Fees Technical services

1. Fees for Technical Services (FTS)
and its Taxability
CA Jugal Gala

2. Research
Credits
Harish Kumar

3. Legends used in the Presentation
DTAA Double Taxation Avoidance Agreements
FTS Fees for Technical Services
ITA Income Tax Act, 1961
MTC Model Tax Convention
PE Permanent Establishment
UN United Nations

4. Presentation Schema
Introduction
FTS Income Deemed
to Accrue or Arise in
India
Definition as per ITA Taxability under ITA
Definitions under
the Treaties
Taxability under the
Treaties
FTS vs Business
Income
Absence of FTS
Clause in DTAA
Make Available
Clause and Most
Favoured Nation
Clause
Illustrations Judicial Precedents

5. Introduction

6. Overview
Fees for Technical Services (FTS), as commonly understood, is a fee paid for availing
some services of technical nature
In most tax treaties FTS provisions are contained along with Royalties
However, UN Model convention has inserted Article 12A in 2017 which separately
deals with FTS
In certain tax treaties Fees for Technical Services is also referred to as Fees for Included
Services
In this webinar, we shall focus on the definition of FTS under ITA and treaties and analyse it
taxability

7. FTS Income Deemed to Accrue or Arise in India
– Sec 9(1)(vii)
FTS income is deemed to accrue or arise in India in the following situations:
Where the FTS is payable by the government to a non-resident
Where the FTS is payable by a resident to a non-resident
• Except
• the fees are payable in respect of services utilised in a business or profession carried on by
such person (i.e. payer) outside India or
• for the purposes of making or earning any income from any source outside India
Where FTS is payable by a non-resident to a non-resident
• Only if
• the fees are payable in respect of services utilised in a business or profession carried on by
such person in India or
• for the purposes of making or earning any income from any source in India

8. Exclusions
Income by way of FTS shall be excluded if
• an agreement has been made before 01.04.1976 and
• approved by the Central Government
Explanation 1 to the exclusion
The agreement made on or after 01.04.1976 shall be deemed to have
been made before 01.04.1976 if-
the agreement is made in accordance with proposals approved by the
Central Government before 01.04.1976

9. Definition as per ITA

10. Explanation 2 to Sec 9(1)(vii)
FTS means any consideration including any lump sum consideration other than
consideration for any
• construction,
• assembly,
• mining or like project undertaken by the recipient or
• consideration which are chargeable as Salaries
Such consideration shall be for rendering of any
Managerial
Technical
Services
Consultancy
Services
Provision of services of
technical or other personnel

11. Relevant Meanings
The terms managerial, technical and consultancy have not specifically defined under the ITA
The Supreme Court in case of GVK Industries Ltd [2015] 371 ITR 453 (SC)
General and common usage of the words has to be understood at
common parlance while interpreting the ambit of the term “FTS”

12. Managerial Services
Judicial Precedents Observation
Intertek Testing Services India Pvt Ltd.,
[2008] 175 Taxman 375 (AAR)
The term “managerial” relates to “manager” or “management”.
Further, a “manager” is a person who manages an industry or
business or who deals with administration or a person who
organizes other people’s activity
R Dalmia vs CIT [1977] 106 ITR 895 (SC) The term “management” includes the act of managing by
direction, or regulation or superintendence
Linde A.G. vs ITO [1997] 62 ITD 330
(Mum ITAT)
‘Managerial service’ entails adoption and execution of various
policies of an organization and is of permanent nature for the
organisation as a whole
Credit Lyonnais vs ADIT [2013] 35
taxmann 583 (Mum ITAT)
'Managerial service' essentially involves controlling, directing or
administering the business. When one talks of rendering
'managerial services' in relation to some activity, it is the
management of such overall activity. Doing bits or small parts of
overall activity independently cannot be considered as rendering
of a 'managerial service' in relation to such activity
The term managerial services has been discussed in several judicial
precedents and the following are the broad principles emanating therefrom:

