Fees for Technical Services - IBA International Business Advisors

Fees for Technical Services – An overview
In common parlance, “Whenever human renders technical services with the aid of the machine they
are called techincial services”. However, as per section 9 of the Income Tax Act, 1961(Act), Fees for
Technical Services (FTS) is defined as any consideration for the rendering of any managerial,
technical or consultancy services” including the provision of services of technical or other personnel.
FTS is also defined in most of the Double Taxation Avoidance Agreements (DTAA) signed by India
with other countries.
Through this article we would like to discuss the concept of FTS within the Act, Double Taxation
Treaties and what have been the recent judicial precedents.
Taxability
As per Indian law, FTS are taxed on the gross amount of the fees. The taxability under the Act and
DTAA is summarized in the below table:
As per Act
As per DTAA
25.75%*
10-20%
* with the amendment in Finance Act 2013, the rate of 10% has now been raised to 25% with effect
from April 1, 2013.
Taxability of FTS
It is important to note that the Act has a beneficial provision to the assessee which allows them to be
governed either by the provisions of DTAA or the Domestic Law, whichever is more beneficial.
Though the Act is clear on the taxability and the rates, but a number of questions arise in ascertaining
whether the services would come under the definition of FTS. The broad issues of contentions are
given below:
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Business Connection
Human Intervention
Nature of service
Make available clause
No FTS Clause in the Treaty
Through this article we have analyzed the above contentions and how they have been viewed by
various courts of law.
Business Connection
Often a question arises whether services that do not fall within the definition of FTS provided in
section 9(1)(vii) be taxed under section 9(1)(i) i.e. business connection?
This has been clarified in CIT vs. Copes Vulcan Inc. 167 ITR 884(Mad) and Mateor Satellite Ltd. Vs.
Income Tax Officer 121 ITR 311 (Guj) that “Recourse cannot be sought under the general provisions
relating to „business connection‟ to tax such FTS “
Another problem arises when a foreign company provides technical services to an Indian company
entirely from outside India. In such cases, a plea is taken that there is no nexus between the foreign
company and its income in India as the foreign company is not involved in any business activities in
India and it receives payment in foreign currency outside India.
However, the Authority has observed that if the benefit of the services provided by the foreign
company is utilised in India by the Indian company, then foreign company is liable to pay tax in India.
[Reference: retrospective amendment in Section 9 by Finance Act 2010]
Even though the above provisions have been clarified by various judicial precedents, still there is a lot
of ambiguity in the treatment of technical services not falling under the definition.
Human Intervention:
“Technical services” as referred in the Act have to be understood as such services involving human
intervention. It is a mandatory requirement for qualification under FTS as held in Pehla Testing lab,
wherein Mumbai ITAT has analyzed the term “FTS” and held that:
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The word “technical” as appearing in Explanation 2 is preceded by the word “managerial” and
succeeded by the word “consultancy”.
It cannot be read in isolation as it takes colour from the word “managerial and consultancy”
between which it is sandwiched.
Managerial and consultancy services has to be given by human only and not by any means of
equipment.
Therefore, the word “technical” has to be construed in the same sense involving direct human
involvement.
Where simply an equipment or sophisticated machine or standard facility is provided albeit
developed or manufactured with the usage of technology, such a user cannot be characterized as
providing technical services
Nature of service:
Whether all services provided from outside India should be considered as technical service?
The definition of FTS under the Act is inclusive and includes managerial, technical and consultancy
services. Since these terms have not been defined anywhere in the Act, let us understand their
dictionary meaning which is:
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Managerial : relating to a manager or to the functions, responsibilities, or position of
management
Technical : relating to, or involving the practical, mechanical, or industrial arts or the applied
sciences
Consultancy :the act of offering expert or professional advice in a field
Services are technical in nature when special technical skills or knowledge are required for the
services. Support services in the field of accounting, finance, taxation, legal and so on may not be
regarded as technical services.
Make available clause:
According to some treaties with USA, UK, etc, services of a managerial, technical or consultancy
nature can be considered FTS only if it makes available the technical knowledge, experience, skill,
know-how or processes that enable the recipient to apply the technology involved. Karnataka High
Court in the case of De Beers India Minerals Pvt Ltd held that “making available” would apply only if
the technical knowledge, experience, skills remain with the recipient even after the contract ends and
can be deployed independent of the provider.
No FTS clause in the treaty:
DTAAs with some nations like Mauritius and Philippines do not have an article on FTS. In such cases,
such payment is classifiable as “Business Profit” under Article 7 of the relevant Tax Treaty and if the
payee does not have a Permanent Establishment in India in terms of Article 5 of the Tax Treaty, the
same will not be liable to tax in India. This view is supported by Siemens Aktiengesellschaft vs. ITO
(1987) 22 ITD 87 (Mum.)
However, the Chennai Tribunal in the case of TVS Electronics Ltd. held that if the provisions of the tax
treaty are silent on the FTS article, FTS is not automatically taxable as business income under the tax
treaty. In such a case, provisions of the Act need to be considered and applied.
Conclusion
Now the ongoing controversy relating to taxability of payment of FTS to Non Residents is resolved to
a great extent. However, Courts and Tribunals have still been delivering conflicting judgments on the
taxability of FTS. In order to achieve a more conducive environment for foreign investors in India,
more clarificatory interpretations need to be formulated about the scope of FTS that would make it
come under the purview of taxability. In the longer run, authorities would definitely need to get away
with its aggressive taxation policy and come out with a permanent solution that would eliminate the
possibility of a conflict between international trade and international taxation since developing
countries like India need to access technical knowhow and skills to enhance the value of their
products and services.
Until the Indian Tax authorities come out with a harmonious tax structure with respect to
international payments, it is pertinent to review a transaction from all aspects of the Act,
before concluding its nature to avoid heavy penalties since the revenue has been critically
reviewing the foreign remittances for services.

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