1. The applicant-Real Resourcing Limited is a Company incorporated in United Kingdom and is said to be a tax-resident of UK. It is a subsidiary of S-Three Group Plc. In the application originally filed, the nature of services to be provided by the applicant in India are stated to be two-fold; (i) recruitment services where the applicant would place a candidate with an Indian company and receives payment for providing such service from the Indian company; (ii) referral services where the applicant would refer potential Indian clients to a third party based in India (likely to be another Indian-based recruitment agency) for which the payment will be received by applicant from the third party in India.
2. Broadly, it is the contention of the applicant that the payments received in respect of these services are not chargeable to tax in India as it has no permanent establishment in India and moreover, as per the India-UK Tax treaty (DTAA), the provision relating to ‘fees for technical services’ is not attracted. Therefore, it is submitted that while making payments to the applicant, the Indian clients are not obliged under law to withhold the tax at source.
3. The following question has been framed for consideration at the time of admitting the application:
Whether the payments received by the applicant for the proposed recruitment services and referral services from the Indian clients is liable to tax withholding under section 195 of the Income-tax Act, 1961 read with Double Taxation Avoidance Agreement between India and UK?
4. In the comments submitted by the designated Commissioner, it is pointed out that the applicant has not furnished full facts to establish that it has no permanent establishment in India while being engaged in recruitment related activities. Further, a stand has been taken that sub-Art. 4(a) of Art. 13 dealing with fees for technical services is attracted as the data-base maintained by the applicant for providing informations of suitable candidates for recruitment is a consultancy service and the applicant is making available the experience and skill of the candidates who seek recruitment.
5. The applicant has not chosen to avail of the opportunity of personal hearing. However, the applicant in its communication dated 23 November, 2009 gave more information regarding the referral services. It has been stated as follows:
“Real Resourcing Ltd will be rendering services to an Indian based recruitment company. These services will include making referrals of potential Indian clients and Indian candidates to the Indian based recruitment company for which Real Resourcing will be paid a referral fee by the Indian based recruitment company.
The Indian based recruitment company will be providing the recruitment services to the Indian clients and placing the candidates with the clients. The Indian based recruitment company will get a fee for recruitment services from its Indian clients which were referred to the Indian based recruitment company by Real Resourcing.”
6. The applicant has relied on the ruling of this Authority in Cushman & Wakefield Ltd.
7. In response to the additional information furnished by the applicant, the Commissioner has stated that as per the information downloaded from the internet, it appears that Real Resourcing Ltd is having an office at Nehru Place, New Delhi which is indicative of the presence of the permanent establishment of the applicant in India. In reply thereto, the applicant has stated as follows:
“We do have an address in New Delhi but this is basically a virtual office i.e, we rent the use of the address and telephone numbers but we do not have actual office space. Real Resourcing Ltd does not have any kind of physical presence in India and therefore we confirm there is no PE in India”.
8. Under Art. 13.2 of the DTAA, royalties and fees for technical services may be taxed in the contracting state in which they arise and according to the law of that state and if the beneficial owner is a resident of the other contracting state the tax rate shall not exceed the specified limits. Paragraph 4 of Art. 13 defines ‘fees for technical services’. It says:
“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 for 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.”.
9. Though the Commissioner, in his comments has attempted to bring the income in question within the scope of cl.(a) & (c) of Art. 13.4, we do not think that they have any application. The contention that the applicant will be rendering consultancy services which are ancillary and subsidiary to the application of a right or information of the nature described in Paragraph 3(a) of Art. 13 is untenable. The said paragraph contains the definition of royalty. It reads:
“payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, any patent, trademark, design or model, plant, secret formula or process or for information concerning industrial, commercial or scientific experience.”
