Concept of ‘Make Available clause’

Non-resident recipient is taxable in India only if satisfying the criteria of ‘made available’ under the Tax Treaty. Make available means any technical skill - know how knowledge or expertise etc. which can enable Indian customer to apply the technology content therein’. If the fruits of the services remained with the service provider then they are out of the ambits of the term make available' but after the fruits of the service rendered remained with the service recipient and the service recipient is able to perform similar activity, for which the services were sought, without the help or recourse of the service rendered then the technology can be said to be transferred or made available to the recipient. The onus of establishing that the services have met the ‘make available’ test is on the Revenue authorities.

Meaning of “make available”

Generally this expression “make available” is used in the sense of one person supplying or transferring or imparting technical knowledge or skill or technology to another and technology is considered “made available” only when the services receiver is enabled to absorb and apply the technology contained therein.

The definition of the words ‘Make available’ given in Oxford Dictionary is to mean that something should be within one’s reach so that one can use it. Broadly, ‘Make Available’ means, by providing services (fees for technical services / fees for included services), the provider of the services has equipped the recipient of the services in such a manner that the recipient of the services is enabled to do such services independently / apply such knowledge independently.

The expression “make available” only means that the recipient of the service should be in a position to derive an enduring benefit and be in a position to utilize the knowledge or know-how in future on his own. By making available the technical skills or knowhow, the recipient of the same will get equipped with that knowledge or expertise and be able to make use of it in future, independent of the service provider.

In order to be covered within the expression ‘make available’ what is necessary is that the service provider should transmit the technical knowledge etc. to the payer so that the payer may use such technical knowledge in future without involvement of the services provider”. 

Simplistically understood, a mere rendition of services does not fall within the gamut of the term “make available” unless the recipient of services is enabled and empowered to make use of the technical knowledge by itself in its business or for its own benefit without recourse to the original service provider in the future.

In CIT v. De Beers India (P) Ltd. (2012) 346 ITR 467 (Karn.), Their Lordships posed the question, as to “what is meaning of make available”, to themselves, and proceeded to deal with it as follows: The technical or consultancy service rendered should be of such a nature that it “makes available” to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology “making available”, the technical knowledge, skill?, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it.

Example

A U.K. manufacturer has experience in the use of a process for manufacturing wallboard for interior walls of houses which is more durable than the standard products of its type. An Indian builder wishes to produce this product for its own use. It rents a plant and contracts with the U.K. company to send experts to India to show engineers in the Indian company how to produce the extra-strong wallboard. The U.K. contractors work with the technicians in the Indian firm for a few months. Are the payments to the U.K. 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.” On the other hand, ‘Most favoured nation’ clause generally occupies its position in the protocol to tax treaty. It is relevant to note that the protocol of the tax treaty is a part of tax treaty unless otherwise provided in the tax treaty.

Payment of consideration would be regarded as “fee for technical/included services” only if the twin test of rendering services and making technical knowledge available at the same time is satisfied.

Avoiding Double Taxation

The Make Available Clause is crucial in preventing double taxation because it ensures that the income is taxed in either the country of residence or the country of source, but not both. This helps taxpayers avoid being taxed twice on the same income.

Income is taxable in India only if the recipient “makes available” its technical knowledge, experience, skill, know-how to the resident

Income is taxable in India only if the recipient “makes available” its technical knowledge, experience, skill, know-how to the resident payer which enables the latter to apply the technology contained therein. If the recipient only enjoy the services, but is unable to apply know-how behind the service, then the income would not satisfy the test of “make available”.

Conditions to be satisfied for make available clause

The condition of “make available” is satisfied when the recipient acquires a means to an end, i.e. he acquires the technical knowledge, experience, skills, know-how or processes from the provider which acts as a means and enables him to use the same for achieving a further end. The condition of make available is not satisfied merely where the services itself serves as an end for the recipient and he does not acquire any technical knowledge, experience, skill, know-how, or processes from the service provider

§  Technical knowledge, skills, etc. must remain with the person receiving the services even after the agreement comes to an end

§  The technical knowledge or skills of the provider should be imparted to the recipient

§  The recipient should be in a position to deploy similar skills or technology or techniques in future without the aid or assistance of the service provider

“Make Available Clause” is a concept often found in Double Taxation Avoidance Agreements (DTAAs)

The expression ‘make available’ has a specific meaning in the context of the tax treaties and there is, thus, no need to adopt the day to day meaning of this expression. The “Make Available Clause” is a concept often found in Double Taxation Avoidance Agreements (DTAAs), also known as tax treaties, between countries. DTAAs are bilateral agreements negotiated between two countries to prevent double taxation of income earned by residents of one country in the other country. These treaties provide rules for allocating taxing rights over different types of income, such as dividends, interest, royalties, and capital gains, to ensure that taxpayers are not subjected to double taxation.

India has signed tax treaties with various countries out of which certain DTAA’s (viz., India-Australia, India-Portuguese Republic, India-USA etc.) contains ‘Make Available’ clause which contains a restrictive definition of Fees for technical services / Fees for included services as against the wider definition of ‘Fees for Technical Services’ as provided under section 9(1)(vii) of the Income-tax Act and certain DTAA’s (like India-France, India-Switzerland etc.) contains ‘Most Favoured Nation’ clause which requires a country to provide any concessions, privileges, or immunities granted to one nation of a particular body (say, OECD) to all other nations of that particular body (say, OECD).

FTS Clause as per Different DTAA’s

§  Some of the DTAA’s contain a restrictive definition of FTS/FIS requiring satisfaction of make available condition- USA, UK, Singapore, Netherlands, Cyprus etc.

§  FTS Definition – varies from treaty to treaty.

§  “Make Available” clause if present – significantly narrows down the scope.

§  Satisfaction of the ‘make available’ requirement which is a sine qua non for taxability of services as FIS.

Make Available’ clause usually present in the Article 12 of the tax treaty

Make Available’ clause usually present in the Article 12 of the tax treaty (i.e., Royalties and/or Fees for technical services / Fees for included services) which are read as under:

“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 : are ancillary and subsidiary to the application or enjoyment of the right, property or information or; 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 are said to be “made available” if the recipient of services is at liberty to use the technical knowledge, skill, know-how and processes in his own right.

For instance, if a US tax resident simply provides some consultancy services to an Indian tax resident, payment towards the same would not satisfy the “make available” criteria and hence, would not qualify as FIS as per Article 12 of the India-US DTAA.

“Make Available” Clause Article 13 of the UK-India Tax Treaty

“Make Available” Clause Article 13 of the UK-India Tax Treaty defines FTS as “payments for technical or consultancy services which are connected to any payment in the nature of royalty. Another category of services, which ‘make available’ technical knowledge, experience, skill, or knowhow or process, or services that consist of the development and transfer of a technical plan or design also fall into this category.” Article 12(4)(b) of India-US tax treaty defines FTS to inter alia include “payments in consideration for the rendering of any technical or consultancy services, which make available technical knowledge, experience, skill, know-how or process.”

Hence, as per this definition, services result in FTS only if they “make available” technical knowledge, experience etc. Fundamentally, a technology is `made available’ when the person acquiring the services. The mere fact that the services have some technical aspects does not mean that technology is made available.

According to the memorandum of understanding (MoU) to the India-US tax treaty, technology is “made available” when the service recipient is enabled to apply the technology. The MoU provides illustrations.

For instance, a US resident (X) “makes available” technical knowledge, skill, etc to an Indian resident (Y), when X sends its experts to India to show Y’s engineers how to produce an extra strong wall board, or when X modifies Y’s formulas pertaining to oil refining process, to eliminate cholesterol in refined oil and trains Y’s employees in applying these new formulas.

