Case Law Details
Court : Authority for Advanced Ruling (AAR)
Citation : Bharti AXA General Insurance Corporation Ltd. (2010-TII-30-ARA-INTL) (AAR)
Brief : Authority for Advanced Ruling (AAR) held that payment for procurement of support services vis-a-vis business, marketing, information technology and strategy from foreign affiliate company are not Fees for Technical Services (FTS) and royalty within the meaning of Article 12 of the India-Singapore tax treaty (tax treaty).
Further, in the absence of Permanent Establishment of the foreign affiliate in India, the payment received by it cannot be taxed as business profits. Consequently, the applicant is not required to withhold tax under Section 195 of the Income-tax Act, 1961 (the Act) on such payment.
Facts of the case
• The applicant, a company incorporated in India, is engaged in the business of general insurance. The applicant entered into a Service Agreement with AXA Asia Regional Centre Pvt. Ltd. (AXA ARC) for receiving assistance such as business support, marketing, information technology support services and strategy support etc.
• For rendering the above services, AXA ARC charges a fee based on actual cost incurred plus a mark up of five percent.
• The applicant stated that the above services are merely advisory in nature and are procured with the intention of carrying on business in line with the best practices followed by other AXA group entities globally.
• The applicant contended that for providing the above services no employee of AXA ARC will physically visit India. Further, AXA ARC has no business establishment in India.
Issues before the AAR
• Whether the payments made by the applicant to AXA ARC for various services under the Service Agreement are in the nature of FTS or royalty within the meaning of Article 12 of the tax treaty?
• Based on the answer to the above question, would the receipt by AXA ARC from the applicant suffer withholding tax under section 195 of the Act?
AAR Ruling
On payment for services as FTS
• The AAR held that only the services which make available technical knowledge, know-how, etc, which facilitates the person acquiring the services to apply the technology, can be considered as FTS within the meaning of Article 12 of the tax treaty.
• In the present case the applicant, receiving the following services, is unable to apply either the technology, knowledge, skills etc. possessed by AXA ARC or technical plan developed by AXA ARC:
-Suggestions to improve the product developed by the applicant so as to bring it in line
-Providing HR support assistance
-Assistance in choosing cost effective re-insurance partners
-Reviewing the actuarial methodologies developed by the applicant and providing suggestions.
-Marketing and risk analysis.
• In view of the above the AAR held that the payments made by the applicant to AXA ARC for various services under the terms of the Service Agreement are not in the nature of FTS.
On payment for services as Royalty
• With respect to IT support services, AXA ARC provided access to software applications and to the server hardware system hosted in Singapore.
• In this regard, the AAR observed that the payments made for accessing the system hosted in Singapore is for availing facilities provided by AXA ARC and it cannot be said that applicant has been conferred any right of usage of the equipment located abroad, more so when the server is not dedicated to the applicant.
• The AAR further held that there is no transfer of any copyright contained in the computer software provided by AXA ARC and therefore the IT support services are not in the nature of royalty.
The AAR concluded that since the services provided under the Agreement were neither FTS nor Royalty and AXA ARC did not have any permanent establishment in India, the applicant is not required to withhold tax under Section 195 of the Act.
Our comments- This is an important ruling by the AAR which reiterates the position that in order to fit into the terminology of ‘make available’, the technical knowledge, skills etc must remain with the person receiving the services even after the particular services contract comes to an end. In arriving at this conclusion the AAR relied on its earlier rulings in the case of Intertek Testing Services India (P) Ltd. , In re [2008] (AAR) and Ernst and Young (P) Ltd., In re [2010] (AAR).
Even though the decision of the AAR is legally binding only on the parties involved in the particular case, the ruling would have a persuasive value in similar cases.
