Payment to be made by Perfetti India for the cost to be allocated by the applicant is taxable under Article 12.5(a) and as also under Article 12.5(b) of the DTAC between India and The Netherlands – AAR
Re- Perfetti Van Melle Holding B.V., Netherlands (AAR) – Applicant seeks advance ruling on the following questions:-
4. Assuming that the Applicant has no other taxable income in India, on the facts and circumstances of the case;
a. Whether the Applicant will be absolved from filing a tax return under the provisions of the Act; and
RULING AND OBSERVATIONS OF THE AAR
Nature of services
The AAR observed that the services under the SA are in the nature of support services being provided by a holding company to a group entity. They are specific to the confectionery industry and are not general in nature. The focus of the services is to extend the benefit of the global experience of the group companies to Perfetti India.
The AAR relying on the decisions in the case of Intertek Testing Services, in re  (307 ITR 418), G.V.K. Industries (228 ITR 564) held that these services giving knowledge and experience of the confectionery industry to Perfetti India are technical in nature. More so, in view of the fact that the agreement clearly brings out the intention of the parties to assist Perfetti India by applying the experience of its sister concerns and group companies .
Ancillary and subsidiary Test
The AAR observed that the two agreements-SA and TTLA- are inextricably attached to each other or at least complimentary to each other. The payment under TTLA has itself been considered as Royalty under Article 12.4 of the DTAC by the Applicant. In furtherance to the application or enjoyment of the right or information, a support system has been put in place in terms of the SA which is effective from the same date.
Thus, the AAR ruled that payment for such services will be taxable as FTS as such services are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 4 of this Article is received.
As regards applicant’s submission that as the term ‘make available’ has not been defined under India-Netherlands DTAA, an inference as to the meaning of make available can be drawn from the MOU to the India-US DTAA.
The AAR did not agree with this submission and observed that a Treaty is a contract between the two sovereign countries and any diversion from it will need the consent of both the contracting states. Also, a contract with a certain country cannot be used to interpret a separate independent contract with another country.
Make Available Test
As per the MOU to the India-US DTAA, the term make available means that the person acquiring the service is enabled to independently apply the technology.
The AAR opined that the fact that the services are “continuous” do not by itself imply that they do not enable the recipient to independently apply the knowledge skill that is provided. The word “enable” is used in the sense that the services should be such that they make the recipient able or wiser in the subject matter. This is even more evident from the fact that it is the recipient who applies the knowledge and skill and the provider only supports the recipient with knowledge and skill. The services in this scenario are continuous to ensure that the knowledge provided and applied by the recipient can be reviewed and continuous experience that is being gained globally can be supplied to the recipient for further enabling it to perform its tasks better.
In the end, the AAR held that the payment for such services will be taxable as FTS on another ground that such services are made available’ by the applicant.
Full text of the AAR is as follows
BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX)
9th Day of December, 2011
A.A.R. No. 869 of 2010
Name & address of the applicant – Perfetti Van Melle Holding B.V., Netherlands
(By Mr. V.K. Shridhar)
Applicant submits that it is a company based in Netherlands and is in the business of manufacture and sale of sugar confectionery and gum. It also provides operational and other support services for the benefit of companies of Perfetti Van Melle Group (Perfetti Group) situated in various countries. It has entered into a Service Agreement with its group company, Perfetti Van Melle India Pvt. Ltd. (Perfetti India), which is effective from 1.4.2010. Under the agreement, the Applicant will incur cost in providing various operational and other support services for the benefit of group companies by drawing its own resources as well as on those available from other Group Companies or third parties and will invoice the cost incurred for providing such services on cost to cost basis without charging any mark up. The employees and other personnel engaged by the Applicant for providing these services will not visit India.
