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of <h1>E-invoicing software services don't qualify as technical services under India-UK tax treaty without knowledge transfer</h1> Delhi HC held that receipts by a UK-based assessee for e-invoicing services did not constitute Fees for Technical Services (FTS) under Article 13(4)(c) of ... Income deemed to accrue or arise in India - FTS under Article 13(4)(c) of the India-UK DTAA - receipts under the provisions of the Act or the India - UK DTAA - make available clause - Whether the Tribunal erred in law in re-characterising business receipts by the Appellant as FTS under Explanation 2 to section 9(1)(vii) of the Act and Article 13(4)(c) of the India – UK DTAA? - HELD THAT:- Undisputedly, for the receipts in question to be construed as FTS under Article 13 of the India-UK DTAA, the services must be such that “make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design.” Whether the services rendered by the Assessee ‘make available’ any technical knowledge, experience, skill or know-how to GIPL and / or its customers? - The expression ‘make available’ entails service recipient acquiring technical knowledge, expertise, skills, know how or the process as involved in rendering the services. It must entitle the service recipient to use the technology, technical skills or experience as involved in rendering of the technical services on its own. The ability of the service recipient to perform the services or use the technical knowledge as involved in rendering of the services on its own in future, is vital and the ‘make available’ condition is sine qua non for FTS under the India-UK DTAA. The consideration paid for development and transfer of technical plan or technical design should also transfer the right to use the technical plans or design, which is provided by service provider, to the recipient. The meaning of the expression ‘make available’ as used in Clause (b) of Paragraph 4 of Article 12 of the India-US DTAA was also considered in US Technology Resources (Pvt.) Limited [2018 (8) TMI 1264 - KERALA HIGH COURT] The Kerala High Court concurred with the view of the Karnataka High Court in CIT v. De Beers India Minerals (P.) Limited [2012 (5) TMI 191 - KARNATAKA HIGH COURT] and found that the subject payments could not be considered as fees for included services as there was no transfer of technical knowhow. In the present case, the Assessee is the proprietor of an e-invoicing software and provides the services of generating electronic invoices compliant with local laws through its secure platform. The services entail automatically generating the e-invoices instead of creating and printing the same manually. The Assessee has provided the license for using its e-portal to GIPL in connection with the services rendered to GSK, which is a non-resident company. The invoices generated pertained to GSK’s European operations. The license granted to GIPL is a non-exclusive license for the use of the e-portal/software. Merely because the training is imparted by the service provider does not necessarily satisfy the ‘make available’ condition. It is important to bear in mind the purpose for which the training is imparted to the employees and the resource so developed. Undisputedly, if the training imparted results in the service recipient absorbing technology that enables the trainees to use the technical knowhow and the skill, which is central to the technical services that are rendered, on their own; the ‘make available’ condition would stand satisfied. This is because such training would result in the transfer of the technical skill, knowhow and the technical knowledge. However, if the training does not entail transfer of the technology or the technical skill or knowhow involved in rendering the services, the same would not qualify the ‘make available’ condition, which as noted above, is essential for the consideration to be construed as FTS under Clause (c) of Paragraph 4 of Article 13of the India-UK DTAA. In the facts of the present case, the training imparted to GIPL’s employees for using the software or e-platform, does not transmit the technical knowhow or the process for rendering the services of generating electronic invoicing. The said service is performed by the Assessee by the use of its proprietary software and the e-platform operated by it. The training to use the said platform does not transfer the knowledge or transfer the technology, which would enable GIPL to absorb the technology to generate e-invoices and render the subject services on its own. GIPL does not acquire any rights in the Assessee’s proprietary software. Thus, question whether the payments received by the Assessee for rendering the services constitute FTS within the meaning of Paragraph 4 of Article 13 of the India-UK DTAA, is answered in the negative. Thus, the said receipts are not chargeable to tax under the Act. In this view, it is not necessary to examine whether such receipts constitute FTS within the meaning of Explanation 2 to Section 9(1)(vii) of the Act. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Court were:(a) Whether the appellant (a UK tax resident company) was taxable in India on receipts of INR 2,93,92,810/- and INR 3,31,98,980/- under the provisions of the Income Tax Act, 1961 or under the India-UK Double Taxation Avoidance Agreement (DTAA) for assessment years 2016-17 and 2017-18 respectively.(b) Whether the Income Tax Appellate Tribunal erred in law by re-characterising the appellant's business receipts as 'Fees for Technical Services' (FTS) under Explanation 2 to Section 9(1)(vii) of the Act and Article 13(4)(c) of the India-UK DTAA.Given that if the receipts were not classified as FTS under the DTAA, the question of their characterization under the Act would become immaterial, the Court confined its examination primarily to whether the receipts constituted FTS under Article 13(4)(c) of the India-UK DTAA.2. ISSUE-WISE DETAILED ANALYSISIssue: Whether the amounts received by the appellant from Genpact India Pvt. Ltd. (GIPL) could be construed as 'Fees for Technical Services' under Article 13 of the India-UK DTAA.Relevant legal framework and precedents:The Court examined Article 13 of the India-UK DTAA, which defines 'royalties' and 'fees for technical services' and sets out the conditions under which such payments may be taxed. Specifically, Article 13(4)(c) defines FTS as payments for rendering technical or consultancy services which 'make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.'Explanation 2 to Section 9(1)(vii) of the Income Tax Act defines FTS broadly as consideration for managerial, technical, or consultancy services, but the Court emphasized that for DTAA purposes, the narrower treaty definition governs.The Court relied on authoritative precedents, including:The Supreme Court's ruling in Engineering Analysis Centre of Excellence (P) Ltd., which clarified that DTAA definitions override domestic law if inconsistent, and that the 'make available' condition is essential for FTS under the DTAA.The Karnataka High Court's decision in Commissioner of Income Tax v. De Beers India Minerals (P.) Ltd., which held that 'make available' means the recipient must be enabled to use the technical knowledge independently in the future without reliance on the provider.Decisions of this Court in Bio-Rad Laboratories (Singapore) Pte. Ltd. and RELX Inc., which reiterated that mere use of services requiring technical skill does not satisfy 'make available' unless there is a transfer of enduring technical knowledge or skill.The Coordinate Bench's ruling in International Management Group (UK) Ltd., which emphasized that 'make available' requires a demonstrable transfer of technical expertise enabling independent use by the recipient.Kerala High Court's decision in US Technology Resources (Pvt.) Limited v. CIT, which aligned with the above and clarified that managerial or advisory services without transfer of technical know-how do not qualify as FTS under the DTAA.Other relevant rulings including Director of Income-tax v. Guy Carpenter & Co. Ltd., Centrica India Offshore P. Limited v. CIT, SFDC Ireland Limited v. Commissioner of Income Tax, and Expeditors International of Washington Inc. which collectively elucidate the 'make available' test and the nature of training or services that do or do not constitute FTS.Court's interpretation and reasoning:The Court scrutinized the nature of services rendered by the appellant, which involved providing an electronic invoicing platform-a secure e-invoicing software enabling automatic generation and transmission of invoices compliant with local laws. The appellant granted a non-exclusive, non-transferable license to GIPL to use this platform for invoicing services provided to GSK, a non-resident company.The Master Partner Agreement (MPA) and associated Statement of Work (SOW) were examined in detail. The MPA clarified that the license granted to GIPL was to use the OB10 services (the appellant's platform) but did not transfer ownership of intellectual property or source code. GIPL acted as a principal, entering into direct contracts with end users (GSK), and the appellant retained all rights to the software and services.The Court noted that the appellant's services involved formatting, encrypting, and transmitting invoice data but did not transfer any technical knowledge, skill, or know-how to GIPL or its customers. The training provided by the appellant to GIPL employees was limited to using the software platform and did not impart the underlying technology or enable GIPL to independently generate e-invoices after the license's termination.The Court rejected the Revenue's contention that the license and training amounted to making available technical