JANUARY 24, 2014 | BY SHEETAL BHATIA
In common parlance, "Whenever a human renders technical services with the aid of the machine it is called technical services". However the Income Tax law defines the same differently.
In accordance to section 9 of the Income Tax Act, 1961 ("the Act"), Fees for Technical Services (FTS) is defined as any consideration for the rendering of any managerial, technical or consultancy services" including the provision of services of technical or other personnel. FTS is also defined in most of the Double Taxation Avoidance Agreements (DTAA) signed by India with other countries.
Through this article I would like to discuss the taxability and contentious issues of FTS within the Act, Double Taxation Treaties and what have been the recent judicial precedents.
Taxability
As per Indian law, FTS are taxed on the gross amount of the fees. The taxability under the Act and DTAA is summarized in the below table:
| Taxability of FTS | As per Act | As per DTAA |
|---|---|---|
| Rate | 25.75%* | 10-20% |
* With the amendment in Finance Act 2013, the rate of 10% has now been raised to 25% with effect from April 1, 2013.
It is important to note that the Act has a beneficial provision to the assessee which allows them to be governed either by the provisions of DTAA or the Domestic Law, whichever is more beneficial.
Though the Act is clear on the taxability and the rates, but a number of questions arise in ascertaining whether the services would come under the definition of FTS. I have discussed the broad issues of contentions below:
- Business Connection
- Human Intervention
- Nature of service
- Make available clause
- No FTS Clause in the Treaty
Business Connection
Often a problem arises when a foreign company provides technical services to an Indian company entirely from outside India. In such cases, a plea is taken that there is no nexus between the foreign company and its income in India as the foreign company is not involved in any business activities in India and it receives payment in foreign currency outside India.
However, the Authority has observed that if the benefit of the services provided by the foreign company is utilised in India by the Indian company, then foreign company is liable to pay tax in India. [Reference: retrospective amendment in Section 9 by Finance Act 2010]
Another question which arises is - whether services that do not fall within the definition of FTS provided in section 9(1)(vii) be taxed under section 9(1)(i) i.e. business connection?
This has been clarified in CIT vs. Copes Vulcan Inc. (2003-TIOL-264-HC-MAD-IT) and Meteor Satellite Ltd. Vs. Income Tax Officer (2003-TIOL-42-HC-AHM-IT) that "Recourse cannot be sought under the general provisions relating to 'business connection' to tax such FTS".
Human Intervention
Often some services are of technical nature but are provided without any human intervention. So it is often debated whether human intervention is a pre condition for adding any service under FTS.
This condition has been analyzed in detail in Siemens Ltd. vs. CIT (Appeals) - 11(Mumbai) - (2013-TII-34-ITAT-MUM-INTL), wherein Mumbai ITAT held that:
- The word "technical" as appearing in Explanation 2 is preceded by the word "managerial" and succeeded by the word "consultancy".
- It cannot be read in isolation as it takes colour from the word "managerial and consultancy" between which it is sandwiched.
- The word "managerial and consultancy" is a definite indicative of the involvement of a human element. Managerial and consultancy services has to be given by human only and not by any means of equipment.
- Therefore, the word "technical" has to be construed in the same sense involving direct human involvement.
- Where simply an equipment or sophisticated machine or standard facility is provided albeit developed or manufactured with the usage of technology, such a user cannot be characterized as providing technical services.
Nature of service
The definition of FTS under the Act is inclusive and includes managerial, technical and consultancy services. However these terms are not further defined in the Act. If we refer to the dictionary meaning, the same comes to:
- Managerial: Services relating to a manager or to the functions, responsibilities, or position of management.
- Technical: Services relating to, or involving the practical, mechanical, or industrial arts or the applied sciences.
- Consultancy: The act of offering expert or professional advice in a field.
Thus from the above definitions it can be connoted that services are technical in nature when special technical skills or knowledge are required for the services. Support services in the field of accounting, finance, taxation, legal and so on may not be regarded as technical services. This has also been affirmed in a number of judicial precedents.
Make available clause
There are often situations where foreign personnel comes to provide some technical services on an annual basis and the same either has not or cannot be delegated to any Indian person. Some treaties have taken a note of such precarious situations and included a 'make available' clause in their treaties.
Thus for such treaties, services of a managerial, technical or consultancy nature can be considered FTS only if it makes available the technical knowledge, experience, skill, know-how or processes that enable the recipient to apply the technology involved.
Karnataka High Court in the case of De Beers India Minerals Pvt Ltd - (2012-TII-17-HC-KAR-INTL) held that "making available" would apply only if the technical knowledge, experience, skills remain with the recipient even after the contract ends and can be deployed independent of the provider.
No FTS clause in the treaty
Majority of the Indian tax treaties include FTS as a part of article on Royalties except treaties with a few countries viz. Indonesia, Mauritius, Sri Lanka, Thailand, Philippines etc. In such cases, such payment is classifiable as "Business Profit" under Article 7 of the relevant Tax Treaty and if the payee does not have a Permanent Establishment in India in terms of Article 5 of the Tax Treaty, the same will not be liable to tax in India. This view is supported by Siemens Aktiengesellschaft vs. ITO - (2003-TII-107-ITAT-MUM-SB-INTL).
However, the Chennai Tribunal in the case of TVS Electronics Ltd. - (2012-TII-83-ITAT-MAD-INTL) held that if the provisions of the tax treaty are silent on the FTS article, FTS is not automatically taxable as business income under the tax treaty. In such a case, provisions of the domestic Act need to be considered and applied.
Conclusion
Since the Act is still silent on the definitions, thus the Courts and Tribunals have still been delivering conflicting judgments on the taxability of FTS. We feel that in order to achieve a more conducive environment for foreign investors in India, more clarificatory interpretations need to be formulated about the scope of FTS. Also in the longer run, authorities would definitely need to get away with its aggressive taxation policy and come out with a permanent solution that would eliminate the possibility of a conflict between international trade and international taxation since developing countries like India need to access technical knowhow and skills to enhance the value of their products and services.
Until the Indian Tax authorities come out with a harmonious tax structure with respect to international payments, it is pertinent to review a transaction from all aspects of the Act, before concluding its nature to avoid heavy penalties since the revenue has been critically reviewing the foreign remittances for services.