The applicant is a US-based manufacturer engaged in manufacturing of engineering goods and is also an R&D-based service provider. It entered a cost al ocation agreement with its India-based group company. The applicant raises invoices on the Indian group company for services rendered based on the formula given in the agreement. The question before the Authority for Advance Ruling was: “Whether payments made for availing services listed out in the agreement are taxable in India and if taxable whether it is liable to TDS under Section 195 of the Act?”
The applicant contended that most of the services listed out in the agreement are outside the ambit of technical services as defined under Article 12 of the DTAA. However, the services can at best be clubbed as managerial services and based on recent rulings it is a well-settled law that the managerial services cannot be taxed as included services. The applicant further argued that since all services have been provided from outside India, the payment made cannot be taxed either under Section 9(1) or Section 5. The applicant further stated that even if some of the services listed in the agreement are brought within the ambit of technical or consultancy services, what further takes it outside the ambit of taxation in India is the Clause (b) of Article 12.4 of the DTAA, which uses the expression”make available”, which means enabling the recipient of the service to apply the technical know-how on its own. The Applicant also contended that even if it is held as stewardship/shareholder activity the amount received cannot be taxed as there is no PE in India.
The AAR dismissed its own observations in case of Intertek Testing Services (307 ITR 418), wherein it had given a wider meaning to the term “technical services”. It also cited the decision of the Delhi High Court in the case of JK (Bombay) Ltd. (118 ITR 312), which had interpreted the term narrowly. Based on the above rulings even though the definition of managerial and technical services is given a wider interpretation, it held that the impugned services are not in nature of ”make available” as these are not imparting the technical knowledge, experience or skills possessed by the provider of service to the recipient. Also based on the ratio of Ishikawajima Harima Heavy Industries, no income can be taxed in India if the services are rendered from abroad.
The AAR went further to rule that even if certain activities undertaken by the applicant are not really services but are more in the nature of stewardship/shareholder activities, for that reason, the amounts received from the Indian group company cannot be taxed in India in the absence of a PE. The AAR also held that since the applicant is not liable to be taxed in India as per the provisions of DTAA – Article 7.1 and Article 12.4, the India-based group company is not obliged to withhold tax at source under Section 195 of the Act.