Section 9 of the Income Tax Act, 1961 provides for the basis for
India’s interpretation to International Taxation, by specifically stating what
income is deemed to be accrued in India and what is not to be income accrued in
India.
Section 9 clearly states that all income accruing
or arising, directly or indirectly, whether through a business connection or
not will be deemed to be income arising or accruing in India. A plain reading
of the various provisos and explanations to this section point out that even
royalty or fee earned by reason of imparting “technical, industrial,
commercial or scientific knowledge, experience or skill” is deemed to arise or
accrue in India.
The problem that arises here is that the
legislature seems to use the phrases “technical services” and “technical, industrial,
commercial or scientific knowledge, experience or skill” interchangeably. This
leads to a problem in identifying exactly what kind of technical knowledge and
skill will involve taxation on consequent income, especially in today’s modern
times where businesses thrive on the use of information technology. Such use of
information technology, when provided to one entity by another related entity,
also entails further technical assistance in the use of such technologies, in
order to make use of them properly. This gives rise to the question, whether
such “call-centre” like services can be covered under the ambit of this section.
This issue of whether certain agreements “make
available” technical knowledge as mentioned under section 9, as well as various
Double Taxation Avoidance Agreements (DTAAs), has been dealt with by the courts
on multiple occasions, who have clarified the law on this issue on multiple
occasions. In the case of Anapharm Inc., Canadian company was a contract
research organization providing clinical and bio-analytical services to assist
pharmaceutical companies around the world in development of new drugs.
Agreements were entered into with Indian companies Sandoz Private Ltd., Ranbaxy
Research Laboratories etc. The methods and the processes were the
applicant’s property. No technical plan, research, specimen samples of
volunteers were given to the clients.
The court held that the agreement excluded any
service that does not make technology available to the person acquiring the
service. Generally, speaking technology will 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 services does not per se mean that technical knowledge,
skills, etc., are made available to the person purchasing the service.
In CIT v. De Beers Minerals P Ltd., the assessees were private companies
engaged in the business of prospecting and mining diamonds. An agreement was
entered into with M/s. Fugro Elbocon B. V. Netherlands, who conducted airborne
surveys, apprised process data acquired and provide necessary reports for
clients. The payment for these services was held by the Assessing Officer as
payment for technical services under Section 9 of the Act, as well as Article
12 of the relevant Double Taxation Avoidance Agreements. The AAR
held that the data and maps remained the property of the non-resident, plans
and designs were not transferred, so that no income arose in India.
Where an assessee entered into an agreement for availing logistic service from a Singapore company which included provision of space, managing services, provision of buffer stock, defective repair services and know-how relating to management and local repair centres and business planning, it was held, that the payment for these services could not be treated as technical service in the light of the definition under Section 9 of the Income Tax Act and the Double Taxation Avoidance Agreement between India and Singapore as no technical knowledge was “made available”. All the services were rendered by the non-resident outside India. Logistic services are not provided in India. A service fee is paid. No technical knowledge is made available. This decision of the tribunal in Sun Microsystems Ltd. was later affirmed by the High Court of Karnataka as well, on appeal, in Director of Income-tax (International Taxation) v. Sun Microsystems India P. Ltd., where the decision in De Beers was also relied upon.
This issue was best summarised by the Appellate Tribunal in Mahindra and Mahindra Ltd. v. Dy. CIT
Thus, the issue, as addressed by the courts
through the various judgments cited above, clearly points to the fact that some
amount of technical know-how must be transferred between entities and such
technical know-how should increase the future skill and expertise of the
transferee entity, or brings into its possession some technology that it did not
have access to prior to receiving such knowledge.
Basic technical assistance for a product, that is
merely of a problem-solving nature, and does not provide any continuous
benefit, except that of enabling something to be used properly, is not to be
considered as “technical or commercial knowledge and skill”, as referred to
under the Act. As a result, income arising from such transfer of knowledge and
services will not be deemed as income arising or accrued in India, and thus,
will not be subject to income tax.
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