Withholding tax need not to be deducted on payments made for services like transcription and data processing –AAR

Before the Authority for Advance Rulings (Income-tax)

New Delhi

16^th Day of May, 2011
Present

Mr. Justice P.K.Balasubramanyan (Chairman)
Mr. J. Khosla (Member)
Mr. V.K. Shridhar (Member)

A.A.R. No. 883 of 2010

Name & address of the applicant                R.R. Donnelley India Outsource Private Limited

Commissioner concerned                          Commissioner of Income-tax Chennai

Present for the Applicant                           Mr. R. Vijayaraghawan, Advocate

Mr. Rajan R. Vora, CA

Mr. T.A. Ramabhadran, CA

Mr. Mukesh Kumar M. CA

Present for the Commissioner                   —

RULING

(By Mr. J. Khosla)

The applicant, RR Donnelley India Outsource Private Limited ( for short ^„RRD India^‟) is an Indian company, provides solutions in commercial printing, direct mail, financial printing, product customization, print fulfillment, forms and labels, logistics, call centres, transactional print and mail, print management, online services, digital photography, colour services. It also provides high end support services to the customers identified by its associated enterprises. It further provides data capture and processing services, transcription services, online transaction processing, shared accounting and financial transaction services, health care, insurance, advertising and call center services.

2. The applicant has entered into a data processing services agreement with RR Donnelley Global Document Solutions Group Limited (RRD,UK) effective from 14.11.2006 for efficient discharge of its services to the customers. RRD, UK is a foreign company and is a tax resident of UK. It is engaged in the business of communications management – delivering creative and presentation services, pre-media, print management, transactional print and mail, warehousing, logistics and distribution, and data processing.

2.1 The services to be rendered by RRD, UK is specified in schedule-I to  the agreement with which we will deal in subsequent paragraphs. As perArticle 2.2(a) of the agreement, RRD India shall pay to RRD, UK consideration for such services (collectively, the ^„fees^‟) based on the invoices raised by RRD UK in accordance with article 2.2(e) of the agreement. RRD, UK shall issue a monthly invoice to RRD India, setting forth the fees (itemized by service) and any applicable taxes payable by RRD India for such calendar month. Fees shall be paid in full by RRD India within 90 days following receipt of an invoice from RRD UK.

2.2 In the light of the above facts, the applicant seeks the ruling of this Authority on the following questions:

(1) Given the facts and circumstances of the case, whether the amount received/receivable by RRD UK as per the Data Processing Services Agreement is taxable as ^„fees for technical services^‟ having regard to the provisions of the Income Tax Act, 1961 (^„the Act^‟) and the Double Taxation Avoidance Agreement between India and UK (^„the DTAA^‟)?

(2)  If the answer to Question 1 is negative, given the facts and circumstances of the case, whether the amount received/receivable by RRD UK as per the Data Processing Services Agreement is chargeable to tax in India having regard to the provisions of the Act and the DTAA, given that RRD UK does not have a Permanent Establishment in India?

(3)  If the answer to Question `1 and 2 are negative, i.e. the amount received/receivable by RRD UK is not taxable in India, then, whether the Applicant is required to withhold tax under section 195 of the Act while making remittance to RRD UK?

• To receive hardcopy applications from the client and sort the applications as per client requirements (data-wise or month-wise).
• To review the hardcopy applications for basic completeness of details.
• To return the applications to the client which are badly damaged and that cannot be processed further.
• To securely destroy blank documents.
• To scan the unidentifiable applications. Such scanned files to
  be sent to the client for identification of requisite information.
• To create batch file comprising of 25 applications (other than mentioned above) in each batch (created by application type. To allocate each batch with a batch number.
• To scan each batch of applications using document scanner to produce document images.
• To ensure the clarity of the scanned documents through a quality control check.
• To transmit the scanned documents to RRD India for further processing in India.
• To create batch files of the completion information. The batch file is loaded in a Compact Disc and sent to the client as per client^‟s specifications.

