Definition of the term “Fees for Technical Services” (FTS) has been a matter of controversy for quite some time because different interpretations have been given by various courts with regard to the true scope and meaning of FTS.
It is very important to decide whether the services rendered fall within FTS or not. This is because in case the service rendered by the foreign party is covered under FTS, then the foreign party shall be subject to tax in India irrespective of its Permanent Establishment (PE) in India.
On the other hand, if the services rendered are not FTS, then it would be taxable in India only if the foreign party has any PE or fixed base in India.
The expression “Fees for Technical Services” is defined in Explanation 2 to section 9(1)(vii) of the Income-tax Act as under:
“For the purposes of this clause, ‘fees for technical services’ means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel)……” A perusal of the aforesaid definition clarifies that the term FTS would include service of the following three types:
- Managerial
- Technical
- Consultancy
Therefore, in order to decide whether the service will fall within FTS or not, it is necessary to determine the scope of the aforesaid three terms.
In the above context, reference may be made to a recent decision of the Mumbai Tribunal in the case of TUV Bayren (India) Ltd. dated 06.07.2012 in ITA No 4944/Mum/2002.
In the said case, the Hon’ble Tribunal has defined the scope of the aforesaid terms in the following manner:
- 'Technical services require expertise in technology and providing the client such technical expertise.
- Managerial services is used in the context of running and management of the business of the client.
- Consultancy is to be understood as advisory services wherein necessary advise and consultation is given to its clients for the purpose of client’s business.
In the said case, the issue involved, was whether the services of audit in relation to issuance of ISO 9000 certification will fall within the scope of FTS or not.
The Hon’ble Tribunal after observing the aforesaid scope held that “the entire nature of services and activities carried out by the assessee comes within the realm of ‘professional services’ and not within the meaning of ‘FTS’ as provided in the Article 12(4) and Section 9(1)(vii).”
The aforesaid decision of the Hon’ble Mumbai Tribunal is well in line with the earlier decisions of the Madras High Court and Delhi High Court.
The Hon’ble Madras High Court in the case of Skycell Communication Ltd. 251 ITR 53 held that “Every instrument or gadget that is used to make life easier is the result of scientific invention or development and involves the use of technology.
On that score, every provider of every instrument or facility used by a person cannot be regarded as providing technical service.”It was also observed that “When a person hires a taxi to move from one place to another, he uses a product of science and technology, viz., an automobile.
It cannot on that ground be said that the taxi driver who controls the vehicle, and monitors its movement is rendering a technical service.”
The Hon’ble Delhi High Court in the case of CIT vs Bharti Cellular Limited (2009) 319 ITR 139 held that the “technical services” would have reference to only technical services rendered by a human; it would not include any service provided by machine or robots.
It is thus clear that every service cannot be called a “technical service” merely because some technicality or technical knowledge is involved in providing the service.
Likewise, the scope of “managerial service” and “consultancy service” is also restricted inasmuch as such services can be covered under FTS only when the service is provided in the context of running and management of client’s business.
The author is a Sr. Partner in S.S. Kothari Mehta & Co.e-mail: hp.agrawal@sskmin.com
