www.pwc.com/in Sharing insights News Alert 23 May, 2012 Payment made for airborne geophysical survey services is not FTS In brief In the recent case of De Beers India Minerals Pvt. Ltd. 1 (the assessee), the Karnataka High Court (HC) upheld the decision of the Bangalore Income-tax Appellate Tribunal (the Tribunal) on the issue of fees for technical services (FTS). It was held that the payment made by the assessee, for carrying out airborne geophysical survey services, is not taxable as FTS under the India-Netherlands Double Taxation Avoidance Agreement (the tax treaty). It was observed that the service provider did not make available the survey technology so as to enable the assessee to conduct the survey independently without recourse to the service provider. 1 CIT v. De Beers India Minerals Pvt. Ltd. [TS-312-HC-2012 (Kar)] Facts The assessee is a private Indian company in the business of prospecting and mining diamonds and other minerals. It has been granted licences (reconnaissance permits) by various state governments. Reconnaissance is an early stage of exploration. To carry out a geophysical survey, the assessee entered into an agreement with Fugro Elbocon BV, Netherlands (Fugro). Fugro conducted an airborne survey using its specialised equipment to provide high-quality and high-resolution geophysical data suitable to select probable kimberlite targets. For the survey, a helicopter was hired by the assessee. All the logistics of the survey such as the flight schedule, re-flight survey lines, control lines, positioning, etc. were set up 1
by Fugro. Fugro deputed technical personnel to conduct the survey. The data collected was provided to the assessee in a particular format (i.e. digital plot files, maps and photographs). Consideration was paid to Fugro, under the agreement, for providing specific data for which it was required to conduct the airborne survey, without deduction of tax under the Income-tax Act, 1961 (the Act). The assessing officer (AO) held that the consideration paid to Fugro is FTS in terms of Article 12 of the tax treaty and treated the assessee as an assessee-indefault for failure to deduct tax under the Act. On appeal, the Commissioner of Income-tax (Appeals) (CIT(A)) reversed the order of the AO. On revenue department s appeal in the Tribunal, the latter dismissed the appeal and held that no technology, skills or experience was made available to the assessee by Fugro. Further, the payment cannot be considered as towards the development and transfer of technical plan or design. Therefore, the consideration paid is not covered by the definition of Article 12(5)(b) of the tax treaty. Aggrieved by the order of the Tribunal, the revenue authority appealed to the HC. Issue Whether income received by Fugro to supply technical data including drawings, plans, maps, etc. (geological survey) to determine kimberlite targets will not fall under section 9(1)(vii) of the Act read with Article 12(5) of the tax treaty Whether payment to Fugro was for the development and transfer of technical plan or design to the assessee Revenue s contentions The assessee had approached Fugro for technical services. After conducting a geophysical survey, the service provider had made available their technical knowledge to the assessee, which was used by the latter to carry out work on its own without reference to the service provider. Such technical know-how made available is of an enduring nature. The technical know-how made available is directly linked with the business the assessee was carrying on. Therefore, it is not necessary that there should be a transfer of technology to constitute FTS as defined under Article 12 of the tax treaty. The information furnished is not of a commercial nature but purely technical and satisfies the requirements of Article 12(5)(b). Thus, it attracts tax under the Act. Assessee s contentions Fugro had utilised its technology to conduct a geophysical survey as per the assessee s requirement. It had taken photographs of the entire area and provided them to the assessee. Though information made available was useful to the assessee in the further operation which is a part of their business, Fugro had not made available the technical know-how of conducting the survey. This was because after making available the information, the assessee would have been able to do what the service provider did without referring to the service provider in the future. 2
