In favour of: The assessee; Income deemed to accrue or arise in India
— Fees for technical services — IT support services — Expression “make
available” — Meaning of — Assessee an Australian Company provided IT support
services to Indian Group companies in Asia Pacific region in order to achieve
the consolidated and standardised IT environment in Sandvik Group — Services
provided were in the nature of Help Desk, administrative and maintenance IT
support, data storage — Payments received by assessee from two group companies
from India, ie Sandvik Asia Ltd and Walter Tools India Pvt Ltd, were claimed to
be not taxable in India — AO and DRP held that amount received by the assessee
from its Indian affiliates are taxable as fees for technical services — Held,
Technology will be considered as made available when the person receiving the
services is able to apply the technology by himself — Assessee was responsible
for updation of patches of the software and provision of backup and recovery
services in respect of data stored on the centralised server — Assessee has
only provided the back-up services and IT support services for solving IT
related problems to its Indian subsidiary — Agreement with the Sandvik Asia Ltd
nowhere suggest that assessee has to make available the required technical
know-how for solving the problems faced in their IT related problems — Unless
and until the services are not made available, same cannot be taxable in India
— Services rendered by assessee-company to its Indian group companies, though
are in the nature of technical services, but is not covered in para (3)(g) to
Art 12 — Same is not taxable in India — Further amount received by assessee
cannot be treated as a Royalty even under the normal provisions of IT Act — But
under the normal provision of the IT Act the same constitute consideration for
rendering the technical services covered u/s .9(1)(vii) — Thus IT support
services provided by assessee does not make available any technical know how
and are not taxable in India — Assessee’s appeal allowed.
ITAT Bench “A”, Pune,
ITA No 93/PN/2011,
Assessment Year: 2007–2008,
R S Padvekar, JM and R K Panda, AM,
Decided on: 31 January 2013.
Held: Assessee’s appeal allowed.
As per the agreement, assessee was
responsible for updation of patches of the software and provision of backup and
recovery services in respect of data stored on the centralised server. The
responsibility of the assessee is to maintain and upkeep of the centralised
server owned by it. Assessee has not imparted any technical know-how, skill,
process or technical plan or design and hence, in view of Art 12(3)(g), the
amount received by the assessee cannot be taxed in India. (Para 9)
The agreement with the Sandvik Asia
Ltd. nowhere suggest that assessee has to make available the required technical
know-how for solving the problems faced by the Sandvik Asia Ltd in their IT
related problems. (Para 10 and11)
The expression “making available” is
very much important to decide in which contracting state the amount received
for rendering the services relating to the technical know-how is to be taxed.
The expression “make available” is used in the context of supplying or
transferring technical knowledge or technology to another. It is different than
the mere obligation of the person rendering the services of that persons own
technical knowledge or technology in performance of the services. The
technology will be considered as made available when the person receiving the
services is able to apply the technology by himself. (Para 13)
The terms of the agreement between
the assessee-company and Sandvik Asia Ltd does not support the case of the
Revenue that the assessee’s case is covered in cl (g) of para 3 to Art 12 of
the India–Australia Treaty as the assessee has not made available any technical
knowledge or expertise to the recipient Indian company. The assessee has only
provided the back-up services and IT support services for solving IT related
problems to its Indian subsidiary. Hence, unless and until the services are not
made available, same cannot be taxable in India. The services rendered by assessee
company to its Indian group companies, though are in the nature of technical
services, but is not covered in para (3)(g) to Art 12 of the India Australia
Treaty and hence, the same is not taxable in India. We also hold that the
amount received by the assessee cannot be treated as a Royalty even under the
normal provisions of IT Act. But under the normal provision of the IT Act the
same constitute consideration for rendering the technical services covered u/s
9(1)(vii) of the IT Act. Accordingly, Ground No 1 is allowed and issue is
decided in favour of the assessee. (Para 16)
Ratio decidendi:
Consideration received by Australian
Company for providing IT support services to Indian group companies, not
taxable as fees for technical services under DTAA, since no technical knowhow
was made available.
