Case Law Details

Case Name : Re. Shell Technology India Private Limited (AAR)
Appeal Number : A.A.R. No. 850 of 2009
Date of Judgement/Order : 21/12/2011
Related Assessment Year :
Courts : Advance Rulings (181)

In Re Shell Technology India Private Limited (AAR) –

The applicant is said to be providing scientific and technical services to Overseas Shell group entities. SSSABV, a company incorporated in Netherlands, through its branch in the Philippines, is currently providing back office financial services relating to accounts etc. to the applicant. It is seen that software are installed for that purpose; but it has not been clarified whether they are installed in India or in the Philippines. It appears to us that this aspect may not matter, as the software is used by the Philippines branch of SSSABV for rendering the services to the applicant and not by the applicant itself, on the facts as now disclosed. Similarly, whether SSSABV Netherlands, has intellectual property rights on the software used, also does not appear to be material. As we see it, the Netherlands company is providing through its branch, output to the applicant through the services included in the agreement. From a look at the distribution of responsibilities amongst the two companies shown in the annexure, it is seen that SSSABV provides services to the applicant without any involvement of the applicant. In that context, it cannot be said that anything is made available to the applicant in terms of the agreement. It is also seen that the customer care centre is handled by SSSABV Netherlands through its branch in Philippines and a timing is fixed for contact. In one sense, it appears to be service through back office, rather than a support service. Since the services are rendered by SSSABV Netherlands though through its branch in Philippines, we see no occasion for taking the view, on the facts of the case, that the treaty that will be applicable would be the one between India and the Philippines.

We therefore rule on question No.(i) that the consideration paid for the financial services received by the applicant is not in the nature of fees for technical services within the meaning of Article 12.5(b) of the DTAC between India and the Netherlands. Since there was no contention that SSSABV had a permanent establishment in India in terms of Article 5 of the DTAC between India and Netherlands, on question No. (ii) we rule that the payment received by SSSABV is not chargeable to tax in India. Since there is no liability to tax in India we rule on question No.(iii) that the applicant has no obligation to withhold tax under section 195 of the Income-tax Act.

BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX)
NEW DELHI

21st Day of December, 2011

A.A.R. No. 850 of 2009

Name of the applicant –  Shell Technology India Private Limited

RULING

The applicant is a company incorporated in India and is a tax resident of India. Its associated enterprises are Shell Global Solutions International BV (SGSI BV) and Shell International Exploration and production BV (SIEP BV). The applicant mainly renders technical services to overseas Shell group companies using desktop based IT applications and claims to be eligible for tax holiday under section 10B of the Income-tax Act in respect of income generated from export of services to the overseas Shell group entities. Shell had set up as part of its global finance functional plan, Shell Shared services (Asia) BV(SSSABV). That company incorporated in Netherlands is supporting the global finance functions of Shell by carrying out common activities across the countries in one sector by bringing them all into one export specialist area. It is designed with the aim of standardisation of processes within a strong control framework. It is also aimed at cost effective deployment of standard system and processes while maintaining control to a high standard with clear account abilities. SSSABV in turn has set up a branch office in Philippines to provide a range of business support services to various Shell Group entities. The SSSABV branch is registered with the Philippines Economic Zone Authority. Currently, the branch performs the back – office finance services related to accounts payable, accounts receivable, supply accounting, credit and collection, general ledger accounting and taxation. The applicant has entered into a service level agreement with the SSSABV Philippines branch, whereby that branch provides business support services to the applicant. The services to be provided, include invoice processing, monitoring operational execution, SOX (Business Controls – Board) and goods receipts/invoice receipts and other services relating to accounts payable/receivable. It also includes general accounting and credit management. For rendering these services, SSSABV charges a monthly operation fee based on the ongoing tariff or on-going charges/rates agreed on the basis of the full time equivalent resources allocated for the services. The applicant has approached this authority with a view to ascertaining the tax ability in India of the payments being so made to SSSABV and consequently on its obligation if any for withholding tax. This authority, after hearing both sides, by order dated 13.01 .2010, allowed the application under section 245R(2) of the Act to rule on the following questions:

i. Whether the payments made by the applicant to SSSABV under the Agreement for Business Support Services is in the nature of “fees for technical services” within the meaning of the term in Article 12 of the Convention between the Republic of India and the Kingdom of Netherlands for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital (“the India-Netherlands Tax Treaty)?
ii. Based on the answer to Question (i), and in view of the facts as stated in attachment-III and also in the light of the declaration provided by SSSABV that it does not have a Permanent Establishment in India in terms of Article 5 of the India-Netherlands Tax treaty, whether the payments received by SSSABV, be chargeable to tax in India?

iii. Based on the answer to Question (ii), would the receipts by SSSABV from STI suffer withholding tax under section 195 of the Act, and at what rate?

According to the applicant, it was entitled to claim the application of the Double Taxation Avoidance Convention (DTAC) between India and Netherlands, its contract being with a company incorporated in Netherlands and which is controlled from Netherlands. It was therefore entitled to rely on paragraph 5 of Article 12 of the India- Netherlands treaty read with the protocol thereto, relating to the most favoured nation clause, to contend that the services received by it from SSSABV do not fall within the purview of Article 12.5(a) of the India-Netherlands Convention. What the applicant was receiving was not technical or consultancy services in terms of the Convention. Moreover, the services were not being made available to the applicant within the meaning of the said paragraph of Article 12. Therefore, the business support services provided to it by SSSABV, is not technical services and the remuneration paid by it for receiving such services was not fees for technical services under Article 12 of the Convention. Since SSSABV did not have a permanent establishment in India in terms of Article 5 of the convention, the payment made by the applicant to SSSABV being the business income of SSSABV, is not taxable in India. Since the payment was not taxable in India as income, the applicant has no obligation to withhold tax in terms of section 195 of the Act.

In its comments, the Revenue submitted that the applicant is receiving high technical services which result in benefit to it by cost effective deployment of standard systems and in standardising processes. Therefore, what was being provided was technical services. Whether the technology was made available to the applicant could not be determined on the scanty facts disclosed by the applicant. Information on whether the employees of the applicant were being trained for making use of the services, the exact nature of the services being provided and the manner in which they are being provided and were being utilised and what was the impact of such services on the functioning of the applicant, all are relevant facts not disclosed by the applicant. It was therefore relevant to know the practices earlier being followed by the applicant which have been replaced under the agreement and what was its impact in terms of manpower, machines and profitability. Alternatively, on a look at the fee structure, it could be seen that the service charges include start-up charges. That amount had to be paid by all customers at the same rate. It appeared that there was a highly specialised technical system developed by the service provider for providing the services to the applicant. Therefore the payment made by the applicant will be royalty within the meaning of section 9(1)(vi) of the Income-tax Act. If it was royalty or fees for technical services, the question of tax ability had to be considered as also the liability to withhold tax.

In its reply, the applicant has referred to the specific services to be rendered by SSSABV under the agreement in question and has reiterated that the services are not taxable as FTS under the India-Netherlands tax treaty. It has also disputed the claim of the Revenue that what was payable was royalty within the meaning of the Act. It has reiterated its reliance on the most favoured nation clause in the protocol relating to the Convention between India and Netherlands and has relied on the treaty India had entered into with Portugal, for emphasizing that unless the service rendered makes available technical knowledge, experience, skill, know-how or process, the payment could not be treated as FTS. No employee of the applicant was being trained by SSSABV for availing the services. It is financial accounting related work that has been out sourced to SSSABV. If it all there was any training required, that would be given to the personnel of SSSABV to understand the process of the applicant and vice – versa. Once a particular process has been out sourced to SSSABV, then it would be the responsibility of the SSSABV to carry out the activities of that process and then report the same to the applicant. No training in hardware, software, accountancy etc. is required to be given to the personnel of the applicant. The applicant has also relied upon some decisions and Rulings in support of its stand.

In its submission submitted after the arguments were completed, based on a doubt raised whether it was India-Netherlands Convention that applied or the India-Philippines Convention that applied, the services being rendered by SSSABV Philippines branch, the applicant submitted that it was India-Netherlands Convention that applied because SSSABV was incorporated in Netherlands, was the tax resident of Netherlands and was controlled and managed from Netherlands. The Philippines branch was only a branch and the income earned through that branch was taxable in Netherlands where the head office of the company was situated. Even if SSSABV was found to be a resident of both Netherlands and Philippines, by applying the tie-breaker rule, it had to be found that the treaty between India and Netherlands applied, in view of the fact that the effective management of SSSABV vesting with its Board of Directors, was from Netherlands. It was therefore reiterated that the treaty that had to be applied was the one entered into by India and Netherlands and the ruling had to be on the basis of Article 12 of that treaty.

