Make available test under Indo-US DTAA limits TDS on service payments unless technical knowledge is transmitted.

Payments to a US subsidiary were tested under Article 12.4 of the Indo-US DTAA and section 195 of the Income-tax Act to determine whether they constituted fees for technical or included services. The marketing agreement and overseas services agreement did not make available technical knowledge, skill, know-how, or processes to the Indian payer, so no tax deduction at source was required and disallowance under section 40(a)(i) failed for those payments. The offshore development facilitation agreement required further factual examination because some activities could involve technical elements, but mere performance of technical work is insufficient unless the recipient can independently apply the knowledge in future; that issue was remitted for fresh consideration.

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Issues: Whether payments made to the US subsidiary under the three agreements were chargeable as fees for technical or included services so as to require tax deduction at source under section 195 of the Income-tax Act, 1961, and whether disallowance under section 40(a)(i) was justified.

Analysis: The payments had to be tested under Article 12.4 of the Indo-US DTAA, which applies only where technical or consultancy services either are ancillary to royalty or make available technical knowledge, experience, skill, know-how, or processes, or consist of development and transfer of technical plan or design. The marketing agreement and the overseas services agreement did not make available any technical knowledge or skill to the assessee. The services under those agreements were either merely promotional and support functions or turnkey services performed entirely by the US subsidiary, and no enduring technical benefit was transferred to the assessee. The offshore development facilitation agreement required closer scrutiny because some of its activities, particularly processing materials, preparing files, and quality assurance, could involve technical elements. However, mere performance of technical work is not enough unless technical knowledge or skill is transmitted so that the recipient can apply it independently in future. On the facts, the authorities below had not examined that agreement with sufficient care. Applying the principle governing section 195, tax deduction is required only where the payment contains income chargeable to tax in India.

Conclusion: Payments under the marketing agreement and the overseas services agreement were not liable to tax deduction at source and the disallowance could not stand to that extent. The issue relating to the offshore development facilitation agreement was remitted to the Assessing Officer for fresh examination under the DTAA and the Act. The Revenue succeeded only to that limited extent.

Ratio Decidendi: Under section 195, tax is deductible only from sums chargeable to tax in India, and under the Indo-US DTAA a service fee is taxable as included services only if it makes available technical knowledge, skill, know-how, or processes to the recipient.

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