Transcript Beginners’ Tip

Fees for Technical Services
Avinash Gupta
LLM (Vienna), FCA, B. Com. H (SRCC)
Nitin Bansal
LLB, ACA, B. Com. H
Fees for technical services –
summary of provisions under the
Act
Page 2
Source Rule – Deemed accrual
FTS payable
by
FTS deemed to accrue or arise in India
a. Govt
Yes
b. Resident
Yes
Exception: where it is payable in respect of services utilized
in business or profession carried on outside India or for the
purpose of earning income from any source outside India
c. NonResident
Yes
Condition: payable in respect of services utilized in business
or profession carried in India or for the purpose of earning
income from any source in India
Page 3
FTS : Domestic Law


Definition for FTS covers consideration for:

Technical Services

Managerial Services

Consultancy Services
Excludes consideration for:

Construction, assembly, mining or like project; or

Amount chargeable as salaries
FTS defined in an exhaustive manner
Page 4
FTS : Domestic Law
FTS receipt taxable in India regardless of:




Residential status of recipient

Situs and mode of rendering of services

Purpose whether personal or non-personal

Situs and currency of receipt

Situs of conclusion of contract
Relevance of territorial nexus for rendering and utilisation of services in India?
Impact of decision of Ishikawajima-Harima Heavy Industries Limited (288 ITR 408)(SC) and
subsequent amendments to section 9 of the Income-tax Act, 1961
Page 5
Fees for technical services –
Treaty provisions
Page 6
FTS : Treaty

No separate Article in Organisation for Economic Co-operation and Development
(OECD) Model and United Nations (UN) Model

FTS normally forms part of ‘business profits’ Article (Article 7)

Can FTS that does not fall within the ambit of section 9(1)(vii) be taxed under section
9(1)(i) ie on account of business connection?

Recourse cannot be sought under the general provisions relating to ‘business connection’ to
tax FTS

CIT vs Copes Vulcan Inc (167 ITR 884) (Mad)

Meteor Satellite Limited vs ITO (121 ITR 311) (Guj)
Majority of Indian tax treaties include FTS as a part of Article on royalties
except treaties with few countries eg Indonesia, Mauritius
Page 7
Taxation of FTS – typical structure of FTS article
Article
para
Subject matter
1
Clarification that the FTS arising in a source country may be taxed in the
country of residence.
2
Taxability rights also given to source country, but with restriction on rate
of tax.
3
Definition of FTS
4
Provides that this Article would not be applicable in case royalty is
effectively connected with PE / fixed base in source country
5
Source rules
6
Concessional rate applicable only to portion of FTS which satisfies the
arms length test
Page 8
FTS : Treaty
FTS clause in most Indian tax treaties
FTS clause
FTS clause + Make available
• FTS means
– payments of any amount in
consideration
– for the rendering of managerial,
technical or consultancy services
– including the provision of services of
technical or other personnel
– does not include payments for services
mentioned in Independent / Dependent
Personal Services
Page 9
• FTS means
– payments of any amount in consideration
– for the rendering of managerial, technical or
consultancy services
– including the provision of services of
technical or other personnel
– does not include payments for services
mentioned in Independent / Dependent
Personal Services
− which make available technical knowledge,
experience, skill know-how or processes
− Consist of the development and transfer of a
technical plan or technical design
– Excluding services that are ancillary and
subsidiary to the rental of ships, aircraft,
containers or other equipment
An overview of selected India’s DTAA (FTS)
US
Singapore
China
rendering of any technical or
consultancy services
(including through the
provision of services of
technical or other personnel)
if such services are:
(i)are ancillary and subsidiary
to the application or
enjoyment of the right,
property or information for
which a payment …. ; or
(ii)make available technical
knowledge, experience, skill,
know-how, or processes, or
consist of the development
and transfer of a technical
plan or technical design
services of a managerial,
technical or consultancy
nature (including the provision
of such services through
technical or other personnel)
if such services :
(i)are ancillary and
subsidiary…….; or
(ii)make available technical
knowledge, experience, skill,
know-how or processes, ….;
or
(iii)consist of the development
and transfer of a technical
plan or technical design, but
excludes any service that
does not enable the person
acquiring the service to apply
the technology contained
therein
The term “fees for technical
services” as used in this Article
means any payment for the
provision of services of
managerial, technical or
consultancy nature by a resident of
a Contracting State in the other
Contracting State, but does not
include payment for activities
mentioned in paragraph 2(k) of
Article 5 and Article 15 of the
Agreement
Exclusions:
Page 10
Russia
payments …in
consideration for the
rendering of any
managerial, technical or
consultancy services
including the provision of
services by technical or
other personnel but does
not include payments for
services mentioned in
Articles 14 and 15 …
An overview of selected India’s DTAA (FTS)
US
Singapore
China
• Services that are ancillary
and subsidiary as well as
inextricably and essentially
linked, to the sale of
property …
• For teaching in or by
educational institution
• for services for the
personal use of the
individual or individuals
making the payments
• Covered by Article relating
to professional services
Similar exclusions as in India
and US tax treaty
Page 11
Russia
Article 12…
Key pre-requisites for application of Article 12






