2009 (8) TMI 6 - AAR - Income Tax

Payment made by IIPL The applicant incurs expenditure in relation to the functions enumerated in Schedule I to the said Agreement for the benefit of the Group as a whole. Pursuant to the Agreement the applicant raises invoice on IIPL for the amounts worked out on the basis of the formula in the Agreement. It is stated that none of the personnel of the applicant visited nor would in the future visit India for providing the centralized assistance to IIPL - Question whether payment made by IIPL towards the costs allocated by the Applicant is taxable in India Whether IIPL is liable to deduct TDS (withhold tax) - Assuming that some of the activities are not really services but they are more in the nature of stewardship/shareholder activities for that reason the amounts received by the applicant from IIPL in terms of the invoices raised by it cannot be taxed in India in the absence of permanent establishment of the applicant Amount is not taxable in India TDS (withholding tax) is liable to be deducted.

Summary

Issues Involved:
1. Taxability of payments made by IIPL to the Applicant under the DTAA between India and USA.
2. Obligation of IIPL to withhold tax at source under Section 195 of the Income-tax Act, 1961 on payments made to the Applicant.

Issue-wise Detailed Analysis:

1. Taxability of Payments under DTAA:

The applicant, a US-based company engaged in various business activities, entered into a Cost Allocation Agreement with Invensys India Private Limited (IIPL), an Indian company. The applicant incurred expenses for functions benefiting the entire group and raised invoices on IIPL based on a formula in the Agreement. The applicant sought an advance ruling on whether these payments are taxable in India under the DTAA between India and USA.

The applicant argued that the services provided are managerial and do not qualify as technical or consultancy services under Article 12 of the DTAA. Even if considered technical or consultancy services, they do not "make available" technical knowledge or skills as required by Article 12.4(b). The applicant cited various rulings interpreting "make available" and claimed the benefit of the DTAA provisions over the Income-tax Act, 1961.

The Authority analyzed the functions enumerated in the Agreement and concluded that many are managerial in nature, involving direction, guidance, and standardization for group companies. The Authority referred to the definitions and interpretations of "managerial," "technical," and "consultancy" services from previous rulings and legal dictionaries. It was determined that the services primarily fall under "managerial" and do not "make available" technical knowledge or skills to IIPL.

The Authority also considered the Delhi High Court's decision in J.K. (Bombay) Limited vs. CBDT, which distinguished managerial services from technical services. Applying the test from previous rulings, it was found that the services provided by the applicant do not equip IIPL with the technical knowledge to use independently in the future.

2. Obligation to Withhold Tax under Section 195:

The second issue was whether IIPL is required to withhold tax at source under Section 195 of the Income-tax Act, 1961 on payments made to the applicant. The Authority noted that under Article 7.1 of the DTAA, business profits of an enterprise of a contracting state are taxable only in that state unless the enterprise has a permanent establishment in the other contracting state.

Since the services provided by the applicant do not qualify as technical or consultancy services making available technical knowledge, and there is no permanent establishment of the applicant in India, the payments are not taxable in India under the DTAA. Consequently, IIPL is not obligated to withhold tax at source under Section 195.

Additional Observations:

The Authority also discussed certain services categorized under 'B' and 'D' that might be stewardship or shareholder activities rather than services rendered to IIPL. These activities, which include control over local HR operations, informing new employees about the company's history, and apportionment of overhead costs, do not commercially benefit IIPL and are more aligned with the parent company's interests.

However, the Authority concluded that even if some activities are not services but stewardship/shareholder activities, the payments received by the applicant cannot be taxed in India in the absence of a permanent establishment.

Conclusion:

Both questions were answered in the negative. The applicant is not liable to be taxed in India under the DTAA provisions (Article 7.1 and Article 12.4(b)), and IIPL is not required to withhold tax at source under Section 195 of the Income-tax Act, 1961. The ruling clarified that no opinion was expressed on the tax implications for IIPL, including the adoption of the arms-length principle.

Final Ruling:

The ruling was given and pronounced on August 6, 2009, concluding that the payments made by IIPL towards the costs allocated by the applicant are not taxable in India, and IIPL is not liable to withhold tax at source under Section 195.