Make available test limits fees for technical services and blocks attribution of offshore supply income in India
Receipts for intermediary services such as marketing, sales support, project management and customer support are taxable as fees for technical services under the India-Sweden treaty only if the services make available technical knowledge, skill or know-how so that the recipient can apply it independently later; on the stated facts, that requirement was not met. Offshore supply income is not attributable to an Indian permanent establishment where the supplies are separately structured, manufactured and sold outside India, payment is received outside India, and no territorial business presence for those supplies is established in India.
Issues: (i) whether receipts from intermediary services rendered to an Indian affiliate were taxable as fees for technical services under the India-Sweden tax treaty and the Income-tax Act; (ii) whether income from offshore supplies could be attributed to a permanent establishment in India.
Issue (i): whether receipts from intermediary services rendered to an Indian affiliate were taxable as fees for technical services under the India-Sweden tax treaty and the Income-tax Act.
Analysis: The services consisted of marketing, sales, business development, project management and customer support. The relevant treaty framework, including Article 12 and Protocol 7, required the technical or consultancy services to make available technical knowledge, skill or know-how so that the recipient could apply it independently in future. On the facts, the services did not transmit any such enduring technical capability to the recipient. The record also supported the view that the services were not shown to satisfy the make available requirement.
Conclusion: The intermediary service receipts were not taxable as fees for technical services and the issue was decided in favour of the assessee.
Issue (ii): whether income from offshore supplies could be attributed to a permanent establishment in India.
Analysis: The supply arrangements were found to be bifurcated, with offshore supplies and onshore activities separately identified. The supplies were manufactured and sold outside India, payment was received outside India, and the material placed on record did not establish a place of business in India from which the assessee carried on the relevant offshore supply operations. The attribution made on the basis of an incorrect factual premise was therefore unsustainable.
Conclusion: No income from the offshore supplies was attributable to a permanent establishment in India and the issue was decided in favour of the assessee.
Final Conclusion: The additions concerning intermediary service receipts and permanent establishment attribution were deleted, and the assessee succeeded in the appeal.
Ratio Decidendi: Under the applicable treaty, technical or consultancy services are taxable as fees for technical services only when they make available technical knowledge, skill or know-how to the recipient, and offshore supply income cannot be attributed to India absent a sufficient territorial nexus or business presence in India for those supplies.