Illustrative examples of income qualifying as “FTS” / “FIS” (under the “make available” criteria in specified circumstances)

§  Engineering services (including the sub-categories of bio-engineering and aeronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical and industrial engineering);

§  Architectural services;

§  Computer software development;

§  Bio-technical services;

§  Food processing;

§  Environmental and ecological services;

§  Communication through satellite or otherwise;

§  Energy conservation;

§  Exploration or exploitation of mineral oil or natural gas;

§  Geological surveys;

§  Scientific services;

§  Technical training;

§  Consulting services in relation to review of hydrocarbons, analysis and review of data maps;

§  Training in the use of simulators [Sahara Airlines v. DCIT (2002) 83 ITD 11 (ITAT Delhi)];

§  Technical assistance and training to enable the recipient to manufacture aluminium foils [Hindalco Industries Ltd. v. ACIT (2005) 94 TTJ 944 (ITAT Mumbai)];

§  Technical plans, designs and information to enable the recipient to execute and install water features [Gentex Merchants (P.) Ltd. v. DDIT (2005) 94 ITD 211 (ITAT Kolkata)].

Illustrative examples of income not qualifying as “FTS” / “FIS” (under the “make available” criteria in specified circumstances)

§  Services provided by overseas lead managers for managing a GDR issue [Raymond Ltd. v. DCIT (2002) 86 ITD 791 (ITAT Mumbai);

§  Standard telecom service [Wipro Ltd. v. ITO (2003) 80 TTJ 191 (ITAT Bangalore)];

§  Quality assurance assessment and certification activities [NQA Quality Systems Registrar Ltd. v. DCIT (2004) 92 TTJ 946 (ITAT Delhi);

§  Reviewing project documentation and providing expert opinion [C.E.S.C. Ltd. v. DCIT (2003) 275 ITR 15 (ITAT Kolkata)];

§  Providing commercial and industrial information [McKinsey & Co., Inc. & others v. ADIT (2005) 99 ITD 549 (ITAT Mumbai)];

§  Updation of a market study [Bharat Petroleum Corporation Ltd. v. JDIT (2007) 14 SOT 307 (ITAT Mumbai)];

§  Project monitoring services [Worley Parsons Services Pty Ltd. (2008) 301 ITR 54 (AAR)];

§  Grading and certification reports [Diamond Services International (P) Ltd. v. UOI (2007) 304 ITR 201) (Bom.);

§  Referral services [Cushman and Wakefield (S) Pte. Ltd. (2008) 305 ITR 208 (AAR);

§  Clinical or bio-analytical studies [Anapharm Inc. v. DCIT (2008) 305 ITR 394 (AAR)]

§  Airborne survey and providing high resolution geophysical data [CIT v. De Beers India Minerals (P) Ltd. (2012) 346 ITR 467 (Karn.)]

§  Services of reinsurance broking [Guy Carpenter & Co Ltd v ADIT (2012) 346 ITR 504 (Del.)]

 

Information Technology & Administrative services provided by Bio-Rad Singapore not Fees for Technical Services (FTS), ‘make available’ not satisfied

The issue that the Tribunal was called upon to consider was whether income from „information technology and other administrative services‟ provided by the respondent/assessee to its affiliate in India could be construed as “Fees for Technical Services” [in short, “FTS”], having regard to the provisions of India-Singapore Double Taxation Avoidance Agreement [in short, “Indo-Singapore DTAA”].

Delhi High Court upholds Delhi ITAT  ruling holding that income from information technology and other administrative services provided by the Assessee to its Indian affiliate cannot be construed as Fees for Technical Services (FTS), under Article 12(4)(b) of India-Singapore DTAA; Agrees with ITAT’s analysis and conclusion that the agreement between the Assessee and its Indian affiliate had been effective from 01.01.2010 and if technical knowledge, experience, skill, and other processes had been made available to the Indian affiliate, the agreement would not have run its course for such a long period, i.e. till relevant Assessment year 2019-20; Thus, concurs with the ITAT that services provided by the Assessee to its Indian affiliate cannot be charged to tax as FTS as it did not fulfil the criteria of ‘make available’ principle since the recipient of the services is not enabled to provide the same service without recourse to the Assessee; Revenue, for Assessment year 2019-20, held the services provided by the Assessee to the Indian subsidiary to be in the nature of management support services and chargeable to tax as FTS under the India-Singapore DTAA; DRP rejected Assessee’s objections, however ITAT ruled in favour of the Assessee; Before High Court , Revenue contended that the Assessee is providing professional advice to its Indian subsidiary through studies, evaluation, review of reports, liaising work, advice on key policy issues and business operations, HR management, and financial management among other things, thus the said services falls under the ambit of FTS; High Court upholds ITAT’s observation, “to invoke make available clauses, technical knowledge and skill must remain with the person receiving the services even after the particular contract comes to an end and 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 the future without depending upon the provider”; Thus, holds that no substantial question of law arises for consideration and dismisses Revenue’s appeal. [In favour of assessee] (Related Assessment year : 2019-20) – [CIT (International Taxation) v. Bio-Rad Laboratories (Singapore) Pte Ltd. [TS-624-HC-2023(DEL)] – Date of Judgement : 03.10.2023 (Del.)]

Services provided on year-to-year demonstrates ‘make available’ not satisfied; Rejects FIS taxability

Delhi ITAT holds that the receipts from provision of consultancy services are not in the nature of FIS as the Assessee did not satisfy the make available clause under Article 12(4)(b) of India-US DTAA; Opines that the Assessee did not make available technical knowledge, skill, etc. to its Indian affiliate to enable it to apply the said knowledge independently without the Assessee’s assistance and observes that the Assessee provided such services to its Indian affiliate continuously since the year 2010 on year-to-year basis; Further holds that the addition of Assessee’s receipts towards reimbursement of client related expenses as FIS is not sustainable, by relying on co-ordinate bench ruling in case of the payer Bain and Company India  wherein the identical payment was held to be not FIS; Assessee, a US-based company, for Assessment year 2018-19, received Rs. 5.24 Cr towards provisions of consultancy services and Rs. 10.98 Cr for reimbursement of client related expenses under a cost reimbursement agreement, from its Indian affiliate, Bain and Company India (Bain India); Revenue noted that the Assessee did not offer the said receipts to tax, on the ground that the said receipts are not in the nature of FIS, thus not taxable in India; Revenue dismissed Assessee’s submission and held that the aforesaid receipts were taxable in India as FIS under Article 12(4)(b) of India-USA DTAA since the Assessee made available technical knowhow, knowledge, skill etc. to the service recipient and made the addition; ITAT analyses the consulting service agreement and observes that the nature of services provided by the Assessee are related to market research, strategic research and planning, data collection, client engagement etc.; Notes that the Revenue failed to bring any material on record to demonstrate that the Assessee, while rendering the services, made available technical knowledge, expertise, skill, knowhow etc. to Bain India, to enable them to apply such technology, knowhow etc. independently without the aid and assistance of the Assessee; Explains that, had the Assessee made available the technical knowledge, knowhow skill etc. to Bain India, there would not have been any occasion for the Assessee to provide such services on year to year basis as the making available or transfer of such technical knowledge, knowhow, skill etc. would have enabled Bain India to apply them on its own without requiring the Assessee to continue to provide them; Refers to Example 7 in the MOU to India-US DTAA, whereby it is explained that a receipt cannot be treated as FIS merely because the service provider used substantial technical skill and expertise, while providing consultancy services where it is not made available to the service recipient; Thus holds that Assessee’s receipts towards provision of consultancy services are not in the nature of FIS under Article 12(4)(b) of India-USA DTAA. [In favour of assessee] (Related Assessment year : 2018-19) - [Bain & Company, Inc. v. ACIT (International Tax), Gurgaon [TS-491-ITAT-2023(DEL)] – Date of Judgement : 29.08.2023 (ITAT Delhi)]