At the hearing, on behalf of the applicant it was submitted that in terms of section 90(2) of the Act, the applicant was entitled to opt for application of the treaty between India and Netherlands and going by the treaty, read with the most favoured nation clause, clause (b) of paragraph 4 of Article 12 had to be applied. On the basis of that treaty, it had to be held that the payment was not taxable as FTS. The applicant had not raised any question of royalty and therefore no ruling is needed on the question whether the payment would be royalty within the meaning of the Act. The entity in Philippines was only a branch of SSSABV Netherlands and the taxable status of the company has to be decided on the basis of the tax residency of the parent company. No technical service was being provided to the applicant in terms of Article 12 of the treaty. The amount paid could not be taxed in India. If it is treated that the payments are made to the Philippines branch and payments are not made on behalf of the parent company in Netherlands, then, the amount was taxable only in Philippines, going by the treaty between India and Philippines. According to the Revenue, specialised services were being provided. It can be seen that there was even a migration charge. It was not a simple case of data management or accountancy services. Operations fee is also charged. Looking at the qualification prescribed for the staff, it can be seen that the services provided are services where the customer himself had a role. Development/testing/support was being given. Training was being provided to the customers. A close reading of the agreement concerned would show that it was a clear rendering of technical services.  There was constant interaction on three fronts of  discussion, training and advisory. Imparting of knowledge is involved. The contract is for 3 years. After three years, obviously the applicant itself can do it. That obviously means that the service is being made available to the applicant. In any event, an apportionment has to be made. A portion is related to technical services and another portion to management and consultancy services. In its reply on behalf of the applicant, the stand of the Revenue is controverted and its original submissions reiterated.

It is argued on behalf of the applicant that what is involved is the nature of the payment made by the applicant to SSSABV for providing financial services relating to accounts, billings etc. to the applicant. These services are financial services and they are not technical services. Therefore, going by paragraph 5 of Article 12 of the Double Taxation Avoidance Convention (DTAC) between India and Netherlands, the payment is not taxable in India in the absence of SSSABV having a permanent establishment in India and consequently, the applicant has no obligation to withhold tax on the said payment in terms of section 195 of the Act. The essential contention on behalf of the Revenue is that the services rendered are technical in nature and consequently, what is being paid by the applicant to SSSABV is liable to be taxed as fees for technical services. Alternatively, the Revenue contended, that the payment was in the nature of royalty and taxable as such. This alternate contention is met on behalf of the applicant by submitting that the applicant has not sought a ruling on the question whether the payment was taxable as royalty, but had sought a ruling only on the operations cost involved in the agreement and not about the earlier part. The applicant not having raised any question on royalty, there was no occasion for this authority to rule on that question.

On behalf of the Revenue it is sought to be contended that the agreement is not simply relating to data management or consultancy services. The exact nature of the services or details of the services are not disclosed. The applicant is to employ qualified persons and the services are of such a nature that the customer has a role in the providing of such services by the service provider. There was constant interaction on discussion, training and advisory. The contract is for a term of three years and after the expiry of the period, the applicant can use the knowledge gained and that would amount to making available the services. In any event, a portion is related to management and consultancy services and an apportionment would be warranted.

Considering the questions raised by the applicant which we have admitted for ruling and the submission that the ruling is sought for only on the operations cost covered by the agreement in question, we feel that we are not called upon to pronounce on the question whether the payment made under the agreement or a part thereof, would amount to royalty and taxable as such. We leave open that question. We clarify that the ruling is limited to the financial services received by the applicant under the agreement in question.

The applicant is said to be providing scientific and technical services to Overseas Shell group entities. SSSABV, a company incorporated in Netherlands, through its branch in the Philippines, is currently providing back office financial services relating to accounts etc. to the applicant. It is seen that software are installed for that purpose; but it has not been clarified whether they are installed in India or in the Philippines. It appears to us that this aspect may not matter, as the software is used by the Philippines branch of SSSABV for rendering the services to the applicant and not by the applicant itself, on the facts as now disclosed. Similarly, whether SSSABV Netherlands, has intellectual property rights on the software used, also does not appear to be material. As we see it, the Netherlands company is providing through its branch, output to the applicant through the services included in the agreement. From a look at the distribution of responsibilities amongst the two companies shown in the annexure, it is seen that SSSABV provides services to the applicant without any involvement of the applicant. In that context, it cannot be said that anything is made available to the applicant in terms of the agreement. It is also seen that the customer care centre is handled by SSSABV Netherlands through its branch in Philippines and a timing is fixed for contact. In one sense, it appears to be service through back office, rather than a support service. Since the services are rendered by SSSABV Netherlands though through its branch in Philippines, we see no occasion for taking the view, on the facts of the case, that the treaty that will be applicable would be the one between India and the Philippines.

We therefore rule on question No.(i) that the consideration paid for the financial services received by the applicant is not in the nature of fees for technical services within the meaning of Article 12.5(b) of the DTAC between India and the Netherlands. Since there was no contention that SSSABV had a permanent establishment in India in terms of Article 5 of the DTAC between India and Netherlands, on question No. (ii) we rule that the payment received by SSSABV is not chargeable to tax in India. Since there is no liability to tax in India we rule on question No.(iii) that the applicant has no obligation to withhold tax under section 195 of the Income-tax Act.

Accordingly the ruling is pronounced on 21 st day of December, 2011.

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