4.1 The learned counsel for the applicant argues that the question is whether the payment given to RRD UK for such services is for technical and managerial service and chargeable to tax in India. According to the learned counsel, the payment given is not for technical services and as such not exigible to tax in India. Further, he has also quoted Article 13 of the Indo-UK agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion. According to him the services rendered by the RRD UK should be made available to the recipient RRD India and then only it can be said to be technical services. We quote below Article 13 of the Indo-UK agreement for better appreciation:

ARTICLE 13 –Royalties and fees for technical services –

1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed :

(a)                   in the case of royalties within paragraph 3(a) of this Articles, and fees for technical services within paragraphs 4(a) and (c) of this Article,

(i)                      during the first five years for which this Convention has effect ;

(aa) 15 per cent of the gross amount of such royalties or fees for technical services when the payer of the royalties or fees for technical services is the Government of the first-mentioned Contracting State or a political sub-division of that State, and

(bb) 20 per cent of the gross amount of such royalties or fees for technical services in all other cases; and

(ii) during subsequent years, 15 per cent of the gross amount of such royalties or fees for technical services; and

(b)         in the case of royalties within paragraph 3(b) of this Article and fees for
technical services defined in paragraph 4(b) of this Article, 10 per cent of the gross amount of such royalties and fees for technical services.

3. For the purposes of this Article, the term royalties means :

(a)               payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematography films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and

(b)               payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic.

4. For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term fees for technical services means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which :

(a)               are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received ; or

(b)               are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received ; or

(c)         make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design.

5. The definitions of fees for technical services in paragraph 4 of this Article shall not include amounts paid :

(a)               for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property, other than property described in paragraph 3(a) of this Article;

(b)               for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships, or aircraft in international traffic;

(c)               for teaching in or by educational institutions ;

(d)               for services for the private use of the individual or individuals making the payment ; or

(e)         to an employee of the person making the payments or to any individual or partnership for professional services as defined in Article 15 (Independent personal services) of this Convention.

6. The provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 (Business profits) or Article 15 (Independent personal services) of this Convention, as the case may be, shall apply.

7. Royalties and fees for technical services shall be deemed to arise in a Contracting State where the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the obligation to make payments was incurred and the payments are borned by that permanent establishment or fixed base then the royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.

8. Where, owing to a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services paid exceeds for whatever reason the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Convention.

9. The provisions of this Article shall not apply if it was the main purposes or one of the main purposes of any person concerned with the creation or assignment of the rights in respect of which the royalties or fees for technical services are paid to take advantage of this Article by means of that creation or assignment.

5. The Revenue in its written submission has admitted that the applicant is an Indian company and it has entered into a Data Processing Services Agreement with RRD UK. According to it, the personnel of the RRD UK visiting India for rendering managerial and technical services periodically and do not stay for more than 30 days and hence no permanent establishment exists. But at the same time draws our attention to Explanation to sub-section 2 of section 9 of the Income-tax Act, 1961 which is inserted with retrospective effect by the Finance Act, 2010:

“Explanation : For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India.”

6. The learned counsel for the applicant cites explanation 2 to clause (vii) of section 9(1) wherein the fee for technical services is defined. 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 dos not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head ^„Salaries^‟. While juxtaposing article 13 of the Indo-UK DTAA, the learned counsel submits that the technical knowledge should be made available. In the instant case technical knowledge is never made available. He cited two cases of this Authority in support of his contention, namely, (i) Invensys Systems Inc. (317 ITR 438) and (ii) Intertek Testing Services India P. Ltd. (2008) 307 ITR 418. The latter case deals with Indo-UK agreement. This Authority had the occasion to examine the phrase ^„make available^‟ in this case. We extract below the relevant portions of this ruling:

“Rendering technical or consultancy service is followed by a relative pronoun “which” and it has the effect of qualifying the services. That means, the technical or consultancy service rendered should be of such a nature that “makes available” to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting the technical knowledge etc. so that the payer of service could derive an enduring benefit and utilize the knowledge or know-how in future on his own without the aid of the service provider. By making available the technical skills or know-how, the recipient of the service will get equipped with that knowledge or expertise and be able to make use of it in future, independent of the service provider. In other words, to fit into terminology “make available”, the technical knowledge, skills, etc. must remain with the person receiving the services even after the particular contract comes to an end.

xx          xx         xx         xx         xx         xx         xx         xx         xx         xx          xx

At this juncture, it is apposite to quote some of the passages in Anapharm Inc. ruling [2008] 305 ITR 394, 405(AAR).

It is, thus fairly clear that mere provision of technical services is not enough to attract article 12(4)(b). It additionally requires that the service provider should also make his technical knowledge, experience, skill, know-how etc., known to the recipient of the service so as to equip him to independently perform the technical function himself in future, without the help of the service provider, in other words, payment of consideration would be regarded as “fee for technical/included services” only if the twin test of rendering services and making technical knowledge available at the same time is satisfied.”

6.1 The ruling of this Authority in Intertek Testing Services (Supra) was followed in M/s Invensys Systems Inc..

Paragraph 4 of article 13 is read as follows:

4. For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term fees for technical services means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which :

(a)                  are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received ; or

(b)                  are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received ; or

(c) make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design.

6.2 The learned counsel for the applicant argues that neither technology is transferred nor any know-how or any skill is provided to the recipient. If technical knowledge or skill is provided along with the services then there is no necessity for continuing with the agreement. Once the knowledge or technical know-how is transferred, the recipient needs no further assistance of the service provider. Since in the instant case the RRD UK continues to render the services to the applicant for a consideration towards the service rendered as per the schedule-I to the agreement rendering of such services continues to be unabated till the parties decide to terminate the agreement as per article 3.1 of the agreement. If there is the transfer of technology, skill and technical know-how there appears to be no necessity to continue with the agreement as the purpose for which the services of RRD UK is sought will be defeated. Therefore, in our view , there is no transfer of technical skill or know-how while rendering the service by RRK UK to RRD India As per article 13 of the Indo-UK agreement, RRD UK is not rendering any managerial or technical services to RRD India and therefore the payment received is not exigible to tax. The apex Court in its judgement in Ishikawajima-Harima Heavy Industries Ltd., Vs DIT (2007) 288 ITR 408  held that the services rendered outside India will not be taxable in India. All these cases support the stand of the applicant.

6.3 Now whether the consideration paid towards managerial and technical or consultancy services attracts the domestic law for imposing tax. The explanation 2 to clause (vii) of section 9(1) of the Act is already mentioned supra. Now, we are to examine the nature of services undertaken by RRD UK. In the instant case pursuant to the agreement, the following services are undertaken:

(i) The RRD UK will receive the hardcopy applications from the client and sort the applications as per client requirements.

(ii) To review the hardcopy applications for basic completeness of details.

(iii)  To return the applications to the client which are badly damaged and that cannot be processed further.

(iv) To securely destroy blank documents.

(v)  To scan the unidentifiable applications. Such scanned files to be sent to the client for identification of requisite information.

(vi) To create batch file comprising of 25 applications in each batch. To allocate each batch with a batch number.

(vii) To scan each batch of applications using document scanner to produce document images.

(viii) To ensure the clarity of the scanned documents through a quality control check.

(ix) To transmit the scanned documents to RRD India for further processing in India.

(x)  To create batch files of the completed information. The batch file is loaded in a Compact Disc and sent to the client as per client^‟s specifications.

6.4 All these services do not speak of rendering any managerial, technical or consultancy services. In the written submission the applicant has said that these are in the nature of routine data entry, application sorting, document handling and data capturing services and do not involve the usage of any sophisticated technology.

We are therefore of the view that under no stretch of imagination it can be said to be technical, managerial or consultancy services and hence the consideration received for such services do not come within the purview of definition given in the Act. So we are of the firm view that the services rendered by the RRD UK are not tantamount to any managerial, technical or consultancy services. Hence the consideration received for such services are not taxable.

7. In the light of our above discussion, we answer the questions formulated by the applicant as follows and rule accordingly: