Royalties and Fees for Technical Services in International Trade
M. M. Chishty and Sumangala A. Chakalabbi Students, University College of Law, Dharwad
Everything you ever wanted to know about Royalties and Fees for Technical Services you will find in this article which was rightly awarded the ‘Best Research Paper of 4th Nani Palkhivala Research Paper Competition for the year 2008’
In a globalised world, the transfer and sharing of intellectual property rights is crucial to the survival of modern industries and service sector in a highly competitive world. The present era is one in which capital is denoted by less of tangible assets like money and raw materials and more of intellectual property rights. In this context, it would only be in the self-interest of developing countries like India to create an atmosphere which is conducive to and promotes transfer of intellectual property and technology by foreigners.1 The taxation in India of such transfer is one aspect of creating that atmosphere. An ideal tax system would be one which keeps abreast of technological developments having effect on it, all the while keeping a delicate balance between providing maximum financial means to the Government and avoiding bleeding taxes on assessees. At this juncture, the pertinent questions would be has our tax system been mature enough to categorise and classify incomes arising by way of intellectual property and technology in accordance with time honoured principles of taxation or has it been befuddled by the intangible nature of the subject; and whether there is an effort by our taxation system to soften the rigours of taxation of cross-border journey of intellectual property.
The tax authorities are interested in classifying as much incomes as possible as royalties, because a fixed tax is imposed on royalties and fees for technical services; and assessees are interested in avoiding such classification since that which is not classified as royalty or fees for technical services is business income, which is taxed at a very low or nil rate.
2. TAXATION OF ROYALTIES AND FEES FOR TECHNICAL SERVICES
Royalties and fees for technical services arise from commercialisation of intellectual property rights. The tax authorities are interested in classifying as much incomes as possible as royalties, because a fixed tax is imposed on royalties and fees for technical services; and assessees are interested in avoiding such classification since that which is not classified as royalty or fees for technical services is business income, which is taxed at a very low or nil rate. This divergence of interests is the cause of much litigation.
2.1 General Considerations
2.1.1 Policy of Presumptive Taxation
The Income Tax Act provides that a nonresident having sources of income situated in India is taxed on presumptive basis on most of the incomes arising in India. The deeming provisions are ss. 44D and 115A of the Income Tax Act. These provisions read together provide for a special method for computing income by way of royalty or fees for technical services in the case of foreign companies. The rate of tax is fixed at a flat 10 percent2 of the gross receipts for royalty or technical services, in total disregard of any expenditures incurred by the non-resident referred to in §§ 28 to 44C of the Income Tax Act. Thus, 10 percent of the gross receipts to the foreign entity are to be withheld with disregard to the actual income accruing to the non-resident. This policy of presumptive taxation is grounded on reasons of practical convenience like absence of books of account, supporting evidences etc.3 provided they maintain a permanent establishment in India and comply with the requirements of §§ 44A and 288 of the IT Act.
2.1.2 Tax Withholding on Royalties and Technical Services
As regards transfer of payment to a nonresident in consideration of royalty or technical services received, § 195 of the IT Act provides that any person responsible for paying to a non-resident any sum chargeable under the Act shall at the time of credit of such income deduct income-tax thereon at the rates in force. Income by way of royalty or technical services is chargeable under the IT Act. Thus, the primary obligation of paying the tax on royalties or technical services is not on the nonresident himself but on the person who is making such payments to him. Failure to comply with this provision may result in disallowance of the expenditure, interest on the taxes and penal action.
2.1.3 Composite Agreements and Withholding Tax
Very often one comes across agreements in connection with royalties and fees for technical services wherein a resident agrees to pay contractual consideration to a non-resident. The consideration consists of two parts, one part is for royalties or technical services on which the resident is obliged to withhold tax, and the other part is claimed to be non-taxable in the hands of the nonresident recipient on grounds of being mere reimbursement of expenditure incurred by the nonresident, hence not liable to taxation. The pertinent questions that arise in such a factual matrix are whether such integrated payments can be subjected to different tax treatment, and whether withholding is to be on the net profit comprised in gross sums or on the gross sums themselves. We will attempt to find out the answers below.
