This article summarizes a recent ruling of the Authority for Advance Rulings (AAR) [AAR No. 811 of 2009 dated 1 December 2009] in the case of Federation of Indian Chambers of Commerce and Industry (Applicant) on the issue of taxability of payments made for obtaining certain services from a wing of the University of Texas (UT), USA, UT(IC2). Considering the facts of the case, the AAR held that as the services do not satisfy the criterion of ‘make available’ under the applicable India-USA Tax Treaty (Tax Treaty), the payments are not taxable under the same. As the payments are not liable to be taxed under the Indian Tax Law (ITL) read with the Tax Treaty, the Applicant would not be required to withhold taxes on its payments to the UT.
Background and facts of the case
- The Applicant is a non-profit company, registered under the Companies Act, 1956. The Applicant entered into a Memorandum of Understanding (MOU) with the Defence Research Development Organization (DRDO). Under the MOU, the Applicant has to assist the DRDO laboratories in the identification and business development of competitive global technologies from its inventory of existing defense-related inventions. In order to implement the MOU, the Applicant and the DRDO have jointly initiated a program wherein a major part of the services would be completed by the Applicant. The rest of the services would be done with the assistance of UT(IC2) for which the Applicant would need to make payments to the UT.
- Broadly, as far as UT(IC2) is concerned, the program involves the provision of services, which may be split into 4 components: (a) Training (b) Technology assessment (c) Business development (d) Program management. The payments made are for services rendered and assistance extended in the defense-related inventions.
- As per the provision of the ITL, payments for managerial, technical or consultancy services are taxable as ‘fees for technical services’ (FTS). As compared to the ITL, the Tax Treaty contains a narrower definition of the term ‘fees for included services’ (FIS) wherein only such services that are ‘technical’ or ‘consultancy’ in nature and which ‘make available’ technical knowledge, experience, skill etc, to the recipient, are regarded as FIS.
- Further, the Tax Treaty contains an exclusionary clause which excludes the provision of services from the ambit of FIS, if they are provided for teaching in or by educational institutions.
Issues for consideration
The key issues under consideration before the AAR are as follows:
