Services in connection with assessing the viability of developing a port do not 'make available' technical knowledge, skills, etc. and therefore, is not taxable as FTS under the India-U.K tax treaty
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Services in connection with assessing the viability of developing a port do not 'make available' technical knowledge, skills, etc. and therefore, is not taxable as FTS under the India-U.K tax treaty

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Recently, the Ahmedabad Bench of the Income-tax Appellate Tribunal in the case of Dholera Port Ltd. and Adani Port-Infrastructure Pvt. Ltd. held that payments for morphological, sedimentation and ...

Recently, the Ahmedabad Bench of the Income-tax Appellate Tribunal in the case of Dholera Port Ltd. and Adani Port-Infrastructure Pvt. Ltd. held that payments for morphological, sedimentation and navigation & and mooring studies conducted by a U.K. based company, do not 'make available' technical knowledge, skills, etc., and therefore, cannot be taxed as Fees for Technical Services under the India-U.K. tax treaty.

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Services in connection with assessing the viability of developing a port do not 'make available' technical knowledge, skills, etc. and therefore, is not taxable as FTS under the India-U.K tax treaty Document Transcript

  • 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG in INDIA Services in connection with assessing the viability of developing a port do not 'make available' technical knowledge, skills, etc. and therefore, is not taxable as FTS under the India-U.K. tax treaty 8 July 2014 22 21 February 2013 Background Recently, the Ahmedabad Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Dholera Port Ltd. and Adani Port-Infrastructure Pvt. Ltd. 1 (the taxpayer) held that payments for morphological, sedimentation and navigation & and mooring studies conducted by a U.K. based company, do not 'make available' technical knowledge, skills, etc., and therefore, cannot be taxed as Fees for Technical Services (FTS) under the India-U.K. tax treaty (tax treaty). Facts of the case  During the year under consideration, the taxpayer was contemplating to develop the Dholera Port, for which it had undertaken certain basic studies for evaluating the feasibility of the port. __________________ 1 ITO v. Dholera Port Ltd. and Adani Port-Infrastructure Pvt. Ltd. (ITA No.1405/Ahd/2009) – Taxsutra.com(Two appeals of two different appellants having identical legal issues, the case of Dholera Port Ltd. being the lead case)  In order to evaluate the economic feasibility of the port, the taxpayer availed services of the U.K. based company to undertake morphological, sedimentation and navigation & mooring studies. In terms of the said services, the taxpayer made payment to the U.K. based company without deduction of tax.  The taxpayer claimed that as per the Article 13 of the India- U.K. tax treaty, the said fees did not ‘make available’ technical knowledge, skill or know- how, etc., to the service recipient.  The taxpayer further claimed that even if the services would have fallen under the provisions of Section 9(1) (vii) of the Income-tax Act, 1961 (the Act), the services were not made available and is outside the scope of Article on FTS. Since the definition of make available is not prescribed under the Act or in any of the Articles, the taxpayer placed reliance on the decision of Raymond Ltd. 2 _______________ 2 Raymond Ltd v. DCIT [2003] 86 ITD 791 (Mum)
  • 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  The Assessing Officer (AO) noted that no tax was deducted as required under Section 195 of the Act while making the payment. According to the AO, the services provided by the U.K. based company were fees for sedimentation studies and were in the nature of FTS under Explanation 2 to Section 9(1)(vii) of the Act. The AO concluded that the services provided by the U.K. based company were in the nature of consultancy services, which were made available to the taxpayer.  The Commissioner of Income-tax (Appeals) [CIT(A)] observed that since no technical knowledge, skill experience or process was made available to the taxpayer, and since the taxpayer was also not in a position to render such services on its own to others, the fees paid to the U.K. based company were not FTS under Article 13(4)(c) of the tax treaty. It constitutes business income in the hands of a non-resident. Consequently, the taxpayer was not liable for withholding of tax. Tribunal’s ruling  The reason for asking a report in respect of the Dholera Port was that as per the previous studies undertaken, it was noticed that there were strong tidal action and occasional cyclone activity at the site. The morphological activity at the site causes rapid coastal erosion and therefore, a survey was required to be undertaken to investigate all those aspects.  