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2019 (6) TMI 1623
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....services. The applicant had preferred an application seeking a ruling from the Authority for Advance Rulings ("AAR") in respect of taxability of payments to be made by Perfetti India for the costs to be allocated by the applicant under the service agreement. The question of taxability was raised in context of the Double Taxation Avoidance Agreement between India and the Netherlands ("DTAA"). The applicant had relied on the provisions of article 12(5)(b) of the DTAA to canvass that in the absence of a "make available" condition, the payments would not partake of the character of "fees for technical services" and further in the absence of any permanent establishment (PE) (in terms of article 5 of the DTAA) of the applicant, such payments would not be taxable in India. The Authority, vide ruling dated December 9, 2011 had ruled on the taxability of the payments to be made by Perfetti India to the applicant and had held that such payments would partake of the character of "fees for technical services" within the meaning of the term as contained in article 12(5)(a) of the DTAA. The questions raised by the applicant and the ruling thereon were as under : Q. No. Question raised by t....
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.... the matter afresh. The order of the hon'ble court is as under : "This writ petition is directed against the ruling dated December 9, 2011 in A. A. R. No. 869 of 2010 ([2012] 342 ITR 200 (AAR)) given by the Authority for Advance Rulings. One of the pleas raised by the petitioner was that the said authority had not considered the Double Taxation Avoidance Agreement between India and Portugal which is an OECD country. The learned counsel for the petitioner submitted that any agreement between India and an OECD country could be looked into while construing the Indo-Netherlands Double Taxation Avoidance Convention. The learned counsel for the petitioner had also raised the plea that the memorandum of understanding concerning fees for included services referred in article 12(4) of the Indo- USA DTAA concerning the expression "make available" was also not considered by the Authority for Advance Rulings. It was submitted that the said Authority refused to look into the Indo-Portuguese DTAA or the Indo-USA DTAA and the memorandum of understanding between India and the USA on the ground that only the Indo- Netherlands DTAC needed to be looked into. The learned counsel ....
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....of confectionery products and was the licensed owner of the right to use the various trademarks. Perfetti SPA also had a licence to manufacture confectionery namely candies, chewing gums, bubble gums, jelly candies, lollipops under those trademarks in a few territories which included India. - Perfetti Van Melle Holding BV, (the applicant) is a company based in the Netherlands and is primarily engaged in the business of managing of manufacture and sale of sugar confectionery and gum and provision of operational and other support services for the benefit of companies in the Perfetti Van Melle group situated in various countries. - A Technology and Trademarks Licence Agreement ("TTLA") dated July 1, 2005 was entered into between Perfetti SPA and Perfetti India (a subsidiary of the applicant), as per which licence was granted to Perfetti India to manufacture and sell various kinds of confectionery and also allowed use of its technology and know-how in manufacture of the products. Clause 12 of the said TTLA provided that Perfetti India would pay royalty to Perfetti SPA subject to the ceiling of 5 per cent. on domestic sales and 8 per cent. on export sales. The royalty ....
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....echnical or consultancy services. It was stated that managerial services are not covered under the said article and the applicant contended that given the nature of services rendered under the services agreement, they were nothing but "managerial services". Hence, there was no applicability of the provisions of article 12(5) of the DTAA. The applicant relied upon the following decisions in this context : - Steria (India) Ltd. v. CIT [2016] 386 ITR 390 (Delhi) - Measurement Technology Ltd., In re [2015] 376 ITR 461 (AAR) ; - Cummins Limited, In re [2016] 381 ITR 44 (AAR) ; and - Koninklijke Philips Electronics N. V. v. Dy. CIT (International Taxation) [2018] 13 ITR (Trib)-OL 485 (Kolkata) (I. T. A. No. 1889/Kol/2012, order dated October 25, 2018) 6. The applicant has drawn our attention to the fact that in the original ruling dated December 9, 2011 the payments under the services agreement were treated to be in the nature of "fee for technical services" under article 12(5)(a) of the DTAA since the services provided under the services agreement were inextricably linked with the right to use the trademark, technology and know-how under the TTKLA ....
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....2014, the contents of the memorandum of understanding of the India-USA DTAA would have to be referred to even for determination of the scope of article 12(5)(a), sought to be invoked in the present case. Our attention was drawn to the examples in the said memorandum of understanding and it was contended that for services to be characterised as "fees for included services" under article 12(4)(a) of the India-USA DTAA, the payments allocable to such services should not form a substantial part of the total consideration payable under the contractual arrangement/s. It was brought to notice that for the assessment year 2011- 12, the payment of royalty under the TTKLA was INR 2.37 crores whereas the payments under the service agreement were to the tune of INR 9.48 crores. Thus, the payment under the services agreement was substantial in comparison with the royalty under the TTKLA. Further that the services must necessarily be related to the application or the enjoyment of the intangible ?. Further that if the services were related to improving the effectiveness of processes, only then they would fall within the scope of article 12(5)(a) of the India-Netherlands DTAA, which was not the ca....
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.... that it is entitled to take the benefit of the India-Portugal Double Taxation Avoidance Agreement and the restricted scope of the phrase "fees for technical services" contained therein. It was submitted that such entitlement was upheld by the hon'ble High Court of Karnataka in the case of CIT v. De Beers India Minerals Pvt. Ltd. [2012] 346 ITR 467 (Karn). Furthermore, in the said case, the hon'ble High Court, while dealing with the phrase "make available" as contained in article 12(5)(b) of the India-Netherlands DTAA observed that "the test is whether the recipient of the service is equipped to carry on his business without reference to the service provider, if he is able to carry on his business in future without the technical service of the service provider in respect of services rendered then, it would be said that technical knowledge is made available." It was submitted that identical view was taken by the hon'ble Delhi High Court in the case of DIT v. Guy Carpenter and Co. Ltd. [2012] 346 ITR 504 (Delhi). For the purposes of article 12(5)(b) to trigger, it is necessary that the recipient of the service should be in a position to derive an enduring benefit and be i....
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....ces P. Ltd. v. Asst. CIT [2013] 28 ITR (Trib) 26 (Cochin) ; - Continental Construction Ltd. v. CIT [1992] 195 ITR 81 (SC) ; - CBDT v. Oberoi Hotels (India) (P.) Ltd. [1998] 231 ITR 148 (SC) ; - International Hotel Licensing Co. S. A. R. L., In re [2007] 288 ITR 534 (AAR) ; - Andaman Sea Food Pvt. Ltd. v. CIT (S. L. P. (C) No. 36385 of 2014). It was also submitted that the decisions relied upon by the applicant were distinct and different on the facts. Therefore, the ratio of those decisions may not be applied in the present case. 16. It was further contended that the services were not only technical and consultancy in nature but were also ancillary and subsidiary to the application or enjoyment of the right or property or information for which royalty was being paid by the applicant as per TTLA. 17. The Revenue also submitted that earlier there was only one TTLA dated July 1, 2005. However, with effect from April 1, 2010 two separate TTKLA arrangements were made. The terms and clauses of the present TTKLA were similar to those of the earlier TTLA. It was contended that the predominant purpose of the service agreement was enjoyment of the....
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....nder the service agreement cannot partake of the character of "fees for technical services" in terms of article 12(5)(a) of the DTAA between India and the Netherlands. The applicant reiterated that the services under the service agreement between the applicant and Perfetti India were not ancillary and subsidiary to the application or enjoyment of the rights, property or information vesting on Perfetti India under the TTKLA and, therefore, the payments made under the service agreement do not constitute "fees for technical services" under article 12(5)(a) of the DTAA between India and the Netherlands. Findings and ruling 21. We have carefully considered the facts of the case and the submissions of the applicant. One of the reasons for remitting the matter by the hon'ble High Court was that the Authority had not considered the amendment made to the Indo-Netherlands DTAC vide Notification No. S. O. 693(E) dated August 30, 1999. It was explained in the said notification that after signing the Convention with the Netherlands, India had subsequently signed Convention with Germany, Sweden, the Swiss Confederation and the U. S. A. which were members of the OECD and which had limit....