Receipts from design services taxable as FTS since contract satisfied make available clause

Delhi ITAT upholds the taxability of receipts for design services as fee for technical services (FTS) provided by a Singapore-based company to Reliance Corporation IT Park Ltd. (RCITP); Opines that the Assessee fulfilled the conditions of make available clause under the India-Singapore DTAA as the Assessee made available all reports, analysis, tests, tables, plans, drawings or other documents etc. to RCITP which enabled it to apply and use all these deliverables for its business purposes; Assessee, for Assessment year 2016-17, received Rs. 2.70 Cr. from RCITP which was subjected to TDS, however, the Assessee did not include it in the taxable income; Revenue held the aforementioned receipts to be taxable as fees for technical services both and Article 12 of the India-Singapore DTAA and accordingly made the addition at 10%, which was confirmed by DRP; ITAT analyses Article 12(4)(b) of the India-Singapore DTAA and observes that payments in consideration for services of a managerial, technical or consultancy nature, if such services make available technical knowledge, experience, skill know-how or process to enable the person acquiring the services to apply the technology contained therein shall fall under fees for technical services under Article 12(4)(b); Further observes that as per Article 12(4)(c), any payment in consideration for services that is managerial, technical or consultancy in nature, if such services consists of the developmental 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, shall be treated as FTS; Peruses the contract/work order entered into between the Assessee and RCITP and notes that the Assessee is the principal designer who assigns and transfer all right title and interest in all deliverables from the moment of creation to RCITP; Further notes that as the principal designer, Assessee granted RCITP a perpetual irrevocable non-exclusive royalty-free fully paid-up right and licence to use copy, modify and prepare derivative works provided by the Assessee; Also notes that Assessee granted intellectual property rights incorporated in the deliverables for the use of the deliverables to the RCITP, its affiliates and even the third parties engaged by RCITP in connection with its business operations; Thus, points out that the Assessee is making available all reports, analysis, tests, tables, plans, drawings or other documents in all forms including electronic or printed form to RCITP which enables them to apply and use all these deliverables for its business purposes, which satisfies the make available condition specified under Article 12(4)(b) and 12(4)(c) of India-Singapore DTAA; Thus, holds that the payments received by the assessee from RCITP falls under the purview of fees for technical services. [In favour of assessee) (Related Assessment years : 2016-17) – [Gensler Singapore (P) Ltd. v. JCIT International Tax, [TS-485-ITAT-2023(DEL)] – Date of Judge,emt : 25.08.2023 (ITAT Delhi)]

Editorial services not FTS/FIS as ‘make available’ clause not satisfied

Delhi ITAT holds that the sub-contracting charges received, by the US based company (Assessee), for provision of editorial services to its Indian AE  are not chargeable to tax as  fees for included services (FIS) in India as it does not satisfy the make available condition under Article 12(4) of India-USA DTAA; Opines that the services rendered by the Assessee, even though involves technical expertise, the same is not transferred to the recipient so as to enable them to apply it independently, in future on its own without recourse to the Assessee, thus the said services cannot be said to have been made available by the Assessee to its Indian AE; Assessee, for Assessment year 2019-20, received Rs. 5.27 Cr from its Indian AE for provision of e-publishing work, which was sub-contracted to the Assessee; Assessing Officer held sub-contracting charges to be ‘Other Income’ under Article 23 of the India-US DTAA and accordingly made the addition; DRP held that the said sub-contracting fees, constituted as FIS under Article 12(4)(b) of India-USA DTAA; ITAT observes that, in order for services to fall under FIS, the services rendered must make available technical knowledge, experience, skill, know-how or processes to the person availing such services; Explains that the ‘make available’ clause is satisfied when the person acquiring the services is enabled to apply the technology independently in the future without the assistance of the service provider; Points out that the fact that the provision of the service may require technical/consultancy input by the service provider, the said service does not per se mean that technical knowledge, skills etc. are made available to the person availing the service; Observes that editorial services provided by the Assessee comprises of page composition, language polishing, indexing, correcting faulty grammar and punctuation etc., which even though involves technical expertise, the same is not transferred by the Assessee which can be independently applied by the Indian AE in future on its own without recourse to the Assessee; Relies on Mumbai ITAT Special Bench ruling in Mahindra and Mahindra Ltd.  30 SOT 374 (ITAT, Mumbai (Special Bench) and co-ordinate bench ruling in Outotec India (P) Ltd. v. CIT (2015) 41 ITR (Trib) 449 (ITAT Delhi) wherein it was held that the expression “make available” in the context of ‘fees for technical services’ contemplates that the technical services should be of such a nature, that the payer comes to possess the technical knowledge so provided which enables it to utilize the same thenceforward; Considers Assessee’s argument that on the same issue under similar facts, in case of Assessee’s group company, Laserwords US, the DRP ruled that sub-contracting charges received from SPi India is not taxable as FIS under India-US DTAA, since the make available clause is not satisfied, however in the instant case the DRP gave a contradicting order; Concurs with Assessee’s argument that  the Revenue misapplied ITAT Chennai ruling in Laserwords US as the same was with regards to marketing fee and not sub-contracting fee; Thus allows Assessee’s appeal and deletes the impugned addition holding that the sub-contracting charges cannot be construed as FIS. [In favour of assessee] (Related Assessment year : 2019-20) – [Spi Global US, Inc. v. ACIT (International Taxation) [TS-386-ITAT-2023(DEL)] – Date of Judgement : 07.07.2023 (ITAT Delhi)]

‘Make Available’ not satisfied as services provided on continuous basis; Managerial services, not FTS

Delhi ITAT holds that the services rendered by the Assessee to its AE do not satisfy ‘make available’ clause, thus the consideration for the said services cannot be held taxable as Fees for Technical Services (FTS); Opines that since the Assessee is providing the said services on continuous basis, it shows that no technical knowledge, experience or skill was made available so as to equip the AE to perform the technical function themselves, independently in future, without Assessee’s help; Further holds that the administrative, accounting, legal and other support services provided by the Assessee are essentially in the nature of managerial services, which is not covered under the scope of FTS under Article 13(4)(c) of India-UK DTAA; Assessee, a UK based Company, engaged in provision of SMS messaging solutions by cloud-based technology, entered into business cooperation agreement with its AE, bSmart Tech (P) Ltd. (BTPL), for provision of centralised services in the nature of financial Support, technical support, sales support and legal support services; For Assessment year 2017-18, Revenue held that the services provided by the Assessee to BTPL, makes available technical knowledge, skill, experience, know-how, etc., thus it falls within the ambit fees for technical services (FTS) under Article 13(4)(c) of the India-UK DTAA and accordingly made addition of the consideration of Rs. 83.04 Lacs received from BTPL; ITAT observes that the nature of services provided by the Assessee to BTPL comprises of maintaining records of invoices, reminders to BTPL for collecting outstanding dues, reviewing legal agreement, providing technical support to customers of BTPL; Further observes that the Assessee processes/addresses the requests received for the services covered in the Agreement from BTPL and executes/delivers the resolution on an e-mail to BTPL; Considers the sample copies of e-mail correspondence between the Assessee and BTPL  and observes that services offered by the Assessee involve review of legal contracts/agreements for BTPL to be entered with its clients; Finds that the services provided by the Assessee including administrative services, accounting services, legal services and other support services that are essentially in the nature of managerial services are outside the scope of the meaning of FTS under Article 13(4) of the India-UK DTAA; Opines that even if the aforementioned services are considered to be FTS under Section 9(1)(vii), the same will not fall within the meaning of FTS under Article 13(4) of India-UK DTAA as the services does not make available any technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of technical plan or technical design enabling BTPL to apply the technology; Observes that the Assessee has been providing the said services on a continuous basis which shows that BTPL cannot perform these services on its own without recourse to the Assessee; Relies on co-ordinate bench ruling Outotec India (P) Ltd. v. CIT (2015) 41 ITR (Trib) 449 (ITAT Delhi), Mumbai ITAT Special Bench ruling in Mahindra and Mahindra Ltd.  30 SOT 374 (ITAT, Mumbai (Special Bench), wherein it was held that mere rendering of services is not considered as ‘make available’ unless the person utilising the services is able to make use of technical knowledge etc. by himself in his business or for his own benefit and without recourse to the performer of services in future; Points out that the receipts would be regarded as FTS only if the twin test of rendering services and making technical knowledge available at the same time is satisfied; Thus, holds that the the consideration received by the Assessee from BTPL cannot be taxed as FTS and accordingly deletes the addition. [In favour of assessee] (Related Assessment year : 2017-18) – [Infobip Ltd. v. ACIT [TS-384-ITAT-2023(DEL)] – Date of Judgement : 26.05.2023 (ITAT Delhi)]

