Intertek Testing Services India P. Ltd., In Re

P.V Reddi, J., (Chairman):— The applicant—a private limited company in India—is a subsidiary of Intertek Holding U.K limited—a limited liability company and incorporated under the laws of the United Kingdom. Intertek Group Plc, U.K is the holding company of the latter. The applicant states that Intertek group of companies operate in several countries. The Intertek group's head office is in London. The applicant is engaged in the business of rendering testing and inspection services to its Indian and overseas clients. Certain companies in the Intertek group have special knowledge and/or capabilities in the field of executive, commercial, financial, marketing and administrative management systems and techniques. It was felt that it would be advantageous to pool the requisite resources and skills available among the members of the Intertek group so that the services could be provided to or received from the other members within the group. Hence, the global management services agreement (for short GMSA) was entered into between Intertek Testing Services Management Limited, U.K and the subsidiaries of Intertek, specified in schedule I to the agreement on October 6, 2006. The applicant and its labtest division find place in the list of subsidiaries in schedule I. The applicant states that one of the key central points for the provision of services is Intertek group's head office in London. The applicant avers that within the framework of the GMSA, the relevant services would be provided to the applicant by Intertek Testing Management Limited (for short “the ITM”) which is a subsidiary of Intertek Group Plc, U.K However, the applicant describes ITM as the group's corporate head office in London (vide note attached to the supplementary written submissions). It is stated that such services are provided either directly or by deputing personnel of any other group company subject to the control and supervision of ITM, U.K It is further stated in the application that broadly, the nature of services provided under the GMSA by the U.K company to the applicant are— “corporate head office services”, “divisional global services” and “divisional regional services” which relate to financial, executive, marketing and administrative matters. The cost of services plus mark-up of 7.5 per cent. will be billed to the applicant by ITM or other group company which provides the services. It is then averred that the costs will be calculated at the beginning of the financial year based on budgeted figures. In case the difference between the budgeted figures and actual costs is more than 5 per cent., then an additional charge or refund will be made by the group company. The third party costs specifically incurred on behalf of the applicant will also be recharged by the concerned group company. Certain copies of invoices raised by ITM, London during the year years 2006 and 2007 have been filed by the applicant. The description of charges in the invoices is given as “management fee (per GMSA).” The applicant has also filed a detailed calculation of the costs included in the “management charge”.

2. On these facts the applicant seeks advance ruling on the following two questions:

(i) Whether on the stated facts and in law the service fee paid by the applicant to Intertek Testing Management Limited, U.K under the global management service agreement is taxable as “royalties and fees for technical services” as per the provisions of article 13 of the Double Taxation Avoidance Agreement between India and United Kingdom?

(ii) Without prejudice and in the alternative, if the answer to question number (i) is in the negative, whether on the stated facts and in law the applicant is required to deduct tax at source on the service fee paid to Intertek Testing Management Limited, U.K, at the rate of 10 per cent. plus applicable surcharge and cess as per the provisions of section 115A(1)(b)(BB) of the Income-tax Act, 1961.

3. In short, the contention of the applicant is that the payments made to ITM for various services as per the agreement do not fall under “fee for technical services” as defined in the DTAA and no income-tax can be charged thereon in India and therefore, the applicant is not liable to deduct the tax at source.

4. The applicant has clarified in its written submissions filed on April 15, 2008, that the instant application only relates to the service fee paid by the applicant to ITM, U.K under the GMSA relating to corporate head office services, divisional global and regional services “in the field of executive commercial, financial, marketing and administrative management system and technique”. It is also made clear that the applicant is not seeking ruling in respect of payments made to any other company located outside the U.K Apart from taking note of this statement, there is one more point to be clarified. Though in the application as well as in the written submissions dated April 14, 2008, the three categories of services mentioned in schedule 2 to the agreement are stated to have been performed by ITM, U.K as per the GMSA, it is doubtful whether “divisional regional services” are also performed.

5. It is clarified by the applicant's counsel that the global headquarters of the applicant's labtest division is London whereas the regional headquarters is Hong Kong. “Divisional global services” are provided to various divisions from the global headquarters of a division whereas the “divisional regional services” are provided from the regional headquarters of a division. If so, in so far as the services provided by ITM, U.K are concerned, divisional regional services do not come into the picture at all. Apparently, there is an inaccurate statement in this behalf. We are, therefore, keeping aside the divisional regional services from our consideration.

