages IP, marketing strategies and business models. Technology
13.commercialization is that structured frame-work. Then, it is pointed out that invention and innovation are not the same thing. Invention plus marketing is innovation. Then, ‘innovation’ is elaborated thus: (a) Solving a problem in a new novel way; (b) Providing villages with solar power; (c) Selling a web service; (d) Licensing an invention to manufacturer for a new product, (e) Starting a new automobile company.
8.1 Under each topic, certain assertions are formulated viz. Invention and innovation are not the same thing, Patentability is not marketability, tech. commercialization is pre-entrepreneurial etc. and these assertions are explained. Under the head “Tech. commercialization comes first”, various aspects of technical commercialization strategy and stages are explained. The macro-level
questions are formulated: – (1) should this technology go to market? (2) what is the best market for this technology? (3) what is the best business model to succeed in this market? Then the subject: of technology commercialization stage has been sub-divided into three: (a) technical assessment, (b) markets and competition; and (c) go-to-market strategy, ‘Technical assessment’ is then elaborated. Should this technology go to market? Assessment areas - Is there a need? Is there a market (pain?)? Does it work? Is it unique? What are the BFCs (Better, Faster & Cheaper) is then explained. Then, what is IP picture? Thereafter, the subject of markets and competition is dealt with. The Queries are posed – which market should we choose? Can we play in a particular market? etc. The assessment areas relating to markets and competition are enumerated as follows:
Identify potential markets, locate key competitors, analyze strengths and weaknesses, understand buyer behaviour and analyze market structures. Then, the Go-to Market strategy is discussed starting with “what is the best business model to succeed in this market? Then, technology commercialization process and stages are explained in the form of a diagram. The power-point presentation ends with the ‘next steps’ - “Delivery of
reports, Develop competitive analysis tools and Prepare to win a medal.
8.2 This is what is broadly contained in Enclosure C of the booklet filed by the applicant.
9. The following observations made in AAR/811/2009 would equally apply to the present case. 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.
10. As regards the entrepreneurial workshop which is an additional feature in the present case and in respect of which certain doubts have been entertained by us initially, we are unable to reach a different conclusion after going through the relevant material placed before us. Having regard to the short duration of the course, the contents and pattern of the modules presented, it is difficult to infer that any technical knowledge, experience, or skills were shared with and made available to the participant – innovators, much less it can be said that there was a transfer of technical know-how/knowledge. The contents of the modules and topics presented in the course of the workshop were sourced by and large from University’s course of study for post-graduation in technology. There is nothing like sharing the trade secrets or imparting skills in a practical manner. No doubt, the workshop an enlightening exercise, opening up new vistas of thinking. The participants will benefit by the lectures and deliverables and they may be better motivated or equipped to deal with the problems in the field of commercialization/marketing of the technology. But, on that account, it cannot be said that the definition of FTS as explained earlier has been satisfied in the instant case. Orientation towards business and inculcation of entrepreneurial outlook does not really amount to “making available” the technical knowledge, experience or skills of the experts of IC 2 Institute.
10.1 The second question is, therefore, answered in the negative by ruling that no income-tax is liable to be paid by UT (IC 2 ) Institute on the payments received by it from FICCI.
11. In view of the answer to question no. (ii), question no.(iii) has to be answered in the negative. It is held that FICCI is not required to deduct tax at source.
12. There is no need to answer the question no.(iv)