Payment is in the nature of ‘FTS’
FTS arise in one Contracting State (‘Source State’)
FTS are ‘paid’ to the resident of the other Contracting State (‘Residence State’)
Recipient is the beneficial owner of ‘FTS’
Recipient does not carry on business in the Source State through a permanent
establishment (‘PE’) / fixed base
Even if a PE/ fixed base exists, the right or property in respect of which the ‘FTS’ are
paid is not effectively connected with such PE / fixed base (If this condition is not
satisfied, then the consideration/ payment would be taxable under Article 7 –
‘Business Profits’)
Page 12
Meaning of ‘managerial’…
Factors relevant in determining whether a service is a ‘managerial service’

Rendering of services which involves controlling, directing, managing or administering
the business or part of the business or any other thing

Adoption and carrying out the policies of an organization and it is permanent nature

Generally, managerial services must necessarily be non-technical services

Managerial services would be technical only when they include ‘technical services’ as
managerial duty.

Not necessary that managerial services should have impact on the running of the
business
Page 13
Meaning of ‘consultancy’…
Factors relevant in determining whether a service is a ‘consultancy
service’

The expression “consultancy” services involves giving of an advice or advisory
services by a professional.

Expertise in a technology not necessary while providing consultancy services

“Consultancy service” may overlap the categories of “technical” and “managerial”
services to the extent the latter types of services are provided by a consultant.
Page 14
Meaning of ‘technical’…
Factors relevant in determining whether a service is a ‘technical service’

A ‘technical’ service means a service requiring expertise in technology – MOU to the
India USA tax treaty

Services are of ‘technical’ in nature when special skills or knowledge related to a
technical field are required for the provision of such services - OECD Technical
Advisory Group Report on Treaty Characterization of Electronic Commerce Payments

The popular meaning associated with ‘technical’ is ‘involving or concerning applied
and industrial science’ - Skycell Communications Ltd v DCIT [(2001) 251 ITR 53
(Mad)]

Technical services take color from expressions managerial services and consultancy
services which necessarily involve a human element – Bharti Cellular Ltd [2008 TIOL
557 Del]
Page 15
Meaning of ‘technical’…
Factors not relevant in determining whether a service is a ‘technical service’


The fact that technology is used in providing a service is not indicative of whether the
service is of a ‘technical’ nature. The delivery of a service via technological means
does not render the service technical - OECD Technical Advisory Group Report on
Treaty Characterization of Electronic Commerce Payments (Para 40)
Technical Services V/s Technology driven services: Illustrations
Sky Cell Communications Ltd [251 ITR 53]
(Mad)
Provision of Cellular mobile telephone facility
Bharti Cellular Ltd Oth [2008-TIOL-557Del]
Interconnect and port access provided by telecom
companies to the other carriers
Dell International Services [305 ITR 7]
(AAR)
Telecom bandwidth service pursuant to dedicated
leased circuit
ISRO Satellite Center [220 CTR 13] (AAR)
Space segment facility of the transponder in satellite
controlled and operated by the service provider
Wipro Ltd [1 SOT 758] (Bang)
Transmission of data through uplink and downlink
services by way of customer linked circuit
Page 16
Concurrent coverage under Independent /
Dependent Personal Services

Treaty has Article on Independent Personal Services (Say, Professional Fees); Treaty also
has Article on FTS

Treaty may avoid the overlap. Eg. Japan, New Zealand, Germany…

The term ‘fees for technical services’ is defined to mean payments of any kind received as a consideration for the rendering of any managerial,
technical or consultancy services including the provision of services by technical or other
personnel but does not include payments for services mentioned in Independent Personal
Services and Dependent Personal Services articles

Usually, IPS ropes in fixed base : Individuals, Firms

Decision of Kolkata ITAT in the case of Graphite India Ltd Vs CIT86 ITD 384 (Cal) in the case
where such specific exclusion was absent

Beneficial provision of a treaty relevant and is to be applied even though services are
covered by lesser beneficial provision
Page 17
Fees For Included Services (FIS)

Deals with Technical Services - but, coverage is of FIS

Definition of FIS as per India-US treaty - Article 12(4)


Defined to mean payments of any kind to any person in consideration for rendering
of any technical or consultancy services (including through the provision of
services of technical or other personnel) if such services:

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or
information for which a payment described as royalty is received; or

(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
In case of treaty with Australia, the concept of FIS has been included in the definition of
royalty.

