India: No Indian Tax On Payments For Commercial Services To Dutch Company: Ahmedabad Tribunal Allows Import Of "Make Available" Test From US Treaty Owing To MFN Clause

The Ahmedabad Bench of the Income Tax Appellate Tribunal ("Tribunal") in the case of Shell Global Solutions International BV v. ITO1 has held that for payments to qualify as Fees for Technical Services ("FTS") under the India – Netherland tax treaty ("Dutch Treaty"), the payments must satisfy "make available" requirement. This requirement can be imported into the Dutch Treaty from India - US tax treaty ("US Treaty") by virtue of the MFN clause.


Shell Global Solutions International BV ("the Taxpayer") is a Dutch Company which rendered services to an Indian company. The services rendered by the Taxpayer could be divided into 2 parts – basic refinery package ("BRS") and certain optional services which can be technical in nature.

For the Assessment Year 2005-06, the Taxpayer offered 50% of its fees from BRS and the entire fee received for optional services for tax as FTS, and claimed the remaining 50% as non-taxable being in the nature of fees for commercial services.

According to the Taxpayer, the latter component was in respect of a) outright purchase of deliverables such as best practice manuals, guidelines and b) Non-technical services such as customer relations, quality control, review of processes, site checks/ inspections etc. ("Commercial Services").

The Taxpayer contended that such Commercial Services did not qualify the "make available" requirement for FTS under the Dutch Treaty read with the US Treaty. At the lower levels, it was held that the entire receipts are taxable as FTS. It was further held that the service agreement has to be read as a composite one, and there is no manner of determining that 50% of the services are of commercial / non-technical nature.

The Taxpayer appealed before the Tribunal against the order of the Commissioner of Income-tax (Appeals) "(CIT(A))".


The fundamental issue before the Tribunal was whether the fees for Commercial Services were taxable as FTS under Article 12 of the Dutch Treaty.


The Tribunal reversed the decision of the CIT(A) and held that the payments for Commercial Services are not in the nature of FTS under the Dutch Treaty. The Tribunal held that the "make available" requirement imported into the Dutch Treaty from the US Treaty was not met in respect of the Commercial Services. This was by virtue of the MFN clause in the Protocol of the Dutch Treaty ("Protocol").

  1. Importing the meaning of "make available" through the MFN clause: Article 12 of the Dutch Treaty contains a broad definition of FTS – payments in consideration for services of a "managerial technical or consultancy nature". However, the Protocol to the Dutch Treaty which was signed on an even date, included an MFN clause. It provides that any relief (directly or indirectly reducing the rate or scope of Indian tax) extended to other OECD countries (in this case, US) shall apply to the Dutch Treaty as well. The Tribunal also noted that unlike other tax treaties, such as Philippines, Switzerland, the Dutch Treaty does not require that the governments of both countries should mutually decide on such incorporation of the relevant provision within the treaty.

    Therefore, it was concluded that whatever benefit is extended to a taxpayer under the US Treaty by virtue of the MFN clause shall stand incorporated in the Dutch Treaty. For this, the Tribunal also placed reliance on the Kolkata Tribunal's decision in DCIT v. ITC Limited2 to state that the above legal situation automatically prevails as a result of the MFN clause.

  2. "Make available" under the US Treaty: The US Treaty which was signed after the Dutch Treaty has a narrower scope for FTS. An added requirement to be met is that the technical or consultancy service must "make available technical knowledge, experience, skill, know-how, or processes, or consists of the development and transfer of a technical plan or technical design."

    The Tribunal further proceeded to examine the scope of "make available" under the US Treaty in judicial precedents, and placed reliance upon the Delhi High Court's judgment in DIT v. Guy Carpenter & Co. Ltd.3 and the Karnataka High Court's judgment in CIT v. De Beers India Pvt. Ltd.4 In these cases, High Courts have interpreted 'make available' to mean that the service should transmit technical knowledge resulting in an enduring benefit to the service recipient so that such technical knowledge or know-how can be utilized by him in future on an independent basis.

    The Tribunal further relied on the Memorandum of Understanding ("MoU") of even date to the US Treaty, which is an integral part of the US Treaty. The MoU explains the scope of Article 12 and states that the "make available" clause excludes any service that does not make technology available to the service recipient. Thus, consultancy services which are not technical in nature cannot be treated as technical services. The Tribunal held that the MoU stands incorporated into the Dutch Treaty by virtue of the MFN clause.

  3. Nature of "Commercial Services": The Tribunal noted that the Commercial Services rendered by the Taxpayer involved – a) delivery of best practice manuals, guidelines etc. developed by the Taxpayer owing to its experience in handling refineries and b) connected services such as site inspection, customer relations, quality control, assistance in organisational review of processes and staff strategy etc. The Commercial Services did not involve transfer of technology.

    The Tribunal also took note of the ruling in Bharat Petroleum Corporation Ltd. v. JDIT5 and Boston Consulting Group Pte Ltd6 where services such as advising on market strategy, price forecast, business and portfolio strategy have been held to be of managerial nature and outside the scope of FTS under treaties with 'make available' clauses.

    The Tribunal further held that the fact that the Commercial Services / physical deliverables are interlinked with certain technical services does not alter their basic character. Discarding the reservation of the CIT(A) against segregating these services, the Tribunal relied on the Supreme Court's decision in Continental Services Limited v. CIT7 and held that the consideration for the composite agreement should be apportioned between various deliverables under the overall package.

    While ruling in favour of the Taxpayer in principle, the Tribunal remanded the matter to the Assessing Officer on the issue of apportionment of the consideration.


MFN clauses are typically included in tax treaties / protocols by the contracting states to ensure that if at a later point in time, one of the contracting states enters into a treaty with a third state where the same subject matter is given a more favourable treatment, then the first mentioned parties can also claim benefit of this favourable treatment.

The Tribunal's ruling has reiterated the principle that the protocol is an indispensable part of a treaty, and should be read as an integral part of the treaty itself. The Tribunal has gone a step further in accepting the explanations and examples provided under the MoU to the US Treaty in respect of interpretation of FTS, while applying the MFN clause.

It is also relevant to note that the MFN clause not only allows for a reduction of tax rate, but also for the scope of taxability. In this case, the narrow scope of "technical services" in the US Treaty was held be equally applicable to Dutch tax residents. The ruling provides clarity on the scope and applicability of MFN clauses.


1 ITA No. 1283/Ahd/2010

2 [(2002) 82 ITD 239 (Kol)]

3 DIT v. Guy Carpenter & Co. Ltd.(2012) 346 ITR 504 (Del.)

4 CIT v. De Beers India Pvt. Ltd. (2012) 346 ITR 467

5 Bharat Petroleum Corporation Ltd. v. JDIT (2007) 14 SOT 307 (Mum);

6 Boston Consulting Group Pte Ltd (2005) 94 ITD 31 (Mum)

7 (1992) 195 ITR 81

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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