Payment received / receivable by the applicant in connection with IVTC Services are taxable as FTS

Que.No.1 The payment received / receivable by the applicant in connection with IVTC Services are taxable as FTS under section 9(1)(vii) of the Act. The exception provided under section 9(1)(vii)(b) of the Act is not available to the applicant.

Que.No.2&3 The payments received / receivable in connection with the cost incurred and recovery of administrative cost for and on behalf of X India are chargeable to tax as FTS under section 9(1)(vii) of the Act.

Que.No.4 As the applicant has tax presence in India, X India / Indian customers are required to withhold taxes under section 195 of the Act at the rate in force mentioned in the Finance Act for the relevant year on the payment made / proposed to be made to the applicant.

Que.No.5 Since the applicants are taxable in India under section 9(1)(vii) of the Act, the applicants are bound to file returns in India under section 139 of the Act.

AUTHORITY FOR ADVANCE RULINGS (INCOME TAX)

19th Day of March, 2012

A.A.R. Nos. 886 to 911, 913 to 924, 927,929 and 930 of 2010

Name and address of the applicant – XYZ

RULINGS

These applications are by affiliates of X group of companies. ABC, the parent company is incorporated in A country. X group of companies is engaged in the business of Inspection, Verification, Testing and Certification (‘IVTC’) services. The X group has various business lines and the IVTC services described in the application are structured into those business lines. The applicants are currently providing IVTC services directly to Indian customers and also through X India, an affiliate of this group incorporated in India. According to the applicants, services outside India are provided to the Indian customers directly and the applicants raised invoices for the services rendered, which the Indian customer pays for. In the case of services rendered through X India, the arrangement between Indian customer and X India. However, at times the Indian customers desire to have services rendered outside India where X India does not have any presence but the applicants have presence. At times X India may not have the requisite capability. In such cases, X India sub-contracts a portion of the work to the applicants. The applicants provide those services and issue analysis reports either to the X India or at times directly to Indian customers. The applicants raise invoices on X India for the services provided by them or to the Indian customers of X India.

2. The applicants approached this Authority under section 245Q of the Income-tax Act, 1961 (‘the Act’) seeking advance ruling on the question whether they are liable to be taxed on these transactions in India and whether there was obligations on the Indian customer to withhold tax under section 195 of the IT Act and whether the applicants have an obligation to file a return of income in terms of section 139 of the Act. We may notice that a number of X affiliates, other than the Indian affiliate have filed applications all of which were heard by us together. This Authority allowed the applications under section 245R(2) of the Act for giving a ruling on the following questions in AAR Nos. 886 to 910, 913 to 921 of 2010 reproduced below. It may be stated here that we have avoided repetition in writing questions raised by each of the applicants since the questions are effectively the same, the only difference being the name of the Country where the Applicant is a resident and the specific Article of the DTAA thereof.

1. Whether, on the facts and circumstances of the case, the payments received/receivable by the applicant in connection with transactions undertaken/proposed to be undertaken in relation to the following services are chargeable to tax in India as ‘fees for technical services’ (FTS) or ‘royalty’ under the provisions of Article of the Double Taxation Avoidance Agreement (DTAA) between India and the Country of the Applicant in absence of Permanent Establishment (PE) in India?

(a)Inspection and Verification services (Refer para A.2.1 of Annexure I)

(b) Testing/Analysis services (Refer A.2.2 of Annexure-I; and

( c) Certification services (Refer A.2.3 of Annexure-I)

2. Whether, on the facts and circumstances of the case, the payments received / receivable by the applicant in connection with transactions undertaken / proposed to be undertaken in relation training services as outline in para B.2.4 of Annexure I are chargeable to tax in India as “FTS” or “royalty” under the provisions of Article of the DTAA between India and the Country of the Applicant in absence of PE in India?

3. Whether, on the facts and circumstances of the case, the payments received/receivable by the applicant in connection with transactions undertaken/proposed to be undertaken in relation to following services provided are chargeable to tax in India as “FTS” under section 9(1)(vii)(b) of the Act?

a. Inspection and Verification services (Refer para A.2.1 of Annexure I)

b. Testing/Analysis services (Refer A.2.2 of Annexure-I); and

c. Certification services (Refer A.2.3 of annex.-I)

4. Whether, on the facts and circumstances of the case, the payments received/receivable in connection with following costs incurred/proposed to be incurred for and on behalf of X India, are chargeable to tax in India under the provisions of the Act and DTAA between India and the Country of the Applicant in absence of PE in India?

