India-USA tax treaty - Fees for Included Services

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Recently, the Cochin Bench of the Income-tax Appellate Tribunal in the case of US Technology Resources Pvt. Ltd. (the taxpayer) held that financial, sales and risk management services provided by a …

Recently, the Cochin Bench of the Income-tax Appellate Tribunal in the case of US Technology Resources Pvt. Ltd. (the taxpayer) held that financial, sales and risk management services provided by a US company are technical in nature. Such services ‘make available’ technical knowledge, experience, skills, etc. to the taxpayer. Therefore, it is taxable as ‘Fees for Included Services’ under the India-USA tax treaty.

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  • 1. KPMG FLASH NEWS KPMG IN INDIA Financial, sales and risk management services ‘make available’ technical knowledge, experience and skills and therefore taxable as Fees for Included Services under India-USA tax treaty 22 October 2013 Background Recently, the Cochin Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of US Technology 1 Resources Pvt. Ltd. (the taxpayer) held that financial, sales and risk management services provided by a US company are technical in nature. Such services ‘make available’ technical knowledge, experience, skills, etc. to the taxpayer. Therefore, it is taxable as ‘Fees for Included Services’ (FIS) under the India-USA tax treaty (tax treaty). Facts of the case  The taxpayer is engaged in the business of providing software development services to the customers in India. The taxpayer entered into ‘management service agreement’ with the US company for obtaining management services. ________________ 1 US Technology Resources Pvt. Ltd. v. ACIT (ITA No. 222/Coch/2013) – Taxsutra.com  In terms of the agreement, the US company would provide assistance, advice and support to the taxpayer in management, decision making, sales and business development, financial decision making, legal matters and public relations activities, treasury service, risk management service and any other management support as may be mutually agreed between the parties.  During the year under consideration, the taxpayer made payment to the US company towards management services without deduction of tax.  The Assessing Officer (AO) held that the payment made by the taxpayer to the US company would be in the nature of consultancy fees and, therefore, the taxpayer was liable to deduct tax under Section 195 of the Income-tax Act, 1961 (the Act). Accordingly, the AO disallowed the payment on account of nondeduction of tax.  The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the addition made by the AO. © 2013 KPMG, an Indian Registered 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.
  • 2. Issue before the Tribunal  Whether payment made by the taxpayer to the US company for the management services is taxable in India? Taxpayer’s contentions  The term ‘managerial service’ is specifically excluded from the term FIS under the tax treaty.  As per Article 12(4) of the tax treaty, the technology will be considered as ‘made available’ only when the person acquiring the service is enabled to apply the technology. However, in the instant case the US company did not make available any technical knowledge, expertise, etc. to the taxpayer.  The service provided by the US company to the taxpayer may require technical inputs. However, it does not per se means that technical knowledge, skills, etc. are made available to the taxpayer while receiving service from the US company.  Relying on the decision of the Karnataka High Court in 2 the case of De Beers India Minerals P. Ltd. it was contended that even if the US company has rendered technical service as per Section 9(1)(vii) of the Act, it does not satisfy the requirement of ‘technical service’ as per the tax treaty.  Relying on the decision of the Mumbai Tribunal in the 3 case of Raymond Ltd it was contended that the term ‘make available’ means to provide something which is capable of use by the other. Such use may be one time or on a continuous basis. The taxpayer also relied on 4 various decisions to support this.  The taxpayer relied on the decision of Sandvik Australia 5 Pty Ltd wherein the Tribunal held that the services in the nature of helpdesk, administrative and maintenance, IT support, data storage, etc., though technical services in nature, but was not covered by Article 12(3)(g) of India-Australia tax treaty.  As per Article 12(4) of the tax treaty, technical as well as consultancy services are considered as ‘included services’ only to the extent that it was made available as per Article 12(4)(b) of tax treaty.  Referring to the Memorandum of Understanding (MOU) of the tax treaty, it was contended that the consultancy service means advisory service in relation to technical service. The services rendered by the US company are mainly in the form of assistance in decision making and operational matters of the taxpayer. The purpose of __________________ activities undertaken as per the agreement is to give direction or guidance to the group companies as a whole so that they will follow standard procedure in various matters.  By virtue of such managerial intervention, common benefit accrues to the affiliated companies and their level of performance will consequently improve which, in turn, would benefit the group as a whole. Therefore, such services are in the nature of management services.  Relying on the decision of the Mumbai Tribunal in 6 Wokhardt Ltd , the taxpayer contended that the managerial services are outside the ambit from the definition of FIS under the tax treaty. Further, referring to the decision of Boston Consulting 7 Group Pte Ltd it was contended that the definition of FIS under the India-Singapore tax treaty and India-USA tax treaty are similar. The taxpayer also relied on ruling in the case of Intertek Testing 8 Services India (P.) Ltd.  The concept of ‘make available’ covers only technical training for the purpose of the tax treaty. However, in the present case, the US company has provided managerial service, it would not be in the nature of technical training.  Even assuming that the management related training was rendered by the US company to the taxpayer, the same would not equip the taxpayer with skill, knowledge or expertise. The taxpayer would not be able to make use of such assistance in future independent of the US company. Tax department’s contentions  Referring to the decision of the Andhra Pradesh 9 High Court in the case of GVK Industries Ltd it was contended that the advice given by the US company in taking a financial decision either to procure loan or to strengthen the finance would be a technical or consultancy services. Therefore, the services provided by the US company have to be considered as technical services and taxable in India.  As soon as the advice or support is received, the same is available to the taxpayer for making use of the same in decision making process of the management and financial decision, etc. Therefore, it may not be correct to say that the technical services were not made available to the taxpayer. _________________ 2 6 3 7 CIT v. De Beers India Minerals P. Ltd. [2012] 21 Taxman.com 214 (Kar) Raymond Ltd. v. DCIT [2003] 86 ITD 791 (Mum) 4 Mahindra & Mahindra Ltd. v. DCIT [2009] 30 SOT 374 (Mum) (SB), DDIT v. Scientific Atlanta Inc [2009-TIOL-585-ITAT-MUM] 5 Sandvik Australia Pty Ltd. v. DDIT [2013] 141 ITD 598 (Pune) Wokhardt Ltd. v. ACIT [2011] 10 Taxmann.com 208 (Mum) DCIT v. Boston Consulting Group Pte Ltd. [2005] 94 ITD 31 (Mum) Intertek Testing Services India (P.) Ltd. [2008] 175 Taxman 375 (AAR) 9 GVK Industries Ltd. v. ITO [1997] 228 ITR 564 (AP) 8 © 2013 KPMG, an Indian Registered 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.
  • 3.  Referring to the management service agreement, it was contended that the knowledge and expertise of the US company will be used to support the taxpayer in managing its business and to training its employees. Therefore, training provided by the US company to the employees of the taxpayer in technical matters would fall within the expression of FIS.  Even the advice provided by the US company which was used for taking managerial decision has to be treated as technical services under the tax treaty. Further, the US company provides highly technical services like, customer specified software development services and IT consultancy services which can be rendered only by person who has high degree of expertise. Therefore, the expertise, which are available to the US company are made available to the taxpayer for using the same in the financial decision making process, managerial decision making process, etc. Hence, services provided by the US company would fall within the ambit of Article 12 of the tax treaty. Tribunal’s ruling  On reference to the tax treaty, it indicates that the term ‘managerial service’ did not find place in Article 12(4) of the tax treaty. However, on a perusal of MOU under the tax treaty, it indicates that if technical or consultancy services are made available technical knowledge, experience, skill, etc., then it would be considered as technical or consultancy services.  It was observed that consultancy services which were not of technical in nature cannot fall under the ‘included services’. However, as per MOU of the tax treaty, the consultancy services which are technical in nature are to be considered as technical and consultancy services under the tax treaty.  On a perusal of management services agreement, extracted from CIT(A)’s order, it indicates that the US company provides highly technical services which were used by the taxpayer for taking managerial decision, financial decision, risk management decision, etc.  The managerial advice rendered by the US company has been used in the decision making process of management, financial and risk management etc. Therefore, the knowledge which was accumulated through study, experience and experimentation with regard to management, finance, risk, etc. was nothing but a technical knowledge.  It is nobody’s case that the US company is taking any decision on behalf of the taxpayer. On the basis of the input, advice, assistance and service provided by the US company, the management decision was taken by the taxpayer by selecting suitable solution after considering all the alternatives available.  