2021 (3) TMI 21 - AAR - Income Tax

Payments for IT services in India-UK DTAA classified under FTS, not Royalty. Withholding tax applies.

In re : Aircom International Ltd.

The Authority ruled that payments for 'direct technical advice, support, and management including implementation' under IT services are characterized as ... Advance ruling application 245Q(1) - Management Service Agreement ('MSA') to its subsidiaries - rendering of technical/consultancy services - whether those services 'make available' the technology to the recipient - Applicant is a company incorporated in England and Wales and is a non-resident entity - Applicant, has entered into a Management Service Agreement ('MSA') with its subsidiaries including Aircom India, effective from 01st July, 2007 whereby the Applicant provides various Management Support Services to Aircom India with a view to rationalize and standardize the business conducted by Aircom India in India in accordance with the international best practices - Whether services specified under the MSA would be in the nature of 'Royalty' within the meaning of the term in Article 13 of the India-UK Treaty? - HELD THAT:- The nature of services rendered has already been mentioned earlier. The services rendered in setting-up and maintaining strategic management support, target setting, direct customer negotiation, business review and consultation, sales, marketing and business development services including vendor management, sales presentations, general treasury and financial management advice and services, legal services including contract management, contract negotiations and advice, legal compliance assistance, consulting including advice on pricing, customer negotiations, customer management etc., human resource services, information technology (IT) and solution services including network sharing development and strategic development, advice on sales presentations, training of IT engineers/employees etc. are all technical services which cannot be provided without the domain knowledge of the relevant field. Thus, the majority of the services are technical in nature and the remaining one are in the area of consultancy. Therefore, we cannot agree with the submission that they were only managerial in nature and not in the nature of technical or consultancy services. Services in the nature of 'direct technical advice, support and management including implementation' were not only technical in nature but were also made available to Aircom India. Such advice was not in respect of any outage on the Aircom network or troubleshooting of malfunctions in the I.T. infrastructure; rather it was in respect of the specific technical problem faced by the clients of Aircom India, which was flagged to the Applicant for resolution and the solution of which was provided through the employees of Aircom India. Therefore, this service was not only technical in nature but was also made available. We are of the view that payment received for various services in terms of the MSA was not managerial but technical in nature. However, we also hold that only 'direct technical advice, support and management including implementation' service provided under Information Technology (IT) service meets the requirement Of 'make available' in clause (c) of Article 13.4 under the treaty. Therefore, only this particular service is found to be in the nature of 'fee for technical services' under Article 13.4(c) of India-UK Tax Treaty. Whether Royalty? - Revenue has contended that payment by Aircom India to Applicant was for the use of information concerning industrial, commercial or scientific experience and hence it was within the ambit of 'Royalty' under India-UK DTAA - Core activities were not part of MSA and were not rendered by the Applicant under MSA. The Revenue could not point out any legally sustainable reason on the basis of which the payment for the services under MSA can said to be covered by Article 13.3 of India-UK DTAA. Thus, we agree with the contentions of the Applicant in this regard. The issue of IPR in the MSA has already been discussed earlier and held that the Applicant had only agreed under MSA for provision of various services to the subsidiaries and the clause regarding IPR had merely entitled the subsidiaries to enjoy the benefit of the services without violation of IPR rights of the Applicant. Further, the payment under the MSA was in respect of actual rendering of the services and not towards right to use the IPR. It was also held that only because the transfer pricing under the SLA was excluded from the 'total gross trading revenue' for the purpose of calculating the service fee payable under MSA, it did not establish that the services provided under MSA were ancillary and subsidiary to the services under SLA. We are, therefore, of the view that the amount received by the Applicant towards the services rendered under the MSA would not be in the nature of 'Royalty'. Whether Business Income? - Revenue has contended that there was a service PE as per Article 5(2)(k) of the India-UK Treaty - No substantive evidence of stay of any particular employee and rendering of service by them for more than 30 days in a twelvemonth period has been pointed out or brought on record by the Revenue. A mere stay of an employee doesn't establish that he had rendered the service all the time. In order to attract this provision there has to be concrete evidence to establish that the service was rendered through an employee for 30 days or more. In the absence of any such concrete evidence we can't hold that a Service PE