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DATE: February 17, 2017 (Date of pronouncement)
DATE: March 6, 2017 (Date of publication)
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CITATION:
S. 9(1)(vii)/ Article 12: In order to constitute “technical services”, services catering to the special needs of the person using them must be rendered. The provision of a common facility is not “technical services”. Amount paid towards reimbursement of a common technical computer facility is not “fees for technical services”. Amount received by way of reimbursement of expenses does not have the character of income

It is clearly held that no technical services are provided by the assessee to the agents. Once these are accepted, by no stretch of imagination, payments made by the agents can be treated as fee for technical service. It is in the nature of reimbursement of cost whereby the three agents paid their proportionate share of the expenses incurred on these said systems and for maintaining those systems. It is reemphasised that neither the AO nor the CIT (A) has stated that there was any profit element embedded in the payments received by the assessee from its agents in India. Record shows that the assessee had given the calculations of the total costs and pro-rata division thereof among the agents for reimbursement. Not only that, the assessee have even submitted before the Transfer Pricing Officer that these payments were reimbursement in the hands of the assessee and the reimbursement was accepted as such at arm’s length. Once the character of the payment is found to be in the nature of reimbursement of the expenses, it cannot be income chargeable to tax

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DATE: February 8, 2017 (Date of pronouncement)
DATE: February 20, 2017 (Date of publication)
AY: 2010-11
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CITATION:
Entire law on Permanent Establishment, Force of Attraction principle, taxability of software embedded in hardware as royalty, make available of technical services etc explained (all important judgements referred)

Some provide for taxing profits/income from all transactions whether they are attributable to PE or not or whether they are of the same kind of transactions carried on by the PE or not, which is referred to as “Full Force of Attraction” principle. As to which principle is applicable in a given case depends on the clauses of the convention between two countries. Article 7(1) of the DTAA between India and Netherlands provides for taxing profits of the enterprise in the other state only to the extent they are attributable to the PE in the other state, adopting “No Force of Attraction” principle

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DATE: January 3, 2017 (Date of pronouncement)
DATE: January 18, 2017 (Date of publication)
AY: 2010-11
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CITATION:
S. 9(1): Important law explained as to the taxability of export sale commission payments received by non-resident agents and the obligation of the assessee to deduct TDS thereon in the context of s. 9(1)(i)/ 9(1)(vii) of the Act and relevant provisions of the DTAA

In the light of the above legal position, what we need to decide at the outset is whether the amounts paid by the assessee to the non-resident agents could be termed as “consideration for the rendering of any managerial, technical and consultancy services”. As we do so, it is useful to bear in mind the fact that even going by the stand of the Assessing Officer, at best services rendered by the nonresident to the agent included technical services but it is for this reason that the amounts paid to these agents, on account of commission on exports, should be treated as fees for technical services. Even proceeding on the assumption that these non-resident agents did render the technical services, which, as we will see a little later, an incorrect assumption anyway, what is important to appreciate is that the amounts paid by the assessee to these agents constituted consideration for the orders secured by the agents and not the services alleged rendered by the agents. The event triggering crystallization of liability of the assessee, under the commission agency agreement, is the event of securing orders and not the rendition of alleged technical services. In a situation in which the agent does not render any of the services but secures the business anyway, the agent is entitled to his commission which is computed in terms of a percentage of the value of the order

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DATE: January 3, 2017 (Date of pronouncement)
DATE: January 16, 2017 (Date of publication)
AY: 2013-14
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CITATION:
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

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’

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DATE: January 4, 2017 (Date of pronouncement)
DATE: January 14, 2017 (Date of publication)
AY: 2012-13
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CITATION:
S. 9(1)(vii)/ Article 12: There is a difference between a 'contract of work' and a ‘contract of service’. In a 'contract of work', the activity is predominantly physical while in a 'contract of service', the dominant feature of the activity is intellectual. Fees paid with respect to a ‘contract of work’ does not constitute "fees for technical services" and consequently the assessee is not liable to deduct TDS u/s 195

There is a difference between ‘Contract of work and ‘Contract of service’. The two words convey different ideas. In the ‘Contract of work’ the activity is predominantly physical; it is tangible. In the activity referred as ‘Contract of service’, the dominant feature of the activity is intellectual, or at least, mental. Certainly, ‘Contract of work’ also involves intellectual exercise to some extent. Even a gardener has to bestow sufficient care in doing his job; so is the case with a mason, carpenter or a builder. But the physical (tangible) aspect is more dominant than the intellectual aspect. In contrast, in the case of rendering any kind of ‘service’, intellectual aspect plays the dominant role. In the case under consideration, the scope of work mentioned in the agreement clearly explains that it is ‘contract of work’ to dismantle the machinery, therefore, it is not a ‘contract of service’ hence payment by the assessee is not for technical services, therefore, the assessee company is not liable to deduct TDS

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DATE: January 21, 2017 (Date of pronouncement)
DATE: January 4, 2017 (Date of publication)
AY: 1998-99, 1999-00
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CITATION:
S. 9(1)(vi)/ Article 12: Law on whether consideration received for licensing of software programmes can be assessed as "royalty" u/s 9(1)(vi) and Article 12 of the DTAA explained

