2011 (4) TMI 548 - AT - Income Tax

DTAA between India and UK - International Taxation - Assessee in default - TDS u/s 195 - there are plethora of case laws which have defined the term make available to mean that the service rendered by a foreign company should have been transferred its technical know-how to the acquirer of the service - the payments made to these foreign companies definitely amount to fees for included services and the amounts in question is taxable in India and hence, the assessee was liable to deduct tax at source - it was tried to bring home that no technology was made available by these two entities and their services were essential to develop the required tooling to validate the new process for manufacture of steel rim - Held that technical know-how was passed on to WIL by these two entities and that is why they have done all these activities in-house using the technical know-how which was passed on to the company by the foreign companies Technical or consultancy service rendered should be of such a nature that it makes available to the recipient technical knowledge, know-how and the like - It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it - there is no reason why that interpretation should be eschewed. It becomes a valuable aid in interpreting the phrase make available in the latter Agreement as well. The explanatory memorandum becomes a valuable aid in interpreting the phrase make available . It reflects the Government of India s viewpoint on the true connotation of the expression - Decided against the assessee

Summary

Issues Involved:
1. Whether the assessee, WIL, is liable to be treated as an 'assessee in default' for non-deduction of tax at source on payments made to non-resident companies, AMT and MFM.
2. Whether the services rendered by AMT and MFM fall under the purview of 'fees for technical services' as per section 9(1)(vii) of the Income-tax Act and Article 12(4) of the DTAA with the USA.
3. Whether the services rendered by AMT and MFM were 'made available' to the assessee, thereby making the payments taxable in India.

Detailed Analysis:

1. Liability as 'Assessee in Default':
The assessee, WIL, entered into agreements with AMT and MFM for developing and proving new manufacturing processes. WIL paid AMT US $95,000 and MFM US $60,000 without deducting tax at source, arguing that the services were rendered outside India by non-residents, and thus no income accrued or arose in India. The Income-tax Officer (ITO) rejected this explanation, treating WIL as an 'assessee in default' under section 201(1) of the Income-tax Act, demanding tax and interest totaling Rs. 10,92,242. The CIT(A) confirmed this decision. The assessee contended that the services did not constitute 'technical services' and were not taxable in India, but the ITO and CIT(A) disagreed, leading to the appeal.

2. Classification as 'Fees for Technical Services':
The ITO and CIT(A) concluded that the services provided by AMT and MFM fell under 'fees for technical services' as defined in section 9(1)(vii) of the Income-tax Act and Article 12(4) of the DTAA with the USA. The agreements indicated that AMT and MFM would develop and provide new processes using their facilities and technical manpower. The ITO argued that these services included managerial, technical, or consultancy services, making them taxable in India. The CIT(A) agreed, stating that the services rendered made available technology, knowledge, experience, skill, know-how, or processes to the assessee.

3. 'Make Available' Criterion:
The main argument from the assessee was that the services rendered by AMT and MFM were not 'made available' to them, meaning the technical know-how was not transferred to WIL in a way that they could use it independently in the future. The assessee claimed that the services were merely for validation and did not involve any transfer of technical knowledge. However, the ITO and CIT(A) found that the services did indeed make available the technical know-how, as WIL was able to use the validated processes and continue manufacturing the products. The tribunal agreed with this view, stating that the services rendered by AMT and MFM fell under 'fees for included services' and were taxable in India. The tribunal emphasized that the term 'make available' signifies the transfer of technical knowledge that allows the recipient to use it independently, which was the case here.

Conclusion:
The tribunal upheld the decisions of the ITO and CIT(A), confirming that WIL was liable as an 'assessee in default' for non-deduction of tax at source on payments made to AMT and MFM. The services rendered by these non-resident companies were classified as 'fees for technical services' under section 9(1)(vii) of the Income-tax Act and Article 12(4) of the DTAA with the USA. The tribunal found that the services made available the technical know-how to WIL, making the payments taxable in India. Consequently, the appeal of the assessee was dismissed.