Similar definition in Canada, Singapore, UK..!
Page 18
Article 12(4)(b)

If the services are not considered ancillary and subsidiary as per Art 12(4)(a),
they will be considered as FIS only if technical or consultancy services:



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.
Three cumulative conditions to be satisfied:



1st – services are technical or consultancy services;
2nd – they make available knowledge, experience, skill, know-how, or
processes, or alternatively consist of the development and transfer of a
technical plan or technical design to such person;
3rd – such knowledge, experience, plan design etc is ‘technical’
Page 19
Article 12(4)(b) under India-US DTAA
Payment for services
Whether ‘technical or
consultancy services’?
Yes
Not taxable as
FIS
No
Whether services involve
technical knowledge, etc?
Yes
No
Whether make
available?
Whether development & transfer of
technical plan or design
Yes
No
Article 12(4)(b)
applies
Not taxable as
FIS
Page 20
No
Yes
Not taxable as
FIS
Article 12(4)(b)
applies
Concept of ‘make available’…
Extract from Technical Explanation on India-USA treaty:
“This FIS category is narrower …….. 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 services 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 4(b).
Similarly, the use of a product which embodies technology shall not per se be considered to
make technology available.”
“Make Available” significantly narrows down the scope of FIS/FTS!
Page 21
Concept of ‘make available’…

Person acquiring the service is enabled to apply the technology embedded in
the services provided to him, independently

The technical knowledge or skills of the provider should be imparted to and
absorbed by the receiver so that the receiver can deploy similar technology or
techniques in future without depending on the provider.

Mere requirement of technical input by a person providing services does not
necessarily mean that technical knowledge is “made available”

Use of a product which embodies technology cannot be considered to make
technology available
Page 22
Concept of ‘make available’… - Some precedents
Raymond Limited …
The Mumbai Tribunal, in the case of Raymond Limited vs CIT [(2003) 86 ITD 791 (Mum)], has
commented on the concept of “make available” and on the use of the explanation provided in the IndiaUSA MOU for the purpose of interpreting the term “make available” appearing in the fees for technical
service article in the India-US DTAA. A gist of the ruling is as under:

An Indian company made issue of GDRs in the overseas market. It appointed a UK resident (ie
non-resident in India) as the lead manager for the issue. The question before the tribunal was
whether the payment of fees could be classified as FTS under Article 13 of the India-UK treaty

The FTS clause in the India-UK treaty contains the ‘make available’ condition. The Tribunal took
guidance from the MOU between India and USA to decipher the meaning of the term ‘make
available’

The Tribunal held that the fees paid to the lead managers could not be classified as FTS since the
lead managers did not make available any technical knowledge, experience, know-how, etc. It also
went on to say that technology will be considered made available only when the recipient is
enabled to apply the technology
Page 23
Concept of ‘make available’
Wipro Ltd
In the case of Wipro Ltd [(2003) 80 TTJ 191 (Bang)], in the context of taxability of services
rendered by the Service Providers under the India-US tax treaty, the Bangalore ITAT held as
follows:

Article 12(4)(b) of the India-US tax treaty defines FIS to mean payment of any kind to any
person in consideration for the rendering of any technical or consultancy services if the said
services ‘make available’ technical knowledge, experience, skill, know-how or processes

The ITAT held that Article 12(4) of the India-US tax treaty is triggered only in the event any
technical services or processes are ‘made available’ by the Service Provider to the recipient.
The ITAT observed that since there was no technical process or service being made available
to Wipro by the Service Providers, Article 12(4) of India-US tax-treaty would not apply
Page 24
Other decisions interpreting ‘make available’…
Sr. No
Decisions
Facts
1.
ITO v. Sinar Mas Pulp &
Paper (India) Ltd. [(2004)
85 TTJ 794 (Del)]
Vetting a project report to enable the service recipient to raise a foreign
loan for its project
Y
2.
XYZ in re [(1999) 156 CTR
583 (AAR)]
Rendering of services (relating to sales, finance and purchase
function) by a US company’s deputed employees to an Indian company
such that the Indian company has a free and irrevocable right to use,
disclose and practice without any restriction, any and all inventions,
ideas and improvements made by the US company’s employees
Y
3.
P6 of 1995, In re [(1998)
100 Taxman 206 (AAR)]
A UK company surveying a earmarked area and providing technical
designs and know how to enable the Indian company to perform the
mining job itself
Y
4.
Hindalco Industries Ltd. v.
ACIT [(2005) 94 TTJ 944
(Mum)]
•
•
Whether
‘make
available’?
Technical assistance to enable service recipient to design, construct
and operate a plant to manufacture aluminum
Training for application of technical know how
Page 25
Y
Other decisions interpreting ‘make available’…
Sr. No
Decisions
Facts
5.
NQA Quality Systems Registrar
Ltd. v. DCIT [(2003) 92 TTJ 946
(Del)]
Surveillance for the purpose of ISO certification
6.
CESC Ltd. v. DCIT [(2003) 80
TTJ 806 (Cal) (TM)]
•
7.
Airports Authority of India v. DIT
[(2005) 273 ITR 437 (AAR)]
Modifications of software
N
8.
Anapharm Inc. 305 ITR 394
(AAR)
Services for providing final results and conclusions of data of bioequivalence tests and no sharing of clinical procedures
N
9.
ICICI Bank Ltd v DCIT 20 SOT
453
Rating fees paid for credit rating, only enabled the assessee to
obtain commercial information and not technical know-how /
technical expertise or the technologies on the basis on which it
was prepared
N
10.
M/s Cushman and Wakefield (S)
Pte Limited 172 TAXMAN 179
Fees for rendering client referral services to Group companies
N
11.
Intertek Testing services [2008TIOL-19](AAR)
Financial, marketing and administrative services provided to
Group company.
N
•
Opining on project details
Review of project details
Page 26
Whether
‘make
available’?
N
N
Other decisions interpreting ‘make available’…
Sr. No
Decisions
Facts
Whether
‘make
available’?
12.
Real Resourcing Limited
AAR 828 of 2009
Referral services for recruitment
N
13.
Invensys Systemts Inc
2009-TIOL-21 ARA -IT
Cost allocation for centralised services
N
14.
HMS Real Estate Pvt Ltd
2010-TIOL-17-ARA-IT
Architectural and design services involving sale of designs
Y
15.
Ernst & Young Pvt Ltd
2010-TIOL-18-ARA-IT
Standardised support services
N
Page 27
Development and transfer of technical plan or design
Meaning of Plan…

The term ‘plan’ has been defined in the Advanced Law Lexicon as “A plan is a design, a delineation,
or projection on a plane surface of a structure, which is reduced in size, the relative position of
which, and the proportions being preserved.

A plan is a draft or form of representation of a horizontal section of anything, as of building or
machinery. Its synonyms are “draft”, “delineation”, “sketch”, and “design”.
Meaning of Design…

Means features of shape, configuration, pattern or ornament applied to any article and appealing to
and not dictated solely by the function the article has to perform, copyright may be obtained on
registration for new and original design – Great Encyclopedic dictionary
Meaning of Transfer…

The Kolkatta Tribunal has held that the expression “transfer” as used in Article 12(4)(b) of the India
– USA tax treaty does not refer to absolute transfer of rights of ownership and includes delivery for
use of designs by the transferee for his benefit.
Page 28
Procurement of design
Design
Customized
design
Standard design
Designs are products
 Abhishek Developers v/s
ITO [37193722/B/04](Bang)
 Indian hotels Co.Ltd v/s ITO
[ITA No. 553/M/2000](Mum)
Page 29
It is a technical service
 MRPL V/S DCIT [ITA
No.1826/Mum/04]
 Gentex Merchants (P) Ltd.
v/s DCIT[94 ITD 0211] (Cal)
 Tag Report of OECD
Definition under India-US treaty - Exclusions
“Fees for included services" does not include amounts paid:
(a) for services
that are ancillary
and subsidiary, as
well as
inextricably and
essentially linked,
to the sale of
property other
than a sale
described in
paragraph 3(a) ;
(b) for services
that are ancillary
and subsidiary to
the rental of
ships, aircraft,
containers or
other equipment
used in
connection with
the operation of
ships or aircraft in
international
traffic ;
(c) for teaching in
or by educational
institutions ;
Page 30
(d) for services for
the personal use
of the individual
or individuals
making the
payment ; or
(e) to an
employee of the
person making
the payments or
to any individual
or firm of
individuals (other
than a company)
for professional
services as
defined in article
15 (Independent
Personal
Services).
Popular exclusions from FIS under the treaty

Services ancillary and subsidiary, as well as inextricably and essentially
linked, to the sale of property




Sale of property by the service provider only;
The services are an inextricable part of the arrangement to supply equipment;
Service charges are a relatively small part of the total cost of the equipment
purchased ie essential nature of the arrangement is supply of equipment and
not provision of services;
“inextricable and essentially linked” – Relevant factors:




The property is of little value to the purchaser or it may not possible to use the
property for which it was acquired
Services are specific to the equipment purchased
Without such services, can the property continue to operate as it did when it was
purchased and continue to accomplish the same functions?
One integrated contract for sale of property and such services
Page 31
Impact of Most Favored Nation (MFN) Clause

MFN triggers favourable tax implications

India-France treaty (Protocol applied for scope – though subsequent notification merely
recognised rate difference). [Refer DCIT v/s. ITC Ltd. [( 82 ITD 239)(Kol.)]

With regard to MFN Clause in DTAA, we would like to highlight that

FTS Rate to be reduced to 10% because of USA, UK and Germany DTAA’s

Scope of FTS is restricted as ‘Make available’ clause under Canada and Portugal DTAA
applies

MFN may restrict FTS to FIS – without consequential service PE trigger though treaty clause
may have FIS with service PE

Further, as a result of MFN clause in treaties with Belgium, France, Kazakhstan, Netherlands
and Spain, ‘Equipment Royalty’ will not be considered as Royalty.
Page 32
An overview of MFN Clause in selected India’s
DTAA
France
Belgium
In respect of articles 11 (Dividends), 12 (Interest) and 13
(Royalties, fees for technical services and payments for the use of
equipment), if under any Convention, Agreement or Protocol
signed after 1-9-1989, between India and a third State which is a
member of the OECD, India limits its taxation at source on
dividends, interest, royalties, fees for technical services or
payments for the use of equipment to a rate lower or a scope
more restricted than the rate of scope* provided for in this
Convention on the said items of income, the same rate or scope
as provided for in that Convention, Agreement or Protocol on the
said items income shall also apply under this Convention, with
effect from the date on which the present Convention or the
relevant Indian Convention, Agreement or Protocol enters into
force, whichever enters into force later.
If under any Convention or Agreement between India and a
third State being a member of the OECD which enters into
force after 1st January, 1990, India limits its taxation on
royalties or fees for technical services to a rate lower or a
scope more restricted than the rate or scope provided
for in the present Agreement on the said items of income,
the same rate or scope as provided for in that Convention or
Agreement on the said items of income shall also apply
under the present Agreement with effect from the date from
which the present Agreement or the said Convention or
Agreement is effective, whichever date is later.
Page 33
An overview of MFN Clause in selected India’s
DTAA
Finland
Switzerland
It is agreed that if after coming into force of this Agreement, any
agreement or convention between India and a Member State of the
Organisation for Economic Cooperation and Development provides
that India shall exempt from tax dividends, interest, royalties
or fees for technical services (either generally or in respect of
specific categories of dividends, interest, royalties or fees for
technical services) arising in India, or limit the tax charged in India
on such dividends, interest, royalties or fees for technical services
(either generally or in respect of specific categories of dividends,
interest, royalties or fees for technical services) to a rate lower than
that provided for in paragraph 2 of Article 10 or paragraph 2 of
Article 11 or paragraph 2 of Article 12 of the Agreement, such
exemption or lower rate shall be made applicable to the dividends,
interest, royalties or fees for technical services (either generally or
in respect of those specific categories of dividends, interest,
royalties or fees for technical services) arising in India and
beneficially owned by a resident of Finland and dividend, interest,
royalties or fees for technical services arising in Finland and
beneficially owned by a resident of India under the same conditions
as if such exemption or lower rate had been specified in those
paragraphs.
In respect of Articles 10 (Dividends), 11 (Interest) and 12
(Royalties and fees for technical services), if under any
Convention, Agreement or Protocol between India and a third
State which is a member of the OECD signed after the
signature of this Amending Protocol, India limits its taxation
at source on dividends, interest, royalties or fees for technical
services to a rate lower than the rate provided for in this
Agreement on the said items of income, the same rate as
provided for in that Convention, Agreement or Protocol on the
said items of income shall also apply between both
Contracting States under this Agreement as from the date on
which such Convention, Agreement or Protocol enters into
force.
The competent authority of India shall inform the competent
authority of Finland without delay that the conditions for the
application of this paragraph have been met and issue a
notification to this effect for application of such exemption or lower
rate.
Page 34
If after the date of signature this Amending Protocol, India
under any Convention, Agreement or Protocol with a third
State which is a member of the OECD, restricts the scope in
respect of royalties or fees for technical services than the
scope for these items of income provided for in Article 12 of
this Agreement, then Switzerland and India shall enter into
negotiations without undue delay in order to provide the
same treatment to Switzerland as that provided to the
third State.]
FTS – In a nutshell….
Part of a sale contract
But check
►
►
Check if effectively
connected to a PE or to a
fixed base
►
Source rule exception if
payment is for business
carried on outside India or
for making or earning of
income from source
outside India
Service PE applicability
Protection under treaty because
of
► Absence of FTS article
► Override of IPS article
► FIS concept of treaty
► Impact of MFN
FTS:
Different facets
Protected under Expln 2
to sec.9(1)(vii)
Page 35
Alternative 1: Absence of Article on FTS
DTAAs signed by India not having the FTS/ FIS article…
•
Australia – however taxability indicated in royalty article
•
Brazil – however taxability indicated in the protocol
•
Bangladesh
•
Greece
•
Indonesia
•
Libya
•
Mauritius
•
Nepal
•
Philippines
•
Sri Lanka
•
Tanzania
Page 36
Alternative 1: Absence of FTS Article
DTAAs signed by India not having the FTS/ FIS article