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....hnical or consultancy service (including through the provision of services of technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received, or (b) make available technical knowledge, experience, skill, know-how or processes or consists 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. 22. Explanation 2 to section 9(1)(vii) of the Income-tax Act defines fees for technical services as under : "Explanation 2.-For the purposes of this clause, 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or con sideration which would be income of the recipient chargeable under the head 'Salaries'." ....
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....ping. Further, the technical or consultancy services will be considered "included services" to the extent : - they are ancillary and subsidiary to the application or enjoyment of a right, property or information for which the royalty payment is made, or ; - they make available technical knowledge, experience, skill, know- how or processes or consist of the development and transfer of a technical plan or a technical design. Consultancy services which are not of a technical nature cannot be included service under the clause (b) above. The memorandum of under standing further clarifies that in order for a service fee to be considered "ancillary and subsidiary", the service must be related to the application or enjoyment of the right, property or information. Thus, the pre-dominant purpose of the arrangement under which the payment of service fees is made must be the application or enjoyment of the right, property or information for which royalty is being paid. It further prescribes that whether the pre-dominant purpose of the arrangement was application or enjoyment of right, property or information must be determined by reference to the facts and circumstan....
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....nufacture and sell various kinds of confectionery products ; (b) licence to use technological, technical marketing and commercial know-how in the manufacturing, sales, advertisement and promotion of the products ; (c) offer technicians, marketers, salesman, in-house legal counsel and any other of the experienced employees to assist in the activities mentioned above and in solving any technological and commercial problem. Under the service agreement following services are being rendered by the applicant : a. specified services requiring the use of proprietary knowledge and processes belonging to Perfetti group, b. specified services are : Accounting, budgeting, sales, marketing, Foreign Exchange management, loans, human resources, legal support, etc. c. specified services are to be provided on continuous basis. It is thus found that some of the services under the two agreements are overlapping. There already is a provision to provide marketers, salesman, in-house legal counsel and other experienced employees to carry out activities of sales, marketing, legal support to Perfetti India in the TTKLA. There is further provis....
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....cial institutions at better terms. This also saves recipient's cost in providing guarantees to bank deposit margins and helps obtain loans at cheaper rates. * Assist recipient's finance managers in financing the businesses. 5 Organisation of international finance managers meetings * Enables recipients finance manager to interact with the international colleagues and to understand best practices at a group level. Corporate to facilitate and take care of accommodation and the complete programme like guest speakers etc. 6 Human resource management service * Global review of HP policies. * Setting up of global bonus scheme for the sales personnel and global performance management system. * Assistance in setting up the benchmarks for the performance standards amongst the group and defining the code of ethics for the recipient. * Assistance in facilitating the personnel mobility within the group and associated contractual support. * Assistance in tasks related to labour conditions. * Support and assistance in personnel related contractual disputes and negotiations. * Enable recipient's international colleagues. Provision of the a....
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....r payment of royalty vide the TTKLA dated April 1, 2010 and the service agreement also dated April 1, 2010 are thus a set of related contracts. The person performing the service is the same, who is also receiving the royalty in this case. The contention of the applicant that the amount paid for services was not an insubstantial portion of the combined payment is found to be misplaced. As pointed out by the Revenue the total outgo on account of royalty and service charge has remained almost the same in terms of percentage of turnover, as compared to the payment of royalty prior to the service agreement. As admitted by the applicant these services were being provided even prior to the present service agreement but were not being separately charged. As per the arrangements made a part of the royalty payment has been transferred to service payment and, therefore, the quantum of payment for service charge becomes inconsequential. In fact the basis of royalty on domestic and export sales in the earlier contract was also tweaked in the subsequent contract and was made dependant on brands, viz. global, regional and local. Further, not much weightage can be given to this factor when all oth....