10. Collecting data and analyzing it and making a data base for providing information on suitable candidates for recruitment, even if they are in the nature of consultancy services, cannot be considered to be ancillary and subsidiary to the enjoyment/application of the right or information referred to in paragraph 3(a). Moreover, by giving access to the data base, it cannot be said that the information concerning industrial, commercial or scientific experience will be transmitted by the applicant to the recruiting agencies. If the contention of Revenue is accepted, it would amount to unwarranted expansion of the terms FTS and Royalties. Consideration for providing information concerning industrial, commercial or scientific experience basically involves the sharing of technical know-how and experience which is not the case here. Secondly, it would be far-fetched to suggest that the ingredient of ‘making available’ technical knowledge, experience, skill, know-how or process is involved in this case. Taking steps to make available the experience and skill of candidates available for recruitment does not at all fall within the ambit of making available the technical knowledge and experience of the service provider. The expression ‘make available’ has been interpreted in a number of rulings of this Authority viz. Anapharm Inc, Intertek Testing etc. The test applied in the MOU to the US-India Tax Treaty concerning FTS has been approvingly referred to. The relevant paragraph of the MOU clarifies the position thus:
“This category is narrower than the category described in paragraph 4(a) because it excludes any service that does not make technology available to the person acquiring the service. 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.”
11. We do not think that the criterion envisaged by Art. 13.4(a) of DTAA has been satisfied in the instant case.
12. The exigiblity of such referral fee in relation to the services rendered in real estate sector was discussed by this Authority in the case of Cushman and Wakefield (supra). Some of the relevant observations are extracted hereunder:
“Assuming that managerial or consultancy services are involved in the present case, as the applicant has sought benefit of the Treaty we have to see whether such payments are FTS as per article 12(4)(b) of the Treaty, which lays down that services of such managerial, technical or consultancy nature can be FTS only if such services “make available” technical knowledge, experience, skill, know-how or processes, which enables the person obtaining the services to apply the technology contained therein. In the instant case, no expertise, or know-how has been “made available” to CWI by reason of rendering service of the said description. We are of the view that transmission of the technical knowledge, experience, skill, etc., from the person rendering the services to the person utilizing the same is contemplated by the article. Further, some sort of durability or permanency of the result of “rendering of services” is also envisaged which will remain at the disposal of the person utilizing the services. Thus, in the instant case, the “know how” or the technical knowledge or commercial experiences, etc., cannot be said to have been “made available” to the Indian company (CWI) merely by reason of customer referral. Consequently, it emerges that the referral fee paid by the Indian company is not FTS as per the phraseology “make available” used in article 12(4)(b) of the Treaty.”
13. If the payments received by the applicant are not in the nature of royalty or FTS then, they can be subjected to Indian income tax in terms of Art. 7 of the Tax Treaty only if the income results from a business activity carried on through a permanent establishment situated in India. The term ‘permanent establishment’ (PE) has been defined in Art. 5. On the facts stated by the applicant, it cannot be said that the applicant operates through a permanent establishment in India. Catering to the function of referring the potential Indian candidates to the Indian based recruitment company without creating any commitment to recruit them does not, without anything more, give rise to an inference of PE. For rendering such services, a fixed place of business in India or dependent agent need not necessarily be there. The applicant has clarified that it has really no office or business place in New Delhi and that the address in New Delhi is basically a ‘virtual office’. Evidently, it means that the address and phone number is given so as to serve as a contact point and for some routine work of inconsequential nature. However, as and when the applicant starts extending its referral services to India, the factual position will be notified to the Commissioner herein so that inquiries could be made as to the role if any played by the so-called office in India. At the same time, the Department is bound by the legal position clarified herein and in Cushman and Wakefield. Subject to this observation, we are of the view that the receipts in the nature of referral fee from the Indian based recruitment company cannot be subjected to tax as business profits in view of the provisions of the Treaty.
14. However, it is made clear that this ruling would only apply to referral services. As regards the proposed recruitment services, no details have been furnished by the applicant as to the exact modalities of operations. In the latest communication of the applicant, reference has been made only to referral services and not a word has been said about the recruitment services, though the Department in its comments did point out that the details were not forthcoming. We, therefore, decline to give any ruling on this aspect.
15. The question is answered as indicated in para 13 above.