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Marketing & Management services rendered outside India are not taxable in India under the India-USA tax treaty.
 

Marketing & Management services rendered outside India are not taxable in India under the India-USA tax treaty.

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Marketing & Management services rendered outside India are not taxable in India under the India-USA tax treaty.

Marketing & Management services rendered outside India are not taxable in India under the India-USA tax treaty.

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    Marketing & Management services rendered outside India are not taxable in India under the India-USA tax treaty. Marketing & Management services rendered outside India are not taxable in India under the India-USA tax treaty. Document Transcript

    • © 2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA Marketing and management services rendered outside India are not taxable in India under the India-USA tax treaty 4 September 2013 Background Recently, the Mumbai Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of WNS North America Inc. 1 (the taxpayer) held that the marketing and management services were provided outside India and such income is not accrued or arisen in India. The Tribunal observed that one of the conditions for applying the ‘Force of Attraction’ rule under the India USA-tax treaty (tax treaty) is with respect to business activity to be carried on in the other State where the Permanent Establishment (PE) is situated. This condition was not satisfied. Therefore, the existence of a Service PE in India would not make such the fees taxable under the tax treaty 2 . _________________ 1 ADIT (IT) v. WNS North America Inc. (I.T.A. No. 2944/Mum/2012) 2 The taxability of the services would be covered under Article 7 (business profits) read with Article 5 (Permanent Establishment) under the India-USA tax treaty The taxpayer has not ‘made available’ any technical knowledge, experience, skill etc. to WNS India while rendering the marketing and management services and therefore, the same cannot be subjected to tax as ‘Fees for Included Services’ (FIS) under Article 12 of the tax treaty. Facts of the case  The taxpayer was a foreign company and tax resident of United State of America. The taxpayer was, inter alia, engaged in the business of rendering marketing and management services to WNS Global Services Pvt. Ltd. (WNS India) which was its Associated Enterprise (AE) in India.  The taxpayer has entered into marketing and management services agreement with WNS India pursuant to which it was entitled to receive fees .
    • © 2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  Reliance was placed upon the case of Hindalco Industries Ltd. 3 wherein this Tribunal held that when principle transaction itself is such that it involves taxability in source country, the transactions subsidiary and integral to such a transaction also give rise to the taxability of subsidiary transactions in the source country.  The benefit of services was received in India therefore the services are deemed to have been rendered or made available in India. Taxpayer’s contentions  The issue in the case of Hindalco Industries Ltd. was whether the payment for training fee was part of sale of know-how and therefore the said decision was not applicable to the facts of the present case.  As per the agreement for providing the marketing and management services, territory means the North America and European Region therefore the principle activity as per the agreement was to provide the marketing and management services in North America and European Region and not in India. Therefore, the decision of this Tribunal in case of Hindalco Industries Ltd. is not applicable to the present case.  ‘Force of Attraction’ Rule applies only when apart from the business through PE if the taxpayer carries on business activity in the other Contracting State of same or similar kind as those affected through the PE. Accordingly, the marketing and management services provided outside India cannot be brought under Article 7 of the tax treaty in the category of the business activities carried on, of the same or similar kind as those effected through the PE. Tribunal’s ruling Marketing & Management Services  In relation to the earlier AYs i.e. 2003-04 to 2006- 07, an identical issue has been considered and decided by the Tribunal in favour of the taxpayer. Further, in the AYs 2004-05 and 2005-06 the order of this Tribunal has been confirmed by the Jurisdictional High Court.  As per Tribunal’s order in relation to earlier AY, the taxpayer has not ‘made available’ any technical knowledge, experience, skill etc. to WNS India therefore the same cannot be subjected to tax as FIS under Article 12 of the tax treaty. _______________ 3 Hindalco Industries Ltd. v. ACIT [2005] 94 ITD 242 (Mum) at its cost plus 10 percent mark up for the marketing and managerial services rendered by it. During the year under consideration, the taxpayer received an amount towards marketing and management services rendered by it to WNS India. Marketing & Management Services  The Assessing Officer (AO) held that the taxpayer rendered expertise and technical knowledge for conduct of business of WNS India. Accordingly, these services were taxable as FIS under Article 12(4)(b) of the tax treaty.  