Article 12 of India-USA DTAA; Section 9(1)(vii), 40(a)(i) of the Act – Rendering of service through deployment of personnel having requisite experience and skill which could not have been performed by service recipient on its own without recourse to the service provider, did not qualify as FIS under the India-USA DTAA.

11. (2018) 92 taxmann.com 407

ACIT vs.
Petronet LNG Ltd.

ITA No. :
865/Del/2011

A.Y.:
2006-07

Date of Order:
6^th April, 2018

Article 12 of India-USA DTAA; Section 9(1)(vii), 40(a)(i)
of the Act – Rendering of service through deployment of personnel having
requisite experience and skill which could not have been performed by service
recipient on its own without recourse to the service provider, did not qualify
as FIS under the India-USA DTAA.

Facts

Taxpayer, an Indian company availed certain consultancy
services from a U.S. company (FCo). As part of the service agreement, FCo, was
required to evaluate different types of LNG vaporizers, recommend a suitable
form of vaporiser and study the benefits of various schemes for generating
power through utilisation of LNG study.

Taxpayer contended that the payments made to FCo were
covered by Article 23 (other income) of the DTAA and hence was taxable only in
the residence state i.e. US. AO however contended that the payment made by
Taxpayer was in the nature of fee for technical services (FTS) as defined u/s.
9(1)(vii) of the Act and accordingly, disallowed the payments made by the
Taxpayer for failure to withhold taxes on the same.

Aggrieved, the Taxpayer appealed before the CIT(A). The
CIT(A) deleted the disallowance. Aggrieved the AO appealed before the Tribunal.

Held

– Article 12(4) of the India-US
treaty provides for a restrictive meaning of ‘fee for included services (FIS) vis-a-vis
the meaning of FTS under the Act. Under the DTAA, FIS is defined to include
only those technical/consultancy services which are ancillary and subsidiary to
the application/enjoyment of right, property or information or which ‘make
available’ technical knowledge, skill, knowhow, process etc.

– As explained in the Memorandum of
Understanding entered into, between India and USA, technology is considered to
be ‘made available’ only when the person acquiring the service is able to apply
such technology on his own.

– Services provided by FCo involved
use of technical knowledge or skill. Although mere rendering of services
involving technical knowledge, skill etc. could qualify as FTS under the
Act, it would not qualify as FIS under Article 12(4) of the DTAA.

– The scope of services rendered by
FCo involved deployment of personnel having the requisite experience and skill
to perform the services. Having regard to the nature of services, it was not
possible for the Taxpayer to carry out such services in future on its own
without recourse to the service provider. Hence, services rendered by FCo did
not qualify as FIS under Article 12(4) of the India-US DTAA. The services were
not taxable in India and accordingly no disallowance is warranted for alleged
default of withholding tax.

[1] It is not clear why
taxpayer resorted to other income article rather than rely on the proposition
that non –FIS overseas services rendered by US Company does not trigger tax in
absence of PE.