Income from maintenance and other support and training services is not taxable as Fees for Technical Services (FTS) as these services do not make available any technical skill knowledge or expertise etc., which can enable Indian customer to apply the technology content therein; absent satisfaction of make available clause under Article 12 of India-Singapore DTAA; thus, we hold that these services are not liable to be taxable

Mumbai ITAT holds that the income from maintenance and other support and training services is not taxable as FTS, absent satisfaction of make available clause under Article 12 of India-Singapore DTAA; Holds that the entire maintenance service contract is dependent on the software sub-licensing agreement, opines that trouble shooting or bug fixes and helping the Indian customers for maintaining and supporting the software does not mean that Assessee made available the technology in the software; Assessee-Company, tax resident of Singapore with a valid TRC, is engaged in the business of providing/sub-licensing software to entities, majorly engaged in the financial service sector and rendering related maintenance and other support services and training services in relation to the software sub-licensed to them; For Assessment year 2018-19, the Revenue held that Rs. 28.29 Cr received by Assessee from maintenance and other support services and training services as well as additional services with respect to the sub-licensed software was in the nature of FTS, both under Section 9(1)(vii) as well as Article 12 of India-Singapore DTAA; ITAT notes that the Assessee rendered maintenance and other support services to the in-house support team maintained by Indian customers (which are big organisations such as SBI) through telephone / email/ login assistance with respect to usage of the software programme, by responding to the questions communicated by his in-house support team concerning software use and resolving bug discovery; Observes that there are no onsite maintenance and support services, assistance provided by the Assessee to the Indian customers and also there is no PE or any maintenance team in India; Notes that Indian customers have in-house support team, which coordinates with Assessee for resolving queries/bugs, opines that the in-house support team of the Indian customers is mainly a centralized point of contact for purpose of co-ordination and related activities of Indian customers with the Assessee; As regards training services is concerned, notes that Assessee provides training to the end users and in-house team members of the Indian customers only with respect to the proper usage of the program, which is akin to training provided for operating any product, software and it is generally provided at the initial stage when the software is sub-licensed and subsequently provided only on need basis; With respect to maintenance services, observes that Assessee provides updates to the software programmes like correction of errors, improvements concerning existing functioning of program, and changes intended to improve calculations / results / formulate of software program etc., holds that there is no addition in the functionalities through such update which are only standard updates and not customization, thus “the entire maintenance service contract is dependent on the software sublicensing agreement.”; Further notes that the maintenance fees are annual and based on a percentage of licence fee and is not dependent upon the number of queries / bugs raised or resolved by the Assessee, opines that “If it is recurring annual fees, there is no question that assessee was making available any technology or knowhow of the Indian customers on year to year basis…”;  Accordingly, holds that maintenance support services and training services do not fall in the ambit and nature of FTS within Article 12(4) of India-Singapore DTAA and allows Assessee’s appeal. (Related Assessment year : 2018-19) – [Murex Southeast Asia (P) Ltd. v. DCIT (International Taxation) [TS-266-ITAT-2023(Mum)] – Date of Judgement : 08.05.2023 (ITAT Mumbai)]

Mere passing off project specific architectural, drawings and designs with measurements does not amount to making available technical knowledge, experience, skill, knowhow or processes. Accordingly, cannot be brought to tax as ‘Fee for Technical Services’.

ISSUES INVOLVED

Whether the amount received for ‘consulting engineering services,’ which involved the transfer of certain technical designs and drawings, was taxable as FTS under Article 13 of India UK Tax Treaty?

The assessee is a company registered in the United Kingdom and was a tax resident of that State. The assessee is an international, integrated engineering and consultancy company. The assessee is engaged in the business of providing structural and MEP (Mechanical, Electrical and Public Healthy) Engineering and consultation services for various buildings and projects in India. During the year under consideration assessee receive various amounts from India. Assessing Officer observed that amount of Rs. 15,18,250/- received by the assessee towards consulting engineering services is in the nature of Fee for Technical Services (FTS) and brought to tax the same as per Article 13(2)(a)(ii) of the India UK DTAA in the hands of the assessee. Assessing Officer also concluded that payment received under the head ‘cost recharge’ is royalty as per Act and as per India UK DTAA. Therefore, the amount of Rs 5,67,33,937/- received by the assessee under the head ‘Cost Recharge’ was treated by the ld. Assessing Officer as Royalty under section 9(1)(vi) of the Act as well as under Article 13 of India UK DTAA. DRP upheld the action of Assessing Officer. Being aggrieved, the present appeal is filed.

Held : We find that the issue in dispute is squarely covered in favour of the assessee by the order of this tribunal in Assessment year 2012-13 in ITA No. 1296/Mum/2017 dated 15.02.2019 wherein it was held that mere passing off project specific architectural, drawings and designs with measurements does not amount to making available technical knowledge, experience, skill, knowhow or processes. In any case of the matter, the Department has failed to establish on record that through development and supply of technical designs / drawings / plans the assessee has made available technical knowledge, experience, skill, knowhow or processes to the service recipient so as to bring the amount received within the meaning of fees for technical services under Article-13(4)(c) of the India-UK Tax Treaty. Therefore, in our considered opinion, the amount received by the assessee has to be treated as business profit and in the absence of a PE in India, it cannot be brought to tax in India. (Related Assessment year : 2019-20) – [Buro Happold Ltd. v. DCIT (2022) 145 taxmann.com 450 (ITAT Mumbai)]

Term ‘Make available’ clause is not satisfied if Non Resident provides services that are repetitive in nature

Assessee-foreign company entered into an agreement to provide offshore maintenance and support services to Power Grid Corporation of India Ltd (PGCIL). The assessee from outside India performed the entire services for software and hardware maintenance and support work through remote system monitoring, remote launching of the system, telephonic discussion or internet communication, etc. The Assessing Officer held that services rendered by the assessee to PGCIL were taxable as fees for included services (FIS) under section 9(1)(vii). The Dispute Resolution Panel (DRP) upheld the findings of Assessing Officer.

Held : On appeal, the Tribunal held that if article 12(4)(a) of India - USA treaty is read along with MOU, it is clear that for a service to qualify as FIS, there should be made available technical knowledge, experience, skill, know-how or processes to the service recipient.

The receiver of this service can be said to acquire the relevant skills used by the service provider only if he acquires those skills so that he can himself use them independently without getting any assistance or being dependent on the service provider in the future.

In the instant case, the assessee’s offshore maintenance and support services to PGCIL were not geared towards making available any technical knowledge, experience, skills, know-how, or processes to PGCIL. Further, the term of the agreement was for five years and services provided by the assessee were repetitive and ongoing. It means that PGCIL could not apply the technical or skills used by the assessee for rendering such service.

