Application of technology decides fee for services

FOREIGN ENTERPRISES

The term "fees for technical services" is defined in explanation 2 to Section 9 (i)(vii) of the Income-Tax Act. According to the definition, "fees for technical services" is any consideration for rendering of any managerial technical or consultancy services including provision of services of technical or other personnel.

It is important to note that fees for technical services is taxable even if rendered wholly outside India provided the services are utilised in India. What is essential is the place where services are utilised and not the place from where the services are rendered.

It may be noted that Section 9 stops with the words "rendering of technical services".

However, some double taxation agreements go further and qualify such rendering of services with words to the effect that services should also make available technical knowledge, experience, skills etc to the person utilising the services. For example, in case of US tax treaty, Article 12 defines technical services in the following words:-

"Fees for included services" means payments of any kind to any person in consideration for rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services...........

(c ) make available technical knowledge, experience, skill, knowhow, or processes, or consist of development and transfer of a technical plan or technical design.

Tax treaty with the UK is similarly worded. The treaty with Singapore is still more specific and qualifies that in order to fall within the definition of "technical services," such services should ....

(b) make available technical knowledge, experience, skill, knowhow or processes, which enables the person acquiring the services to apply the technology contained therein; or

(c ) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein.

This distinction between "rendering of services" and "making technology available" has recently been discussed in Mckinsey and Co case 284 ITR 227 (AT). In the said case, the income-tax department took a stand that the expression "make available" means that the person providing the service merely enables the acquirer to use knowledge and the provider does not participate in the act of doing the job himself.

The assessee submitted that in order to attract the taxability of an income under the US tax treaty, not only should the payment be in consideration for rendering of technical or consultancy services but the services should also "make available" technical knowledge, experience, skill knowhow, or process, or consist of the development and transfer of a technical plan or technical design.

The tribunal, after referring to the Raymond's case (86 ITD 791) and CESC's case (87 ITD 653), observed that not only the services should be technical in nature but should be such as to result in making the technology available to the person receiving the technical services. The technology can be considered "made available" when the person acquiring the service is enabled to apply the technology.

Therefore, before subjecting the "fees for technical services" to tax (particularly where the service provider is a resident of the UK, USA or Singapore), it should be examined whether the person receiving the services is actually able to apply the technology or not. If the answer is in the negative, fees for technical services may not be liable to tax in India.

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