India: 'Make Available Condition' To Be Applied Even In Case Of Transfer Of Designs/Drawings/Plans

Last Updated: 7 June 2019
Article by SKP  

Recently, in the case of Buro Happold Ltd[1] (a UK resident), the Mumbai Income Tax Appellate Tribunal held that the project-specific technical designs/drawings/plans supplied cannot be treated as 'Fees for Technical Services (FTS)' as the same does not 'make available' any technical knowledge, experience, skill, know-how or process to the recipient.

Furthermore, the Mumbai Tax Tribunal also clarified that the words "or consists of the development and transfer of a technical plan or technical design" appearing in the second limb of Article 13(4) (c) of India-UK Tax Treaty has to be read in conjunction with "make available technical knowledge, experience, skill, know-how or process" by virtue of the principle of ejusdem generis.

Brief Facts

  • The taxpayer is a company registered in the UK and is a tax resident of the UK. It is in the business of providing consulting and engineering services in relation to structural and MEP (Mechanical, Electrical and Public health) designs for buildings.
  • The taxpayer had a subsidiary in India, namely Buro Happold Engineers India Pvt Ltd (Buro India). Buro India rendered consulting engineering services to its clients. However, in areas, such as master planning, acoustics engineering, environmental engineering, etc., for which they lacked the expertise, the said services were availed from the taxpayer.
  • During the year under consideration, the taxpayer had received income for the provision of consulting and engineering services and income on account of cost recharge to Buro India.  

Issues involved

  • Whether the amount received for 'consulting engineering services,' which involved the transfer of certain technical designs and drawings, was taxable as FTS under Article 13 of India UK Tax Treaty?
  • Whether common cost recharge is taxable as FTS under Article 13 of India UK Tax Treaty?

Taxpayer's contentions

  • The taxpayer's main business is rendering of consultancy services, and the supply of technical designs, drawings and plans were incidental to such consultancy services.
  • The taxpayer contended that the income received for the rendering of consulting and engineering services could be charged to tax as FTS under Article 13 of India UK Tax Treaty only if it makes available technical knowledge, experience, skill, know-how or processes or consists of the development and transfer of a technical plan or technical design. Given that the taxpayer provided project-specific consultancy services and the same cannot be used by Indian entity for subsequent projects, the same did not result in making available technical knowledge, experience, skill, know-how or processes.
  • The taxpayer alternatively also argued that even if the amount received from rendering of the consultancy services was attributed to the supply of technical design and drawings, the same cannot be treated as FTS under Article 13 of India- UK Tax Treaty as the second limb of Article 13(4) (c) "consist of the development and transfer of technical plan or technical design" cannot be read disjunctively. Thus, the condition of making available has to be applied even for the second limb.
  • Based on the above, the taxpayer argued that project-specific designs, drawing and plans supplied cannot be considered as FTS.
  • Furthermore, with respect to the amount received towards the common cost recharge, the taxpayer contended that the common costs are recovered on a cost-to-cost basis from various group entities and did not have any income element and hence, the same should not be subjected to tax.
  • Furthermore, without prejudice to the same, the taxpayer also argued that even where cost allocation is deemed as consideration for technical and consultancy services, the same should not be taxable as 'make available' test was not satisfied.

Revenue's contentions

  • The primary contention of the Revenue was that the key deliverable of the taxpayers included the supply of designs, drawings while the provision of other services were ancillary to supply of designs and drawings.
  • The Revenue observed, as per Article–13(4) (c) of the India–UK Tax Treaty, payment received for development and transfer of a technical plan or technical design would be in the nature of fees for technical services, irrespective of the fact, whether it makes available technical knowledge, experience, skill, know-how, etc.
  • The revenue contented that 'make available' clause goes with technical knowledge, experience, skill, know-how, etc., but does not go with the second limb of Article 13(4) (c), i.e., the development and transfer of technical plan or a technical design. Hence, the amount received for consulting and engineering services would be taxable as FTS.
  • Furthermore, the revenue argued that the cost recharge was charged under a composite agreement which  was merely an extension and directly related to the provision of consulting and engineering services. Accordingly, the same would qualify as FTS under Article 13 of India UK DTAA.

Tribunal's observations

  • Tax Tribunal observed that the taxpayer provided consultancy services and, in that context, provided technical designs/drawings/plans.
  • Tax Tribunal analyzed Article 13(4) (c) of India-UK Tax Treaty and held that the words "or consists if the development and transfer of a technical plan or technical design," appearing in the second limb has to be read in conjunction with "make available technical knowledge, experience, skill, know-how or processes."
  • Tax Tribunal held that tax officer's interpretation that second limb of Article 13(4) (c) has to be read independently could not be the correct interpretation of the said article. As per rule of ejusdem generis, the words "or consists of the development and transfer of a technical plan or technical design" will take color from "make available technical knowledge, experience, skill, know-how or processes."
  • Furthermore, it also held that since the designs/drawings/plans supplied by the taxpayer to Indian party were project specific, it cannot be used by the Indian entity in any other future project.
  • Tax Tribunal also held that if the tax department was of the view that through development and supply of technical designs/drawings/plans the taxpayer has made available technical knowledge, experience, skill, know-how or processes, it is for the Revenue to establish such fact through proper evidence. The tax payer cannot be asked to prove the negative.
  • Accordingly, the tax tribunal held that the supply of project-specific designs/drawings/plans did not make available technical knowledge, experience, skill, know-how or process and hence, the same was not taxable in India.
  • Furthermore, it was held that since the cost allocation was ancillary and subsidiary, the same was also not taxable in India as the main service was not taxable.

[1] ITA No. 1296/Mum/2017

SKP's Comments

This is a very important decision as it takes a unique proposition, which is that the make available test has to be applied even in case of the second limb, i.e., the development and transfer of technical plan or technical design. The tax tribunal relied on the principle of ejusdem generis to hold that second limb of Article 13(4) (c) takes color from the first limb and hence, to be read jointly.

Taxpayers providing services, which involves usage of certain designs, drawings and plans should look at their line of argument post this decision. However, it would be advisable to have robust documentation in place to prove that it was primarily a service contract and use of design/drawings was incidental to such services.

(This case was handled and supported by SKP)

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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