6. We shall now refer to the details of services enumerated in schedule 2 to GMSA. Under the head “Corporate head office services”, the following are mentioned:

Executive:

• Review of operating results, budgets, and market trends, and liaison with local management on business strategy;

• Assistance with contract negotiations;

• Liaison with bankers, investors, and other financial institutions to secure investment finance working capital requirements; and

• Co-ordination of public relations issues.

Financial:

• Advising the management on financial matters and the production of management accounts;

• Advice on accounting policies and circulation of accounting policies manual;

• Design of regional reporting systems and provision of systems support;

• Arrangement and co-ordination of global insurance to include cover, exclusions, and excesses specific to subsidiary operations;

• Provision of accounting and financial services, where required, and control procedures;

• Agreement of intercompany balances, assistance in preparation of, and processing monthly, quarterly and annual results and budgets and preparation and circulation of monthly digest;

• Co-ordination of audit services.

Administrative management

• Provision of appropriate legal and professional services and liaison with lawyers;

• Professional tax advice, including agreement of tax liabilities on bi-annual reports, assistance in the preparation of corporate tax returns, tax planning and global tax advice;

• Provision of, and guidance on company secretarial services;

• Assistance on contract legal disputes and maintenance of a central claims register;

• Maintenance of trade mark register and arranging renewals as necessary;

• Advice and implementation of global IT policies and systems;

• Provision of marketing services, including preparation and distribution of brochures and other promotional material including corporate website and divisional/regional sub-sites.

7. Divisional global services are the following:

Executive

• Review of operating result, budgets, and market trends, and liaison with divisional regional management on business strategy;

• Negotiation of global/regional contracts for the division and contract implementation advice to satisfy customers requirements;

• Review of business plans and capital expenditure projects in order to liaise with corporate head office to facilitate support from bankers, investors, and other financial institutions of secure investment to finance working capital requirements; and

• Arrangement and co-ordination of global business sector initiatives to build upon group contacts and areas of expertise to drive success at the local level.

All the above activities are for co-ordination amongst group companies within a region - Benefit to the applicant-company is merely incidental, if any stewardship activity.

Financial

• Advising the divisional regional management team on financial matters and the production of management accounts;

• Advice and explanation/interpretation of accounting policies;

• Design of divisional reporting systems and provision of updates by local currency for local management use;

• Provision of accounting and financial services, where required and control procedures;

• Identification of intercompany balance differences assistance in preparation of, and processing monthly, quarterly and annual results and budgets; and

• Preparation and circulation of monthly divisional financial digest and business sector reports.

• Advice on internal and external audit practices and implementing change.

All the above activities are also for co-ordination within division/region of the group - Benefit to the applicant-company is merely incidental, if any stewardship activity.

Administrative management

• Guidance on the selection of legal and professional services and engagement terms with suppliers;

• Assistance on contract legal disputes and review of options available to the local units;

• Advice and implementation of global/divisional IT policies and systems;

• Negotiation of discounts/best service levels in procurement policies in particular IT hardware and services;

• Provision of divisional specific marketing services, including preparation and distribution of brochures and other promotional material and updates for individual web pages;

Activities mostly in the nature of consulting - Do not make available any know-low that can be used by the recipient on its own in future.”

8. In the note annexed to the “supplementary written submissions” filed on May 22, 2008, the applicant stated that the management charges “related to support services provided by ITM, U.K being the group corporate head office”. The examples/elaboration of the services provided are furnished therein under four heads, viz. (i) Executive, (ii) Finance, Treasury and tax, (iii) Compliance, and (iv) I.T.A summary of the services narrated against each head is given below:

Executive

Indirect benefits through “reviewing and challenging” business plans and defining implementation plans, building new and maintaining existing relationships with key customers and contacts, drafting press releases and coordinating announcements to media.

Finance and tax related services

Budget reviews and reviews of submitted financial information coupled with feed back for improving local reporting and accounting skills, deputing key employees to review internal controls and to train staff on the use of accounting software; providing treasury functions such as managing liquidity, planning cash requirements, managing foreign exchange and interest risk; tax services which include providing assistance regarding local and international tax compliance issues and tax audits, tax planning including issues relating to double taxation under treaties.

Compliance

The central compliance team assists the management in the assessment of risks inherent in the trading activities, advice on contractual/commercial claims against the company and providing significant support and co-ordination in relation to legal transactions.

Information technology

Providing centralised services to the group, managing and centralizing e-mail, video conferencing, developing system design and net works and updating desktop and internet standards. Also includes management of the global internet site in order to provide a key point of contact for new customers.

