[2021] 123 taxmann.

com 306 (Article)

[2021] 123 taxmann.com 306 (Article)
Date of Publishing: January 19, 2021

Fee for Technical Services Under International Taxation: Issues and Challenges
HRICHA GANDHI

Introduction

Section 9 of the Income-tax Act, 1961 (the Act) is a deeming provision, meaning thereby it creates a friction that income
deemed to accrue or arise in India, to be charged in India. Under this section, clause 1 sub-clause vii creates a charge in the
domestic law for the fee for technical services (FTS) to be charged in India; it states that income payable by way of FTS
will be deemed to accrue or arise in India. So now even if a treaty is there between the contracting states, the charge shall
be created from Section 9 (1) (vii) per se.

FTS, as defined in Explanation 2 to Section 9 (1) (vii), states that"For the purposes of this clause, fees for technical
services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical
or consultancy services(including the provision of services of technical or other personnel) but does not
includeconsideration for any construction, assembly, mining or like project undertaken by the recipient or
consideration which would be the income of the recipient chargeable under the head Salaries." Meaning thereby, any
consideration for managerial, technical, consultancy or provision of services of technical or other personnel, utilized:

♦   by the government to the non-resident (Section 9 (1) (vii) (a)) or;

♦   by the resident to the non-resident, goes on with an exception that the fees are payable in respect of service
utilized in business or profession, which is carried on by such person outside India or making or earning income
from any source outside India, shall not be considered (Section 9 (1) (vii) (b)) or;
♦   by the non-resident to the non-resident, only if fees are payable in respect of service utilized in business or
profession, which is carried on by such person in India or making or earning income from any source in India,
shall only be considered (Section 9 (1) (vii) (c)).
shall be charged in India under the head of FTS deemed to accrue or arise in India.1

As mentioned consideration received for construction, assembly, mining or like project undertaken by the recipient, or
which are chargeable as salary received for providing technical services are excluded and cannot be charged as FTS.

The rationale behind the introduction of this provision as discussed2 because there are many foreign companies which earn
by providing either royalty services or FTS to India, and for this, the parties enter into an agreement, so the cases when
income may not straight away accrue or arise in India, the Revenue Department cannot afford not charging such non-
residents in India and hence this deeming provision is necessary. Further, in the case of G.V.K. Industries Ltd. v. ITO,3 it
was said that Section 9 (1) (vii) could not be read in isolation, and that has to read with other clauses of Section 9 (1) to
give it non-anomalous and exact results.

Further, in the case of Timken India Ltd., In re4 it was held that technical services by Parent Company to Indian Subsidiary
Company should be taxable even if no profit element is there.

WHEN IS A TRANSACTION CALLED AS FTS?

Effectively Connected

In the case of Ishikawajma-Harima Heavy Industries Ltd. v. DIT5 it was held that "whatever is payable by a resident to a
non-resident by way of fees for technical services would not always come within the purview of Section 9(1)(vii), but it
must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax."

As verily written in Section 9(1)(vii) and also from the case of G.V.K. Industries Ltd.6, it can be said that if FTS is sourced
or have some nexus with the income accrued in India, only, in that case, it shall be charged in India. Further, as held in
Elkem Technology v. Dy. CIT7, the mere existence of permanent establishment (PE) is not enough; instead, it should be
involved in the performance of technical services or should be involved in the actual rendering of services as Section 9(1)
(vii) (b) and (c) uses the term "utilized in India" and not "rendered in India". For instance, "it may be that some of the
services are rendered abroad by the personnel employed or deputed by the non-resident company under a collaboration
agreement with the Indian company. But if the fees are paid for services utilized by the Indian company in its business
carried on by it in India, irrespective of the place where the services are rendered, the amount of the fees should be deemed
to accrue or arise in India."

Types of services

In the case of GVK Industries Ltd. v. ITO8, it was held that the"general and common usage of the words has to be
understood at common parlance while interpreting the ambit of the term FTS". Meaning, that to interpret the below-
mentioned services, general and common meaning has to be taken as they are not defined in the Act.