Thailand

UAE

UAR

Zambia– however separate article for management and consultancy services
Page 37
Alternative 1: Absence of FTS Article

Conveys no special treatment envisaged for FTS
‒ Eg. Mauritius, Philippines, Thailand, UAE
‒ Bangladesh, Greece, Indonesia, Libya, Mozambique, Myanmar, Nepal

Article 7 of DTAA may apply
‒ If PE in India, then taxable in India
‒ If no PE in India, then not taxable in India
OR

Other income Article required to be examined
OR

Governed by the provisions of the domestic tax law
Page 38
Rates in force u/s 115A
Domestic Law
Description
Rate as per
S.115A
Where agreement has been made on or before the 31st day
of May, 1997
30%
Where agreement has been made after the 31st day of May,
1997 but before the 1st day of June, 2005
20%
Where agreement has been made after 1st day of June 2005
10%
Payment for Royalty/FTS made after 1st April, 2013
25%(Amendment
made by Finance
Act, 2013)
Tax Treaty
• Majority of tax treaties signed by India prescribe tax rate of 10%/15% for taxation
of FTS
Page 39
Amendment brought in by Finance Act, 2013 - FTS
becomes expensive
After Amendment

Tax rate increased from 10% to 25% w.e.f 1st April, 2013

New rate (of 25%) applicable irrespective of the date of signing of agreement

Foreign companies generally insist on passing their tax liability to the service
recipient - cost of availing technical support would now stand increased in hands
of Indian companies.

Assessee may consider to route their transactions through favorable jurisdictions
(where treaty rate is 10%)

Many international decisions on the issue of “beneficial ownership” in treaty
shopping situations have been decided in favor of taxpayers
Disputes relating to novation of agreement no more
relevant in respect of subsequent payments
Page 40
Rates in force u/s 115A – Interplay of S. 115A with S.
206AA and 90(4)
• Tax shall be deducted at higher of ‘rates in force under the Act’ and 20%, if the
recipient does not have PAN (S. 206AA)
• Treaty relief available only on production of valid TRC [S. 90(4)]
Scenarios
Applicable Section
Tax Rate
Both PAN and TRC
available
S.206AA not applicable and treaty
benefit shall be available
25% or treaty rate which ever
is more beneficial
PAN available but TRC
not available
S.206AA not applicable
25% (lower rate under treaty
not available)
TRC available but PAN
not available
S.206AA applicable
25% or treaty rate which ever
is more beneficial subject to
minimum of 20%
Both PAN and TRC not
available
S.206AA applicable; Treaty benefit
shall not be available
25% (lower rate under treaty
not available)
Page 41
Case Study 1 - FTS
Facts of the case

Siemens Ltd. (Taxpayer) made payment to PTL, Germany for carrying out tests of circuit
breakers manufactured by it in order to establish that the design and the product meet the
requirements of International Standard.

According to the taxpayer, the payment was purely for standard facility provided by the
laboratory which was done automatically by the machines, though under observations of
technical experts. Once these tests are done successfully by the machines, a certificate is
issued by the authorities of the PTL.

It was submitted by the taxpayer that the payment does not fall in the nature and category of
FTS as per the Act.

The AO held that that payment made by the taxpayer would qualify as fees for technical
services under section 9(1)(vii) and liable to withholding as per section 195.
Issue before the Tribunal

Whether since there was not much of human involvement for carrying out tests of circuit
breakers in laboratory and it was mostly done by machines, it could be concluded that PTL
was not rendering any kind of technical services within the meaning of Explanation 2 to
section 9(1)(vii) and whether the taxpayer was required to deduct tax at source while making
payments to PTL
Page 42
42
Case Study 1 Cont. - FTS
Observations and Decision of Tribunal

FTS means consideration for rendering managerial, technical or consultancy services. As
the word 'technical' is preceded by the word 'managerial' and succeeded by the word
'consultancy‘, it cannot be read in isolation. The word 'managerial and consultancy' is
indicative of the involvement of a human element and managerial services and consultancy
services have to be given by human only and not by equipment.

Thus, the word 'technical' has to be construed to involve direct human involvement without
which technical services cannot be held to be made available. Where simply an equipment
or sophisticated machine or standard facility is provided albeit developed or manufactured
with the usage of technology, such a user cannot be characterized as providing technical
services.

Usage of technology or machine developed by human and put to operation automatically
and operating without much human interface or intervention cannot per se be held as
rendering of 'technical services' by human skills. Merely because there would be some
human involvement and certificates would be provided by human after a test is carried out in
a laboratory automatically by the machines, it cannot be held that services have been
provided through human skills.

Therefore, the payment does not fall within the ambit of section 9(1)(vii)
Siemens Ltd. – Mumbai Tribunal
Page 43
43
Case Study 2 - FTS
Facts

The Taxpayer, an Indian company, made payments to the UK-based service

providers in respect of training services provided for market awareness and in-house training
/ development of its employees in India.
Issue

Whether consideration paid by Indian company constitute FTS under India-UK DTAA?
Observations and Decision

The fees paid to the UK service provider was for training services that were general in
nature and which did not involve transfer of technology and, hence, does not satisfy the
make available condition as provided under the India-UK DTAA.

Accordingly, the consideration for general training services is not taxable as FTS in India
under the UK DTAA. Even though the consideration may qualify as FTS under the ITL, the
provisions of the UK DTAA, being more favorable, would apply.

Further, the taxpayer was also not required to withhold tax on the consideration paid to the
UK service provider for general training services
Veeda Clinical Research Pvt. Ltd. – Ahmedabad Tribunal
Page 44
Case Study 3 - FTS
Facts

X Ltd. is a company incorporated in Singapore and is a diamond testing institute which was
engaged in the grading of diamonds

The Gemological Institute of America (GIA) was in business of grading and issuing
certificate stating properties of diamonds

X Ltd. was appointed as an agent by GIA. X Ltd. collected grading fee from customers in
India and sought nil deduction of tax on the remittances that were to be made to GIA
Issue

Whether such grading could constitute FTS
Decision

Undoubtedly the institute was using its experience in grading the diamonds but such grading
could not be said to have transferred its experience, knowledge or skill to the customer,
therefore, the transactions cannot be labelled as fee for technical services

Payment of consideration would be regarded as 'fee for technical/ included services' only if
twin test of rendering services and making technical knowledge is available at the same time
Diamond Services International – Mumbai High Court
Page 45
Case Study 4 - FTS
Facts

Canadian company was engaged by the Indian Company to undertake technical services for
upgradation of NHAI which includes technical drawings, detailed designs and reports
Issue

Whether the payments constitute “fees for included services” within the meaning of Article 12 of
the DTAA with Canada or FTS as per section 9(1)(vii) of the Act
Decision

ITAT held that when the payment is for development and transfer of a technical plan or
technical design, it need not be coupled with the condition that it should also make available
technical knowledge, experience, skill, know-how, or process etc.

Condition of making available technical knowledge is not sine qua non for considering the
question as to whether the amount is fees for included services or not particularly when the
payment is only where the technical or consultancy services consists of development and
transfer of a technical plan or technical design only.

Accordingly, the payment was held to be in the nature of fees for included services as per
Article 12(2) of the DTAA
Snc-lavalin International Inc. – ITAT Delhi
Page 46
Case Study 5 – (MFN Clause) - CIT v. De Beers
India Minerals Pvt. Ltd. (Karnataka High Court)
Facts of the case

De Beers India Minerals Pvt. Ltd. (“taxpayer‟) is engaged in the business of prospecting and
mining for diamonds and other minerals.

During the early stage of exploration, for carrying out geophysical survey, the taxpayer entered
into an agreement with Fugro Elbocon B. V., Netherlands (“Fugro‟) for providing high quality,
high resolution, geophysical data suitable for selecting probable kimberlite (mineral deposit)
targets.

The taxpayer paid consideration to Fugro without withholding tax; this position was challenged
by the Assessing Officer.

On appeal, the Commissioner of Income-tax (Appeals), and thereafter the Income-tax Appellate
Tribunal, decided the matter in favour of the taxpayer.
Issues before the Karnataka High Court


Whether income received by Fugro from the taxpayer would fall within the definition of “fees for
technical services‟ under article 12(5) of the India-Netherlands tax treaty which refers to ”making
available” knowledge, etc.?
Whether payment to Fugro was for the development and transfer of technical plan or technical
design to the taxpayer?
Page 47
Case Study 5 – (MFN Clause) - CIT v. De Beers
India Minerals Pvt. Ltd. (Karnataka High Court)
Observations and Ruling of the High Court
Making available knowledge, etc.




