Court: Authority of Advanced Ruling (AAR)
Citation: Joint Accreditation System of Australia and New Zealand [2010-TII-28-ARA-INTL]
Brief :Issuance of accreditation certificate does not result in making available skills, technical knowledge, etc and therefore does not result in rendering technical services as per India-Australia Tax Treaty.
Recently, the Authority of Advanced Ruling (AAR) in the case of Joint Accreditation System of Australia and New Zealand [2010-TII-28-ARA-INTL] dated 6 August 2010 held that issuance of accreditation certificate does not result in ‘making available’ skills, technical knowledge etc. possessed by the applicant and accordingly does not result in rendering technical services as per Article 12(3)(g) (Please see note-1) of India-Australia Tax Treaty (tax treaty).
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Facts of the case
- The applicant, a tax resident of Australia, provides accreditation to CAB’s (Conformity Assessment Bodies) in several countries including India. The applicant accredits organizations which provide third party certification and/or inspection services.
- Post accreditation, regular surveillance visits are carried out by the applicant’s auditors to ensure that CAB maintains and operates its procedures in accordance with the requirements of the accreditation criteria.
- In consideration of the accreditation work done, the applicant receives fee from CAB in the form of application fee, programme fee, certificate fees and fee for conducting surveillance audit, witnessing audit and re-assessment visits.
- Accreditation fee cannot be characterised as Fee for Technical Services (FTS) within the meaning of the expression in Section 9(1) (vii) of the Act or as royalty within the meaning of the clause (g) of Article 12(3) of the tax treaty.
- The applicant has not rendered any service to CAB. The job undertaken by the applicant is not in the nature of assistance provided to CAB and moreover the applicant does not act according to the instructions or modalities set by the recipient.
- The applicant issues the certificate to CAB after it is satisfied that CAB can perform the relevant function (of certification and inspection) competently and independently. Further it is the discretion of the applicant to refuse the certificate for non¬compliance with certain parameters which indicate that there is no contract of service between the applicant and the CAB.
- The AAR relied on its earlier decision in the case of Anapharm Inc  305 ITR 394 [AAR]where it was held that along with providing technical services, the service provider should also make his technical knowledge, experience, skill, know-how, etc. known to the recipient of the service so as to equip him to independently perform the technical function himself in future, without the help of the service provider.
- Further, the AAR relied on its earlier decision in the case of Intertek Testing Services India (Pvt) Ltd.  307 ITR 418 (AAR) in which it was held that the technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in future without depending on the provider.
- The AAR observed the decision of Bombay High Court in the case of Diamond Services International Ltd v. UOI  304 ITR 201 (Bom) in which it was held that the job of grading the diamonds in the laboratory and furnishing grading certificate did not amount to transferring any (technical) skill or knowledge to the customers.
- The AAR held that the skills, expertise or know-how possessed by the applicant for the grant of accreditation certificate cannot be said to have been made available to the CAB who gets the accreditation.
- The applicant evaluates the capabilities, competence, potential and infrastructure possessed by the CAB in the light of certain set standards and parameters. The fact that the CAB is apprised of its shortcomings and an opportunity to rectify the shortcomings does not reasonably lead to the inference of ‘making available’ the skills, technical knowledge, etc. possessed by the applicant to the CAB.
- Accordingly, the AAR held that by issuing accreditation certificate to CAB, the applicant cannot be said to have rendered technical service in the nature of royalty under clause (g) of Article 12(3) of the tax treaty.
This is a welcome ruling from the AAR in which it was held that issuance of accreditation certificate does not result in ‘making available’ the skills, technical knowledge, etc. possessed by the applicant and accordingly does not result in rendering technical services in the nature of royalty (FTS) as per the tax treaty.
We would like to bring to your attention various decisions where certain services were held to be not ‘made available’ technical knowledge, skills, etc. under respective tax treaties and therefore does not amount to FTS:
- Market study for updating outlook for domestic oil refining capacity (Bharat Petroleum Corp. Ltd. v. JDIT.  14 SOT 307 (Mum))
- Assessment surveillance for the purpose of ISO certification. (NQA Quality Systems Registrar Ltd. v. DCIT  92 TTJ 946 (Del))
- Services rendered in connection with GDR issue (Raymond Ltd. v. DCIT  86 ITD 791 (Mum))
- Reviewing and opining of a project (rather than designing and directing the project) and in the case of any risks or issues which are required to be corrected or mitigated, suggesting alternative solutions. (CESC Ltd. v. DCIT  80 TTJ 806 (Kol))
- Preparation of material safety data sheets. (National Organic Chemical Industries Ltd. v. DCIT  96 TTJ 765 (Mum))
- Provision of bandwidth for uplinking / downlinking. (Wipro Ltd. v. ITO  80 TTJ 191 (Bang)) , Software Technology Parks of India v. ITO  3 SOT 529 (Bang)
- Specialised data processing by use of computers- Kotak Mahindra Primus Ltd. v. DDIT  105 TTJ 861 (Del)
- Provision of transponder capacity by a satellite company to TV Channels / broadcasters. DCIT v. PanAmsat International System Inc.  103 TTJ 861 (Del)
- Factory Acceptance Test, Project Management and Engineering Support. DDIT v. Scientific Atlanta Inc  130 TTJ 142 (Mum)
- Managing client relationship and providing catalytic support for deliverables to the clients of the taxpayer. ITO v. Cepha Imaging Pvt. Ltd. [2009-TIOL-558-ITAT-BANG]
Note- 1 As per Article 12 (3)(g) of the tax treaty, royalty includes the rendering of any services (including those 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 design