Chennai bench of the Income-tax Appellate Tribunal in the case of Wheels India Ltd. Vs. ACIT I.T.A No. 1793/Mds/2006 (Chennai) held that payment made to US companies for ‘developing tooling’ and ‘validating new process for manufacture’ of wheels for commercial vehicle was ‘fees for included services’ as per Article 122 of the India-USA tax treaty.
Facts of the case – The taxpayer was engaged in the manufacture of steel wheels for commercial vehicles, passenger cars, utility vehicles, earthmoving and construction equipments, agricultural tractors and defence vehicles. The taxpayer developed a concept of manufacturing a wheel out of a single piece of steel material which resulted in reduction of input material and improvement in the strength properties by elimination of welding. The taxpayer applied for patents in India with the Government Patent Authorities. The taxpayer did not have the know-how for designing the machine capable of manufacturing the product as per the patented process. • The taxpayer entered into an agreement with Advanced Metal Technologies Inc. USA (AMT) and Metal Forming Machines Inc. USA (MFM) for developing and proving the new process to manufacture the product as per the patented process. The taxpayer made a payment of USD 95,000 and USD 60,000 to AMT and MFM respectively for the provision of the above services. The taxpayer did not deduct tax at source in respect of the above payment on the premise that the payees were non- resident and the entire services had been rendered outside India. Accordingly, no income would either accrue or arise or deemed to accrue or arise to the payee in India. The Assessing Officer (AO) considered the taxpayer as an assessee in default and proceeded to collect tax and interest under section 201(1A) of the Income-tax Act, 1961 (the Act) in respect of payments made to AMT and MFM respectively.
Taxpayer’s contentions – The taxpayer was already in possession of technical know-how of manufacture of the wheels. Further AMT and MFM were engaged to validate the process developed by the taxpayer with the required facilities in the form of machineries and technical manpower in its facility in USA. The taxpayer contended that the term “developing and providing the new process” as mentioned in the agreement did not mean any technical/ consultancy services to be made available to the taxpayer but represented only validation charges for the process developed by the taxpayer. The taxpayer further contended that mere carrying out of testing activities outside India would not amount to “technical service” as per Explanation 2 to Section 9 (1) (vii) of the Act. The taxpayer further contended that as the entire services were rendered outside India and the recipient of fees had no permanent establishment in India, the fees paid by the taxpayer were not taxable in India.
Tax Department’s contention – The non-resident companies were interested in undertaking the work of developing and providing the new process with the required facilities at their disposal in the form of machineries and technical manpower. The taxpayer got the test for validation done in USA and after that the taxpayer was manufacturing the same items in India and hence the taxpayer was made available with the technical know-how involved in the process. Both the non-resident companies fall under the purview of “fees for technical services” as per Explanation to clause (vii) of sub section (1) of Section 9 of the Act. Further, both the non-resident companies satisfied the two conditions as mentioned in Article 12(4) (b) of the tax treaty i.e. the payment should be a consideration for technical or consultancy services rendered; and the services so rendered should also be such that ‘make available’ technology, knowledge, experience, skill, know how or processes consists of the development or transfer of a technical plan or technical design. Hence both the companies would come under the purview of ‘fees for included services’ under Article 12(4)(b) of the tax treaty.
Tribunal’s ruling – The Tribunal relying on the AAR decision in the case of Intertek Testing Services India Pvt. Ltd.  307 ITR 418 (AAR) observed that the ‘make available’ clause as mentioned in Article 13(4)(c) of the India-UK tax treaty make it clear that mere rendering of specific services is not sufficient to attract the definition of ‘fees for technical services’. The services rendered should make available technical knowledge, experience, skill, know how etc. to the taxpayer. The Tribunal further relied on the decision in the case of Skycell Communications Ltd. v. Deputy CIT  251 ITR 53 (Mad) wherein it observed that technical or consultancy services rendered should be of such a nature that it makes available to the recipient technical knowledge, know how and the like. The service should be aimed at and result in transmitting technical knowledge, etc, so that the payer of the service could derive an enduring benefit and utilize the knowledge or know how on his own in future without the aid of service provider. The Tribunal held that in the instant case the taxpayer was made available the technical know-how involved in the manufacturing process and hence the developing tooling and validating new process for manufacture was taxable as fees for technical services.
Our Comments –The Tribunal has held that developing machine tools to manufacture as per the patented process and validating the new process for manufacture amounts to ‘make available’ and hence falls within the definition of the term fees for included services under Article 12(4) of the tax treaty. The ruling of the Chennai Tribunal is in line with various judicial pronouncements interpreting the meaning of words ‘make available’ in the ‘Fees for Technical Services’ clause of the tax treaties and holding that the income in hands of non-resident service provider is taxable in India if the same does not enable the service recipient to perform services on his own without recourse to the service provider.The concept of ‘make available’ is available under the Indian tax treaties with Australia, USA, UK, Canada, Cyprus, Netherlands, Singapore, etc.