was created in this case. The contention of Revenue is based on mere suspicion and not on hard facts. Further, as already discussed earlier the part of the services under MSA is found covered under Article 13 of the DTAA. We are, therefore, in agreement with the Applicant that it does not have a PE in India. As no business was carried out in India and in the absence of any PE, the payment for the services rendered under MSA cannot be considered as business income. Ruling:- Que. 1 The payment made by Aircom India to the Applicant under the MSA for the services specified there under would be characterized as 'fee for technical services '('FTS') under Article 13(4) of the convention between India and UK only in respect of 'direct technical advice, support and management including implementation' service provided under Information Technology (IT) service. The other services rendered under MSA are not found taxable under the convention. Que. 2 The payments made by Aircom India to the Applicant for availing the services specified under the MSA are not in the nature of 'Royalty ' within the meaning of the term in Article 13 of the India-UK Treaty. Que. 3 The payments received by the Applicant are not business income. Que. 4 The payments made by Aircom India to the Applicant would suffer withholding tax under section 195 of the Act only in respect of component of 'direct technical advice, support and management including implementation' service provided under Information Technology (IT) service at the applicable rate. Issues Involved1. Characterization of payments as 'fee for technical services' (FTS) under Article 13(4) of the India-UK DTAA.2. Classification of payments as 'Royalty' under Article 13 of the India-UK DTAA.3. Treatment of payments as business income and the existence of a permanent establishment (PE) in India.4. Applicability of withholding tax under section 195 of the Income-tax Act, 1961.Detailed AnalysisIssue 1: Characterization as Fee for Technical Services (FTS)The Applicant, Aircom UK, sought a ruling on whether payments received from Aircom India under the Management Service Agreement (MSA) would be characterized as FTS under Article 13(4) of the India-UK DTAA. The Applicant contended that the services provided were managerial and did not 'make available' technical knowledge, skill, or experience to Aircom India. The Revenue argued that the services were technical and consultancy in nature and were made available to Aircom India.The Authority found that:- The services provided under the MSA were predominantly technical and consultancy in nature.- Only the 'direct technical advice, support, and management including implementation' service under Information Technology (IT) services met the 'make available' criterion under Article 13.4(c) of the India-UK DTAA.- Other services did not qualify as FTS as they did not make available technical knowledge, experience, skill, or processes.Issue 2: Classification as RoyaltyThe Revenue argued that the payments were for the use of information concerning industrial, commercial, or scientific experience and thus constituted 'Royalty' under Article 13 of the India-UK DTAA. The Applicant contended that the services under the MSA did not involve the transfer of any know-how or intellectual property rights (IPR).The Authority concluded that:- The services rendered under the MSA were not intended to supply any knowledge or information concerning industrial, commercial, or scientific experience.- The payments under the MSA were for actual services rendered and not for the right to use any IPR.- Therefore, the payments did not qualify as 'Royalty' under Article 13 of the India-UK DTAA.Issue 3: Treatment as Business Income and Permanent Establishment (PE)The Applicant asserted that it did not have a PE in India as per Article 5 of the India-UK DTAA, and thus, the payments should not be treated as business income. The Revenue contended that there was a service PE in India as the Applicant's employees were in India for more than 30 days in a twelve-month period.The Authority determined that:- There was no substantive evidence to prove that the Applicant's employees rendered services in India for more than 30 days in a twelve-month period.- Without concrete evidence of service provision by employees for the requisite period, the existence of a service PE could not be established.- Consequently, the payments could not be considered as business income in the absence of a PE.Issue 4: Applicability of Withholding TaxThe Applicant sought clarity on whether payments made by Aircom India to the Applicant would suffer withholding tax under section 195 of the Income-tax Act, 1961, and at what rate.The Authority ruled that:- Withholding tax under section 195 would apply only to the component of 'direct technical advice, support, and management including implementation' service under IT services, which qualifies as FTS.- The applicable rate of withholding tax would be determined based on this specific component.Conclusion1. Payments for 'direct technical advice, support, and management including implementation' under IT services are characterized as FTS under Article 13(4) of the India-UK DTAA.2. Payments under the MSA are not classified as 'Royalty' under Article 13 of the India-UK DTAA.3. Payments received by the Applicant are not considered business income due to the absence of a PE in India.4. Withholding tax under section 195 applies only to the component of 'direct technical advice, support, and management including implementation' service under IT services at the applicable rate.