Here we summarized the ruling of the Bangalore Income Tax Appellate Tribunal (ITAT) [2009-TIOL-666-ITAT-BANG] in the case of Bovis Lend Lease (India) Pvt. Ltd. (Taxpayer) on the taxability of payments towards reimbursement of cost for services provided by a group entity. The ITAT held that such payments are in the nature of Fees for Technical Services (FTS), under the Indian Tax Law (ITL). In addition, the criteria of ‘make available’, which is stipulated in the India-Singapore Tax Treaty (Tax Treaty) is also satisfied. However, since the services were rendered offshore, from outside India, remuneration for such services was held not taxable in India.
Background and facts of the case
- The Taxpayer is an Indian company, engaged in the business of project and construction management in India. It entered into a Management Service Agreement (MSA) with one of its Group companies, based in Singapore (SingCo), for obtaining management, administrative, legal, financial, marketing, business operational and information technology services.
- The MSA provided for recovery of cost, attributable to a specific service based on time, and an agreed cost allocation formula for other services. The SingCo raised invoices on the Taxpayer with adequate supporting documents providing information on time, identity and cost of personnel involved. An auditor’s report was also provided, certifying that the invoiced amounts do not include any profit element and also stating the fact that the SingCo rendered services from outside India.
- The SingCo belatedly applied for and obtained a certificate from the Tax Authority to receive initial payments under the MSA, without withholding of any taxes (Nil TDS Certificate). An application for renewal of NIL TDS Certificate for subsequent payments was pending disposal with the Tax Authority.
- The Taxpayer credited payables under the MSA to an ‘outstanding expense account’ until the SingCo produced the Nil TDS Certificate. Thereafter, the Taxpayer made remittances to the SingCo, without withholding any taxes.
- The Tax Authority sought to treat the Taxpayer as an assessee-in-default (AID) for not withholding taxes on its payments to the SingCo. The Tax Authority held that the Taxpayer ought to have withheld taxes on such payments, as they were not in the nature of ‘pure’ reimbursements and were, therefore, taxable as FTS. The ITL provides for a wide definition of FTS to mean any consideration for the rendering of any managerial, technical or consultancy service whereas a comparable provision under the Tax Treaty contains an additional requirement of satisfaction of the ‘make available’ criteria.
Contentions of the Tax Authority
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