'Technically' Correct: 'Make Available' Requirements to be met for Classification as 'Fees for Technical Services'
In a reaffirmation of well established principles regarding taxation of “fees for technical services”(“FTS”), the judgment delivered by the Bangalore Bench of the Income Tax Appellate Tribunal (“ITAT”) in ITO v. M/s Cepha Imaging Pvt Ltd1 throws light on the interpretation of the words ‘make available’ in the context of FTS.
M/s Cepha Imaging Pvt. Ltd. (“Assessee”) is a 100% export-oriented unit, engaged in the business of providing customized publishing-related solutions and exporting services to US and UK. The Assessee entered into a Master Services Agreement (“MSA”) with M/s. Keyword Group Ltd., UK (“KGL”) which included managing client relationship and providing catalytic support for the deliverables to the Assessee’s clients. Additionally, KGL also rendered services in connection with identifying new and potential clients to develop a strong and competitive market position for such services in UK. For the performance of these services under the MSA, KGL had to engage and train necessary professionals with suitable qualifications and background.
In light of the abovementioned facts, the Assessing Officer (“AO”) contended that the Assessee was liable to withhold tax at source under section 195 of the Income Tax Act, 1961 (“ITA”) on the payments made to KGL under the MSA as these payments were in the nature of FTS under Article 13 (4) (c) of the India-UK Tax Treaty (“Treaty”) as well as Section 9(1)(vii) of the ITA. On appeal, the Commissioner of Income Tax (Appeals) rejected the view of the AO and held that the payments were not in the nature of FTS. The revenue then filed an appeal with the ITAT.
Under the provisions of the ITA, a non-resident is subject to tax in India to the extent any income is deemed to accrue or arise in India. Further, Section 9 (vii) of the ITA provides that income payable by way of FTS to a non-resident is considered as income deemed to accrue or arise in India. Section 90(2) of the ITA provides that the provisions of a tax treaty would be applicable to the extent the same are more beneficial to the assessee as compared to the ITA. It is pertinent to note that the definition of FTS under the Treaty is much narrower (and therefore beneficial to the assessee) than the definition of FTS under the ITA.
Article 13(4) of the Treaty provides inter alia that for a service to be regarded as FTS, it is imperative that service should ‘make available’ knowledge, experience, skill, know-how or processes.
Ruling and Analysis
In the instant case, the ITAT analyzed the scope of the services contemplated in the MSA and was of the opinion that the consideration for the services could not be regarded as FTS as no technical knowledge, expertise, skill, know how or process consisting of the development and transfer of technical plan or technical design had been transferred to the Assessee so that the Assessee could use that knowledge, expertise, skill etc., in the future.
The ITAT in its judgment has relied on some of the important cases on this issue including Mahindra and Mahindra Ltd., vs. DCIT (Mumbai)2 and held that the AO had erred by taking a simplistic meaning of the words ‘make available’ rather than importing the meaning of ‘make available’ under the Treaty.
Generally speaking, technology is considered to be ‘made available’ when the person acquiring the service is enabled to apply the technology. ‘Make available’ contemplates some degree of permanency of the services rendered for future use or utilization on a reasonably permanent basis. The technical knowledge, experience, skill, etc. must remain with the person utilizing the services even after the rendering of the services has come to an end3. Technology is considered ‘made available’ when the service recipient is enabled to apply the technology contained therein4.
Indian tax authorities have time and again tried to adopt a restrictive approach to interpret the words ‘make available’. However, this approach has not been favoured by the Courts and they have adopted a broader interpretation. It is important to consider the tests laid down by the Courts above for interpreting the definition and scope of FTS. This judgment once again re-affirms the approach previously taken by Indian courts in this context.