Section 9(1)(vii) of the Act; Article 12(4) of India-USA DTAA – since monitoring and review services provided to a specialist company by an American company ‘make available’ technical knowledge, etc. the payments made were FTS under India-USA DTAA.
Facts
The Taxpayer was a French company engaged in providing technical and engineering services. The Taxpayer had entered into an agreement with an Indian company for providing technical and engineering services in India. For providing these services, Taxpayer deputed his employees to India. Taxpayer also entered into another agreement with its affiliate, a USA Company (“USCo”) as per which USCo was required to monitor and review the work done by the employees of the taxpayer, deputed to India. As part of its services US Co was required to share best practices in engineering services in the form of written procedure, forms, and specifications to be adopted in execution of the work in India.
Though the TPO did not consider it necessary to make any adjustment, invoking the provisions of section 40(a)(i) of the Act, the AO disallowed the payments to USCo since the Taxpayer had not withheld tax from these payments. AO contended that the payment made to USCo amounts to FTS and is subject to withholding of taxes in India. Taxpayer argued that the services rendered by US Co did not make available any technical knowledge and hence does not qualify as FTS under the DTAA and no withholding is required on such payments.
The issues before the Tribunal were:
(i) Whether, as per the provisions of section 9(i)(vii) of the Act, the services provided by USCo were in the nature of FTS?
(ii) Whether, as per the provisions of Article 12(4)(b) of India-USA DTAA , the payments received by USCo could be characterised as FTS?
Held
As regards the Act
The payments made by the Taxpayer for provision of services in the nature of managerial, technical and consultancy services and utilised by the Taxpayer in its business in India, is liable to tax in India in terms of Explanation 2 to Section 9(1)(vii) as FTS.
As regards India-USA DTAA
To qualify as Fee for included services (FIS) under the DTAA , services should satisfy the “make available” condition.
Taxpayer received best practices in different engineering specifications as well as engineering details from US Co to be adopted in execution of the different phases of the project in India.
U S Co provided the best practices by way of written procedures and specifications and details. When the procedures and specifications are provided to the Taxpayer, which is also a specialized company in engineering and execution of construction, the specifications and details provided can very well be used in the business of engineering and construction.
Moreover, these specifications and procedures made available to the Taxpayer by USCo can very well be used by the Taxpayer for execution of other projects. Also, the Taxpayer was not a layman but was a specialist in engineering and construction.
The information, expertise, execution plan, project budget, technical standards and quality management standards provided by USCo is absorbed by the Taxpayer who is capable of deploying such technology in future without depending on USCo.
Hence, it could very well use these for its future business without any assistance from USCo. Hence, USCo had ‘made available’ its technical knowledge, expertise, knowhow, etc. to the Taxpayer.
