June 2012
Income from inspection, verification, testing and certification services (IVTC) provided by FCO in India qualifies as Fees for Technical Services (FTS) under Income-tax Act. IVTC does not qualify as FTS under treaties containing a ‘make available’ clause, as services cannot be independently applied by service recipient. Under treaties having a Most Favoured Nation (MFN) clause, benefit of a restricted meaning of FTS in terms of make available clause is available. Income from IVTC qualifies as ‘<
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XYZ (a.a.r. Nos. 886 to 911, 913 to 924, 927, 929 and 930 of 2010)
Section 9(1)(vii) 139, 195, 245 of ITA,
article 7, 22 of india-US DTAA
Dated: 19-3-2012
Justice P. K. Balasubramanyan (Chairman)
V. K. Shridhar (Member)
Present for the applicant: G and others
Present for the Department: Mahesh Shah, Ashish Heliwal
Income from inspection, verification, testing and certification services (IVTC) provided by FCO in india qualifies as Fees for Technical Services (FTS) under income-tax act.
IVTC does not qualify as FTS under treaties containing a ‘make available’ clause, as services cannot be independently applied by service recipient.
Under treaties having a Most Favoured Nation (MFN) clause, benefit of a restricted meaning of FTS in terms of make available clause is available.
Income from IVTC qualifies as ‘other income’ under treaties not having specific FTS article.
Facts:
- X group of companies is engaged in the business of inspection, verification, testing and certification (IVTC) services. Taxpayer, part of X group and a non-resident in India (FCO), provides IVTC services directly to Indian customers from outside India and payments are also made outside India.
- FCO provides services, issues an analysis reports and raises invoices on ICO or directly on Indian customers.
- FCO approached the AAR for determining the taxability in India of its income from IVTC services. Questions were also raised about the taxability of recovered costs, withholding obligations of the payers and obligation of FCO to file ROI in India.
- The above questions were also raised, before AAR, by various entities of X group belonging to different countries.
AAR examined the position separately under the Income-tax Act/DTAAs:
FTS under Income-tax Act
- IVTC services are in the nature of technical services and taxable as FTS under the Income-tax Act.
- The exclusion in respect of services to be utilised in businesses carried on by residents outside India or earning income from a source outside India does not apply to facts of the case.
Under the DTAA with ‘make available’ clause:
- Services did not ‘make available’ technical know-how, experience, skill, know-how or process to the Indian customers as:
- Utility of services came to an end soon after its rendition.
- There was no system in place which equipped ICO to carry on IVTC services independently.
AAR also held:
- MFN clause extended ‘make available’ benefit in suitable cases even though the treaty was on FTS.
- In absence of FTS Article, services would get covered by other Income Article.
- Reimbursement of expenses partook the character of FTS. FCO obligated to file return of income if non-taxability is based on treaty entitlement.
