Case Law Details

Case Name : Maruti Udyog Ltd. Vs. ADIT (Int'l Taxation) [ITAT Delhi]
Appeal Number : ITA Nos. 4217, 4219 & 4221 (Del.) of 2005
Date of Judgement/Order : 31/08/2009
Related Assessment Year : 2005- 2006
Courts : All ITAT (4449) ITAT Delhi (984)

RELEVANT PARAGRAPH

9.1 Double Taxation Avoidance Agreement entered into between India and United Kingdom (206 ITR St. 235), Article 13(4) and 13(5) provides as. follows:
Article 13(4)

For the purposes of paragraph 2 of this Article, and subject to paragraph 5 of this Article, the term “fees for technical services” means 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:

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a)* of this Article is received; or . .

(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; 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.

Article 13(5) • —

The definitions of fees for technical services in paragraph 4 of this Article shall not include amounts paid:

(a) for services that are ancillary and subsidiary, -as well as inextricably and essentially „ linked, to the sale of property, other than property described in paragraph 3(a)* of this Article;

(b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships, or aircraft in international traffic;

(c) for teaching in or by educational institutions;

(d) for services for the private use of the individual or individuals making the payment; or

(e) to an employee of the person making the payments or to any individual or partnership for professional services as defined in Article 15 (Independent personal services) of this Convention. ” :

[* Article 3 (a) refers to payments of any kind received as consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematography films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.]

9.2 In India United States Double Taxation Avoidance Agreement (187 ITR St. 102), Article 12 (4) and (5) provides as follows: ‘ –

Article 12(4)

For the purposes of this Article, “fees for included services” means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services:

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph (3) is received; or *

b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.

Article 12(5)

Notwithstanding paragraph (4), “fees for included services” does not include amounts paid:

(a) for service$ that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale or property other than a sale described in paragraph (3) (a);*

(b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic;

(c) for teaching in or by educational institutions;

(d) for services for the personal use of the individual or individuals making the payment; or

(e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services).

[*Article 12(3)0?) refers to payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematography films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof).

10. From elope reading of above treaties one may find that one of the discernible common factor in Indian Double Taxation Avoidance Agreements with UK, USA and Switzerland is that in all these treaties ‘fees for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property* is outside the scope of ‘fees for technical services* liable to separate treatment under the respective DTAA. In other words, in all these treaties, unless the ‘fees for services that are ancillary and subsidiary, as well as inextricably arid essentially linked, to the .sale of property’ is attributable to PE and fulfills the other requirements laid down under the relevant article dealing with business profits, the same cannot be taxed in the source country. The scope of expression ‘fees for technical services*, in these treaties, appears to be far more restricted than the scope of the same expression in Indo French DTAA which broadly defines fees for technical services as to mean payments in consideration for services of a managerial, technical or consultancy nature. Therefore, whereas payments for all kind of technical services are to be treated as ‘fees for technical services’ for the purpose of Article 13(4) of Indo French DTAA, such payments cannot be treated as to be in the nature of ‘fees for technical services*, under respective articles in Indo UK, Indo US and Indo Swiss Double Taxation Avoidance Agreements, in case the same constitutes ‘fees for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property’. Therefore, scope of *fees for technical services’ is much more restricted in Indo UK., Indo US and Indo Swiss DTAAs vis-a-vis the DTAA that India has entered into with France. Hence in all these DTAAs, fees for technical services will not include the fees received for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of a property.

11.1 It is settled position in law that protocol is an indispensable part of the treaty with the same binding force as the main clauses therein, as protocol is an integral part of the treaty and its binding force is equal to that of the principal treaty. The provisions of the aforesaid DTAA _ are, therefore, required to b.e read with the protocol clauses and are subject to the provisions contained in such protocol. Examined in the light of DTAAs between India and U.K.., USA, and Switzerland, we find that in the case before us the assessee had not purchased any property from UTAC France^ Therefore, none of the fees i.e. impact testing fees or fee paid for test repots are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of a property. Therefore, the decision of the ITAT, Calcutta Bench in the case of DCIT Vs. ITC Ltd. relied upon by the assessee is not applicable to the facts of the case. In th&case the assessee had purchased machines from U.K. and payments were made to foreign party for installation and commissioning of the machines. The foreign party did not have any permanent establishment in India to which such income could be attributed. In this view of the matter it was held that the payment made to foreign party for installation and commissioning of the, machines were related to technical services, which were ancillary and subsidiary as well as inextricably and essentially linked to the sale of the property. Hence, the payments made to the foreign party were not liable to be taxed in India. In the decision relied upon by the assessee in the case of Raymond Ltd. Vs. DCIT (supra), it was held that no technical knowledge, experience, skills, know-how or process etc. was made available to the assessee company by the non-resident managers of the GDR issue within the meaning of article 13(4Xc) of the DTAA. Likewise, decision in the case of Skycells Ltd. (supra), NQA Quality Systems Registrar Ltd. (supra) are distinguishable on facts. Hence, are not applicable to the facts of the assessee’s case.

11.2 The impact tests conducted by UTAC France are not in nature of managerial services. From the letter dated 20.12.2003 written by UTAC to the assessee one may find that the assessee was to define the area and points to be tested. The tests were to be performed by UTAC using a vehicle front unit on which the dashboard and its interior parts were mounted. It has also been mentioned that that the dashboard and its interior parts were to be changed for each test. For carrying out the tests UTAC specified the prices as under:-

1st test: 1138EUR

2ndtest:1138EUR

Each additional test :458 EUR

Determination of impact points: 375EUR

Report: 598 EUR

For one model with 10 impacts: 6913EUR

11.3 The above tests were carried out in France and bills were raised for the tests carried out by UTAC. According to assessee no technical knowledge or expertise or skill or knowledge or technical plan or technical decision has been made available to the assessee by M/s UTAC- It is not a case of the assessee that every vehicle produced under-went the testing. The testing was done so as to pass the quality test of a particular specification, which was based only on test reports given by UTAC, France. Therefore, the impact testing reports are in the nature of technical services rendered by UTAC, which enhanced the capability of the product development of the assessee. The presence of assessee’s representative Sh. Sanjay Gupta AGM (Engineering 4 Dept.) was with intention of getting experience about testing. The work area of Sh. Sanjay Gupta at the relevant time included design development and testing of vehicle interior parts as well as exterior parts. Definitely his presence at the time of impact testing would have enriched his knowledge in field of design development and testing of parts. Sh. MY. Rao had also participated in impact testing reports. UTAC France in letter dated 20.12.2003 addressed to Sh. Sanjay Gupta informed the assessee as under:

” Dear Mr Sanjay Gupta,

I, confirm we have experience regarding this test and we can perform your request. To evaluate the head impact test, we need:

to determine the energy absorption area using the apparatus specified in annex. A;

to perform energy dissipation tests as defined in annex. B ( 80g/3ms maximum and

no aggressive parts)

If we perform the full control and tests, we need a vehicle frame forward, the B pillar, driver and passenger seats, ‘steering wheel and column, dashboard and its interior components “

11.4 From plain reading of above letter one may find that the impact test to be conducted by UTAC were purely technical in nature. After carrying out the impact tests in above manner testing reports were submitted to assessee which were utilized for the purposes of modification of the products. This in our considered opinion will amount to rendering of technical services/ information in form of impact testing reports by UTAC France to the assessee. Accordingly, the amounts paid by the assessee to UTAC would be in nature of technical or consultancy services.

13. Now question arises as to whether the payment made will be taxable in India under Article 13(4) of the treaty read with Explanation 2 to section 9(1 )(vii) of the Act? The test reports have been used by the assessee in India in manufacturing of cars. There is no dispute about this fact. It has been laid down in Steffen, Robertson & Kristen Consulting Engineers & Scientist, In re[1998] 230 ITR 206(AAR) that the statutory test for determining the place of their accrual is not the place where the services for which the payments are being made, are rendered but the place where the services are utilised. Therefore, the payments made UTAC are chargeable tax in India.

14. In view of above discussion we are of the considered opinion that UTAC France had provided technical services to the assessee and those technical services were used in India in product development of desired specifications and hence payments for such technical services are liable to be taxed in India. Therefore, the assessee was liable to deduct tax at source u/s 195 (2) of the Act. Accordingly, We do not find any reasons to interfere with the findings Id CIT(A) who upheld the order of the assessing officer directing the assessee to deduct tax at source.

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Category : Income Tax (25536)
Type : Judiciary (10287)
Tags : ITAT Judgments (4629) ITR (552)

0 responses to “Payments for technical services are to be treated as ‘fees for technical services’ under Article 13(4) of Indo-French DTAA”

  1. Kenji Nakanishi says:

    Dear sir,

    Will you tell me URL which include;

    Taxation of income of Non-residents from transfer of Technology – Tax treatment of Royalty and fees for technical Services

    Contents

    1 Rates of taxation
    2 Exemptions from tax
    3 Double tax Avoidance Agreements

    8.1 Royalty has been defined to mean……

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