9. At the outset, we may mention that an objection has been raised by the Department that the question raised by the applicant is the subject-matter of pending appeals before the Commissioner of Income-tax (Appeals)-X, Mumbai in respect of the assessment years 2003-04 and 2004-05, and therefore, the application is not maintainable in view of the proviso to section 245R of the Income-tax Act, 1961. It is seen from the assessment orders filed along with the comments of the jurisdictional Commissioner that the Assessing Officer did not accept the plea of the applicant that the inspection charges paid to foreign associate entities which carried out inspection on behalf of the applicant were not in the nature of fees for technical services and such charges were added to the applicant's income in terms of section 40(a)(i) of the Income-tax Act on account of non-deduction of tax at source. Similarly, in regard to marketing expenses paid to Intertek Testing Services Ltd., Hong Kong, they were added to the income of the appellant. It is against these orders, the appeals seem to be pending. The assessing authority was of the view that the inspection charges were covered by the expression “technical services” within the meaning of section 9(1)(vii) of the Income-tax Act and therefore TDS should have been deducted. As regards the marketing expenses paid to ITS, Hong Kong, it was the case of the assessee that the reimbursement was made to the said company for the “intensive marketing and sales support extended”. The assessing authority rejected the claim on the ground that the assessee has not filed any material to establish that the foreign based group company actually incurred the expenditure for the business purposes of the assessee. The Assessing Officer consequentially applied section 40(a)(i) on account of the applicant's failure to withhold and pay the tax. Accordingly, the marketing expenses were added to the total income. Having regard to these facts, we do not think that the Revenue's objection to the maintainability on the ground of pendency of appeals against the assessments for the two years has any merit. We are concerned here with the “service fees” or “management charges” paid by the applicant to its head office in London pursuant to the terms of the agreement known as “global management service agreement” concluded on October 10, 2006. As far as India is concerned, the said agreement was effective from January 1, 2005. The agreement was not in force during the assessment year 2004-05. Testing and inspection services are not covered by it. That apart, the nature of services considered and the findings of the Assessing Officer with respect to the two disputed items have no direct bearing on the questions raised in the present application. Some similarity in facts or certain overlapping arguments on the issues involved is not sufficient to denude this Authority of the jurisdiction to deal with the question raised for advance ruling. In fact, the learned counsel for the Revenue though initially raised this objection has not seriously pursued it in the course of arguments. Moreover, the objection as to the maintainability was not taken at the time when the Commissioner was put on notice before passing an order under section 245R(2) of the Act. For all these reasons, we find no legal bar to give the ruling on the merits.

10. We may also mention that the comments of the Commissioner are mostly devoted to pre-shipment inspection charges, which is not in issue here.

11. Now, the terms of the agreement (GMSA) may be referred to. The agreement dated October 10, 2006 is between ITM, London and the subsidiaries (“and together with ITM, the Intertek group”). The term “subsidiaries” is defined to mean, excluding ITM, such subsidiary companies of Intertek Group Plc, London, as are identified in schedule 1. In the list of subsidiaries in schedule 1, the name of the applicant and its Labtest division is mentioned. The background for entering into the agreement is contained in the preamble which has already been referred to. It is stated in paragraph (B) of the preamble that “it is recognized that each company in the Intertek group, not maintaining the capacity to carry out all of the services, relies on the expertise of an Intertek group company having such capacity (referred to as providing party) to provide it with some or all of the services”. It is further stated that the relevant services are regarded as essential to the success of the businesses of the receiving parties. Clause 2 lays down that the providing party shall from time to time provide the receiving party with the relevant services on the terms set out in the agreement. Clause 2.2 says that the services shall be provided through correspondence, telephone, fax, e-mail and periodical visits of personnel, normally for short periods. Clause 3 bearing the caption “Compensation” enjoins that the receiving party shall pay to the providing party (ITM, London according to the applicant) the amount determined in accordance with schedule 3 which is described as “service charge”. The providing party shall send the appropriate invoices and arrange with the receiving party the transfer of all required payments (vide 3.2). Clause 3.5 lays down that the providing party shall support any invoice with reasonable details of the cost basis for the charge made. Clause 4.1 speaks of the providing party keeping a record of the costs incurred in respect of the relevant services. Clause 5 says that the agreement will be in force for a term of 2 years for each subsidiary from the effective date and shall be renewed automatically on annual basis unless terminated in accordance with clause 5.2 For ITS, India (applicant), the effective date is specified to be January 1, 2005. Clause 14 says that nothing in the agreement shall be construed to place a party in the position of a partner, agent or employee of another party and no party shall have power to bind other parties towards third parties. Schedule 2 lists out the services under three broad heads. We have already set out the summary of services mentioned in the agreement as well as the note accompanying the written submissions. Schedule 3 deals with the “Fee”. Paragraph (i) speaks of “service charge” and the same is extracted hereunder.

