Service Agreement: How Is It Different From Technology Transfer?
Effective transfer of services remains a persistent challenge for developing countries. Nepal, in particular, has faced significant difficulties in obtaining services from developed regions to enhance its local capabilities. Unclear laws and regulatory practices hinder foreign service providers from receiving their fees as per the agreed terms of payment. This regulatory ambiguity creates uncertainty and discourages foreign professionals from rendering service to the Nepali market.
Foreign professional services are crucial for existing Nepali businesses, given the limited local resources and expertise. For instance, hydropower companies often need to procure services from foreign consulting firms to conduct feasibility studies, which are essential for the development and sustainability of such projects. Addressing these regulatory challenges is vital for Nepal to fully benefit from global expertise and advance its development goals.
What is Transfer of Service?
Transfer of service is the process by which expertise skill or knowledge is transferred from one party to another in consideration of certain renumeration. This can include technical support, professional consulting, educational services, and various other forms of service, often transmitted across national borders. Transfer of service is structured through service agreement which is a contract between the service provider and recipient, outlining the scope of services, payment terms, duration, responsibilities, confidentiality and other relevant conditions. Service agreements ensure that both parties have a clear understanding of their obligations and the terms under which services will be delivered.
Technology Transfer under FITTA
The Foreign Investment and Technology Transfer Act, 2075 (FITTA) and Nepal Rastra Bank Foreign Investment and Foreign Loan Bylaw, 2078 (FIFL) define technology transfer as transfer of (a) patent, design, trademark, goodwill, technological specialisation, formula or process, (b) user’s licence, know- how sharing or franchise, and (c) providing foreign technological consultancy, management and marketing services or other technical skill or knowledge through an agreement between an industry and foreign investor. However, transfer of foreign skill or knowledge including consultancy, management and marketing services should not fall within the ambit of FITTA.
There is a need to amend existing laws by clearly defining and differentiating service agreements and TTAs, streamlining regulatory processes, and ensuring fair and transparent payment arrangements. These changes will help manage intellectual property rights effectively and foster a conducive environment for both service provision and technological innovation.
Regulatory Challenges
FIFL and Nepal Rastra Bank Unified Circular, 2080 stipulate the requirement of the approval/recommendation of the regulatory authority for the approval of repatriation of amount exceeding $5,000 for countries other than India and amount exceeding INR 300,000 in case of India. The determination of regulatory authority for the pure service agreement itself is unclear in the present context.
The Department of Industry (DOI) interprets all service agreements surrounding technical transfer as Technology Transfer Agreements (TTA), without distinguishing between pure service agreements and TTA. Consequently, both TTA and pure service agreements exceeding the threshold of $5,000 or INR 300,000, require DOI approval /recommendation. Also, they are subject to royalty cap as provided under the Foreign Investment and Technology Transfer Regulation, 2077 (FITTR). If the fees are within the cap prescribed by FITTR, TTA and service agreements are generally approved. However, this regulation and repatriation fee cap should not apply for pure service agreement.
FITTR has set an annual cap on royalty and service fees payable to foreign parties under a TTA. If an industry has multiple technology transfer arrangements with a foreign investor, the total fee payment of those arrangements must not exceed the fiscal year cap. This low cap is unattractive to service providers, as it restricts adequate fee payments for services rendered.
Despite FITTA’s clear provisions indicating that only foreign investment made through technology transfer is covered under its ambit, there is lack of clarity when services are required by entities other than industries. This ambiguity results in regulatory challenges, especially regarding payment terms for foreign service providers.
In practice, if there is confusion about whether a service falls under TTA, the DOI reviews the terms of payment. Continuous and recurring payments are deemed as technology transfer, while one-time payments are considered pure service agreements.
There is a grey area in regulatory interpretation regarding whether service agreements fall within the purview of technology transfer under FITTA. Unless the nature of service provided falls within the definition of technology transfer, such services should not be construed as technology transfer and should fall outside the scope of FITTA. Misinterpreting general services as technology transfer creates regulatory hassles for foreign service providers, especially concerning payment. The determination of the regulatory authority for service agreements remains unclear, further complicating the approval process for repatriation of earned amounts.
Need for clear distinction between Service Agreement and TTA
There is a need for a clear distinction between pure service agreements and TTA in terms of their nature, purpose and terms of payment. Service agreements focus on delivering specific tasks or projects that meet defined standards and requirements. These agreements involve straightforward payment structures, where fees are paid individually for each service rendered, without concerns about royalties. In contrast, TTAs are designed to facilitate the transfer of technology, including licences and technical know-how that are registered and recognised. These agreements enable the recipient to utilise proprietary technology, often involving complex payment arrangements such as royalties and licensing fees.
It is essential to differentiate between foreign investments through technology transfer and pure services agreement, as they should not be regulated under a single framework. Each type of investment has unique challenges and requirements, necessitating tailored legal approaches. To address these issues, there is a need to amend existing laws by clearly defining and differentiating service agreements and TTAs, streamlining regulatory processes, and ensuring fair and transparent payment arrangements. These changes will help manage intellectual property rights effectively and foster a conducive environment for both service provision and technological innovation.
