Facts of the case
• The taxpayer, a company incorporated in Switzerland, was engaged in the business of providing strategic consulting services like advising clients in matter related to strategic issues such as establishing joint ventures, technology transfers and related matters, etc. The taxpayer also provides support to and monitors joint ventures and other collaborations on an ongoing basis, to ensure that cooperation between the business partners involved continues smoothly.
• The taxpayer entered into a strategic consulting services agreement with an Indian company, Stock Traders Pvt. Ltd. (STPL), to render services under the agreement at any place outside India, depending on the requirements of STPL. Further, the taxpayer was to make an endeavor to locate new business opportunities and partners for STPL and recommend proposals for new projects for technology transfers, equity participation, etc.
• The fees for the services rendered by taxpayer were to be determined in accordance with the compensation clause of the agreement and it will not be affected either by the success or failure of a project, strategy or business approach recommended by taxpayer.
• The taxpayer claimed that the fees received from the STPL were not taxable in India as per the provisions of the tax treaty. However, the AO held that the fees received by the taxpayer from STPL were taxable as Royalty or alternatively as FTS in India. The CIT(A) held that the fees received by the taxpayer were not in nature of royalty or FTS within the provisions of the tax treaty. The CIT(A) also held that the since the taxpayer did not have PE in India the business income of the taxpayer cannot be taxed in India.
Issue before the Tribunal:- Whether the consideration received by the taxpayer can be considered either as FTS or Royalty within the provisions of the tax treaty?
Taxpayer’s contentions:- The taxpayer contended that the strategic consulting fees received by the taxpayer does not fall within the meaning of the term FTS as defined under Article 12 of the tax treaty. Accordingly, the fees received should be regarded as regular business income under Article 7 of the tax treaty. However, since the services were rendered outside India and in the absence of PE in India the income received by the taxpayer was not chargeable to tax in India as per Article 7 of the tax treaty.
Tax department’s contentions
• The tax department contended that the services rendered by the taxpayer were utilized in its own business by the STPL and therefore, the technology should be considered to have been made available to STPL. Accordingly, the fees received by the taxpayer can be taxed as FTS under Article 12(4) of the tax treaty.
• Further, the STPL was a dependent agent of the taxpayer and therefore, the taxpayer had a PE in India. Accordingly, even if the fees received by the taxpayer were not regarded as Royalty/FTS under Article 12 of the tax treaty, such fees will be taxable in India under Article 7 of the tax treaty.
Tribunal’s ruling
Tax ability as FTS
• The Tribunal observed that the wordings of the Article 12(4)(b) of the India-Switzerland tax treaty dealing with FTS are identical with the Article 12(4)(b) of the India-USA tax treaty. Therefore, the MOU to the India-USA treaty can be looked into to see what meaning India and Switzerland would have contemplated in the tax treaty. It is a settled law that a tax treaty with one country can be compared with the tax treaty with another country in case of ambiguity and in order to understand the true scope and meaning of the concerned tax treaty. The above propositions have been held by the Karnataka High Court in the case of AEG Telefunken Vs. CIT [1998] 231 ITR 129 (Kar).
• The Tribunal after relying on the decision of the Mumbai Tribunal in the case of Raymond Ltd. v. DCIT [2003] 86 ITD 791 (Mum) held that as per the tax treaty, the services must be made available to the taxpayer in order to qualify as FTS. The provision of service in the present case 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 Article 12 4(b) of the tax treaty. Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available.
• Further, it was clear from the nature of service that the technical knowledge, experience, skill continues to remain with the taxpayer even after conclusion of the agreement and nothing was made available to STPL by the taxpayer. Services are not made available to STPL by the taxpayer for its future use or utilization on reasonably permanent basis. Therefore, the receipts in question cannot be said to be in the in the nature of FIS.
Tax ability as Royalty
• The Tribunal based on the OECD Commentary on Article dealing with royalty observed that in a contract involving the provision of know-how, the emphasis is on enabling the recipient to use the know-how on its own account. As against this, in a contract for rendering advisory services, the consultant uses his skills to merely execute certain work for the service recipient. There is no effort involved in educating the user to reproduce the processes involved in rendering the services. In other words, a consultant may give a certain advice based on his experience. However, there is no imparting of experience in rendering advisory services.
• Consideration for information concerning industrial, commercial and scientific experience is to be regarded as Royalty, only if it is received for imparting know-how. However, providing strategic consulting services, which may entail the use of technical skills and commercial experience by a strategic consultant, does not amount to know-how being imparted to the buyer of the strategic consulting services.
• Accordingly, the Tribunal held that since the taxpayer was only rendering consultancy services and was not imparting any know how to STPL, the amount received by the taxpayer cannot be considered to be in the in the nature of Royalty.
Our Comments
The Mumbai Tribunal in the present case after relying on the relevant provisions of the tax treaty has held that the amount received by the taxpayer was neither FTS nor Royalty. The Tribunal rightly made an important observation that the MOU to the India-USA tax treaty can be looked into to understand as to what meaning was intended to be conveyed in the tax treaty since the workings of the India-USA tax treaty are identical.
It is also significant to mention that with effect from 1 April 2001, definition of term ‘Fees for Included Services’ have undergone a change and it is wide enough to cover to technical managerial or consultancy services.
Note- 1
The years under consideration were Assessment Years 1996- 97 to 2001- 02 i.e. prior to amendment to the India-Switzerland tax treaty (the tax treaty) by the protocol in 2001.