Cases referred:
Kotak Mahindra Primas Ltd v DCIT 105 TTJ 578 (Delhi)
Skycell Communications Ltd v DCIT 251 ITR 53 (Mad)
Legislation referred:
Income-tax Act, 1961, s 9(1)(vii), 5(2), 90, 144C(5)
Judgement:
1. In this appeal, the assessee
has questioned the action of the A.O. for treating the payment of
Rs.1,07,71,888/- received from M/s.Sandvik Asia Ltd., Pune, as taxable being
royalty/FTS. The assessee has taken the following grounds:
1.1. The Learned Deputy
Director of Income-tax, (International Taxation)-II, Pune, i.e., Assessing
Officer (AO) has erred in holding that the IT support services rendered by the
Appellant are in the nature of Royalty/FTS within the meaning of article 12 of
the India-Australia treaty and/or Section 9(1)(vii) of the Income Tax Act,
1961.
1.2. The Learned AO has erred
in holding that the services rendered by the Appellant fall within the ambit of
Royalty/FTS without any discussion of the facts, terms of the contract or the
binding case law cited before the authorities.
2.1. The learned AO has erred
in making an addition of Rs.1,07,71,888 by treating such IT support services as
chargeable to tax in India.
2. The facts which revealed
from the record are as under. The assessee is a non-resident company
incorporated in Australia. The assessee filed the return of income for the A.Y.
2007-08 declaring nil income. The return filed by the assessee was selected for
scrutiny by issuing notice u/s.143(2) of the Act. The A.O. has observed that
the assessee company is a tax resident of Australia as per the treaty between
India and Australia. The assessee received the payment of Rs.1,05,83,086/- from
Sandwich Asia Ltd., and Rs.1,88,802/- from Walter Tools India Pvt. Ltd. So far
as the payment received from Sandvik Asia Ltd., and Walter Tools India Pvt.
Ltd., the assessee stated before the A.O. that the said payment is not received
to make available technical knowledge, skill, know- how or process and the same
do not fall within the ambit of royalty under Article 12 of the Treaty (DTAA)
between India and Australia. Assessee also contended that as assessee is
not
having any Permanent Establishment (PE) in India, the said income is not
taxable. Assessee also contended that the services rendered by it are in the
nature of IT support services.
2.1. The A.O. has observed that
the IT support services for which the assessee has received the payment from
the Indian group companies is taxable under the normal provisions of the Income
Tax Act, 1961. The assessee has claimed the benefit of the Treaty. The A.O. has
noted that the assessee gives the IT support in Asia–pacific region which was
introduced in order to achieve the consolidated and standardised IT environment
in Sandvik Group. The services provided by the assessee are in the nature of
Help Desk, administrative and maintenance IT support. Assessee also claimed
that in view of the Treaty between India and Australia, as no technical
services are made available to its group companies in India, the payment is
exempt. The A.O. also referred to the agreement made between the assessee and
the Sandvik Asia Ltd., date 19.12.2006, part of the same is reproduced in the
draft order on pages No.3 to 6. The A.O., therefore, concluded that as per the
agreement the assessee is not only providing the basic IT services such as help
desk support, by supporting Sandvik IT personnel but much more than that which
is IT infrastructure to those facilities. The A.O. has also observed that the
assessee is also charging payments from its affiliates for providing the
infrastructure which is evident from the copy of the invoices submitted by the
assessee. A.O. also referred to section 5(2) r.w.s. 9(1)(vi) and section
9(1)(vii) and concluded that the services rendered by the assessee company to
its group companies in India i.e. Notes Domino Administration, SBS, Windows
operations, network infrastructure, global server, and AS400 data processing
are services in the nature of technical services and payments made for those
services get covered under the fees for the technical services.
