2010 (8) TMI 9 - AAR - Income Tax

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

Re. Joint Accreditation System of Australia and New Zealand

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 ... Accreditation function - Conformity Assessment Bodies (CAB's) - Nature of service - Fees for technical services (FTS) - Section 9(1)(vii) - Sections 115A(1)(b)(AA) or (BB) 115A(1)(b)(AA) or (BB) - TDS - DTAA with Australia - Held that: - there is no transfer of any skills or technical knowledge or experience, or process or know-how to the CABs on account of grant of accreditation to those entities. The skills, expertise or know-how possessed by the applicant for the grant of accreditation certificate cannot be said to have been made available to the CAB who gets the accreditation. What the applicant does is to evaluate and assess the capabilities, competence, potential and infrastructure possessed by the CAB in the light of certain set standards and parameters. - The fact that the CAB is apprised of its shortcomings and deficiencies, if any, and that the CAB is given an opportunity to rectify, if possible, does not reasonably lead to the inference of 'making available' the skills, technical knowledge etc. possessed by the applicant to the CAB. CAB will, of course, be benefited by the accreditation certificate issued by the applicant but that fact has hardly any bearing on the point whether 'make available' criterion has been satisfied or not. Viewed from any angle, it cannot be said that the applicant is imparting any knowledge or skills to the CABs which are utilized by the CAB in conducting its business. - The activities of the application are not falling under FTS - Since there is no PE in India, such profits can not be subject to tax in India - No withholding tax in India 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.