Treaty make-available test excludes IT support and management receipts from royalty and technical service taxation.
Information Technology support and management service receipts were not taxable as royalty because no technical, industrial, commercial or scientific know-how was transferred. Although the payments could fall within the domestic definition of fees for technical services, the treaty and Protocol, read with the Most Favoured Nation clause, required the services to make available technical knowledge, experience, skill, know-how or processes. As the support services were only consumed in performance and did not confer enduring technical capability, and the managerial services fell outside the treaty definition, the receipts were excluded from total income. The separate ground was remanded for fresh adjudication after natural justice compliance.
Issues: (i) Whether income from Information Technology Support Services and Management Services was taxable as royalty or as fees for technical services; (ii) whether the matter relating to Ground No. 3 was to be remanded to the Assessing Officer for fresh adjudication.
Issue (i): Whether income from Information Technology Support Services and Management Services was taxable as royalty or as fees for technical services.
Analysis: The services rendered comprised managerial as well as technical support functions. The characterisation as royalty failed because the receipt did not involve imparting information concerning technical, industrial, commercial or scientific knowledge, experience or skill so as to constitute transfer of know-how. The receipts were, however, within the broad domestic definition of fees for technical services, but the applicable treaty provisions, read with the Protocol and the Most Favoured Nation clause, restricted the scope of taxable fees to services that made available technical knowledge, experience, skill, know-how or processes. The technical support services were consumed in performance and did not make available any enduring technical capability to the Indian entity, while the managerial services were outside the treaty definition altogether.
Conclusion: The receipts were not taxable as royalty or as fees for technical services under the applicable treaty and were therefore excluded from the assessee's total income.
Issue (ii): Whether the matter relating to Ground No. 3 was to be remanded to the Assessing Officer for fresh adjudication.
Analysis: The assessee sought remand for determination in accordance with law, and the Revenue raised no objection. The matter was therefore sent back for adjudication after following the principles of natural justice.
Conclusion: The issue was remanded to the Assessing Officer for fresh adjudication.
Final Conclusion: The appeal succeeded on the principal taxability issue and was otherwise sent back for limited fresh consideration, resulting in partial relief to the assessee.
Ratio Decidendi: Fees for technical services under the treaty require the service to make available technical knowledge, experience, skill, know-how or processes to the recipient, and absent such make-available effect, managerial or technical support payments do not fall within the treaty charge.
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