Taxability of service fees as Fees for Technical Services: Applicability of Most Favoured Nation clause contained in the protocol to the India- Sweden tax treaty
- The Assessee was a company incorporated in Sweden. SKF Group was the originator of the self-aligning ball bearings and was one of the leading global suppliers of products, solutions and services within rolling bearings, seals mechatronics, services and lubrication systems. The Assessee had entered into agreements with SKF India and SKF Technologies, in relation to technology License agreement; Trademark License agreement and information technology service delivery agreement. The Assessee has filed its return of income for AY 2013-14 on 31.11.2013, declaring total income at Rs.87.48 lakhs and such income included gross receipts from royalty and trademark fee, information technology-related services and training and support services fee. The Assessee had offered entire receipts as taxable income under the head royalty as per India-Sweden tax treaty.
- The case of Assessee was selected for scrutiny and the Assessing Officer opined that the Indian subsidiary was enabled to apply technical knowledge acquired from the Associated Enterprise, which resulted in a reduction of expenses and thus, concluded that the nature of services was such that it could be considered to be in the nature of Fees for Technical Services, which makes available technical knowledge/ experience/ skill or process.
- There was no doubt of whatsoever with regard to the applicability of the benefit of Most Favoured Nation status, if the other country, where India was having tax treaty was a member of OECD, then even if there is no separate notification from the Government, the benefit of Most favoured Nation has to be given to the Assessee to examine services rendered, in light of the definition of Fees for Technical Services as provided in the tax treaty between India and other countries. However, the fact remains that since, it has already been concluded that services rendered by the Assessee, in light of scope of services offered by the Assessee to its Associated Enterprise as referred to in IT service delivery agreement, were in the nature of Fees for Technical Services, as per the India- Sweden tax treaty, as well as the definition of Fees for Technical Services, as provided in section 9(1)(vii) of the Income Tax Act, 1961, applicability of the definition of Fees for Technical Services as provided in the India-Portugal tax treaty had to be examined in light of nature of service rendered by the Assessee to its Associated Enterprise. As per the India-Portugal treaty and the India USA treaty, Article 12, the definition of Royalty and Fees for included service has two limbs.
- The first limb speaks about ancillary and subsidiary services and the second limb speaks about to make available clause. If the Assessee needs to apply the second limb, then it has to first exhaust the first limb. Further, if you go through the definition as per Article 12, prima-facie it appears that as per Article 12(4)(b) of the Treaty between the India-Portugal and India-US if service rendered, were ancillary and subsidiary to the application or enjoyment of the right, property or information, for which a payment described in paragraph 3 is received or make available technical knowledge, experience, skill, know-how or process or consist of the development and transfer of a technical plan or technical design, which enables the person acquiring the services to apply the technology to contend therein, then it comes under the definition of fees for included services, which is akin to the definition of royalty as provided in section 9(1)(vii) of the Income Tax Act, 1961 and the definition of royalty as provided in the India-Sweden tax treaty.
- The information technology services rendered by the Assessee were subservient to the royalty agreement and were ancillary and subsidiary to the mainframe royalty agreement entered into by both the parties. Since the Assessee has already a royalty agreement with the associated enterprise under which it transfers its knowledge in relation with the products covered under the royalty agreement, the information technology setup was clearly meant for achieving the objective and had to be treated along with royalty agreement.
- The services rendered by the Assessee would definitely fall in the first limb, as they were integrally connected with the royalty agreement and hence, would be treated as the fee for technical services, as contemplated under Article 12(4)(a) of the tax treaty between India- Portugal as well as the India-US and accordingly, even if the Assessee gets the benefit of Most Favoured Nation clause, as provided in a protocol of the India- Sweden tax treaty, the Assessee would not get any benefit, because services rendered by the Assessee were in the nature of fees for technical services, which were liable to be taxed in India.
- Thus, services rendered by the Assessee through information technology service delivery agreement was part and parcel of main agreement of technology license and trademark, which could not have been separated and accordingly, fees received for information technology-related services were liable to be taxed as Fees for Technical Services, as per the definition of Fees for Technical Services, as provided under section 9(1)(vii), as well as provided under the India-Sweden tax treaty.