13. Technical Services
Technical Services includes a range of services involving technical knowledge, assistance in
technical operations, maintenance and other support in technical matters.
The following are some of the judicial precedents which have explained the term technical services:
Judicial Precedent Observation
CIT vs Kotak Securities Ltd.
(2016) 239 Taxman 139 (SC)
Services which are specialized, exclusive and customized to
user/consumer qualify as "fees for technical services". "Technical services"
like "Managerial and Consultancy service" would denote seeking of
services to cater to the special needs of the consumer/user as may be felt
necessary
Expeditors International (India)
Pvt. Ltd. Vs ACIT [2010] (2 ITR
(Trib.)153) (Delhi ITAT)
Payment for fees for standard services (cellular network, VSAT up linking,
use of internet bandwidth) is not in the nature of FTS. The mere fact that
the service provider has installed sophisticated equipment does not itself
make it FTS. A technical service without human intervention would not be
covered within the ambit of the definition of “FTS”
Atos Information Vs. DCIT (ITA
NO. 237, 238, 239 &240 /
MUM / 2016), Mum ITAT
Payment towards data processing involved provision of a standard facility
without any human intervention and would not constitute FTS

14. Consultancy Services
• Black's Law Dictionary, Eighth Edition defines ‘consultation’ as an act of asking the advice or opinion
of someone (such as a lawyer). Based on the definition the Honourable Supreme Court (in GVK
Industries) observed that consultation means a meeting in which a party consults or confers and
eventually it results in human interaction that leads to rendering of advice.
• ‘Consultancy service’ may overlap the categories of ‘technical’ and ‘managerial’ services to the
extent the latter type of services are provided by a consultant
Judicial Precedent Observations
CIT v. Bharti Cellular Ltd.
[2011] 330 ITR 239 (SC)
The word "consultant" is a derivative of the word "consult" which entails
deliberations, consideration, conferring with someone, conferring about or upon a
matter. Service of consultancy necessarily entails human intervention.
The consultant, who provides the consultancy service, has to be a human being. A
machine cannot be regarded as a consultant
Intertek Testing Services
India Pvt. Ltd., [2008] (175
Taxman 375) (AAR)
Advisory service which merely involve discussion and advice of routine nature or
exchange of information cannot appropriately be classified as consultancy services.
An element of expertise or special knowledge on the part of the consultant is implicit
in the consultancy services
Le Passage to India Tours &
Travel (P.) Ltd. vs DCIT [2014]
369 ITR 109 (Delhi ITAT)
The consultancy should be rendered by someone who has special skills and expertise
in rendering such advisory

15. Provision of Services of Technical or Other
Personnel
In simple terms, the provision of services of technical or other personnel amounts to
rendition of technical services
In this case, the service provider makes available the services of the personnel to the
recipient of the services
Thus, services would be covered under FTS as per the Act, irrespective of whether
these personnel renders ‘managerial’, ‘technical’ or ‘consultancy’ services
There are certain important features which are generally present in the arrangement between the service provider
and the service recipient for “provision of services of technical or other personnel”:-
The nature of work specifically states the number of personnel of the service provider whose services would be
provided.
The consideration of such services is based on the number of personnel provided.
The person providing personnel may have an ongoing role to play.
The recipient of services is responsible for the work performed by the personnel.
The personnel provide services under the supervision and control of the service recipient.
The person providing the personnel retains the right to remove/withdraw or replace

16. 16
Distinguishment between “Provision of
services of technical or other personnel”
and arrangement of “Provision of
personnel”
The recruitment agency is paid for ‘providing personnel’ and not for the ‘services of the personnel’ and thus, not
FTS
Thereafter, the personnel are on the payroll of the party and the recruitment agency does not retain any right
over the personnel.
In the case of a recruitment agency, the arrangement between the parties is such that the agency assists the
other party in recruiting the personnel and the role of the recruitment agency ends once the personnel are hired.
the fees earned would be in the nature of FTS
the firm can be said to ‘provide services of technical personnel’ and thus,
In distinction to the above case, where a computer professional firm sends its computer engineers to
a company for continuous support,