2.2. The A.O. also referred to
article 12 of the DTAA (Treaty) between India and Australia and noted that
according to the terms of the Treaty, fees for technical services (FTS) means
payments of any kind to any person in consideration of rendering any technical
or consultancy services if such service make available technical knowledge,
experience, skill, know-how or process or consists of development and transfer
of technical plan or technical design. In the opinion of the A.O., the assessee
has created global basic infrastructure to provide the global functional
services. He further held that the services rendered by the assessee are in the
nature of the technical services to its Indian affiliates. The assessee opposed
the conclusion of the A.O. that the services rendered to Indian affiliates are
in the nature of technical services by taking the stand that the payment for
the services rendered by the assessee is not in the form of the royalty income
and nor it is FTS. Assessee further contended that assessee has not made
available any technical knowledge, experience, skill and know-how. The assessee
also relied on the decision in the case of Kotak Mahindra Primas Ltd. Vs. DCIT
105 TTJ 578 (Delhi), Skycell Communications Ltd. Vs. DCIT 251 ITR 53 (Mad.).
The A.O. did not accept the contention of the assessee that the services
rendered by the assessee are not the technical services and hence the payment
received by it from its Indian affiliates cannot be treated as FTS. The A.O.
also held that so far as the taxability of the payment received by the assessee
from its Indian affiliates is concerned, the same is taxable u/s.9(1)(vii) of
the Act as assessee cannot get the benefit even under the Treaty.
3. The issue was carried before
the DRP as assessee raised the objections against the draft assessment order.
The DRP-II, Pune, passed the order in the form of directions u/s.144C(5) of the
I.T.Act dated 30.10.2010 and confirmed the view taken by the TPO that the
amount received
by
the assessee from its Indian affiliates are taxable in the normal provisions of
the Act u/s.5(2) r.w.s. 9(1)(vi) and 9(1)(vii) of the Income Tax Act, 1961 as
well as same is taxable in view of the Article 12 of the DTAA between India and
Australia. The operative part of the findings of the DRP is as under:
“5. We have considered the submission
of the A.R. and have also gone through the assessment order. The assessee has
created Global basic infrastructure to provide the global functional services.
As per the agreement dated 19.12.2006 made between the assessee and M/s.Sandvik
Asia Ltd. the providing party (assessee) is prepared to transfer such knowledge
to the Receiving Parties (SAL), and to provide the Receiving parties with
Information Technology consultancy and data processing services. Therefore, we
are of the opinion that as per this agreement the assessee has rendered IT
Support Services, which are technical services and which results in the
transfer of technical knowledge to its Indian Affiliate and make available
technical knowledge, experience, skill and know how to its Indian affiliates.
These services cannot be considered as helpdesk and user administration
services, networking services and data centre services. Further it is observed
that according to treaty, FTS means payments to any kind to any person in
consideration for the rendering of any technical or consultancy services 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. Hence the payment received by the assessee gets squarely
covered as per the provisions of section 5(2) in conjunction with sec.9(1)(vi)
and 9(1)(vii) of the I.T. Act, 1961 and Article 12 of the Treaty and hence
taxable in India.
5.1. Further, it has to be
stated that in the agreement entered into by the assessee with its AE it has
been provided that “the provider party is prepared to transfer such knowledge
to the receiving party”.
5.2. It is clear from the above
that in the contract itself, there is a provision for transfer of knowledge and
thus making it available to the other contracting party. Further, technical
knowledge, experience and skills have been made available to the assessee and
the assessee has rendered the IT support services. In view of these facts and
circumstances, the assessee’s case is taxable u/s.9(1)(vii) of the I.T. Act and
also it falls within royalty/fee for technical services within the meaning of
Article 12 of DTAA between India and Australia. Hence, the panel is of the view
that the A.O. is justified in holding that the receipts are taxable in India
and therefore, the Panel declines to interfere.”
4. As per the directions of the
DRP, the Assessing Officer passed the assessment order bringing to tax the
entire amount received by the assessee from its two affiliates in India. Now
the assessee is in appeal before us.
