Taxation of ‘Fees for Technical Services’ : Application of the Concept of ‘Make Available’

[ 2002]
82 ITD 239

Payment
for installation and commissioning of machines purchased

(Kol.)

DTAA –
France

Issue(s)

Whether
such payments for installation and commissioning are liable for

TDS u/s
195?

Held

Installation
and commissioning of machineries constituted services that

were
ancillary and subsidiary, as well as inextricably and essentially

linked
to the sale of the machines. Therefore, these services, rendered to

the
assessee, were not covered by the scope of ‘fees for technical services’

referred
to in Article 13 of the India France DTAA. Hence, installation

and
commissioning fees, on the facts of the present case, were not exigible

to tax
in India.

Note

It is
important to keep in mind that contrary to the popular belief, the

ITC’s
case does not deal with the ‘make available’ clause of the treaty,

and
instead deals with the importance and relevance of the Protocol to the

India
French Treaty for application of the restricted meaning of FTS.

34.   Pro-Quip Corpora-

Nature of services and payments

tion
vs. CIT (AAR)

Payment
for supply of engineering drawings and designs for the setting

[2002]
255 ITR 0354

up of
the plant.

DTAA –
US

Issue(s) Involved

Whether
the applicant is liable to tax on the amount received towards

consideration
for the sale of engineering drawings and designs received.

Whether
the payment is to be treated as fee for included service covered

by
clause (b) paragraph 4 of Article 12.

Held

The facts of this case are very similar to the
facts of the first part of ex–

ample 8
given in the MoU to the India-US Tax Treaty. The engineering

services
were being rendered as a part of the purchase agreement as a

composite
whole. This service was essentially linked with the sale of

drawings
and designs. It is not an agreement for long-term service to be

rendered
after the sale of the machinery. The case is a case of out and

out
sale of property.

The AAR
held that the payments made to the American company will

not
fall within the ambit of Article 12 of the Indo-US Treaty for Double

Taxation.

Sr.

Decisions/Citation/Tax

Gist of
the decision relating to concept of ‘Make Available’ aspect

No.

Treaty

35 .

Sahara
Airlines Ltd.

Nature of services and payments

vs. Dy
CIT

Payment
for providing training to the crew members

[2002]
83 ITD 11

(Delhi)

Issue(s)

DTAA –
UK

Whether such payments amounted to fee for
technical services as defined

in
Explanation 2 of Section 9(1)(vii) of the Act, as well as Article 13(4) of

DTAA
with UK.

Held

The
ITAT was of the view that it was an agreement for training of asses-

see’s
personnel and not for mere use of simulator. Training can be given

to the
trainees either directly or through customer’s instructors. Clause 14

of the
agreement clearly provides for free training to assessee’s instructors,

who, in
turn, had provided the same to its personnel. Since training to

assessee’s
instructors was free of charge, the payment in the invoice was

shown
for use of simulator alone but that does not mean that technical

knowledge
was not provided by the UK company. The simulator is a

highly
sophisticated machine which cannot be operated unless requisite

technical
knowledge is given to the user of the machine. Therefore, we

are
unable to accept the main contention of assessee’s counsel that no

technical knowledge was given. Apart from
this, flight training personnel

are experts
and experienced persons, who have shared their experiences

with
the assessee’s instructors and, therefore, on this account also, it would

fall within the definition of technical
services as provided in Article 13

of DTAA
with UK, in as much as it not only includes making available

of
technical knowledge but also the experience. Therefore, it is held that

the
agreement was for providing of training to assessee’s personnel and

consequently,
the payment for the same was fee for technical services and,

therefore,
chargeable to tax in the hands of the recipient under section 9(1)

(vii)
of the Act as well as under the provisions of DTAA with UK.

36.

P. No.
28 of 1999 In

Nature of services and payments

re vs.
(AAR)

Payment
for services to make available executive personnel for develop-

[2000]
242 ITR 0208

ment of general management, finance and
purchasing, service, marketing

DTAA –
USA

and
assembly/manufacturing activities under the management provision

agreement.

Issue(s)

Whether
any part of the amount invoiced by the foreign company in terms

of the
management provision agreement is liable to tax in India.

Held

These
clauses envisage transfer of information by “XYZ” [Foreign Com-

pany]
to “AB” [Indian JV Company] (whether independently of or through

Sr.

Decisions/Citation/Tax

Gist of
the decision relating to concept of ‘Make Available’ aspect

No.

Treaty

the
personnel employed) and also confer on “AB” the right to use and

disclose
the technology and knowledge developed by the employees in

the
course of their work. Reference has also been made to the letter of

approval
of the Government of India which shows that the government

was
informed that these personnel were being deputed for a period of

up to
three years for providing management and technical service to the

joint
venture, so that the services of these employees could eventually

be replaced by Indian personnel. It is,
therefore, difficult to accept the

plea
that no technology, information, know-how or processes were made

available
to “AB” by “ XYZ”.