17. Taxability under ITA
The ITA prescribes the methodology for computing income under FTS. The same
would vary depending on whether the non- resident has a PE / fixed place of
profession in India or not

18. Tax on Technical Fees - Sec 115A
Where the non-resident does not have a permanent establishment (PE) or fixed
place of profession in India to which the FTS income is effectively connected
In such a scenario, the FTS income would be taxable on gross basis (without
allowing deduction of expenses)
The applicable tax rates would be 10% plus applicable surcharge and cess

19. Computation of FTS Income – Sec
44DA
Where the non-resident has a PE / fixed place of profession in India to which the FTS income is effectively connected
and
FTS received by a non-resident from the Government / Indian concern under agreements entered after 31st March,
2003 and effectively connected to a PE / fixed place of profession in India, would be computed under the head
“business income”.
Accordingly, FTS income would be arrived at after reducing permissible expenses as per provisions of the Act (Sec 28
to 44C).
In computing FTS income, deduction shall not be allowed for –
• Expenditure which is not wholly and exclusively incurred for the business of the PE / fixed place of profession in
India; or
• Amount paid by the PE to its head office / any of its other offices (other than actual reimbursement of
expenses)

20. Contd.
Further, the non-resident would be required to compulsorily maintain books of accounts as per Sec
44AA of the ITA and get the accounts audited (Form 3CE)
The tax rate applicable under Sec 44DA of the ITA is 40% (plus applicable surcharge and education
cess)
Further, if the above mentioned FTS is received from a non-resident (i.e., not from the Government
or an Indian concern), the applicable tax rate would be 40% (plus applicable surcharge and
education cess) as per Sec 28 of the ITA.
However, in such a scenario, the benefit of net basis of taxation would be available (allowability of
deduction for expenses)

21. Concept of “Effectively Connected”
The term effectively connected is not defined under the ITA
In general FTS income would be considered to be effectively connected with a PE or fixed
base if the technical services are closely related to or connected with the PE or fixed base
or if the business activities are similar to those carried out through the PE
PE should have some role in carrying out of technical services and not when PE is set up
for a completely different purpose
PE should be engaged in performance of technical services or should be involved in actual
rendering of services.

22. Withholding of Tax – Sec 195
Particulars Rate of TDS
Income from FTS payable by the Government or an Indian concern 10%
In other cases 40%
Sec 195 requires deduction of tax on any payments to non-residents which is chargeable to tax
under the ITA
Even a non-resident making a payment to non-resident shall deduct tax if the payment would
constitute income chargeable to tax under the ITA for the recipient
Deduction shall be made at the rates in force
Rates in force – rate of TDS as per Finance Act or rate as per relevant DTAA whichever is lower

23. Definitions under the
Treaties

24. Article 12A of UN MTC
Article 12A(1)
FTS arising in a contracting state and paid to a resident of the other contracting state
may be taxed in that other state
Article 12A(2)
• Such FTS may also be taxed in state in which they arise and according to the laws
of that state
• But if the beneficial owner of the fees is a resident of the other state, the tax so
charged shall not exceed the percentage established through bilateral
negotiations of the gross amount of FTS (treaty rate)
Article 12A(3) Meaning of the term FTS
Article 12A(4)
Provisions of the Article shall not apply for the beneficial owner of FTS being a
resident of a contracting state,
• carries on business in the other contracting state in which the FTS arise through
a PE situated or
• performs independent personal services in the other contracting state from a
fixed base situated
and the FTS are effectively connected with
• such PE or fixed base or
• business activities referred in Article 7 (Business Profits) or Article 14
(Independent Personal Services)