Service charge:

“Service provided by the relevant providing party will be billed to the receiving parties (allocated where relevant between those receiving parties as set out in paragraph (ii) below) at a fee calculated at cost plus a mark-up of 7.5 per cent. Services will be billed periodically but in any event not less than annually.

The cost is calculated at the beginning of the financial year based on budgeted figures. If the difference between budgeted and actual cost is greater than 5 per cent. then an additional charge or refund may be made by the providing party in the first quarter of the following year.”

Third party costs specifically incurred on behalf of a receiving party will be recharged at cost to that receiving party.

Then, the formula for allocation of fee to various receiving parties/subsidiaries is given in paragraph (ii).

12. Two sample invoices were filed by the applicant covering the period January to July 2006 and July to December, 2006. A consolidated amount with the description “management fee” is found therein. In order to explain the basis on which the cost is allocated to the various group companies as per the formula set out above, the applicant has filed the cost analysis statement along with its written submissions. It is stated in the accompanying note that “the costs re-charged in the management service agreement are based on the budgeted costs incurred by ITM”. It is also stated that the costs of stewardship are removed from the total costs as they do not benefit the other members of the group. Further, it is stated that the costs are currently allocated to all world-wide participating entities based on 80 : 20 weighted ratio of turnover and employee numbers over the group's external turnover and total employee numbers.

13. Now, we shall discuss the questions framed for consideration.

Question No. 1:

14. The applicant admits that the charges paid to ITM, U.K are taxable as “fee for technical service” under section 9(1)(vii) of the Income-tax Act in view of the definition contained in Explanation 2 to clause (vii). Fee for technical service is defined to mean any consideration “for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel ….)”. Realizing that the said definition squarely applies, the applicant seeks to invoke the benefit under article 13 of the Double Taxation Avoidance Agreement (hereinafter referred to as “DTAA” or “Treaty”). It is well settled that the provision in the DTAA will prevail over the domestic law if it is more beneficial to the assessee.

15. Article 13 of the DTAA [1994] 206 ITR (St.) 235, 249 deals with “Royalties” and fees for technical services. The relevant portion of article 13 is extracted hereunder:

“Article 13. Royalties and fees for technical services

(1) Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

(2) However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed : ….

(4) For the purposes of paragraph (2) of this article, and subject to paragraph (5) of this article, the term ‘fees for technical services’ means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel which:

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information from which a payment described in paragraph (3) (a) of this article is received; or

(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph (3)(b) of this article is received; or

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

16. It may be noticed that the language in the definition contained in Explanation 2 to section 9(1)(vii) of the Act and article 13(4)(c) of the DTAA is not the same. Clause (c) of article 13(4) restricts the scope of “fees for technical services” (hereinafter referred to as “FTS”) by using the expression “make available” whereas as per Explanation 2, mere rendering of specified service is sufficient to attract the definition of FTS. Article 13(4)(c) says that the services rendered should make available technical knowledge, experience, skill, know-how, etc. On an analysis of article 13(4) read with clause (c) it follows that FTS is consideration paid for the rendering of technical or consultancy services, provided that those services make available to the other party, the technical knowledge, experience, know-how, etc. Another point to be noticed is that the offer of a standard facility to a number of customers such as telephone/cell phone users does not amount to rendering any technical service within the meaning of the definition, as held by the Madras High Court in the case of Skycell Communications Ltd. v. Deputy CIT, [2001] 251 ITR 53.

17. In the DTAA with some other countries, the expression “make available” is not there. FTS is defined therein almost on similar lines as in section 9(1)(vii) of the Act. In fact, the relevant provision of the superseded DTAA was on a similar pattern as the definition under the Income-tax Act.

18. Let us now analyse clause (c) of article 13(4) and then explore the meaning of the crucial phrase “make available”. There are three ingredients or requirements in clause (c). The first requirement is that the payment is made by way of consideration for the rendering of technical or consultancy services (“including the provision of services of technical or other personnel”). The second requirement is that those services should “make available technical knowledge, skills, etc., to the recipient of services”. The third part of the definition speaks of “development and transfer of a technical plan or technical design” with which we are not concerned.

