A. Concept of ‘Make Available’ and historical background :The expression ‘make available’ used in the Article in the Tax Treaties relating to ‘Fees for Technical Services (FTS)’ has far reaching significance since it limits the scope of technical and consultancy services in the context of FTS.
India has negotiated and entered into tax treaties with various countries where the concept of ‘make available’ under the FTS clause is used. India’s tax treaties with Australia, Canada, Cyprus, Finland, Malta, Netherlands, Portuguese Republic, Singapore, UK and USA contain the concept of ‘make available’ under the FTS clause. Further, the concept is also applicable indirectly due to existence of Most Favored Nation (MFN) clause in the protocol to the tax treaties with Belgium, France, Israel, Hungary, Kazakstan, Spain, Switzerland and Sweden.
It is interesting to note that India-Australia tax treaty does not have separate FTS clause but the definition of Royalty which includes FTS, has provided for make available concept. An analysis of the countries having the concept of make available directly or indirectly in their tax treaties with India reveals that almost all of these countries are developed nations and they have successfully negotiated with India the restricted scope of the definition of FTS as almost all of them are technology exporting countries.
In view of the above, while deciding about taxability of any payment for FTS, the reader would be well advised to examine the relevant article and the protocol of the tax treaty to examine whether the concept of make available is applicable to payment of FTS in question and accordingly whether such a payment would be not liable to tax in the source country. He would also be well advised to closely examine the relevant judicial decision to determine the applicability of the concept of ‘make available’ to payment of FTS in question.
B. Explanation of the concept in the MOU to the India-US Tax Treaty :
Article 12(iv)(b) of the India US tax treaty reads as follows :
“4. For purposes of this Article, ‘fees for included services’ means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services :
(a) . . . .
(b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.”
As per Article 12(4)(b) of the India US tax treaty, payment of any kind in consideration for rendering of services results in FTS if :
(a) Such services are technical or consultancy services;
(b) They ‘make available’ knowledge, experience, skill, know how, or processes or alternatively, consist of development and transfer of a plan or design; and
© Such knowledge, experience, plan, design etc. is technical.
The three conditions above are cumulative and not alternative. In order to fall under the Article 12(4)(b) of the India US tax treaty, it is essential that services should make available knowledge, experience, skill, know-how, or processes.
The Memorandum of Understanding (MoU) to the India-US Tax Treaty, Technical Explanation to India-US Tax Treaty, Technical Explanation to India-Australia Tax Treaty, and various Indian Judicial Pronouncements, have laid down different tests for considering whether or not services ‘make available’ knowledge, experience, skill, know-how, or processes.
The concept of ‘make available’ is interpreted and explained with concrete illustrations in the ‘Memorandum of Understanding concerning Fees for Included Services in Article 12’ appended to the said India-US DTAA. The concept is explained as under in the Memorandum of Understanding :
“Paragraph 4(b) of Article 12 refers to technical or consultancy services that make available to the person acquiring the service technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design to such person. (For this purpose, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person.) This category is narrower than the category described in paragraph 4(a) because it excludes any service that does not make technology available to the person acquiring the service. Generally speaking, technology will be considered “made available” when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available.” (Emphasis supplied)
“Typical categories of services that generally involve either the development and transfer of technical plans or technical designs, or making technology available as described in paragraph 4(b), include :
1 Engineering services (including the sub-categories of bio-engineering and aeronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical, and industrial engineering);
2 Architectural services; and
3 Computer software development.
Under paragraph 4(b), technical and consultancy services could make technology available in a variety of settings, activities and industries. Such services may, for example, relate to any of the following areas :
1 Bio-technological services;
2 Food-processing;
3 Environmental and ecological services;
4. Communication through satellite or otherwise;
5. Energy conservation;
6. Exploration or exploitation of mineral oil or natural gas;
7. Geological surveys;
8. Scientific services; and
9. Technical training.”
This concept is further explained by Examples 3 to 7 in the MoU which are as follows:
Example (3) :
Facts:
A U.S. manufacturer has experience in the use of a process for manufacturing wallboard for interior walls of houses which is more durable than standard products of its type. An Indian builder wishes to produce this product for his own use. He rents a plant and contracts with the U.S. company to send experts to India to show engineers in the Indian company how to produce the extra-strong wall-board. The U.S. contractors work with the technicians in the Indian firm for a few months. Are the payments to the U.S. firm considered to be payments for ‘included services’ ?
Analysis:
The payments would be fees for included services. The services are of a technical or consultancy nature; in the example, they have elements of both types of services. The services make available to the Indian company technical knowledge, skill, and processes.
Example (4) :
Facts:
A U.S. manufacturer operates a wallboard fabrication plant outside India. An Indian builder hires the US. company to produce wallboard at that plant for a fee. The Indian company provides the raw materials and the US. manufacturer fabricates the wall-board in its plant, using advanced technology. Are the fees in this example payments for included services?
