Reimbursement
towards with services in the nature of assistance, professional and
administrative consultation and training @ attracts tax withholding
requirements
In a recent AAR ruing in case of Mersen
India Private Limited, it was held that--under Article 13 of the India-France
DTAC, there is no stipulation that managerial services should 'make available'
any, knowledge experience, skills, and know-how before the consideration paid
for it can be taxed. In other words, mere rendering of managerial services to
the applicant would invite the liability to be taxed in India for the
consideration received for that service. Advice on business strategy, on
general management, on marketing and commercial matters, on financial control
and accounting matters, and on purchase and sales, environment and safety and
the giving of training to optimize sales techniques to the employees of the
applicant, are all capable of being put to use by the applicant on its own and
hence can be said to be 'made available' to applicant and taxable in terms of
Article 13.4 of India-France DTAC read with para 4 of Article 12 of India-US
DTAC.
In short, reimbursement towards with
services in the nature of assistance, professional and administrative
consultation and training @ attracts tax withholding requirements.
[2012] 20 taxmann.com 475 (AAR - New
Delhi) AUTHORITY FOR ADVANCE RULINGS (INCOME TAX), NEW DELHI
Mersen India (P.) Ltd., In re JUSTICE
P.K. BALASUBRAMANYAN, CHAIRMAN
A.A.R. NO.1074
OF 2010
RULING
________________________________________
1. The applicant is a company
incorporated under the companies Act 1956. It is a 100% subsidiary of a French
company. The French company in turn has another 100% subsidiary incorporated in
France. The said subsidiary is now known as Mersen Corporate Services. The
applicant originally entered into what is called a "Services
agreement" on 1.1.2008, which was to be in force for a period of one year.
On the expiry of one year, another agreement was entered into which was also to
be for one year. With effect from 1.1.2010, the applicant has entered into a
fresh agreement with the French company. Though the agreement stipulates the
term of one year, unlike the earlier agreements, it provides for an automatic
renewal of its terms for one year at a stretch. The applicant has also produced
the agreement dated 30.12.2009 which is to come into effect on 1.1.2010, which
is the agreement currently governing the relationship between the parties. The
applicant and its parent company in France, are both in the business of
manufacturing electrical components. The applicant is doing its business in
Bangalore and Chennai for over a decade.
2. Under the services agreement, Mersen
has undertaken to provide the applicant with services in the nature of assistance,
professional and administrative consultation and training. The applicant has to
pay the expenses incurred by Mersen for the services rendered to the applicant
plus 5% of that amount. The invoice was to be in Euro and the money had to be
remitted to a bank in Paris in France. The payment had to be made free of and
without withholding taxes and duties and other charges and if such withholding
was necessary, the same had to be borne by the applicant and there could be no
deduction of the same from the amount to be paid to Mersen. The applicant had
also entered into another agreement with Mersen wherein Mersen had undertaken
transactions in the nature of E-Sourcing, Mail messaging, ERP maintenance etc.
The applicant was not seeking an advance ruling in respect of that transaction.
The applicant was seeking a ruling on the transaction evidenced by the services
agreement.
3. After hearing the applicant and the
Revenue which raised no objection to the allowing of the application under
section 245R(2) of the Income-tax Act, this Authority allowed the application
for giving a ruling on the following questions:
(1) Whether, pursuant to the
"Services Agreement" entered into by the Applicant with Mersen,
France, the payment made by the Applicant to Mersen, France, towards advisory
services is 'fees for technical services' as per Article 13 (4) of the India-French
DTAA read with the protocol to the said DTAA?
(2) If the answer to query 1 is in the
affirmative, what is the rate at which the Applicant is required to deduct tax
at source from such payment under Section 195(1) of the Income tax Act, 1961
(hereinafter referred to as the IT Act)?
(3) If the answer to query 1 is in the
negative, is the above payment in the nature of business profits dealt with by
Article 7 of the Indo-French DTAA?
(4) If the answer to query 3 is in the
affirmative, is the above payment not taxable in India as Mersen, France does
not have a permanent establishment in India as per Article 5 of the
India-French DTAA?
(5) If the answer to query 4 is in the
affirmative, is the Applicant required to deduct tax at source under section
195(1) in respect of the aforesaid payment to Mersen, France?