25. Contd.
Article 12(5)
FTS shall be deemed to arise in a contracting state
 if the payer is a resident of that State or
 if the person paying the fees, (irrespective of resident or not), has PE or a fixed base
in connection with which the obligation to pay the fees was incurred, and such fees
are borne by the PE or fixed base
Article 12(6)
FTS shall not be deemed to arise in a contracting state
 if the payer is a resident of that State and carries on business in the other
contracting state through a PE situated in that other state or
 performs independent personal services through a fixed base situated in that
other state and such fees are borne by that PE or fixed base
Article 12(7)
Where by reason of a special relationship between:
o Payer and beneficial owner
o Payer, beneficial owner and some other person
the payment of FTS exceeds than what would have been paid in absence of such
relationship, then the provisions of this Article shall apply only to the extent of
amount which is not in excess.
The excess amount shall be taxable as per the laws of the respective contracting
states

26. Summary of Article 12A
FTS may be taxed both, in the country of which the recipient is
a resident and in the country in which it arises
Para 1 outlines the basic rule that FTS may be taxed in the state of residence
Para 2 entitles the state of source to tax FTS to the extent as agreed in bilateral negotiation
Para 3 defines the term FTS
Para 4 provides exception to FTS income which arises through a PE to which article 7 or
article 14 applies
Para 5 states the condition under which FTS income is deemed to arise in a contracting state
Para 6 indicates when a FTS income is not deemed to arise in a contracting state
Para 7 provides for adjustment of an amount which is in excess of arm’s length principle

27. Beneficial Ownership
• Article 12 provides that such income shall be taxed in that state of which the beneficial
owner of the income is resident.
• The concept of ‘beneficial ownership’ is also used to grant the benefit of reduced treaty
taxes
• The concept of ‘beneficial ownership’ is one of the safeguards provided in the DTAA’s
to prevent treaty shopping and is applicable in situation where the source of income
is in one country and the recipient of certain incomes is in other country.
• This concept of beneficial ownership is not only applicable to Royalty / FTS, but also
applies to Interest and dividend income.
The term ‘beneficial owner/ownership’ is not defined in the DTAAs’.
Prof Klaus Vogel has explained the same as:
“The ‘beneficial owner’ is he who is “free to decide-
i. Whether or not capital assets should be used or made available for
use by others; or
ii. How the yields there from should be used; or
iii. Both.”

28. Meaning of FTS as per UN MTC
The term fees for technical services means
any payment in consideration for any service of
• managerial,
• technical or
• consultancy nature
except the payment is made
• to an employee of the person making the payment
• for teaching in an educational institution or
• for teaching by an educational institution or
• by an individual for services for the personal use of an individual

29. Taxability under the
Treaties

30. Taxability under DTAA
Article 12A prescribes the rate of taxability of FTS income, currently majority of FTS income is
taxable as per Article 12 as the former is introduced recently
The assessee has an option to apply the tax rate
prescribed as per DTAA or Sec 115A of ITA
whichever is more beneficial to him
Generally DTAAs levy tax rate in the range of 10-
15%
Would be taxable on gross basis (as per the
DTAA)
FTS not attributable to PE in India of the non-
resident
Applicable tax rate would be 40% (plus applicable
surcharge and education cess)
The income liable to tax would be computed on net
basis as per relevant Articles of the DTAA (i.e., Article 5
- PE read with Article 7 - Business Profits in most cases)
FTS is attributable to PE in India of the non-resident
Taxability

31. FTS vs Business Income
This aspect is typically dealt with in Article 12A(4) of the UN Model – if FTS is effectively
connected to a PE of the recipient, then it shall be covered under Article 7 business profits
To tax the FTS as business profits under Article 7
the following conditions are to be satisfied:
FTS arises in contracting state (state of source)
The beneficial owner is a resident of other contracting state (state of residence)
Such beneficial owner carries on business in state of source through PE situated or
performs independent personal services from a fixed base situated therein and
FTS is paid is effectively connected with such PE or fixed base
o The above conditions are required to be satisfied on a cumulative basis.
o It is very important that the PE should be situated in a contracting state and not in a third state for Article 7 to
apply