5. The ld. Counsel for the
assessee vehemently submitted that the services rendered by the assessee are
not only limited to its affiliates or group companies in India but the same are
for the entire Asia region. He submits that the assessee acts as a global
information technology support centre for the Asia-pacific region and is
responsible for providing necessary IT support services for Sandvik Asia Ltd.
in Asia-pacific region. He submits that assessee company has installed servers
in various locations in Asia-pacific region i.e., Singapore, Malaysia, China,
Japan, Korea,
India,
etc., and the regional servers installed at various locations are part of
global infrastructure maintained by the assessee. He submits that there are two
servers located in India, one is at Mehsana(Gujarat) and another is in Gurgaon.
He submits that the services rendered by the assessee company do not make
available any technical knowledge, skill, know-how or process to the recipients
and they do not fall within the ambit of the royalties under Article 12 of the
Treaty. He submits that even it is not the case of the A.O. also that the
payments received by the assessee company is in the nature of the royalty
though he has mentioned royalty/FTS in the draft order as well as in the final
order. He submits that the Ld. Counsel referred to the agreement entered into
between the assessee and Sandvik Asia Ltd. (page Nos.2 to 10 of the
compilation). He took us to the entire agreement more particularly the
definition clause, the service clause as well as Schedule II where the services
are specified. He submits that so far as taxability of the payments received by
the assessee from the Indian affiliates, the same is taxable under the normal
provisions of the Act more particularly under sec.9(1)(vi)/9(1)(vii) but in
view of the DTAA between India and Australia, unless and until the technical
knowhow is made available the same cannot be taxed in India. He submits that
the nature of the services has been elaborated in the agreement between these
two parties, the assessee and Sandvik Asia Ltd. and these are as under:
1. Giving advice to the
receiving parties – IT personnel
2. Help Desk Support
3. Contacting Sandvik’s IT
personnel
4. Providing IT operations and
support service in IT infrastructure.
5. Disseminating related IT
information.
6. He referred to page No.11 of
the compilation, which is the copy of the submission made before the A.O.
explaining what services are rendered by assessee company to the Sandvik Asia
Ltd. His main thrust of the argument is that assessee is only rendering IT
support services but is not imparting any technical knowhow or knowledge to its
Indian affiliates and unless and until the technical know-how is imparted, the
same cannot be taxable in India in view of the DTAA more particularly Article
12. Ld. Counsel took us to Article 12 of the India Australia Treaty more
particularly sub-para 3(g) and submits that it is clear from the language used
in the Treaty that unless the services are made available to the person
acquiring the services, the same cannot be taxed in the contracting State. He
placed his reliance on the decision of the Hon'ble High Court of Karnataka in
the case of CIT, Central Circle, Bangalore and another vs. M/s.De Beers India
Minerals Pvt. Ltd. ITA No.549, 550 and 551 of 2007 judgment dated 15.3.2012.
Finally he concluded that there is a difference between rendering the services and
to make available the services. In case of the first category of the services,
the services are rendered to give the end results without imparting any
technical know-how or its knowledge and the issues are sorted out. But in case
where the services are made available, in that case it is open to the recipient
of the services to make use of the technology. He therefore pleaded for
allowing Ground No.1.
7. Per contra, the ld. DR put
his more emphasis on the recitals of the agreement (page No.2 of the compilation)
in which it is mentioned that the assessee company (providing party) is
prepared
to
transfer knowledge as per the agreement to Sandvik Asia Ltd. (receiving party)
and hence there should not be any quarrel on the fact that assessee company is
not only rendering the back-up IT support services but as per the agreement is
also transferring knowledge of the said services to the recipient party i.e.,
Sandvik Asia Ltd. He submits that the recital clause cannot be neglected in the
agreement. He also referred to the Article 12 of the India Australia Treaty and
submits that whatever is received by the assessee from the Sandvik Asia Ltd is
nothing but royalty. In reply the Ld. Counsel submits that agreement is to be
understood after considering the operative clauses and not merely recitals. He
submits that the service which is agreed between the parties has been
elaborated in clause 2 read with Schedule 2 to the agreement and none of the
clauses suggest that the assessee has made available any technical services to
Sandvik Asia Ltd. or any affiliate.
8. We have heard the rival
submissions of the parties and perused the record. The assessee is a
non-resident company. The assessee is providing the IT support services to its
group companies in the Asia-pacific region. So far as the issue before us is
concerned, two group companies from India, i.e., Sandvik Asia Ltd. and Walter
Tools India Pvt. Ltd., have made the payments to the assessee company. The DRP
confirmed the action of the TPO treating the payment received by the assessee
company from its Indian affiliates as taxable as royalty/FTS. The Ld. Counsel
fairly conceded that so far as normal provisions of I.T. Act are concerned,
i.e., more particularly section 9(1)(vii), in view of the Explanation 2 below
the said section, the amount received by the assessee from its Indian
affiliates is taxable as FTS, but the same is exempt in view of the Article 12
of the Treaty. We, therefore, need not go into the first limb of this issue
whether the amount received by the assessee company is taxable under the normal
provisions of the I.T. Act.
9. Let us examine the claim of
the assessee that in view of Article 12 of the India Australia Treaty, as no
services are “made available”, hence, the same cannot be taxed in the sourced
country. The assessee is providing help desk and user administration services,
i.e., IT support and advisory services for solving any IT related problems
faced by the users as well as user administration services such as addition of
new user/deletion of any existing users in the system. It is further claimed by
the assessee company that it also provides IT help desk services in connection
with any problems faced by the users in the usage of Lotus Notes i.e., Notes
Domino Administration. Assessee also provides S&C based services which are
in the nature of IT help desk services in connection with any problems faced by
the users in operating various application softwares. Assessee provides
networking services which comprise provision of routers and networking lines
for connection to the global servers. Assessee also contended that the routers,
network lines, WAN and other hardware devices are owned and maintained by the
assessee. Assessee also provides data centre services. AS400 software
application is stored on the centralised server of the assessee in Sydney. As
per the agreement, assessee is responsible for updation of patches of the
software and provision of backup and recovery services in respect of data
stored on the centralised server. The responsibility of the assessee is to
maintain and upkeep of the centralised server owned by it. In sum and
substance, assessee has not imparted any technical know-how, skill, process or
technical plan or design and hence, in view of Article 12(3)(g), the amount
received by the assessee cannot be taxed in India.
10. The assessee has filed the
copy of the agreement with the Sandvik Asia Ltd. dated 19.12.2006. It is placed
in the Paperbook (page Nos.1 to 10). We find that in the said agreement
the
parties have described the nature of the services which the assessee company is
to provide to the recipient company i.e., Sandvik Asia Ltd. The DRP has placed
his emphasis in the recital of the said agreement where it is stated as under:
“Providing Party is prepared to
transfer such knowledge to the Receiving Party and to provide the receiving
parties with information technology, consultancy and data process services.”
11. Though the agreement is to
be read as a whole and cannot be read into piece-meal basis but what we find as
per operative clauses in respect of the contractual obligation of the assessee
company nowhere it is suggested that assessee has to make available the
required technical know-how for solving the problems faced by the Sandvik Asia
Ltd. in their IT related problems.
12. The Assessing Officer has
already reproduced Article 12 of the India Australia Treaty in his draft
assessment order and he has interpreted that as per the Treaty FTS means
payment of any kind to any person in consideration for the rendering of any
technical or consultancy services if such services make available technical
knowledge, experience, skill, know-how or process or consists of development
and data of technical plan or technical design. In view of the above rendered
by the assessee company to its Indian affiliates are in the nature of FTS or
royalties and same is taxable in India. We reproduce herein under the relevant
part of Article 12:
ARTICLE XII - Royalties - 1.
Royalties arising in one of the Contracting States, being royalties to which a
resident of the other Contracting State is beneficially entitled, may be taxed
in that other State.
2. Such royalties may also be
taxed in the Contracting State in which they arise, and according to the law of
that State, but the tax so charged shall not exceed:
(a) in the case of :
(i) royalties referred to in
sub-paragraph (3)(b) ;
(ii) payments or credits for
services referred to in sub- paragraph (3)(d), subject to sub-paragraphs (3)(h)
to (l), that are ancillary and subsidiary to the application or enjoyment of
equipment for which payments or credits are made under sub-paragraph (3)(b); or
(iii) royalties referred to in
sub-paragraph (3)(f) that relate to equipment mentioned in sub-paragraph (3)(b)
;
10 per cent of the gross amount
of the royalties; and
(b) in the case of other
royalties :
(i) during the first 5 years of
income for which this Agreement has effect :
(a) where the payer is the
Government or a political sub-division of that State or a public sector
company:
15
per cent of the gross amount of the royalties; and (b) in all other cases: 20
per cent of the gross amount of the royalties; and
(ii) during all subsequent
years of income: 15 per cent of the gross amount of the royalties.
3. The term “royalties” in this
Article means payments or credits, whether periodical or not, and however
described or computed, to the extent to which they are made as consideration
for :
(a) the use of, or the right to
use, any copyright, patent, design or model, plan, secret formula or process,
trade mark or other like property or right;
(b) the use of, or the right to
use, any industrial, commercial or scientific equipment;
(c) the supply of scientific,
technical, industrial or commercial knowledge or information;
(d) the rendering of any
technical or consultancy services (including those of technical or other
personnel) which are ancillary and subsidiary to the application or enjoyment
of any such property or right as is mentioned in sub-paragraph (a), or any such
equipment as is mentioned in sub-paragraph (b) or any such knowledge or
information as is mentioned in sub-paragraph (c);
(e) the use of, or the right to
use : (i) motion picture films;
(ii) films or video tapes for
use in connection with television; or
(iii) tapes for use in
connection with radio broadcasting;
(f) total or partial
forbearance in respect of the use or supply of any property or right referred
to in sub-paragraphs (a) to (e);
(g) the rendering of any
services (including those of technical or other personnel), which make
available technical knowledge, experience, skill, know-how or processes or
consist of the development and transfer of a technical plan or design;
but that term does not include
payments or credits relating to services mentioned in sub-paragraphs (d) and
(g) that are made;
(h) for services that are
ancillary and subsidiary, and inextricably and essentially linked, to a sale of
property;
(i)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;
(j)for teaching in or by an
educational institution;
(k) for services for the
personal use of the individual or individuals making the payments or
credits;
or
(l)to an employee of the person
making the payments or credits or to any individual or firm of individuals
(other than a company) for professional services as defined in Article 14.
4. The provisions of paragraphs
(1) and (2) shall not apply if the person beneficially entitled to the
royalties, being a resident of one of the Contracting States, carries on
business in the other Contracting State, in which the royalties arise, through
a permanent establishment situated therein, or performs in that other State
independent personal services from a fixed base situated therein, and the
property, right or services in respect of which the royalties are paid or
credited are effectively connected with such permanent establishment or fixed
base. In such a case, the provisions of Article 7 or Article 14, as the case
may be, shall apply.
5. Royalties shall be deemed to
arise in a Contracting State when the payer is that State itself or a political
sub-division or local authority of that State or a person who is a resident of
that State for the purposes of its tax. Where, however, the person paying the
royalties, whether the person is a resident of one of the Contracting States or
not, has in one of the Contracting States or outside both Contracting States a
permanent establishment or fixed base in connection with which the liability to
pay the royalties was incurred, and the royalties are borne by the permanent
establishment or fixed base, then the royalties shall be deemed to arise in the
State in which the permanent establishment or fixed base is situated.
