Article 12 of India-USA and India-Netherlands DTAAs – Testing and certification charges paid to US and Netherlands entities did not qualify as FTS since they did not satisfy ‘make available’ requirement Article 12 of India-China and India-Germany DTAAs – Testing and certification charges were FTS and taxable in India

2. [2020] 117
taxmann.com 983 (Delhi-Trib.) Havells India Ltd.
vs. ACIT ITA Nos.:
6072/Del./2010; 6073/Del./2010; 466/Del./2011 A.Ys.: 2004-05 and
2007-08 Date of order: 25^th
August, 2020

Article 12 of
India-USA and India-Netherlands DTAAs – Testing and certification charges paid
to US and Netherlands entities did not qualify as FTS since they did not
satisfy ‘make available’ requirement

Article 12 of
India-China and India-Germany DTAAs – Testing and certification charges were
FTS and taxable in India

FACTS

The assessee was
engaged in the manufacture of electrical goods. It made payments to various
foreign entities in the USA, the Netherlands, China and Germany for testing and
certification of its products. The foreign entities had specialised knowledge
and facilities for undertaking testing and certification, which was required
for the manufacturing activity of the assessee. These were country-specific
certifications that were mandatory for sale in the respective countries.

The A.O. held that
the payments for testing fees were taxable u/s 9(1)(vii). As regards the
applicability of the DTAAs, the A.O. held that the services met the requirement
of ‘made available’ under the India-Netherlands and India-USA DTAAs. The A.O.
further held that the testing fees were in any case taxable under the
India-China and India-Germany DTAAs wherein the ‘make available’ clause was not
present.

The CIT(A) upheld
the order of the A.O.

Being aggrieved,
the assessee appealed before the Tribunal.

HELD

Payments to
US and Netherlands entities

Relying upon its
order in the assessee’s own case for A.Y. 2005-06 and A.Y. 2006-07 and
following orders for earlier years, the Tribunal held that the services
provided did not satisfy the ‘make available’ condition. Hence, the services
were not chargeable to tax in India.

Payment to
Chinese entity

(a) The assessee contended that in terms of Article
12 of the India-China DTAA, the meaning of FTS was restricted to only services
performed in India, based on ‘place of performance test’.

(b) Relying on the decision in Ashapura
Minichem Ltd.² dealing with Article 12 of the India-China
DTAA, the Tribunal observed that: (i) FTS shall be deemed to accrue or arise in
the source country when the payer is resident of that country; (ii) it is the ‘provision
of services’, and not necessarily the ‘performance of services’ in the
source country which triggers taxability. The Tribunal observed that the
expression ‘provision for services’ used in the India-China DTAA is much wider
in scope than the expression ‘provision for rendering of services’
used in other DTAAs. Hence, rendition of services in India is not necessary for
taxability of FTS in India. It is sufficient that services were utilised in
India. Accordingly, under India-China DTAA, FTS was taxable in India.

(c) Relying on the above decision, the Tribunal
upheld disallowance u/s 40(a)(ia) for non-withholding of tax.

Payment to
German entity

In case of payments
made to the German entity, the Tribunal held that the services provided by it
were in the nature of technical services and hence were taxable under the
India-Germany DTAA.

Standard
services and machine-provided services

(i)  The assessee relied upon the Supreme Court
decision in Kotak Securities³ to contend that
technical services were standard services. However, the Tribunal held that
testing services were not standard services as they were for a specific
country, a specific product, and / or a specific manufactured lot of the
assessee, which was exported to that particular country and conformed to the
standards specified in that country.

(ii) The assessee also relied
on the decision of the Apex Court in Bharti Cellular Ltd.⁴
to contend that services were not FTS as they were provided by machines without
any human intervention. However, relying on the Supreme Court decision in Kotak
Securities (Supra), the Tribunal did not accept the contention of the
assessee. In the said decision, after taking note of the decision in Bharti
Cellular (Supra), the Court had observed that services could be
technical even in case of a fully-automated process which did not involve human
intervention.

_________________________________________________________________________________________________

2    (2010)
40 SOT 220 (Mum)

3    (2016)
383 ITR 1 (SC)

4    (2011)
330 ITR 239 (SC)

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 — 
Albert Einstein