Introduction to FTS and issue of ‘make available’
Under section 9(1) of the Income Tax Act, 1961 (“the Act”), incomes of the nature listed under clauses (i) to (viii) are deemed to accrue or arise in India. The clause (vii) in section 9(1) particularly deals with FTS. When such fees is payable by the persons listed in clause (vii), then they are deemed to accrue or arise in India and become liable to tax in India. Further, in the domestic law, the Explanation 2 to section 9(i)(vii) of the Act lays down the bifurcation of the services for which the consideration received can be covered under FTS which are the consideration received for rendering of any managerial, technical or consultancy services, any lump sum consideration in regard to rendering of managerial, technical or consultancy services, and consideration for provision of services by technical or other personnel. What is excluded in the provision is the consideration received for any construction, assembly, mining or like project undertaken by the recipient of the fee, any income which is characterised and taxed as salary in the hands of the recipient.
Now, in the international scenario, while the Organization for Economic Co-operation and Development (“OECD”) Model Tax Convention (“MTC”) does not contain any taxing provision for FTS as OECD follows residence based taxation, whereas, the United Nations (“UN”) MTC which follows the source based taxation does provide for FTS treatment in Article 12A and provides for similar language like the domestic law for taxing of FTS as any payment in consideration for any service of a managerial, technical or consultancy nature, unless the payment is made to an employee of the person making the payment; for teaching in an educational institution or for teaching by an educational institution; or by an individual for services for the personal use of an individual.
Although some Double Taxation Avoidance Agreements (“DTAAs”) provide for a ‘make available’ clause which narrows down the definition of FTS in such DTAA. This clause acts as a test for services and only if this test is passed, a payment-consideration given for services can be taxed as FTS under the DTAA. Interestingly, the ambit of this ‘make available’ clause has not been defined in the Act (as it does not exist in the Act) as well as the DTAAs. The only existing legislative interpretation can be taken from the India-US DTAA, in which there is a Memorandum of Understanding (“MoU”) signed between both the countries on September 12, 1989 and lists some examples which show the operation of this clause.
Due to this narrowing ‘make available’ clause for FTS taxation in some treaties, it provides the non-resident taxpayers an option to pay less taxes on FTS receipts as it is a well settled principal that if the domestic law as well as the DTAA are both applicable, then the more beneficial provision for the taxpayer is applicable as per Section 90(2) of the Act, which has been reiterated by many judicial pronouncements time to time. Due to this difference in the ambit of FTS provisions between the domestic law and the international law, there is a long lasting and ever-growing litigation in the interpretation of the DTAAs to classify the services as taxable or not between the revenue and the taxpayer.
The concept of ‘make available’
The inclusion of the “make available” clause in some DTAAs act as a safeguard against excessive taxation of cross-border payments for the services, ensuring that only those services where there is a genuine transfer of knowledge or technical know-how, which would enable the recipient of the services to apply the said knowledge independently are taxed.
For instance, let us consider the India-US DTAA, under which the term “fees for included services” applies only when technical knowledge or skill is made available to the recipient. If the foreign entity is merely performing/rendering a service without actually transferring any knowledge or the technical know-how which would equip the recipient to use that service independently, the fees would not qualify as “fees for included services,” and thus there would be no application of tax withholding to such transaction.
As per the MoU between the Indian and the US government, paragraph 4(b) of Article 12 of the India-US DTAA refers to technical or consultancy services that make available to the person acquiring the services, technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plant or technical design to such person. Thus, the fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available.
In Hindustan Aeronautics Ltd. [TS-173-ITAT-2022(Bang)], the Bangalore Bench of ITAT held that to fall under the FTS provision and satisfy the ‘make available’ clause, it is pertinent that after the completion of the services, the resident entity should be enabled to carry out the same services in future without having to take recourse to the service provider again. In De Beers India Minerals (P.) Ltd. [TS-312-HC-2012(KAR)], the Hon’ble Karnataka High Court while elaborating the meaning of the term ‘make available’, held as under:
1. Service should be aimed at transmitting knowledge.
2. Recipient of the service should receive an enduring benefit and should be able to utilize the knowledge on its own in the future for performance of services without the aid of the service provider.
3. Payment would be regarded as FTS only when the twin test of rendering services and making technical knowledge available at the same time is satisfied.
