Shell India Markets Private Limited Vs Union of India (Bombay High Court)
Bombay High Court held that payments made to non-resident for availing General Business Support Service under Cost Contribution Arrangement is not in the nature of fees for ‘technical services’ and accordingly tax is not deductible on the same.
Facts- This Petition visits the question pertaining to determination of tax liability of the payments made by Petitioner to its non resident group company, Shell International Petroleum Company Limited (SIPCL) for availing General Business Support Services (BSS) under a Cost Contribution Arrangement (CCA) between Petitioner and SIPCL.
On an application made by Petitioner seeking such determination, the Authority for Advance Rulings (Income Tax), New Delhi (AAR), by its Order dated 17th January 2012 held that payments made by Petitioner to SIPCL towards BSS under the CCA constitutes income in the hands of SIPCL being in the nature of fees for technical services within the meaning of Article 4 (c) of the Double Tax Avoidance Agreement (DTAA) between India and UK and is chargeable to tax in India. Consequently, AAR held that Petitioner is under obligation to withhold tax under section 195 of the Income Tax Act, 1961.
Conclusion- Even if it is fees for technical or consultancy services, it can be only where fees are paid in consideration for making available technical knowledge, experience etc. Thus the view of the AAR that SIPCL works closely and advises the employees of Petitioner and hence makes available the services is not This view in fact suffers from fallacy since the agreement continues to operate till date. If the view of AAR is to be held as correct then the contract must stand concluded as once the services and the know how, skill etc is transferred to Petitioner, the need of continuing to render said services must end. This is factually not so as the CCA is in effect till date.
Held that the AAR has interpreted the requirements to be satisfied for ‘make available’ based on its own general notion of the said term without appreciating the applicable law on the subject and also reached an erroneous conclusion that the services availed are technical services.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. This Petition visits the question pertaining to determination of tax liability of the payments made by Petitioner to its non resident group company, Shell International Petroleum Company Limited (“SIPCL”) for availing General Business Support Services (“BSS”) under a Cost Contribution Arrangement (“CCA”) between Petitioner and SIPCL.
2. On an application made by Petitioner seeking such determination, the Authority for Advance Rulings (Income Tax), New Delhi (“AAR”), by its Order dated 17th January 2012 held that payments made by Petitioner to SIPCL towards BSS under the CCA constitutes income in the hands of SIPCL being in the nature of fees for technical services within the meaning of Article 4 (c) of the Double Tax Avoidance Agreement (“DTAA”) between India and UK and is chargeable to tax in India. Consequently, AAR held that Petitioner is under obligation to withhold tax under section 195 of the Income Tax Act, 1961 (“the Act”).
3. Aggrieved by this Order, Petitioner, by way of the present petition, challenges the validity and legality of the said Order passed by the AAR.
4. Petitioner is a company registered in India under the Companies Act, 1956 and engaged, inter alia, in the business of operating chain of retail fuel stations in India. Respondent No.1 is the Union of India, Respondent 2 is the AAR and the other Respondents are the various officials concerned of the Income Tax department.
5. By way of a CCA dated 1st April 2009 executed between Petitioner and SIPCL, Petitioner avails of BSS provided by SIPCL to all operating companies in its group across the The arrangement is that SIPCL manages for consideration its group entities, either directly or through own employees or through its third party affiliates/vendors. The costs incurred are then allocated to Shell entities including SIPCL on a cost to cost basis.
6. It is the case of Petitioner that services availed by it are managerial services only and specifically exclude technical Petitioner makes payment for the availed services on the basis of share determined using cost allocation keys specified in the CCA. With a view to attain clarity in respect of its obligation to deduct tax at source, in case the payments made by it to SIPCL represents income taxable in India, Petitioner made an application under Section 245R of the Income Tax Act, 1961 (“the Act”) to the AAR raising various related questions. The questions were:
“i. Whether the payments made by the Applicant to Shell International Petroleum Company Limited (“SIPCL”) for availing General Business Support Services (“General BSS”) under the terms of the Cost Contribution Agreement (“CCA”), would constitute “income” in the hands of SIPCL within the meaning of the term in Section 2(24) of the Act?
