Facts
Taxpayer, a company incorporated and tax resident of Netherlands, rendered certain services to an Indian Company (ICo), who owned and operated refineries in India. These services contained two parts – basic refinery service package and certain optional services.
As part of the basic services, Taxpayer was required to provide ICo with certain deliverables such as manuals, guidelines, standards, etc., which were developed by the Taxpayer based on its expertise and experience in running refineries. Additionally after referring to the manuals if the employees of ICo required any personal assistance or advice, Taxpayer would render the requisite consultancy services and assistance to ICo.
As part of optional services, Taxpayer, when specifically requested by ICo, was required to provide consultancy services and assistance relating to various commercial or technical aspects of the day to day operations of the refinery.
Taxpayer contended that some part of basic refinery services represented supply of goods in the form of deliverables such as training manuals, guidelines, etc., and consideration for such outright transfer, was not in the nature of fee for technical services (FTS) under the India-Netherlands DTAA .
Further, Taxpayer contended that certain part of basic refinery package which were commercial in nature did not qualify as technical service. In any case, such service did not ‘make available’ any technical knowledge, experience, skill, know-how. By virtue of the MFN clause in the India-Netherlands DTAA , the make available condition contained in the India-USA DTAA can be read into India-Netherlands DTAA and since services rendered by Taxpayer did not satisfy the make available condition, it did not fall within the definition of fees for technical services of India-Netherlands DTAA . Taxpayer offered the balance portion as taxable in terms of India-Netherlands DTAA .
However, Tax Authority contended that the payments made by ICo towards basic refinery services was composite payment for holistic technical services and which cannot be split into technical and commercial services. Also, it is not correct to suggest that some part of services satisfy “make available” condition and other part of service does not satisfy “make available” condition. Accordingly, entire consideration should be treated as FTS even under the DTAA . Tax Authority also contended that India-Netherlands DTAA should be interpreted independently without making reference to the MOU between India-USA.
Held
Most Favoured Nation (MFN) clause of India-Netherland DTAA provides that if under any DTAA , India limits its taxation at source on dividends, interest, royalties, or fees for technical services to a rate lower or a scope more restricted than the rate or scope in the India- Netherlands DTAA , the same rate or scope shall apply under the India- Netherlands DTAA also. India-USA DTAA provides a restricted definition of FIS, wherein services can be regarded to fall within the scope of FTS only if the same makes available technical knowledge, skill etc.
By virtue of MFN clause in India- Netherlands DTAA , FTS Article of India-Netherlands DTAA would stand amended in light of the beneficial provisions in India-USA DTAA.
Further, in terms of specific Notification, the MOU between India and USA with reference to Article 12 applies mutatis mutandis to India-Netherlands DTAA .
Certain services rendered as part of the basic refinery services, did not involve any transfer of technology and hence cannot be treated as FTS. Further services in relation to physical delivery of manuals, etc. would also not constitute FTS. The fact that these services or physical deliverables are interlinked with certain technical services does not alter the basic character of these services and physical deliverables.
The mere fact that the overall package is considered as a whole and the services are interlinked cannot be the basis for not apportioning the consideration. The consideration under the composite contract needs to be apportioned between chargeable technical services and non chargeable commercial services.
