FTS Tax Rate Between India and USA Under DTAA

FTS Tax Rate Between India and USA

The India-USA Double Taxation Avoidance Agreement (DTAA) takes a fundamentally different approach to taxing technical services compared to most other Indian tax treaties. Instead of using the widely adopted term "fees for technical services" (FTS), the India-USA treaty uses the term "fees for included services" (FIS) under Article 12. This distinction is critically important because the scope of FIS is significantly narrower than FTS under the Indian Income Tax Act or under most other Indian DTAAs.

The key differentiator is the "make available" clause -- a requirement unique to only a handful of India's tax treaties (including the USA, UK, and Singapore DTAAs). Under this clause, a technical or consultancy service is taxable as FIS only if it makes available technical knowledge, experience, skill, know-how, or processes to the recipient, enabling the recipient to apply the technology independently in the future without the service provider's continued assistance.

The treaty rate for FIS is 15% of the gross amount under Article 12(2)(a), or 10% under Article 12(2)(b) where the services are ancillary to equipment use. Both rates are lower than India's domestic withholding tax rate of 20% (plus surcharge and 4% health and education cess) under Section 115A read with Section 195 of the Income Tax Act, 1961.

Treaty Rate vs Domestic Rate: Detailed Comparison

The taxation of technical services under the India-USA DTAA operates at two levels: first, whether the service qualifies as FIS at all (the make-available test), and second, the applicable withholding rate if it does qualify.

15% Rate for General FIS (Article 12(2)(a))

Under Article 12(2)(a), fees for included services are taxed at a maximum rate of 15% of the gross amount. This applies to technical or consultancy services that satisfy the make-available clause -- meaning the service transfers enduring technical knowledge or capability to the Indian recipient.

10% Rate for FIS Ancillary to Equipment Use (Article 12(2)(b))

Under Article 12(2)(b), a reduced rate of 10% applies when the technical services are ancillary and subsidiary to the enjoyment of property for which an equipment royalty payment is made. For example, installation and training services provided alongside equipment leasing would qualify for this lower rate.

0% Rate -- Services That Do Not Meet the Make-Available Test

Crucially, if a technical or consultancy service does not make available any technical knowledge, skill, or know-how to the Indian recipient, the payment does not qualify as FIS at all. In such cases, the payment is treated as business profits under Article 7, which are taxable in India only if the US service provider has a permanent establishment in India. If there is no PE, the payment is not taxable in India -- a result that is dramatically different from the 20% domestic withholding rate.

Who Qualifies for the Reduced Rate

Qualifying for the FIS rates under the India-USA DTAA involves multiple tests:

The Make-Available Test (Article 12(4)(b))

This is the most critical condition. Under Article 12(4)(b), "fees for included services" means payments for rendering technical or consultancy services if such services:

• Make available technical knowledge, experience, skill, know-how, or processes to the recipient; or
• Consist of the development and transfer of a technical plan or technical design

The Memorandum of Understanding accompanying the treaty clarifies: "Technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available."

This means:

• A US consultant providing ongoing advisory services where the Indian client cannot replicate the service independently does NOT make available technology -- payment is not FIS.
• A US firm conducting training programmes that transfer skills and enable the Indian team to perform the work independently DOES make available technology -- payment is FIS.
• A US company providing IT support services on a recurring basis without transferring know-how does NOT make available technology.

Limitation of Benefits (Article 24)

Even if a payment qualifies as FIS, the US recipient must satisfy the LOB clause under Article 24 to claim the reduced treaty rate. The recipient must pass either the active trade or business test or the ownership/base-erosion test, as described in the royalty tax rate page for this treaty.

Beneficial Ownership

The recipient must be the beneficial owner of the FIS income, not a mere agent, nominee, or conduit. The beneficial owner must have the independent right to use and enjoy the income.

FTS-Specific Treaty Provisions

FIS vs FTS: A Critical Distinction

The domestic definition of FTS under Section 9(1)(vii) of the Income Tax Act is much broader than the treaty definition of FIS. Under domestic law, FTS includes consideration for any managerial, technical, or consultancy services -- with no make-available requirement. Under the treaty, only services that make available technology qualify. This means many payments that would be taxable as FTS under domestic law are not taxable as FIS under the treaty.

