Ancillary-and-subsidiary test fails where independent IT support is not functionally connected to royalty-bearing rights.

Amounts received for IT and SAP support were not fees for technical services under the India-Israel DTAA, read with the Most Favoured Nation protocol and the narrower India-Portugal DTAA definition, because the ancillary-and-subsidiary test was not met. The support agreement covered day-to-day IT infrastructure and system support, while the separate technical collaboration agreement concerned drip irrigation technology, know-how, training, and product-related inputs. As the two arrangements were independent in purpose and timing, and the support services were not shown to be functionally connected to the royalty-bearing rights or information, Article 12(4)(a) of the India-Portugal DTAA did not apply. The receipts were therefore not taxable in India as fees for technical services.

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Issues: Whether the amounts received by the assessee from its Indian subsidiary towards IT and SAP support charges constituted fees for technical services under the India - Israel Double Taxation Avoidance Agreement, or under the more restricted scope imported from the India - Portugal Double Taxation Avoidance Agreement by virtue of the Most Favoured Nation clause.

Analysis: The assessee was governed by the India - Israel Double Taxation Avoidance Agreement, but the Protocol to that treaty permitted application of a more restricted definition of fees for technical services where India later entered into a treaty with a third State containing a narrower scope. The relevant comparison treaty was the India - Portugal Double Taxation Avoidance Agreement. For Article 12(4)(a) of that treaty to apply, the services had to be ancillary and subsidiary to the application or enjoyment of the right, property, or information for which royalty was paid. On the facts, the IT and SAP support agreement was for day-to-day IT infrastructure and system support, whereas the technical collaboration agreement related to drip irrigation technology, know-how, training, and product-related technical inputs. The two agreements were independent in nature and in time, and the IT and SAP services were not shown to be ancillary or subsidiary to the royalty arrangement.

Conclusion: The receipts from the IT and SAP support agreement did not fall within Article 12(4)(a) of the India - Portugal Double Taxation Avoidance Agreement and could not be taxed in India as fees for technical services.

Ratio Decidendi: Services qualify as fees for technical services under the ancillary-and-subsidiary limb only when they are functionally connected to the royalty-bearing right, property, or information; independent support services do not satisfy that test merely because the recipient also earns royalty income.

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