M/s. Wheels India Ltd. v. ITO ITA No. 1793/Mds./2006 (Chennai) Article 12(4) of India-US DTAA; Sections 9(1)(vii), 210, 201(1A) Income-tax Act A.Y.: 2005-06. Dated: 19-4-2011

• The taxpayer (WIL), an Indian company, is engaged in the manufacture of steel wheels for commercial vehicles, passenger cars, utility vehicles, earthmoving and construction equipments, agricultural tractors and defence vehicles.
• WIL developed a new process for manufacturing steel wheels for trucks out of a single piece of steel material. The new design and concept was intended to result in reduction of input material and improvement in the strength of the wheel by elimination of welding process. WIL applied for registering patents in India with Indian Government Patent authorities in respect of the wheels which it intended to manufacture.
• However, WIL did not have requisite knowhow for designing the machine capable of manufacturing the product as per patented processes.
• WIL approached two US companies (USCOs), which had the required machine/tooling capability with them for validating the process conceptualised by WIL. In terms of the agreements, WIL got the validation done through USCOs. However, after receipt of initial report, WIL did not pursue the agreement with USCOs as the validation reports did not meet WIL’s requirement.
• After discontinuation of the agreement, WIL began manufacturing the item/articles in their own in-house facility, after importing requisite machinery from other parties in Germany and US.
• WIL did not deduct tax at source in respect of advance payments made to USCOs, on the premise that the entire services under the agreement were rendered by USCOs outside India and no income was chargeable to tax in India. And, in any case, in terms of the treaty no amount was chargeable as no technology was made available by USCOs as its services were essentially for validating the new process which was actually developed by WIL.

The Tax Authority rejected the contention of WIL and concluded that the services provided by both foreign companies would come under the purview of ‘fees for technical services’ liable to tax in terms of section 9(1)(vii) of the Income-tax Act and under ‘fees for included services’ under Article 12(4) of India-US DTAA. On this basis, the Tax Department proceeded to treat WIL as assessee in default u/s.201 for not withholding tax on payments made to USCOs.

Held:
ITAT accepted the contentions of the Tax Authority and held that:

• The term ‘fees for technical services’ and ‘make available’ in the context of DTAA is generally understood by Courts1 as under:
• Mere rendering of specific technical services is not sufficient to attract definition of ‘fees for technical services’. The services rendered should make available technical knowledge, experience, skill, know-how, etc.
• To fit into ‘make available’, the technology, the technical knowledge, skills, etc. must remain with the person receiving the services even after the particular contract comes to an end.
• It is not enough that the services offered are the product of intense technological effort and that a lot of technical knowledge and experience of the service provider have gone into it. 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 upon the provider.
• WIL got validation done through USCOs and thereafter it began manufacturing items/articles. Necessary tooling was developed in-house with CAD and CAM techniques available with WIL. Furthermore, extensive process trials were conductedat WIL. This directly supports the fact that WIL was ‘made available’ with technical know-how making it able to carry out in-house manufacturing activities.
• The fact that WIL got the test for validation done and thereafter got the manufacturing of tooling done raises a strong presumption that the technical know-how involved in the process was made available. It is not the case of WIL that the know-how was obtained from some other party and/or that the manufacturing was abandoned. The fact that the toolings were developed in-house by WIL support that the know-how was passed on to WIL and hence the services made available requisite know-how.
• The payments made to USCO’s, were liable to tax in India, and hence WIL was required to deduct tax at source.