India Tax: AAR rulings address scope of fees for technical services and for included services

India's Authority for Advance Rulings (AAR) issued two separate decisions on 5 March 2010 that exclude payments (under the U.K. treaty) for referral services from being "fees for technical services" (FTS) and exclude (under the U.S. treaty) from "fees for included services" (FIS) payments for conducting a workshop for information dissemination that is part of a course of study when there is no transfer of technical knowledge/know-how. Consequently, as neither foreign tax resident maintained a permanent establishment (PE) in India, neither was liable to tax in India on the payments received.


Referral services

In the U.K. treaty ruling (AAR 828/2009), Real Resourcing Limited (RRL) is a U.K.-incorporated company qualifying as U.K. tax resident. RRL provides both recruiting and referral services for Indian companies (the AAR declined to rule on the recruiting services due to insufficient details). While RRL has no physical presence in India, it maintains a "virtual" office in New Delhi, with a rented address and New Delhi phone numbers.

Under the applicable law, if the payments received by the applicant are not in the nature of royalties or FTS, they can be subject to Indian income tax under the India-U.K. tax treaty only if the income results from a business activity carried on through a PE situated in India. Contrary to the Indian tax authorities' arguments, the AAR did not find that the "virtual office" gave rise to a PE, nor did the function of referring potential Indian candidates to the Indian-based recruitment company without creating any commitment to recruit them.

For purposes of providing the services, RRL collects, analyzes and makes available information, via a database, on suitable candidates. The tax authorities argued that the fees were for technical services under the treaty with the U.K. because RRL's database is a consultancy service and RRL makes available the experience and skill of the candidates seeking recruitment.

The AAR agreed that the data collection, analysis and access is in the nature of consultancy services but said it cannot be considered to be ancillary and subsidiary to the application or enjoyment of the right, property or information referred to in the India-U.K. tax treaty (i.e. literary, artistic or scientific work, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience).

Further, by giving access to the database, it cannot be said that the information concerning industrial, commercial or scientific experience will be transmitted by the applicant to the recruiting agencies. Consideration for the required provision of information concerning industrial, commercial or scientific experience basically involves the sharing of technical knowhow and experience, which is not the case here. That is, taking steps to make available the experience and skill of candidates available for recruitment does not fall within the ambit of making available the technical knowledge and experience of the service provider.


Workshop fees

In the U.S. treaty ruling (AAR 812/2009), Federation of Indian Chambers of Commerce and Industry (FICCI), a company registered under the Indian Companies Act, 1956, was required to make payments to the University of Texas IC2 Institute (Institute) to meet the Institute's expenses incurred in technology assessment and for their personnel's travel to India to participate in a commercialization workshop. FICCI requested a ruling on whether it must withhold taxes on payments to the Institute.

The payment was required under a contract with the Indo-U.S. Science and Technology Forum, New Delhi (USSTF) for administering an innovation growth program as joint partners with the Institute and IUSSTF. The objective of the program was to identify, award and accelerate innovative new Indian technologies into the market space. Program participants were to receive training in technology commercialization strategies and entrepreneurship, analysis of the commercial potential of their technology by U.S. and Indian experts and participation in a technology competition judged by an international panel of experts (with finalists receiving additional benefits). The project was characterized as non-commercial and not-for-profit.

The AAR ruled that the Institute is a resident of the U.S. and thus is covered under the India-U.S. treaty: it is located in the U.S. and is liable to pay U.S. tax by reason of its place of incorporation and place of management, regardless of its actual U.S. tax-exempt status. Further, the AAR found that the Institute does not have a PE in India.

The AAR went on to examine whether the payment made to the Institute was FIS as defined in the royalties article in the treaty. The AAR concluded that none of the technical/consultancy services and related activities undertaken by the Institute would amount to making available the technical knowledge, experience, skill, know-how or processes possessed by the Institute. Acting as a facilitator and technical consultant for the purpose of commercialization of identified technologies, screening and assessment of technologies by deploying the expertise and resources the Institute has and preparing technical reports, including market analysis, cannot be legitimately brought within the purview of FIS under the India-U.S. tax treaty.

Further, with regard to the entrepreneurial workshop, having regard to the short duration of the course and the contents and pattern of the modules presented, it is difficult to infer that any technical knowledge, experience or skills were shared with and made available to the participant innovators, much less can it be said that there was a transfer of technical knowhow or knowledge. The contents of the modules and topics presented in the course of the workshop primarily were sourced from the university's post- graduate level courses in technology. It does not involve sharing trade secrets or imparting skills in a practical manner. Providing an orientation in business and instilling an entrepreneurial outlook does not amount to making available the technical knowledge, experience or skills of the Institute's experts.

Consequently, the AAR ruled that the Institute would not be liable to tax in India on payments received from FICCI and there was no requirement for FICCI to deduct tax at source on the payments it made to the Institute under the agreement.