The AAR
concluded that the services of the nominees of “XYZ” are “mana-

gerial”
and not “technical or consultancy” services within the meaning of

Article 12, and in the result, the Authority
finds, on the facts available to

it, that the services of the five nominees of “XYZ”
are not covered by the

expression
“included services” in Article 12.

37.

Bovis  Lend
Lease

Nature of services and payments

(India)
Pvt. Ltd. vs.

Assistance
with respect to administrative matters between the appellant

ITO(IT), Bangalore

and
LLAH [Foreign Company based in Singapore]; Assistance with respect

2009-TIOL-666-ITAT-

to personal matters, legal matters, finance
and accounting information,

marketing
support, insurance matters; Assistance in operation of the busi-

Bang

ness;
Treasury Management; Information Technology.

DTAA –
Singapore

Issue(s)

(a)  Whether the reimbursements made to the
foreign company be not

considered
as fees for technical services or income chargeable to tax

in
India;

(b) At
any rate, since the in situs of the services was outside India, no

part of
the payment be held as deemed to accrue or arise in India.

Held

The
ITAT, in respect of the payment to be considered as reimbursement

of
expenses, laid down the following tests:

a)

The actual liability to pay should be of the
person who reimburses

the
money to the original payer.

b)

The liability ought to have been clearly
determined. It should not be

an
approximate or varying amount.

c)

The liability ought to have crystallized. In
other words, payments

which
were never required to be done, but were done just to avoid

a
potential problem, may not qualify.

d)

There should be a clear ascertainable
relationship between the

paying
and reimbursing parties. Thus, an alleged reimbursement by

an
unconnected person may not qualify.

e)

The
payment should first be made by somebody else whose liability

Sr.

Decisions/Citation/Tax

Gist of
the decision relating to concept of ‘Make Available’ aspect

No.

Treaty

it never
was, and the repayment should then follow to that person to

square
off the account.

f)  There should be clearly three parties
existing: the payer, the payee

and the
reimbursing party.

The
transactions tested, fail to meet the criteria that would enable the

payments
to be treated as reimbursements.

The
dictionary meaning of the word ‘make available’ is ‘able to use or

obtain’.
It does not mean that the recipient should equally use the tech-

nology.
In a case like this where a group owns a number of companies

and
certain companies provide services to the companies belonging to

the
group, then it becomes the policy of the group to get services of that

company
though other group companies might be able to perform the same

functions
on the basis of the services already provided to them. Therefore,

in the
instant case, Section 195 will b e applicable because reimbursement

of
expenses relates to the fee for technical services. Hence, we hold that

the authorities below were justified in
holding that tax was not required

to be
deducted on the ground that the appellant company reimburse the

expenses,
as the amounts payable were to be taxed in the hands of the

recipient
as fees for technical services as per DTAA.

The
jurisdictional High Court, in the case of Jindal Thermal Power Company

vs.
DCIT, had an occasion to consider the taxability of income deeming to

accrual
and arising in India as mentioned in section 9(1)(vii). The Hon’ble

High
Court has considered the explanation introduced in Section 9(2) of

the I T
Act. Before the Hon’ble High Court it was argued that the ratio of

Supreme
Court in Ishikawajma Harima Heavy Industries Ltd. vs Director

of
Income Tax 288 ITR 408 regarding twin criteria of rendering of services

and its
utilization in India has not been done away with by the incorpo-

ration
of Explanation to section 9(2). It was also argued that the objects

and
reasons stated in introducing explanations are only external aids, to

be used
only when the text of the law is ambiguous. After considering

the
submission, the Hon’ble High Court held that “however, in respect

of
technical services, the rendering of services being purely off-shore and

outside
India, the remuneration, whatever paid towards technical services,

does
not attract tax liability”. In the instant case, from the perusal of the

certificate from the auditor, it is clear that
services have been provided

offshore.
Hence, in view of the decision of the jurisdictional High Court,

the
appellant will not incur any liability to deduct tax towards the amount

paid in
respect of the services. Hence, it is held that the appellant was not

required
to deduct tax at source in respect of the payments.

38.

Federation of Indian

Nature of services and payments

Chambers
of  Com-

Non-resident
service provider acting as a facilitator and technical consultant

merce and Industries

(FICCI) in re AAR

for the purpose of commercialisation of
identified technologies; screening

2009-TIOL-30-ARA-IT

and
assessment of technologies by deploying the expertise and resources

and
preparing technical reports including market analyses.

DTAA

Sr.

Decisions/Citation/Tax

Gist of
the decision relating to concept of ‘Make Available’ aspect

No.

