CA Final · Direct Tax Laws & International Taxation · Application and Interpretation of Tax Treaties
Kaveri Ltd, an Indian company, pays Rs 50,00,000 to Brightway GmbH, a non-resident, for technical services. The India–Germany type treaty applicable defines fees for technical services only if the services 'make available' technical knowledge, skill or know-how to the recipient. Brightway provided routine, standardised data-processing services and did not transfer any know-how to Kaveri that it can use independently. What is the correct treatment in India under the treaty?
The payment is not fees for technical services under the treaty, because the make-available clause requires transfer of technical knowledge or skill, which did not happen. It is therefore business profits, taxable in India only if Brightway has a permanent establishment there; absent one, India cannot tax it.
- AThe payment is taxable as fees for technical services because any technical service qualifies
- BThe payment is not fees for technical services under the treaty as no technology is made available, so it is taxable as business profits only if Brightway has a permanent establishment in IndiaCorrect
- CThe payment is taxable as royalty at the treaty rate
- DThe payment is fully exempt from tax in both countries in all cases
Explanation
The 'make available' clause narrows the treaty definition of fees for technical services. Routine services that do not transfer know-how fall outside it, so the amount is treated as business profits under Article 7. Business profits are taxable in India only if a permanent establishment exists. Option A ignores the clause and option C mischaracterises the payment.
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