(a) Procurement of goods/services (Refer B.4. 4.1. Annexure-I)

(b)Reimbursement of out of pocket expenses incurred by the applicant and on behalf of the X India during the course of provision of services (Refer B.4.1.2. of Annexure-I); and

(c) Reimbursement of other expenses (Refer para B. 4.1.3.)

5. Whether, on the facts and circumstances, recovery of reasonable administrative cost incurred for and on behalf of X India as outlined in Para B.4.2 of Annexure-!, be chargeable to tax in India under DTAA between India and the Country of the Applicant in absence of PE in India?

6. Whether, on the facts and circumstances of the case, in case the applicant is not taxable in India for the services provided/proposed to be provided as outlined in Annexure I, would X India/ Indian customers be required to withhold taxes under section 195 of the Act on payments made/proposed to be made to the applicant in connection with the transactions as mentioned in above questions and if yes, at what rate the taxes should be withheld?

7. Assuming that the applicant has no other income in India, whether, on the facts and circumstances of the case, the applicant will be absolved from filing a tax return in India, under the provisions of Section 139 of the Act with respect to the services outlined in Annexure-I.

During the proceedings under section 245R (2) of the Act, the Applicant has sought to withdraw Question No.2 for a ruling by this Authority. We allow the Question to be withdrawn.

As regards AAR Nos. 911, 922 to 924, 927, 929 and 930 of 2010, the Ruling is to be given on the questions being numbers 3 to 7 above which have been numbered 1 to 5 in the said applications.

3. In our Ruling in AAR 928 of 2010, heard along with the present applications, we have ruled that the payment received/receivable by the applicants in connection with the IVTC services are in the nature of

technical services and taxable as FTS under section 9(1)(vii) of the Income-tax Act and that the exception provided in section 9(1)(vii)(b) is not available to the applicants. We have also held that the payments received in connection with the costs incurred and recovery of administrative cost on behalf of the X India is chargeable to tax as FTS. We have also ruled that since the applicants have a tax presence in India, X India/Indian Customers are required to withhold tax under section 195 of the Act.

4. That Ruling was given in the case of an applicant, a resident of a country with whom India did not have a Tax Treaty and hence the applicant was not entitled to the benefits under section 90(2) of the Act. But, here the applicants have opted for and are entitled to avail the beneficial provision of the DTAA entered into by India with the respective countries of their residences. Hence the question remained to be answered in these applications is: In the light of the Article on “Royalties and fees for technical services” under the respective DTAAs, whether the consideration received by the applicants would attract any tax liability in India on the applicants? We answer the question as follows.

In A.A.R. Nos.886 to 892, 899 to 903 of 2010

5. As regards these applications, the relevant provision of the DTAAs defines the term: “fees for technical services” as under:

“For the purpose of the said Article of the DTAA, 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” if such services:

(-) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.”

Further, the term ‘fee for technical service’ is defined in Explanation 2 to section 9(1)(vii) of the Act. The Explanation reads as under:

“For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration ͙.”

Though the opening paragraphs of the two definitions are somewhat identically worded, but under the DTAA, a service would not be FTS unless technical knowledge, experience, skill, know-how or processes is made available to the person making the payment, even where other ingredients are satisfied. We have ruled in AAR 928 of 2010 that IVTC services are in the nature of “fee for technical services’. We have also ruled therein that the exception provided in section 9(1)(vii)(b) will not be available to the applicant. Now let us see whether the “technical services” are made available to X India/ Indian customers.

This Authority has explained the meaning of “make available” in recent Rulings. In Shell India Markets Pvt. Ltd. (AAR 833 of 2009), this Authority had ruled that where services are in the nature of advice to be applied independently or with support of the service provider, the same are made available to the person availing of such services. However, the same has no applicability in the present cases, the services being not advisory in nature as these are in the form of independent reports. In Perfetti Van Melle Holding B.V (AAR 869 of 2010), this Authority ruled that the expression “make available” would mean that the recipient of the service should be in a position to derive an enduring benefit and be in a position to utilize the knowledge or know-how in future on its own. Here, X India / customers have to repeatedly seek IVTC services from the affiliates even if the product is the same. X Affiliate is not involved in supporting a system which is put in place or is already in place by X India / Indian customers. The affiliates are not getting X India / Indian customers equipped to carry on IVTC services independent of X Affiliates. The utility of the services available in the form of a report, though highly technical in nature, comes to an end, little thereafter, if not immediately, after its rendition. The reports/samples may have to be kept for a while to claim demurrage / insurance or for valuation, etc. We see that the elements of “make available” is absent in the present services in as much as even for the said reports, the customers have to continuously refer to the applicants and the same is not freely made available to the customers. Thus, we are of the view that technical services rendered by the affiliates do not “make available” technical knowledge, experience, skill, know-how or process while preparing these reports for their clients, X India / Indian customers.

In A.A.R. Nos. 893 to 898, 904, 907 to 910 ,921 of 2010

6. It is contended on behalf of the applicants that in the DTAAs which India has entered into with the countries of the applicants, the term FTS in the Conventions does not have a “make available” clause. However, in the Protocol signed between India and these countries, there is a Most Favoured Nation Clause covering FTS dealt with in the Article of the Convention. Going by Protocol and the Convention entered into by India, “make available” clause would come within the purview of the definition contained in the Article dealing with FTS. In that case, the applicants would be entitled to take advantage of the restricted meaning of the term FTS.

We have upheld such plea in our Rulings in AAR Nos. 953 and 967 of 2010. Again, it does not appear to be necessary to repeat the reasons for that conclusion. Suffice it to say that we adopt that part of the reasoning in the Ruling in AAR 953 of 2010 also. Thus, we are of the view that technical services rendered by the applicants do not “make available” technical knowledge, experience, skill, know-how or process while preparing these reports for their clients, X India / Indian customers.

We answer the questions in AAR Nos. 886 to 904, 907 to 910, 921 of 2010 as under:

Que.No.1 The payments received / receivable by the applicants in connection with IVTC Services are chargeable to tax as FTS under section 9(1)(vii) of the Act, but not under the provisions of Article on “Royalties and fees for technical services” under the respective DTAAs or when the said Article is read with the MFN clause, which has to be taken as part of the Convention.

Que.No.3 The exception provided under section 9(1)(vii)(b) of the Act is not available to the applicants in respect of the payments received / receivable in connection with IVTC Services.

Que.No.4 The payments received / receivable by the applicants in connection with IVTC Services receivable in connection with the cost incurred for and on behalf of X India are chargeable to tax as FTS under section 9(1)(vii) of the Act, but not under the provisions of Article on “Royalties and fees for technical services” under the respective DTAAs or when the said Article

is read with the MFN clause, which has to be taken as part of the Convention.

Que.No.5 The recovery of reasonable administrative cost incurred for and on behalf of X India by the applicants are chargeable to tax as FTS under section 9(1)(vii) of the Act, but not under the provisions of Article on “Royalties and fees for technical services” under the respective DTAAs or when the said Article is read with the MFN clause, which has to be taken as part of the Convention.

Que.No.6 As the applicants do not have a tax presence in India, X India / Indian customers are not required to withhold taxes under section 195 of the Act.

Que.No.7 Since the applicants would have been taxable in India under section 9(1)(vii) of the Act but for the intervention of the respective DTAA, the applicants are bound to file returns in India under section 139 of the Act.

A.A.R. Nos. 913 to 920 of 2010

7. It is contended on behalf of the applicants that there is no specific provision governing the taxability of FTS in the Tax Treaty with the countries of which the applicants are residents. In the absence of a provision on FTS, the amount received by the applicants would be taxable  as business income under Article 7 of the DTAA. As the applicants do not have a PE in India, the amount received would not be taxable as business income.

In the case of Lanka Hydraulic Institute Limited (A.A.R. No.874 of 2010), this Authority has taken the view that “ It is true that the treaty does not contain a specific article for the taxation of fees for technical services. In that event reference is to be made to Article 22 of the Tax Treaty that reads as follows:

“Item of income of a resident of a Contracting State which are not expressly mentioned in the foregoing Article of this Agreement in respect of which he is subject to tax in that state shall be taxable only in that state.”

Accordingly, we answered the question stating that FTS shall be governed by Article 22 of the Tax Treaty and not as per Article 7 of the Tax Treaty that deals with taxation of business profits. We find no reason to deviate from that view in the matter before us.

We answer the questions in AAR Nos.913 to 920 of 2010 as under.

Que.No.1 The payments received / receivable by the applicants in connection with IVTC Services are chargeable to tax as FTS under section 9(1)(vii) of the Act, but not under the provisions of DTAAs, in the absence of a provision on FTS in the DTAAs.

Que.No.3 The exception provided under section 9(1)(vii)(b) of the Act is not available to the applicants in respect of the payments received / receivable in connection with IVTC Services.

Que.No.4 The payments received / receivable by the applicants in connection with IVTC Services / receivable in connection with the cost incurred for and on behalf of X India are chargeable to tax as FTS under section 9(1)(vii) of the Act, but not under the provisions of DTAAs, in the absence of a provision on FTS in the DTAAs.

Que.No.5 The recovery of reasonable administrative cost incurred for and on behalf of X India by the applicants are chargeable to tax as FTS under section 9(1)(vii) of the Act, but not under the provisions of DTAAs, in the absence of a provision on FTS in the DTAAs.

Que.No.6 As the applicants do not have a tax presence in India, X India / Indian customers are not required to withhold taxes under section 195 of the Act.

Que.No.7 Since the applicants would have been taxable in India under section 9(1)(vii) of the Act but for the intervention of the respective DTAAs, the applicants are bound to file returns in India under section 139 of the Act.

A.A.R. Nos. 905, 906, 911, 922 to 924, 927, 929 and 930 of 2010

8. As regards these applications, the relevant provision of the DTAAs  defines the term: “fees for technical services” as follow:

“The term “fees for technical services” as used in this Article means payments of any kind received as a consideration for the rendering of any managerial, technical or consultancy services including the provision of services by technical or other personnel but does not include payments for services…… ”

Explanation 2 to section 9(1)(vii) of the Act reads as under:

“For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration ͙.”

The two definitions are identically worded. The term “fees for technical services” carry the same meaning and has same application. We have ruled that IVTC services are in the nature of “fee for technical services’. The Article under “Royalties and fees for technical services” of the respective DTAAs provide that “fees for technical services” may be taxed in the contracting state in which they arise. It further provides that “fees for technical services” shall be deemed to arise in a contracting state when the payer is the resident of that state. As the payer X India/Indian customers are resident of India, fees for technical services would arise in India. As we have ruled in AAR 928 of 2010 that the exception provided in section 9(1)(vii)(b) will not be available to the applicant, it will also apply mutatis mutandis to these applicants. Thus, in the case of the applicants all the conditions are satisfied to tax the fees for technical services in India.

We answer the questions in A.A.R. Nos. 911, 922 to 924,927, 929 and 930 of 2010 as under:

Que.No.1 The payment received / receivable by the applicant in connection with IVTC Services are taxable as FTS under section 9(1)(vii) of the Act. The exception provided under section 9(1)(vii)(b) of the Act is not available to the applicant.

Que.No.2&3 The payments received / receivable in connection with the cost incurred and recovery of administrative cost for and on behalf of X India are chargeable to tax as FTS under section 9(1)(vii) of the Act.

Que.No.4 As the applicant has tax presence in India, X India / Indian customers are required to withhold taxes under section 195 of the Act at the rate in force mentioned in the Finance Act for the relevant year on the payment made / proposed to be made to the applicant.

Que.No.5 Since the applicants are taxable in India under section 9(1)(vii) of the Act, the applicants are bound to file returns in India under section 139 of the Act.

In AAR Nos.905 and 906, the Que.No.1 is the same as in AAR No.886. While answering this question we rule that payments received / receivable by the applicants in connection with IVTC services are taxable under DTAA and under the Act. Que.No.2 is withdrawn and is not answered. Answers to Que.No.3 to 7 may be read as answers given from 1 to 5 above.

9. Amongst the affiliates, X India is not before us. The determinations of the nature of the transactions between X India and Overseas X / X SA are not a subject matter before us. We, therefore, accept for the purpose of this ruling the applicant’s stated position that it does not have a business connection in India. The Revenue’s assertion that the applicant with other X affiliates forms an association of persons under the Act is a subject matter, which is not covered by the questions, posed for a ruling by this authority and hence is not pronounced upon. It is open to the Revenue to pursue it.

Accordingly, rulings are given and pronounced on 19th day of March, 2012.