2008 (11) TMI 9 - AAR - Income Tax

Applicant a company in India is subsidiary of ITM UK - business of rendering testing and inspection services to its Indian and overseas clients - it is not possible to hold that all the services rendered do not fall under FTS (Royalties & Fee for Technical Services) & that the entirety of service fee charged to the applicant does not constitute the income of ITM UK under Article 13 of the Treaty - applicant is directed to approach the competent authority to determine the issue of TDS

Summary

Issues Involved:
1. Taxability of service fees as "Royalties & Fee for Technical Services" under Article 13 of DTAA between India & UK.
2. Requirement to deduct tax at source on service fees under Section 115A(1)(b)(BB) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Taxability of Service Fees as "Royalties & Fee for Technical Services" under Article 13 of DTAA between India & UK:

The applicant, a private limited company in India and a subsidiary of Intertek Holding U.K. Limited, sought an advance ruling on whether the service fee paid to Intertek Testing Management Limited (ITM), UK under the Global Management Services Agreement (GMSA) is taxable as "Royalties & Fee for Technical Services" under Article 13 of the Double Taxation Avoidance Agreement (DTAA) between India and the United Kingdom.

The applicant contended that the payments made to ITM for various services do not fall under "fee for technical services" as defined in the DTAA and, therefore, no income-tax can be charged in India. The applicant further clarified that the application relates only to the service fee paid under GMSA for Corporate Head Office Services and Divisional Global Services in the fields of executive, commercial, financial, marketing, and administrative management systems and techniques.

The Authority examined the definition of "fee for technical services" under Article 13.4(c) of the DTAA, which requires that the services rendered should "make available" technical knowledge, experience, skill, know-how, etc., to the recipient. This means that the recipient should be able to use the technical knowledge or skills independently in the future without the aid of the service provider.

The Authority noted that the applicant did not provide specific details of the services rendered by ITM, UK, and only gave a general account of the services that might be received. On a broad analysis, the Authority found that many of the services catalogued in the Agreement and the Note are in the nature of technical or consultancy services but do not "make available" technical knowledge, experience, skill, know-how, etc., to the applicant. However, some services, such as training staff on the use of accounting software, feedback for improving accounting skills, advice on tax planning, developing IT-related systems design, and provision of accounting policies manual, do satisfy the test of "making available" technical knowledge and are taxable as FTS under Article 13.4 of the Treaty.

The Authority also noted that some services could be classified as managerial, and certain services did not fall under either technical, consultancy, or managerial categories. Therefore, it was concluded that many of the services do not fall within the ambit of clause (c) of Article 13.4, but some do, and thus, the service fee is partially taxable under the Treaty.

2. Requirement to Deduct Tax at Source on Service Fees under Section 115A(1)(b)(BB) of the Income-tax Act, 1961:

Given the mixed nature of services, the Authority held that it is not possible to determine definitively that all the services rendered do not fall under FTS and that the entirety of the service fee charged does not constitute income under the Treaty. The Authority laid down the principle and indicated broadly whether the listed services attract the provision of Article 13.4(c) of the Treaty.

The Authority suggested that the applicant should approach the competent authority to determine the issue of tax deduction at source by filing an application under Section 195 of the Income-tax Act. Any order passed under Section 195 is tentative and does not adversely affect the rights of the payee or recipient. The appropriate authority will determine the extent and rate of tax deduction in light of the principles laid down and observations made in the ruling.

Conclusion:

The ruling concluded that many services under the GMSA do not make available technical knowledge and are not taxable as FTS under the DTAA, while some services do and are taxable. The applicant should seek a determination from the competent authority regarding the tax deduction at source. The Authority's ruling provided guidance on the classification of services and the interpretation of "make available" under the Treaty.