4. Though in the application, as part of
its contentions, a contention is raised that what is payable under the services
agreement to the French company was not fees for technical services within the
meaning of section 9(1)(vii) of the Income-tax Act, at the hearing, learned
counsel for the applicant did not dispute the position that the payment would
be fees for technical services within the meaning of the Act. It was also
agreed that going by the Double Taxation Avoidance Convention between India and
France the amount would qualify as fees for technical services under paragraph
4 of Article 13 of the Convention. What was mainly contended for was that in
terms of clause 7 of the protocol annexed to the DTAC, the applicant was
enabled to claim the benefit of the limiting of the scope for taxation of
technical services and if one restricted it to the convention between India and
the United States, for satisfying the definition of included services in that
Convention, it had also to be shown that the know-how was made available to the
applicant before the payment for it could qualify as fees for included services
under that Convention. It was also pointed out that managerial services were
not included in the concept of "included services" under the India-US
Convention and hence, the payments could be understood only as the business
income of the French company and the payments to it could not be taxed in India
in the absence of that company having a permanent establishment in this
country.
5. On behalf of the Revenue it was
contended that going by the definition contained in the Income-tax Act and the
DTAC between India and France, payments made under the services agreement,
would be fees for technical services and taxable as such. The exemption
contained in section 9(1)(vii) of the Act did not apply and the transaction was
liable to tax in India. In terms of the DTAC, what was inter alia being
provided was consultancy services and the same fell within the concept of
included services as now put forward. As regards the protocol, it is submitted
that it will make no difference to the situation and the payments were taxable
in India.
6. As per explanation 2 to section
9(1)(vii) of the Income-tax Act, fees for technical services means any
consideration for the rendering of any managerial, technical or consultancy
services. Under paragraph 4 of Article 13 of the Convention between India and
France also, fees for technical services means payment of any kind as
consideration for services of a managerial, technical or consultancy nature.
Learned counsel is right in his submission that the position under the
Convention and under the Act are the same regarding the nature of the payment.
He has, therefore, rightly pitched his arguments on the modification brought
about by the protocol to the DTAC wherein it is provided as follows:
"7. In respect of articles 11
(Dividends), 12 (Interest) and 13 (Royalties, fees for technical services and
payments for the use of equipment), if under any Convention Agreement or
Protocol signed after 1.9.1989, between India and a third State which is a
member of the OECD, India limits its taxation at source on dividends, interest,
royalties, fees for technical services or payment for the use of equipment to a
rate lower or a scope more restricted than the rate of (?) scope provided for
in this Convention on the said items of income, the same rate or scope as
provided for in that Convention, Agreement or Protocol on the said items of
income shall also apply under this Convention, with effect from the date on
which the present Convention or the relevant Indian Convention, Agreement or
Protocol enters into force, which ever enters into force later."
7. It is curious to see that the
convention between India and France was signed on 29.9.1992. The protocol was
also signed on the same day with a preamble that the same was to form an
integral part of the Convention. But a look at clause 7 of the protocol
indicates that if any other Convention, agreement or protocol had been signed
by India after 1.9.1989 (a date preceding the signing of the DTAC between India
and France) with a third state, which is a member of the OECD, in which India
limits its taxation at source on fees for technical services (relevant for our
purpose) to a rate lower or scope more restricted than the rate of (?) scope
provided for in this Convention, the same rate or scope as provided for in that
Convention, was also to apply under the DTAC.
8. Learned counsel for the applicant
submitted that the DTAC between India and the United States was entered into on
12.9.1989, a date later than 1.9.1989 referred to in clause 7 of the protocol
and that the applicant was relying on the relevant clause of that Convention,
which had a more restricted scope for taxation of such fees. He submitted that
in Article 12 of the Convention between India and the US, what was taxable was
fees for included services. He pointed out that paragraph 4 of Article 12 of
that Convention, provides that fees for "included services" means
payment of any kind in consideration for the rendering of any technical or
consultancy services, if such services are ancillary and subsidiary to the
application or enjoyment of the right, property or information for which the
payment described as royalty is received or make available technical knowledge,
experience, skill, know how or consists of the development and transfer of a
technical plant or technical design. His submission was that even though the
DTAC between India and the French Republic did not insist on the making
available of the technical knowledge etc., by virtue of the protocol, this
concept had also to be taken note of while deciding the question whether the
payment made is fees for technical services. Similarly, the Convention between
India and the US has not taken in managerial services as part of included
services the payment in consideration of which would be fees for technical
services and consequently, notwithstanding the relevant paragraph in the
India-France DTAC, payment made for managerial services, cannot be taxed as
fees for technical services.
