Filtrex Technologies Pvt. Ltd. Vs. ACIT [2011-T11-60-ITAT-BANG-INTL] – ITAT Bangalore held that payments made under a Technology Transfer Agreement (TTA) ‘make available’ technical knowledge or experience, and hence, are taxable as Fees for Technical Services (FTS) in terms of Article 12(4)(b) of Double Taxation Avoidance Agreement (DTAA) between India and Singapore. Also, payments made for services in the nature of marketing support and other administrative services do not ‘make available’ technology, and hence, cannot be held as FTS under Article 12 of DTAA between India and Singapore.
The assessee, an Indian company, was engaged in the business of carbon blocks used in water filters for residential use. The assessee had entered into the TTA with Filtrex Holding Pte. Ltd. (“FHPL”), a foreign company, to provide a three stage gravity water purification system. Also, the assessee had entered into a Services Agreement with M/s Final Touch Grafix (“FTG”) and Filtrex International Pte. Ltd. (“FIPL”), both non-residents, for provision of various services as below:
During the Assessment Years 2005-06 and 2006-07, the assessee had made payments to FHPL, FTG and FIPL in connection with the above mentioned agreements. No taxes were withheld by the assessee under section 195 of the Act, while making the payments.
The Assessing Officer (“AO”) held that the payments were in the nature of FTS in terms of Article 12(4)(b) of DTAA between India and Singapore and that tax was required to be withheld under section 195 of the Act. Since the tax was not withheld, the AO disallowed the payment under section 40(a)(i) of the Act for both the Assessment Years.
Aggrieved by the action of the AO, the assessee filed an appeal with the Commission of Income-tax (Appeals) (“CIT(A)”) against the dis allowance for both the Assessment Years.
The CIT(A) held as below: As regards payments under the TTA, the confidentially clause and the termination clause of the TTA provided that FHPL made available technology as contemplated under Article 12(4)(b) of DTAA between India and Singapore. Accordingly, the payment made to FHPL were taxable as FTS and tax was required to be withheld under section 195 of the Act. As regards payment made under the Services Agreement, the services are not in the nature of managerial, technical or consultancy services. Furthermore, it was held that the AO had not established the fact that the services made available technical know-how or skill as required under Article 12(4)(b) of DTAA between India and Singapore. Accordingly, the CIT(A) deleted the dis allowance made by the AO for both the Assessment Years.
Against the CIT(A)’s order, the assessee and the revenue filed appeals with the Tribunal.
Issues before the Tribunal: Whether the payment made to FHPL under the TTA is subject to dis allowance under section 40(a)(i) of the Act as tax was not withheld from the payment by the assessee? Whether the payment made to FTG under the Services agreement is subject to dis allowance under section 40(a)(i) of the Act as tax was not withheld from the payment by the assessee? Whether the payment made to FIPL under the Services agreement is subject to dis allowance under section 40(a)(i) of the Act as tax was not withheld from the payment by the assessee?
• Payment made to FHPL under the TTA:
– It manufactures carbon blocks used in water purifiers and one of the main operations was mixing of the raw material being carbon and spraying. The mixing and spraying has to be done in a particular proportion depending on the purity level of water where the filter is to be used and the requirements of manufacturers of the water purifier. The TTA was entered to give this mixing level.
– No technology was made available by FHPL, and accordingly, the payments made to FHPL are not in the nature of FTS as contemplated by Article 12(4)(b) of DTAA between India and Singapore. FHPL had subsequently patented the technology so that it cannot be used after the currency of the TTA.
• Payment made to FTG and FIPL under Services Agreement:
– The AO had not considered the provisions of DTAA between India and Singapore while arriving at the conclusion that the payment is liable to withholding tax.
– The payment does not make available technology, and accordingly, is not in the nature of FTS as contemplated by Article 12(4)(b) of DTAA between India and Singapore.
Furthermore, it was contended that none of the companies had a PE in India.
In view of the above, the payments were not taxable in India, and therefore, there was no requirement to withhold tax under section 195 of the Act.
• Payment made to FHPL under the TTA:
– The skill, information and technical excellence that make up technology for the limited portion of the product that has been defined in the TTA was being passed on which constitutes FTS even if it pertained to the smallest component of the product in question which remains with the recipient.
– Know-how represents what a manufacturer cannot know from mere examination of the product and mere knowledge of the places of technique. Therefore, know-how transfers were generally viewed as involving transfer of pre- existing knowledge where such knowledge or experience remains confidential.
– Product design, which was required by the assessee, was being passed on by FHPL and the assessee had made payment for the same.
• Payments made to FTG and FIPL under the Services Agreement:
– All the services provided by FTG and FIPL were made available to the assessee to promote its business and they were in the nature of managerial services.
– Accordingly, the payments were in nature of FTS under the Act and the assessee was liable to withhold the tax under section 195 of the Act. Since tax was not withheld, the payments were subject to dis allowance as per provisions of section 4o(a)(i) of the Act.
The Tribunal held:
• Payment made to FHPL under the TTA:
– It agreed with the finding of CIT(A) that the insertion of a confidentiality clause in the TTA pointed to the technology having been made available to the assessee thus requiring legal protection to ensure that the technology did not go beyond the assessee or its employees.
– The termination clause in the TTA simply provided that the TTA may be terminated in the event of either party not fulfilling its end of the negotiation. It did not mention about any information or documents with regard to technology made available through the TTA or any other condition that the assessee, on cessation of the TTA was not entitled to use the technology, which unambiguously made it clear that the technology had, in fact, been made available to the assessee.
– Accordingly, the assessee was required to withhold tax and since it had failed to do so, the payments made to FHPL were subject to dis allowance as per provisions of section 4o(a)(i) of the Act
• Payments made to FTG and FIPL under the Services agreement:
– The nature of services rendered by FTG being public relations activities, liaison, co-ordination and design of advertising material like PowerPoint presentation materials, leaflets, etc. did not represent rendering any managerial, technical or consultancy services.
– As regards payment made to FIPL, the Tribunal agreed with the conclusion reached by the CIT(A) in its order that the AO had not produced any evidence to show that the services rendered by FIPL were part of managerial, consultancy or technical services.
– In view of the above, the Tribunal held that the assessee was not required withhold tax from the payment made to FTG and FIPL under the Services Agreement.
Conclusion :– With this decision, the High Court has affirmed the nature of the This decision strengthens the argument that unless the condition of ‘making available’ technology, contained in various DTAAs is fulfilled, the payments cannot be characterized as FTS and vice versa.
Do you think #GST Council should provide option to Revise Form GSTR-3B?— Tax Guru (@taxguru_in) November 13, 2017
Please Comment, Like, Vote and Retweet the Poll.