Managerial Services

In the case of Intertek Testing Services India (P.) Ltd., In re9 it was said that"the term managerial relates to manager or
management. Further, a manager is a person who manages an industry or business or who deals with the administration
or a person who organizes other people's activity." Further, in the case of R. Dalmia v. CIT10, it was said that the term
management includes the Act of managing by direction, or regulation or superintendence. Also in the case of Credit
Lyonnais v. Asstt. DIIT11, scope of managerial services was discussed "to essentially involve controlling, directing or
administering the business. When one talks of rendering managerial services in relation to some activity, it is the
management of such overall activity. During bits or a small part of overall activity independently cannot be considered as
the rendering of a managerial service in relation to such activity."

Technical Services

In the case of CIT v. Kotak Securities Ltd.,12 it was held that "services which are specialized, exclusive and customized to
user/consumer qualify as FTS. Technical services like managerial and consultancy service would denote seeking of
services to cater the special needs of the consumer/user as may be felt necessary," hence in this case stock exchange
trading and assistance was held not to be technical services. Further, in the case of Expeditors International (India) (P.)
Ltd. v. Addl. CIT13 it was held that payment for the fee for standard services like a cellular network, VSAT up linking, is
not in the nature of FTS. The mere fact that the service provider has installed sophisticated equipment does not itself make
it FTS. A technical service without human intervention would not be covered within the ambit of the definition of FTS.
Furthermore, in the case of Atos Information Technology HK Ltd. v. Dy. CIT14 it was held that payment towards data
processing involved provision of a standard facility without any human intervention and would not constitute FTS.

Consultancy Services

In CIT v. Bharti Cellular Ltd.15 it was said that the "word consultant is a derivative of the word consult which entails
deliberations, consideration, conferring with someone, conferring about or upon a matter. Service of consultancy
necessarily involves human intervention; the consultant who provides the consultancy service has to be a human being. A
machine cannot be regarded as a consultant." Further, in the case of Intertek testing services India (P.) Ltd., In re16 it was
said that "advisory service which merely involves discussion and advice of routine nature or exchange of information could
not appropriately be classified as consultancy services." An element of expertise or special knowledge on the part of the
consultant is implicit in the consultancy services. In relation to the services by solicitors, in the case of Barendra Prosad
Ray v. ITO,17 it was held that professional connection exists when lawyer giving his services to a client in India, and hence
it should be considered as business connection and FTS shall be charged in India.

Provision of services of technical or other personnel:

It simply means the provision of services of technical or other personnel would amount to rendering technical services. So
this part is personnel specific, hence irrespective of whether personnel is giving managerial, technical or consultancy
services, it will be considered as FTS. The determinant factors here are the nature of work, the number of personnel hired,
consideration of such services, whether recipient directly responsible or not for fro work performed by personnel and
whether the person providing personnel has right to remove, replace or withdraw the services or not. It is significant to
understand that there is a difference between providing personnel and services of personnel, for instance, a recruitment
agency providing personnel to a firm will not be FTS as its service ends when the personnel provided and after that, the
service of technical personnel is given to the firm directly and hence cannot be treated as FTS.

Exceptions as given in Explanation 2 to Section 9(1) (vii) of the Act:

In the case of Orissa Synthetics Ltd. v. ITO,18 it was held that the"fact that the payment would come within the exclusion
part of this Explanation or not would have to be established by the person who claims the exclusion." Further, in the case
of Pr. CIT v. Senior Manager (Finance) Bharat Heavy Electricals Ltd.,19 it was held that contracts for erection and
transportation are not FTS as will fall under exception given in the definition clause. Further, in the case of Ernst & Young
(P.) Ltd., In re20 it was held that fees paid for availing market development and global development services are not FTS.
Furthermore, in Oil & Natural Gas Corporation Ltd. v. CIT,21 it was held that non-resident receiving payment from India
in relation to mineral oil prospecting fraction, is taxable under section 44BB of the Act.

TAX TREATIES AND FTS

FTS is generally a part of Article 12 of the treaty which includes both FTS and royalty but recently in 2017 United Nations
Model treaty convention, introduced Article 12 A specifically considering FTS. Clause 1 and 2 states that primary right
will be with the country of residence and it can tax, but the secondary right can be with source country considering the
beneficial ownership percentage determined by the contracting states and the tax charged shall not exceed the same.

In UN model, "similar definition as under section 9 (1) (vii) is there, but the exceptions herein are, payment made to an
employee of the person making the payment or for teaching in an educational institution or for teaching by an educational
institution or by an individual for services for the personal use of an individual" are excluded from the purview of FTS.