At the outset, it should be mentioned that the integrity of the integrated payments itself is subject to challenge by the ‘disjunctive test’ laid down by the Supreme Court in Sultan Brothers v. CIT.4 By this test, the Assessing Officer can enquire whether the contract could still have stood if hypothetically the contract were to be split, and the reimbursement ignored—if it can, then the sums can be subject to different tax treatment, otherwise not.
The issue of whether sums representing integrated consideration can be subjected to different tax treatment came up in the case of Sedco Forex International Drilling Inc v. Deputy CIT.5 In this case, the assessee company had entered into a contract with ONGC for providing certain services with regard to oil exploration in Indian territorial waters, and the consideration paid for these services was mentioned in two parts—(a) contract amount and (b) mobilisation expenses incurred by the contractor in transporting the oil rig from Portugal to Mumbai. While tax liability on the first part was not denied, the same was denied on the second part on grounds of reimbursements. The tribunal held that on a reading of the contract that the obligation to incur expenses on mobilisation of the oil rig from Portugal to Mumbai was of the assessee and not of ONGC; hence by mentioning these amounts separately in the agreement and by describing one as reimbursement, the assessee’ obligation is not converted into the contractee’s obligation. Since by the ‘indivisibility doctrine’ the mobilisation expenses were an integral part of the gross consideration received by the assessee, tax was liable to be deducted on both parts of the sums received.
The next issue that arises is whether tax is to be withheld on the net profit comprised in gross sums or on the gross sums themselves. We have already discussed above that withholding tax on royalties and fees for technical services are taxed on a flat rate basis, in total disregard of the actual expenditure incurred by the non-resident.6 The application of this principle can be seen in the case of Associated Cement Co. Ltd v. CIT,7 wherein ACC had entered into a contract for loading packed cement bags into trucks, and was to pay a fixed sum of forty one paise per tonne of cement loaded. The contract further provided that in case the contractor was obliged to upwardly revise the wages of his employees as per the recommendations of the Wages Board, then ACC would have to increase the payment accordingly. The assessee withheld tax on the original contract amount, i.e. on 2 percent of 41 paise, but refused to withhold tax upon the hiked wage on the ground that additional payment was a reimbursement simpliciter. It was also an admitted position that there was no taxable surplus in the hands of the contractor on additional amounts paid because he was obliged to pass on the entire sum to his labour. But the court refused to buy this reason stating: Indeed, it is neither possible nor permissible for the payer to determine what part of the amount paid by him to the contractor constitutes the income of the latter. It is not also possible that the Parliament could have intended to cast such impossible burden upon the payer nor could it be attributed with the intention of enacting such an impractical and unworkable provision. In other words, qua the resident, the base figure to apply the tax withholding rate is the gross amount paid to the non-resident, and it is not for the resident to ascertain the taxable income comprised in such gross sums; that is the job of the Assessing Officer. In Sprint RPG India Ltd. v. Commr. of Customs,8 where the Supreme Court had to consider the issue whether customs duty on software imported on hard disk drives should be valued on the basis of at hard disk simpliciter at 25 percent or on the basis of computer software at 10 percent. Propounding the doctrine of ‘essential character’ of the goods, the Court noted that the total value of the hard disk drives was estimated at Rs. 60,000/- while the value of the software so imported was of Rs. 68 lacs, and therefore held that the essential character of the goods was software. But just because two items are complementary and supplementary to each other does not mean that they cannot be individually valued always. As the Court succinctly put the matter in another case:9 Secondly, that a computer and its software are distinct and separate is clear, both as a matter of commercial parlance as also upon the material on record. A computer may not be capable of effective functioning unless loaded with software such as discs, floppies and CD ROMs. But that is not to say that these are a part of the computer or to hold that, if they are sold along with the computer, their value must form part of the assessable value of the computer for the purposes of excise duty. To give, an example, a cassette-recorder will not function unless a cassette is inserted in it; but the two are well-known and recognized to be different and distinct articles. The value of the cassette, if sold along with the cassette-recorder, cannot be included in the assessable value of the cassette-recorder. Just so, the value of software, if sold along with the computer, cannot be included in the assessable value of the computer for the purposes of excise duty.
It is submitted that this amendment cannot have the effect of nullifying the decision in Ishikawajima – Harima since in that case, the Court emphasising on the territorial nexus doctrine ruled that § 9 raises a legal fiction; but having regard to the contextual interpretation and furthermore in view of the fact that we are dealing with a taxation statute the legal fiction must be construed having regard to the object it seeks to achieve.
2.1.4 Relation and Accrual of Tax on Royalties and Technical Services
India follows the receipt basis in respect of international taxation. By this, tax liability is imposed even where the income does not accrue or arise within its borders. This is in contradistinction to the nexus basis, where nexus is ordinarily presumed only where the income is earned either directly within the territories or it is earned indirectly because of the nexus with any activity in such territories. Clauses (vi) and (vii) of § 9(1) of the IT Act provide that income shall be deemed to arise in India by way of royalties and fees for technical services respectively if the payment is payable by the Government or a resident, except in cases where such payment is payable for the purposes of a business or profession or making an earning from a source outside India. Moreover, payment by a non-resident is also included in this category if such payment is for the purposes of business or profession carried on by such person in India or for the purposes of earning any income from any source in India. To illustrate, Shyam & Co, an Indian resident, enters into a contract with Davy Inc, a resident of the US, that on payment of certain sums, Davy Inc would courier to Shyam & Co certain drawings and diagrams related to construction of iron ore melting plants. Though, in this case service has not been performed in India, still withholding tax would become due. However, if an Indian hotel chain were to set up a hotel in London, and technical services were availed in London for the purpose of setting up of the hotel, which would be a source of income to the Indian hotel chain there, such payments would not be subject to Indian withholding tax. This receipt basis of taxation is the object of much criticism on the grounds that it runs contrary to the well settled international norms of taxation and is also against the letter and spirit of various tax treaties entered into by India with foreign countries. Fortunately, the Supreme Court in a landmark judgment Ishikawajima-Harima Heavy Industries Ltd. v. DIT10 has reversed the position. The Court ruled that § 9(1)(vii) of the IT Act should be read together with § 5 thereof, which takes within its purview the territorial nexus on the basis of whereof tax is required to be levied. Therefore, the Court held that § 9(1)(vii) of the Act envisages the fulfilment of two conditions for the service to be taxed in India, viz.: (a) such services are rendered in India, and (b) such services are utilised in India, and these two conditions have to be satisfied simultaneously. And, when a technical service is rendered outside India, even if it is utilised in India, the provisions of § 9(1)(vii) of the IT Act will not be applicable. Regrettably, ratio of this judgment was sought to be nullified by the amendment of § 9 of the IT Act by the Finance Act, 2007, by which an explanation was inserted therein stating that for the purposes of the said section, where income is deemed to accrue or arise in India under clauses (v), (vi) or (vii) of sub-section 1, such income shall be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India. It is submitted that this amendment cannot have the effect of nullifying the decision in Ishikawajima-Harima since in that case, the Court emphasising on the territorial nexus doctrine ruled that § 9 raises a legal fiction; but having regard to the contextual interpretation and furthermore in view of the fact that we are dealing with a taxation statute the legal fiction must be construed having regard to the object it seeks to achieve. What the amendment has done is just restating the old position; therefore, in light of the overriding principle of territorial nexus of taxation as was propounded by the Court, the amendment cannot nullify the ratio stated by the Court. In this regard, it should always be remembered that royalties and fees for technical services are only exceptions to the general rule that only the country of residence will be able to tax business income. Therefore, sovereignty and comity of nations demands that a country cannot go on taxing endlessly every non-resident, however tenuous the tax connection, but rather restrict itself to incomes that have a nexus with the source country. As to accrual of income, a recent decision of the Bombay High Court throws some light on the issue. In Pfizer Corporation v. CIT,11the court held that dividend accrues on remittance to the nonresident. On similar grounds, it can be argued that royalty is taxable on remittance.
