As per Sec -9 (1) (vii), the FTS income is deemed to accrue or arise in India when-
- FTS is payable by the Govt. to the NR recipient;
- FTS is payable by a resident to the NR recipient (except where the FTS is payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India)
- FTS is payable by a NR to the NR recipient, only when FTS is payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India
FTS will be deemed to accrue or arise in India, whether or not –
- the NR recipient has residence or place of business or business connection in India.
- the NR recipient has rendered services in India.
Further, as per Explanation 2 to Sec – 9(1) (vii) of the Income Tax Act, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be the income of the recipient chargeable under the head “Salaries”.
The terms managerial, technical & consultancy are not defined in the Act. The Supreme Court in the case of GVK Industries  371 ITR 453(SC) held that general and common usage of these words has to be understood at common parlance while interpreting the term FTS.
Primarily, the FTS income is taxed as per the source rule. It means the FTS income is liable to tax at a place where the service is consumed or received by any person.
Let’s evaluate each and every aspect in detail one by one to cover:-
The Supreme Court observed in the case of GVK Industries that consultation means a meeting in which a party consults or confers and eventually it results in a human intervention that leads to the rendering of advice.
The Delhi High Court observed that the word “Consultant” is a derivative of the word “consult” which includes deliberations, consideration, conferring with someone, discussing about or upon a matter. The service of consultancy necessarily entails human intervention. [CIT v/s Bharti Cellular Ltd.  319 ITR 139”  330 ITR 239 (SC)]
The Delhi Tribunal held that not all kinds of advisory qualify as technical services. For any consultancy to be treated as technical services, it would be necessary that a technical element is involved in such advisory. Thus, the consultancy should be rendered by someone who has special skills and expertise in rendering such advisory. [Le Passage to India Tours & Travel (P) Ltd.  369 ITR 109 [Delhi ITAT]
The term consultancy services, in common parlance, means providing advice or advisory services by a professional. Usually consultancy services are professional services requiring specialized qualification, knowledge, expertise of a professional person, and are more dependent on skill, intellect and individual characteristics of the person rendering it. [Endemol South Africa (Proprietary) Ltd. vs DCIT  98 taxmann.com 227 (Mum ITAT)]
The expression “consultancy involves giving of advice /opinion /recommendation or counseling or advisory services by a professional. Expertise in technology is not essential while providing consultancy services. However, an element of expertise or special knowledge on part of the advisor is essential. Advisory services that merely involve discussion and advice of a routine nature cannot be classified as consultancy services. [Intertek Testing Services India (P) Ltd.  307 ITR 418 (AAR)]
The expression “managerial service” needs to be considered in commercial parlance. It has been interpreted as follows:
- It signifies service for management of affairs or services rendered in performing management functions.
- It involves controlling, directing or administering the business.
- It means managing the affairs by laying down certain policies, standards and procedures and then evaluating the actual performance in light of the procedures so laid down
The ordinary meaning of the term “management” involves the application of knowledge, skill, or expertise in the control or administration or the conduct of a commercial enterprise or organization. Thus, if the management of all or a significant part of an enterprise is contracted out to persons other than the directors, officers, or employees of the enterprise, payments made by the enterprise for those management services would be fees for technical services.
The term managerial services ordinarily mean handling management and its affairs. As per the concise oxford dictionary, the term managerial services means rendering of services which involve controlling, directing, managing, or administering a business or part of a business or any other thing. [Endemol South Africa (Proprietary) Ltd. vs DCIT  98 taxmann.com 227 (Mum ITAT)]
The ordinary meaning of the term “technical” involves the application of specialized knowledge, skill or expertise with respect to a particular art, science, profession, or occupation. Therefore, fees received for services provided by regulated professions such as law, accounting, architecture, medicine, engineering, and dentistry would be fees for technical services.