9. I find it some what strange that in
spite of having entered into a DTAC with United States on 12.9.1989, preceding
the signing of the Convention with France, the language or scope of the
Convention between India and United States was not adopted for the India-France
Convention. If the intention was to adopt the Convention as contained in the
India-US DTAC, there would have been no difficulty in adopting the relevant
clause in the India-France Convention as well. From the fact that in the
India–France Convention, the bargaining countries struck to the definition as
it is found in the Convention and parallel to the one found in the Indian
Income-tax Act, surely, the intention must be taken to be not to adopt the
concept as in the India-US DTAC. When this logical interference follows, in
steps the protocol, providing for adopting the scope of taxation from any other
treaty entered into after 1.9.1989, a date almost 3 years prior in point of
time to the signing of the DTAC between India and France. I find it strange
that if the intention was to have an identical regime of taxation, and nothing stood
in the way of enacting an Article in the India–France DTAC along the same lines
as the one found in the India–US DTAC, why that intention was not given effect
to. If one were to draw the interference that the intention was not to adopt
the parallel provision found in the India-US Convention, in steps the protocol
with its abjuration that the other Convention must be given effect to. It is
not clear why this confusing process has been adopted. It has also created
considerable difficulty in understanding what exactly was the intention behind
wording Article 13 in the Convention between India and France in the manner in
which it is done. No doubt, as indicated by the Supreme Court in Azadi Bachao
Andolan (263 ITR 706), the approach of a diplomat has to be adopted in
interpreting a Convention between nations. Even such an approach does not
appear to be capable of removing the confusion created by the circuitous
process adopted, while entering into the Convention and signing the protocol
with France.
10. Clause 7 of the protocol reads:
"…………………… India limits its taxation
at source on dividends, interest, royalties, fees for technical services or
payments for use of equipment to a rate lower or a scope more restricted than
the rate of scope provided for in this convention on the said items of income
the same rate or scope as provided…."(Emphasis supplied)
Can one take what is contained in the
emphasized portion, a printer's devil? Or, is it deliberate to show that only
provision for lower rate is intended to be applicable? The copy of the protocol
provided by the applicant and the publications available in this Authority all
show this expression. Counsel for the applicant submits that this is only a
printing error, and the expression is really 'rate or scope', and reading it
so, will be consistent with the use of the expression in the other parts of the
clause. The representative for the revenue submitted that only provision for a
lower rate of taxation is roped in and the scope of the provision in the DTAC
for taxation cannot be whittled down by using this clause.
11. One supposes that reading the clause
as a whole, it would be appropriate to read the expression 'rate of scope' as
'rate or scope' in the context. One also supposes that it is open to this
Authority or a court to 'iron out the creases' if warranted, to give a meaning
to the provision. On making that approach, I am inclined to accept the
submissions of Counsel for the applicant that both rate of taxation and scope
of taxation are brought within the purview of clause 7 of the protocol.
12. Going by the submissions of Counsel
for the applicant, what has to be considered is whether the payments made by
the applicant to the French Company is 'fees for technical services' In Article
12 of the India-US DTAC which provides for taxation of 'Fees for Included Services'
paragraph 4 explains that 'fees for included services' means payment of any
kind to any person in consideration for the rendering of any technical or
consultancy services, if such services make available technical knowledge,
experience, skill, know-how, or processes or consist of the development and
transfer of a technical plan or technical design. So, notwithstanding the
absence of a 'make available' stipulation in the Indo-French Convention, the
applicant can rope in the concept of 'make available.' But this can be done
only for technical and consultancy services which alone are embraced by the
India-US Convention and from the 'Make Available' stipulation, Managerial
Services are left out. It is the case of the applicant that consideration for
managerial services paid to the French service provider, will only be business
income and can be taxed in India only if it has a Permanent Establishment in
India.
13. The applicant, receiving services
from the French Company, can claim the application of the DTAC between India
and France, or the provisions of the Income-tax Act which ever is more
beneficial to it. The applicant has claimed the benefit of the DTAC. Now, under
the DTAC, managerial services are taxable as 'Fees for Technical Services'
under paragraph 4 of Article 13 which says that fees for technical services
means payments in consideration for 'services of a managerial, technical or
consultancy nature'. So, managerial services are taxable under the DTAC as FTS
and under paragraph 2 of Article 13 read with paragraph 7 thereof, the same can
be taxed in India as provided therein. By the strength of the protocol it has
also claimed the benefit of the India-US Convention. In respect of technical
and consultancy services, it is entitled to insist on the 'make available'
requirement. This leaves out managerial services to be taxed under the DTAC
between India and France. Managerial services are specifically dealt with under
Article 13 of that DTAC. So, it is not possible to resort to Article 7 or Article
23 to look for a Permanent Establishment in this country before it being taxed.
14. Under Article 13, there is no
stipulation that managerial services should be made available before the
consideration paid for it can be taxed. In other words, mere rendering of
managerial services to the applicant would invite the liability to be taxed in
India for the consideration received for that service.
15. I will now briefly consider the
services that are being provided or are to be provided under the services agreement.
They include:
(1) Advice and assistance on business
strategy and on general management.
(2) Advice and assistance on marketing
and commercial matters.
(3) Advice and assistance on
international relationship matters.
