2012 (5) TMI 191 - HC - Income Tax

Payments for geological survey data were technical service fees but did not 'make available' know-how under Article 12(5) DTAA, s.9(1)(vii)

Commissioner of Income-tax Versus De Beers India Minerals (P.) Ltd.

HC held that payments to the foreign service provider for geological survey data, maps and photographs constituted fees for technical services rendered ... Classification of Income u/s 9(1)(vii) and Article 12(5) of the DTAA - Fees for technical services - meaning of 'make available' - DTAA agreement between India and Netherlands - services to supply technical data including drawings, plans, maps etc., (geological survey) to identify the mineral deposits – Held that:- The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as 'fee for technical/included services' only if the twin test of rendering services and making technical knowledge available at the same time is satisfied. Article 12 of the India-Netherlands Treaty defines fees for technical services for the purpose of Article 12 which deals with royalties and fees for technical services paid to any person in consideration for rendering of any technical services only, if such services make available technical knowledge, expertise, skill, know-how or processes - in terms of the contract entered into with Fugro data, photographs and maps are made available but they have not made available technical expertise, skill or knowledge in respect of such collection or processing of data to the assessees, which the assessee can apply independently and without assistance and undertake such survey independently excluding Fugro in future - Fugro has rendered technical service to the assessees. They have not made available the technical knowledge with which they rendered technical service - if the technology is not made available along with the technical services and what is rendered is only technical services and the technical knowledge is with-held, then, such a technical service would not fall within the definition of technical services in DTAA and not liable to tax – in favour of assessee. Whether payment to Fugro was for the development and transfer of technical plan or technical design to the assessee - Held that:- the assessees not being possessed with the technical know how to conduct this prospecting operations engaged the services of Fugro which is expert in the field - By way of technical services Fugro delivered to the assessees the data and information after such operations - These maps and photographs which were made available to the assessees cannot be construed as Technology made available as Fugro has not devised any technical plan or technical design - The maps which are delivered are not of kind of any developmental activity – Fugro is engaged in providing services relating to collection and processing of the data and the contract is for providing of services and not for supply of technical design or plan - in favour of assessee. Issues Involved:1. Whether the income received by M/s. Fugro Elbocon B.V. Netherlands from the assessee for services to supply technical data including drawings, plans, maps, etc., (geological survey) to identify the Kimberlite (mineral deposits) targets falls within Section 9(1)(vii) of the Income Tax Act read with Article 12(5) of the DTAA between India and Netherlands.2. Whether the payment to Fugro was for the development and transfer of a technical plan or technical design to the assessee.Detailed Analysis:Issue 1: Income Classification under Section 9(1)(vii) and Article 12(5) of the DTAAThe primary question was whether the income received by Fugro from the assessees for providing technical data falls under the definition of 'fees for technical services' as per Section 9(1)(vii) of the Income Tax Act and Article 12(5) of the DTAA between India and Netherlands.- Assessing Officer's View: The payments to Fugro were classified as fees for technical services under Article 12 of the DTAA, asserting that the assessees failed to deduct tax, thus treating them as assessees in default and levying tax under Section 201(1) and interest under Section 201(1A) of the Act.- Appellate Authority's View: The appellate authority disagreed, stating that Fugro did not impart any technology to the assessees. The services rendered were not covered under Article 12(5) of the DTAA, as no technology was made available to the assessees, and the data provided was raw and not a technical plan or design.- Tribunal's View: The Tribunal upheld the appellate authority's decision, emphasizing that Fugro's services, although technical, did not make any technical knowledge available to the assessees. The data provided was used by the assessees to generate reports using their software, which does not constitute a transfer of technical knowledge or design.- Revenue's Argument: The Revenue argued that the technical knowledge made available by Fugro had an enduring nature and was used by the assessees in their business, thus falling under Article 12(5)(b) of the DTAA.- Assessee's Argument: The assessees contended that Fugro did not make available the technical know-how of conducting the survey, which is a requirement under Article 12(5)(b) for tax liability to arise.- Court's Interpretation: The court analyzed the statutory provisions and the DTAA, emphasizing that for technical services to be taxable under the DTAA, the service must make available technical knowledge, experience, skill, know-how, or processes to the recipient. The court concluded that Fugro's services did not make such technical knowledge available to the assessees, and thus, the payments did not constitute fees for technical services under the DTAA.Issue 2: Payment for Development and Transfer of Technical Plan or DesignThe second issue was whether the payments to Fugro were for the development and transfer of a technical plan or technical design.- Assessing Officer's View: The officer alternatively held that the payment was for the development and transfer of a technical plan or design.- Appellate Authority's View: The appellate authority found that the data supplied by Fugro was raw and did not constitute a technical plan or design.- Tribunal's View: The Tribunal concurred, stating that the data and maps provided were merely additional modes of reporting data and not technical plans or designs.- Court's Interpretation: The court examined the nature of the services and the agreement between the parties, concluding that Fugro provided technical services related to data collection and processing but did not develop or transfer any technical plan or design. The data and maps were the property of the assessees, and Fugro was not the owner of this data, thus no transfer occurred.Conclusion:The court dismissed the appeals, ruling in favor of the assessees on both issues. It held that the payments to Fugro did not fall within the definition of fees for technical services under Article 12(5) of the DTAA, nor were they for the development and transfer of a technical plan or design. Therefore, the assessees were not liable to deduct tax on these payments.