If all of the above criteria are satisfied, then only can the payment meet the ‘make available’ criteria and hence, be considered as FTS as per the DTAA and chargeable to tax accordingly. Similar view was also taken by AAR in Intertek Testing Services India (P.) Ltd. [TS-120-AAR-2008] and also in DIT v. Guy Carpenter & Co Ltd. [2012] 346 ITR 504/207 Taxman 121/20 taxmann.com 807 (Delhi).
Interesting judicial interpretations
A. Reimbursement vs Remuneration
It is often seen that in order to get around the underlying litigation around the ‘make available’ clause interpretations, payments made to foreign entities are said to be in the nature of mere reimbursement of expenses occurred for carrying out the services and no profit element is embedded, thus the payment made cannot be treated as FTS since there is no remuneration for services. In Koninklijke Philips Electronics N.V. vs DCIT [2018] 99 taxmann.com 23 (Kolkata – Trib.), similar view was taken by ITAT Kolkata, where it was held that the services provided in area of commercial, accounting, auditing, financial, social and legal matters, human resources, insurance etc. and said services provided did not ‘make available’ technical knowledge, skill, expertise, etc. and, therefore, by providing these services, the assessee could not be said to have ‘make available’ any knowledge, skill, etc.
On the other hand, there have been situations where the employees of foreign Associate Enterprise (“AE”) travel India to provide business support, training or expertise to employees of its Indian AE. In return, the Indian AE reimburses the amount of salary cost of the staff seconded by the foreign AE. Similar situation occurred in the case of Panasonic Corpn. v. Dy. CIT [2018] 99 taxmann.com 183 (Chennai – Trib.) & Foster Wheeler France S.A. v. Dy. DIT [2016] 67 taxmann.com 120/157 ITD 793 (Chennai), where ITAT Chennai noticed that the foreign AE has to provide all expertise to the Indian AE which would be utilized in the decision-making process. Accordingly, it was held that the technical knowledge, expertise, knowhow, provided by the foreign AE was made available to the Indian AE even if the same constitutes reimbursement of salary cost of deputed employees of overseas AE.
B. Transfer of technical plan and designs
There has been a lot of litigation on consultancy or technical services where technical plans/blueprints have been provided by a foreign service provider to a resident for purposes of business. The issue here is that since the blueprints have been provided, will it be considered as FTS under the DTAA. This was interpreted by ITAT Mumbai in Buro Happold ltd. vs DCIT ITA No.1690/Mum/2022, where the words “or consists of the development and transfer of a technical plan or technical design” appearing in Article 13(4)(c) of the India-UK DTAA will take colour from the first limb i.e., ‘make available technical knowledge, experience, skill, knowhow or processes’ as per the principles of ejusdem generis. It was said that the technology is considered to have been made available when the recipient of such services is competent and authorised to apply the technology contained therein independently as an owner without depending upon the service provider. Therefore, the technical designs, drawings, or plans supplied by the taxpayer to Indian entity were project-specific and could not be used in any future projects. Therefore, it did not ‘make available’ the technical knowledge, skill, know how, etc. to the recipient. It was also reiterated that the onus to prove that the service passes the ‘make available’ test for the purpose of FTS is on the Revenue.
Conclusion and comments
India is a country which has the principle of ‘Atithi Devo Bhava’ rooted deep inside, which means “the guest is identical to God”. Although the guest is treated like a God, yet he can’t escape the income tax levy.
For the purpose of levying tax by withholding on non-resident entities under FTS, the onus is on the revenue to prove that the service provided has enabled the resident-recipient of the service to an extent that the recipient does not have to take recourse to the service provider again and can independently carry out the same service in future, and to prove the same the twin test of rendering services and making technical knowledge available has to be satisfied at the same time.
Although we have a lot of precedence available on this, it often leads to conflicting judicial interpretations due to lack of unified/particular legislative provisions in this. Since business and services are dynamic and every day some new type of services is born due to new technological advancements and business innovations, which will always keep happening, it is better to have legislative amendments/inclusions of the same, because if not done, with every new judgement on the same, there will be a rise of more cross litigation. Thus, it is necessary to integrate the judicial interpretations on ‘make available’ into the DTAAs.
Furthermore, the inclusion of Principal Purpose Test in some DTAAs, included by the bilaterally signed Multi-Lateral Instrument with some countries has given revenue the power to deny the treaty benefits if one or more of the principal purposes of an arrangement is tax avoidance. This has opened up a new dimension to the already everlasting litigation on the ‘make available’ clause. This gives rise to a unique situation that even if the alleged transaction does not pass the ‘make available’ test, but if is proved to be for the purpose of tax avoidance, the treaty benefits will be denied to the taxpayer.
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