Similarly, Fugro had not developed and transferred any technical plan or design as contemplated under Article 12(5)(b) of the tax treaty. What Fugro had transferred were the photographs taken by it which did not involve any development. Therefore, the said provision has no application to the facts of this case. High court ruling Meaning of make available The HC referred to the definition of FTS under the tax treaty and provisions of the Act. In this case, it is not disputed that the nature of services rendered by Fugro is technical. Accordingly, it is liable to tax under the provision of the Act. However, as per Article 12(5)(b) of the tax treaty, FTS means payment of any amount to any person in consideration for rendering of any technical service only if such services make available technical knowledge, expertise, skill, know-how or process. The definition of FTS contained in the tax treaty overrides the statutory provisions contained in the Act in view of section 90 of the Act. Accordingly, technical services should also make available technical knowledge, expertise, skill, know-how or process in order to be covered within the preview of FTS. By virtue of the protocol IV 2, the HC applied the meaning of make available contained in the India-Singapore Double Taxation Avoidance Agreement. According to it, FTS means payments of any kind to any person in consideration for technical services if they make available technical knowledge, 2 Protocol IV(2) of the tax treaty - If after the signature of this convention under any Convention or Agreement between India and a third State which is a member of the OECD India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention. experience, skill, know-how or processes, which enables the person acquiring the services to apply technology contained therein. The HC discussed and distinguished the judgement of the Authority for Advance Ruling in the case of Perfetti Van Melle Holding 3, Shell India Markets Pvt. Ltd. 4 and Areva T&D India Ltd. 5 based on the facts of this case. To fit into the terminology of making available, the technical knowledge, skills, etc. must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that services offered are the product of intense technological effort and lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the service provider should be imparted to and absorbed by the service receiver so that the latter can deploy similar technology in the future without depending upon the provider. It is clear that the assessee acknowledged the services of Fugro for conducting aerial survey, taking photographs and providing data information and maps. The assessee can make use of the data supplied by way of technical services and put its experience to identify the location where the diamonds are found and carry on its business. But the technical services which were provided by Fugro will not enable the assessee to independently undertake any survey either in the same area or any other area in the future. They did not get any enduring benefits from the aforesaid survey. Therefore, Fugro had not made available the aforesaid technology with the aid of which the assessee will be able to collect the data, which was earlier passed on by Fugro. 3 Perfetti Van Melle Holding B V, In re [2012] 342 ITR 200 (AAR) 4 Shell Technology India (P) Ltd., In re [2012] 204 TAXMAN 314 (AAR) 5 Areva T&D India Ltd., In re [2012] 18 taxmann.com 171 (AAR) 3
In view of the above, though Fugro had rendered technical services as defined under section 9(1)(vii) of the Act, it did not satisfy the requirement of technical services as contained in the tax treaty. Therefore, the liability to tax was not attracted. Development or transfer of technical plans or designs The contract was for providing services and not for supply of technical design or plan. Fugro compiled the data and processed them for error correction and delivered it to the assessee in a computer-readable media. Using this raw input data provided by Fugro, the assessee used further process in software technology which was not owned or provided by Fugro and generated a report to determine probable targets. The reports and maps were only additional mode of representation of data and Fugro had not devised any technical plan or design. Therefore, the question, whether Fugro transferred any technical plan or design, did not arise in the facts of case. Therefore, such cases do not fall in the second part of the aforesaid clause of Article 12(5)(b) of the tax treaty dealing with development and transfer of technical plans or designs. Conclusion This is an important HC ruling which deals with the concept of make available. It was held that the payment made to Fugro for carrying out geophysical survey to provide the commercial and technical data is not taxable in India as FTS within the meaning of Article 12(5)(b) of the tax treaty. The HC emphasised on the meaning of make available and stated that technical services make available the technical knowledge, experience, skill, know-how or processes only when the person acquiring the services is enabled to apply technology contained therein without recourse to the service provider in future. Additionally, under the terms of the agreement, the data collected is kept confidential under the supervision of the Indian government and ownership of the data collected or other documents vest with the assessee only and not with Fugro. Hence, the question of transfer of such data does not arise. All information recorded in digital and analog form and all products derived from the information are the property of the assessee. 4
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