Given the repetitive nature of the services, it would be factually incorrect to allege that the services make available any technical knowledge, expertise, skill, know-how or processes to PGCIL. Consequently, the PGCIL would not apply technology on its own. It would continue to depend on the assessee for provision of software and hardware maintenance and support services in the future.

Thus, keeping in view of the facts and circumstances of the case, receipts from PGCIL do not qualify as ‘fees for included services ‘under articles 12(4)(a) and 12(4)(b) of India - US DTAA. – [GE Energy Management Services Inc. v. ADIT (2022) 135 taxmann.com 173 (ITAT Delhi)]

Non-resident-Salary - Double Expatriate employees Reimbursement not taxable in hands of overseas entity-No making available of any technical knowledge or skill to Indian entity - Not fees for technical services-Not Liable for deduction of taxes at source-Cannot be treated as assessee in default

Held that since the arrangement was in the nature of a cost-to-cost reimbursement without any element of income therein. From a conjoint reading of article 15 of the OECD Model Convention and article 12 of the Double Taxation Avoidance Agreement between India and the United States of America, there was no doubt that the assessee in India was the economic and de facto employer of the seconded employees, who were in India for more than 183 days in a 12-month period. All the seconded employees had a permanent account number and filed their returns in India in respect of the full amount of their salary. The definition of “fees for technical services” excluded “consideration which would be income of the recipient chargeable under the head salaries”. If the seconded employee was regarded as an employee of the assessee in India, the reimbursement to the overseas entity by the assessee would be in the nature of not “fees for technical services” but “salary”. Therefore, the reimbursements could not be chargeable to tax in the hands of the overseas entity and there would be no obligation to deduct tax at source under section 195. Further, the concept of “make available” was not satisfied. Thus, even if the rendering of service by the seconded personnel constituted a contract for service, in the absence of “making available” any technical knowledge or skill to the Indian entity, it shall not constitute fees for technical services. As a result, the amount reimbursed by the assessee to the overseas entity could not be subjected to tax in India as there was no element of income embedded in it. Consequently, as there was no violation of section 195, the assessee could not be held to be an assessee-in-default under section 201(1) for all the years under consideration. The Assessing Officer was directed to delete the interest levied under section 201(1A). [In favour of assessee] (Related Assessment year 2011-12 to 2018-19) – [Goldman Sachs Services (P) Ltd. v. DCIT (2022) 99 ITR 104 (ITAT Bangalore)]

Absent ‘make available’, Cloud, Colocation, Mainframe & Data Recovery services not Fees for Included Services (FIS)

Pune ITAT holds that US entity's receipts from from an Indian IT Company towards provision of Cloud Services, Colocation and Network Services, Mainframe Services, Disaster/Data Recovery Services to be not taxable in India as Fees for Included Services (FIS); Holds that the above stated services as per subcontracting agreement are provided outside of India and does not fulfil the ‘make available’ condition under Article 12(4)(b) of India-USA DTAA, thus cannot be taxed in India; Assessee, a USA based LLP, entered into subcontracting agreement with an Indian IT Company under which its US subsidiary rendered software support services to McDonald's Corporation by using the services of the Assessee; Revenue held that Assessee's receipts of Rs. 68,72,13,090/- from the India IT Company is taxable as FIS in India; On Assessee’s appeal CIT(A) deleted the addition against which the Revenue preferred an appeal; ITAT notes that the Assessee provided Cloud Infrastructure managed Private Cloud, Colocation and Network Services, Mainframe Services, Disaster/Data Recovery Services to the Indian IT Company, under the sub-contracting agreement; Observes that even if Revenue’s argument of applicability of Section 9(1)(vii) is accepted, the Assessee, in light of Section 90(2), is very well entitled for the benefit under India-USA, DTAA; Further observes that Article 12(4)(b) of the DTAA states that the income arising from provision of technical services can only be taxable if the services concerned fulfils the make available condition; Points out that the Revenue could not prove that the ‘make available clause’ is satisfied by the Assessee; Relies on co-ordinate bench ruling in Faurecia Automotive Holding v. DCIT ITA No. 784/PN/ 2015 dated 08.07.2019, wherein reliance was placed on Karnataka High Court ruling in CIT v. De Beers India Minerals (P) Ltd. (2012) 346 ITR 467 (Karn.) and it was held that the ‘make available condition is said to be satisfied when the service recipient is independently able to make use of the technical know-how provided by the Assessee, which is not proved in the present case; Thus, upholds CIT(A)’s findings reversing the Assessing Officer’s action holding the amount in issue of Rs. 68,72,39,090/- as taxable in India. [In favour of asseessee] (Related Assessment year : 2017-18) – [ITO v. Sungard Availability Services LLP [TS-1042-ITAT-2022(PUN)] – Date of Judgement : 28.11.2022 (ITAT Pune)]

Cadila Healthcare liable for TDS on Clinical Trial payments as FTS (fee for technical services), absent make available clause in India-Mexico DTAA

Ahmedabad ITAT holds that payment made by Cadila Healthcare to a Mexico-based entity for clinical trials is in the nature of FTS, liable for tax deduction at source since the payments are not covered under the exception to Section 9(1)(vii)(b) and there is no ‘make available’ clause in India-Mexico DTAA; For Assessment year 2013-14, Revenue found that Assessee-Company made remittances to certain non-residents in USA, Canada and Mexico for clinical trials without deducting tax at source; Revenue held that Assessee was liable to deduct taxes on such remittances made to overseas parties and raised a demand of Rs. 1.59 Cr (inclusive of interest); CIT(A) granted partial relief in respect of payments made for clinical trials to parties in USA and Canada, holding that the test of “make available” as provided under the India-USA and India-Canada DTAA was not satisfied, however in respect of payment made to non-resident in Mexico, CIT(A) held: (i) since the Assessee is an exporter of products and all the activities related to the business of the Assessee are carried out in India and source of income is with India, the Assessee does not fall within the exception of Section 9(1)(vii)(b), and (ii) in absence of ‘make available’ clause in India-Mexico DTAA, rendering of technical services invokes the taxability under the head “fee for technical/included services” and thus upheld the demand to that extent; ITAT notes Assessee’s contention that the payments made to Mexico are not in the nature of technical services under Section 9(1)(vii) but were covered in the exception provided in Section 9(1)(vii)(b) but holds, “the services clearly qualify as “technical services” and especially in the absence of “make available” in the India Mexico tax treaty, the same in our view would qualify as technical services…”; Further concurs with CIT(A)’s finding that Assessee was not covered under exception provided in Section 9(1)(vii)(b), notes that to be covered under the exception Assessee should have utilised the services in the business carried on outside India or making or earning income from any source outside India, however in the present case Assessee has entered into a supply and distribution agreement with Zydus Pharmaceuticals Mexico, with the objective of promoting its businesses in Mexico; Concurs with CIT(A) observation that “The business set up of the assessee is situated in India. Mere doing the export activity from India cannot be treated as business carried outside India. Being an exporter and customers situated outside India and receiving payment against export sales, is only a source of receipt outside India but not a source of “income” outside India.”; As regards Revenue’s appeal against CIT(A) order granting partial relief in respect of payments made for clinical trials to non-residents in US and Canada, ITAT notes that identical issue was covered by coordinate bench in Assessee’s own case for Assessment year 2010-11; Also relies on coordinate bench ruling in B.A. Research India (P) Ltd. and Veeda Clinical Research wherein it was held that unless there is “transfer of technology” involved in the technical services rendered by foreign entity, the 'make available' clause is not satisfied, accordingly holds that the condition of 'make available' under the India USA/India Canada tax treaty is not being met, and accordingly, the services do not qualify as 'fee for technical services/fee for included services'; On Revenue’s alternate claim the payment should qualify as “royalty”, holds that the payment is towards clinical trials/ testing conducted by overseas company and they cannot be termed as falling under any of the specific clauses of royalty under the India USA/India Canada Tax Treaty; Relies on Bombay High Court ruling in Diamond Services International (P) Ltd. v. UOI (2008) 169 Taxman 201 (Bom.), and Hyderabad ITAT ruling in Dr. Reddy’s Laboratories Ltd. v. ADIT (2017) 78 taxmann.com 63 (ITAT Hyderabad) wherein it was held that since Assessee had only provided final results to its Indian clients by using highly sophisticated bio-analytical know-how, without providing any access whatsoever to clients to such know-how, fee received by it was business income and not fee for technical/included services or royalty. (Related Assessment year : 2013-14) – [Cadila Healthcare Ltd. v. DCIT (Intl.Taxn.)-1, Ahmedabad – Date of Judgement : 09.09.2022 (ITAT Ahmedabad)]