6. Where, owing to a special
relationship between the payer and the person beneficially entitled to the
royalties, or between both of them, and some other person, the amount of the
royalties paid or credited, having regard to what they are paid or credited
for, exceeds the amount which might have been expected to have been agreed upon
by the payer and the person so entitled in the absence of such relationship,
the provisions of this Article shall apply only to the last-mentioned amount.
In that case, the excess part of the amount of the royalties paid or credited
shall remain taxable according to the law, relating to tax, of each Contracting
State, but subject to the other provisions of this Agreement.
13. We are concerned with para
No.3 of Article 12, which defines the term Royalty. Under the IT Act, the term
royalty and expression FTS are classified as two different connotations, i.e.
9(1)(vi) and 9(1)(vii). So far as Article 12 is concerned, FTS is included in
the term “royalty” for the purpose of deciding in which contracting state the
income from the same is to be taxed. Clause (g) in Article 12(3) goes to the
roots of the issue. Main thrust of the argument of the Ld. Counsel is that it
is not only sufficient to render the services but the same should be made
available to the recipient and this particular important aspect is missed by
the DRP/TPO. We find that the expression “making available” is very much
important to decide in which contracting state the amount received for
rendering the services relating to the technical know-how is to be taxed. The
expression “make available” is used in the context of supplying or transferring
technical knowledge or technology to another. It is different than the mere
obligation of the person rendering the services of that persons own technical
knowledge or technology in performance of the services. The technology will be
considered as made available when the person receiving the services is able to
apply the technology by himself.
14.
The expression ‘make available’ has come for consideration before the Hon'ble
High Court of Karnataka in the case of M/s.De Beers India Minerals Pvt. Ltd.
(supra). In the said case, the Treaty between India and Netherlands was for the
consideration of their Lordships. The assessee in that appeal was a providing
company engaged in the business of prospecting and mining for diamonds and
other minerals. They have been granted licences (Reconnaissance Permits) by the
State Government of Karnataka, Andhra Pradesh and Chhattisgarh. During the
early stage, various techniques were employed for the purpose of carrying out
geophysical survey, the assessee entered into agreement with M/s.Fugro Elbocon
B.V. Netherlands, who had a team of experts specialised in air borne
geophysical services for clients. For the technical services rendered by them
the said assessee had paid consideration. The Assessing Officer applied Article
12 of the Indo- Netherlands Treaty and held that the same was taxable in the
hands of the Netherlands Company. As the wordings of Article 12 in the
Indo-Netherlands Treaty are analogous to Article 12 of the India Australia
Treaty, as expression ‘make available’ is also used while determining fiscal
jurisdiction of the contracting state, the Hon'ble High Court explained the
meaning of the expression ‘make available’ which was appearing in the
Indo-Netherlands Treaty, the Lordships explained the expression as under:
“13. Under the Act if the
consideration paid for rendering technical services constitute income by way of
fees for technical services, it is taxable. However, Article 12 of the
aforesaid India-Netherlands Treaty defines fees for technical services for the
purpose of Article 12 which deals with royalties and fees for technical
services. The fees for technical services means the payment of any amount to
any person in consideration for rendering of any technical services only, if
such services make available technical knowledge, expertise, skill, know-how or
processes. If the technical knowledge expertise, skill, know how or process is
not made available by the service provider, who has rendered technical service
for the purpose of Article 12 of DTAA it would not constitute fees for
technical services. To that extent the definition of fee for technical services
found in the agreement is inconsistent with the definition of fees for
technical services provided in Explanation 2 to clause (vii) of sub-section (1)
of Section 9. In view of Section 90 the definition of fees for technical
services contained in the agreement overrides the statutory provisions
contained in the Act. In fact, the latest agreement between India and Singapore
further clarifies this position, where they have explained the meaning of the
word ‘make available’. According to the aforesaid definition fees for technical
service means payments of any kind to any person in consideration for services
of technical nature if such services make available technical knowledge,
experience, skill, know how or processes which enables the person acquiring the
service to apply technology contained therein. Though this provision is not
contained in India Netherlands Treaty, but virtue of Protocol in the agreement,
Clause (iv)(2) reads as under:
“If after the signature of this
convention under any Convention or Agreement between India and third State
which is a member of the OECD India should limit its taxation at source on
dividends, interests, royalties, fees for technical services or payments for
the use of equipment to a rate lower or a scope more restricted than the rate
or scope provided for in this Convention on the said items of income, then as
from the date on which the relevant Indian Convention or Agreement enters into
force the same rate or scope as provided for in that Convention or Agreement on
the said items of income shall also apply under this Convention.”