Services are of technical nature when special skills or knowledge or education related to a technical field are required for the provision of such services. The mere use of a standard facility does not result in availing of technical services although such a facility has been developed with the usage of technology. [E-bay International AG vs ADIT (2012) 25 taxmann.com 500 (Mum)]
The Supreme Court has categorically held that the use of standard facility does not amount to technical services, as technical services, as technical services denote services catering to the special needs of the person using them and not a facility provided to all. [CIT v/s Kotak Securities Ltd.  383 ITR 1]
The word technical is involving or concerning applied and industrial sciences. Consultancy is generally understood to mean advisory services. Further, it may be fair to state that not all kinds of advisory could qualify as technical services. For any consultancy to be treated as technical services, it would be necessary that a technical element is involved in such advisory. Thus, the consultancy should be rendered by someone who has special skills and expertise in rendering such advisory. [Skycell Communication Ltd. vs DCIT  251 ITR 53]
The expression technical service would have reference to only technical service rendered by a human being. It would not include any service provided by machines or robots. [DDIT (International Taxation) vs Avavya Global Connect Ltd.  43 SOT 439]
The term ‘technical services’ takes within its sweep services which would require the expertise in technology or special skill or knowledge relating to the field of technology. As per the concise oxford dictionary, the term ‘technical services’ means belonging or relating to art, science, profession, or occupation involving mechanical arts and applied sciences. As the administrative services, viz., arranging for logistics, etc., by the assessee did neither involve use of any technical skill or technical knowledge, nor any application of technical expertise on its part while rendering such services, the same cannot be characterized as technical services. [Endemol South Africa (Proprietary) Ltd. vs DCIT  98 taxmann.com 227 (Mum ITAT)]
Note: The terms “management,” “technical” and “consultancy” do not have precise meanings and may overlap. Thus, for example, services of a technical nature may also be services of a consultancy nature and management services may also be considered to be services of a consultancy nature.
RULE OF “NOSCITOR A SOCIIS”
It means an unclear or ambiguous word (as in a statute or contract) should be determined by considering the words with which it is associated in the context.
The words ‘technical services’ is preceded by the word ‘managerial’ and succeeded by the word ‘consultancy’. It cannot be read in isolation as it takes color from the words ‘managerial and ‘consultancy’ between which it is sandwiched.
The phrase managerial and consultancy is a definite indicator of the involvement of the human element. The word ‘rendering of’ used here again signifies through human skill or experience. Therefore, the phrase ‘rendering of technical services’ has to be construed in the same sense involving direct human involvement without which technical services cannot be rendered. [Reliance Communications Ltd. vs ACIT  69 taxmann.com 307 ITAT Mumbai]
SIGNIFICANCE OF MAKE AVAILABLE CLAUSE
- In some treaties, there is make an available clause in Article 12/13 which mandates service rendition must have the facility of making available technical knowledge, experience, skill, know-how or processes to the service recipient.
- The term makes available has far-reaching significance since it limits the scope of FTS. This clause is generally available in tax treaties with developed countries which want to retain the exclusive rights for taxing the transaction where there is no transfer or dissemination of knowledge or skill involved.
- The expression “make available” is used in the sense of one person supplying or transferring or imparting technical knowledge or technology to another.
- Technology is considered made available when the service recipient is enabled to absorb and apply the technology contained therein without the help of a service provider in the future. In other words, technology, know-how, knowledge etc. is considered to be made available when the service receiver is able to use such technology, know-how, knowledge etc. as owner independently in future work without recourse to the service provider. [Dee Beers India Minerals (P) Ltd. 346 ITR 467 (Karnataka HC)]
DIFFERENT DTAA’S AND DIFFERENT CONDITIONS
- Some of the DTAA’s which India has entered into like US, Canada, UK, Australia, Finland, Singapore etc. provide for a restrictive definition of FTS (i.e. Make Available Condition).
- In some DTAA’s there is no separate definition of FTS and the same is included in the definition of Royalty. E.g. Australia
- In some DTAA’s there is no concept of FTS/FIS. E.g. Brazil, Greece, Mauritius, Saudi Arabia, UAE
- In some DTAA’s FTS include only Technical and Consultancy services only. E.g. Finland, Canada, UK, Netherlands
- Protocols extend the restrictive definition (Make Available Clause) of FTS/FIS pursuant to MFN Clause.
- In some DTAA’s the definition of FTS is similar to the definition given under the Income Tax Act.
- In some DTAA’s word FIS (Fee for included services) used in place of FTS. E.g. USA.
Disclaimer: The above analysis of FTS is done on the basis of available law provisions and judicial precedents. This article is written for understanding and educational purposes only and it does not contain any opinion.
For any query, suggestions or opinions, please feel free to reach out at email@example.com