In the ITAT, Mumbai Bench ‘G’

Taxation Department, ICICI Bank Ltd.

v.

Deputy Commissioner of Income-tax,

(International Taxation) 3(1), Mumbai

Sunil Kumar Yadav, Judicial Member

And R. K. Panda, Accountant Member

IT Appeal No. 486 (Mum.) of 2004

[Assessment year 1997-98]

October 9, 2007

Article 12 of the Double Taxation Avoidance Agreement between India and USA, read with section 195 of the Income-tax Act, 1961 - Technical and consultancy services - Assessment year 1997-98 - Assessee-bank had appointed one M, a credit rating agency, for purpose of ratings its floating rate euronotes issued - M was not carrying on any business or profession in India and did not have even a permanent establishment in India - Assessee made payments in US $ to M for rendering analytical services in connection with counter party rating of issue and claimed that payment in question was not assessable to tax in India and, therefore, it was not liable for deduction of tax under section 195 - Lower authorities held that payments received by M would fall within category of ‘fees for included services’ defined in article 12(4) of DTAA and, therefore, tax deduction was to be done - Whether since for bringing any payment within definition of ‘fees for included services’ non-resident must make available technical skill, expertise or technical know-how to assessee, on basis of which assessee had prepared or developed commercial information and further since technical skill, expertise or technical know-how used in preparing commercial information was not made available to assessee, payment made by assessee for obtaining such commercial information could not be called to be fees for included services - Held, yes - Whether, therefore, payment made in instant case was not chargeable to tax in India - Held, yes - Whether, therefore, assessee could not be held to be responsible/liable for deduction of tax under section 195 - Held, yes

FACTS

The assessee-bank had appointed one M, a credit rating agency, for the purpose of ratings its floating rate euronotes issued. M was not carrying on any business or profession in India and did not have even a permanent establishment in India. The assessee made payments in US $ to M for rendering analytical services in connection with counter party rating of the issue and did not deduct tax on this transaction on the grounds that no withholding of the tax was required to be done for this transaction because of the provisions of section 5 read with section 9, and that having regard to M’s activities being situated outside India and the issue payment made outside India, the service fees charged by M was to be received by it outside India and, therefore, the provisions of section 5(2)(a) did not apply. The Assessing Officer held, inter alia, that since the services rendered by M were technical services, the assessee’s case was covered by article 12 of the DTAA between India and USA. He, accordingly, held that the payments required withholding of tax at the normal rate applicable in the instant case.

On appeal, the Commissioner (Appeals) upheld the impugned order holding that the payments received by M fell within the category of fees for included services defined in article 12(4) of the DTAA and, therefore, tax deduction was to be done as per provisions of DTAA in connection with the fees for included services.

On second appeal:

HELD

Whatever commercial information was gathered, it was collected by use of technical expertise outside India and the commercial information was provided to the assessee. For taxing the payments made by the assessee to M, provisions of article 12 could only be invoked if payments made by the assessee fell within the definition of ‘fees for included services’. According to para 4 of article 12. ‘Fees for included services’ means payment of any kind to any person in consideration for rendering of any technical or consultancy services if such services: (a) are ancillary and subsidiary to the application or enjoyment of a right, property or information for which payment described in paragraph 3 is received or (b) make available technical knowledge, experience, skill, know-how, or process or consist of the development and transfer of a technical plan or technical design. In the instant case, commercial information with regard to ratings as per international practice was supplied to the assessee and since it was not an ancillary and subsidiary to the application or enjoyment of a right/property or information, clause (a) of para 4 would not attract. The scope of applicability of clause (b) is to be examined to determine whether the payments for obtaining this commercial information fell within the purview of fees for included services. For bringing the remittance or fees within the definition of ‘fees for included services’, it should be against the availability for technical knowledge, expertise, skill, know-how or process or consist of the development and transfer of a technical plan or technical design. Unless and until the non-resident made these items available to the assessee, fees paid inter alia on that would not fall within the definition of fees for included services. [Para 10]

The definition of fees for included services is further explained through the memorandum of understanding concerning fees for included services in article 12 issued on 15-5-1989 through Notification No. 8786. According to this memorandum of undertaking, article 12 includes only certain technical consultancy services. Technical service is defined to be services requiring expertise in a technology. Likewise consultancy service is in the context of advisory service. Categories of technical and consultancy services are to some extent overlapping because consultancy service can also be technical service. However, the category of consultancy service also includes advisory service, whether or not expertise in technology is required to perform it. Under paragraph 4 of article 12 technical and consultancy services are considered to be included services only to some extent. Through this memorandum it is further explained that paragraph 4(b) of article 12 refers to technical or consultancy services that make available to the person acquiring the service technical knowledge, expertise, skill or know-how or process, or consist of the development and transfer of a technical plan or technical design to such person. This category is narrower than the category described in para 4(a) of article 12 because it excludes any service that does not make technology available to the person acquiring the service. Generally speaking, technology would be considered ‘made available’ when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology would not per se be considered to make the technology available. [Paras 11 and 12]

In the instant case, the assessee had obtained the commercial information of rating from M and the remuneration was paid outside India. For bringing any payment within the definition of ‘fees for included services’ the non-resident must make available the technical skill, expertise or technical know-how to the assessee, on the basis of which assessee had prepared or developed the commercial information. In the instant case, the technical skill, expertise or technical know-how used in preparing the commercial information was not made available to the assessee and, hence, the payment made by the assessee for obtaining such commercial information could not be called to be the ‘fees for the included services’ to make it chargeable to tax in India. [Para 14]

Therefore, the payment made in the instant case was not in the nature of ‘fees for included services’ and, as such, was not taxable in India. Therefore, the assessee could not be held to be responsible/liable for deduction of tax under section 195. [Para 17]