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TMI Blog2025 (2) TMI 712X X X X Extracts X X X X X X X X Extracts X X X X ..... 321 - DELHI HIGH COURT] The appeal is accordingly dismissed. Income deemed to accrue or arise in India - Freight Logistic Support services provided by the assessee is in the nature of Fee for Technical Services/Fee for Included Services as per Section 9 (1) (vii) of the Income Tax Act, 1961 and Article 12(5) of the India-US Double Taxation Avoidance Treaty - HELD THAT:- As we had explained in International Management Group, FTS is firstly concerned with rendition of specialized knowledge, skill, expertise and know-how. It is principally concerned with a transfer of knowledge, skill and expertise. Those three attributes must be those which are possessed by the service provider and are distinctive and special qualities that it possesses. The second facet of FTS is the "make available" condition and which envisions an enablement or transfer of specialized knowledge and skill. As was explained in International Management Group, the mere furnishing of service would not be sufficient to categorise the service as FTS. It would have to be necessarily accompanied by a transfer of expertise and which would consequently enable the recipient of service becoming skilled in its own right and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stions, the Court while dismissing ITA 475/2009 had observed as follows: - "Learned counsel for the appellant could not dispute that question of law proposed to be raised is covered by the judgment in CIT vs. Woodward Governor India Pvt. Ltd. 312 ITR 254 and judgment of this Court in Skycell Communications Ltd. and Anr. vs. DCIT and Ors. 251 ITR 53 which has been followed in appeal Commissioner of Income Tax vs. Bharti Celluar Ltd. I.T.A. No. 1120/2007. The appeal is accordingly dismissed. It could not be disputed that the question covered there is a pure question of fact. No question of law has arisen. Dismissed." 3. The fact that questions 'B' and 'C' stand conclusively settled and answered against the appellant is also evident from a reading of Para 6 of the order passed in ITA 1088/2011: -. "6. Prima facie, we find force in the argument of learned counsel for the assessee. In any case, this is the view already taken by this Court in the case of this very assessee affirming the earlier decision of the Tribunal in ITA Nos. 475/2009 and 751/2010 and we see no reason to deviate from the same. Therefore, in our opinion, no substantial question of law arises and the appeal is di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... customs rules and regulations in multitude of countries which Expeditors Inc. assists in providing. e) Training and Personnel Management: As the Group is a service organisation, it has laid down a focus on recruitment, training and retention of personnel. Expeditors Inc. has attempted at developing a global culture of ongoing development of key personnel and management personnel via formal and informal means; creation of unlimited advancement opportunities for employees, mentoring of successors for every key position." 7. As we view the aforesaid extracts, we find that under the head of "Technical Knowledge", the assessee is only stated to have assisted the Indian entity in dealing with customs brokerage and other services to be provided at destinations including assisting customers in clearance of shipments through customs and preparation of required documentation. 8. The appellant, however, would seek to draw sustenance from the usage of the expression "complicated function" as appearing under that head to sustain their submission that the Freight Logistic Support would qualify FTS. In our considered opinion, the submission is clearly misconceived since the "complicated func ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cialized knowledge, skill or expertise on behalf of a client or the transfer of knowledge, skill or expertise to the client, other than a transfer of information covered by the definition of 'royalties' in paragraph 3 of article 12. Services of a routine nature that do not involve the application of such specialized knowledge, skill or expertise are not within the scope of article 12A. 63. The ordinary meaning of the term 'management' involves the application of knowledge, skill or expertise in the control or administration of the conduct of a commercial enterprise or organization. Thus, if the management of all or a significant part of an enterprise is contracted out to persons other than the directors, officers or employees of the enterprise, payments made by the enterprise for those management services would be fees for technical services within the meaning of paragraph 3. Similarly, payments made to a consultant for advice related to the management of an enterprise (or of the business of an enterprise) would be fees for technical services. 64. The ordinary meaning of the term 'technical' involves the application of specialized knowledge, skill or expertise with respect to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12A(3) of the UN Model Convention contains the definition of 'fees for technical services'. In so far that the UN Model Convention itself provides an autonomous definition of 'fees for technical services', national law cannot be used for its interpretation (cf. article 3(2) of the UN Model Convention, see supra m. No. 71). In contrast to article 12(2) of the OECD Model Convention which refers to the national law for the interpretation of the different terms in the catalogue of the paragraph, the terms 'management', 'technical', and 'consultancy' of article 12A(3) of the UN Model Convention have an autonomous meaning in the UN Model Convention. b. Any payment The term 'payment' has a broad meaning that is comparable to 'paid to' in articles 10, 11, and 12 of the UN Model Convention. It is defined as 'fulfilment of the obligation to put funds at the disposal of the service provider in the manner required by contract or custom' (No. 40 of UN Model Convention Comm. on article 12A referring to No. 3 of UN Model Convention Comm. on article 10 and No. 6 of UN Model Convention Comm. on article 11 quoting No. 7 of OECD Model Convention on article 10 and No. 5 of OECD Model Convention on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as such but uses them to make statements on customers' issues. These services are dubbed as 'technical' because they relate to the application of Intellectual Property and not to fundamental research. Furthermore, in the context of article 12 of OECD and UN Model Conventions and their catalogue of Intellectual Property, the term 'technical' must initially be understood in a traditional way such as 'applied and industrial science' or 'engineering sciences'. It excludes social sciences, the arts and humanities, and arts and crafts as well as commercial managerial or professional services such as managers, intermediators, lawyers, and doctors. This narrow understanding of a technical nature was not in every country's interest and, therefore, some Double Taxation Conventions explicitly add managerial services, general consulting, or cover services of all kinds. Article 12A of UN Model Convention follows this tradition in including services of managerial and consulting services. This raises the issue of whether these additions form a separate category that does not need a link to the traditional technical nature in the context of article 12. In that wide understanding, any 'ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 62 of UN Model Convention Comm. on article 12A). Technical services have to be discerned from routine services with a case-by-case analysis. One important aspect is whether the service is individually customized to the specific needs of the customer. A standard scope of services under a standard contract is a strong argument for routine services. Yet, if a service provider determines the need of a customer in-depth and then chooses from several standardized services in order to offer the one that fits best, they cannot qualify as being of a routine nature. Thus, it is not possible to avoid a qualification as a technical service by simply drafting the contract in a standard manner or using standard service elements. The UN Model Commentary provides some examples. The access to a database will, in most cases, be of a routine nature while the creation of a customized database qualifies as technical services (Nos. 90, 91 UN Model Convention Comm. on article 12A). Yet, the selective access to some databases according to the established needs of clients is equivalent to the creation of a custom database and can thus also be qualified as a technical service. Financial services such as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onfined to the traditional sciences. What authorities commend for consideration is an ascertainment of whether the services rendered involved the application of a specialised skill, knowledge or expertise. It is this shift in understanding which has led to the application of specialised knowledge, skill or expertise with respect to any art, science, profession or occupation being recognised as falling within the ambit of the expression "technical" services. Similarly, the word "consultancy" would entail the provision of advice or service of a specialised nature. There could also be the possibility where technical and consultancy services may also overlap or where the nature of service furnished may be discerned as falling under both those heads. We thus broadly concur with the views expressed and noticed above. However, we note that in so far as these appeals are concerned, there appears to be no contestation on the nature of activities which were rendered by IMG and the respondents have not questioned those services falling within the scope of the expression "technical and consultancy services". The principal issue of disputation was whether the "make available" test was satisfied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical service, in view of the clauses in the Double Taxation Avoidance Agreement the liability to tax is not attracted. The learned Additional Solicitor General relied on three judgments to point out that was the earlier view. Now, there is a departure supporting the Department. The first judgment on which reliance is placed is the judgment of the Advance Rulings Authority in the case of Perfetti Van Melle Holding B.V., In re[(2012) 342 ITR 200 (AAR); 2011 SCC OnLine AAR-IT 30.] where it was held as under (page 212): "The expression "make available" only means that the recipient of the service should be in a position to derive an enduring benefit and be in a position to utilise the knowledge or know-how in future on his own. "By making available the technical skills or know-how, the recipient of the same will get equipped with that knowledge or expertise and be able to make use of it in future, independent of the service provider"... So when the expertise in running the industry run by the group is provided to the Indian entity in the group to be applied in running the business, the employees of the Indian entity get equipped to carry on that business model or service mode ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame time is satisfied." 91. Of equal significance are the observations of the Kerala High Court in US Technology Resources [US Technology Resources (Pvt.) Ltd. v. CIT, (2018) 407 ITR 327 (Ker); 2018 SCC OnLine Ker 3113.] when their Lordships laid emphasis on the transfer of technology or know-how being a necessary ingredient of the "make available " condition which stands indelibly attached to fees for technical services. To recall, the Kerala High Court in the aforenoted decision had held (page 338 of 407 ITR): "We are conscious of the fact that the Double Taxation Avoidance Agreement as relevant in the present case, is not applicable even in the case of CIT v. De Beers India Minerals P. Ltd. [(2012) 346 ITR 467 (Karn); 2012 SCC OnLine Kar 8858.] where the non-resident hailed from Netherlands. However, on facts we are of the opinion that when the definition clause in Double Taxation Avoidance Agreement read along with the memorandum of understanding specifically refers to transfer of technologies, the facts as available in the Karnataka decision are more similar to the present facts. Herein also there is no technology transfer; nor is there a plan or strategy relating to manag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contracts in which the payment is for information concerning experience. This special case of property is also known as a 'know-how' contract. Its specific attribute is the lack of legal protection as an absolute right. When know-how is shared, it cannot be taken back and its use cannot be prohibited (at least to third persons, the receiver of know-how might be bound by contractual injunctive reliefs). Therefore, the transfer of the use cannot be distinguished from a transfer of full ownership. A third type of contracts contains the full transfer of ownership, alienation. Alienation is not included in the OECD and UN Model Conventions, and thus is covered by article 13 of OECD and UN Model Conventions (supra m.No. 20 et seq.). In all types of contracts the payer receives the property for his own use or ownership. Hence, they have to be distinguished from contracts where the property is not transferred to the payer but is used by the beneficial owner for producing goods for or rendering services to the payer. The payer then does not receive the property itself, but a good or service that was created by utilizing the property (infra m. No. 105 et seq.)." 93. As we read article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transmission or conferment of technical expertise, knowledge and skill. 95. It is also important to bear in mind that the mere usage or utilisation of technical or consultative material in aid of business would not be sufficient to attract article 13 of the Double Taxation Avoidance Agreement. If we were to accept the submission that handing over of research or advisory work were sufficient for the purposes of article 13, it would render the "make available " condition comprised in para 4(c) wholly redundant and otiose since the mere rendering of service would have sufficed. As De Beers [CIT v. De Beers India Minerals P. Ltd., (2012) 346 ITR 467 (Karn); 2012 SCC OnLine Kar 8858.] correctly holds "The tax is not dependent on the use of technology by the recipient". The make available prescription bids us to make a conscious distinction between a mere service provision and the impartation of lasting expertise. The offer of service or advise does not fundamentally alter the recipient's capabilities. These services, while potentially valuable, do not endow the recipient with new skills or knowledge which could be independently deployed in the future. The kernel of "make availabl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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