Special Knowledge provided by Service PE falls under Royalty under Tax Treaty

Court :
Dispute Resolution Panel

Brief :
A foreign company constitutes a service PE in India under the India-UAE tax treaty. Services provided in the form of sharing or permitting to use the special knowledge or expertise falls within the term ‘royalty’ under the treaty.

Citation :
Not Avilable

Bangaluru ITAT

Facts and Background of the Case

The assesse ABB FZ LLC(“ABB Dubai”/”Assessee”) is a non-resident company incorporated in UAE.

During the year, the assesse rendered regional service activities for the benefit of ABB Ltd. (ABB India) pursuant to regional headquarter service agreement between the ABB Dubai and ABB legal entities in India, Middle East and Africa, for which it received the consideration.

For rendering of services, employees of assesse were physically present in India for a period of 25 days, although, the services were provided from remote locationas well through various other communication channels.

The assesse claimed that above amounts are non-taxable in India as per India-UAE DTAA, as the DTAA does not contain the Fees for Technical Services clause and since this clause has been specifically excluded from the treaty, the taxability would fall under Article 22- other income, which provides that that income would be taxable in India only if taxpayer is having PE in India.

As per Article 5(2)(i) of the treaty, a foreign company is deemed to have PE in India, if the foreign company renders services through its employees or any other person for a period of 9 months or more in any 12 months period.

However, AO denied the benefit of treaty by stating that payment shall be taxable as Royalty as well as FTS. As per AO, if treaty is silent as regards taxability of particular category of income, its taxability has to be ascertained as per the domestic law.

On filing objection with Dispute Resolution Panel (DRP), the DRP upheld the order of the Tax Office and also held that taxpayer would constitute PE in India.

Issues involved in the Ruling

  1. Whether ABB Dubai’s service rendering constitutes PE in India?
  2. Whether services provided by assesse falls in the definition of Royalty s per DTAA?


Tribunal held that furnishing of services including consultancy services by assesse to ABB Ltd. for the project in India or with the connected project was for a period of 3 months after commencing its activities in January, 2010.Thus, it fulfils the prerequisite of PE and service PE does not require fixed place of business. In the present age of technology where services, information, consultancy, management, etc. can be provided through various virtual modes like email, internet, video conference, remote monitoring, remote access to desktop, etc., through various software, therefore, the argument of fixed place of business raised by assesse that 3 employees rendered services only for 25 days cannot be sustained, as the services can be rendered without the physical presence of employees of the assesse.

It was held that it is not the stay of the employees for more than 9 months, which is required to be there but it is the fact that rendering of services or activities which was required to be rendered for a period of 9 months.

The providing of services for the period of 9 months is stipulated in the period of 12 months. Once, the activities of the assesse commenced only in the month of January, 2010, then the argument of completing 9 months before March, 2010, is preposterous, implausible and against the common sense. Since, the assesse continues to render services w.e.f. January, 2010 and thereafter also in the subsequent assessment year.

Tribunal held that payment received by assesse will fall in Article 12(3) of DTAA as it is a consideration for the use or right to use, industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific equipment.

Tribunal held that information provided by the assesse to ABB Ltd., were acquired by the assesse of its expertise, experience and knowledge based on its association with ABB group Zurich.

The said information are not available on the public domain and cannot be acquired by ABB Ltd. on its own effort and the information which are provided were in the nature of special knowledge, skill and expertise.

The agreement gives opportunity to ABB Ltd. of using the information pertaining to industrial/commercial/scientific experience belonging to assessee.

The information provided by the assesse to ABB Ltd. were in the nature of know-how contract; given by the assesse to ABB Ltd. so that such know-how can be used by ABB Ltd., for its industrial or commercial purposes and further this special knowledge and experience would remain unrevealed to the public.

These information were not already existing and were supplied by the assesse after its development or creation to ABB Ltd. and there also exist specific provisions concerning the confidentiality of these information. Moreover the assesse has done very little after giving access to these information to ABB Ltd., thus the information provided of the assesse given to ABB Ltd. with the right to use and exploit commercially were concerning industrial, commercial or scientific experience activities would fall under Royalty of DTAA.

As has been held that the activities under consideration of the assesse fall under Royalty clause 12 of DTAA and not under residual clause, therefore the assesse is liable to be taxed within India in accordance with Article 12 of DTAA, Section 5 read with Section 9.