If we analyse and compare various provisions of the Copyright Act with the relevant clauses of the master agreement, it is noted that the said agreement does not permit HLL to carry out any alteration or conversion of any nature, so as to fall within the definition of ‘adaptation’ as defined in Copyright Act, 1957. The right given to the customer for reproduction was only for the limited purpose so as to make it usable for all the offices of HLL in India and no right was given to HLL for commercial exploitation of the same. It is also noted that the terms of the agreement do not allow or authorise HLL to do any of the acts covered by the definition of ‘copyright’. Under these circumstances, the payment made by HLL cannot be construed as payment made towards ‘use’ of copyright particularly when the provisions of Indian Income-tax Act and DTAA are read together with the provisions of the Copyright Act, 1957

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DATE: June 13, 2016 (Date of pronouncement)
DATE: August 4, 2016 (Date of publication)
AY: 2006-07
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CITATION:
S. 9(1)(vi)/ Article 12: Consideration received for sale of computer software programme in CD Rom is not assessable as “royalty”. The retrospective amendment in Explanation 4 to section 9(1)(vi) to tax such receipts as royalty has no application to DTAA if the definition of the term “royalty” in the DTAA has remained unchanged

The retrospective amendment brought into statute with effect from 01.06.1976 cannot be read into the DTAA, because the treaty has not been correspondingly amended in line with new enlarged definition of ‘royalty’. The alteration in the provisions of the Act cannot be per se read into the treaty unless there is a corresponding negotiation between the two sovereign nations to amend the specific provision of “royalty” in the same line. The limitation clause cannot be read into the treaty for applying the provisions of domestic law like in Article 7 in some of the treaties, where domestic laws are made applicable. Here in this case, the ‘royalty’ has been specifically defined in the treaty and amendment to the definition of such term under the Act would not have any bearing on the definition of such term in the context of DTAA. A treaty which has entered between the two sovereign nations, then one country cannot unilaterally alter its provision

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DATE: July 11, 2016 (Date of pronouncement)
DATE: July 14, 2016 (Date of publication)
AY: 2009-10, 2010-11
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CITATION:
S. 9(1)(vi): Though in Infrasoft 220 Taxman 273 (Del) the impact of the amendment to s. 9(1)(vi) on the question whether consideration received for sale of pre-packaged software was “royalty” or “fee for technical services” or "business income" was not examined, it is not required to be examined because u/s 90 (3) provides that the Act prevails only if it is more beneficial compared to the DTAA

The short question considered by the Court in Director of Income Tax v. Infrasoft Limited (2014) 220 Taxman 273 (Del) was whether the term “royalty” covered by Article 12 (3) of the DTAA would apply in the context of sale of pre-packaged copyrighted software. The Court stated that it has not examined the effect of the subsequent amendment to Section 9 (1) (vi) of the Act and also whether the amount received for use of software would be royalty in terms thereof for the reason that the Assessee is covered by the DTAA, the provisions of which are more beneficial

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DATE: June 2, 2016 (Date of pronouncement)
DATE: June 4, 2016 (Date of publication)
AY: -
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CITATION:
Law on whether "installation or construction activity" constitutes a PE under Article 5 and whether "mobilisation/ demobilisation charges" can be treated as "royalty" u/s 9 (1) (vi) & Article 12 (3) (b) of the DTAA and whether "installation charges" could be treated as "Fees for Technical Services" under Explanation 2 below s. 9 (1) (vii) read with Article 12 (4) (a) of the India-Singapore DTAA explained

Therefore, on two counts the finding of the AAR on FTS cannot be sustained. The first being that the installation services are not incidental to the mobilisation/demobilisation service. The contract was in fact for installation, erection of equipment. Mobilisation/demobilisation constituted an integral part of the contract. Secondly, the AAR has proceeded on a factual misconception that the dominion and control of the equipment was with IOCL. It was erroneously concluded that the payment for such mobilisation/demobilisation constitutes royalty. In that view of the matter, the consideration for installation cannot not be characterized as FTS and brought within the ambit of Article 12.4(a) of the DTAA. The resultant position is that no part of the income earned by the Petitioner from the contract with IOCL can be taxed in India

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DATE: March 23, 2016 (Date of pronouncement)
DATE: May 26, 2016 (Date of publication)
AY: 2008-09
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CITATION:
Installation services provided by a foreign enterprise which are inextricably connected to the sale of goods are not assessable as "fees for technical services" or as "business profits" under the DTAA

Though service of installation is covered by the FTS clause as well as Installation PE clause of the India China treaty and though the installation contract (including period of after sales service) exceeded 183 days, the income from installation activity was neither taxable as FTS nor as business income since (i) the service of installation was inextricably connected to sale of goods, the same could not be treated as FIS or FTS (ii) specific installation PE clause in India China Treaty will override General FTS clause (iii) the aforesaid threshold limit of 183 days would have to be applied to the actual period of installation (which was less than 183 days) and not the contractual period

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