Treaty

Issue(s)

Whether
on the facts and circumstances of the case, the non-resident is

not
liable to pay income tax in India out of the payments received by it

from
FICCI in instalments.

Held

Explaining
broadly the principles involved in technology commercializa-

tion
and making the participants familiar with various aspects of the

programme,
does not prima facie amount to making available technical

knowledge
or expertise possessed by the instructors of University of Texas

[UT].
At any rate, it seems to be merely incidental to the implementation

of the programme which does not fall within
the definition of ‘included

services’.
It is not possible to split up this segment of service and appor-

tion a part of consideration received to ‘training’,
even if it has the flavour

of ‘included
services’.

Expression
of opinion, formulation of recommendation, and rendering

assistance
to DRDO in connection with ATAC programmes do not really

make
available the technical knowledge or know-how to DRDO, except

perhaps
in an incidental or indirect manner. UT’s services and the con-

sideration
received, therefore, cannot be brought within the ambit of Art

12.4 of
DTAA.

39.

International
Tire

Nature of services and payments

Engineering

Granting
a perpetual irrevocable right to use the know-how as well as to

Resources LLC. in

Re AAR

transfer
the ownership in tread and side-wall designs and patterns required

2009-TIOL-25-ARA-

for the
manufacture of radial tyres for a lump sum consideration.

IT

Issue(s)

DTAA –
USA

Whether
on the stated facts in the “Technology Transfer Agreement” en-

tered
into between the applicant and M/s. CEAT Limited, and in law, the

consideration
for the transfer of documentation payable by M/s. CEAT

Limited
to the applicant is exigible to tax under the Act, in the hands of

the
applicant.

Whether
on the stated facts, and in law, the consideration for consultancy

and assistance
receivable by the applicant from M/s. CEAT Limited is

taxable
in the hands of the applicant in India under the Act.

Held

Whether or not the first limb of Art 12(4)
applies, undoubtedly, the second

limb is
attracted in the instant case. The consultancy, assistance and train-

ing
services make available to CEAT the technical knowledge, experience,

know-how
and processes, so that transferee CEAT will be able to derive

full
advantage from the know-how supplied by the applicant and equip

Sr.

Decisions/Citation/Tax

Gist of
the decision relating to concept of ‘Make Available’ aspect

No.

Treaty

itself
with the requisite knowledge and expertise so that the transferee

will be
able to utilize the same even in future ventures on its own and

without
reference to the transferor. The importance of consultancy and

assistance
services is highlighted by an express declaration in the ‘Agree-

ment’
which we may, at the risk of repetition, notice at this stage. The

“transferor
acknowledges that the transferee will not be able to use the

know-how
unless the transferor trains the transferee’s personnel in the

plant
in order to be capable of designing, developing and manufacturing

the
products in accordance with the know-how.” In the MOU concerning

fees for included services appended to
US-India Treaty, it is thus clarified:

“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 knowl-

edge,
skills, etc., are made available to the person purchasing the service,

within the meaning of paragraph 4(b).” This
test is satisfied in the instant

case.
The fee received by the applicant under clause 8 of the Agreement,

therefore, falls within the scope of fee for
included services as defined in

paragraph
4 of the Art 12 of the ‘Treaty’. The position, in regard to the

liability under the Act, is equally clear. The
definition of fee for technical

services
in Explanation 2 to clause (vii) of Section 9(1) is even wider in

its
scope and amplitude than the corresponding provision in the ‘Treaty’.

The
restrictive phrase “make available” is not there in the Act. In fact, the

learned
counsel for the applicant has not disputed that the fee received

by
virtue of clauses 7 and 8 of the Agreement constitute fee for technical

services
or included services as per the Act and the Treaty.

Thus,
for more than one reason, the AAR held that paragraph 5 of Art

12 of
the Treaty cannot be invoked by the applicant.

The
consideration received for consultancy, assistance and training as per

clauses
7 and 8 of the Agreement is liable to be taxed as fee for included

services
under the Treaty, and as fee for technical services under the

Income-tax
Act, 1961.

40.

ADIT
(IT), Mumbai

Nature of services and payments

vs.
McKinsey & Co

Strategic
consultancy and other services; Advisories do not include any

Inc., UK & others

2009-TIOL-728-ITAT-

transfer
of technical know-how or specialised knowledge.

Mum

Issue(s)

DTAA –
USA

Whether
such payments made can be considered as fees for included

services
as per the India-USA Treaty.

Held

The assessing officer should not be prevented
from calling for details,

under
the pretext of “the world knows what McKinsey & Co, Inc does”.

Even if the burden is on the assessing officer
to prove that a particular

Sr.

Decisions/Citation/Tax

Gist of
the decision relating to concept of ‘Make Available’ aspect

No.

