2010 (3) TMI 108 - AAR - Income Tax

AAR: Consultancy fees from foreign group not taxable in India as FTS or business profits under section 9(1)(vii)

AAR held that amounts payable by the applicant under the consultancy agreement with the foreign group are not taxable in India as fees for technical ... Taxability of the amount payable by the applicant under the agreement with Ernst & Young (EMEIA) - Consultancy services in India - DTAA between India and UK - chargeable to tax in India as 'fees for technical services' under section 9(1)(vii) of the Income-tax Act, 1961 - HELD THAT:- The Agreement contains an elaborate preamble explaining the underlying objective of the Agreement. There are two types of services categorized in the schedule; they are area services and global services. Both of them almost overlap. Global services are more relevant for the purposes of this case. The applicant's counsel has taken us through the global services and broadly explained the scope of each service. The learned counsel at the outset pointed out some inaccuracy in the definition of 'global services' because it refers to the services set out in the EYGSLLP Management Services Agreement. The learned counsel has stated that the global services are enumerated in a self-contained Schedule to the relevant agreement i.e. Area Services and Market Development Agreement and, therefore, the reference to some other earlier agreement is not appropriate. In any case, the learned counsel has clarified that practically, there is no difference between the services mentioned in both these agreements and if at all the enumeration in the present agreement is more comprehensive. A chart containing comparative analysis of these two agreements has been furnished to clarify this point. What all is provided by EMEIA is informations on various business and commercial matters, guidelines, templates, best practices and strategies that could be adopted in various spheres of their business which ultimately lead to protection of EY image and client relations. Dissemination of informations, furnishing guidelines and suggesting plans of action aimed at uniformity and seamless quality in business dealings of participating group entities do not per se amount to making available to them technical knowledge and experience possessed by EMEIA to a substantial extent. There is no transfer of technical know-how in that process nor can it be said that the recipient of these coordinated/centralized services has been enabled to apply the technology which EMEIA is possessed of. In fact, EMEIA has not developed any technology of its own nor does it innovate anything. It is ruled that the amounts receivable by Ernst and Young EMEIA Services Ltd. from the applicant under the Agreement are not liable to be taxed under the Income Tax Act as fee for 'included services' or as business profits, having regard to the provisions of DTAA between India and UK. However, the Income-tax authorities are not precluded from making inquiry into the question whether the cost contribution is fixed on arm's length basis and such determination can be made in the assessment proceeding of the applicant. Issues Involved:1. Taxability of the amount payable by the applicant under the agreement with Ernst & Young (EMEIA) Services Limited under Indian Income-tax Act, 1961 and the Double Taxation Avoidance Agreement (DTAA) between India and the UK.2. Classification of the amount receivable by Ernst & Young (EMEIA) Services Limited from Ernst & Young (P) Ltd. as 'fees for technical services' under section 9(1)(vii) of the Income-tax Act, 1961.Detailed Analysis:Issue 1: Taxability under Indian Income-tax Act and DTAAThe applicant, Ernst & Young Private Ltd. (EYPL), contended that the payment made to Ernst & Young (EMEIA) Services Limited for services rendered under the Agreement dated 5th May 2009 is not taxable in India as 'fees for technical services' under Article 13 of the DTAA between India and the UK. The applicant argued that the services provided by EMEIA do not result in the transfer of any technical know-how, technical plan, or design, thus not satisfying the 'make available' criterion under Article 13 of the DTAA. The services listed in the Agreement primarily include support and access to central resources for business strategies, knowledge management, market development, and other non-technical services. The applicant emphasized that EMEIA does not have a Permanent Establishment (PE) in India, and hence, the receipts should not be taxable as business profits under Article 7 of the DTAA.Issue 2: Classification as 'Fees for Technical Services'The term 'fees for technical services' is defined in para 4 of Article 13 of the DTAA to mean payments for rendering technical or consultancy services that 'make available' technical knowledge, experience, skills, know-how, or processes. The applicant argued that the services provided by EMEIA do not meet the 'make available' criterion as they do not result in the transfer of technical knowledge or skills enabling the recipient to apply the technology independently in the future. The services rendered by EMEIA include providing guidelines, templates, best practices, and strategies, which do not amount to making available technical knowledge or skills.The Authority for Advance Rulings (AAR) examined the nature of services listed in the Agreement and concluded that the services provided by EMEIA do not satisfy the 'make available' criterion under Article 13 of the DTAA. The AAR noted that the services rendered by EMEIA are more in the nature of management services, which are not included within the scope of Article 13. The AAR referred to previous rulings, including Intertek Testing [307 ITR 418] and Anapharm Inc. [304 ITR 394], to support its conclusion that mere provision of technical services is not sufficient to attract Article 12(4)(b); it also requires that the service provider makes their technical knowledge, experience, or skills known to the recipient.Conclusion:The AAR ruled that the amounts receivable by Ernst & Young (EMEIA) Services Limited from the applicant under the Agreement are not liable to be taxed under the Income Tax Act as fees for 'included services' or as business profits, considering the provisions of the DTAA between India and the UK. However, the Income-tax authorities are not precluded from inquiring whether the cost contribution is fixed on an arm's length basis, and such determination can be made in the assessment proceeding of the applicant.The ruling was given and pronounced on the 19th day of March, 2010.