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
- The ITL provides for taxes to be withheld on payments, at the time of credit or on actual payment, whichever occurs earlier. Therefore, the application for the Nil TDS Certificate should have been made prior to the Taxpayer making a credit entry to the ‘outstanding expense account’ in its books of account. A Nil TDS Certificate received post such a credit entry is not legally valid, as it can operate only prospectively. Further, the issue of a Nil TDS Certificate is only a tentative determination and is not conclusive of the tax ability position of the income recipient (i.e. the SingCo). The Taxpayer was, therefore, bound to withhold taxes, without considering the Nil TDS Certificate.
- The first appellate authority rightly considered the following conditions to be cumulatively satisfied for a payment to constitute ‘reimbursement’:
-Existence of 3 parties – the payer, the payee (Recipient) and the party reimbursing the amount to the payer (Reimburser).
-Actual liability to pay should be of the Reimburser.
-The liability should be clearly determined; it cannot be an approximate or a varying amount.
-The liability should have crystallized; a payment which is not required to be made, though made to avoid a potential problem, does not qualify.
-Existence of a ‘clear, ascertainable relationship’ between the payer and the Reimburser; an alleged reimbursement by an unconnected person does not qualify.
– The payment should be first made by the payer, which did not have any liability to pay and the Reimburser should, thereafter, make the repayment to ‘square off the account’.
Since some of the above mentioned conditions were not satisfied in the facts of the case, the payments did not constitute ‘reimbursement’.
- The amount paid by the Taxpayer is consideration for services rendered by the SingCo and, therefore, taxable as FTS. The SingCo trained the Taxpayer’s employees, enabling them to apply the technology and derive benefit from the training. Hence, the criterion of ‘make available’, under the Tax Treaty, was also satisfied.
Contentions of the Taxpayer
- Payments were made by the Taxpayer only after obtaining the Nil TDS Certificate. This certificate was never cancelled or revoked at any point of time. Hence, the Taxpayer cannot be treated as an AID for not withholding taxes.
- On tax ability, the certification by the auditor, a third party, confirms that the reimbursement is bereft of any profit element. Hence, being ‘pure’ reimbursement of cost, payments under the MSA should not require any withholding of Indian taxes.
- The services rendered by the SingCo were not technical. Some of the services related to certain operating manual, accounting system, management information system, internal/statutory reporting, safety regulations, etc. The training provided on this aspect merely facilitated the Taxpayer’s employees to work in accordance with the expected standards. The other services provided by the SingCo were in relation to day-to-day business operations such as administrative, financial, personnel, legal, marketing, insurance, etc., that enabled the Taxpayer to make use of certain facilities in return of payment for such services. Hence, there was no ‘make available’ of technical knowledge in the services provided nor did it result in transfer of technology. Training, per se, does not result in satisfaction of the ‘make available’ condition.
Ruling of the ITAT
- The application for issue of Nil/lower TDS Certificate, under the ITL, is required to be made at the earliest point in time i.e. earlier of credit entry or payment. This application can be made either by the Taxpayer or the income recipient (SingCo). However, where there is a delay, an administrative circular issued by the Tax Authority provides for a procedure for condoning the delay.
- Therefore, on receipt of the belated application, the Tax Authority should have guided the SingCo to follow the procedure to condone the delay. Instead, the Tax Authority acted on the belated application and granted the Nil TDS Certificate. Also, this certificate was not subsequently withdrawn. Hence, the Taxpayer was justified in relying on the Nil TDS Certificate in making its remittance to the SingCo. The Taxpayer cannot, therefore, be considered as an AID for not withholding taxes.
- The agreement provides the basis for ascertaining the amounts to be paid to the SingCo. In case these payments are in the nature of FTS, as the tax is levied on the gross amount of such fees, the computation of such fees, with reference to cost, does not become relevant. However, if the payments constitute ‘business income’, then one is required to ascertain the income in the hands of the recipient. Where the recipient is getting reimbursement of expenses, there is no income element on which withholding is required.
- As per the Tax Treaty, FTS is taxable in India if such services ‘make available’ technical knowledge, experience, skill, know-how or process, which enable the person acquiring the services to apply the technology. For interpreting the term ‘make available’, reference can be made to an interpretation given to a similar term, as used in another Tax Treaty.
- Where a group owns a number of entities, it is common for certain entities to be designated to provide services to other group entities. In such cases, it becomes the policy of the group to get services of that entity though the other group entities might be able to perform the same functions, on the basis of the services already provided to them.
- The SingCo was providing services to entities within its Group, including the Taxpayer. As per the MSA, the SingCo had to provide education and training to the Taxpayer’s employees. The word ‘make available’ only refers to the willingness of the provider of the services and does not refer to the acceptance of the receiver of the services. From the MSA, it was clear that the SingCo was to provide assistance in the operation of the Taxpayer’s business. Having regard to the dictionary meaning of the term ‘assistance’, which means to help or support, it would imply that the helper is assisting the other person so that the latter can do the same, without assistance, in the future. Thus, one can conclude that the true character of such services was in the nature of FTS, satisfying the criteria of ‘make available’.
- However, the services were rendered by the SingCo from outside India and, hence, the jurisdictional Karnataka High Court (HC) ruling in the case of Jindal Thermal Power Company Limited [2009-TIOL-302-HC-Kar] needs to be considered. The HC had relied on the decision of the Supreme Court (SC) in case of Ishikawajima Harima Heavy Industries [288 ITR 408] and held that, for tax ability as FTS under the ITL, the twin conditions of rendering of services and their utilization should take place in India. Since, in the facts of the present case, the services were rendered entirely offshore, the Taxpayer was held not required to withhold any taxes on its payments to the SingCo.
- The ITAT also held that in the event that the Taxpayer was required to have withheld taxes, then the period for which the Taxpayer would be liable to pay interest would commence from the date of credit entry in its books until the date of receipt of the Nil TDS Certificate. Thereafter, the Taxpayer would be justified in relying on the Nil TDS Certificate in making its remittance.
- This ITAT ruling clarifies that a taxpayer, while discharging its obligations as a withholding tax agent, is protected from being assessed as an AID and interest consequences where reliance is duly placed on a nil/lower withholding tax certificate, even assuming that such a certificate was issued erroneously by the Tax Authority.
- This ruling recognizes the principle of ‘parallel treaty interpretation’ under which, while interpreting a particular term used in a tax treaty, it may be permissible to refer to the definition of such a term contained in another tax treaty or protocol. The ITAT, however, appears to have given a fairly narrow interpretation to the concept of ‘make available’, by stating that the concept only refers to the willingness of the service provider. A number of other rulings on the matter have interpreted this term, from the definition, to exclude payments for services not containing any technology or payment for services that do not enable the recipient to apply the technology.
- This ruling also reinforces the criteria laid down by the SC and the jurisdictional HC that services should be rendered as well as utilized in India for the service fee to be taxable in India.