Case Law Details
Brief of the Case
Authority for Advance Rulings held In the case of Measurement Technology Limited, UK that the services under agreement No.1 relate to review by Group operation Director and general guidance given by him on financial, operational, human resource, setting up targets and performance appraisal related matters. He is providing these services from the UK mainly, his visits during a year are generally for short duration having aggregate number of days of visit in a year never exceeding 30 days. The applicant has provided sample e-mails sent by him to MTL India which show that his services generally related to human resource matters, cost control, fund management, quality and design reviews etc. These are routine managerial activities and cannot be classified as technical or consultancy services. Moreover, by providing such services he is not making available any technical knowledge of enduring benefit in nature which would enable employees of MTL India to apply them on their own in future. Further, the services under agreement No.2, the procurement team travels to different countries to visit suppliers and distributors to determine the best price that would be available to entire MTL Group including MTL India. These types of services can never be classified as technical or consultancy in nature and surely are not making available any technical knowledge, experience, know-how etc.
Facts of the Case
The applicant is a company incorporated in UK and engaged in the development and supply of intrinsic safety explosion protection devices, field bus and Industrial networks, lightning and surge protection and gas analysis equipment. It is a wholly owned subsidiary of MTL Instruments Group Ltd., UK.
MTL Instruments Private Limited (MTL India) is an Indian company, incorporated under the Companies Act, 1956. It is also a subsidiary of MTL Instruments Group Ltd., UK and is engaged in the business of manufacturing industrial control equipment’s used for process control in hazardous environments. The applicant entered into two service agreements with MTL India for providing certain services. The applicant has sought ruling on the following questions arising in respect of these two service agreements: – Whether amount received by the applicant for services rendered as per agreements is chargeable to tax in India as per India – UK DTAA.
The agreement no.1 between the applicant and MTL India is MTL instruments Intra Group agreement for products and services according to which the nature of services provided by the applicant is to make strategy and direction of business development of MTL India, management of personnel and other related services. The above mentioned services are provided through one of the employees of the applicant based in UK and designated as Group Operations Director (GD).The agreement no. 2 is called Intercompany Services Agreement (Procurement Services) for providing procurement services with a view to reduce cost and to avoid duplication of procurement efforts within MTL Group.
Submission of Applicant
The stand of the applicant in respect of agreement No.1 is that the compensation received for providing “Management Services” is not in the nature of Fees for Technical Services (FTS) under Article 13 of India-UK Tax Treaty. The applicant has argued that as per Article 13 of the Treaty FTS does not include ‘Managerial Services’ and for technical or consultancy service to fall under the definition of FTS, it must meet the condition of ‘make available’ technical knowledge, experience, skill, know-how and processes etc. It has been further pointed out that the India-UK Tax Treaty was amended w.e.f. 11.02.1994 and in the Pre-amendment India- UK Tax Treaty ‘Managerial Services’ was specifically covered within definition of FTS but, however, under the Post amendment Treaty ‘Managerial Services’ are not included with the definition of FTS.
It has been further stated that after the amendment even if the services rendered are of the nature of technical or consultancy but do not meet the criteria of ‘make available’, the same cannot be treated as FTS. As regards ‘Managerial Services it has been stated that the concept of services PE has been introduced in the post amendment Treaty and the ‘Managerial Services’ will now be taxable provided the same are physically rendered in India for more than 90 days in case the service recipient is unrelated and more than 30 days in case the service recipient is a related concern.
The applicant has relied upon the rulings of this Authority in the case of Intertek Testing Services India Pvt Ltd (307 ITR 418) and Invensys Systems Inc., In re [2009]183 Taxman81. The applicant has admitted that the services provided by the GD are in the nature of ‘Managerial Services’ but do not meet the criteria to ‘make available’ and, therefore, such services was not chargeable to tax as FTS. The applicant has further emphasized that to qualify as ‘make available’ the services should be aimed at and result in transmitting the technical knowledge etc so that the payer of services could derive enduring benefit and utilize the knowledge and know-how in future of its own without the aid of service provider. As this is not the case here, the applicant has stated that services would not qualify as FTS. The applicant has relied upon the judgement of Hon’ble Karnataka High Court in the case CIT vs De Beers India Mineral (Private) Limited [2012] 346 ITR 467.
In respect of agreement No. 2 also the applicant is of the view that procurement services do not meet the criteria of ‘making available’ and are not taxable as FTS. The procurement team in the UK, as part of procurement services, looks into the global sourcing requirements of all the raw materials within MTL India. It identifies the best material for MTL India at the best available prices. Such services do not provide any enduring benefit to MTL India or ‘make available’ any technical knowledge, experience, skills, know-how and processes etc.
