|I. C. Sudhir (JM), Inturi Rama Rao (AM)
|Domestic Tax, International Tax
|Fees for technical services, Permanent Establishment
|July 8, 2015 (Date of pronouncement)
|July 20, 2015 (Date of publication)
|Click here to download the file in pdf format
|Entire law on taxability of "fees for technical services" under the "make available" clause of the DTAA explained
The assessee was in the process of setting up a manufacturing facility at Chennai. For this purpose, the contract for design, manufacturing and completion for the manufacturing facilities was given to Leighton Contractors India Pvt. Ltd. Olof Granlund Oy is a company incorporated in Finland and is engaged in the business of providing consulting services in relation to HVAC, electrical and fire protection systems and this company was engaged by the assessee company for the purpose of reviewing the design, construction plans prepared by the Leighton Contractors India Pvt. Ltd. This was to ensure that Nokia’s global standards for the manufacturing facility are met. These services are rendered outside India only. The assessee claimed that the services rendered by the Finland company do not come within the purview of Article 13(4) (c) of the DTAA between India and Finland as technical services. It was further contended that the services rendered cannot be even be taxed under Article 7 read with Article 5 of the DTAA in the absence of PE of Olof in India. However, the AO and CIT(A) rejected the assessee’s claim and held that the services rendered by Olof Granlund are in the nature of technical services. Relying on Transmission Corporation of AP Ltd. vs. CIT (1999) (239 ITR 587) it was further held that the assessee company is deemed to be assessee in default u/s 201(1) for non deduction of tax at source u/s 195 of the Act at source u/s 195 of the Act. On appeal by the assessee to the Tribunal HELD allowing the appeal:
(i) In light of the judicial pronouncements (which have affirmed the principle of parallel treaty interpretation, especially as regards the meaning of the term ‘make available’), considering the interpretation provided in the MoU to India-US tax treaty, services can be said to ‘make available’ technical knowledge etc, where such technical knowledge is transferred to the person utilizing the service (i.e. the appellant in the instant case) and such person is able to make use of the technical knowledge etc, by himself in his business or for his own benefit and without recourse to the performer of services (i.e OlofGranlund) in the future. The mere fact that provision of service may require technical knowledge by the person providing the service would not per se mean that knowledge has been made available.
(ii) On facts, Olof Granlund merely provided services to ensure that the HV AC, Electrical and Fire Protection systems to be installed at the assessee’s factory in Chennai are of the right design and quality. The scope of work performed by Olof Granlund clearly lays down that Olof Granlund shall be responsible for providing certain quality and design control services to the assessee such as review of systems description, diagrams, cost estimates, building designs etc. Olof Granlund’s services to the assessee were not driven towards imparting any technical knowledge or experience to the assessee that could be used by the assessee independently in its business and without recourse to Olof Granlund. These services were neither geared to nor did they ‘make available’ any technical knowledge, skill or experience to the assessee or consisted of development and transfer of a technical plan or technical design to the assessee.
(iii) Given that the term ‘make available’ envisages a situation where the service recipient (i.e the assessee) is able to make use of the technical knowledge inherent in the services provided to him independently in his business or for his own benefit and without recourse to the service provider (i.e Olof Granlund), payments made by the assessee to Olof Granlund for provision of above services do not constitute FTS under narrower provisions of Article 13 of the India-Finland tax treaty. Further, the services rendered by Olof Granlund are restricted to the review of design, drawings, cost estimates etc prepared/ developed by the contractor of the assessee, to check whether the same are as per Nokia group’s standard. Olof Granlund iss not responsible for preparation of any design, diagram etc for the assessee and accordingly the services provided by it does not involve development and transfer of technical plan or design. Accordingly, we hold that the payments made by the assessee to Olof Granlund do not qualify as FTS under the provisions of India-Finland tax treaty.
(iv) Further, as per the provisions of India-Finland tax treaty, where the service do not qualify as FTS, Article 13 would not be applicable to the Finnish enterprise and its taxability would need to be examined as per Article 7 (read with Article 5) of the India-Finland tax treaty. As per Article 7( 1) of the tax treaty, ‘Business Profits’ earned by a Finnish Enterprise is taxable in India only if that Finnish enterprise carries on business in India through a PE in India. The term PE has been defined in Article 5 of the India-Finland tax treaty to include a branch, office, factory, workshop, etc of the Finnish enterprise in India. Where the Finnish enterprise does not have a PE in India under the provisions of Article 5 of the India-Finland treaty, no portion of the income from services provided to a customer in India are liable to taxation in India. In the instant case, admittedly Olof Granlund did not have any office/place of business in India. Further, the services were performed by Olof Granlund primarily from outside India and its employees made intermittent visits to India only for the purpose of attending meetings with the assessee. Accordingly, Olof Granlund Oy did not have a PE in India under the provisions of Article 5 of the India-Finland tax treaty during the subject period. Certificate obtained by the assessee from Olof Granlund in this regard is on record. In light of the above, the payments received by Olof Granlund from the assessee for provision of services are not liable to taxation in India under the narrower provisions of the India-Finland tax treaty.