Gujarat High Court Sets Aside TDS Order For Failure To Apply 'Make Available' Test Under India–Singapore DTAA

The Gujarat High Court has recently set aside a tax deduction at source order against Solvay Specialities India, holding that the Income Tax Department failed to apply the mandatory “make available” test under the India–Singapore tax treaty.

Under this test, tax authorities are required to first determine whether the foreign service provider actually passed on any technical knowledge, skill, or know-how in a way that allows the Indian company to use it independently in the future.

Without such transfer, payments cannot be taxed as fees for technical services under the treaty.

A Division Bench of Justice A.S. Supehia and Justice Pranav Trivedi held that this core inquiry was completely missing from the TDS officer's decision.

Solvay India had paid intra-group service charges to its Singapore affiliate under a 2014 functional services agreement. The services were related to general management, finance, human resources, legal, IT systems, compliance, purchasing, and other support functions.

No tax was deducted at source. Solvay's case was that these were routine support services and did not involve any transfer of technical knowledge.

The Court noted that identical payments under the same agreement had been examined in earlier assessment years. On those occasions, the tax authorities had accepted that the services did not qualify as fees for technical services under the India–Singapore Double Taxation Avoidance Agreement.

For Assessment Year 2020–21, the scrutiny assessment resulted only in a large transfer pricing adjustment. No disallowance was made for non-deduction of tax.

Separately, the TDS officer initiated proceedings under Section 201 of the Income Tax Act and treated Solvay India as an assessee in default for not deducting tax on the Singapore payments.

On this legal issue, the High Court agreed with the Revenue. It held that proceedings under Section 201 operate independently of assessment proceedings under Section 143(3). The absence of a disallowance under Section 40(a)(i) does not bar a TDS officer from acting later.

However, on merits, the Court found the TDS order unsustainable.

It held that the Assessing Officer had focused on the wording of invoices and the broad description of services, instead of examining whether any technical knowledge or skill was actually made available to Solvay India.

“The Assessing Officer (TDS) has ignored the crucial determination of whether Solvay Singapore made available any technology or skill to the petitioner as per Article 3.1 of the Agreement dated 01.01.2014. Instead, the AO (TDS) has dismissed the petitioner's detailed submissions on the nature of services, merely noting that invoices contained common descriptions, without addressing how the services satisfy the “make available” clause necessary to classify them as fees for technical services under Article 12(4) of the India–Singapore DTAA.” the Court observed.

The bench clarified that managerial or support services do not automatically become taxable. Unless the service enables the recipient to independently apply technical knowledge, the payment cannot be treated as fees for technical services under Article 12 of the treaty.

As this essential test was never applied, the Gujarat High Court set aside the Section 201 order and the consequential demand passed by the tax authorities.