Facts
De Beers India Minerals Pvt. Ltd. („taxpayer‟) is engaged in the business of prospecting and mining for diamonds and other minerals.
During the early stage of exploration, for carrying out geophysical survey, the taxpayer entered into an agreement with Fugro Elbocon B. V., Netherlands („Fugro‟) for providing high quality, high resolution, geophysical data suitable for selecting probable kimberlite (mineral deposit) targets.
The taxpayer paid consideration to Fugro without withholding tax; this position was challenged by the Assessing Officer. On appeal, the Commissioner of Income-tax (Appeals), and thereafter the Income-tax Appellate Tribunal, decided the matter in favour of the taxpayer.
Issues before the Karnataka High Court
Whether income received by Fugro from the taxpayer would fall within the definition of „fees for technical services‟ under article 12(5) of the India-Netherlands tax treaty which refers to „making available‟ knowledge, etc.?
Whether payment to Fugro was for the development and transfer of technical plan or technical design to the taxpayer?
Observations and Ruling of the High Court
Making available knowledge, etc.
The term „fees for technical services‟ is defined in article 12(5) of the India-Netherlands tax treaty to include payments in consideration for the rendering of any technical or consultancy services if such services make available technical knowledge, experience, skill, know-how or process.
At the outset, the High Court placed reliance on the „most favoured nation‟ clause under the India-Netherlands tax treaty, which essentially provides that a more beneficial tax provision in a subsequent treaty between India and another OECD country would apply to the India-Netherlands tax treaty as well.
Based on the „most favoured nation‟ clause, reference was made to the India-Singapore tax treaty which clarifies the scope of the term „make available‟ as enabling the person acquiring the services to apply the technology contained therein.
Services are „made available‟ to the recipient where:
– The service is aimed at and results in transmitting technical knowledge, etc. so that the payer of service could derive an enduring benefit and utilise the knowledge or know-how on his own in future without the aid of the service provider.
– The technical knowledge, skills, etc. must remain with the person receiving the services even after the particular contract comes to an end.
– The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider.
– The fact that the provision of the service may require technical knowledge, skills, etc. does not mean that technology is made available to the person purchasing the service.
Considering the above, Fugro has given data, photographs and maps to the taxpayer, but have not made available technical expertise, skill or knowledge in respect of such collection or processing of data to the taxpayer, which the taxpayer can apply independently and without assistance of Fugro in the future.
The taxpayer is completely kept in the dark about the process and the technologies which Fugro adopted in arriving at the information / data which is passed on to the taxpayer as technical service.
Fugro had rendered technical services to the taxpayer but they had not „made available‟ technical knowledge, etc. to the taxpayer as envisaged under the Indian-Netherlands tax treaty and hence the liability to tax is not attracted.
Development and transfer of technical plan or technical design
The contract between the taxpayer and Fugro was for providing services and not for supply of technical design or plan.
The reports and maps provided by Fugro are only additional mode of representation of data and it is not a technical plan or design as understood in law.
The agreement between the taxpayer and Fugro provides that all information and data relating to any site on which any work or services are performed shall exclusively belongs to the taxpayer; hence as Fugro was never the owner of the said data, the question of transfer of such data does not arise.
Thus Fugro had not devised any technical plan or technical design and therefore the question of transfer of any plan or design did not arise.
Conclusion
The Karnataka High Court has laid down very important guidelines for interpreting the term „make available‟ in the definition of „fees for technical services‟ under tax treaties. These guidelines will aid taxpayers in determining whether a payment for services attracts withholding tax under the relevant tax treaty or not.
Source : CIT v. De Beers India Minerals Pvt. Ltd. (ITA Nos. 549, 550 & 551 of 2007) (Karnataka High Court)
De Beers India Minerals Pvt. Ltd. („taxpayer‟) is engaged in the business of prospecting and mining for diamonds and other minerals.
During the early stage of exploration, for carrying out geophysical survey, the taxpayer entered into an agreement with Fugro Elbocon B. V., Netherlands („Fugro‟) for providing high quality, high resolution, geophysical data suitable for selecting probable kimberlite (mineral deposit) targets.
The taxpayer paid consideration to Fugro without withholding tax; this position was challenged by the Assessing Officer. On appeal, the Commissioner of Income-tax (Appeals), and thereafter the Income-tax Appellate Tribunal, decided the matter in favour of the taxpayer.
Issues before the Karnataka High Court
Whether income received by Fugro from the taxpayer would fall within the definition of „fees for technical services‟ under article 12(5) of the India-Netherlands tax treaty which refers to „making available‟ knowledge, etc.?
Whether payment to Fugro was for the development and transfer of technical plan or technical design to the taxpayer?
Observations and Ruling of the High Court
Making available knowledge, etc.
The term „fees for technical services‟ is defined in article 12(5) of the India-Netherlands tax treaty to include payments in consideration for the rendering of any technical or consultancy services if such services make available technical knowledge, experience, skill, know-how or process.
At the outset, the High Court placed reliance on the „most favoured nation‟ clause under the India-Netherlands tax treaty, which essentially provides that a more beneficial tax provision in a subsequent treaty between India and another OECD country would apply to the India-Netherlands tax treaty as well.
Based on the „most favoured nation‟ clause, reference was made to the India-Singapore tax treaty which clarifies the scope of the term „make available‟ as enabling the person acquiring the services to apply the technology contained therein.
Services are „made available‟ to the recipient where:
– The service is aimed at and results in transmitting technical knowledge, etc. so that the payer of service could derive an enduring benefit and utilise the knowledge or know-how on his own in future without the aid of the service provider.
– The technical knowledge, skills, etc. must remain with the person receiving the services even after the particular contract comes to an end.
– The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider.
– The fact that the provision of the service may require technical knowledge, skills, etc. does not mean that technology is made available to the person purchasing the service.
Considering the above, Fugro has given data, photographs and maps to the taxpayer, but have not made available technical expertise, skill or knowledge in respect of such collection or processing of data to the taxpayer, which the taxpayer can apply independently and without assistance of Fugro in the future.
The taxpayer is completely kept in the dark about the process and the technologies which Fugro adopted in arriving at the information / data which is passed on to the taxpayer as technical service.
Fugro had rendered technical services to the taxpayer but they had not „made available‟ technical knowledge, etc. to the taxpayer as envisaged under the Indian-Netherlands tax treaty and hence the liability to tax is not attracted.
Development and transfer of technical plan or technical design
The contract between the taxpayer and Fugro was for providing services and not for supply of technical design or plan.
The reports and maps provided by Fugro are only additional mode of representation of data and it is not a technical plan or design as understood in law.
The agreement between the taxpayer and Fugro provides that all information and data relating to any site on which any work or services are performed shall exclusively belongs to the taxpayer; hence as Fugro was never the owner of the said data, the question of transfer of such data does not arise.
Thus Fugro had not devised any technical plan or technical design and therefore the question of transfer of any plan or design did not arise.
Conclusion
The Karnataka High Court has laid down very important guidelines for interpreting the term „make available‟ in the definition of „fees for technical services‟ under tax treaties. These guidelines will aid taxpayers in determining whether a payment for services attracts withholding tax under the relevant tax treaty or not.
Source : CIT v. De Beers India Minerals Pvt. Ltd. (ITA Nos. 549, 550 & 551 of 2007) (Karnataka High Court)
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