TMI Blog2014 (12) TMI 388X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 - 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 - on the basis of the protocol to the DTAA between the India and Sweden the assessee can claim the benefit of the conditions imposed for bringing to tax the fees for technical services in the treaty between the India and Por ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a technical service and hence, the payment received by the SAPL to the assessee is towards the fees for technical service (FTS). The assessee claimed before the authorities below i.e. the AO/DRP, that it is a tax-resident of Sweden and hence, eligible to claim benefits under the India-Sweden DTAA. The assessee took the stand that the nature of the services is not technical and the services rendered by it do not satisfy the make available condition of the tax Treaty. The assessee submitted before the Assessing Officer that the services rendered by it do not satisfy the make available condition of the tax Treaty. The assessee also took the stand that the services rendered by it do not make available any technical knowledge, experience, skill, know-how, process to either SAPL, or WTIPL, enabling it to apply the technology contained therein, which is a pre-requisite for the payment to be categorized as FTS under Article 12 of the India- Sweden Tax Treaty read with the protocol thereto. The assessee also relied on the following decisions: i. Intertek Testing Services India P. Ltd. 307 ITR 418 (AAR). ii. Anapharm Inc AAR No. 746 of 2008. iii. Invensys Systems Inc. Vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perform services which may require the use, by the supplier, of special / knowledge, skill and expertise but not the transfer of such special knowledge, skill or expertise to the other party , The above clarification clearly differentiate between transfer of such special knowledge, skill or expertise, which is covered in the definition of royalty under 12(3)[a) of India- US DTAA and fee for included services covered under 12(4)[b) of India-US DTAA. 6.4 By this act, supplier of services has enabled the recipient to use the technology of the subject matter without transfer of know-how or technology. This is precisely explained in memorandum of understanding concerning fees for included services in Article 12 of India-US Tax Treaty dated 15/5/1989. The explanation clearly focuses on the fact that a person acquiring the services should be enabled to apply technology and not related to transfer of the technology. It further goes on to explain typical category of services which generally involves either the development and transfer of technical plants or designs, or making technology available as described in para.4 (b) which include: 1. Engineering services (including the sub-cat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rate or scope provided for in this convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items of income shall also apply under this Convention. The assessee submitted before the DRP that in the DTAA between India and Portuguese, the fees for technical services has been defined in Article 12(4) and definition of the India-Portuguese DTAA purports to restrict the scope of taxability of FTS. It was argued before the DTAA that as per the India-Portuguese DTAA, any payment for services would be considered as FTS only if the services are: i. Technical in nature: and ii. When such services make available technical knowledge, experience, skill, know-how, processes to the recipient enabling it to apply the technology contained therein. 6. The DRP was not impressed with the stand of the assessee and rejected the above contention and confirmed the view of the Assessing Officer in the draft assessment order. The reasons given by the DRP are as under: 6. The Panel has considered assessee s submission and arguments in this regard. There is no dispute that above services are taxable as per I.T. Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perience to the recipient of services. These agreements are for provision of services and do not contain provision for transfer of related experience/ technical knowledge/ know-how etc. 6.3 The Boston court in the USA has given a ruling on the phrase 'make available', which again supports above contention. Quoting from the below mentioned website further supports contention- Another Court Ruling Actually Does Say Making Available Is Not Distribution, While the ruling in the Elektra V. Barker case got plenty of attention, even if some of it was misleading, the EFF points out that in another ruling on the same day (which got much less publicity) a court in Boston seems to have made a much stronger case for why making available is not distribution. Once again, the judge did not throw out the case, saying that an offer to distribute is still enough of a claim to have the case move forward to trial (at which point the copyright holder would need to show that actual distribution occurred). However, with so many different court rulings making so many different interpretations of making available, there are going to be appeals and eventually it will move up the chain. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble' have not been accepted by the department as these are not based on correct interpretation of 'make available'. These cases have not discussed all examples and other technical notes provided in protocol of India- US treaty, there were certain other examples which suggest that transfer / teaching of such experience/ know-how is not required to treat these services as make available, Examples from protocol related to technical and consultancy services could make technology available in a variety of settings, activities and industries. An example given in MOU which is relevant for interpreting term make available is as under: Example-12 Facts: An Indian wishes to install a computerized system in his home to control lighting, heating and air-conditioning, a stereo sound system and a burglar and firm alarm system. He hires an American electrical engineering firm to design the necessary wiring system, adapt standard software, and provide instructions for installations. Are the fees paid to the American firm by the Indian individual fees for included services? Analysis: The services in respect of which the fees are paid are of the type which would generally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t place of business in India (PE). The dispute is in respect of the payment of ₹ 5.9 Crores received by the assessee company from its Indian subsidies i.e. Sandvik Asia Pvt. Ltd. (SAPL) and WTIPL. The claim of the assessee is that the assessee received the said payment from its Indian subsidies for rendering the services which are in the nature of commercial, management, marketing and production services. The nature of the services as per the agreement are already mentioned here-inabove. In this case there is no dispute about the legal position that the amount received by the assessee from its Indian subsidies is taxable in India under normal provisions of Act more particularly u/s. 9(1)(vii) r.w.s. 5(2) of the Income-tax Act. The main plank of the argument of the Ld. Counsel is that when the assessee is covered by the beneficial clauses in the treaty entered into as per the provisions of Sec. 90 (2) of the Incometax Act then even if the assessee s income is taxable in the normal provisions still he can claim the exemption from the tax as per the clauses applicable in the treaty. 8.1 Ld. Counsel argues that the above payment received by the assessee company is not taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on principle of MFN clause? The India entered into DTAA with the Sweden which was notified vide notification no. GR 705/E dated 17.12.1997. Article 12 of the India-Sweden DTAA provides the mode of taxation of the royalties and fees for technical services whether the same are to be taxed in the source country or in the residence country. The definition of the fees for technical services (FTS) is given in Article 12(3)(b) of the Act. It is true that it is a very conservative definition and there is no condition that the technical services should be made available. The India also entered into the treaty with Portuguese republic which was notified vide notification no. GR F42/E dated 16th June, 2000. In the said Treaty, mode of taxation of the fees for technical services (FTS) between two countries is also provided in the Article 12 but instead of fees for technical services the expression used is fees for included technical services . As per the Article 12(4) fees for included services means payment of fees of any kind other than those mentioned in article 14 and 15 of the said treaty, to any person in consideration of the rendering of any technical or consultancy services (includin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agraph (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices 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 process ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 utili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eatment by way of a definition or mode of tax then the parties can claim the benefit on the recognized principle of MFN clause. In his introduction to Double Taxation Conventions (Third Edition) Klaus Vogel has explained the role of the protocol and its role in interpreting the treaty. The same has been considered by the ITAT, Calcutta in the case of DCIT V. ITC Ltd., 76 TTJ 323. 11.2 In the case of Maruti Udyog Ltd., Vs. ADIT reported in (2010) 37 DTR 85 (Delhi) explaining the scope of the protocol it is held as under : 11.1 It is settled position in law that protocol is an indispensable part of the treaty with the same binding force as the main clauses therein, as protocol is an integral part of the treaty and its binding force is equal to that of the principal treaty. The provisions of the aforesaid DTAA are, therefore, required to be read with the protocol clauses and are subject to the provisions contained in such protocol. Examined in the light of DTAAs between India and UK, USA and Switzerland, we find that in the case before us the assessee had not purchased any property from UTAC France. Therefore, none of the fees i.e., impact testing fees or fee paid for test re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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