|CORAM:||Pramod Kumar (AM), S. S. Godara (JM)|
|SECTION(S):||9(1)(vi), 9(1)(vii), Article 12|
|CATCH WORDS:||Fees for technical services, make available, royalty|
|COUNSEL:||Kanchan Kaushal, Piyush Chawla|
|DATE:||January 3, 2017 (Date of pronouncement)|
|DATE:||January 16, 2017 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 9(1)(vi)/ 9(1)(vii): Important law explained on whether payment for use of equipment can be assessed as "royalty" and whether payment for rendering of services can be assessed as "fees for technical services" in the context of s. 9(1)(vi) and 9(1)(vii) and Article 12 of the India-Canada DTAA|
Re whether payment made towards various IT support services received from the Holding Company and associated enterprises of the group concerns are in the nature of Fee for Technical Services (FTS)
(i) We find that the related payments made by the assessee to BT Canada were in the nature of reimbursements, and, as evident from the details taken to record earlier in this order, there were specific cost allocations which were borne by the assessee. These payments, by no stretch of logic, could be viewed as payments for right to use the equipment. The assessee was entitled to certain services, during rendition of which even if certain equipment were to be used, but that by itself did not result in any use of or right to use the equipment by the assessee. The service may involve use of equipment but that does not vest right in the assessee to use the equipment. Even if a part of consideration can be said to be on account of use of equipment by breaking down all the components of economic activity for which consideration is paid, it is neither practicable, nor permissible, to assign monetary value to each of the segment of this economic activity and consider that amount in isolation, for the purpose of deciding character of that amount. Similarly, even if the payment is to be considered as payment for use of software, as is the settled legal position as on now, unless there is no transfer of copyright, there cannot be any occasion to hold it as royalty. In any event, so far as the transaction between the assessee and the BT Canada is concerned, it is simply in the nature of reimbursement of expenses incurred by BT Canada, on behalf of the assessee, and it has no income element so far as BT Canada is concerned. During the course of hearing before us, when we put this proposition to the learned Departmental Representative, he did not have much to say beyond placing reliance on the stand of the Assessing Officer.
(ii) We also find that this issue is also covered, in favour of the assessee, by a coordinate bench decision of this Tribunal which has, in the case of Kotak Mahindra Primus Ltd vs DDIT [(2007) 11 SOT 578 (Mum)] wherein it was observed by the bench that “The Indian company does not have any control over, or physical access to, the mainframe computer in Australia. There cannot, therefore, be any question of payment for use of the mainframe computer. It is indeed true that the use of mainframe computer is integral to the data processing but what is important to bear in mind is the fact that the payment is not for the use of mainframe computer per se, that the Indian company does not have any control over the mainframe computer or physical access to the mainframe computer, and that the payment is for act of specialized data processing by the Australian company. Use of mainframe computer in the course of processing of data is one of the important aspects of the whole activity but that is not the purpose of, and consideration for, the impugned payment being made to Australian company. The payment, as we have observed earlier, is for the activity of specialized data processing. It is neither practicable, nor permissible, to assign monetary value to each of the segment of this economic activity and consider that amount in isolation, for the purpose of deciding character of that amount. Therefore, neither the impugned payment can be said to be towards use of, or right to use of, the mainframe computer, nor is it permissible to allocate a part of the impugned payment, as attributable to use of, or right to use of, mainframe computer. Accordingly, the provisions of art. 12(3)(b) cannot have any application in the matter.”
(iii) Going by this logic even if one proceeds on the basis that any equipment is used in rendition of these services, such a payment, or part thereof, cannot be treated as payment for use of equipment. Revenue’s case is thus acceptable as payment for use of equipment. In any case, the details furnished by the assessee also support the fact of reimbursement. When recipient does not have any income embedded in the related payment as reimbursement, there cannot be any occasion for deduction of tax at source under section 195.
Re whether payment made towards providing of services to use of equipment and right to use equipment received from the Holding Company and associated enterprises of the group concerns is in the nature of Royalty
(iv) We find that so far as taxability under Article 12, i.e. with respect to ‘Royalties and fees for included services’ is concerned, we find that Article 12(4) provides that, “The term “fees for technical included services” as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or (b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein”. In order to invoke article 12(4)(a) it is necessary that such services should “make available” technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design The services provided by BT Canada were simply management support or consultancy services which did not involve any transfer of technology. It is not even the case of the Assessing Officer that the services were such that the recipient of service was enabled to perform these services on its own without any further recourse to the service provider. It is in this context that we have to examine the scope of expression ‘make available’.
(v) As for the connotations of make available clause in the treaty, this issue is no longer res integra. There are at least two non-jurisdictional High Court decisions, namely Hon’ble Delhi High Court in the case of DIT Vs Guy Carpenter & Co Ltd ([(2012) 346 ITR 504 (Del)] and Hon’ble Karnataka High Court in the case of CIT Vs De Beers India Pvt. Ltd [(2012) 346 ITR 467 (Kar)] in favour of the assessee, and there is no contrary decision by Hon’ble jurisdictional High Court or by Hon’ble Supreme Court. In De Beers case (supra), Their Lordships posed the question, as to “what is meaning of make available”, to themselves, and proceeded to deal with it as follows: 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, skill?, 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.
(vi) As we have noted earlier, it is not even the case of the Assessing Officer that the assessee, i.e. recipient of services, was enabled to use these services in future without recourse to BT Canada. The tests laid down by Hon’ble Court were clearly not satisfied. There mere fact that there were certain technical inputs or that the assessee immensely benefited from these services, even resulting in value addition to the employees of the assessee, is wholly irrelevant. The expression ‘make available’ has a specific meaning in the context of the tax treaties and there is, thus, no need to adopt the day to day meaning of this expression, as has been done by the Assessing Officer.