At the outset, the High Court placed reliance on the ”most favored nation‟ clause under the
India-Netherlands tax treaty, which essentially provides that a more beneficial tax provision in a
subsequent treaty between India and another OECD country would apply to the IndiaNetherlands tax treaty as well.
Based on the “most favored nation‟ clause, reference was made to the India-Singapore tax
treaty which clarifies the scope of the term “make available‟ as enabling the person acquiring the
services to apply the technology contained therein.
Considering the above, Fugro has given data, photographs and maps to the taxpayer, but have
not made available technical expertise, skill or knowledge in respect of such collection or
processing of data to the taxpayer, which the taxpayer can apply independently and without
assistance of Fugro in the future. The taxpayer is completely kept in the dark about the process
and the technologies which Fugro adopted in arriving at the information / data which is passed
on to the taxpayer as technical service.
Fugro had rendered technical services to the taxpayer but they had not “made available‟
technical knowledge, etc. to the taxpayer as envisaged under the Indian-Netherlands tax treaty
and hence the liability to tax is not attracted.
Page 48
Case Study 5 – (MFN Clause) - CIT v. De Beers
India Minerals Pvt. Ltd. (Karnataka High Court)
Observations and Ruling of the High Court (Cont.)
Development and transfer of technical plan or technical design




The contract between the taxpayer and Fugro was for providing services and not for supply of
technical design or plan.
The reports and maps provided by Fugro are only additional mode of representation of data and
it is not a technical plan or design as understood in law.
The agreement between the taxpayer and Fugro provides that all information and data relating to
any site on which any work or services are performed shall exclusively belongs to the taxpayer;
hence as Fugro was never the owner of the said data, the question of transfer of such data does
not arise.
Thus Fugro had not devised any technical plan or technical design and therefore the question of
transfer of any plan or design did not arise.
Page 49
Oxford University Press In re – AAR - [2014] 45
taxmann.com 282


Facts of the case

Oxford University Press ( OUP / the Applicant) is an Indian branch of Oxford University Press, UK. It is engaged in
publishing, printing and reprinting of educational books for schools, Universities, Professional and other educational
institutions or scholarly books.

OUP appointed Geetha K (GK), a Sri Lankan tax resident for a period of 12 months for carrying out sales and brand
promotion activities and achieving sales and collection budgets exclusively for OUP in Sri Lanka.

OUP paid monthly remuneration / retainership fees and fixed sum towards business expense reimbursement to GK in
Sri Lanka
Issue before the AAR


Whether tax should be withheld on the monthly remuneration and reimbursement paid to GK
AAR's observations & ruling


The sales promotion and marketing services rendered by GK was not in the nature of managerial, technical or
consultancy services for the purpose of the definition of Technical Services (TS) under the Act. Moreover, TS is not
defined under the India Sri Lanka DTAA
The aforesaid remuneration would qualify as Independent Personal Services under the IS DTAA and devoid any place
of business / service in India, not taxable in India
Sales promotion services not being managerial / consultancy services by nature, gets
out of the definition of technical services
Page 50
Steria (India) Ltd. In re – AAR - [2014] 45
taxmann.com 281


Facts of the case

Steria India Ltd, (SI) a is a leading provider of IT driven business services for its client's core
business processes. Group Steria France (SF) is a French partnership firm centralizes technical
skills to carry on management functions such as legal finance, human resources, communication
risk control, information systems, controlling and consolidation, delivery and industrialization,
technology and the management information services etc

SI entered into a management services agreement with SF whereby SF provides various
management services to the SI with a view to rationalize and standardize the business conducted
by SI in India in accordance with the international best practices for an agreed basis of fees with
5% mark up

SF has no personnel / physical presence in India
Issue before the AAR

Whether the management services fees paid to SF is taxable in India in view of the conjoint
reading of the protocol to the India France DTAA and restricted scope of FTS definition qua
"make available" clause under the India UK DTAA?
Page 51
Steria (India) Ltd. In re – AAR - [2014] 45
taxmann.com 281

AAR's observations & ruling

Protocol may be used to interpret the provisions of a DTAA but can't import words, phrases or
clauses into the provisions of the treaty

Had the notification ratifying the protocol to the India-France DTAA intended to include "make
available" clause in the DTAA, it would have expressly done so and devoid that the management
services fees are taxable in India under the India France DTAA as well
Is the MFN clause in the India France DTAA rightly interpreted?
Page 52
Acclaim Management Solutions
Private Limited
E – 6A,
Kailash Colony
New Delhi: 110 048
Avinash Gupta:
+91 98107 51999
Ph: +91 11 2410 8838
Fax: +91 11 40556069
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[email protected]
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Page 53