Rules on ‘make available’ clause w.r.t. Management Support Services for Singapore-based InterContinental Hotels Group Co.; Operational and accounting support, training, recruitment and manpower specifications provided as Management Support Services do not satisfy ‘make available’ clause, not taxable as FTS under India-Singapore DTAA

Delhi ITAT holds that operational and accounting support, training, recruitment and manpower specifications provided as Management Support Services do not satisfy ‘make available’ clause, not taxable as FTS under India-Singapore DTAA; Assessee-Company  incorporated in Singapore and a part of the InterContinental Hotels Group (IHG) is engaged in hospitality business under different hotel brands in the Asia-Pacific region and is the economic and beneficial owner of various hotel brands including ‘Inter Continental’, ‘Holiday Inn’ and ‘Crowne Plaza’; For Assessment year 2012-13, Assessee was subjected to addition of Rs. 5.43 Cr. being Management Support Services charged from Inter Continental Hotels Group (India) Private Ltd. (IHG India) held taxable as Fee for Technical Services (FTS) under the India-Singapore DTAA; CIT(A) confirmed the addition by holding that it was not merely a service but equipping with capacity building in order to manage the hotel operations; Before ITAT, Assessee submitted that the services were not made available as they were required by IHG India on an ongoing basis and in case the services conferred any technology, skill set, knowledge etc., there would have been no need of providing the services on an ongoing basis and relied on several judicial precedents; ITAT finds that Assessee started charging management support services from Financial year 2011-12 since the size of hotel management operations of IHG India were relatively small in prior years; In the light of DTAA, observes that ‘make available’ only means that the recipient of the service should be in a position to derive an enduring benefit and be in a position to utilize the knowledge or know-how in future on his own; After taking note of the various services provided by the Assessee, ITAT observes, “It is obvious that the assessee Company provides highly technical services which are used by IHG India for taking managerial decision, budgeting & accounting decision, risk management decision, etc. The knowledge & expertise in the field of hotel operation & management & related areas which was accumulated through study, experience and experimentation with regard to management, budgeting, risk, etc. of the same business is nothing but a technical knowledge”; Relies on Andhra Pradesh High Court ruling in G.V.K. Industries Ltd. v. ITO (1997) 228 ITR 564 : (1998) 96 Taxman 179 (AP) where it was held, “advice given by non-resident company in taking a financial decision either to procure loan or to strengthen the finance would be a technical or consultancy services. This shows that the advise given related to managerial including operational and financial aspects would tantamount to delivery of managerial, consultancy or technical services.” Also relies on Supreme Court ruling in Central Board of Direct Taxes v. Oberoi Hotels (India) (P) Ltd. (1998) 231 ITR 148 : 146 CTR 242 : 97 Taxman 453 (SC) where it was observed that running a well-equipped modern hotel is no ordinary affair, needs a great deal of expertise skill and technical knowledge; Thus, holds that there is no doubt that the services rendered by the Assessee were in the nature of managerial/ technical/ consultancy services; On the applicability of ‘make available’ clause, ITAT finds: (i) the operational support such as providing advice, information and competitive expertise on the operation of Hotels in accordance with brand standards, maintaining the quality, management techniques and coordinating the managerial plan and actions, advising on trends and changes in the hotel business in general and providing advice on the production of operating and capital budgets which are consistent with the strategic plan can at best be the managerial consultancy service but not the services ‘made available’ which the recipient could use or replicate, (ii) accounting support was in relation to the preparation of balance sheet and modalities and to advice production of reports regarding the budgets from time to time and the services are rendered repetitively based on the requirements of the clients and hence it cannot be treated as a service which was ‘made available’ to be applied independently, and (iii) the services rendered in connection with training & recruitment and manpower specification, there was neither technology transfer, knowledge transfer nor transfer of any skill or know-how; Thus, holds that the provisions of the Article 12(4) could not be applied to the services rendered by the Assessee in the strict sense of the provisions of DTAA and allows Assessee’s appeal. [In favour of assessee] (Related Assessment year : 2012-13) – [Inter Continental Hotels Group (Asia Pacific) Pte. Ltd. v. ACIT [TS-933-ITAT-2021(DEL)] – Date of Judgement : 24.09.2021 (ITAT Delhi)]

Consultancy Fee to Harvard Professor outside ‘make available’ clause, not liable to TDS

Delhi ITAT deletes disallowance under section 40(a)(i) for Consultancy fees paid by Hero Motocorp (assessee-company) during Assessment year 2005-06, rejects Revenue’s alternate plea of capital expenditure; Assessee obtained consultancy services from a Harvard Professor (a US resident) in respect of scenario planning exercise, aimed at identifying key variables impacting two-wheeler industry and establishing early warning signal and paid Rs. 14.74 Lacs without deducting tax thereon; Accepts assessee’s submission that the professor was engaged merely for providing services in the scenario planning exercise and in no case or circumstance did he reveal or provide the details of researches to the assessee, in order to enable the latter to carry out and undertake such services in future on its own accord without availing services from him; Holds that since the consultancy service did not involve making available of any technology or technical knowledge to the assessee, the same cannot be characterized as FTS/FIS, within the meaning of Article 12(4) of India-USA DTAA and, therefore, not chargeable to tax in India requiring TDS under section 195; As regards Revenue’s alternative claim that the consulting services provided enduring benefit to the assessee and thus was capital expenditure, ITAT holds “The said expenditure is part and parcel of the existing business, incurred to gain some insight of the future outlook of the two-wheeler industry and, therefore, the same formed integral part of the existing business, which cannot, in our view, be sought to be capital in nature.”; Separately, on allowability of additional depreciation in respect of new plant and machinery, rejects Revenue’s contention that the relevant plant and machinery installed during the year did not enhance the production of the assessee and, therefore, the same had no nexus/correlation with the increase in installed capacity, entitling additional depreciation; Explains that as per Section 32(1)(iia), there is no condition requiring nexus of the relevant plant and machinery acquired and installed during the year with the increase in installed capacity of the relevant industrial undertakings during the year; Directs Revenue to allow the additional depreciation since the condition for increase in installed capacity was fulfilled by the assessee. With respect to disallowance of deduction under section 80IA(4) in respect of captive power generating unit, ITAT notes that Revenue held that the inter-unit transfer price of power should be considered at ‘market price’ and rejected the deduction claim since there was no profit after substituting the market value; Follows co-ordinate bench ruling in assessee’s own case wherein it was held that for the purpose of determination of ‘market price’ of power under section 80IA(4) r.w.s. 80IA(8), where multiple options of price of a product are available, then the price which is more favourable to the assessee needs to be adopted; Accordingly, directs Revenue to delete disallowance. [In favour of assessee] (Related Assessment year : 2005-06) – [Hero Motocorp Ltd. v. Addl. CIT [TS-275-ITAT-2021(DEL)] – Date of Judgement : 13.04.2021 (ITAT Delhi)]