ii. If the answer to Question 1 is in the affirmative, whether ther payments made by the Applicant to SIPCL for availing General BSS under the terms of the CCA would be in the nature of Fees for Technical Services (“FTS”) within the meaning of the term in Article 13 of ‘Convention between the Government of the Republic of India and the Government of the Republic of India and the Government of United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains’ (“the India-UK Tax Treaty”)?
iii. Whether the payments made by the Applicant to SIPCL for availing General BSS under the terms of the CCA would be in the nature of “royalty” within the meaning of the term in Explanation 2 to clause (vi) of Section 9(1) of the Act?
iv. Whether the payments made by the Applicant to SIPCL for availing General BSS under the terms of the CCA would be in the nature of “royalty” within the meaning of the terms in Article 13 of the India-UK Tax Treaty?
v. Based on the answers to Questions (1) to (4) above, and in view of the facts as stated in Attachment III, and also in light of the declaration provided by SIPCL that it does not have a permanent establishment in India in terms of Article 5 of the India-UK Tax Treaty, whether the payments received by SIPCL would be chargeable to tax in India? If the answer is in the affirmative, would the payments made by the Applicant to SIPCL suffer withholding tax under section 195 of the Act and at what rate?”
7. Although none representing the Revenue Department appeared before the AAR, a notice dated 2nd December 2009 was received by Petitioner from the Assistant Director of Income Tax, (International Taxation)-2(1) Mumbai seeking certain clarification including details of the nature of services availed by Petitioner provided the required details vide its reply dated 23rd December 2009. Further details were sought by another notice dated 21st January 2010 issued by the Deputy Director of Income Tax, (International Taxation)-2(1), Mumbai. Petitioner provided additional details as well by letter dated 27th January 2010, which included following information:
i. Details regarding nature of services covered by CCA.
ii. The costs of certain services availed by SIPLC from its third party vendors in relation to corporate activities/costs were not directly attributable to Petitioner.
iii. Petitioner had not deducted tax at source since SIPCL has not made available any technical services to petitioner.
iv. Petitioner had not availed any BSS from SIPCL prior to 1st April 2008 and hence no amount was payable prior to that date.
v. Documents including audited financial statements of Petitioner from FYs 2005-06 to 2008-09, copy of Form 3CEB for financial year 2006-07 , were provided. Petitioner also filed additional submissions before the AAR which were not rebutted by the Department.
8. AAR, by the impugned order dated 17th January 2012 held as under:
“ We therefore rule on Que. No.(i) & (ii) that the payment made by the applicant to SIPCL for availing the General BSS under the CCA would constitute income in the hands of SIPCL and is in the nature of fees for technical services within the meaning of Article 13.4 (c) of the DTAC between India and UK; and not in the nature of royalty within the meaning of the term in Explanation 2 to Clause (vi) of Section 9(1) of the Act and under Article 13 of DTAC, while we rule on Que. No. (iii) & (iv). Based on answer to Que. No. (i) & (ii) that the payment received by SIPCL is chargeable to tax in India and the declaration provided by SIPCL that it does not have a Permanent Establishment (PE) in India in terms of Article 5 of DTAC, we rule that the applicant is under obligation to withhold tax under section 195 of the Act. ”
9. Petitioner assailed this order in the Supreme Court of India by filing a Special leave Petition No. 31543/2012. The Supreme Court after observing that the AAR being a quasi judicial authority at par as a ‘tribunal’, a challenge to its order is assailable not only in the Supreme Court but also in the High Court, permitted Petitioner to withdraw the SLP with liberty to move the High Court invoking its writ jurisdiction of Article 226 of the Constitution of Petitioner is thus before us seeking relief as prayed.