As regards PE, the applicant has mentioned that it does not have any fixed place of business in India. As per Article 5(2)(k) of the India- UK Tax Treaty a services PE of a non-resident is constituted where managerial or other services not covered under Article 13 (Royalty and FTS) are furnished in India through its employees for aggregate period of 30 days in the case of associated enterprises within any 12 month period. The applicant has confirmed that the visit of GD for each of these management and procurement services separately has been for periods less than 30 days in a year.
As regards royalty, the applicant has mentioned that the services provided under two agreements mentioned above are routine in nature and do not lead to creation of an intellectual property and, therefore, does not fall within the purview of information concerning industrial, commercial or scientific experience in order to qualify as ‘royalty’ as per the provision of Article 13 of India-UK Tax Treaty.
Submission of Department
The Revenue has argued that the services provided are in the nature of assistance to MTL India and managerial services provided to manage day to day general and administrative functions. According to the Revenue the applicant is providing management consultancy through the analysis of existing organizational problems and development of plans for improvement. As the applicant is providing knowledge and experience of global standardization to MTL India, Revenue is of the view that such professional services imbued with expertise would be regarded as technical service. Revenue has relied on the ruling given in Intertek Testing Services, in Re (2008) (307 ITR 418) where it was held that the term ‘technical’ ought not to be confined only to technology relating to engineering, manufacturing or other applied sciences.
Revenue has further relied upon GVK Industries (228 ITR 564) wherein it was held that the advice given by financial consultancy firm on the modalities of procuring loans shall be regarded as technical and consulting services. As regards applicability of ‘make available’ clause, the Revenue has stated that the applicant renders the consultancy services by analyzing the project and submitting a detailed report thereon which contain technical details and plans which are made available to MTL India.
As regards PE, the Revenue has offered no comments saying that it is a question of facts and such facts can be ascertained only during the course of assessment proceedings.
The Revenue has also mentioned that the strategy developed by the applicant and implemented by MTL India also partakes the character of royalties under Article 12(3)(a) being payment for the use of plan, or for information concerning industrial, commercial or scientific experience. According to the Revenue the information provided by the applicant (like accounting policies, HRD policies, market researches, bank information etc) is its proprietary information which the applicant would not share with any other person or is available in public realms.
Held by AAR’s
The AAR held that Under Article 13(4) of the Treaty dated 11th November, 1981 the FTS meant payments of any kind to any person, other than payments to an employee of the person making the payments and to any individual for independent personnel services mentioned in Article 15 (Independent Personnel Services), in consideration for services of a managerial, technical or consultancy in nature, including the provision of services of technical or other personnel. The Treaty was amended w.e.f. 11th February, 1994 and ‘managerial services’ was taken out from the ambit of FTS and a clause relating to ‘make available’ was inserted saying that in order to qualify as FTS such 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. Therefore after the amendment effective from 11 February, 1994 managerial services are not covered in the definition of FTS and even the technical or consultancy services, if they do not meet the criteria of ‘make available’, cannot be treated as FTS.
The services under agreement No.1 relate to review by GD and general guidance given by him on financial, operational, human resource, setting up targets and performance appraisal related matters. GD is providing these services from the UK mainly, his visits during a year are generally for short duration having aggregate number of days of visit in a year never exceeding 30 days. The applicant has provided sample e-mails sent by GD to MTL India which show that his services generally related to human resource matters, cost control, fund management, quality and design reviews etc. These are routine managerial activities and cannot be classified as technical or consultancy services. This authority had ruled in the case of Invensys Systems [2009]183 Taxman 81 that even though some of the services may have the trappings of technical or consultancy service, looking at the nature and the predominant nature of the services, they primarily fall under the category of managerial services. Similar is the case in respect of services provided by GD. Moreover, by providing such services he is not making available any technical knowledge of enduring benefit in nature which would enable employees of MTL India to apply them on their own in future.
The services under agreement No.2, the procurement team travels to different countries to visit suppliers and distributors to determine the best price that would be available to entire MTL Group including MTL India. These types of services can never be classified as technical or consultancy in nature and surely are not making available any technical knowledge, experience, know-how etc.
As regards PE the Revenue has not offered any comments in the absence of facts but the applicant has stated that GD has never visited India for more than 30 days in a year and, therefore, his visit would not constitute a ‘service PE’. As regards visits by other employees, the applicant has also agreed that the Income-tax Department may ascertain the facts in the course of assessment proceedings and determine the applicability of Article 5(3)(k) of the India-UK Tax Treaty.
The Revenue has given an alternative argument that services provided may be covered under ‘Royalties’ because various services provided by the applicant are of commercial experience which involved confidential information or experience from commerce, business, science or industry. This is a very far-fetched argument because services provided under both agreements are general and routine in nature and do not create any intellectual property. It cannot even be imagined that rendering of such services would qualify as ‘Royalties’ as per the provisions of Article 13 of the India-UK Treaty.
Accordingly, we held that amount received by the applicant for services rendered as per agreement No.1 & 2 is not chargeable to tax in India as per the provisions of the India-UK Tax Treaty.
