FTS: The ‘Make Available’ Principle in DTAA – Tax Implications and a Study of the Indo-Singapore Agreement
An In-depth Analysis of the Delhi High Court’s Interpretation of Fees for Technical Services (FTS) and its Broader Impact on International Tax Law
Introduction to FTS Under DTAA
The interpretation of “Fees for Technical Services” (FTS) under various Double Taxation Avoidance Agreements (DTAA) has been a subject of intense debate and litigation. A recent ruling by the Delhi High Court in the case of The Commissioner of Income Tax (International Taxation)-1, Delhi vs M/S Bio-Rad Laboratories (Singapore) PTE LTD (Case Number: ITA 564/2023) brought this issue into sharp focus. This article delves into the details of this case and its implications on the larger question of law.
The ‘Make Available’ Principle in context of DTAA
The ‘make available’ principle is a key concept in international tax law, particularly in the context of DTAAs. It stipulates that fees for technical services (FTS) can only be taxed in the source country if the services not only utilize technical skills, knowledge, etc., but also “make available” these skills or knowledge to the recipient, i.e., enable the recipient to apply the technology or knowledge on their own in the future.
The Case at Hand
In this case, the IT department contended that the services provided by a Singapore entity to its Indian affiliate were in the nature of “management support services” and hence taxable as FTS under the Indo-Singapore DTAA. The department argued that these services, which included professional advice through studies, evaluation, review of reports, liaison work, advice on key policy issues and business operations, HR management, and financial management, made available technical knowledge and skills to the Indian affiliate.
The Court’s Ruling
However, the Delhi High Court ruled in favor of the respondent or assessee. The court observed that services offered by the respondent or assessee to its Indian affiliates did not come within the purview of FTS as reflected in Article 12 (4) (b) of the Indo-Singapore DTAA. The court concluded that these services did not fulfill the criteria of the “make available” principle. The court reasoned that if technical knowledge, experience, skill, know-how or processes had indeed been made available to the Indian affiliate as contended by the appellant/revenue, then their agreement would not have run its course for such a long period.
This case is part of a larger debate on how to define and tax FTS under various DTAAs. Different countries have different interpretations and practices, leading to complex legal disputes. The “make available” principle is one such area of contention. While it is included in some DTAAs (like those India has with certain countries), it is absent in others. This inconsistency can lead to differing tax implications for similar transactions, depending on which DTAA applies.
Conclusion of FTS under DTAA
The ruling by the Delhi High Court provides valuable insights into how courts interpret complex provisions like FTS under DTAAs. It underscores the importance of understanding not just the letter but also the spirit of these provisions. As international transactions become increasingly complex and varied, such interpretations will play a crucial role in ensuring fair and equitable taxation.