Brief of the Case
Authority for Advance Rulings held In the case of Cummins Limited, UK that the agreement shows that the CTIL, a company incorporated in India is working with the applicant only to ensure market competitive pricing from the suppliers. The applicant maintains contract supply agreement with suppliers after identifying the products availability, capacity to produce and competitive pricing. The applicant is not imparting its technical knowledge and expertise to the Indian company based on which the Indian company will acquire such skills and will be able to make use of it in future. Therefore, the ’make available’ clause under India-UK Treaty is not satisfied. Further, nature of services related to identification of products and competitive pricing cannot qualify as royalties under the provisions of Article 13 under India-UK Tax Treaty because it is not related with the use of, or the right to use any copyright, patent, trademark, design or modal, plan, secret formula or process etc.
Facts of the Case
The applicant, Cummins Limited is a company incorporated in the UK. Cummins Technologies India Limited (CTIL) is a company incorporated in India. CTIL is engaged in the business of manufacture and sale of turbochargers. CTIL purchases turbocharger components directly from third party in UK and US and in relation to such purchases, Cummins Limited provides supply management services vide Material Suppliers Management Service Agreement dated 7th December, 2010. The agreement is effective from 1st July, 2010. As per the agreement CTIL pays supply management service fees calculated at 5% of the base prices from the suppliers.
The applicant requested for ruling on the followings issue – whether such management service fees is in the nature of “Fees for Technical Services” or “royalties” within the meaning of the term in Article 13 of the India-UK DTAA, the applicant has no PE in India, whether such amount received will be taxable in India, whether transfer pricing provisions will be applicable for such transaction and whether any TDS liability u/s 195 exists for such transaction.
Submission of Applicant
According to the applicant the services rendered by them are purely managerial in nature and even if the same are held to be technical in nature, they do not ‘make available’ any skill, technical know-how, knowledge or design and hence cannot be construed as taxable services under the India-UK Treaty. The applicant has relied on the MOU to the India-US Treaty to interpret the concept of ‘make available’ in respect of FTS and has stated that various judicial precedents have upheld the reliance on MOU to the India-US Treaty for this purpose:- Raymond Ltd (86 ITD 791), Intertek Testing Services India (P) Ltd (307 ITR 418) , De Beers India Minerals Private Ltd (346 ITR 467) , CESC Ltd (80 TTJ 806) , Invensys Systems Inc (317 ITR 438) and Measurement Technologies Limited (AAR No.966 of 2010).
In its rejoinder the applicant has reiterated that the services rendered do not make available any technical knowledge to CTIL since upon termination of the agreement CTIL would not be able to make use of the specialized knowledge of the applicant by itself. As regards department‘s reliance on Perfetti ruling, the applicant has mentioned that in this case a writ petition challenging the ruling of this authority was filed before Hon’ble Delhi High Court which remanded the matter back to this authority for fresh consideration. As regards the ruling in the case of Steria Limited it has been stated that in this case the authority was faced with a different question in deciding whether a mere restrictive definition of the FTS clause entered into with another country could be imported into the India-France Treaty by virtue of the most favoured nations clause which was present in the said tax treaty.
Submission of Department
The Revenue has objected to the reliance by the applicant on MOU to the India-US Treaty saying that MOU is intended to give guidance to the tax payers and tax authorities in interpretation and is not applicable in the case of the applicant where India-UK Treaty applies. The Revenue has relied on the ruling of the AAR in the case of Perfetti Van Melle Holding BV and Steria India Limited 45 Taxman.com 281.
As regards the nature of services the Revenue has mentioned that turbocharger is a technical industrial product and for rendering supply management services for purchase of components of turbocharger the applicant has to use its technical knowledge and expertise. According to the Revenue the applicant is imparting its technical knowledge and experience to CTIL. In this respect the Revenue has relied on the ruling given by this authority in the case of Shell India Markets Private Limited (2012) 18 Taxman.com 46.
The Revenue has also contended that the Applicant has entered into contract with the Indian Company with an intention to take benefits of the India-UK Tax Treaty. The Revenue has mentioned that as per the explanation 2 to sec.9(1)(vii) of the I.T. Act, the FTS means any consideration (including lump sum consideration) for rendering managerial, technical or consultancy services. The phrase “Managerial Services” is not expressly included in the DTAAs with the Canada, Portugal, UK & USA only. Similarly, the concept of “make available” has been included in DTAA with country like Australia, Canada, Cyprus, Malta, Netherlands, Singapore, UK & US. According to the Revenue these provisions shows that the applicant has with an intention to take benefits of provisions of DTAA between India and UK entered into a contract with Indian Company with an intention to avoid tax. The Revenue contends that the provision of limitations of benefits as per Article 28C of the protocol in respect of DTAA with UK is squarely applicable in the applicant’s case.
Held by AAR’s
The objection of the Revenue that the agreement entered into by the applicant with CTIL is a scheme for tax avoidance is without any merits. To say that the applicant has entered into contract with Indian company with the main purpose to take advantage of India-UK Treaty is factually incorrect. The facts as stated by the applicant in the application show that the applicant maintains Global Cummins contract supply agreement with suppliers and is responsible for finalization of supplier prices to Cummins Turbo Technologies worldwide, including CTIL , from UK and US suppliers. There is no mandate for CTIL to source the components from the approved suppliers only and if CTIL finds a better pricing from an alternate supplier, it shall be free to source the component from them. It is incorrect to say that such arrangement has been done with the main purpose to avoid tax. Therefore, the objection of the Revenue on this count fails.
As regards taxability of the Supply Management Services fees as FTS, it is important to see whether the services provided under the agreement would lead to imparting of any technical knowledge and expertise to the Indian company, i.e., whether the applicant is making available any technical knowledge, experience, skill know-how or processes to the Indian company. The agreement shows that the CTIL is working with the applicant only to ensure market competitive pricing from the suppliers. The applicant maintains contract supply agreement with suppliers after identifying the products availability, capacity to produce and competitive pricing. The applicant is not imparting its technical knowledge and expertise to the Indian company based on which the Indian company will acquire such skills and will be able to make use of it in future. Therefore, the ’make available’ clause under India-UK Treaty is not satisfied.
We had also recently analyzed the concept of ‘make available’ in the case of Measurement Technologies Ltd. and concluded that the services in the nature of procurement services can never be classified as technical or consulting in nature and surely are not making available any technical knowledge, experience, know-how etc. The facts of this case are also similar and there is no reason to take a different view. It is also relevant to point out that the services rendered in this case are managerial in nature and managerial services was taken out from the ambit of FTS from India-UK Treaty w.e.f. 11th February 1994 and a clause relating to ‘make available’ was inserted. This clearly shows that the intention was to introduce such clause and exclude managerial services. The reliance of the Revenue on the rulings in the case of Perfetti and Steria would not help because in the case of Perfetti the ruling has been set aside and in the case of Steria the facts were different.
As regards services being royalty and covered under Article 13(3), it must be said that the nature of services related to identification of products and competitive pricing cannot qualify as royalties under the provisions of Article 13 under India-UK Tax Treaty because it is not related with the use of, or the right to use any copyright, patent, trademark, design or modal, plan, secret formula or process etc.
Accordingly, the Supply Management Services fees received by the applicant are not in the nature of FTS or royalties under the India-UK Tax Treaty. Also applicant has no PE; the fees received are not taxable in India. CTIL is not required to withhold tax u/s 195.