10. By an order dated 30th June 2014, Rule was issued and the petition was admitted.
11. Submissions of Mistry are as follows:
i. AAR has erred in concluding that transactions contemplated under the CCA involve rendering technical and consultancy services and thus fall within the scope and ambit of Article 13 of the India-UK DTAA. The AAR has failed to appreciate that the CCA is only an approach adopted by the group entities as part of their group business strategy at standardizing and carrying out global quality business in a cost effective manner.
ii. Services availed by Petitioner are neither intended nor result in placing Petitioner in a position where it could independently carry on services without SIPCL.
iii. Services that make available technical knowledge, skill, know how , are distinct from services shared under the CCA which may involve technology/industry expertise but neither can be construed as technical services nor satisfy the requirement of making available technical knowledge as commonly understood.
iv. The CCA represents sharing of cost amongst the cost sharers pursuant to which Petitioner becomes co-owner of any expertise arising out of the arrangement.
v. The AAR has totally disregarded the authentic technical commentary-protocol in India-USA DTAA which is similarly worded and involves determination of similar technical aspects relating to the ‘make available’ condition.
vi. The AAR has interpreted the requirements to be satisfied for ‘make available’ requirement based on its own general notion of the said term and thereby reached an erroneous conclusion that the services availed are technical services. Thus the impugned order is inconsistent, arbitrary, and unlawful which deserves to be set aside.
vii. The AAR has failed to appreciate that the services under the CCA do not necessarily make available technical knowledge, skill, experience etc merely because the service is technical and involves industry expertise.
viii. AAR further erred in ignoring its own observation that provision of services did not involve element of profit and therefore, in holding that the payments received by SIPCL would be in the nature of income chargeable to tax in India in the hands of SIPCL.
ix. What will be covered in Article 13 is only fees for technical services arising in a contracting state in India and paid to a resident of the other contracting state. Such fees may be taxed in the other contracting state, e., UK. However, fees for technical services may also be taxed in India according to the law of India but if the beneficial owner of the fees for technical services is a resident of UK the tax so charged shall not exceed the rate prescribed in clause 2.
x. Under paragraph 4 of Article 13 for the purposes of para 2, fees for technical services means payments of any kind to any person in consideration for the rendering of any technical or consultancy services which (under sub-clause (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.
Therefore, it only covers fees for any technical or consultancy services which make available technical knowledge etc. Even if it is fees for consultancy services, it can be only where technical knowledge, experience is made available. If either of these ingredients are missing, it cannot come under Article 13(4).
12. Mistry stated that since passing of the impugned order, Petitioner is deducting tax at source in respect of SIPCL. However, he urges the court to allow the Petition as that was/is done only by way of abundant caution.
Mr. Mistry relied on the following decisions of various High Courts to buttress his arguments relating to the interpretation of the term ‘technical’ and ‘consultancy’ services as well as the meaning of the term ‘make available’ as they appear in the DTAA.
a. Commissioner of Income Tax, Central Circle v. De Beers India Minerals (P) Ltd 1
b. Director of Income Tax Guy Carpenter & Co. Ltd2
c. US Technology Resources (P) v. Commissioner of Income Tax Thiruvanthapuram3
d. Commissioner of Income Tax (International Taxation and Transfer Pricing Timken Company.4
e. Commissioner of Income Tax (International Taxation)-1 Delhi M/s Bio-rad Laboratories (Singapore) Pte. Ltd.5
f. Director of Income Tax (IT)-1 A.P. Moller Maersk-AS 6
g Director of Income Tax, (IT)-1 v. WNS Global Services (UK) Ltd7
13. Suresh Kumar submitted as follows:
(I) The AAR has dealt with in detail the submissions of Petitioner regarding the definition of the term ‘Fees for Technical Services’ and has rightly concluded that the transactions contemplated under CCA involve rendering services of technical nature which fall within the scope of Article 13 of the India-UK DTAA.
(II) Petitioner is able to use the know-how/intellectual property generated from the General BSS independent of the service provider and hence, the services have been ‘made available’ to Petitioner.