2.1.5 Customs Duty on Royalties and Fees for Technical Services
Customs law regulates the import and export of goods by imposing duties on goods, which are mostly tangible.12 However, there will be situations where imposing customs duty on a good is complicated by the fact that there being a value addition to the good through linking it with an intellectual property. It is in such situations that disputes arise whether it is permissible to assess the goods taking into account the value of the royalty and technical fees also.13 It is settled law that a payment cannot be classified as royalty unless the ‘copyright rights’ are transferred to the payer.14 Operating on the same principle, the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 provide that the charges for the right to reproduce the imported goods in the country of importation shall not be added to the price payable in determining the customs value. Thus, if the assessee can prove that the charges relate to right to reproduce the goods in India, then the same amount shall not be included in considering the assessable value. In Union of India v. Mahindra and Mahindra,15Mahindras had paid a lump sum amount of 15 million French francs to Peugeot for technical know-how for manufacture of diesel engines in India. Subsequently, Mahindras also imported Completely Knocked Down [CKD] units from Peugeot. The Customs demand of including 15 percent of the lump sum amount with the price of the CKD, was rejected on the ground that there was no nexus between know how transfer fee and import of CKD packs. Further, such demand was unjustifiable from the view point of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988.
2.2 Taxation of Royalty
2.2.1 Definition of Royalty
Generally, royalty is the sum payable for the right to use someone else’s property for the purpose of gain.16Royalty is a sum which is taxable under § 9 of the IT Act, which section further provides that consideration flowing in from the following items shall be deemed to be royalty:
i. the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;
ii. the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;
iii. the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;
iv. the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
v. the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;
vi. the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or
vii. the rendering of any services in connection with the activities referred to in sub-clauses (i) to 66 [(iv), (iva) and] (v).
Therefore, an essential precondition for determining royalty is that the non-resident owner of such intellectual property should have retained the property in them while allowing the right to use such intellectual property. In CIT v. Davy Ashmore India Ltd.,17the assessee made payments to a foreign entity in consideration for outright sale of designs and drawings, which payments were sought to be taxed by the ITO as royalty under § 9(1)(vi) of the IT Act. The Court rejected the ITO’s contention and held that when there was an outright sale, the consideration could not be referred to as royalty.
2.2.2 Intellectual Property and Royalty
A proper reading of Explanation 2 of § 9(1)(vi) of the IT Act makes it clear that royalty would only be payments made in consideration of receiving certain intellectual property like copyrights, designs, patents, know how etc. At this point, the most common dispute which arises is whether for a payment to be considered as royalty, the consideration for such payment should be transfer of the intellectual property itself or an item in which such intellectual property is embedded. To illustrate, an Indian resident might pay some sums for franchising of a trademark of a reputed car manufacturer of Germany and shrink-wrapped Operating System software from a developer in the US. Though the payments for franchising will undoubtedly be classified as royalty, the software which comes on a disc or tape is the cause of much litigation as to the point as to whether it is royalty. Non-resident licensors of shrink-wrapped software resist source State taxation of such licence fees as taxation on the grounds that (a) characterised as goods liable to sales tax,18 it is business income and cannot be charged to income tax as royalties unless non-resident vendor has permanent establishment in India; and (b) there is a distinction between ‘copyright rights’ and ‘program copy.’19 In the former, the vendee is entitled to make copies or modify the program for commercial exploitation, while in the latter the vendee can use it only for his business and personal purposes and has no rights to exploit the software. To decide this question, it is necessary to take recourse to § 14 of the Copyright Act, 1957. This section provides that unless the owner of the copyright authorises any other person to do any of the acts mentioned in the said section, it cannot be said that he has allowed that other person to use of or right to use that copyright. Since computer software is copyright protected under the Copyright Act, 1957, it can be only by an express authorisation that a licensee can make use of the Copyright in the program to make further copies for commercial exploitation or even modify it.
In this connection, it is helpful to take note of the distinction made between ‘copyright rights’ and ‘program copy’ made by the OECD.20 Thus, reading § 14 of the Copyright Act along with the OECD commentary makes it clear that copyright rights for which royalty would be payable does not get paid for by the purchase of an article which has copyright embedded in it, and thus royalty need not be paid for purchase of such articles. Thus, in the above given example, by purchase of a copyrighted article, it cannot be said that the purchaser had got the copyright rights.