The reports were in the form of preliminary assessment and therefore, the result of the survey was required to be projected in tabular and graphical form. Wherever it was appropriate, a design of the terminal with proper analysis was also required to be provided by the service provider. There was a clause of confidentiality and the know-how in the agreement.  Perusal of the agreement indicated that the report prepared by the U.K. based company shall not be transferable by the taxpayer. The taxpayer shall not use the know-how in performing services for any other client in the future. Even the taxpayer was not entitled to sub- license any of the right granted in the report.  In the case of Diamond Services International 3 it was held that the job of grading diamonds in the laboratory and furnishing a grading certificate did not amount to transferring of any technical skill or knowledge to the customer. The High Court had observed that the grading report by a foreign taxpayer was a statement of fact regarding the characteristics of a diamond. Therefore, the payment received by the foreign taxpayer was not for the right to use the experience. ______________ 3 Diamond Services International v. UOI [2008] 304 ITR 201 (Bom)  Various decisions 4 laid down a common principle that if the fruits of the service rendered by service provider remained with the service recipient and it was able to perform similar activity, without the help of the service rendered, then the technology can be said to be transferred or made available to the recipient.  In the case of Mahindra & Mahindra 5 , the meaning of the expression ‘make available’ has been analysed by discussing another decision in the case of Intertek Testing Services Ltd. 6 wherein it was observed that the service should result in transmitting the technical knowledge, etc., so that the receiver of the service could derive an enduring benefit and utilise the knowledge or know-how in the future, of his own without the aid of the service provider.  In view of the aforesaid decisions, clauses of the tax treaty and provisions of the Act, it was observed that there is a significant distinction between the definition of FTS provided under Section 9 of the Act as compared with the definition of FTS provided in Article 13 of the tax treaty.  The Tribunal made a reference to the decision of the Supreme Court in the case of Azadi Bachao Andolan 7 . Further, in the case of GE India Technology 8 , the Supreme Court held that there was no obligation for withholding of tax on any person, if the payment made to a non-resident was not chargeable to tax.  Accordingly, it was held that services rendered by the U.K. based company do not make available the technical knowledge, experience and know-how to the taxpayer. Therefore, the payment made by the taxpayer was outside the ambit of Section 195 of the Act. Our comments Taxability of FTS under the tax treaties has been a matter of debate before the courts. The present decision deals with the meaning of the term ‘make available’ in the FTS clause under the tax treaty. ___________________ 4 Raymond Ltd v. DCIT [2003] 86 ITD 791 (Mum), NQA Quality System Register Ltd. v. DCIT [2005] 92 TTJ 946 (Del), CESC Ltd., v. DCIT [2003] 80 TTJ 806 (cal), Mckinsey and Company v. ADIT [2006] 99 ITD 549 (Mum), Sheraton International v. DDIT [2007] 106 TTJ 620 (Del) 5 Mahindra & Mahindra v. DCIT [2010] 122 ITD 216) (Mum)(SB) 6 Intertek Testing Services Ltd., In re [2008] 307 ITR 418 (AAR) 7 Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC) 8 GE India Technology v. CIT [2010] 327 ITR 456 (SC)
  • 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The Tribunal observed that the report prepared by the U.K. company was not transferable by the taxpayer. Further, the taxpayer was not allowed to use the know how in performing services for any other client in the future. It was also not entitled to sub-license any of the rights granted in the report. Accordingly, the Tribunal held that morphological, sedimentation and navigation & mooring studies conducted by the U.K. company did not make available knowledge, experience, skill, etc. to the taxpayer, and therefore is not taxable as FTS under the India-U.K. tax treaty.
  • 4. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903, Near Vodafone House, Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bengaluru Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi Syama Business Center 3rd Floor, NH By Pass Road, Vytilla, Kochi – 682019 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Unit No. 603 – 604, 6th Floor, Tower – 1, Godrej Waterside, Sector – V, Salt Lake, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010