Concept of "Make available" as enshrined in the treatise

INDIA-US DTAA: "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:

(b)make available technical knowledge, experience, skill, know-how, or processes or consist of the development
and transfer of a technical plan or technical design."
This treaty is a classic example of 'make available' concept which is inserted by the states to restrict the applicability of
FTS taxability. It means that mere rendition of services is not enough unless the recipient of services is enabled to make
use of technical know-how, or process through which that service can be availed by the party. As held in ITO v. Nokia
India (P.) Ltd.,22 it is completed when the recipient gets the technical knowledge, experience and is capable of using the
same for achieving the further ends. Furthermore, in the case of NQA Quality Systems Registrar Ltd. v. Dy. CIT,23 it was
held that 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.

Most favoured Nation Clause

Under this clause, as entered between India and Belgium, France and Spain etc., it provides that for instance, today if India
enters into a Bilateral treaty with another state such as Taiwan (Republic of China), and in this treaty if these two countries
agree on Royalty of FTS rate below the rate at which India entered in treaty with Belgium, then according to this clause
the rate of India- Taiwan treaty will apply to India- Belgium treaty from the date when the present treaty came into effect.
In the case of Sandvik AB v. Dy. DIT,24 ITAT observed that by having the most favoured nation clause in India- Sweden
DTAA; hence India is bound to implement the restricted approach of FTS (make available concept) as opted in India-
Portugal DTAA to India- Sweden treaty also.

CONCLUSION

The strife between Revenue Department and taxpayers continues in the Taxation law as one side tries to impose and collect
as much tax as they can, and on the other hand, the other side tries to avoid tax liability by any means, respectively. In FTS
regime under International Taxation law, same continues as after the judgment of Ishikawajma-Harima Heavy Industries
Ltd.25 the source rule was jolted and then the government brought an amendment in royalty and FTS provision under
section 9 by stating that, whether or not the non-resident has a residence or place of business or business connection in
India, it shall be deemed to accrue or arise in India. Further, the debate continued post-Vodafone International Holdings BV
v. Union of India26, so as to not include the deemed income under section 9, but the same is still disconcerted, and the law
is not yet settled.

Further, the treatise incorporating 'make available' clause, is also against the Revenue Department as mere 'rendering' of
service would not suffice to charge FTS in India and hence, 'utilization' of same is required to the level that the recipient
can use for achieving a further end.

■■

1.
Carborandum Co. v. CIT [1977] 108 ITR 335 (SC).
2. Kanga and Palkhivala's The Law and Practice of Income-tax Eighth Edition, pg. 453.
3.
[1998] 96 Taxman 179 (AP).
4.
[2005] 143 Taxman 257/273 ITR 67 AAR.
5.
[2007] 158 Taxman 259 (SC).
6. (supra).
7.
[2001] 117 Taxman 382 (AP).
8.
[2015] 54 taxmann.com 347/231 Taxman 18/371 ITR 453 (SC).
9.
[2008] 175 Taxman 375 (AAR).
10.
[1977] 106 ITR 895 (SC).
11.
[2013] 35 taxmann.com 583/144 ITD 644 (Mum ITAT).
12.
[2012] 120 taxmann.com 846/340 ITR 333 (Bom.).
13.
[2010] 2 ITR (Trib.) 153 (Delhi ITAT).
14.
[2017] 79 taxmann.com 26 (Mum.).
15.
[2010] 193 Taxman 97 (SC).
16.
[2008] 175 Taxmann375 (AAR).
17.
[1981] 6 Taxman 19/129 ITR 295 (SC).
18.
[1993] 71 Taxman 602 (ORI.).
19.
[2017] 77 taxmann.com 269/390 ITR 322 (P&H) DDRC.
20.
[2010]189 Taxman 409/323 ITR 184 (AAR).
21.
[2015] 59 taxmann.com 1/233 Taxman 495/376 ITR 306 (SC).
22.
[2015] 59 taxmann.com 120/[2016] 156 ITD 307 (Delhi - Trib.).
23.
[2005] 2 SOT 249 (Delhi).
24.
[2014] 52 taxmann.com 211/[2015] 67 SOT 297 (Pune - Trib.).
25. (supra).
26.
[2012] 17 taxmann.com 202/204 Taxman 408 (SC).