There is an important judgment by Delhi ITAT on FTS.

Facts of the case: 

1) The assessee was engaged in the business of manufacturing and export of leather footwear in the name of prop. concern ‘Regency Impex’.

2) M/s Ace Trading Co., France (In short ‘Ace’) was appointed by the assessee in earlier years for assistance in procuring export orders for the assessee in France. In the year under consideration also, the assessee appointed M/s ‘Ace’ as its agent for procuring export orders in France. The assessee debited a sum of Rs. 1,16,99,172/- as commission paid on export sales. No TDS was deducted by the assessee on said payment.

3) The AO held the assessee in default for non-deducting tax at source on the export commission and consequently, in default under section 40(a)(i) of the Act and held the assessee liable for disallowance of such export commission of Rs. 1,16,99,172/-.

4) ITAT View:

The NR ‘M/s Ace’ was engaged for procuring export orders for the assessee in the territory of France and commission has been paid on the export sales, which were procured through the said agent. The assessee has agreed with the said agent every year, though the scope of the services remained the same. The Learned DR could not bring before us any evidence as regards to change of scope of services rendered by the said agent in the year under consideration as compared to the earlier year.

The NR can invoke DTAA between India and France if provisions of the same are more beneficial to the non-resident. We find that Hon’ble Delhi High Court in the case of Steria India Ltd. v. DCIT, 255 Taxman 110 (Delhi) (HC) held that the MFN clause of the protocol will form an integral part of India France DTAA and it will be automatically applicable without any further notification.

In view of the MFN clause, the beneficial provision of the Convention between India and other OECD country, i.e., UK automatically extends to India-France DTAA.

In India, UK DTAA, FTS exclude the term ‘managerial services’ and provides for ‘make available clause’. While analyzing the Fee for technical services (FTS) definition as per India France DTAA, in view of the MFN clause, the entire definition of the FTS can be imported from India UK DTAA.

The services under the net of Fee for Technical Services (FTS) under the India France DTAA, the ‘make available’ clause has to be satisfied. But in the services rendered by the non-resident of procuring export order for the assessee, no knowledge has been provided to the assessee which could be exploited further by the assessee.

In such circumstances, the services rendered by the non-resident cannot be held as ‘FTS’ under the India-France DTAA. Accordingly, such services will not be chargeable in India in the hands of a non-resident under DTAA and, therefore, no liability to deduct TDS will arise. Consequently, payment to a said non-resident is not liable to disallowance under section 40(a)(i) of the Act.

The copy of the order is as under: