© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
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Payments for BSP link services are not ‘Fees for Technical Services’ under India-France tax treaty by virtue of MFN clause

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Recently, the Mumbai Bench of the Income-tax Appellate Tribunal in the case of IATA BSP India held that the restricted scope with respect to Fees for Technical Services (FTS) under the India-USA and India-Portuguese tax treaties, is applicable to the India-France tax treaty, by virtue of Most Favoured Nation clause in the India-France tax treaty. The ‘make available’ clause in the FTS Article under the India-USA and India-Portuguese tax treaties, is applicable to India-France tax treaty. Accordingly, since the payments made for BSP link services are not making available technical knowledge, skills, etc., the same are not taxable as FTS under the India-France tax treaty.

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Payments for BSP link services are not ‘Fees for Technical Services’ under India-France tax treaty by virtue of MFN clause

  1. 1. © 2014 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. KPMG FLASH NEWS KPMG in INDIA Payments for BSP link services are not ‘Fees for Technical Services’ under India-France tax treaty by virtue of MFN clause 24 June 2014 22 21 February 2013 Background Recently, the Mumbai Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of IATA BSP India 1 (the taxpayer) held that the restricted scope with respect to Fees for Technical Services (FTS) under the India-USA and India-Portuguese tax treaties, is applicable to the India-France tax treaty, by virtue of Most Favoured Nation (MFN) clause in the India- France tax treaty. The ‘make available’ clause in the FTS Article under the India-USA and India-Portuguese tax treaties, is applicable to India-France tax treaty. Accordingly, since the payments made for BSP link services are not making available technical knowledge, skills, etc., the same are not taxable as FTS under the India-France tax treaty. __________________ 1 DDIT v. IATA BSP India (ITA No. 1149/Mum/2010) – Taxsutra.com Facts of the case  The taxpayer is a branch office of IATA, Canada. The said branch office is established with the permission of the Reserve Bank of India (RBI) for the purpose of undertaking certain commercial activities on no profit basis.  In pursuance of an agreement entered into by IATA Canada through its administrative office in Switzerland, ADP-GSI, a French entity developed the system as per the specific need of the airlines and agents. The said system called BSP link, whereby the manual operations such as issue of debit notes/credit notes, issue of refund, billing statement, etc., relating to tickets are carried out electronically for agents as well as airlines who participate in the BSP Link.  These BSP Link services were provided to the agents and airlines operating in India, for which invoices were initially raised by ADP-GSI on Switzerland office of IATA, Canada who in turn raised the invoices on IATA, India. The payment against the said invoices thus was liable to be made by the taxpayer to Switzerland office of IATA, Canada.
  2. 2. © 2014 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.  An application under Section 195(2) of the Act was filed by the taxpayer before the Assessing Officer (AO) seeking permission to remit the said amounts to Switzerland office of IATA, Canada without deduction of tax on the ground that the Switzerland office of IATA, Canada was not rendering any service to IATA, India and it was only collecting the funds from various IATA offices including IATA, India for making payments to ADP-GSI.  The AO held that, the actual beneficiaries of DSP Link services were airlines and agents in India. The payment for the said services was in the nature of FTS chargeable to tax in India at 10 per cent as provided in Article 13 of the India-France tax treaty. Accordingly, the AO directed the taxpayer to deduct tax from the remittances made to Switzerland Office of IATA, Canada.  The Commissioner of Income-tax (Appeals) [CIT(A)] held that the amount paid by the taxpayer to Switzerland office of IATA, Canada was not taxable in India as it was not in the nature of Fees for Included Services (FIS) under Article 12(4)(b) 2 of India-USA tax treaty read with Article 13 of the India-France tax treaty and protocol thereto. Therefore, the taxpayer was not liable to deduct tax from the payment of the said amount. Tribunal’s ruling  As per clause 7 of the Protocol in the India-France tax treaty, if under any convention, agreement or Protocol signed after 1 September 1989 between India and a third state which is a member of the OECD, India limits its taxation at source inter alia on FTS or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in the India-France tax treaty, the same scope as provided for in that convention, agreement or Protocol on the said items of income shall also apply under the India-France tax treaty.  On 12 September 1989, India has entered into a tax treaty with USA, which is a member of OECD and as per Article 12(4)(b) thereof, the scope of FIS is restricted. India has also entered into an tax treaty with Portuguese Republic on 11 September 1998 and as per Article 12(4)(b) of the said tax treaty, the concept of FIS is further restricted to mean the services which make available technical knowledge, experience, skill, know- how or processes or consist of the development and transfer of a technical plan or technical design which enables the person acquiring the services to apply the technology contained therein. _______________ 2 Fees for included services’ means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) 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.  This restricted scope provided in the India-USA tax treaty and India-Portuguese tax treaty is applicable to the India-France tax treaty, as per clause 7 of the Protocol. As per the restricted scope of the tax treaty, the BSP link services provided by ADP-GSI France did not make available to the agents/air lines any technical knowledge, experience, skill, know-how, or processes so as to enable them to apply the technology.  Perusal of the clauses of the agreement entered by IATA Canada with its administrative office in Switzerland, does not indicate that the services provided by ADP-GSI France made available to the agents/airlines any technical knowledge, experience, skill, know-how or processes so as to enable them to apply the said technology.  The services envisaged in certain clauses of the agreement related to development services, testing and other facilities which were provided to the agents/airlines to enable them to operate and implement BSP link services in order to utilise the same for their own use.  The decision of the Karnataka High Court in the case of De Beers India Minerals (P.) Ltd. 3 and the decision of the Kolkata Tribunal in the case of ITC Ltd. 4 explaining the concept of ‘technology being made available’ fully support the view of the taxpayer.  The decisions of Authority for Advance Rulings (AAR) in the case of Cargo Community Network Pte Ltd. 5 , and ABC, In re 6 are on different facts and the same cited by the tax department in support of the new plea that the payment being royalty, cannot be relied upon, as it was not even the case of the AO.  Accordingly, the Tribunal upheld the order of the CIT(A) holding that the payment made for BSP link services rendered by ADP-GSI France is not in the nature of FIS chargeable to tax in India. Our comments This is a welcome ruling of the Mumbai Tribunal where it has been held that payments for BSP link services are not FTS under India-France tax treaty by virtue of MFN clause applying the restricted scope of FTS in the form of ‘make available’ clause under the India- USA and India-Portugal tax treaties. _____________ 3 CIT v. De Beers India Minerals (P) Ltd. [2012] 346 ITR 467 (Kar) 4 DCIT v. ITC Ltd. [2002] 82 ITD 239 (Kol) 5 Cargo Community Network Pte Ltd. [2007] 289 ITR 355 (AAR) 6 ABC, in re [1999] 238 ITR 296 (AAR)
  3. 3. © 2014 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. It is pertinent to note the decision of the Karnataka High Court in the case of De Beers India Minerals Pvt. Ltd. wherein the High Court applied the MFN clause under the Netherland tax treaty and observed that the meaning of term ‘make available’ under the Netherland tax treaty is further narrowed down by emphasising the words ‘which enables the person acquiring the service to apply technology contained therein’ under the India-Singapore tax treaty. Similarly, the Karnataka High Court in the case of ISRO Satellite Centre 7 applied the ‘make available’ clause in the India-USA tax treaty while interpreting the India-France tax treaty by virtue of MFN clause under India-France tax treaty. However, the AAR in a recent case of Steria (India) Ltd 8 has denied the benefit of MFN clause under the India- France tax treaty and held that payment for management services will be taxable as FTS since the Protocol cannot be treated as the same with the provisions contained in the tax treaty itself, though it may be an integral part of the tax treaty. It is pertinent to note that the entire purpose of a MFN clause is to grant benefit of a restricted scope and/or a rate to a treaty country by providing the MFN clause in the treaty or in the protocol. The current decision of the Mumbai Tribunal would help the countries having MFN clause under their respective tax treaties by applying the benefits of restrictive scope or lower rate prescribed by the subsequent tax treaty entered by India. ______________ 7 CIT v. ISRO Satellite Centre [2013] 35 taxmann.com 352 (Kar) 8 Steria (India) Ltd. [2014] 45 taxmann.com 281 (AAR)
  4. 4. © 2014 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. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903,Near Vodafone House,Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bengaluru 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 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. © 2014 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. The KPMG name, logo and “cutting through complexity“are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. 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 Syama Business Center 3rd Floor, NH By Pass Road, Vytilla, Kochi – 682019 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Unit No. 603 – 604, 6th Floor, Tower – 1, Godrej Waterside, Sector – V, Salt Lake, 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

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