19. First, we shall consider the meaning and scope of technical and consultancy services.

20. What is meant by the expression “technical” ? Should it be confined only to technology relating to engineering, manufacturing or other applied sciences ? We do not think so. The expression “technical” ought not to be construed in a narrow sense. It has received a wide interpretation in tune with its dictionary meaning in several cases.

21. In Continental Construction Ltd. v. CIT, [1992] 195 ITR 81, the Supreme Court observed that “the expression ‘technical services’ has a very broad connotation and it has been used elsewhere in the statute also so widely as to comprehend professional services: vide section 9(1)(vii)”. The relevant meanings of the word “technical” given in the New Shorter Oxford Dictionary (Thumb Index Edition) are 1. Of a person: having knowledge of or expertise in a particular art, science, or other subject. 2. pertaining to, involving, or characteristic of a particular art; science, profession, or occupation, or the applied arts and sciences generally. In CBDT v. Oberoi Hotels, [1998] 231 ITR 148, the Supreme Court reiterated the view that the term “technical services” included professional services. In the case of Dean, Goa Medical College v. Dr. Sudhir Kumar Solanki, (2001) 7 SCC 645, the question was whether the expression “technical institutions” takes within its fold medical colleges. The Supreme Court observed that “the dictionary meaning of the word “technical” is also “professional” and is used in contradistinction with pure sciences to prepare the professionals in applied sciences”. However, we would like to observe that it is not any or every professional service that amounts to technical service. Professionalism and an element of expertise should be at the back of such services.

22. There is a decision of the Andhra Pradesh High Court in “which the ambit of the expression “technical service” was considered. In G.V.K Industries Ltd. v. ITO, [1997] 228 ITR 564, S.S.M Quadri J., speaking for the Division Bench, rejected the argument of the assessee's counsel “that the NRC did not render any technical or consultancy service to the petitioner-company and that it merely rendered advice in connection with the procurement of loans by it, which does not amount to rendering technical or consultancy service within the contemplation of the said clause and that the technical or consultancy service should relate to the core of the business of the petitioner-company”. It was observed, “In our view, advice given to procure loan to strengthen finances would be as much a technical or consultancy service as it would be with regard to management, generation of power or plant and machinery”. From the above discussion it follows that “success fees” fall in line with any other technical services within the ambit of section 9(1)(vii)(b).

23. The other expression used in clause (c) of article 13(4)(as well as section 9(1)(vii) of the Income-tax Act) is “consultancy services”. Consultancy services could also be technical in nature. These two expressions are not to be treated as water-tight compartments. However, advisory services which merely involve discussion and advice of routine nature or exchange of information cannot appropriately be classified as “consultancy services” under the article. An element of expertise or special knowledge on the part of the consultant is implicit in the consultancy services contemplated by article 13(4)(c).

24. Now, we shall proceed to analyse further clause (c) of article 13(4). Rendering of service and making use of service go together. They are two sides of the same coin. But clause (c) of article 13(4) does not stop at that. It carves out a qualification thereto by employing the words “which make available technical experience, skill, know-how or processes”. Rendering technical or consultancy service is followed by a relative pronoun “which” and it has the effect of qualifying the services. That means, the technical or consultancy service rendered should be of such a nature that “makes available” to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting the technical knowledge, etc., so that the payer of service could derive an enduring benefit and utilize the knowledge or know-how in future on his own without the aid of the service provider. By making available the technical skills or know-how, the recipient of the service will get equipped with that knowledge or expertise and be able to make use of it in future, independent of the service provider. In other words, to fit into the terminology “make available”, the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. The services offered may be the product of intense technological effort and a lot of technical knowledge and experience of the service provider would have gone into it. But that is not enough to fall within the description of services which make available the technical knowledge, etc. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in future without depending on the provider. Taking some examples, the training given to a commercial aircraft pilot or training the staff in particular skills such as software development would fall within the ambit of the said expression in clause (c). Supposing, a prescription and advice is given by the doctor after examining the patient and going through the clinical reports. The service rendered by the doctor cannot be said to have made available to the patient, the knowledge and expertise possessed by the doctor. On the other hand, if the same doctor teaches or trains students on the aspects of diagnosis or techniques of surgery, that will amount to making available the technical knowledge and experience of the doctor.

25. The definition of FTS in the India-U.K DTAA is similar to the one contained in the India-USA DTAA, [1991] 187 ITR (St.) 102, 138, 139. Paragraph (4)(b) of article 12 is similar to article 13(4)(c) of the Indo-U.K Treaty. The MOU appended to the India-USA DTAA explains the scope of the phrase “make available” in the context of technical services as follows:

“Generally speaking, technology will be considered ‘made available’ when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available.”