Treaty

item of
income is taxable, and at the same time the assessee does not

co-operate
or give any information or documentation whatsoever when

specifically asked for and when it is
undisputed that these documents

are in
its exclusive possession and only relies on its history and facts that

were submitted in the earlier assessments, the
assessing officer can draw

an
adverse inference.

Nobody
can refuse to furnish any information which is exclusively in

its possession
and then argue that the revenue has not discharged the

burden
of proof. The onus is also on the assessee to lead the evidence to

prove
that the receipt is not taxable because it falls within a provision or

it is
exempt.

Accepting
the assessee’s plea that the case be decided on the basis of in-

formation
furnished in 1997, would amount to laying down a very wrong

precedent.
The departmental representative was correct in pointing out that

if such
a view is taken by the Tribunal, in future also the assessees would

not produce any document before any assessing
officer on the argument

that
the facts are same as in the earlier years and the proposition for the

law
laid down by the Tribunal in earlier years should be followed.

Note

Please
also refer to the decision of the ITAT Mumbai in the case of McK-

insey
and Co., Inc (Philippines) vs. ADIT (IT) (ITAT-Mum) [2006] 284 ITR

(A.T.)
0227 discussed at Sr. No. 20 of the Part III of the Article.

41.

ITO vs.
Sinar Mas

Nature of services and payments

Pulp
& Paper (India)

Fees
for preparing feasibility study on the project to be used for  presen-

Limited

ITAT –
Delhi

tation of the project to the foreign investors
and financial institutions.

2003-TIOL-19-ITAT-

Issue(s)

DEL

DTAA –
Singapore

Whether
payment for said services liable to tax in India as “Fees for

Technical Services” as defined in Article 12
of India-Singapore Double

Taxation
Agreement?

Held

Held
that the payment made, clearly and unquestionably comes under

clause
(b) of Para 4 of the Article 12. The ITAT have taken note of the fact

that
the concerned party has clearly made available technical knowledge,

experience,
skill by way of the ‘Project Report’ which was used to woo

the
foreign investors, and the detailed project report not only provides

the
rough road map but virtually provides the entire detailed design and

map
work. At the cost of reiteration, the project report not only lays down

the
mill site and infrastructure but also deals with mill organization and

training;
it takes care of the grades to be produced; and the markets which

will supply fibre to the mill.  The technology and environment aspects

Sr.

Decisions/Citation/Tax

Gist of
the decision relating to concept of ‘Make Available’ aspect

No.

Treaty

memorandum
of understanding, is `communication through satellite or

otherwise`,
and relying on the same, learned special counsel for the Rev-

enue
has contended that the interface between the reservation system of

the
assessee-company and that of the Indian hotels/clients was covered

in this category.” We, however, find it
difficult to agree with this conten–

tion of
the learned special counsel for the Revenue. First of all, it is the

area which has been specified in the
Memorandum of Understanding for

ascertaining
the services relating thereto being of technical and consultancy

nature
making technology available, whereas the services rendered by the

assessee
in the present case are in the hotel industry and such services

are in
relation to advertisements, publicity and sales promotion which are

not in
the nature of technical and consultancy services involving making

of
technology available. Secondly, the interface between the computerized

reservation
system of the assessee and the computerized reservation system

of the
Indian hotels/ clients was provided to facilitate the reservation of

hotel
rooms by the customers worldwide as an integral part of the inte-

grated
business arrangement between the assessee and the Indian hotels/

clients.
This interface thus was not separable from and independent of

the
main integrated job undertaken by the assessee-company of render-

ing
services in relation to marketing, publicity and sales promotion; and

the
same, in any case, was not in the nature of technical and consultancy

services,
making any technology available to the Indian hotels/clients in

the field/area of communication through
satellite or otherwise. Moreover,

as pointed
out by the learned counsel for the assessee before us, no com-

munication
through satellite was involved in the interface between the

computerized
reservation system of the assessee and that of the Indian

hotels/clients.

What is
transferred to the Indian company through the service contract

is
commercial information and the mere fact that technical skills were re-

quired
by the performer of the service in order to perform the commercial

information
services does not make the service a technical service within

the
meaning of paragraph (4)(b) of article 12. Since the facts of the present

case
are almost similar to the facts of this case given in Example 7 of the

Memorandum of Understanding, it leaves no doubt
that the payment in

question
received by the assessee-company from the Indian hotels/clients

or any
part thereof could not be treated as ` fees for included services`

within
the meaning of paragraph (4)(b) of Srticle 12.”

For the
sake of ready reference, we shall provide in the next part of the

Article,
the list of various comprehensive DTAAs entered into by India

with
all other countries. We shall also indicate those countries which are

members
of OECD and the date of coming into effect of the treaties and

protocols
with countries having the restricted scope in respect of Fees for

Technical
Services by incorporating the ‘make available’ clause, and also

discuss
other relevant aspects.