knowledge or skill. It held that merely granting a license to use software or providing operational training does not satisfy the 'make available' condition under Article 13(4)(c) of the DTAA.The Court also distinguished the facts from cases where secondees or employees were seconded to impart technical know-how or where training resulted in the recipient acquiring enduring technical skills enabling independent operation.Key evidence and findings:The appellant's non-exclusive license to GIPL did not transfer intellectual property rights or source code.The appellant retained ownership of the software and all proprietary rights.GIPL's role was limited to using the platform to provide invoicing services to GSK and its affiliates; it did not acquire technical knowledge or know-how enabling independent operation.The training provided was limited to operational use of the software, not transfer of technical expertise.The invoices generated pertained to GSK's European operations, with no link to India.Application of law to facts:Applying the 'make available' test from the DTAA and relevant case law, the Court concluded that the appellant's services did not transfer technical knowledge or skill to GIPL. The appellant's provision of software access and operational training did not enable GIPL or its customers to independently use or exploit the technology. Therefore, the receipts could not be characterized as FTS under Article 13(4)(c) of the India-UK DTAA.Since the receipts were not FTS under the DTAA, the question of their characterization under Explanation 2 to Section 9(1)(vii) of the Act was rendered immaterial.Treatment of competing arguments:The Revenue argued that the license and training constituted transfer of technical knowledge and thus FTS. The Court rejected this by interpreting the MPA and SOW, finding no transfer of intellectual property or technology. The Court also distinguished precedents cited by the Revenue where technical knowledge was actually transferred or employees were seconded to impart know-how.The appellant's argument that the services were business income and not taxable in India due to absence of permanent establishment and no transfer of technical knowledge was accepted.Conclusions:The Court held that the amounts received by the appellant from GIPL did not constitute FTS under Article 13 of the India-UK DTAA. Consequently, the receipts were not taxable under the Income Tax Act for the relevant assessment years. The impugned orders of the Tribunal and the assessment orders were set aside.3. SIGNIFICANT HOLDINGS'The expression 'make available' entails service recipient acquiring technical knowledge, expertise, skills, know how or the process as involved in rendering the services. It must entitle the service recipient to use the technology, technical skills or experience as involved in rendering of the technical services on its own. The ability of the service recipient to perform the services or use the technical knowledge as involved in rendering of the services on its own in future, is vital and the 'make available' condition is sine qua non for FTS under the India-UK DTAA.''Merely availing of services that may require technical expertise, technical inventions or technology would not qualify the consideration paid for such services as FTS under Article 13 of the India-UK DTAA.''The 'make available' stipulation ensures that only those services that impart lasting technical benefits are classifiable as fees for technical services. The offer of service or advice does not fundamentally alter the recipient's capabilities. These services, while potentially valuable, do not endow the recipient with new skills or knowledge which could be independently deployed in the future.''The training imparted to GIPL's employees for using the software or e-platform, does not transmit the technical knowhow or the process for rendering the services of generating electronic invoicing. The said service is performed by the Assessee by the use of its proprietary software and the e-platform operated by it. The training to use the said platform does not transfer the knowledge or transfer the technology, which would enable GIPL to absorb the technology to generate e-invoices and render the subject services on its own.''If the services rendered do not qualify any of the three clauses of Paragraph 4 of Article 13 of the India-UK DTAA, the consideration received would not qualify as FTS for the purposes of India-UK DTAA.'Final determinations:The receipts of INR 2,93,92,810/- and INR 3,31,98,980/- were not taxable as FTS under the India-UK DTAA.The Tribunal erred in re-characterising the appellant's business receipts as FTS under Explanation 2 to Section 9(1)(vii) of the Act and Article 13(4)(c) of the India-UK DTAA.The impugned orders and assessment orders were set aside.
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