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.... its fold medical colleges. The Supreme Court observed that 'the dictionary meaning of the word "technical" is also "professional" and is used in contra-distinction with pure sciences to prepare the professionals in applied sciences'. However, we would like to observe that it is not any or every professional service that amounts to technical service. Professionalism and an element of expertise should be at the back of such services. There is a decision of the Andhra Pradesh High Court in which the ambit of the expression 'technical service' was considered. In G.V.K. Industries Ltd. v. ITO [1997] 228 ITR 564, S. S. M. Quadri J., speaking for the Division Bench, rejected the argument of the assessee's counsel 'that the NRC did not render any technical or consultancy service to the petitioner-company and that it merely rendered advice in connection with the procurement of loans by it, which does not amount to rendering technical or consultancy service within the contemplation of the said clause and that the technical or consultancy service should relate to the core of the business of the petitioner-company'. It was observed, 'In our view, advic....
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.... remaining ones are in the area of consultancy. Therefore, we cannot agree with the submission that they are not technical or consultancy in nature. As already demonstrated earlier, these services are also ancillary and subsidiary to the enjoyment of right, property or information under the TTKLA as such services are provided to group companies only, with whom the TTKLA is entered into, and not to any third party. The services provided under the service agreement are all specialized services and the applicant could have provided these services to any entity. However, the applicant has not done so for the precise reason that these specialized services are only ancillary and subsidiary to the production process and could be provided only to those with whom the TTKLA is made. 31. The applicant has placed reliance on the decision of the Delhi High Court in the case of Steria (India) Ltd. (supra) in support of the contention that the services rendered as per the service agreement were not technical or consultancy services but were managerial in nature. It is found that in that case a management service agreement was entered into, as per which services provided were corporate communic....
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....pplier process and controls meet the requirements. As the nature of services rendered in this case were much restricted and totally different than the present case the applicant cannot derive any benefit therefrom. In the case of Koninklijke Philips Electronics N. V. (supra) the nature of services rendered under the management support service agreement were in areas of commercial, accounting, auditing, financing and legal matters which were held as managerial in nature by the Income-tax Appellate Tribunal. However, the facts of this case are also found to be different, as in this case receipt under the management support service agreement was held as cost sharing arrangement and not as royalty or fees for technical services. The Tribunal has not discussed the exact nature of services rendered nor has given any detailed reason as to why they are treated as managerial service. Further, the requirement of "make available" was also not found fulfilled in this case. Under the circumstances, this cannot be treated as a binding precedent as the facts of the case are totally different. The facts of the case of Spencer Stuart International BV (supra) relied upon by the applicant ar....
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....SC) and CBDT v. Oberoi Hotels (India) (P.) Ltd. [1998] 231 ITR 148 (SC) was already referred in the decision of Intertek Testing Services (India) (P.) Ltd. discussed earlier. In the case of Andaman Sea Food Pvt. Ltd. v. CIT (S. L. P. (C) No. 36385 of 2014), the Supreme Court dismissed the special leave petition against the Calcutta High Court judgment wherein it was had held that payment of consultancy fees to the Singaporean company for foreign exchange derivative transaction services was taxable as "fees for technical services" ("FTS"). In the case of International Hotel Licensing Co. S. A. R. L., In re [2007] 288 ITR 534 (AAR) ; 158 Taxman 231 (AAR), this authority had held that the services of marketing and promotion were consultancy services and in the nature of fees for technical services. 34. In view of the above facts, findings, discussions and the relevant judicial precedents, we are of the opinion that services rendered under the service agreement when read with TTKLA, fall within the purview of article 12(5)(a) of the DTAC as such services "are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described ....