Analysis:
The fees would not be for included services. Al-though the U.S. company is clearly performing a technical service, no technical knowledge, skill, etc., are made available to the Indian company, nor is there any development and transfer of a technical plan or design. The U.S. company is merely performing a contract manufacturing service.
Example (5) :
Facts:
An Indian firm owns inventory control software for use in its chain of retail outlets throughout India. It expands its sales operation by employing a team of travelling salesmen to travel around the countryside selling the company’s wares. The company wants to modify its software to permit the salesmen to access the company’s central computers for information on products available in inventory and when they can be delivered. The Indian firm hires a U.S. computer programming firm to modify its software for this purpose. Are the fees which the Indian firm pays to be treated as fees for included services?
Analysis:
The fees are for included services. The U.S. company clearly, performs a technical service for the Indian company, and transfers to the Indian company the technical plan (i.e., the computer program) which it has developed.
Example (6) :
Facts:
An Indian vegetable oil manufacturing company wants to produce a cholesterol-free oil from a plant which produces oil normally containing cholesterol. An American company has developed a process for refining the cholesterol out of the oil. The Indian company contracts with the US. company to modify the formulae which it uses so as to eliminate the cholesterol, and to train the employees of the Indian company in applying the new formulae. Are the fees paid by the Indian company for included services?
Analysis:
The fees are for included services. The services are technical, and the technical knowledge is made available to the Indian company.
Example (7) :
Facts:
The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol-free oil and wishes to market the product worldwide. It hires an American marketing consulting firm to do a computer simulation of the world market for such oil and to advise it on marketing strategies. Are the fees paid to the U.S. company for included services?
Analysis:
The fees would not be for included services. The American company is providing a consultancy service which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc., nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. The fact that technical skills were required by the performer of the service in order to perform the commercial information service does not make the service a technical service within the meaning of paragraph 4(b).
It is important to note that in the protocol to the said DTAA the Government of India has also accepted the interpretation of Article 12 (Fees for included services) in the following words:
“This memorandum of understanding represents the current views of the United States Government with respect to these aspects of Article 12, and it is my Government’s understanding that it also represents the current views of the Indian Government.” (emphasis supplied)
C. Application of concept of ‘make available’ – Relevant and irrelevant tests:
In ‘The Law and Practice of Tax Treaties: An Indian Perspective’ (2008 edition), the learned authors Shri Rajesh Kadakia and Shri Nilesh Modi, have culled out the relevant and irrelevant tests (on pages 569-571) as under :
Relevant tests:
1. The expression ‘make available’ is used in the sense of one person supplying or transferring technical knowledge or technology to another.
2. Technology is considered to be ‘made available’ when the service recipient is enabled to apply the technology contained therein. [Bharat Petroleum Corporation v. DfT, (200) 14 SOT 307(Mum.)]
3. If the services do not have any technical knowledge, the fees paid for them do not fall within the meaning of FTS as per Article 12(4).
4. The service recipient is able to make use of the technical knowledge, skill etc. by himself in his business or for his own benefit and without recourse to the performer of the services, is able to make use of the technical knowledge, etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill, etc. must remain with the person utilising the services even after the rendering of the services has come to an end. A transmission of the technical knowledge, experience, skill, etc. from the person rendering the services to the person utilising the same is contemplated by the article. Some sort of durability or permanency of the result of the ‘rendering of services’ is envisaged which will remain at the disposal of the person utilising the services. The fruits of the services should remain available to the person utilising the services in some concrete shape such as technical knowledge, experience, skill, etc.
5. The service recipient is at liberty to use the technical knowledge, skill, know-how and processes in his own right.
6. The technical knowledge, experience, skill, know-how, etc. must remain with the service recipient even after the rendering of the service has come to an end.
ii) Irrelevant tests:
1. Provision of service may require technical input by the service provider;
2. Use of a product which embodies technology;
3. The service recipient gets a product and not the technology itself;
4. Merely allowing somebody to make use of services, whether actually made use of or not;
5. Service recipient acquires some familiarity or in-sights into the manner of provision of services.
D. Concept of ‘make available’ as explained in various judicial pronouncements:
The concept of make available has been examined, explained and applied by various judicial authorities in India in the following cases (which shall be summarised in the next part of the Article) :
E. Application of explanation and examples given in MoU to the India-US Treaty to other Treaties:Although the abovementioned interpretation is given in the context of the DTAA between India and the USA, considering that identical terminology is used in other DTAAs between India and other countries, the Government can be considered to have contemplated the same meaning to be assigned to the .same term in the other DTAAs. This proposition, has found judicial recognition.
E.1 The above interpretation of the concept of ‘make available’ has now gained acceptance even with the Indian judicial authorities in the context of a variety of DTAAs India has entered into with different countries. In Raymond Ltd. v. Deputy CIT, [2003] 86 ITD 791 (Mum.), the assessee made an issue of Global Depository Receipts (GDRs) to in-vestors outside India, and it paid, inter alia, com-mission to the managers to the GDR issue, who were residents outside India, for rendering a vari-ety of services outside India for the successful completion of the GDR issue. The question before the Tribunal, among others, was whether the com-mission paid for such services rendered outside India could be taxed in India as ‘fees for technical services’ in the light of the provisions of S. 9(1)(vii) of the Act read with Article 13(4) of the DTAA with the UK. It is noteworthy that the terminology used in Article 13(4)(c) of the DTAA with the UK is the same as that used in Article 12(4)(b) of the DTAA with the USA. Although in this case the Tribunal was concerned with the interpretation of Article 13(4)(c)of the DTAA between India and the UK, the Tribunal made a reference to the identically worded Article 12(4)(b) of the DTAA between India and the USA, took into consideration the interpretation and the illustrations given in the Memorandum of Understanding appended to the said DTAA, and observed that the same can be used as an aid to the construction of the DTAA with the UK because they deal with the same subject (namely, fees for technical services). The Tribunal also observed that merely because these treaties are with different countries does not mean that different meanings are to be assigned to the same words, especially when both have been entered into by the same country on one side, namely, India. It it is difficult to postulate that the same country (India) would have intended to give different types of treatment to identically defined services rendered by entrepreneurs from different countries. On the facts of the case, the Tribunal held that the commission paid by the assessee for the various services rendered by the non-resident manager to the GDR issue did not fall within the definition of ‘fees for technical services’ given in Article 13(4) of the DTAA between India and the UK because no technical knowledge, experience, skill, know-how or process, etc. was ‘made available’ to the assessee by the managers to the GDR issue. After referring to the grammatical purpose of the word ‘which’ used in Article 13(4)(c) of the DTAA with the UK, the Tribunal gave its inter-pretation of the expression ‘make available’ in the following clear-cut words (paragraphs 92 and 93) :
“92. We hold that the word ‘which’ occurring in the article after the word ‘services’ and before the words ‘make available’ not only describes or defines more clearly the antecedent noun (‘services’) but also gives additional information about the same in the sense that it requires that the services should result in making available to the user technical knowledge, experience, skill, etc. Thus, the normal, plain and grammatical meaning of the language employed, in our understanding, is that a mere rendering of services is not roped in unless the person utilising the services is able to make use of the technical knowledge, etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill, etc. must remain with the person utilising the services even after the rendering of the services has come to an end. A transmission of the technical knowledge, experience, skill, etc. from the person rendering the services to the person utilising the same is contemplated by the article. Some sort of durability or permanency of the result of the ‘rendering of services’ is envisaged which will remain at the disposal of the person utilising the services. The fruits of the service should remain available to the person utilising the services in some concrete shape such as technical knowledge, experience, skill, etc.
93. In the present case, … after the services of the managers . . . came to an end, the assessee-company is left with no technical knowledge, experience, skill, etc. and still continues to manufacture cement, suitings, etc. as in the past.” (emphasis supplied)
The Tribunal also noted the language employed in the definition of ‘fees for technical services’ in Article 12(4)(b) of the DTAA between India and Singapore to the effect “if such services … make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein”, and opined that these words, though not found in the DTAAs with the UK and the USA, merely make explicit what is embedded in the words ‘make available’ appearing in the DTAAs with the UK and the USA.
E.2 In the decision in CESC Ltd. v. Deputy CIT [2005] 275 ITR (AT) 15 (Kol) (TM) this interpretation of the concept of ‘make available’ used in Article 13(4)(c) of the DTAA between India and the UK got the stamp of judicial approval. In this case, a UK company acted as a technical adviser to cer-tain financial institutions in India and the assessee, CESC, paid some fees to the UK company for the services rendered in respect of the technical appraisal of the assessee’s power project. One of the questions before the Tribunal was whether the fees paid to the UK company fell within the sweep of the expression’ fees for technical services’ as understood in Article 13(4)(c) of the DTAA between India and the UK. As noted earlier also, the terminology used for defining the expression’ fees for technical services’ in the DTAA between India and the UK is the same as that used in, among many others, the DTAA between India and the USA. The Tribunal held that the fees paid by the assessee to the UK company did not fall within the expression ‘fees for technical services’ as it did not result in making available to the assessee any technical knowledge, skill, etc. The Tribunal made a reference to Article 12 of the DTAA between India and the USA and to the Memorandum of Understanding appended thereto, discussed above, as also to the Protocol attached thereto wherein it is stated, inter alia, that the Memorandum of Understanding with regard to the interpretation of Article 12 (Royalties and fees for included services) also represents the views of the Government of India, and observed that under Article 12(4)(b) of the DTAA between India and the USA, which is pari materia with Article 13(4)(c) of the DTAA with the UK, technology would be considered made available when the person acquiring the services is enabled to apply the technology; that the mere fact that the provision of services may require technical input to the person providing the services does not per se mean that technical knowledge, skill, etc. are made available to the person purchasing the services. Since in this case the role of the engineers providing the services was of mere reviewing and opining rather than designing and directing the project, the Tribunal held that no technical knowledge, etc. was made available to the assessee and therefore the fees paid to the UK company did not fall within the scope of ‘fees for technical services’ under Article 13(4)(c) of the DTAA with the UK. It is pertinent to note that the Tribunal made certain observations at page 25, which, in effect, mean that the interpretation adopted by the Tribunal of the term ‘fees for technical services’ with reference to the DTAA between
India and the UK, particularly of the concept of ‘make available’, relying upon the definition and interpretation of the term ‘fees for included services’ used in the DTAA with the USA, should apply to several subsequent DTAAs India has entered into using the same phraseology, including specifically the DTAA between India and the UK.
E.3 In NQA Quality Systems Registrar Ltd. v. Deputy CIT, (2005) 92 TTJ (Del.) 946, wherein the above-referred decision in Raymond Ltd. v. Deputy CIT (supra) is followed and similar views are expressed in the context of the DTAA with the UK. In this case, the assessee, an Indian company, made payments to certain non-resident companies in the UK for certain services rendered by those UK companies. The assessee was in the business of ISO audit and certification. The nature of services provided by the UK companies to the assessee included providing the assessee with assessors to assess the quality assurance systems existing with the assessee’s customers, visits to the assessee’s customers, providing of training, etc. The question was whether while remitting the fees to the UK companies the assessee was required to deduct tax at source there from. The Tribunal analysed the definition of the term ‘fees for technical services’ given in Article 13 of the DTAA with the UK, noted the similar provisions of Article 12 of the DTAA with the USA, the Memorandum of Understanding appended thereto, and concluded that the nature of services provided by the UK companies to the assessee did not make available any technical knowledge, experience, skill, etc. to the assessee and therefore the fees paid by the assessee to the UK companies do not fall within the definition of the term ‘fees for technical services’ and that, therefore, the assessee was under no ob-ligation to deduct tax therefrom u/s.195 of the Act.
E.4 In National Organic Chemical Industries Ltd. v. Deputy CIT, (2005) 96 TT] (Mum.) 765, this interpretation of the concept of ‘make available’ is reiterated by the Tribunal in the context of Article 12(4) of the old DTAA between India and Switzerland. It is in effect observed by the Tribunal that when there is mere rendering of services without the transfer of technology it cannot be said that technology, etc. are ‘made available’ within the meaning of Article 12(4) of the DTAA between India and Switzerland and therefore payment for such services is not liable to tax in India.
E.5 In Dy. CIT v. Boston Consulting Group Pte. Ltd., [2005] 94 ITD 31 (Mum.) reiterates similar views. In this case, the non-resident company, a resident of Singapore, was in the business of ‘strategy consulting’. One of the issues before the Tribunal was whether the fees paid for such services fell within the term ‘fees for technical services’ under Article 12(4)(b) of the DTAA between India and Singapore where more or less the same language is employed as in the DTAA with the USA, the UK, etc. Noting the above-referred decision in Raymond Ltd. v. Deputy CfT (supra), the language of Article 12 of the DTAA with the USA, the Memorandum of Understanding appended to the said DTAA and the illustrations given therein, the concept of ‘make available’, etc., discussed above, the Tribunal concluded that the fees paid for such strategy consulting do not fall within the scope of ‘fees for technical services’ used in Article 12(4)(b) of the DTAA with Singapore. However, interestingly, it seems that the Tribunal has given an altogether different dimension to this issue by making a very broad observation at page 57 that so far as the DTAA with the USA is concerned, consultancy services which are not technical in nature cannot be treated as fees for included services. Though not clear, perhaps this view is influenced by a more general or profound statement made in the Memorandum of Understanding appended to the DTAA between India and the USA, under the paragraph titled ‘Paragraph 4 (in general)’, regarding the interpretation of the term ‘fees for included services’ given in Article 12(4)(b) of the said DTAA, which statement runs as follows:
“Thus, under paragraph 4(b), consultancy services which are not of a technical nature cannot be included services.”
F. Indian Treaties where the concept of ‘make available’ is used and differences in the wordings used in the relevant Articles:
Detail of DT AA with different countries having ‘make available’ phrase in FTS clause or indirectly made applicable through Protocol