Where, in ‘Management Service Agreement’ there was no intention on part of agreeing parties of ‘Making available’ technical expertise to service recipient, management services provided by assessee to its AE, could not be treated as fees for technical services (FTS)

Assessee, a US company received payment from its Indian AE in respect of management services provided by it to the AE. The main issue here was to determine whether management services be considered as FTS/ FIS. The services provided by the assessee were in the nature of finance, legal, EHS, quality review, HR services. Also, the category ‘management services’ is missing from the definition of FIS as per the India-USA DTAA. Further, the make available condition was also not satisfied. Hence the Hon’ble ITAT held that these management services do not constitute to be FTA/FIS. – [Sabic Innovative Plastics US, LLC v. DDIT (2020) 119 taxmann.com 398 (ITAT Delhi)]

Upholds FTS taxability for IT services income linked to ‘royalty’; ‘Make-available’ test inapplicable

Mumbai ITAT upholds taxability of fees received by assessee (a Swedish company) for IT related services from its Indian subsidiary as FTS under the Act as well as under the India-Sweden DTAA, observes that  the I.T services rendered by the assessee are subservient to the royalty agreement and are ancillary and subsidiary to the main frame royalty agreement ..”; Assessee had entered into three agreements i.e. trademark license agreement, technology license agreement and IT services delivery agreement and had offered to tax, the royalty income under the first two agreements while claimed the fees charged for IT services as  not royalty and hence, not liable to tax in India; ITAT at the outset observes that the three agreements are  meant to function together and the royalty agreements cannot be effectively implemented, unless it is integrated with the IT support agreement” and remarks that  the assessee has bifurcated the agreements into separate  IT services agreement, so that it can be taken out of the ambit of definition of royalty”;   With respect to assessee's claim on extending the 'make available' clause benefit under India-Portugal Treaty to instant Sweden treaty in view of the MFN clause, ITAT examines Article 12(4) of the India-Portugal Treaty and elucidates that in order to apply the second limb (providing for the 'make-available' requirement), assessee has to first exhaust the first limb (covering services that are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a royalty payment is received);   Clarifies that  when the services  rendered by the assessee under agreement comes under first  limb of FTS, then the assesee is not correct in moving to the second limb of FTS, as per the above definition to argue that the services do  not make available any technical knowledge, skill, process etc”; On perusal of the scope of IT services under the agreement, ITAT holds that services fall under the ambit of FTS under section 9(1)(vii) of the Income tax Act. [In favour of revenue] (Related Assessment year : 2013-14 & 2014-15) – [Aktiebolaget SKF v. DCIT(International Taxation) [TS-45-ITAT-2020(Mum)] – Date of Judgement : 10.01.2020 (ITAT Mumbai)]

Testing fees paid to Netherland Co. not FTS, absent ‘make available’; TDS under section 195 inapplicable

Chennai ITAT holds that testing fees paid by assessee (an Indian company) to Netherlands company, not FTS under India-Netherlands DTAA since the knowledge of testing was not made available to the assessee, TDS under section 195 not applicable for Assessment year 2008-09; Assessee had paid testing fees to Netherland company for the purpose of testing the transformers manufactured by it without deducting tax, Assessing Officer disallowed the payment under section 40(a)(i); Relies on earlier year ITAT decision in assessee’s own case for Assessment year 2007-08 which in turn followed Delhi ITAT ruling in Romer Labs Singapore Pte. Ltd.; ITAT holds that in absence of knowledge made available as per Article 12(4) of India-Netherlands DTAA, payment made to Netherlands company cannot be considered as fees for technical services.” (Related Assessment year 2008-09) – [ACIT v. Alstom India T& D India Ltd. [TS-79-ITAT-2020(CHNY)] – Date of Judgement : 07.01.2020 (ITAT Chennai)]

Permanent usage of the service envisages by the concept of make available services remains at the disposal of their service recipients - Liable to be assessed as as FTS both under the Income Tax Act and under the tax treaty as well

The assessee entered into a global agreement with its group entities including HIPL. The Assessing Officer held that that services provided by assessee were in area of supply chain, human resources, strategic planning and marketing, finance and information systems under agreement which was an admitted fact. Thus, services were utilized by Indian Company as well. Concept of make available required that fruits of services should remain available to service recipients in some concrete shape such as technical knowledge, experience, skills etc. which was met in instant case as could be reflected from nature and duration of contract. Service recipient had to make use of such technical knowledge, skills etc. by himself in his business and for his own benefit. Accordingly the short durability or permanent usage of service envisages by concept of make available services remained at disposal of their service recipients. Accordingly the, consideration qualified as FTS both under Income -tax Act and under tax treaty as well. Tribunal affirmed the order of the Assessing Officer. (Related Assessment years : 2009-10 & 2011-12) – [H. J. Heinz company USA v. Add. CIT( 2019) 201 TTJ 786 : (2020) 185 DTR 207 (ITAT Delhi)]

Taxability of Reimbursement of Expenses

Assessee is a US company and had an independent subsidiary in India. During the year under appeal the US Co. had allocated cost without any mark-up to its Indian subsidiary which were reimbursed by the Indian Co. Nature of activities, the cost of which were allocated by the US co. were, HR, strategic planning and marketing, finance and information systems. The underlying objective of the agreement entered into by the US company with its Indian affiliate was to achieve consistency of approach and economies of scale. As per the make available criteria of Article 12 of the India-USA DTAA, to qualify as ‘fees for included services’ the fruits of the service should remain available to the service recipient in some concrete shape such as technical knowledge, experience, skill etc. The Hon’ble ITAT held that as the benefit of the services provided by the assessee remained with the Indian affiliate and the same was treated as “fees of included services’. [In favour of revenue] – [H. J Heinz Company v. ADIT (2019) 108 taxmann.com 473 (ITAT Delhi)]

Taxability of Management and Consultancy services

The assessee being an Indian tax resident availed management, financial and legal, public relations, treasury and risk management advice services from a US enterprise. The scope of services fall in the definition of ‘technical and consultancy’ services under the explanation 2 to the section 9(1)(vii) of the Act. However, as per the Article 12 (4) of the India USA DTAA read with the MOU that was entered as a part of the DTAA explains that for the purpose of clause 4(b) of Article 12, the expression ‘make available’ means when the technology enables the recipient of service to use it independently. The mere fact that the provision of a service may require technical input by the service provider does not per se mean that the technical knowledge, skills, etc. are made available to the person availing such services. The Hon’ble High Court held that the payments made by the assessee cannot be considered as fees for included services. – [US Technology Resources (P) Ltd. v. CIT (2018) 97 taxmann.com 642 (Ker.)]

Upholds FTS taxability; ‘Make available’ condition inapplicable as services linked to royalty

Delhi ITAT upholds taxation  of consideration for providing SAP/CAD software related support as FTS under Article 13(4)(a), being ancillary and subsidiary to the enjoyment of the right / property for which royalty was received by assessee (a UK co., JCBE), clarifies that ‘make available’ clause under Article 13(4)(c) is not applicable; ITAT notes that in earlier years, assessee had entered into bilateral agreement under which it used to receive royalty from JCB India (Indian subsidiary) for licensing the technology with an exclusive right to manufacture and market, however, during relevant Assessment year, assessee entered into a Tripartite Agreement whereby the technology was sub-licensed by assessee to JCB investments, and the royalty paid by JCB India was routed through JCB Investments; Thus noting that entire royalty amount was passed on to assessee through JCB Investments less 0.5%, ITAT holds JCB Investments as a pass through entity, remarks that  ‘Substance will rule over form’, observes that except for this routing of royalty through JCB Investments, all the terms and conditions of the agreement between the assessee and JCB India including secondment of assessee's employee to JCB India for rendering of services; Rejects assessee's stand that co-ordinate bench ruling holding JCB India a Service PE of assessee cannot be applied in present facts, observes that there is no difference in the facts and circumstances except for the tripartite vs. bilateral arrangement; Further follows co-ordinate bench ruling to hold that royalty was not effectively connected to PE in India, therefore, cannot be considered under Article 13(6), but should be taxed as royalty / FTS under Article 13 itself. [In favour of revenue] (Related Assessment year : 2004-05) – [J.C. Bamford Excavators Ltd. v. DCIT (International Taxation) [TS-389-ITAT-2018(DEL)] – Date of Judgement : 18.07.2018 (ITAT Delhi)]