26. True, the MOU relating to the India-US Treaty in terms does not apply to the Indo-U.K Treaty but when a similar expression found in another Treaty is interpreted and explained in a particular manner consistent with one shade of meaning that can be attributed to it, there is no reason why that interpretation shall be eschewed. In our view, the explanatory memorandum becomes a valuable aid in interpreting the phrase “make available”. It reflects the Government of India's viewpoint on the true connotation of the expression. It stands on a higher pedestal than the principle of contemporanea expositio applied in several cases. Hence, the interpretation given in the MOU can be usefully adopted while dealing with a provision similarly worded.

27. In the specific context of article 12(4)(b) (corresponding to paragraph (4)(c) of article 13 of the India-U.K Treaty), the following examples given in the MOU succinctly bring forth the true import of the expression “make available”.

“1. Facts: A U.S manufacturer has experience in the use of a process for manufacturing wallboard for interior walls of houses which is more durable than standard products of its type. An Indian builder wishes to produce this product for its own use. It rents a plant and contracts with the US company to send experts to India to show engineers in the Indian company how to produce the extra-strong wall-board. The US contractors work with the technicians in the Indian firm for a few months. Are the payments to the US firm considered to be payments for ‘included services’“?

Analysis: The payments would be fees for included services. The services are of a technical or consultancy nature; in the example, they have elements of both types of services. The services make available to the Indian company technical knowledge, skill, and processes.

2. Facts: An Indian vegetable oil manufacturing company wants to produce cholesterol-free oil from a plant which produces oil normally containing cholesterol. An American company has developed a process for refining the cholesterol out of the oil. The Indian company contracts with the U.S company to modify the formula which it uses so as to eliminate the cholesterol and to train the employees of the Indian company in applying the new formula. Are the fees paid by the Indian company for ‘included services’”?

Analysis: The fees are for included services. The services are technical and technical knowledge is made available to the Indian company.

3. Facts: The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol-free oil and wishes to market the product worldwide. It hires an American market consulting firm to do a computer simulation of the world market for such oil and to advise it on marketing strategies. Are the fees paid to the US company for included services?

Analysis: The fees would not be for included services. The American company provides a consultancy service which involves the use of substantial technical skills and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc., nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. The fact that technical skills were required by the performer of the service in order to perform the commercial information service does not make the service a technical service within the meaning of paragraph (4)(b).”

28. The expression “make available” has been interpreted by this Authority in some of the recent rulings, viz., Anapharm Inc., In re reported in [2008] 305 ITR 394; Cushman and Wakefield Pte. (S.) Ltd., In re reported in [2008] 305 ITR 208 (AAR); 172 Taxman 179 and ISRO Satellite Centre, In re, [2008] 307 ITR 59 (AAR) (AAR/765/2007). The Income-tax Appellate Tribunal has in a series of decisions interpreted the expression “make available” in tune with the memorandum to the India-USA DTAA. Those decisions are Raymond Ltd. v. Deputy CIT, [2006] 86 ITD 791 (Mumbai); CESC Ltd. v. Deputy CIT, [2005] 275 ITR (AT) 15 (Delhi); M/S Quality, A Registered Partnership Firm v. Md. Ejaz, [2005] 92 TTJ 946 (AT) and McKinsey and Anapharm Inc. v. Director Of Income-Tax), [2006] 284 ITR (AT) 227 (Mumbai). The view expressed by this Authority in the above cited cases is similar to the view consistently taken by the Income-tax Appellate Tribunal.

29. At this juncture, it is apposite to quote some of the passages in the Anapharm Inc. ruling [2008] 305 ITR 394, 405 (AAR).

“It is, thus fairly clear that mere provision of technical services is not enough to attract article 12(4)(b). It additionally requires that the service provider should also make his technical knowledge, experience, skill, know-how, etc., known to the recipient of the service so as to equip him to independently perform the technical function himself in future, without the help of the service provider. In other words, payment of consideration would be regarded as “fee for technical/included services” only if the twin test of rendering services and making technical knowledge available at the same time is satisfied.” (Vide 12(3))

At paragraph 12.6 it was observed (page 406):

“In the present case, the applicant renders bioanalytical services which, no doubt, are very sophisticated in nature, but the applicant does not reveal to Sandoz/Ranbaxy as to how it conducts those tests or the inputs that have gone into it, so as to enable them to carry out those tests themselves in future. A broad description or indication of the type of test carried out to reach this conclusion does not enable the applicant's client to derive requisite knowledge to conduct the tests or to develop the technique by itself. The mere fact that the tests in question are highly technical in nature will not make a difference… From the perusal of the relevant agreements, we have not found any provision which would entitle Sandoz/Ranbaxy to know the details of the analytical methods and procedures employed by the applicant in carrying out the bioequivalence tests.”

30. In a recent decision in Diamond Services International P. Ltd. v. Union of India, [2008] 304 ITR 201 (Bom) a Division Bench of the Bombay High Court held that the job of grading diamonds in the laboratory and furnishing a grading certificate did not amount to transferring any (technical) skill or knowledge to the customers. Nor did it amount to transfer of any industrial or commercial experience of the company which issued the certificates.

31. In the light of the foregoing discussion, we accept in principle the contention of the applicant on the point of interpretation of the expression “make available” occurring in clause (c) of article 13(4) of the Treaty.

32. Though we have indicated the parameters of technical/consultancy services and interpreted the expression “make available”, a practical difficulty arises in the actual application of the principles to the case on hand. The reason is, the applicant has not furnished the details of the exact services provided by ITM, U.K The applicant has only given a general account of the relevant services that might be received in terms of the agreement. It is not the case of the applicant that the entirety of services set out in the agreement under the two heads, namely “corporate head office services” and “global divisional services”, were actually rendered. Though opportunity was afforded to furnish the details of actual transactions, the applicant, through its note appended to supplementary submissions, only furnished a catalogue of activities broadly conforming to the enumeration in the agreement. We have already referred to them. But, it is not at all clear whether all such services or some out of them were rendered to the applicant. The preamble to the service description in the note is quite ambiguous in this regard. It says : “Further examples of the services provided (see also the agreement) are detailed below”. If the applicant had spelt out clearly the nature of services rendered in the past and those normally expected to be rendered by ITM, U.K in relation to the Indian office of the applicant, this Authority would have been in a better position to analyze and give a specific finding whether or not the particular services pointed out by the applicant would fall within the definition of FTS as per the Treaty. A wide-ranging, perhaps a roving enquiry, could have been avoided. In the circumstances, we are left with no option but to take an overall view after going through the long list of services set out in the agreement and the applicant's note. On a broad analysis, we find that majority of the services catalogued are in the nature of technical or consultancy services. But most or many of them do not “make available” to the applicant the technical knowledge, experience, skill, know-how, etc., possessed by the provider of services. At the same time, there are some services which can be brought within the ambit of phrase “make available”. They are training staff on the use of accounting software 2008, feedback passed on to the subsidiary after review of financial information for improving accounting skills 2008, advice on tax planning 2008, developing IT related systems design 2008, implementation of global IT policies and systems, provision of accounting policies manual. There are some services which stand on a border line, e.g, design of regional reporting systems, advice on “Production of management accounts”, and advice on internal and external audit practices and implementing change where need is identified. In relation to them, unless better particulars are available, it is not proper to express a definite view.

33. By holding that many of the services referred to in the agreement and the note do not satisfy the requirement of “making available” technical knowledge, etc., we shall not be understood to have expressed any view on the aspect whether any services were factually rendered or not. We only go by the averments of the applicant, taking them at their fac??? value. The possibility of some or many of the listed services having been rendered cannot be ruled out. But what exactly are those services remains to be an enigma.

34. The next contention urged by the applicant is that the word “managerial” which found its company with technical and consultancy services was omitted by the new DTAA between India and the U.K entered into in the year 1993. By reason of such omission it is contended that the receipts from managerial services can no longer be taxed as fees for technical services. Though the applicant is right in its submission, no endeavour has been made either in the application or during arguments to demonstrate that the particular services covered by the agreement or those specified in the note squarely fall within the scope of managerial services. In this situation, we will advert to a few aspects which have a bearing on the issue of classification of services as managerial and proceed to give some examples of such services. First, about the connotation of the term “managerial”. The adjective “managerial” relates to manager or management. Manager is a person who manages an industry or business or who deals with administration or a person who organizes other people's activity. As pointed out by the Supreme Court in R. Dalmia v. CIT, [1977] 106 ITR 895, “management” includes the act of managing by direction, or regulation or superintendence. Thus, managerial service essentially involves controlling, directing or administering the business. Seemingly, some services can be classified either under managerial or some other head. In such a situation, the test to be applied is whether they are predominantly managerial in nature. Whatever services are enumerated under the head “administrative management” cannot automatically be brought within the purview of managerial services. In fact, many of them may not appropriately fall under managerial services. To give some examples, the maintenance of trade marks register and arranging renewals, preparation and distribution of brochures and other promotional material, maintenance of central claims register or providing professional tax advice, are not predominantly managerial services. Yet, they were included under the head “administrative management”. To give a few instances of managerial services, we may make mention of co-ordination of public relations issues and audit services and advice on global IT policies. Arrangement and co-ordination of global insurance can perhaps fall under this category, though in the absence of details, we do not want to express a firm view. Another point we would like to clarify is that from the nomenclature used in the invoice, i.e, “management fee”, it cannot be inferred that all the services under the agreement rendered to the applicant are managerial services. The label given in the invoice is not important, much less decisive. In fact, the expression “management fee” is not found in the agreement. It is described in the agreement as service charge or fee and the same description is given in the application also. In the note, the applicant stated that management charges relate to “support services”. Support services are not necessarily equivalent to services of managerial nature.