(III) The CCA does not contain any exhaustive description of services covered under the General BSS to be availed by Petitioner and the Appendix 2 of CCA only gives broad headings not specifying any information regarding the type of service being provided to Petitioner. In the absence of this information, AAR has rightly inferred the nature of services to be ‘consultancy services’/ ‘technical services’.
(IV) Petitioner cannot rely on the Protocol annexed to the India-USA DTAA specifying the meaning of the phrases/words ‘make available’ because the contents of a DTAA with one country cannot be imported in the DTAA of another country unless the DTAA itself is modified or amended to that extent. Since the India-UK DTAA is not amended to include any content or explanation regarding interpretation of the words ‘make available’ to read in consonance with the India-USA DTAA, the same has to be read independently and a parallel cannot be drawn in that regard.
(V) The AAR has correctly interpreted the phrase ‘make available’ as the ownership of Petitioner to the expertise shared by SPCIL arises from sharing of costs and Petitioner owns the results of the expertise only when such expertise is transferred to Thus, the view of the AAR that General BSS is made available to Petitioner is correct.
(VI) The AAR has taken a view in respect of the interpretation of the words and phrases of the DTAA and since there is no perversity in the said view, this Court may not substitute that view with its own view under its Article 226 writ jurisdiction.
(VII) It is true that the AAR has not dealt with the aspect as to whether the transaction falls within the scope and ambit of Article 7 of the DTAA and the question pertaining to ‘permanent establishment’ of SIPCL remains In this context, the proceedings be remanded to the AAR to give a ruling on this aspect also. In the event the Court opines in favour of Petitioner and holds the services not to be ‘technical/consultation’, the Department may be permitted to take necessary steps against Petitioner as permitted in law and the time spent during the pendency of this Petition be excluded for the purpose of limitation.
ANALYSIS AND FINDINGS:
14. By the impugned order, the AAR has determined that the payment made by Petitioner to SIPCL for availing the General BSS under the CCA is in the nature of fees for ‘technical services’ within the meaning of Article 4(c) of the DTAA and hence, constitutes income in the hands of SIPCL. It has thus ruled that Petitioner is under obligation to deduct tax at source under Section 195 of the Act. The AAR has not gone into but prima facie has accepted the declaration provided by SIPCL that it does not have permanent establishment in India and in any case that was not the issue before AAR. There is no discussion or finding pertaining to the status of SIPCL as having permanent establishment in India in terms of Article 5 of the DTAA. Hence, determination by the AAR on this issue remains inconclusive.
15. Be that as it may, the crux of the matter lies in ascertaining whether the finding of the AAR that services availed by Petitioner from SIPCL or payments made by Petitioner to SIPCL are of/for ‘technical/’consultation’ services and secondly, whether such services are ‘made available’ to Article 13 of DTAA reads as under:
“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 Article, and fees for technical services within paragraph (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 subdivision 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 cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, 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 to any person in consideration for the rendering of any technical or consultancy services (including the provisions of services of 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.”
16. From the bare words of the Article, it is clear that income of SIPCL will be chargeable to tax in India only if the payment by Petitioner is towards fees for ‘technical services’. Under Article 13(4), the term ‘fees for technical services’ means payments of any kind in consideration for the rendering of any technical or consultancy services. Sub-para (c) to Article 13(4) further restricts the meaning of the term to only that which makes available technical knowledge, experience, skill, know-how or processes, or consists of the development or transfer of a technical plan or technical design.
17. The principle of noscitur a sociis mandates that the meaning of a word is to be judged by the company of other words which it The word ‘consultancy’ services follows ‘technical’ which is further followed by the phrase “which make available technical knowledge, experience, skill, know-how or processes, or consist of development and transfer of a technical plan or technical design.” A clear reading indicates that even if consultancy services is ‘stand alone’, the bunch of words indicate that the said ‘consultancy’ necessarily relates to consultancy which makes available technical or any other knowledge, experience, skill, know-how or processes and does not relate to consultancy on managerial issues.
18. The Appendix 2 of CCA contains the General BSS. The list of services availed are as follows:
EXAMPLES OF GENERAL BUSINESS SUPPORT SERVICES:
