Previous posts have examined the scope of Indian taxation of fees for technical services that are paid to non-residents. This is an increasingly common commercial practice, especially in the context of issuing shares or bonds abroad. An interesting issue that has arisen recently before the Bombay ITAT is whether Indian companies that make use of this service are liable to make provision for TDS (Mahindra & Mahindra v. DCIT, MANU/IU/0033/2009). The question is really another way of asking whether such services are at all taxable in India, for liability to make provision for TDS arises under s. 195 of the Income Tax Act only if the item is chargeable to tax in the first place.
This issue came up in the context of Mahindra & Mahindra’s Ltd.’s [“MML”] Euro issue. In 1993 and 1996, MML had used this process to raise $74 and 100 million respectively. M/s Banque Paribas was appointed the lead manager, and paid marketing and underwriting commission of about Rs. 8 crore. The question that arose was whether MML was liable to make provision for TDS on these payments, or, in other words, whether these receipts in the hands of M/s Banque Paribas are taxable in India. The Assessing Officer took the view that these receipts were fees for technical services under s. 9(1)(vii) read with Explanation 2 to that provision. In response, the assessee raised two contentions: that the services in question were part of a “subscription agreement” and were not “technical services”, and that in any case, were exempt under Art. 13 of the Indo-UK DTAA. The case also deals with several other procedural questions, and one important issue on the scope of s. 205(1) of the Act.
The Tribunal, in a well-reasoned and comprehensive judgment, notes that it is a general principle that liability to tax arises only if it is chargeable both under the Income Tax Act and is not exempt under the relevant DTAA. This is the case because the provisions of a DTAA override domestic law, as per s. 90(2) of the Act. Therefore, it was necessary for the Department to establish that both these tests are satisfied with respect to FCCB commissions/payments. There was little difficulty for the Court in concluding that the first test was satisfied, as there is a consistent line of authority holding that such services are indeed technical services. The exception is underwriting services, since that is payable not on the provision of a service, but when there is an unsubscribed portion of the issued shares.
The controversial issue concerns the interpretation of the DTAA, and since similar provisions are adopted across many DTAAs, the issue is likely to be of some commercial importance. Two provisions are relevant – Art. 7 and 13. Art. 7 provides that that the profits of enterprises of Contracting State shall be taxable only in that State unless the enterprises carries on business in the other contracting State through a permanent establishment situated therein. However, the Court correctly held that this provisions, being general in nature, gives way to Art. 13, which specifically deals with royalties and fees for technical services. Art. 13(2) provides that royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to law of that State subject to certain conditions. However, Art. 13(4), which defines the term “technical services” states:
“(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 development and transfer of a technical plan or technical design.”
The question that arose was whether there is a distinction between “providing services” and “making available” services. The assessee argued that there is, and that the latter refers only to transactions where the so-called service can be independently utilised by the assessee in the future. The Court accepted this contention and observed as follows:
“Make available means to provide something to one, which is capable of use by the other. Such use may be for once only or on a continuous basis. In our context to make available the technical services means that such technical information or advice is the transmitted by the non-resident to the assessee, which remains at its disposal for taking the benefit there from by use. Even the use of such technical services by the recipient for once only will satisfy the test of making available the technical services to the assessee. If the non-resident uses all the technical services at its own the benefit of that directly and solely flows to the payer of the services, that cannot be characterized as the making available of the technical services to the recipient.”
An example the Court used to illustrate the distinction was a doctor who gives a patient a prescription, and a doctor who trains students on aspects of diagnosis. In both cases, the doctor “provides” a service, but in the second case, he also “makes it available”, since the student can in the future utilise the technical knowledge and experience. The result was that none of these items was taxable in India, and as a result, the Indian company is not liable to provide for TDS.
This decision is a welcome relief for Indian companies engaging foreign service providers. However, an appeal has been admitted by the Bombay High Court against another case which was based on the same distinction between “make available” and “provide”, and it remains to be seen whether the High Court affirms it.