Taxability of Bio-Analytical Services

The assessee company made payments for services in nature of bio - analysis to non resident entities based in USA, Canada and UK. It was found that none of these service ‘make available’ any technology to the service recipient. The Hon’ble ITAT held that services provided by the non resident did not involve any transfer of technology and it will not enable to use these services in future without recourse to service providers. Thus, the payments made to non resident would not be regarded as FTS/FIS. – [ITO v. Cadila Healthcare Ltd. (2017) 77 taxmann.com 309 (ITAT Ahmedabad)]

Payment for Interpreting 3D seismic data not FTS; ‘Make available’ test not satisfied

Ahmedabad ITAT allows assessee’s appeal for Assessment year 2011-12, holds payments for 3D Seismic Data Interpretation services not FTS under Article 13 of India- UK DTAA as services do not make available” technical expertise, skill or knowlegde and hence, TDS under section 195 not deductible; ITAT observes that the assessee had provided the initial data and the non-resident was only required to provide the interpretation report of such data; ITAT states that the Assessing Officer had erred in treating maps/designs given by RPS Energy Ltd to assessee as technical plan or design occurring made available of technical expertise, skill or knowledge”.. ..the maps/designs are nothing but a way to interpret the data and cannot be equated to development and transfer of technical maps and designs as contemplated by the Assessing Officer;' ITAT further clarifies payment was made for providing analysis of data and conclusion provided by RPS and assessee was not enabled to apply such knowledge or undertake survey independently without assistance from RPS Energy; Relies on Karnataka High Court ruling in De Beers India Minerals (P) Ltd and AAR ruling in Perfetti Van Melle Holding B.V Authority. [In favour of ssessee] (Related Assessment year : 2011-12) – [Adani Welspun Exploration Ltd. v. ITO (International Taxation) [TS-249-ITAT-2016 (Ahd)] – Date of Judgement : 04.05.2016 (ITAT Ahmedabad)]

India-France DTAA – Application of ‘Make Available’ concept by virtue of MFN Clause in Protocol to the Treaty

The assessee is a branch office of IATA, Canada. The said branch office is established with the permission of the Reserve Bank of India (RBI) for the purpose of undertaking certain commercial activities on no profit basis. In pursuance of an agreement entered into by IATA Canada through its administrative office in Switzerland, ADP-GSI, a French entity developed the system as per the specific need of the airlines and agents. The said system called BSP link, whereby the manual operations such as issue of debit notes/credit notes, issue of refund, billing statement, etc., relating to tickets are carried out electronically for agents as well as airlines who participate in the BSP Link. These BSP Link services were provided to the agents and airlines operating in India, for which invoices were initially raised by ADP-GSI on Switzerland office of IATA, Canada who in turn raised the invoices on IATA, India.

The payment against the said invoices thus was liable to be made by the assessee to Switzerland office of IATA, Canada. An application under Section 195(2) of the Act was filed by the assessee before the Assessing Officer seeking permission to remit the said amounts to Switzerland office of IATA, Canada without deduction of tax on the ground that the Switzerland office of IATA, Canada was not rendering any service to IATA, India and it was only collecting the funds from various IATA offices including IATA, India for making payments to ADP-GSI. The Assessing Officer held that, the actual beneficiaries of DSP Link services were airlines and agents in India. The payment for the said services was in the nature of FTS chargeable to tax in India at 10 per cent as provided in Article 13 of the India-France tax treaty. Accordingly, the Assessing Officer directed the assessee to deduct tax from the remittances made to Switzerland Office of IATA, Canada. The Commissioner of Income Tax (Appeals) [CIT(A)] held that the amount paid by the assessee to Switzerland office of IATA, Canada was not taxable in India as it was not in the nature of Fees for Included Services (FIS) under Article 12(4)(b) of India-USA tax treaty read with Article 13 of the India-France tax treaty and protocol thereto. Therefore, the assessee was not liable to deduct tax from the payment of the said amount. On Revenue’s Appeal, the Tribunal held that Payments for BSP link services are not ‘Fees for Technical Services’ under India-France tax treaty by virtue of MFN clause in Protocol to the Treaty. [In favour of the assessee] – [DDIT v. IATA BSP India (2014) 46 taxmann.com 150 (ITAT Mumbai)]

Management services ‘making available’ technological inputs for decision-making, taxable as FIS

Services providing assistance & advice in management decision making, financial and risk decision making, sales and business support, etc. taxable as fees for included services” under India -US DTAA; Services facilitated the assessee to take correct decision towards achievement of desired objects and business goal; Rejects the assessee’s contention that it received only a ‘managerial advice’ and not ‘technical advice’; Technological input acquired by non-resident through experience & experiment and tested at various stages and process; It was made available to assessee so as to enable it to apply / use in its decision making process; Reliance placed on Andhra Pradesh High Court ruling in GVK Industries Ltd. [In favour of revenue] (Related Assessment year : 2007-08) – [US Technology Resources (P) Ltd. v. ACIT, Trivandrum [TS-511-ITAT-2013(COCH)] – Date of Judgement : 27.09.2013 (ITAT Cochin)]

Technical design/blue prints ‘make available’ technical knowledge, taxable under India-US DTAA

Services of technical design & blue prints by US Company to L&T 'make available' technical knowledge, taxable under Article 12 of India-USA DTAA; Technical services of plans, designs, projects, etc., being blueprints of technical side of mega power projects and meant for future use; Services made available technical knowledge to L&T and covered under Article 12 of DTAA; Reliance placed on Karnataka High Court ruling in De Beers India Minerals (P) Ltd and SB ruling of Mumbai ITAT in Mahindra & Mahindra Ltd. v. DCIT (2009) 122 TTJ 577 (MUM)(SB) - [In favour of revenue] (Related Assessment year : 2007-08) – [Sargent & Lundy, LLC, USA  [TS-341-ITAT-2013(Mum)] – Date of Judgement : 24.07.2013 (ITAT Mumbai)]

To “make available” technical knowledge, mere provision of service is not enough; the payer must be enabled to perform the service himself

The assessee, a UK based reinsurance broker, received commission from several Indian insurance companies for arranging reinsurance contracts. The Assessing Officer & CIT (A) held that the commission was assessable to tax in India as “fees for technical services” under section 9(1)(vii) & Article 13(4)(c) of the DTAA. However, the Tribunal (included in file), relying extensively on Raymond v. DCIT 86 ITD 791 (ITAT Mumbai) & other judgements, held that “In order to fit the terminology “make available” in Article 13(4)(c), 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 without the help of the service provider. “It was held that as the nature of services rendered by the assessee was not “technical or consultancy services which made available technical knowledge” etc to the payer, the commission was not assessable to tax. On appeal by the department, HELD dismissing the appeal:

The Tribunal held that the “make available” condition was not satisfied inasmuch as no technical knowledge etc, was made available by the assessee to the Indian insurance companies operating in India. The Tribunal conclusions are based on an assessment of the factual matrix of the case at hand and are factual in nature. As there is no perversity in the findings, it does not give rise to a substantial question of law. – [DIT v. Guy Carpenter & Co Ltd (2012) 346 ITR 504 : 254 CTR 243 : 72 DTR 105 (Del.)]