TMI Blog2012 (4) TMI 351X X X X Extracts X X X X X X X X Extracts X X X X ..... wledge and know-how are made available to the applicant. Hence the services agreement are held to be consultancy services are made available to the applicant - in terms of paragraph 2 of Article 13, the tax charged is not to exceed 10% of the gross amount of the fees and the deduction under section 195(1) of the I.T. Act has to be on that basis - contention of assessee on 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 - applicant is required to deduct tax at source under section 195(1) of the Income Tax Act - against assessee. - A.A.R. No.1074 of 2010 - - - Dated:- 16-4-2012 - Justice Mr. P.K.Balasubramanyan, J. Present for the applicant Mr. Chythanaya K. K., Advocate Present the Department Ms Shewta Mishra, Asstt. Director of Income Tax Bangalore RULING 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 cal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nswer 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayments 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 state ..... X X X X Extracts X X X X X X X X Extracts X X X X
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