A Netherlands-based company received network fees from its Indian Associated Enterprise (AE) for services including:
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IT systems maintenance,
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Accounting and finance support, and
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Human resources services.
The central question: Are these network fees taxable in India as royalty or fees for technical services (FTS) under the India–Netherlands DTAA?
Legal Thresholds and Definitions
A. Royalty
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Indian Law: Section 9(1)(vi) of the Income-tax Act, 1961, covers payments for:
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Use of patents, trademarks, designs, secret formulas, or technical know-how, or
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Transfer of copyrights.
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DTAA (India–Netherlands, Article 12): Requires consideration for right to use, or for technical know-how.
Threshold: Payment must involve transfer or right to use intellectual property or technical knowledge.
B. Fees for Technical Services (FTS)
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Indian Law: Section 9(1)(vii) defines FTS as consideration for:
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Technical, managerial, or consultancy services; or
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Provision of technical knowledge, experience, skill, or processes.
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DTAA: Services must be technical in nature, not merely administrative.
Threshold: Actual technical know-how or skill transfer is necessary; routine support does not qualify.
Facts vs. Thresholds
| Aspect | Facts in Case | Threshold for FTS/Royalty |
|---|---|---|
| Services rendered | IT maintenance, accounting, HR support | Must involve technical know-how or IP |
| Provision of knowledge | None | Must transfer proprietary knowledge, methodology, or skill |
| Permanent Establishment (PE) | No PE in India | Business profits taxable in India only if PE exists |
Analysis: Services provided are administrative/support in nature and do not meet thresholds for royalty or FTS.
Legislative Intent and Judicial Interpretation
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Intent: Sections 9(1)(vi) & 9(1)(vii) and the DTAA aim to tax cross-border payments where India receives economic benefit from technical knowledge or IP.
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Judicial precedent: Courts have clarified that:
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Purely administrative/management services are outside FTS;
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FTS requires actual technical skill/know-how transfer.
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Implication: Routine network fees should not be taxed as FTS or royalty in India.
DTAA Implications
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Article 7 (Business Profits) & Article 12 (Royalties/FTS):
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Network fees do not constitute royalty/FTS, hence treated as business profits.
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Taxable in India only if PE exists.
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Condition: No taxation arises unless there is a fixed place of business or PE under Article 5.
Practical Flowchart: Determining Taxability of Network Fees
Step 1: Identify Nature of Service
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Technical knowledge / IP transferred? → Yes → Step 2
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Routine administrative/support service? → No → Not taxable in India
Step 2: Classify Payment
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Payment for use of IP / technical know-how → Royalty
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Payment for technical/managerial consultancy with know-how transfer → FTS
Step 3: Check Permanent Establishment (PE)
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Is there a PE in India?
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Yes → Tax business profits or FTS/royalty as applicable
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No → Business profits not taxable
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Step 4: Documentation & Compliance
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Maintain records proving services are non-technical
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Ensure AE does not create PE risk
Key Insight: Administrative “network fees” without know-how/IP transfer → Not royalty/FTS → Not taxable in India.
Practical Takeaways for Multinationals
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Substance over label: “Network fee” alone does not determine taxability.
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Administrative vs. technical: Routine IT/HR/accounting support ≠ FTS/royalty.
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PE review: Ensure no permanent establishment arises in India.
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Maintain records: Proof that services are routine support is critical.
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Threshold clarity: Only payments involving technical know-how or IP transfer are taxable.
Conclusion
Network fees received from an Indian AE for administrative, accounting, HR, or IT support—without transfer of technical know-how or IP—are:
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Not royalty or FTS under Indian law or DTAA,
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Not taxable in India without a PE, and
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Aligned with legislative intent, focusing on taxing technical knowledge/IP, not routine operational support.
This analytical approach with flowchart logic allows multinational enterprises to structure cross-border network fees and back-office arrangements in a DTAA-compliant manner.
