The expression ‘Fees for Technical Services’ has been subject matter of regular judicial reviews in our country. The expression ‘fees for technical services’ has been defined by Explanation 2 to section 9(1)(vii) of the Income-tax Act, 1961. It means any consideration (including any lump sum consideration) for rendering of managerial, technical or consultancy services, including the provision for services of technical or other personnel. For a particular stream of income to be characterized as ‘fees for technical services”, it is necessary that some sort of “managerial”, “technical” or “consultancy” services should have been rendered for a consideration. The terms “managerial”, “technical” or “consultancy” do not find definition in the Income Tax Act and it has been held by various courts that they have to be interpreted based on their understanding in common parlance.
Various courts have tried to interpret the meaning of the words “managerial”, “technical” or “consultancy” services depending on facts of each case. Delhi High Court in the case of CIT vs Bharti Cellular Ltd.1 held that technical service to be covered in the Explanation 2 to Section 9(1)(vii) must involve human element and does not include any service provided by machines or robots. In another case of Adidas Sourcing Ltd. vs DIT2 it was held by Delhi Tribunal that for services to be covered in the word “Consultancy”, it would be necessary that a technical element is involved in such advisory.
Clause (vii) of Section 9(1) specifies circumstances in which fees for technical services are deemed to accrue or arise in India. In cross border provision of services, many type of services are exchanged between non-resident and resident entities. Such transactions may include services like accounting services, information technology related services, testing services and many more. These services may qualify as Fees for Technical Services ("FTS") as per section 9 of Income-tax Act, 1961. However, in many cases, the payment so made may not qualify as FTS within the purview of Double Taxation Avoidance Agreement ("DTAA") between the countries whose payer and payee are residents. Most of the DTAAs contains a restricted definition of FTS. Most of the DTAA’s contains separate clause for Professional Services which otherwise may fall within the scope of Section 9(1)(vii). In other words, the definition of FTS as per Income-tax Act is much wider in scope than one given in the respective DTAAs.
When an Indian entity makes the payment for technical services to an entity located outside India, the amount so paid can be deemed to accrue or arise in India. In such a case, the Indian entity is required to deduct tax at source under the provisions of section 195 of the Income-tax Act. However to determine whether said payment is liable to tax in India or not, it is necessary to refer to the Double Tax Avoidance Agreement between the relevant countries otherwise exact taxability cannot be ascertained.
In a very recent case of GVK Industries Limited vs ITO3 before the Hon’ble Supreme Court of India, which involved rendering of professional/consultancy services by a Switzerland based Company for arranging financial assistance for an India Client, the Indian appellant company did not invoke DTAA at any stage of its arguments either before Hon’ble Supreme Court/High Court or before lower authorities. The case has been discussed herein below.
- Whether ‘success fees’ earned through consultancy services, rendered outside India, by Switzerland based Company to an Indian Company for availing financial assistance would be chargeable to tax under the provisions of Income Tax Act 1961?
FACTS OF THE CASE:
The assessee,an Indian Company, sought services of Non Resident Company located at Zurich, Switzerland, to prepare a scheme for raising the finance and tie up for the loan for its power project. The Swiss Company successfully carried out its obligations and assessee company was able to avail the required loan/financial assistance. After successful rendering of services the Swiss Company sent invoice to the Indian Company for the payment of ‘success fees’. The assessee approached the Income Tax Officer for issuing NOC to remit the said fees without deduction of any tax, pointing out that Swiss Company had no place of business in India and that no part of services were rendered in India. It also contended that the said services were not technical services so as to fall within the scope of Section 9(1)(vii).
The Income Tax officer refused to issue ‘No Objection Certificate’. The appellant unsuccessfully preferred revision petition before Commissioner of Income Tax u/s 264 and also failed to get relief from High Court through writ petition. The High Court held that though no business connection is established between the assessee and Swiss company for Section 9(1)(i) to come into operation but payment of ‘success fee’ would fall within the purview of clause (vii)(b) of Section 9(1) of the Income Tax Act and liable to tax in India as Fees for Technical services.
Being aggrieved, the appellant Indian Company approached the Hon’ble Supreme Court.
(a) That the Swiss Company was very actively associated not only in arranging loan but also in providing various services which fall within the ambit of both managerial as well as consultancy services and hence liable to pay tax as per Section 9(1)(vii)(b) of the Act.
hat Section 5(2) read with Section 9(1) will apply to the remittance to be made by the company to the Swiss Company as the income would be deemed to have accrued or arisen in India and hence, the Indian company was liable to deduct tax at the prescribed rate before remitting any money to the Non Resident Company.
That there is a business connection between the Non Resident Company with the company in India and the voluminous correspondence between the two wings discloses the said connection and hence the case falls within the ambit of Section 9(1)(i) also.
It was asserted by the revenue that the services of the Swiss Company, as demonstrable from the material brought on record, was rendered within India and, therefore, the company is obliged in law to deduct income-tax before remitting "success fee" to the Swiss Company. On this premise, the denial of 'No Objection Certificate' (NOC) was sought to be justified.
(a) That the Swiss company had no place of business in India and that all the services rendered by it were from outside India; and that no part of success fee could be said to arise or accrue or deemed to arise or accrue in India attracting the liability under the Income-tax Act, 1961.
(b) That the Swiss Company had no business connection in India and hence Section 9(1)(i) is not attracted and further, as the Swiss Company had rendered no technical services, Section 9(1)(vii) is also no attracted.
(c) That the Swiss Company did not render any technical or consultancy service to the company but only rendered advise in connection with payment of loan by it and hence, it would not amount to technical or consultancy service within the meaning of Section 9(1)(vii)(b) of the Act. It is important to note here that the assessee did not invoke the Double Taxation Avoidance Agreement between India and Switzerland at any stage and this was taken note by the Hon’ble Supreme Court in Para 20 of its order.
The Hon’ble Supreme Court discussed the relevant Sections of the Income Tax Act and observed & held as under:
(a) That the Swiss Company is a Non-Resident Company and it does not have a place of business in India. The revenue has not advanced a case that the income had actually arisen or received by the Swiss Company in India. The High Court has recorded the payment or receipt paid by the appellant to the Swiss Company as success fee would not be taxable under Section 9(1)(i) of the Act as the transaction/activity did not have any business connection. The conclusion of the High Court in this regard is absolutely defensible in view of the principles stated in CIT v. R.D. Aggarwal & Co.4
(b) That for deciding whether the case would fall within the ambit of Section 9(1)(vii), the expression, managerial, technical or consultancy service, are to be appreciated. The said expressions have not been defined in the Act, and, therefore, it is obligatory on our part to examine how the said expressions are used and understood by the persons engaged in business. The general and common usage of the said words has to be understood at common parlance.
(c) As the factual matrix in the case at hand, would exposit the Swiss Company had acted as a consultant. It had the skill, acumen and knowledge in the specialized field i.e. preparation of a scheme for required finances and to tie-up required loans. The nature of activities undertaken by the NRC has earlier been referred to by us. The nature of service referred by the Swiss Company, can be said with certainty, would come within the ambit and sweep of the term 'consultancy service' and, therefore, it has been rightly held that the tax at source should have been deducted as the amount paid as fee could be taxable under the head 'fee for technical service'. Once the tax is payable paid the grant of 'No Objection Certificate' was not legally permissible. Ergo, the judgment and order passed by the High Court are absolutely impregnable. Hence, the grant of NOC was not legally permissible.
In this case, surprisingly, DTAA between India and Switzerland was not invoked by the appellant.If the relevant articles of DTAA had been invoked and got analyzed by the appellant, Hon'ble SC might have come out with different decision as DTAA restricts the meaning of Fees for Technical Services giving lesser scope of taxation for Source State. Further there is a separate clause for professional services of these nature in the DTAA.
This decision might cause a major controversy in the coming days as consultancy services of professional nature are generally considered under separate clause of Independent Personnel Services and not under the clause relating to Fees for Technical Services in majority of DTAA’s. However by not invoking Indo-Swiss DTAA, the appellant has allowed the Hon’ble Court hold that the fees for rendering such professional services is taxable in India.
Indo Swiss DTAA also has protocol which says that if there is any restrictive covenant in any other DTAA relating to Fees for Technical Services, then that would be made applicable to Indo Swiss DTAA also. Now there is ‘Make available’ clause in many DTAA’s .It has been interpreted to be meant by various courts as the restrictive clause which means that FTS would be taxable in the source state only if the service provider has made available the technical knowledge, experience, skill, know-how, or processes, etc. to the recipient of services and then service receiver can itself use those services in future. ‘Make Available’ concept has been discussed in many cases such as DeBeers India Minerals (P) Ltd.5
Further professional services like consultancy services are covered under Article 14 of Indo Swiss DTAA which states that source state can tax those services only if Service Provider has fixed base in the source country or he stayed in the source country for at least 183 days. Now if Article 14 is invoked, then also these services cannot be taxed in India as all the services were provided outside India and Swiss company had no fixed base in India.
Hence these services can neither be taxed under Article 14, there being no fixed base in India and nor under FTS clause as Article 12 read with Protocol restricts applicability of FTS clause and assessee gets benefit of ‘make available’ clause.
However this ruling by the Hon’ble SC is going to open Pandora’s Box of litigation as revenue is going to apply this judgement on every case of consultancy service being treated as FTS ignoring the fact that the Hon’ble SC itself has stated that DTAA has not been invoked by the appellant and hence the same has not been considered.
Reference to Judgements
1. (2008) 175 Taxmann 575 (Delhi HC)
2. (2012) 28 Taxmann.com 267 (Delhi Trib)
3. (2015) 54 Taxmann.com 347 (SC)
4. (1965) 56 ITR 20 (SC)
5. (2012) 208 Taxman 406 (Kar HC)
CA. Arun Gupta
Ex-Chairman Ludhiana Branch of NIRC of ICAI
Ex-Secretary Distt Taxation Bar Association,Ludhiana