Section 90(2) of the Income Tax Act provides that DTAA provisions apply to the extent they are more beneficial to the taxpayer. Since the treaty narrows the scope of taxable services (and can result in 0% tax instead of 20%), the treaty is almost always more beneficial for US service providers.

Exclusions from FIS (Article 12(4))

Certain services are explicitly excluded from the definition of FIS:

• Services for teaching in or by educational institutions
• Services for the personal use of the individual making the payment
• Services that are ancillary to rental of ships, aircraft, containers, or other equipment used in international transport
• Employee compensation (salaries, wages) for services rendered

PE Attribution Rule (Article 12(5))

If the US service provider has a permanent establishment in India and the FIS is effectively connected with that PE, the income is taxed as business profits under Article 7 at the applicable corporate tax rate (35% for foreign companies), not at the reduced FIS rate.

Documentation Required

To claim the reduced DTAA rate on FIS payments, the following documentation is required:

Tax Residency Certificate (TRC)

The US recipient must provide IRS Form 6166 as the Tax Residency Certificate, obtained by filing IRS Form 8802. This confirms US tax residency under the treaty.

Form 10F

Form 10F must be filed electronically on India's income tax e-filing portal, providing the recipient's status, US taxpayer identification number, and residential status details.

Self-Declaration

A declaration confirming: (i) beneficial ownership of the FIS income; (ii) no permanent establishment in India; and (iii) that the services satisfy (or do not satisfy) the make-available test. The declaration should specifically address whether technical knowledge has been made available to the Indian recipient.

Service Agreement and Scope of Work

Given the importance of the make-available test, Indian payers often require a detailed scope of work or service agreement to assess whether the services qualify as FIS. Tax authorities may also request this documentation during assessment proceedings.

Withholding Procedure for Indian Payers

Indian entities paying for technical services to US providers must navigate the withholding obligations carefully:

Section 195 Compliance

Under Section 195, the Indian payer must assess whether the payment constitutes FIS under the treaty. If the service does not meet the make-available test and the US provider has no PE in India, the payer may apply nil withholding. However, exercising this judgment carries risk -- if the tax department later determines the service qualifies as FIS, the payer faces interest and penalty under Section 201.

Section 195(2) Application for Determination

To mitigate risk, the Indian payer can apply to the Assessing Officer under Section 195(2) for a determination of the appropriate withholding rate. The AO will examine the nature of the services and determine whether the make-available test is met.

Lower Deduction Certificate (Section 197)

Alternatively, the US service provider (or the Indian payer on behalf of the provider) can apply for a lower deduction certificate under Section 197, which authorises the payer to withhold at a rate lower than the statutory rate (including nil).

Form 15CA and Form 15CB

For remittances exceeding INR 5 lakh, Form 15CA/15CB compliance is mandatory. The Chartered Accountant issuing Form 15CB must specifically address whether the make-available test is satisfied and cite the applicable treaty provision.

Common Disputes and Judicial Precedents

General Motors Company (ITAT Delhi, September 2024)

In the General Motors Company case, the Delhi ITAT examined whether certain payments to a US entity constituted fees for included services under Article 12 of the India-USA DTAA. The tribunal applied the make-available test and assessed whether the Indian recipient was enabled to apply the technology independently. The case reinforced that the make-available test requires a transfer of enduring capability, not merely the provision of a service.

Invesco Holding Company (ITAT, 2024-2025)

The tribunal held that cost-to-cost reimbursements for IT support services do not qualify as FIS under Article 12 because no technical knowledge was made available to the Indian affiliate. The services were recurring support activities that the Indian entity could not replicate independently. The ITAT deleted the additions made by the Assessing Officer.

Coursera Inc. (ITAT, May 2025)

The ITAT ruled that income from providing online educational content to Indian users was not taxable as royalty or FIS under the India-USA DTAA. The tribunal held that the platform merely provided access to pre-recorded content and did not make available any technical knowledge to the subscribers.

Cloud Computing and SaaS Services

Multiple ITAT rulings have held that payments for cloud computing, SaaS, and IaaS services do not constitute FIS because no technical knowledge is made available to the Indian user. The user accesses the service provider's infrastructure remotely without acquiring any technology that can be independently applied. A 2023 ruling specifically held that receipts from cloud computing services were not taxable as royalty, FTS, or FIS under the India-USA DTAA.