32. 32
Absence of Article on FTS in the
DTAA
In DTAA’s where FTS clause is present, the income gets taxed under the specific FTS clause unless the same is
effectively connected to the PE, in which case it is taxed as Business Profits under Article 7 of the respective DTAA
In DTAAs where no FTS / FIS clause is present, an ambiguity arises as to whether:
 such income would be taxed under the Article dealing with ‘Business Profits’; or
 under the residuary Article ‘Other Income’; or
 would be taxed as per the provisions of the Act?
This issue is of significant importance to the Source State as classification of such income as ‘Business
Profits’ may result in income not being taxed at all unless there is a PE in the source state

33. 33
Contd
There are divergent views on this issue:
In absence of FTS clause, the income
would be governed under the Article
‘Business Profits’ and would be
taxable in India only if the taxpayer
had a PE in India
[ACIT vs Viceroy Hotels Ltd. (2011)(46
SOT 4)(Hyd)]
In absence of FTS clause, the
taxability of the income needs
to be evaluated under the
‘Other Income’ Article
Lanka Hydraulik Institute Ltd, In
Re (2011) 199 taxmann 232
(AAR)
If a DTAA is silent on a particular
type of income, such income
cannot be automatically construed
as ‘Business Profits’ and reference
should be made to the provisions of
the Act
CIT vs TVS Electronics (2012) 22
taxmann.com 215 (Chennai)
Based on the judicial precedents and general rules of interpretation of the DTAA’s, a
view which is commonly adopted is that in absence of FTS clause in the DTAA, the income
should not be taxed in India in absence of a PE of the non-resident recipient

34. 34
FTS Article not embracing Managerial
Services
In some DTAAs, the scope of the term “FTS” includes only technical and consultancy
services and does not embrace Managerial Services (E.g. India-USA DTAA).
In case the services do not qualify as technical or consultancy services, it is possible to
take a position that the payment is not covered within the purview of Article 12.
Thus, the same qualifies as business income under Article 7 and would be taxed only if
the non-resident has a PE in India
Raymonds Ltd vs DCIT (2003) 80 TTJ 120 (Mum)
Where Managerial services is outside the purview of the definition of FTS, no part of the
fees for ‘managerial services’ could be considered as fees for technical services and
therefore could not be charged to tax

35. Make Available Clause and
Most Favoured Nation
Clause

36. Make Available Clause
• The expression make available assumes great significance in the context of determining the
taxability of payment of FTS.
• Some of the DTAAs which India has entered into, USA, UK, Singapore, Netherlands, Cyprus etc.
contain a more restrictive definition of FTS as it requires satisfaction of the make available
condition with respect to such services
 The DTAA’s which contain make available clause provide that FTS paid by a resident to non-resident
shall be liable to tax in India only if such services ‘make available’ technical knowledge,
experience, skill, know-how, or processes or consist of the development and transfer of a
technical plan or technical design.
 The presence of this clause limits the scope as well as the taxability of such services in the Source
State

37. Contd.
Mere rendition of services does not fall within the gamut of the expression ‘make
available’ unless the following conditions (illustrative) are fulfilled:
The technical knowledge, skills, etc. remain with the person receiving the services even
after the agreement comes to an end.
The technical knowledge or skills of the provider are imparted to the recipient.
The recipient is in a position to deploy similar skills or technology or techniques in
future without the aid or assistance of the service provider.
The technical information which is imparted or transmitted remains at the disposal of the
recipient for taking benefit therefrom

38. Contd.
• A distinction needs to be made between services which are rendered and services which are made
available.
• While all services that are made available are necessarily rendered, not all services that are rendered,
‘make available’ the technical knowledge, skill, etc. to enable the recipient to derive an enduring
benefit and apply the technology contained therein
The expression ‘make available’ has not been defined in any of the DTAA’s except for the India-USA DTAA.
The explanation provided in the Memorandum of Understanding appended to the India-USA DTAA is as
follows:
“Generally speaking, technology will be considered "made available" when the person acquiring
the service is enabled to apply the technology. The fact that the provision of the service may
require technical input by the person providing the service does not per se mean that technical
knowledge, skills, etc., are made available to the person purchasing the service, within the
meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not
per se be considered to make the technology available.”

39. Examples
Architectural services
Computer software development
Bio-technical services
Exploration or exploitation of mineral oil or natural gas
Consulting services in relation to review of hydrocarbons
Examples of FTS incomes under make available clause are as follows:

40. Most Favoured Nation Clause
Most Favored Nation (MFN) status is an economic position in which a country enjoys the best trade
terms given by its trading partner
General terms that MFN clause can contain
The lowest possible trade tariffs
Least possible trade barriers
Highest import quotas
Benefits
It ensures the trade partner non-discriminatory trade between two countries vis-a-vis other trade partners.
A WTO member country is obliged to treat other trading nation in a non-discriminatory manner
MFN ensures that the country receiving MFN status will not be in a disadvantageous situation compared to
the granter’s other trade partners

41. Contd.
India has entered into DTAA’s having a Most Favoured Nation (MFN) clause with various
countries Netherlands, France, Spain, Belgium, Switzerland, Sweden, Finland, Hungary, etc.
The Protocol to the DTAA’s with said countries (‘relevant DTAA’) provide that
if under any DTAA between India and a third State (‘subsequent DTAA’),
India limits its taxation to a lower rate or a more restricted scope than the
rate or scope provided in the relevant DTAA,
the same rate or scope as is applicable in the subsequent DTAA shall also
apply under the relevant DTAA
In simple terms MFN clause is a provision in the DTAA by which one state agrees to accord to the
other State a treatment that is no less favourable than that which it accords to the third States

42. Contd.
A typical MFN clause in any Indian DTAA reads as under –
“In respect of Articles 10 (Dividends), 11 (Interest) and 12 (Royalties and Fees for
Technical Services) if under any Convention, Agreement or Protocol between
India and a third State which is a member of the OECD, India limits its taxation at
source on dividends, interest, royalties, or fees for technical services to a rate
lower or a scope more restricted than the rate or scope provided for in this
Convention on the said items of income, the same rate or scope as provided for
in that Convention, Agreement or Protocol on the said items of income shall also
apply under this Convention.”

43. Illustrations

44. Illustration 1
• An Indian firm owns inventory control software for use in its chain of retail outlets
throughout India.
• It expands its sales operation by employing a team of travelling salesmen to travel around
the countryside selling the company's wares.
• The company wants to modify its software to permit the salesmen to assess the company's
central computers for information on what products are available in inventory and when
they can be delivered.
• The Indian firm hires a German computer programming firm to modify its software for this
purpose.
• Are the fees which the Indian firm pays treated as fees for included services ?
Situation

45. Solution
• The fees are fees for technical services.
• The German company clearly performs a technical service for the
Indian company
• It provides services with specialized skill/knowledge it possesses
• The Service provided to the Indian company is also exclusive and
customized
Analysis

46. Illustration 2
• An Indian vegetable oil manufacturing company wants to produce a cholesterol-
free oil from a plant which produces oil normally containing cholesterol.
• An Australian company has developed a process for refining the cholesterol out of
the oil.
• The Indian company contracts with the Australian company to modify the formulas
which it uses so as to eliminate the cholesterol.
• Are the fees paid by the Indian company Fees for technical services ?
Situation

47. Solution
• The fees are for technical services.
• The services provided by the Australian company is
technical in nature and involves special skill or
knowledge
Analysis

48. 48
Situation
• An Indian vegetable oil manufacturing firm has mastered the science of producing
cholesterol-free oil and wishes to market the product worldwide.
• It hires an American marketing consulting firm to do a computer simulation of the
world market for such oil and to adverse it on marketing strategies.
• Are the fees paid to the U.S. company for included services ?
Illustration 3

49. 49
Analysis
• The American company is providing a consultancy service which involves the use of
substantial technical skill and expertise.
• It is not, however, making available to the Indian company any technical experience,
knowledge or skill, etc., nor is it transferring a technical plan or design.
• What is transferred to the Indian company through the service contract is commercial
information.
• The fact that technical skills were required by the performer of the service in order to
perform the commercial information service does not make the service a technical service
• Therefore, the fees would not be for included services.
Solution

50. Judicial Precedents

51. 51
Assessee
(Netherlands)
Indian
Subsidiary
assessee CIT (A)
Services
Consideration
AO levies addition
Inclusive of
Managerial,
Technical and
consultancy
services
Made available,
Technical
knowledge, Know
how, Experience
etc.
Covered by, Article-
12 (India-
Netherland DTAA) as
Fee for Technical
service (FTS)
Appeal
• Services are managerial in nature ≠ FTS
• Further, supporting growth of group co ≠
making available technical knowledge, know
how, experience etc
Deputy Commissioner of Income-tax (IT)
vs Hyva Holding B.V [2019] 106
taxmann.com 24 (Mumbai - Trib.)

52. 52
Analysis of Make Available
Clause
Make available Clause
Recipient of service is in a
position to derive enduring
benefits out of utilization of
knowledge or knowhow
Such knowledge of knowhow
must remain with the recipient
for independent usage
Therefore, to fall within the purview of fees for technical services under article 12 of the
India-Netherland Tax Treaty,
• rendering of services and
• making available of technical knowledge, experience, know-how, skill, etc.,
have to take place simultaneously.

53. 53
Held
1
Services like information technology, R&D, strategic purchasing service were also provided along with the
services under consideration. However, the core activity of appears to be in the nature of managerial services
2
Managerial services are not included in the definition for FTS under Article 12(5) of India Netherlands Tax
Treaty
3
Further, AO failed to demonstrate the fact that provision of services has enabled Indian subsidiary to apply
technology independently. Hence there are no make available clause in the services provided
In view of the aforesaid, there is no infirmity in the order of the Commissioner (Appeals) in holding that the amount
received by the assessee from its subsidiary is not in the nature of fees for technical services; hence, the addition
made by the Assessing Officer is to be deleted

54. 54
Steria (India) Ltd. Vs. Commissioner of
Income-tax VI [2016] (386 ITR 390)(Delhi
HC)
Indian Public
Company
(Assessee)
Client’s core
business
Providing IT driven services
Steria France
France group
entity of the
assessee
centralizes skills for carrying on
management functions
MSA - Management Service
Agreement
No office or
Permanent
establishment in
India
Issue: Withholding tax implications for the sum payable under MSA
Most Favoured Nation clause under the India-France DTAA

55. 55
Observations
Separate notification of the Protocol was not required. The benefit of the lower rate or restricted scope of
FTS under the India-France DTAA was not dependent on any further action by the respective governments
The wording of the Protocol made itself- operational and an integral part of the notified DTAA
The purpose was to afford to a party to the India-France DTAA, the most beneficial provision that might be
available in any DTAA between India and another OECD country
The benefit could accrue in terms of lower rate or a more restrictive scope under more than one DTAA
which may be signed after 1 September1989 between India and another OECD member State
In respect of Protocol to the India –France DTAA, the HC held that the words, “a rate lower or a scope
more restricted” envisaged that there could be a benefit of either kind i.e. a lower rate or a more
restricted scope and one did not exclude the other

56. 56
Held
Unless specifically provided, Protocol need not be separately notified
Restrictive scope of FTS in subsequent DTAA can be read into India-France DTAA and shall be available
to parties falling within the ambit of India-France DTAA
Further, in respect of taxability of sum payable to Steria France it was held that FTS under the India–
UK DTAA (because of protocol of MFN provided in India-France DTAA and UK being member of
OECD), excludes ‘managerial services’
It was hence not even necessary to examine the ‘make available’ requirement in the second limb of
the definition
Since it was projected that the fee paid to Steria France par took the character of FTS , the question
whether the French entity had a PE in India under Article7 of the India-France DTAA did not arise
The payment made for managerial services provided by Steria France could not be taxed as FTS and TDS
under Sec 195 did not apply

57. Thank You!
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