2. Applicant submits that being a tax resident of the Netherlands, the provision of India- Netherlands Double Taxation Avoidance Convention (DTAC) will apply to the extent they are more beneficial when compared to the provisions of the Income-tax Act, 1961 (Act). Under para 5(b) of Article 12 of the DTAC, any service to qualify as fees for technical services (FTS), the service should be technical or consultancy in nature and the services should „make available‟ technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. The definition of FTS under the DTAC is more restrictive than under the Act and hence being invoked. Applicant submits that the term „make available‟has not been defined under the DTAC, but an inference may be drawn from India-USA DTAC which has an identical definition in paragraph 4(b) of Article 12 for defining “fees for included services”. Under the memorandum of understanding of India-USA DTAC, „make available‟means that the person acquiring the services is enabled to independently apply the technology, that there should be transfer of technical knowledge, skill etc. from the service provider to the recipient in order for the services to qualify as making available technical knowledge, skill etc. [Ref.:Intertek Testing Services India (P) Ltd. in re (2008) (307 ITR 418) National Organic Chemicals Ind., Ltd., 96 TTJ 765; CESC vs. CIT (80 TTJ 806).]
3. Applicant seeks advance ruling on the following questions:-
4. Assuming that the Applicant has no other taxable income in India, on the facts and circumstances of the case;
a. Whether the Applicant will be absolved from filing a tax return under the provisions of the Act; and
5. Referring to the description of the services rendered by the Applicant, the Revenue argued that these services equip Perfetti India to manage its services efficiently based on the reports, codes and procedures without further help from the Applicant. It is not required that Perfetti India should know how such reports, codes, procedures are prepared. What is required merely is that the fruits of the services should remain available to the person utilising the services in some concrete shape such as technical knowledge, experience skill etc. Such benefits are available to Perfetti India in the shape of market research reports, accounting policy manuals and procedures etc. Therefore, the services would fall within the purview of FTS as the knowledge the users in India are utilising is the expertise of the applicant in the business. Revenue pleaded that the specified services under the Service Agreement are in the nature of managerial and consultancy services and unlike for technical services, the phrase „make available‟would have no application. The applicant‟s reliance on MFN clause does not support its cause.
Revenue has also taken a plea that the support services under the Service Agreement can be characterised as FTS within the meaning of Article 12.5(a) of the DTAC and fall under Section 9 Explanation 2(vi) of the Act. This is submitted in view of the Trademarks Technology License Agreement which was earlier entered into by Perfetti India with PVM Italy and now with PVM Benulux BV and PVM Holding BV (the applicant) for the reason that under the Agreement with PVM Italy, Perfetti India had undertaken to carry out its business operations on its own accord subject to the quality standard fixed by PVM Italy. However, such quality standards now find place in the support services under the Service Agreement with PVM Benulux BV and PVM Holding BV (the applicant).
In a rejoinder the Applicant submits that the scope of the Service Agreement and Trademark Technology and Know-how License Agreement are totally different and cannot be combined. Trade Mark Technology and Know-how License Agreement is for providing technical know-how to Perfetti India in relation to its manufacturing and sales of brands owned by the licencors and support service agreement is to provide services regarding its business operations to help Perfetti India to improve its profitability and efficiency.
6. For the purpose of Article 12.5 of the DTAC with the Netherlands, “fees for technical services”means payments of any kind to any person in consideration for the rendering of any “technical or consultancy services”if such services:
(a) make available technical knowledge, experience, skill, know-how or processes,
(b) consist of the development and transfer of a technical plan or technical design.
7. It is submitted by the Applicant that no tax is payable under Article 12.5 of the DTAC. The argument of the Applicant is two-fold, namely:
Let us examine the nature of the services being rendered under the Service Agreement. The services under the Services Agreement are in the nature of support services being provided by a holding company to a group entity. They are specific to the confectionery industry and are not general in nature. The focus of the services is to extend the benefit of the global experience of the group companies to Perfetti India.
It was held in Intertek Testing Services,in re (2008) (307 ITR 418), by this Authority that the expression “technical services”cannot be construed in a narrow sense. It has been observed therein that the term “technical”ought not to be confined only to technology relating to engineering, manufacturing or other applied sciences. Professional service imbued with expertise could be regarded as technical service. In G.V.K. Industries (228 ITR 564), it was held that advice given by a financial consultancy firm on the modalities of procuring loans shall be regarded as technical and consultancy service.
We must appreciate the law in the light of the facts before us. Hence, these services giving knowledge and experience of the confectionary industry to Perfetti India are technical in nature. More so, in view of the fact that the Agreement clearly brings out the intention of the parties to assist Perfetti India by applying the experience of its sister concerns and group companies. We cannot agree with the submission that they are not technical in nature. This leaves us to examine whether the services are “made available” by the Applicant.