Management Consultancy vs Technical Services

Courts have consistently distinguished between management consultancy (strategic advice, market analysis, business planning) and technical services that make available technology. Pure management consultancy that provides recommendations but does not transfer technical skills does not qualify as FIS. This distinction has significant implications for multinational groups that centralise management functions in the USA.

Practical Examples and Calculations

Example 1: US Engineering Firm Providing Training (FIS -- Taxable at 15%)

A US engineering firm conducts a 3-week training programme in India for the client's engineers, teaching them a proprietary welding technique. The training fee is INR 1,00,00,000 (INR 1 crore).

• Make-available test: Satisfied -- the Indian engineers can independently apply the welding technique after training.
• Domestic rate: 20% = INR 20,00,000 (plus surcharge and cess, effective ~INR 21,84,000)
• DTAA rate (Article 12(2)(a)): 15% = INR 15,00,000
• Tax saving under DTAA: INR 6,84,000

Example 2: US IT Company Providing Managed Services (Not FIS -- 0% Tax)

A US IT company provides ongoing managed IT infrastructure services to an Indian client. The US company manages the client's servers, handles security, and performs routine maintenance remotely. The annual fee is INR 3,00,00,000 (INR 3 crores).

• Make-available test: Not satisfied -- no technical knowledge is transferred; the Indian client cannot perform these services independently.
• PE in India: None.
• Tax under domestic law: 20% = INR 60,00,000 (plus surcharge and cess)
• Tax under DTAA: 0% (business profits, no PE)
• Tax saving under DTAA: INR 65,52,000 (entire tax eliminated)

Example 3: US Company Providing Equipment Installation Training (FIS -- 10% Tax)

A US manufacturer sells specialised equipment to an Indian factory and provides installation and training services ancillary to the equipment lease. The service fee is INR 50,00,000.

• Make-available test: Satisfied and ancillary to equipment royalty.
• Domestic rate: 20% = INR 10,00,000 (plus surcharge and cess)
• DTAA rate (Article 12(2)(b)): 10% = INR 5,00,000
• Tax saving under DTAA: INR 5,92,000 (including surcharge and cess)

Frequently Asked Questions

What is the FTS tax rate under the India-USA DTAA?

The India-USA DTAA uses the term "fees for included services" (FIS) rather than FTS. The rate is 15% under Article 12(2)(a) for general FIS, or 10% under Article 12(2)(b) for services ancillary to equipment use. However, if the service does not meet the make-available test and the provider has no PE in India, the payment is not taxable at all.

What is the make-available clause in the India-USA DTAA?

The make-available clause requires that technical or consultancy services must make available technical knowledge, experience, skill, know-how, or processes to the recipient, enabling the recipient to apply the technology independently. If the service does not transfer enduring capability, it does not qualify as FIS and is not taxable under Article 12.

How is FIS different from FTS under Indian domestic law?

FTS under Section 9(1)(vii) of the Income Tax Act covers any managerial, technical, or consultancy services with no make-available requirement. FIS under the treaty covers only services that make available technology. This means many services taxable as FTS domestically (at 20%) are not taxable as FIS under the treaty -- a major benefit for US service providers.

Are management consultancy fees taxable under the India-USA DTAA?

Generally no. The India-USA DTAA does not separately tax managerial services, and the domestic definition of FTS (which includes managerial services) is overridden by the narrower treaty definition of FIS. Management consultancy that provides strategic advice without transferring technical skills typically does not meet the make-available test and is not taxable if the provider has no PE in India.

What happens if the Indian payer incorrectly applies nil withholding?

If the Indian payer determines that a service does not meet the make-available test and applies nil withholding, but the tax department later disagrees, the payer faces liability under Section 201 as an assessee-in-default, including interest at 1% per month. To mitigate this risk, payers can seek a determination under Section 195(2) or the US provider can obtain a lower deduction certificate under Section 197.

Do cloud computing and SaaS payments qualify as FIS?

Recent ITAT rulings have consistently held that cloud computing and SaaS payments do not qualify as FIS because no technical knowledge is made available to the user. The user merely accesses the provider's infrastructure remotely without acquiring any technology for independent application.

Has any recent ruling changed the scope of FIS under the India-USA DTAA?

The Invesco Holding Company ruling (2024-2025) reinforced that cost-to-cost IT support reimbursements are not FIS. The Coursera ruling (May 2025) confirmed that online educational content does not qualify as FIS. These rulings continue a trend of narrowly interpreting the make-available clause in favour of taxpayers.