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TMI Blog2025 (2) TMI 712X X X X Extracts X X X X X X X X Extracts X X X X ..... as per Section 9 (1) (vii) of the Income Tax Act, 1961 and Article 12(5) of the India-US Double Taxation Avoidance Treaty? B. Whether reimbursement of Global Account Management charges received by assessee is taxable as FTS/FIS? C. Whether reimbursement of Leaseline charges received by assessee is taxable as Royalty under Section 9 (l) (vi) of the Act?" 2. Insofar as questions 'B' and 'C' are concerned, it could not be disputed before us that those also formed the subject matter of ITA 475/2009 and the decision on which came to be followed in ITA 751/2010. While dealing with those questions, the Court while dismissing ITA 475/2009 had observed as follows: - "Learned counsel for the appellant could not dispute that question of law proposed to be raised is covered by the judgment in CIT vs. Woodward Governor India Pvt. Ltd. 312 ITR 254 and judgment of this Court in Skycell Communications Ltd. and Anr. vs. DCIT and Ors. 251 ITR 53 which has been followed in appeal Commissioner of Income Tax vs. Bharti Celluar Ltd. I.T.A. No. 1120/2007. The appeal is accordingly dismissed. It could not be disputed that the question covered there is a pure question of fact. No question of law has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly qualify the requirements of Article 12 of the DTAA. He specifically drew our attention to the following parts of the Transfer Pricing Study: - "d) Technical Knowledge: Customs brokerage and other services involves providing services at destination, such as helping customers clear shipments through customs by preparing required documentation, calculating and providing for payment of duties and taxes on behalf of customers as well as arranging for any required inspections by government agencies, and arranging for delivery. This is a complicated function requiring technical knowledge of customs rules and regulations in multitude of countries which Expeditors Inc. assists in providing. e) Training and Personnel Management: As the Group is a service organisation, it has laid down a focus on recruitment, training and retention of personnel. Expeditors Inc. has attempted at developing a global culture of ongoing development of key personnel and management personnel via formal and informal means; creation of unlimited advancement opportunities for employees, mentoring of successors for every key position." 7. As we view the aforesaid extracts, we find that under the head of "Techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for services are not included in the definition and are not dealt with in article 12A (see the examples in paragraphs 87 to 103 below). 62. Article 12A applies only to fees for technical services, and not to all payments for services. Paragraph 3 defines 'fees for technical services' as payments for managerial, technical or consultancy services. Given the ordinary meanings of the terms 'managerial', 'technical' and 'consultancy' the fundamental concept underlying the definition of fees for technical services is that the services must involve the application by the service provider of specialized knowledge, skill or expertise on behalf of a client or the transfer of knowledge, skill or expertise to the client, other than a transfer of information covered by the definition of 'royalties' in paragraph 3 of article 12. Services of a routine nature that do not involve the application of such specialized knowledge, skill or expertise are not within the scope of article 12A. 63. The ordinary meaning of the term 'management' involves the application of knowledge, skill or expertise in the control or administration of the conduct of a commercial enterprise or organization. Thus, if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature." 88. Vogel explains the concept of technical services in the following terms (at page 1184): "IV. Article 12A(3) UN Model Convention 1. The Model a. Rule The term 'fees for technical services' is defined as: - any payment in consideration for - any service of managerial, technical, or consultancy nature, - unless the payment is made: a. to an employee of the person making the payment; b. for teaching in an educational institution or for teaching by an educational institution; or c. by an individual for services for the personal use of an individual. Article 12A(3) of the UN Model Convention contains the definition of 'fees for technical services'. In so far that the UN Model Convention itself provides an autonomous definition of 'fees for technical services', national law cannot be used for its interpretation (cf. article 3(2) of the UN Model Convention, see supra m. No. 71). In contrast to article 12(2) of the OECD Model Convention which refers to the national law for the interpretation of the different terms in the catalogue of the paragraph, the terms 'management', 'technical', and 'consultancy' of article 12A(3) of the UN Model Convention have an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contain a definition (No. 83 of UN Model Convention Comm. on article 12A). The category of technical services has developed from the problematic delimitation between Intellectual Property licensing and service contracts. While the protected information that constitutes Intellectual Property has to be divulged to the licensee as part of the licensing contract, there is often the need for further training of the licensee and the employees; this constitutes a service. Similar problems arise with consulting : The service provider does not transmit its special knowledge, skill, and expertise as such but uses them to make statements on customers' issues. These services are dubbed as 'technical' because they relate to the application of Intellectual Property and not to fundamental research. Furthermore, in the context of article 12 of OECD and UN Model Conventions and their catalogue of Intellectual Property, the term 'technical' must initially be understood in a traditional way such as 'applied and industrial science' or 'engineering sciences'. It excludes social sciences, the arts and humanities, and arts and crafts as well as commercial managerial or professional services such as