The services are provided under the heads of Accounting, Budgeting and reporting, Forex management, Global credit facility administration and co-ordination of global funding, Organisation of International Finance managers meetings, Human resource services, support in co-ordination and local strategy, support in financial controlling, corporate secretarial and legal support, environment health and safety and support on risk management. We cannot help but notice the repetitive use of the word “support” above as also in the recitals of th Agreement where it is stated “… recipient is in a continuing need for support services”
Exhibit A to the Agreement delves into the details of the services. The details under each head clearly show that the service is in the nature of assistance to the team of the Perfetti India. Under some heads the Applicant will review the work of Perfetti India and assist in maintaining standards as per group requirements. In some cases, there will be provision of guidelines/manual to Perfetti India. Hence the services are not being carried out independently by the Applicant but are only to enable the Perfetti India to be able to carry out its day-to-day tasks better.
As per the MOU to the India-US DTAC, the term „make available‟ means that the person acquiring the service is enabled to independently apply the technology. In our opinion, the fact that the services are “continuous” does not by itself imply that they do not enable the recipient to independently apply the knowledge/skill that is provided. The word “enable” is used in the sense that the services should be such that they make the recipient able or wiser in the subject matter. This is even more evident from the fact that it is the recipient who applies the knowledge and skill and the provider only supports the recipient with knowledge and skill. The services in this scenario are continuous to ensure that the knowledge provided and applied by the recipient can
be reviewed and continuous experience that is being gained globally can be supplied to the recipient for further enabling it to perform its tasks better.
In Raymond Ltd. (86 ITD 791), relied upon by the Applicant it is stated:
a) Licence to manufacture and sell products
b) Licence to use technological, technical marketing and commercial know-how in the manufacturing, sales, advertisement and promotion of the products
c. Specified services are to be provided on continuous basis
It is pertinent to note that the costing for specified services is based on net sales to third parties.
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 TTLA. There is further provision to use commercial know-how in TTLA which ordinarily should cover accounting, budgeting, forex management, loans etc. The service agreement has not brought out anything specifically which is not covered in the broad parameters of TTLA. In fact scrutiny of service agreement reveals only details of services mentioned in TTLA.
10. The recitals in the Service Agreement recognize “proprietary knowledge and processes” to PVM group. The two Netherland companies belong to PVM group and so are the rights in TTLA belong to them. The right to use these rights have been passed on through the TTLA from the two Netherland companies to the Indian company whereby the two Netherland companies have given right to use copyright of artistic work, trademarks, secret formula or process, information concerning industrial, commercial experience. The payment for such a consideration has itself been considered as royalty under Article 12.4 of the DTAC by the Applicant. In furtherance to the application or enjoyment of the right or information, a support system has been put in place in terms of the Service Agreement which is effective from the same date. The Service Agreement specifically recognizes the existence of proprietary knowledge, processes belonging to PVM group which include the two Netherlands companies. It also recognizes that Specified Services are required to be rendered to use such proprietary knowledge and processes on a continuous basis. The specified services are drawn from the experienced personnel under their employment as well as of the group companies or third parties. All such services are required in connection with the Trademarks, Technology and Know-how License Agreement through which the consideration in the form of royalty is flowing. More the efficiency in application in the manufacturing, quality control, costing, working capital control availability of finance, manpower and HR policies, advertisement of the products, IP protection to the trademark, legal support, developing strategies to enhance sales, etc. larger is the enjoyment of the rights conferred through TTLA. Thus one agreement gives the right to manufacture and the other agreement brings the efficiency in such manufacture. It is not a case where rights are given and the recipient is free to exploit them in the manner one likes. The recipient is bound to apply the specified services to optimize the profits to give maximum royalty amount which is based on the sales turnover. That apart, we also notice that in the Technology and Trademarks License Agreement between the mother company of the PVM group i.e. PVM Italy and Perfetti India, which came into effect from July 2005, PVM Italy was entitled to a royalty of 5% on domestic sales and 8% on export sales in respect of products manufactured and sold by Perfetti India. However, under the present agreement i.e. TTLA, the royalty payable on the products manufactured and sold by Perfetti India has been reduced to 2.5%, 2%, and 1.5% on various products.