(4) Advice and assistance on financial
matters
(5) Advice and assistance on finance
control and accounting matters.
(6) Advice and assistance on tax and
legal matters.
(7) Advice and assistance on insurance
matters.
(8) Advice and assistance on purchases
and sales, environment and safety matters.
(9) Advice and assistance on human
resources matters.
16. In addition, the French company is to
provide the applicant with services other than those mentioned when requested,
if the French company had sufficient expertise and knowledge to render such
services. The applicant is also entitled to seek specific services from the
French company which it had agreed to provide. Various elements under which all
these heads are recited in the services agreement, make it clear that the
services to be rendered under any particular head, are not limited to what are
enumerated in the agreement but that what are enumerated are to be included. In
other words, the services agreement provides to the applicant advice and
assistance on management, on marketing, on international relationship, on
finance, on financial control and accounting, on taxation and law, on
insurance, on purchases and sales, environment and safety and on human
resources issues. I have noticed that the applicant is in the business of
manufacturing electrical components. A reference to the areas covered by advice
and assistance to be made available by the French Company to the applicant,
would show that the advice and assistance pervades the entire business of the
applicant. One thing to be noticed is that under some of the heads training is
also imparted. A reference to the various clauses under each head would also
show the pervasiveness of the area of advice and assistance by the French
Company. It appears to me that the services rendered take in technical,
managerial and consultancy services. The clauses contain provisions for
services which relate to over all management and direction, marketing and
managing the accounts and financial operations of the applicant. I am,
therefore, satisfied that managerial services, within the meaning of paragraph
13 of India-France DTAC, are provided by the French Company to the applicant
for a consideration equivalent to the cost incurred by the French Company plus
5% thereof as mark up.
17. It is also clear from a reading of
the obligations undertaken by the French Company under the agreement, that it
is rendering consultancy services. The services rendered on marketing, on
strategy and the training provided to optimize sales techniques all would come
within the purview of consultancy services. Though on reading some of the items
of advice and assistance, it may even be possible to say that technical
services are also rendered, the predominant purpose of the services agreement
appears to be to provide managerial and consultancy services.
18. I have already held that for taxing
the payment made for managerial services under the India-France DTAC, it is not
necessary to make available such services within the meaning of that expression
as generally understood with reference to fees for technical services. On the
terms of the agreement it is even possible to say that the services are made
available so as to satisfy even that test. Suffice it to say, that payments
made for managerial services are liable to be taxed in terms of paragraph 4 of
Article 13 of the DTAC between India and France.
19. As regards consultancy services, the
question is whether such services are made available in the context of the DTAC
between India and France read with the DTAC between India and US relied on by
the applicant. It is seen that the advice and assistance rendered by the French
Company to the applicant are not transient in nature and are capable of being
used by the applicant on its own. It is true that some of the consultancy
services rendered may not have that quality of permanency and may be a one time
assistance, but advice on business strategy, on general management, on
marketing and commercial matters, on financial control and accounting matters,
and on purchase and sales, environment and safety and the giving of training to
optimize sales techniques to the employees of the applicant, are all capable of
being put to use by the applicant on its own. The services are enduring and
they help in promoting the business of the applicant. The employees of the
applicant are in a position to, actually they are expected to use the knowledge
gained, in the business of the applicant. Thus, knowledge and know-how are made
available to the applicant. Hence, on an understanding of the over all effect
of the services agreement, it has to be held that the consultancy services are
made available to the applicant.
20. Thus on a true construction of the
services agreement between the applicant and the French company, I hold that
the French company is rendering managerial and consultancy services to the
applicant. The managerial services are taxable under paragraph 4 of Article 13
of the DTAC. They are taxable even if one were to invoke the concept of 'make
available' for making the payments for such services taxable. The consultancy
services provided are taxable in terms of Article 13.4 of the DTAC between
India and France read with paragraph 4 of Article 12 of the India-US DTAC.
21. In the light of what is stated above,
I rule on question no. 1 that the payments made by the applicant to Mersen
France towards advisory services is fees for technical services in terms of
paragraph 4 of Article 13 of the India-French DTAC read with the protocol to
the said DTAC.
22. On question number 2, I rule that in
terms of paragraph 2 of Article 13, the tax charged is not to exceed 10% of the
gross amount of the fees. The deduction under section 195(1) of the I.T. Act
has to be on that basis.
23. On question no. 3, I rule that the
payments in terms of the services agreement are not in the nature of business
profits dealt with in Article 7 of the India-French DTAC.
24. On question no.4, I rule that the
question of existence of a permanent establishment does not arise in view of
the finding that the payments are liable to be taxed as fees for technical
services.
25. On question no. 5, I rule that the
applicant is required to deduct tax at source under section 195(1) of the
Income Tax Act, 1961.
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