The Commissioner of Income-tax (Appeals) [CIT(A)] decided the issue in favour of the taxpayer by following the decision of this Tribunal in taxpayer’s own case for an earlier Assessment Year (AY). ‘Force of Attraction’ Rule  The taxpayer’s employees visited India for providing managerial services therefore WNS India constituted Service PE under Article 5(2)(l) of the tax treaty. Accordingly certain amount was attributed to such Service PE for managerial service rendered in India and was offered to tax by the taxpayer. Issues before the Tribunal  Whether the amount received by the US Company for rendering marketing and management services were in nature of Fees for Included Services as per Article 12 of the tax treaty?  Whether the fees received by the US Company for rendering marketing and management services outside India was attributable to the Service PE in India in view of the ‘Force of Attraction’ rule and taxable as business profits under Article read with Article 5 of the tax treaty? Tax department’s contentions  When the receipts towards the fee for marketing service is treated as business income and not as FIS then the same is taxable in India as attributable to the Service PE in view of the ‘Force of Attraction’ Rule. Accordingly, the receipts are liable to be taxed under Article 7 read with Article 5 of the tax treaty.  There was a composite agreement under which the taxpayer provided marketing and management services to WNS India and once the services provided in India are held to be taxable because of the Service PE in India then the similar and part of the composite service provided outside India is also attributable to the Service PE in view of the ‘Force of Attraction’ Rule.  Since this issue has not been considered by the Tribunal and the High Court in the earlier years therefore, this issue was raised as an alternative plea.
    • © 2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  Based on the earlier AY’s order of the Tribunal and the jurisdictional High Court, the marketing and management services were not taxable as FIS under the tax treaty. ‘Force of Attraction’ Rule  As per Tribunal’s order in relation to the earlier AY, in relation to the receipts for provision of marketing and management services outside India, the same cannot be subjected to tax in India because such income cannot be said to have accrued or arisen or deemed to have been accrued or arisen to the taxpayer in India. Even the existence of the Service PE in India will not make it taxable because of no involvement of such PE in earning this income for which the services were rendered outside India.  As per Article 7(1) of the tax treaty, only in case when enterprise of Contracting State carries on business in the other Contracting State through its PE as well as otherwise and both the activities are of same or similar kind then the business activities carried or not through PE shall also be treated as attributable to the PE and the profit of the enterprise may be taxed in the other State, so much of them as it is attributable to PE.  The two essential conditions for applying the ‘Force of Attraction’ Rule are (i) the business activity carried on should be in the other State where the PE is situated (ii) the business activity carried on must be of the same or similar kind as those effected through PE.  In the present case, the condition of business activity carried on in the other State where the PE is situated is not satisfied because the marketing and management services are provided by the taxpayer outside India.  Since the marketing and management services were rendered outside India and income of such services was not accrued or arisen to the taxpayer or deemed to have accrued or arisen to taxpayer in India, the existence of Service PE in India would not make it taxable under Article 7 of the tax treaty. Our comments In the current decision, the Tribunal observed that of the two essential conditions for applying the ‘Force of Attraction’ Rule, the first condition was not satisfied because the services were provided outside India. Accordingly, the fees for services were not taxable under the tax treaty though the taxpayer had a Service PE in India. Recently, the Special Bench of the Mumbai Income-tax Appellate Tribunal, in the case of Clifford Chance 4 held that services provided by the taxpayer outside India were not taxable under Income-tax Act, 1961 (the Act). Further, the Special Bench Tribunal rejected the application of ‘Force of Attraction’ rule while applying the India-UK tax treaty. ______________ 4 ADIT (IT) v. Clifford Chance [2013] 24 ITR(T) 1 (Mum) The Mumbai Tribunal in the case of Linklaters & Paines 5 had held that entire profit in respect of the Indian Project relating to services rendered by the taxpayer in India and outside India was held to be taxable in India by virtue of ‘Force of Attraction’ rule in the India-UK tax treaty. It is important to note a recent trend in the India tax treaties where the ‘Force of attraction’ rule has been omitted for e.g. Norway and Australia tax treaties 6 . ______________ 5 Linklaters & Paines v. ITO [2013] 56 SOT 116 (Mum) 6 The India-Norway tax treaty has come into effect from 1 April 2012 and the effective date of the protocol of the India Australia tax treaty is yet to be notified.
    • © 2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. www.kpmg.com/in Ahmedabad Safal Profitaire B4 3rd Floor, Corporate Road, Opp. Auda Garden, Prahlad Nagar Ahmedabad – 380 015 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Infinity Benchmark, Plot No. G-1 10th Floor, Block – EP & GP, Sector V Salt Lake City, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.