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2009 (8) TMI 6

..... reement 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. - 796 of 2009 - 6-8-2009 - Mr. Justice. P.V. Reddi (Chairman) Present for the applicant : Dr. Anitha Sumanth, Advocate Mr. Swathanth, R., Analyst Present for the Department : - RULING [By Hon ble Chairman] - The applicant is a Company based in United States of America which is engaged in the business of manufacture of process control instruments, engineering and rese .....

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..... ment; s.no.6: Supporting online learning programmes in areas such as sales, project management and employee orientation; s.no.16: Assistance in relation to global policies and framework on recruitment; s.no.8: Allocation of costs of Head Quarters facilities being run and maintenance charges incurred while providing the above services; s.no.14: Internet / intranet maintenance and support; C. Assistance on key projects s.no.4: Assistance in setting strategies, coordinating key global project pursuits and large international projects; s.no.7: Assistance with bid preparation and project execution strategy on global basis; D. Finance, internal audit, treasury and tax s.no.5: Assistance in relation to financial reporting and monitoring; s.no.11: Support in relation to management accounting and reporting; s.no.12: Assistance in treasury management; s.no.13: Assistance in internal audit function on a global basis covering financial audits, operational audits (to improve efficiencies), and internal control evaluation; s.no.19: Assistance in global tax strategies including transfer pricing, and coordinating/collating status on tax filings, litigation, etc; E.Corporate secretarial and legal s .....

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..... r a primary term of 5 years from its effective date (i.e. 01.04.2007) and it will automatically continue thereafter unless and until terminated by written notice in advance in accordance with the provisions of agreement. 5. It is the contention of the learned counsel for the applicant that the various services provided by the applicant to its Indian group company are managerial in nature and they cannot be considered to be technical or consultancy services. The services, therefore, fall outside the ambit of Article 12 of the India-USA DTAA. It is next contended that even assuming that technical or consultancy services are involved, the essential ingredient in clause (b) Article 12.4 is not satisfied because the applicant by rendering such services does not make available technical knowledge, skill, know-how and the like. Reference has been made to the decisions/rulings interpreting the expression make available . It is submitted that the provisions of the DTAA relating to fees for included services (including technical services) being more beneficial than the provisions in the Income-tax Act, 1961, the applicant is entitled to invoke the benefit under the treaty provisions in accor .....

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..... rvices may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed: xx xx xx xx 8. On an analysis of the nature of functions that are enumerated in the Agreement, it is fairly clear that many or most of them are managerial in nature. The learned counsel for the applicant has drawn our attention to the dictionary meanings of the word manage . In Intertek Services, In re (2008) 307 ITR pg.418 this Authority observed: First, about the connotation of the term managerial . The adjective managerial relates to manager or management. Manager is a person who manages an industry or business or who deals with administration or a person who organizes other people s activity. As pointed out by the Supreme Court in R. Dalmia vs. CIT [1977] 106 ITR 895, management includes the act of managing by direction, or regulation or superintendence. Thus, managerial service essentially involves controlling, directing or administering the business. In some DTAAs, apart from the terms technical and consultancy .....

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..... ical would exclude the managerial services. Pursuing the example of technical education given in the dictionary, we find that technical education is concerned with teaching applied sciences, special training in applied sciences, technical procedure and skills required for practice of trade or profession, especially those involving the use of machinery or scientific equipment ………… It would appear that managerial services may be professional service like legal or medical service but they would not be technical services like engineering services. The view expressed by the High Court in that case that narrow meaning has to be placed on the expression technical service has to be confined to the context in which the observation was made. Otherwise, it may conflict with the view taken by the Supreme Court in various decisions referred to in Intertek. The reason for giving restricted meaning to the word technical was the purpose and object of Section 80-O of the I.T.Act. 9. Assuming that some of the services/functions can be brought within the definition of technical or consultancy services, yet the other ingredient in clause (b) of Art. 12.4. of DTAA viz. make available is not satisfied i .....

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..... gnosis or techniques of surgery, that will amount to making available the technical knowledge and experience of the doctor. 9.2. In the case of Anapharm Inc. [2008] 305 ITR 405, after explaining the scope of the expression make available this Authority observed at paragraph 12.6 : In the present case, the applicant renders bioanalytical services which, no doubt, are very sophisticated in nature, but the applicant does not reveal to Sandoz / Ranbaxy as to how it conducts those tests or the inputs that have gone into it , so as to enable them to carry out those tests themselves in future. A broad description or indication of the type of test carried out to reach this conclusion does not enable the applicant s client to derive requisite knowledge to conduct the tests or to develop the technique by itself. The mere fact that the tests in question are highly technical in nature will not make a difference. ……………….. From the perusal of the relevant agreements, we have not found any provision which would entitle Sandoz /Ranbxy to know the details of the analytical methods and procedures employed by the applicant in carrying out the bioequivalence tests. 9.3. Applying the above test, we can .....

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..... activities which either help the applicant as a corporate head (coordinator) with the necessary inputs or merely represent the normal activities undertaken by the parent company. It is not some remote or indirect benefit that accrues to the group companies that matters. The alleged service must cater to the specific needs of the member of the group. Whether Intra-group services in the sense in which it has been explained earlier have in fact been provided or whether the activities are of such nature that a group member (the parent or other holding company) performs them solely because of its ownership interest as shareholder has been the subject matter of debate in the context of transfer pricing provisions. There is an illuminating discussion on this subject in Chapter VII of the OECD Transfer Pricing Guidelines published in March, 1995. For instance, it is specifically stated in para 7.10 that the costs relating to reporting requirements of the parent company including the consolidation of reports will constitute shareholder activities. 11.1. There is no need to pursue the discussion further on this aspect. Assuming that some of the activities are not really services but they ar .....

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