14.
Therefore the Clause in Singapore agreement which explicitly makes it clear the
meaning of the word ‘make available’, the said clause has to be applied, and to
be read into this agreement also. Therefore, it follows that for attracting the
liability to pay tax not only the services should be of technical in nature,
but it should be made available to the person receiving the technical services.
The technology will be considered ‘made available’ when the person who received
service is enabled to apply the technology. The service provider in order to
render technical services uses technical knowledge, experience, skill, know how
or processes. To attract the tax liability, that technical knowledge,
experience, skill, know how or process which is used by service provider to
render technical service should also be made available to the recipient of the
services, so that the recipient also acquires technical knowledge, experience,
skill, know how or processes so as to render such technical Services. Once all
such technology is made available it is open to the recipient of the service to
make use of the said technology. The tax is not dependent on the use of the technology
by the recipient. The recipient after receiving of technology may use or may
not use the technology. It has no bearing on the taxability aspect is
concerned. When the technical service is provided, that technical service is to
be made use of by the recipient of the service in further conduct of his
business. Merely because his business is dependent on the technical service
which he receives from the service provider, it does not follow that he is
making use of the technology which the service provider utilises for rendering
technical services. The crux of the matter is after rendering of such technical
services by the service provider, whether the recipient is enabled to use the
technology which the service provider had used. Therefore, unless the service
provider makes available his technical knowledge, experience, skill, know how
or process to the recipient of the technical service, in view of the Clauses in
the DTAA, the liability to tax is not attracted.”
15. Their Lordships also
considered the decisions of the Authority for Advance Rulings (AAR) where the
term ‘make available’ is interpreted. The relevant discussion and observations
of their Lordships are as under:
“22. What is the meaning of
‘make available’. 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, skills, 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. 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. Technology will be considered ‘made available’
when the person acquiring the service is enabled to apply the technology. The
fact that the provision of the service that may require technical knowledge,
skills, etc., does not mean that technology is made available to the person
purchasing the service, within the meaning of paragraph 4(b). Similarly, the
use of a product which embodies technology shall not per se be considered to
make the technology available. In other words, 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.”
16. In the present case, as per
the terms of the agreement between the assessee company and Sandvik Asia Ltd.,
does not support the case of the Revenue that the assessee’s case is covered in
clause (g) of para 3 to Article 12 of the India Australia Treaty as the
assessee has not made available any technical knowledge or expertise to the
recipient Indian company. In our opinion, the assessee has only provided the
back-up services and IT support services for solving IT related problems to its
Indian subsidiary. Hence, unless and until the services are not made available,
same cannot be taxable in India. We, therefore hold that the services rendered
by assessee company to its Indian group companies, though are in the nature of
technical services, but is not covered in para (3)(g) to Article 12 of the
India Australia Treaty and hence, the same is not taxable in India. We also
hold that the amount received by the assessee cannot be treated as a Royalty
even under the normal provisions of I.T. Act. But under the normal provision of
the I.T. Act the same constitute consideration for rendering the technical
services covered u/s.9(1)(vii) of the I.T.Act. Accordingly, Ground No.1 is
allowed and issue is decided in favour of the assessee.
17. The assessee has taken
alternative Ground by way of Ground No.2. As we have decided the issue in
favour of the assessee, the alternate Ground does not survive.
18. In the
result, the assessee’s appeal is allowed.
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