11. Under Exhibit A it is stated that „The Agreement covers provision of following services, but is not limited to(emphasis supplied)‟.The scrutiny of the services listed in the Exhibit A relates to accounting and finance, marketing, human resources and legal support. The allocation criteria for the cost of above services are net sales to 3 rd parties as per the audited financial statement (of the recipient). The nature of services is tailor made for Perfetti group companies and also serve the purposes of provider‟s own business. The services relating to accounting policy, procedure manual, loans and bank guarantees, marketing strategies once adopted do not require continuous monitoring in comparison with the process of manufacturing. These services do not require continuous rendition to the recipient. According to us, the reference to continuation of the services which are ‘not limited to such services are the ones which are related to manufacturing of the products to which TTLA pertains. The two agreements-Service Agreement and TTLA- are inextricably attached to each other or atleast complimentary to each other.
Thus, we are of the opinion that services under the Service Agreement when read with TTLA, 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 in paragraph 4 of this Article is received”.
Chairman (adding) AAR/869/2010
I fully agree with the ruling proposed by Member(R).
A Convention is a treaty entered into by two sovereign States relating to rights and duties of subjects or citizens of the respective States in one another‟s possessions (see Ramanatha Aiyar ± Law Lexicon). A treaty is negotiated and entered into at political level and have several considerations as their base (See Azadi Bachao Andolan- 263 ITR 706). A treaty is unique for the two nations that are parties to it. So, how can a treaty with one country, be interpreted in the light of the treaty with another country, subject of a bargain and mutual give and take with reference to the relationship with that particular country? If so, how can a Memorandum of Understanding accompanying a treaty with another country, be used as an aid to interpret the treaty with a different country? I am of the view that the use of the Memorandum of Understanding accompanying or supplementing the India-US Tax Convention cannot be used as an aid to understand the terms of the India-Netherlands treaty. The significance of the fact that such a Memorandum or a similar Memorandum of Understanding does not supplement the convention with Netherlands cannot also be lost sight of. One possible inference is that India did not want the situation arising out of the Memorandum of Understanding accompanying the India-US Double Taxation Avoidance Convention to prevail in the interpretation of its Convention with Netherlands. I am, therefore, not persuaded to accept the argument that the India-Netherlands Convention should be interpreted with the aid of the Memorandum of Understanding accompanying the India-US Convention. Article 12.5 of the Convention between India and Netherlands has to be interpreted on its terms, at best with reference to the protocol that accompanied that Convention.
2. The expression make available only means that the recipent of the service should be in a position to derive an enduring benefit and be in a position to utilise the knowledge or know-how in future on his own“By making available the technical skills or know-how, the recipient of the same will get equipped with that knowledge or expertise and be abe to make use of it n future independent of the service provder.” [See Intertek Testing Services India (P) Ltd.,In re (2008) 307 ITR 418]. So when the expertise in running the industry run by the group is provided to the Indian entity in the group to be applied in running the business, the employees of the Indian entity get equipped to carry on that business model or service model on their own without reference to the service provider, when the service agreement comes to an end. It is not as if for making available, the recipient must also be conveyed specifically the right to continue the practice put into effect and adopted under the service agreement on its expiry.
(P.K. Balasubramanyan) Chairman, AAR (IT)
Que. 1 The payment to be made by Perfetti India for the cost to be allocated by the applicant is taxable under Article 12.5(a) and as also under Article 12.5(b) of the DTAC between India and The Netherlands.
Que.2 As the answer to question No.1 is in affirmative, the payment made by Perfetti India would be chargeable to tax in India.
Que.3 Perfetti India is liable to withhold taxes under section 195 of the Act on the payments to be made towards the costs to be allocated by the applicant.
Que.4 As the applicant is liable to tax in India, it is required to file a tax return under the provisions of the Act and the transfer pricing provisions of section 92 to 92F would be applicable in respect of the payment to be made by Perfetti India.
Accordingly, ruling is given and pronounced on this 9th day of December, 2011.