2010 (8) TMI 9 - AAR - Income Tax

Consideration for Services Not Taxable under Income-tax Act; No Royalties under Double Taxation Agreement

The Authority ruled that the consideration received by the applicant was not classified as 'fees for technical services' under the Income-tax Act. It was ... Fees for technical services (FTS) - royalties - making available technical knowledge, experience, skill, know how or processes - permanent establishment (PE) - business profits - Article 12.3(g) of the India Australia DTAAFees for technical services (FTS) - royalties - making available technical knowledge, experience, skill, know how or processes - Article 12.3(g) of the India Australia DTAA - Whether the consideration received by the applicant from Conformity Assessment Bodies (CABs) falls within clause (g) of Article 12.3 (i.e., royalties including fees for technical services that 'make available' technical knowledge) and thus constitutes 'royalty' or 'FTS' under the DTAA and domestic law. - HELD THAT: - The Authority examined the scope of clause (g) and the jurisprudence interpreting the phrase 'make available' and held that mere provision of a service or issuance of a certificate does not satisfy the additional requirement that the service provider impart technical knowledge, skill or know how so as to enable the recipient to perform the technical function independently in future. The applicant's activity is an evaluative accreditation process - assessment, certification and surveillance - which determines whether a CAB meets prescribed standards; it does not transfer the applicant's technical knowledge, skills or processes to the CAB. Reliance was placed on prior rulings explaining that the twin test requires both rendering of services and making technical knowledge available; absence of the latter excludes the payment from falling within clause (g). Applying that principle, the Authority concluded that accreditation fees are not within the 'royalty' or 'FTS' description in Article 12.3(g). [Paras 7, 10]The income from accreditation does not fall within clause (g) of Article 12.3 and therefore is not 'royalty' or 'fees for technical services' under the DTAA.Permanent establishment (PE) - business profits - Article 7.1 of the India Australia DTAA - Whether visits by the applicant's personnel to India for on site assessments and witness audits give rise to a permanent establishment in India so as to make the applicant's income taxable as business profits in India. - HELD THAT: - Having excluded the income from Article 12.3(g), the Authority addressed whether the applicant had a PE in India. On the facts presented the applicant had no fixed place of business in India, and the personnel's visits were occasional and of duration less than 90 days in a 12 month period. Consequently the prerequisites for a PE under the Treaty were not satisfied. In the absence of a PE, profits attributable to the applicant cannot be taxed in India under Article 7.1 of the DTAA. [Paras 11, 12]No permanent establishment in India is constituted by the described visits; business profits of the applicant are not taxable in India.Withholding tax - treaty relief - Whether Indian payers are required to withhold tax at source from payments to the applicant where the services are not 'royalties' and the applicant has no PE in India. - HELD THAT: - Since the accreditation receipts do not constitute 'royalties' or 'FTS' under the DTAA and the applicant does not have a PE in India, the payments are not chargeable to tax in India. Accordingly, the obligation to withhold tax at source in respect of such payments does not arise under the facts and law considered. [Paras 12]Payors are not required to withhold tax at source from payments to the applicant in the circumstances found.Final Conclusion: The Authority ruled that the applicant's accreditation fees do not constitute 'royalty' or 'fees for technical services' under Article 12.3(g) of the India Australia DTAA; the applicant has no permanent establishment in India from the described visits; accordingly the income is not taxable in India and payers need not withhold tax at source. Issues Involved:1. Classification of consideration received by the applicant as 'fees for technical services' under Section 9(1)(vii) of the Income-tax Act, 1961.2. Applicability of Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and Australia.3. Classification of services rendered by the applicant as 'royalties' under Article 12 of the DTAA.4. Taxation of income from royalty or fees for technical services under Section 115A(1)(b) of the Income-tax Act.5. Existence of a permanent establishment (PE) in India under Article 5 of the DTAA.6. Requirement for payers to withhold tax at source if services are not classified as 'royalties' and no PE exists.Detailed Analysis:Issue 1: Classification as 'Fees for Technical Services'The applicant contends that the consideration received from Indian CABs cannot be categorized as 'fees for technical services' within the meaning of Section 9(1)(vii) of the Income-tax Act, 1961. The applicant argues that no service is involved in its activities and that it does not render any technical or consultancy services that make available technical knowledge, experience, skills, know-how, or process as per Article 12.3(g) of the India-Australia Tax Treaty. The Authority finds considerable force in the applicant's contention but decides to rest its decision on the relevant treaty provision, i.e., Article 12.3(g) of the DTAA.Issue 2: Applicability of Article 12 of the DTAAThe Authority examines whether the applicant's activities fall under clause (g) of Article 12.3 of the DTAA, which deals with rendering technical services. It concludes that the applicant's activities do not make available technical knowledge, experience, skill, know-how, or processes to the CABs. The Authority references previous rulings, such as Anapharm and Intertek Testing Services India, to support this interpretation. The skills and expertise possessed by the applicant are not transferred to the CABs; rather, the applicant evaluates and assesses the CABs' capabilities against set standards.Issue 3: Classification as 'Royalties'Since the applicant's activities do not fall under the 'fees for technical services' clause of Article 12.3(g) of the DTAA, the income derived does not qualify as 'royalties' under Article 12 of the Treaty. The Authority emphasizes that the applicant does not impart any knowledge or skills to the CABs that they can utilize independently in the future.Issue 4: Taxation Under Section 115A(1)(b)Given the negative answers to the first and third questions, there is no need to address the taxation of income from royalty or fees for technical services under Section 115A(1)(b) of the Income-tax Act.Issue 5: Existence of Permanent EstablishmentThe Authority concludes that the occasional visits of the applicant's personnel for on-site assessment and witness audits do not constitute a permanent establishment in India. The applicant does not have a fixed place of business or PE in India, and the visits of its personnel were less than 90 days in a 12-month period.Issue 6: Withholding Tax RequirementSince the services rendered by the applicant are not classified as 'royalties' and the applicant does not have a PE in India, the payers are not required to withhold tax at source from the payments made to the applicant.Conclusion:The Authority provides the following rulings:- Question No.1: Not answered due to the response to Question No.2.- Questions No.2 and 3: Answered in the negative; the income does not fall within the 'royalty' clause under Article 12 of the Treaty.- Question No.4: Not answered.- Question No.5: Answered in the negative; no permanent establishment exists.- Question No.6: Answered in the negative.- Question No.7: Not answered.Ruling pronounced on 6th August 2010.