The US company was giving training to the taxpayer’s employees in making use of the inputs, experience, experimentation, assistance and advice rendered by them for taking a better decision in order to achieve the desired objectives. Therefore, the service rendered by the US company was in the nature of technical services and it cannot be said that advice received by the taxpayer is only a managerial advice and not technical advice.  The decision is taken by the taxpayer on the basis of service provided by US company. Therefore, the technical knowledge, experience, skill possessed by the US company with regard to financial and risk management was made available in the form of advice or service which was used by the taxpayer in the decision making process not only in management but also in financial matters.  Risk management service is a highly complicated one in the financial sector. Unless, the technical expertise and knowledge gained by the US company is made available to the taxpayer, they may not be able to analyse the situation to avoid risk in the business.  The Tribunal observed that apart from providing advice, the US company is also providing training to the employees of the taxpayer. Therefore, the services of technical input, advice, expertise, etc. rendered by the US company are technical in nature.  The Andhra Pradesh High Court in the case of GVK Industries Ltd has held that the advice given to procure loan to strengthen finances would be a technical or consultancy service. Even though India-USA tax treaty has not been discussed by the High Court, but the ratio laid down by the High Court clearly indicates that advice given to procure loan to strengthen the finance would be managerial or technical or consultancy services.  The decision in the case of De Beers India Minerals Pvt. Ltd. is not applicable to facts of the present case since in that case the taxpayer was not being possessed with technical know-how to conduct the prospecting operation. However, in the instant case the experiment, knowledge was made available to the taxpayer and the taxpayer was facilitated to take a decision on the knowledge, expertise, experimentation which was made available by the US company. © 2013 KPMG, an Indian Registered 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.
  • 4.  The decision of the Mumbai Tribunal in the case of Raymond Ltd is not applicable to facts of the present case as in that case the services of the managers for issue of Global Depository Receipt (GDR) were utilised outside India for the purpose of carrying on its business in India. The decision to issue GDR was taken by Indian company without any assistance from managers. However, in the present case, the taxpayer is using of the technology, expertise of the US company in India for taking managerial, financial decision and risk management analysis and it remains with the taxpayer forever and it could be even used in future for the business of the taxpayer. It is pertinent to note that the Authority for Advance Rulings (AAR) in the case of Mersen India Private 10 Limited observed that services provided by the taxpayer included advice and assistance on business strategy, general management, marketing, commercial matters, international relationship matters, finance control and accounting matters, tax and legal matters, insurance matters, etc. Such services were made available knowledge and know-how to the recipient. Accordingly, it was held that such services were taxable as FTS under India-France tax treaty.  The Tribunal discussed the decisions in the case of Wokhardt Ltd, Intertek Testing Services India (P) Ltd and Sandvik Australia Pty Ltd and held that they are distinguishable on the facts of the present case. Therefore, the expertise and technology which was made available by the US company is technical service under Article 12(4)(b) of the tax treaty. Our comments In the present case, a US company had provided assistance, advice and support to the taxpayer in management, decision making, sales and business development, financial decision making, legal matters and public relations activities, treasury service, risk management service, etc. The Tribunal held that such managerial service has been used in the decision making process of financial and risk management etc. and hence knowledge which accumulated through study and experience of a foreign company is nothing but technical knowledge. Further, such technical knowledge was made available to the taxpayer so as to enable to apply the same in its decision making process and therefore, it was treated as FIS under the India-USA tax treaty. The Mumbai Tribunal in the case of Wockhardt Ltd. has held that services provided by the foreign company to the taxpayer was in the nature of sharing management experiences and business strategies and it had nothing to do with the pharmaceutical industry of the taxpayer. Accordingly, it was held that such services cannot be termed as technical services as no technical knowledge has been made available to the taxpayer. However, the Tribunal in the present case distinguished the decision in the case of Wokhardt Ltd. on the basis of facts. _________________ 10 Mersen India Private Limited [2013] 353 ITR 628 (AAR) © 2013 KPMG, an Indian Registered 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.
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