m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... another person in consideration for a payment whereas the manner of providing services was not decisive (No. 84 of UN Model Convention Comm. on article 12A). Examples in the commentary also follow the wide understanding by, e.g., including a heart surgeon (No. 89 of UN Model Convention Comm. on article 12A). Traditionally, technical services have been defined by the provisions of special knowledge, skill, and expertise to make statements on the special issues of the customer. The UN Model Convention apparently draws on this understanding as it excludes services of a routine nature (No. 62 of UN Model Convention Comm. on article 12A). Technical services have to be discerned from routine services with a case-by-case analysis. One important aspect is whether the service is individually customized to the specific needs of the customer. A standard scope of services under a standard contract is a strong argument for routine services. Yet, if a service provider determines the need of a customer in-depth and then chooses from several standardized services in order to offer the one that fits best, they cannot qualify as being of a routine nature. Thus, it is not possible to avoid a qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices involve the application of specialized knowledge, skill, or expertise with respect to a particular art, science, profession, or occupation (No. 64 of UN Model Convention Comm. on article 12A). The UN Comm. further refers to regulated professions such as law, accounting, architecture, medicine, engineering, and dentistry as examples covered by article 12A(3) of UN Model Convention. These examples are not exhaustive'." 89. It becomes apparent upon a consideration of the views expressed above that the word "technical" is no longer liable to be understood in its archaic sense as being confined to the traditional sciences. What authorities commend for consideration is an ascertainment of whether the services rendered involved the application of a specialised skill, knowledge or expertise. It is this shift in understanding which has led to the application of specialised knowledge, skill or expertise with respect to any art, science, profession or occupation being recognised as falling within the ambit of the expression "technical" services. Similarly, the word "consultancy" would entail the provision of advice or service of a specialised nature. There could also be the possibility ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 Double Taxation Avoidance Agreement the liability to tax is not attracted. The learned Additional Solicitor General relied on three judgments to point out that was the earlier view. Now, there is a departure supporting the Department. The first judgment on which reliance is placed is the judgment of the Advance Rulings Authority in the case of Perfetti Van Melle Holding B.V., In re[(2012) 342 ITR 200 (AAR); 2011 SCC OnLine AAR-IT 30.] where it was held as under (page 212): "The expression "make available" only means that the recipient of the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." 91. Of equal significance are the observations of the Kerala High Court in US Technology Resources [US Technology Resources (Pvt.) Ltd. v. CIT, (2018) 407 ITR 327 (Ker); 2018 SCC OnLine Ker 3113.] when their Lordships laid emphasis on the transfer of technology or know-how being a necessary ingredient of the "make available " condition which stands indelibly attached to fees for technical services. To recall, the Kerala High Court in the aforenoted decision had held (page 338 of 407 ITR): "We are conscious of the fact that the Double Taxation Avoidance Agreement as rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he OECD and UN Model Conventions contain up to three contract types. They distinguish themselves by the different extent to which all or part of the property rights are transferred to the royalty payer. The main type are contracts that transfer 'the use or the right to use' to the payer. The payer himself can use the property, but does not get the full ownership rights of it. As the case may be, the owner might grant the use to different persons at the same time. The intellectual property is 'lent' (No. 1 of OECD Model Convention Comm. on article 12) or 'rented out'. A special type are contracts in which the payment is for information concerning experience. This special case of property is also known as a 'know-how' contract. Its specific attribute is the lack of legal protection as an absolute right. When know-how is shared, it cannot be taken back and its use cannot be prohibited (at least to third persons, the receiver of know-how might be bound by contractual injunctive reliefs). Therefore, the transfer of the use cannot be distinguished from a transfer of full ownership. A third type of contracts contains the full transfer of ownership, alienation. Alienation is not incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leads us to the definitive conclusion that the rendering of technical and consultancy services has to be read alongside and in conjunction with "make available " as that phrase appears in the aforesaid paragraph. On a plain textual reading of article 13 it becomes apparent that both the rendering of service and the skill, knowledge and expertise being made available are conditions which must be concurrently and cumulatively satisfied. What we seek to emphasize is that article 13 in unambiguous terms creates an enduring, unfading and imperishable link between the furnishing of service and a transmission or conferment of technical expertise, knowledge and skill. 95. It is also important to bear in mind that the mere usage or utilisation of technical or consultative material in aid of business would not be sufficient to attract article 13 of the Double Taxation Avoidance Agreement. If we were to accept the submission that handing over of research or advisory work were sufficient for the purposes of article 13, it would render the "make available " condition comprised in para 4(c) wholly redundant and otiose since the mere rendering of service would have sufficed. As De Beers [CIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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