35. Keeping the above observations in view, the classification of services as managerial may have to be undertaken in an appropriate proceeding.

36. There are certain services which may not come under either technical or consultancy or managerial. At any rate, a doubt arises in regard to their classification in the absence of sufficient particulars. For instance, preparation and circulation of business sector reports, negotiation of discounts and best service levels in procurement policies especially IT hardware and services and co-ordination of audit services, fall within such doubtful category.

37. A contention has been raised by the counsel for the Revenue that the recipient of FTS shall be the beneficial owner of fees and if the non-resident entity which ostensibly receives the fee is a mere conduit for the other related companies and the amount received by it is simply made over to those companies, then no benefit can be sought from article 13 of the Treaty. If the beneficial owner is someone other than the immediate recipient of the fee, the legal position has to be examined in the light of the relevant Treaties governing the country of residence of the real and beneficial owner. It is argued that ITM, U.K acts as a coordinating or central point agency to requisition the services from various other Intertek groups subsidiaries and, therefore, ITM, U.K presumably passes on the amount charged to various other entities, while retaining at the most, the mark-up charge of 7.5 per cent. In the absence of the applicant furnishing any details of services actually rendered by ITM, U.K, it is submitted that a conclusion cannot be drawn that the U.K company is the real beneficial owner. It appears that the omission on the part of the applicant in spelling out the details of the actual services received by it from the payee of the fee, i.e, ITM, U.K has given scope for this argument. The argument is evidently based on certain assumptions. It is not proper to proceed on the assumption that ITM, U.K is incapable of rendering any technical or consultancy services and that its role is merely that of a conduit, in the absence of definite material leading to such inference. The omission on the part of the applicant in furnishing the details of actual services cannot be stretched too far. On the basis of the facts appearing on the record, it is not possible to arrive at a finding in this proceeding that the beneficial owner of the fee is someone else.

38. In view of the foregoing discussion, the first question defies a precise answer—either in the affirmative or negative. Many of the services catalogued in the agreement and in the note are technical/consultancy services which do not “make available” technical knowledge, experience etc. and therefore do not fall within the ambit of clause (c) of article 13(4). But some of them satisfy the test of making available “technical knowledge” etc. and therefore taxable as FTS under article 13(4) of Treaty. There are also services which can be categorized as managerial. There are some which do not fall under either of the three categories. We have given sufficient indication of all such services, on a broad analysis.

39. It is made clear that nothing in this ruling shall preclude the concerned income-tax authority to determine the cost of services etc. on arm's length basis by taking resort to the provisions of section 92 of the Income-tax Act, 1961.

40. Second question: As indicated earlier, while discussing question No. 1, it is not possible to hold, on the basis of the material placed before this Authority, that all the services rendered do not fall under FTS and that the entirety of service fee charged to the applicant does not constitute the income of ITM, U.K under the Treaty. There is some grey area in respect of certain services, as pointed out in the course of discussion supra. However, we have interpreted article 13(4)(c) of the Treaty and laid down the principle. We have also indicated broadly whether in relation to the listed services, the said provision is attracted. Further, we have attempted at the classification of various services by giving examples. It is for the applicant to approach the competent authority to determine the issue of tax deduction at source by filing an application under section 195 of the Income-tax Act. It is settled law that any order passed under section 195 is tentative and the rights of the payee or recipient are not thereby adversely affected (vide Transmission Corporation of A.P v. CIT, [1999] 239 ITR 587 (SC)). To what extent and at what rate the tax deduction has to be made by the applicant will be determined by the appropriate authority expeditiously in the light of the principles laid down and observations made in this ruling.

41. Accordingly, the ruling is given and pronounced on the 5th day of November, 2008.