Background
Taxation of payments characterised as “fees for technical services” (“FTS”) is a contentious issue in arena of international taxation. The definition of FTS covered under DTAAs entered into by India can be broadly classified into 2 categories, namely wide definition and restrictive definition. The wide definition which is found in majority of DTAAs includes payments towards technical, managerial and consultancy services including provision of services of technical or other personnel. The restrictive definition includes such payments only if such services “make available” technical knowledge, experience, skill, know how, or processes, or consist of the development and transfer of a technical plan or technical design. Such restrictive definitions are found in some DTAAs entered into by India with USA, UK, Singapore, Netherlands, etc.
Amongst others, one of the key controversies in the interpretation of the restrictive definition of FTS is the meaning of the term ‘make available’. According to the MoU, FTS technology will be considered to be ‘made available’ only when the person acquiring the service is enabled to apply the technology in the future, on its own (without having recourse to the seller). 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.
The technical knowledge, experience, skill etc must remain with the person utilising the services even after the rendering of services has come to an end. The fruits of the services should remain available to the person utilising the services in some concrete shape such as technical knowledge, experience, skills etc and the service recipient must be at liberty to use the technical knowledge, experience, skills etc.
Discussed below are the two recent judgments of ITAT (Mumbai) where in one of the cases it was held that technical services were “made available” and hence taxable as FTS and in another 2 cases it was held that the same were not of the nature of being “made available”.
Facts of the case & Issue
In the case of ITO v. Veeda Clinical Research Private Limited
The taxpayer was an Indian company. It had made certain payments to a UK service provider for providing ‘market awareness and development training’ to its employees. The issue before ITAT was whether the training fees paid to the service provider were covered under Article 13(4)(c) of India-UK DTAA (i.e. making available of technical knowledge or transfer of technical plan or design etc and accordingly, were taxable in India?
In the case of Sargent & Lundy, LLC, USA v. AD CIT
The US Co., a US tax resident (“US Co.”) and the tax payer provided services in the nature of operating power plants, decommissioning, consulting, project solutions and other engineering based services. It entered into an agreement with an Indian Company (“I Co.”) for rendering consulting and engineering services in relation to ultra-mega power projects in India as per which, the US Co. was required to prepare necessary designs and documents. The issue before ITAT was whether the services rendered by the US Co. satisfied the test of ‘make available’ under the India-US DTAA and, thus, were taxable as fees for included services (“FIS”).
In the case of United Helicharters Private Limited v. ACIT
The assessee was engaged in the business of charter hire of helicopters. The US company providing training to enable the pilots or engineers to get their respective licences endorsed, to operate/work on respective type of helicopter. The assessee made payment towards training expenses to the US company. The issue before the ITAT was that whether expenditure on training of pilots was in the nature of FTS under Article 12(4) of India-USA DTAA.
Applicable Law
ITO v. Veeda Clinical Research Private Limited Article 13(4) of India – UK DTAA
“For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term fees for technical services means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which a… b…. c. make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design.”
Sargent & Lundy, LLC, USA v. AD CIT
Article 12(4) of India – USA DTAA – “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) …….; 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.”
Judgment of the ITAT (Mumbai)
In the case of ITO v. Veeda Clinical Research Private Limited
ITAT held that the condition precedent for invoking the “make available clause” is that the services should enable the person acquiring the services to apply the technology contained in such services pursuant to transfer of technology. As the training services provided were general in nature and did not involve transfer of technology, the fees paid for the same could not be covered under Article 13(4)11 of India-UK DTAA.
In the case of Sargent & Lundy, LLC, USA v. AD CIT
The expression ‘make available’, in the context of FIS, contemplates that the services are of such a nature that the payer of the services comes to possess the technical knowledge so provided, which enables the payer to utilise the same in the future, on is own. As the US Co. rendered technical services in the form of technical plans, designs, projects etc. which were blueprints of the technical side of the projects and such services were rendered at a pre-bid stage, it was quite natural, that such technical plans etc. are meant for use in the future, if and when, I Co. took up the bid for installation of the projects.
When the technical services provided by the US Co. are of such nature, which are capable of use in the future, the same satisfies the test of ‘make available’ as envisaged under the India-US DTAA. Accordingly, the services rendered by the US Co qualified as FIS and were, therefore, taxable in India. In the case of United Helicharters Private Limited v. ACIT As the training given to the pilots and other staff was as per the requirements of the regulatory and was necessary for eligibility of the pilots, such training did not fall under the term “make available” under the India-USA DTAA.
Our Analysis & Comments
The concept of “make available” with respect to technical services has been analysed in various judgments. Some of them are as under:
In CESC Ltd. Vv. DCIT, it was held payments made by assessee to a UK firm, which was appointed as technical advisor with a role of review and giving opinion and suggesting corrections rather than design and directing the project did not fall under the ‘make available’ clause of Article 13(4) of India UK DTAA.
In DIT v. Guy Carpenter & Co. Ltd, it was held by the Delhi High Court that in order to fit the terminology “make available” in Article 13(4), mere provision of technical services is not enough but the technical knowledge must remain with the payer, and he must be equipped to independently perform the technical function himself with the help of service provider.
In the case of CIT v. De Beers India Minerals Pvt. Ltd, it was held that it was not enough that the services offered are the products of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the service provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered “make available’ when the person acquiring the service is enabled to apply the technology.
In the case of Raymond Limited v. DCIT, it was inter alia held by the Mumbai bench of ITAT that “making available” of services was a stage subsequent to the “making use of” stage. The qualifying word is “which”- use of this relative pronoun as a conjunction is to denote some additional function the “rendering of services” must fulfil. And that is that it should also “make available” technical knowledge, experience, skill etc. Some sort of durability or permanency is envisaged which will remain at the disposal of the person utilising the services.
In the case of Anarpham Inc, it was held by the AAR that the payments made to a Canadian company using highly sophisticated bio analytical knowhow without providing access to the client to such knowhow cannot be taxable as fees for technical services.
About Bulwark Solicitors
Bulwark Solicitors is a law firm pioneered by Solicitor Chirag Sancheti and Advocate Deep Shridharani. The firm has expertise in the areas of both Litigation and non-Litigation. Under the non-litigation Law practice, the firm practices in the areas of Corporate Law, Intellectual Property Law, Bankruptcy & Insolvency Law, Competition Law, Real Estate and Conveyancing and DTAA Advisory. Further, under Corporate Law area, we practice Company Law, Securities Law, Mergers and Amalgamations, Private Equity and Venture Capital Investment Transactions, Legal Due Diligence and Foreign Exchange Management Law.