30 September 2019

Satisfaction of the ‘make available’ condition in services of short duration – An analysis

by Shalini Maheshwari

The interpretation of  the 'make available' clause in respect of Fees for Included Services (FIS) in the India-US DTAA had been matter of much debate, more so since certain other treaties like India-UK also incorporate the same terms for Fees for Technical Services (FTS) and reliance is often placed on the Memorandum of Understanding (MoU) which forms part of the India US DTAA. While specific facts in each case could lead to a different conclusion, the common understanding of various High Courts and Tribunals is that the service recipient must be able to apply the technical knowledge or skill without recourse to the service provider (foreign entity) to satisfy the make available test.

In the recent ruling[see endnote 1] on the taxability of reimbursement received by the -Assessee from its Indian affiliates for providing support services, ITAT Delhi held that the same is taxable as FIS as it has made available the services to the Indian-recipient.

The assessee entered into the Service Agreement with its affiliates across the globe including the Indian entity, wherein it agreed to provide the HR, strategic planning, marketing and information system on commercial level. The cost incurred for providing such services by the assessee was to be allocated between all the affiliates to whom the services are being provided by the Assessee, on the basis of pre-decided allocation keys with zero mark up.

Assessee’s contention: Reimbursement of cost received without mark-up is not taxable and "make available" test not satisfied

The assessee contended that there was only recoupment of expenses and no element of income and hence the sum cannot be taxed in India. Secondly the assessee relied on the various decision wherein it was held that ‘make available’ is not satisfied if the services provider does not make available the know-how or technology to the recipient to apply the same on its own in future. The assessee also relied on the various judicial precedents wherein it was held that since support services are rendered by the assessee on year to year basis, they do not satisfy the make available test and hence, cannot be taxed as FIS.

Assessee also contended that amount received for providing support service will not fall under the provision of Article 12(4)(a) of the India US DTAA as the same cannot be considered as ancillary and subsidiary to the payment of royalty as such license agreement and service agreement are two different agreements. – The Technology Transfer Agreement (TTLA) aims to provide license to use technology under which royalty was being earned. On the other hand, the aim of SA was to provide uniformity, consistency and international standards across the group by providing these support services. Also, services were not only for the license products covered under the license agreement but for the company as a whole whereas royalty paid in terms of license agreement was for the license granted to Indian entity to manufacture, distribute, market and sell only the Licensed products. The assessee argued that the Indian entity was engaged in manufacture and sale of many other products which were not ‘licensed products’ of the assessee and hence, the services were not ancillary to the use of the intellectual property.

Revenue’s contention: Services were ancillary to use of IP and the services continued to be at disposal of the recipient

Firstly, revenue argued that contention of zero mark-up cannot be considered as no evidence was placed by the assessee before the revenue authorities that no profit is embedded in the fees charged for services. It also referred to the clauses in the TTLA and the SA to contend that the assessee was providing training to the employees of the licensee (Indian entity) and hence, the employees developed managerial and technical skills. Thus, the make available clause was satisfied.

The revenue contended that payment received by the assessee is clearly are in relation to and ancillary and subsidiary to the application or enjoyment of the right, property or information for which royalty is paid and hence covered under Article 12(4)(a) of the India-USA DTAA. The revenue further contended that the SA was only an extension of the TTLA. In case the employees of the licensee developed any new method of marking or manufacturing the product, the assessee would be entitled to the same and hence, the employees were enabled to acquire new managerial and operational skills which satisfies the ‘make available’ clause.

ITAT Ruling

ITAT held that the concept of make available requires that the fruits of the services should remain available to the service recipient in some concrete shape such as technical knowledge, experience, skills, etc., which is met in the instant case as can be reflected from the nature and duration of the contract. The service recipient has to make use of such technical knowledge, skills, etc. by itself in its business and for its own benefit. Thus, the consideration qualifies as FTS both under the Income Tax Act and under the India-USA DTAA. The ITAT distinguished various decisions cited by the assessee on the aspect of “make available” including the decision in case of Guy Carpenter on certain factual aspects. Further, the ITAT distinguished various decisions on holding reimbursement of expenses to be non-taxable and holding support services as not being ancillary to use of intellectual property.

To conclude

The issue with respect to taxability of reimbursement of expenses without any mark up has been a matter of debate before various courts/tribunal. The ruling in the present case does not throw any light on why the amount received by the assessee in nature of recoupment of expenses is taxable as income. Moreover, there is no discussion on how the entire gamut of services provided relate to the licensed technology/ licensed products, when the sale of licensed products was less than 5% of the total sales of the Indian entity. On the issue of “make available”, the reasoning adopted by the ITAT is to be that provision of services including training to employees of the recipient to enable them to apply the licensed technology is sufficient to satisfy ‘make available’. The ruling seems to be influenced by the facts and the reasoning in Centrica[see endnote 2] judgment of Delhi High Court. In the said judgment the employees of the Indian entity were given training in the initial stages of the setting up of the business. The High Court concluded that post the initial phase, the employees were able to apply the knowledge and skill by themselves and hence, ‘make available’ was satisfied. However, given that the ITAT did not analyse the characteristics of the services rendered and did not accord any weightage to the fact that services in question were being provided every year, it remains to be seen whether this order of the Tribunal will be sustained by the higher courts and whether its ratio will be widely applied in other cases. 
 [The author is an Associate, Direct Tax Team, Lakshmikumaran & Sridharan, New Delhi]


  1. H. J. Heinz Company USA v. ADIT,ITA No. 6252/DEL/2012 (A.Y 2009-10)
  2. (2014) 364 ITR 336


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