A manifestation of this principle is seen in the case of Lucent Technologies Hindustan Ltd. v. ITO. 21 The facts were that the assessee had imported certain machinery related to the telecom industry along with the software, and the ITO sought to impose royalty on the software so paid for. However, the software was such that it was customised for each of the machines imported and could not have been duplicated for commercial purpose. The contract also forbid the assessee from copying the software. Moreover, the hardware could not have functioned at all without the software. Therefore, holding that no copyright in the software could be said to have accrued to the assessee, the Court rejected the contentions of the ITO. In Sonata Information Technology Ltd. v. Addl. CIT,22 payments were made to non-residents for right to distribute computer programmes protected by the Copyright Act, 1957 and the Income Tax authorities sought to tax such distribution rights under the head of royalties. Making a distinction between ‘right over a copyrighted material’ and ‘property contained in copyright in software,’ the Tribunal came to the conclusion that acquisition of right for distribution of copyrighted material is only towards distribution of software packages to the customer akin to the normal purchase and sale transaction, and accordingly such transaction partook character of purchase and sale of goods. Therefore, since a sale and purchase transaction of goods does not include transfer of copyright rights, there can be no payment of royalty, and therefore no tax may be withheld.
The question whether subscribing to a journal which gave information on a particular industry, and which was commercial in nature could be termed royalty came up for adjudication in CIT v. HEG Ltd. 23 Rejecting the CIT’s contention that the since the journal was of a commercial nature, payments made for it would be royalty, the High Court held that the mere characteristic of being commercial in nature would not make it a thing for which royalty would be payable. Some sort of expertise or skill was required. So, in the absence of such skill in the journal, payments made to it would not be royalty.
Similarly, in Wipro Ltd. v. ITO, 24 the assessee had made subscription payments to Gartner Group, an internationally renowned, specialized agency which maintains and publishes the business data pertaining to the software technology area of business. In return, Wipro was to receive access to the database of Gartner which comprised of commercial knowledge. The tax authorities sought to tax these under the head ‘Royalties’ holding that this information came under the head ‘commercial experience’ in Explanation 2 of § 9(1)(vi) of the IT Act. Ruling on the question of the information being ‘commercial experience,’ the Tribunal ruled that the ‘experience’ mentioned should be one’s own experience in the realm of industrial, commercial and scientific and not compilation of somebody else’s experience. Further, such experience should give rise to some form of intellectual property rights. Since, the facts compiled were not the compilation of Gartner’s experience, and the compilation too did not warrant copyright protection, the claims of the assessee were upheld. Therefore, from the analysis done on the cases above we can come to the conclusion that for payments made to a non-resident to be considered as royalty, the payments should be like rentals, with ownership remaining in the nonresident; the consideration received should be something which is an intellectual property under any of the applicable acts like the Copyright Act, 1957, the Trade Marks Act, 1999, or the Patents Act, 1970 or know how and there should be transfer of ‘copyright right’ to modify or commercially exploit the property.
2.2.3 Royalty from use of Equipment
The Finance Act, 2001 inserted a new item in the IT Act for which royalty would be payable, which is payments arising from the use or right to use any industrial, commercial or scientific equipment.25 In this regard, distinction must be made between acquiring use of equipment and acquiring service of the equipment, because royalty is payable only on the former. The criteria for determining royalty under the said provision are that the resident should control and have physical possession over the equipment. Moreover, the resident should be having significant economic and possessory interest in the equipment, while at the same time the provider should not be having any risk of substantially diminished receipts or substantially increased expenditures if there is nonperformance. Lastly, the equipment should be provided exclusively to the resident, and to no others.26
2.2.4 What is not Royalty
Clause (v) to Explanation 2 of § 9(1)(vi) of the IT Act makes an exception for consideration for the sale, distribution or exhibition or cinematographic film, which all shall not be deemed as royalties. Also, the capital gains earned from the sale of transfer of IPR are not deemed to be royalties.27 2.3 Taxation of fees for technical services 2.3.1 Definition of Technical Services Technical service has been defined as 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 not including consideration for any construction, assembly, and mining or like project. Thus, under the head technical service, managerial and consultancy services too have been included.
