Brief of Case:
ITAT Delhi has held in the case of ITO, TDS vs. Nokia India Pvt. Ltd that services rendered does not qualify as FTS for technical services under the India Finland Tax Treaty if service provider has not made available to assessee any technical knowledge skill, know how, Technical Design etc. Services can be considered to be made available by provider only where the services leads to transfer/imparting of technical knowledge, experience, skills know-how, or processes to the recipient.
Brief Facts and Question of Law:
Brief Facts of the Assessee:
The Assessee Company is wholly owned subsidiary of Nokia Corporation. It is a company incorporated under the provisions of the Companies Act, 1956. During the year under consideration, it is in the process of setting up a manufacturing facility at Chennai. For this purpose, the contract for design, manufacturing and completion for the manufacturing facilities was given to Leighton Contractors India Pvt. Ltd. Olof Granlund Oy (herewith “Olof Granlund”) is a company incorporated in Finland and is engaged in the business of providing consulting services in relation to HV AC, electrical and fire protection systems and this company was engaged by the respondent assessee company for reviewing systems description, diagrams, cost estimates, building designs, preliminary system design and quality control equipment list/selections, lay out proposals, conducting inspections, etc. prepared by the Leighton Contractors India Pvt. Ltd. This was to ensure that Nokia’s global standards for the manufacturing facility are met. These services are rendered outside India only.
In consideration for the services rendered during the year under consideration the respondent-assessee company paid Euro 2,208,421 (Rs. 11,869,359 approx.) to Olof Granlund. Since the respondent assessee company took a view that the said payments are not liable to taxation in India under the provision of Double Taxation Avoidance Agreement entered between India and Finland. No taxes were withheld by the respondent- assessee company on said payments.
Held by CIT (A):
The CIT (A) upheld the Assessee’s contention that the scope of services rendered by Olof Grandlund is limited to design review and other related services and no technical knowledge skill, know how had been made available to the respondent-assessee company and further submitted that no technical plan design had been transferred by the said Olof Granlund to the respondent-assessee company and therefore the services rendered does not qualify as FTS for technical services under the India Finland Tax Treaty. Hence the subjected payments are not liable to tax in India and therefore there was no liability for deduction of tax at source under provision of section 195 of the Income Tax Act 1961 (herewith “the Act”).
Question of Law:
Whether the consultancy fee paid to Olaf Grandlund, is not chargeable to tax in India and thus that there is no requirement to withhold tax on the impugned payments, even though these had been characterized as FTS taxable on source basis.
Contention of the Revenue:
The Revenue contended that the services provided by Olof Granlund were in the nature of Fees for technical services (herewith “FTS”) as the source of income was located in India and therefore the payment was liable for deduction of tax u/s 195 of the Act. Hence the assessee was Assessee in default u/s 201(1) and (1A) of the Act for non-deduction of tax u/s 195.
Contention of the Assessee:
The Assessee was of the contention that under the provisions of Article 13(4)(c) of the India-Finland tax treaty, the term FTS has been defined to include payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.
And as per the Memorandum of Understanding between India US tax treaty concerning Fees for Included Services in Article 12, technology will be considered “made available” when the person acquiring the service is enabled to apply the technology. Hence the said payment made towards consultancy fees is not taxable in India and therefore no withholding tax liability arises on the same.
Held by the Income Tax Appellate Tribunal (“ITAT”):
The ITAT held that undisputedly the services provided by Olof Granlund are in the nature of FTS and are taxable under the Indian domestic tax law. But as per section 90(2) of the Act, the assessee is entitled to be governed by India Finland DTAA if the provisions of such DTAA are more beneficial.
As per Article 13, paragraph 4 of India Finland DTAA, FTS means services which:
a) are ancillary and subsidiary to the application or enjoyment of the right, property or information or
b) are ancillary and subsidiary to the enjoyment of the property or
c) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.
As Olof Granlund is providing consultancy services independent of supply of any property, right or information, Article 13(4)(a) and (b) are not applicable. And as per Article 13(4)(c), it is imperative to determine whether these services ‘make available’ any technical knowledge, experience, skill, etc. to the recipient of the service or involves development and transfer of technical plan or design to the recipient of services.
As the India-Finland tax treaty does not specifically define the term ‘make available’, reliance can be placed on the meaning assigned to the said term under the MoU to India-USA DTAA. According to which, technology will be considered “made available” when the person acquiring the service is enabled to apply the technology. 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. Similarly, the use of a product, which embodies technology, shall not per se be considered to make the technology available. Hence the MoU seeks to clarify that the services are considered to be made available by provider (Olof Granlund) only where the services leads to transfer/ imparting of technical knowledge, experience, skills know-how, or processes to the recipient (The Assessee) which enables the recipient to apply the same on his own.
Hence, such consultancy services would not be taxable in India as per the provisions of Article 13(4). Also the same shall not be taxable under Article 7 “Business profits” as, as per Article 7(1), ‘Business Profits’ earned by a Finnish Enterprise is taxable in India only if that Finnish enterprise carries on business in India through a Permanent Establishment in India. Here, Olof Granlund admittedly did not have any PE in India, therefore no portion of the income from services provided to a customer in India are liable to taxation in India.
Now to determine the withholding tax liability under domestic tax law, reference was drawn towards section 195 of the Act. According to which, tax is to be withheld on any sum chargeable to tax in India. If the said sums are not chargeable to tax in India, then no question of withholding tax arises. The said issue is covered by the decision of Hon’ble Supreme Court in the case of GE India Technology Centre P. Ltd. vs. CIT and another 327 ITR 456 (SC) wherein the Hon’ble Supreme Court held that if payment is not assessable to tax there is no question of tax at source being deducted.
Hence the grounds of appeal filed by Revenue were dismissed.