(2009 TIOL 30 AAR)
Articles 4, 12(4)(b), India-USA DTAA;
S. 9(1)(vii), S. 195, Income-tax Act
Dated : 30-11-2009
Issues :
University of Texas (UT) is a tax resident of the USA and
entitled to treaty benefit even if certain income of UT is not liable to tax
in the USA on account of exemption under the provisions of US tax laws.
Payment made by Indian entity to UT for training,
technology assessment, business development and project management as part of
commercialisation project is not ‘fees for included services’.
Facts :
FICCI, a non-profit company, registered under the Companies
Act, 1956 entered into MOU with Defense Research Development Organisation (DRDO).
Under the MOU, FICCI were to assist the DRDO laboratories in identifying
competitive global technologies from inventory of existing defense-related
inventions of DRDO so as to enable DRDO to decide upon commercialisation
policy. For this, FICCI and DRDO initiated joint programme for technology
assessment and commercialisation. While FICCI was responsible for providing
assistance to DRDO, FICCI entered into an agreement with UT for the purpose of
taking support for research in the area of market economics and other related
aspects involving commercialisation of technological innovations.
The services to be rendered by UT to FICCI were broadly
categorised under the following heads :
The scope of services under each of the above four segments
included the following.
-
Training :
Under this, UT was to conduct a workshop for DRDO officers and scientists at
management level to provide them with broad understanding of the key
principles involved in the technology commercialisation process. For this
purpose, two training programmes of 5 days each were conducted in India for
which facilities were made available by FICCI. The training materials were
stated to be customised modules which gave broad overview of factors which
the participant had to consider for the purposes of shortlisting the
innovations for taking them to the second phase of the programme.
-
Technology assessment : Under this, UT was expected to undertake
screening and assessment for evaluating the technologies and to shortlist
what UT perceived to be the unique and globally competitive technologies
which DRDO can market. This phase involved process of screening
technologies, eliminating those which did not score well from the point of
view of commercialisation, doing validation check for determining commercial
potential and submitting the report of such assessment for consideration by
the board of DRDO.
-
Business
Development : The third phase of the programme was commercialisation
process. In this phase, UT assisted in identifying about 20 global partners
with which DRDO can enter into licensing or other engagements in respect of
technologies identified under phase three. UT also was required to monitor
and support negotiations between DRDO and the potential partner.
-
Programme Management : Under this phase, UT agreed to provide programme
manager for administrative assistance and actual implementation.
For the above services, FICCI was required to provide lump
sum consideration to UT. In this background, the applicant sought ruling on
the following questions :
(i) Whether UT was covered by India-USA DTAA ?
(ii) Whether UT was not liable to pay tax in India on
payments received for the services ?
(iii) Whether FICCI was not required to deduct tax
u/s.195 in respect of payments to UT ?
(iv) If answers to (ii) and (iii) are in negative, which
amounts were liable to tax and at what rate ?
The Tax Department contended that the tax treaty covered
only those persons who are taxable in one of the countries and since income of
UT was exempt from tax in the USA, UT was not eligible for benefit of the
treaty. As a result, UT was liable to pay tax as payment to UT was in the
nature of fees for technical services. Alternatively, the services rendered by
UT were fees for included services as defined in Article 12 of the treaty and
hence liable for taxation in India.
Ruling :
The AAR held :
-
The fact
that UT is required to file tax return in the USA for certain unrelated
business income and is also having obligation of filing the tax return on an
annual basis supports that UT would qualify as ‘resident’ of the USA as
envisaged in the tax treaty between India and the USA. The fact that part of
its income is exempt from tax does not take it out of the category of tax
resident.
-
Under the
treaty, services can be taxed only if they are in the nature of fees for
included services (FIS). In order to be taxable as FIS under the tax treaty,
a mere provision of technical and other services would not suffice. It,
additionally, requires that the service provider should also make its
technical knowledge, experience, skill, know-how, etc. known to the
recipient of the service so as to equip him to independently perform the
technical function in future without the help of the service provider.
-
Although
most of the services falling within the scope of business development and
programme management, may answer the description of technical and
consultancy services, they do not really ‘make available’ the technical
knowledge or know-how, except perhaps in an incidental/indirect manner.
Therefore, it would not come within the purview of FIS.
-
In the circumstances, though the services involved certain attributes of teaching, they were only incidental to the primary objective of business promotion of technologies. The services would not constitute FIS and will also not fall in the exclusionary clause of the treaty which exempts teaching in or by educational institution.
The AAR confirmed that FICCI did not have obligation of withholding tax as the payments were not chargeable in the hands of the recipient.