2.3.2 Service as a Verb
Technical service referred to in § 9(1)(vii) contemplates a ‘service’ to the payer of the fee. It can be said that where a service is one which requires specific skills, which is to be performed when the service is being performed, a service can be regarded as a technical service.28 But we must distinguish it from commercial, official and administrative related services. Thus, if a person were to pay amount to another to put up hoardings on a busy road, it cannot be considered as technical service, but rather as commercial service. CBDT also has taken the view that if a foreign resident were to appoint a person in India to promote the exports to that or any other country, then the service is not technical in nature but merely commercial.29 The main characteristic of technical service is that it should be created and customised according to the needs of the customer. An analogy could be drawn between canned (shrink-wrapped) software and un-canned software. While the former is sold generally to all, the latter is made according to specifications of the customer. The former is made as per the anticipated demand but in the latter work begins after orders and specifications are given. Therefore, the former is goods, while the latter is service. Moreover, there is also a valid distinction between technical service and technology driven service. The principle of this distinction is that a thing cannot be labelled as technical service merely because technology is used in rendering that service. In recent times technology has pervaded all aspects of business and commerce. Merely because a new technology is utilised in rendering of a service, it cannot be characterised as technical service.
The OECD has been canvassing a principle called ‘e-neutrality.’ 30 This means that introduction of technology into the rendering of a service should not be deemed to change the essential character of the service. To illustrate, earlier workers used to wash cars in garages. The washing of cars could not have been deemed to be a technical service. Therefore, introduction of machines which automatically wash cars would not make that a technical service.
2.3.3 Composite Agreements and Technical Services
Very often, we find in agreements for sale of property, there is an element of technical service also which comes attached. In CIT v. Neyveli Lignite Corporation Ltd.,31 the assessee entered into an agreement to purchase steam generating plants from a Hungarian supplier. The contract included the design, manufacture and supply of all imported equipment and components as also the supervision of erection, testing and commissioning. The Assessing Officer took the view that the income accrued to the foreign supplier in respect of design and engineering came under the head technical service, and demanded withholding tax for the same. The demand was rejected by the Court on the ground that supply of drawings by the supplier was only incidental to the performance of the total contract which included manufacture and supply of machinery.
In AEG Aktiengesllschaft v. CIT, 32 the assessee had undertaken the electrical contract for light and medium merchant mill and in that connection had prepared certain documents and drawings which were handed over to the Indian company. Tax was sought to be withheld on the drawings on the head technical service. Holding that technical service can be in the nature of designs and drawings too, and in view of the fact that separate payments had been made for it, the Court held that the drawings were separable from the electrical contract and thus liable for tax withholding.
2.3.4 Use of Standard Facilities not Technical Service
Many times we come across instances of service which employ technology as well as intellectual property rights like copyrights, patents and secret processes and know-how. But the question that arises is whether the service could be held to be technical service even in the absence of service or transfer of any experience or such similar intellectual property to the customer. The following analysis of case laws will throw light on the correct legal position.
In Skycell Communications Ltd. v. DCIT,33 the assessee was a mobile network service operator, and the tax authorities claimed that technical service was involved. The Court held that mere collection of a fee for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been received for technical services. In Wipro Ltd. v. ITO,34 the issue was whether subscription to a database of business information would constitute payment for technical services. Holding that it was a case of standard facilities being offered to any willing customer, the Court observed that installation and operation of sophisticated equipment with a view to earn income by allowing customers to avail of the benefit of the use of such equipment does not result in provision of any technical service. Similarly, in CIT v. HEG Ltd., 35 it was held that mere provision of database by a non-resident does not constitute technical service rendering the foreign company liable to tax in India. Because the data server was located outside India, the receipt of materials offered by foreign company by way of database and used in India would not be taxable in India.
In Diamond Services International, 36 the assessee was a diamond testing institute which was engaged in the grading of diamonds. The question was whether such grading could constitute technical service. The Court held that though undoubtedly the institute was using its experience in grading the diamonds, such grading could not be said to have transferred its experience, knowledge or skill to the customer, therefore the transactions cannot be labelled fee for technical services. In Ericsson Telephone Corporation v. CIT, 37 where the contract was for installation of mobile telephone systems and the issue was one of withholding tax on receipts of the foreign company from Indian company in pursuance of the contracts, it was held that the nature of the receipt was one which was covered by the definition of technical services. The reason was apart from installation of cellular communication the contract involved also an obligation to impart knowledge and training for Indian personnel for continued operation of the system in India, so that it was clearly a case of technical services.