2010 (3) TMI 108 - AAR - Income Tax

Consultancy services in India DTAA between India and UK - Ernst & Young Private Ltd. (EYPL) is a company incorporated in India - Ernst & Young (EMEIA) Services Limited is a limited liability company incorporated under the laws of England and Wales. - Whether the amount payable by the applicant in accordance with the agreement entered into with Ernst & Young (EMEIA) Services Limited is chargeable to tax in India under the provisions of the Income-tax Act 1961 ( the Act ) and Double Taxation Avoidance Agreement between India and UK? Whether the amount receivable by Ernst & Young (EMEIA) Services Limited from Ernst & Young (P) Ltd. inter alia on account of Area Services Market Development Support Services and Global Services as detailed in the Schedule to the Area Services and Market Development Agreement is chargeable to tax in India as fees for technical services under section 9(1)(vii) of the Income-tax Act 1961? Held that - Both the questions are answered in the negative and it is ruled that the amounts receivable by Ernst and Young EMEIA Services Ltd. from the applicant under the Agreement are not liable to be taxed under the Income Tax Act as fee for included services or as business profits having regard to the provisions of DTAA between India and UK. However the Income-tax authorities are not precluded from making inquiry into the question whether the cost contribution is fixed on arm s length basis and such determination can be made in the assessment proceeding of the applicant. What all is provided by EMEIA is informations on various business and commercial matters guidelines templates best practices and strategies that could be adopted in various spheres of their business which ultimately lead to protection of EY image and client relations. Dissemination of informations furnishing guidelines and suggesting plans of action aimed at uniformity and seamless quality in business dealings of participating group entities do not per se amount to making available to them technical knowledge and experience possessed by EMEIA to a substantial extent. There is no transfer of technical know-how in that process nor can it be said that the recipient of these coordinated/centralized services has been enabled to apply the technology which EMEIA is possessed of. In fact EMEIA has not developed any technology of its own nor does it innovate anything.

Summary

Issues Involved:
1. Taxability of the amount payable by the applicant under the agreement with Ernst & Young (EMEIA) Services Limited under Indian Income-tax Act, 1961 and the Double Taxation Avoidance Agreement (DTAA) between India and the UK.
2. Classification of the amount receivable by Ernst & Young (EMEIA) Services Limited from Ernst & Young (P) Ltd. as "fees for technical services" under section 9(1)(vii) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Taxability under Indian Income-tax Act and DTAA

The applicant, Ernst & Young Private Ltd. (EYPL), contended that the payment made to Ernst & Young (EMEIA) Services Limited for services rendered under the Agreement dated 5th May 2009 is not taxable in India as "fees for technical services" under Article 13 of the DTAA between India and the UK. The applicant argued that the services provided by EMEIA do not result in the transfer of any technical know-how, technical plan, or design, thus not satisfying the "make available" criterion under Article 13 of the DTAA. The services listed in the Agreement primarily include support and access to central resources for business strategies, knowledge management, market development, and other non-technical services. The applicant emphasized that EMEIA does not have a Permanent Establishment (PE) in India, and hence, the receipts should not be taxable as business profits under Article 7 of the DTAA.

Issue 2: Classification as "Fees for Technical Services"

The term "fees for technical services" is defined in para 4 of Article 13 of the DTAA to mean payments for rendering technical or consultancy services that "make available" technical knowledge, experience, skills, know-how, or processes. The applicant argued that the services provided by EMEIA do not meet the "make available" criterion as they do not result in the transfer of technical knowledge or skills enabling the recipient to apply the technology independently in the future. The services rendered by EMEIA include providing guidelines, templates, best practices, and strategies, which do not amount to making available technical knowledge or skills.

The Authority for Advance Rulings (AAR) examined the nature of services listed in the Agreement and concluded that the services provided by EMEIA do not satisfy the "make available" criterion under Article 13 of the DTAA. The AAR noted that the services rendered by EMEIA are more in the nature of management services, which are not included within the scope of Article 13. The AAR referred to previous rulings, including Intertek Testing [307 ITR 418] and Anapharm Inc. [304 ITR 394], to support its conclusion that mere provision of technical services is not sufficient to attract Article 12(4)(b); it also requires that the service provider makes their technical knowledge, experience, or skills known to the recipient.

Conclusion:

The AAR ruled that the amounts receivable by Ernst & Young (EMEIA) Services Limited from the applicant under the Agreement are not liable to be taxed under the Income Tax Act as fees for "included services" or as business profits, considering the provisions of the DTAA between India and the UK. However, the Income-tax authorities are not precluded from inquiring whether the cost contribution is fixed on an arm's length basis, and such determination can be made in the assessment proceeding of the applicant.

The ruling was given and pronounced on the 19th day of March, 2010.