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 services under section 9(1)(vii) or as business profits, having regard to the India-UK DTAA. The AAR found the services constituted provision of information, guidelines and best practices, not transfer of technical know-how or enabling application of technology. The Authority clarified tax authorities may still examine in assessment whether the applicant's cost-sharing/consideration is fixed on an arm's-length basis.

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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 DTAA

The 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.

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