Aircom International Ltd. v. Cit

Narendra Prasad Sinha, Chairman:— Aircom International Limited (“Applicant” or “Aircom UK”) has filed an application for advance ruling on 23 May 2012 seeking ruling under section 245Q(1) of the Income-tax Act, 1961 (‘the Act’). The same was admitted on 10 January, 2014.

2. The Applicant is a company incorporated in England and Wales and is a non-resident entity. The Applicant is now known as TEOCO. Aircom International India Private Limited (‘Aircom India’) is a company incorporated in India and is wholly owned subsidiary of the Applicant and is engaged in business of software solutions and consultancy business in the area of telecommunications. The Applicant has entered into a Management Service Agreement (“MSA” with its subsidiaries including Aircom India, effective from 01 July, 2007 whereby the Applicant provides various Management Support Services to Aircom India with a view to rationalize and standardize the business conducted by Aircom India in India in accordance with the international best practices. The services as per the MSA are as under:

• Establishment and set-up advice and services

• General management advice and services

• Group bulk purchasing arrangement

• Group-led sales, marketing and business development services

• General Treasury and financial management advice and services

• Legal, Human Resource, Information Technology (‘IT”) services

3. The Applicant has filed the present application in connection with this MSA and the following questions have been raised in the application:

(i) Whether based on (he facts and circumstances of the case, the payments being made by Aircom India to the Applicant under the MSA for the services specified there under would be characterized as “fee for technical services “(“FTS”) under Article 13(4) of the convention between the Government of the Republic of India and the Government of the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and capital gains (“the India-UK Treaty”)?

(ii) Whether based on the facts and circumstances of the case, the payments being made by Aircom India to the Applicant for availing the services specified under the MSA would be in the nature of “Royalty” within the meaning of the term in Article 13 of the India-UK Treaty?

(iii) If the answers to Question (1) and (2) above are in negative, i.e., the services rendered by the Applicant to Aircom India are neither characterized as FTS nor are in the nature of Royalty, whether the payments received by the Applicant should be treated as business income in the light of the statement of facts attached herewith (Refer Attachment III) and the declaration provided by the Applicant that it does not have a permanent establishment in India in terms of Article 5 of the India-UK Treaty, and will be chargeable to tax in India?

(iv) Based on the answers to Questions (1) to (3) above, whether the payments made by Aircom India to the Applicant suffer withholding tax under section 195 of the Act and at what rate?

Submission of the Applicant

4. Shri Rajan Vora, the Ld. AR of the Applicant submitted that a Master Service Agreement effective from 01.07.2007 was made between Aircom UK and the fifteen parties listed in Schedule-1 of the said agreement, to which Aircom India was also a signatory. The objective of this agreement was to rationalise and standardise the business conducted by all the subsidiaries in accordance with the international best practices. Further, the MSA was aimed to facilitate the smooth business operations aligning it with the global standards of the Aircom Group. It was explained that the parties were independent contractors and nothing contained in the MSA gave either party the power to direct and control the day-to-day activities of the other in any manner. It was further submitted that the services provided by the Applicant were not binding on Aircom India and that Aircom India had the right to engage any other person to render any services that were similar to or duplicative of the services rendered by the Applicant by virtue of the MSA. Further that these services were procured and utilized by Aircom India for its own business purposes and not for the benefit of any of its customers.

5. The Ld. A.R. explained that Aircom India was making payment to the Applicant for specific global support services which were in the nature of general management, finance, information technology, marketing, sales, consulting and legal support services. The payment was being made to the Applicant's account in UK. The service fee payable was as per Schedule-2 to the agreement and the same was based on the total cost incurred by the Applicant in providing these services, as increased by a mark-up of 6%, and apportioned to various affiliates (group entities) to which such services were provided.

6. The Ld. A.R. submitted that as per Explanation 2 to Section 9(l)(vii) of the Act, fee for technical services (‘FTS’) is defined as consideration for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel). However, Article 13(4) of India-UK Tax Treaty defines FTS as payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provisions of services of technical or other personnel). Based on the definition of FTS under the Income-tax Act and India-UK DTAA, the Ld. A.R. explained that the definition of FTS was narrower under the Treaty than under the Act. Therefore, the provision of India-UK Treaty was more beneficial to the Applicant than the provision of the Act. Accordingly, the beneficial provision of India-UK Treaty was applicable in the case of the Applicant under Section 90(2) of the IT Act which stipulates that provisions of the DTAA shall apply to the extent they are more beneficial to the assessee.

7. The Ld AR has drawn our attention to Article 13(4) of the India-UK DTAA which defines FTS and submitted that the payments made by Aircom India to the Applicant was not for the enjoyment of any right, property, information or equipment and, therefore, the services provided would not fall within the purview of Article 13(4)(a) and 13(4)(b) of the Treaty. The Ld. AR emphasized that under the India-UK Treaty, services will fall within the category of technical services, only if all the following conditions were satisfied:

a) The services were technical or technical consultancy services;

b) The services “make available” technical knowledge, skill, experience, etc. or consist of the development and transfer of a technical plan or design; and

c) Such knowledge, skill, experience, etc. was technical in nature.

8. According to the Ld. AR, in order to be characterized as FTS under the India-UK Treaty, the services need to be in the nature of technical or consultancy services. It was submitted that the services rendered to Aircom India were primarily for managerial services and were not technical or consultancy in nature. The Ld. AR explained that the payments received from Aircom India under consideration shall not be covered under said Article 13 of the India-UK Treaty on account of the following:

a) Article 13(4) of the India-UK Treaty specifically excludes the term “managerial services”. Thus, managerial services are not intended to be covered therein.

b) The payment for managerial services would not be covered under the term “technical or consultancy services “.

c) Even if it is argued that managerial services are covered under the term “technical or consultancy services “, such managerial services do not make available technical knowledge or skill to Aircom India and thus would be outside the scope of taxability under Article 13(4) on FTS of the India-UK Treaty.

9. Thus the contention of the Applicant was that the payment made by Aircom India to the Applicant was in respect of managerial services only. Further that the managerial services provided by the Applicant to Aircom India did not make available any technical knowledge, experience or skill.

10. The Ld. AR explained that the word ‘managerial’ was initially included in the original definition of FTS but was omitted by the revised DTAA between India and UK entered into in the year 1993. This shows that intention of the Treaty partners was to exclude the managerial services from the purview of the Article 13 of the treaty. The Applicant has placed reliance on the Memorandum of Understanding (MoU) entered into between India & USA. The MoU, on Article 12 of the India-US Treaty, which is akin to Article 13(4) of the India UK Treaty, has interpreted the definition of fee for included services (FIS) and has interpreted the meaning of the terms ‘technical or consultancy services’. As per this MoU only technical or consultancy services arc covered within the ambit of Article 12 and that a technical service is one that requires an expertise in technology. Further, the MoU specifies that a consultancy service is of an advisory nature and consultancy services which are not of a technical nature cannot be ‘included services’ under the India - US treaty. The Ld AR emphasized that the services rendered under MSA were not of technical nature and hence would not fall under the purview of ‘technical or consultancy services’. According to the Ld AR, technical services would imply a service requiring expertise in technology whereas managerial services were more towards adoption and carrying out the policies of the organization. The global support services rendered by the Applicant under MSA were geared to ensure uniformity in processes/practices/systems followed by the Aircom group globally. These were internal organization support services that benefit all Aircom group entities worldwide and were only managerial in nature and not included in the definition of FTS under India-UK treaty.

11. The Ld. AR emphasized that the global support services being provided by the Applicant as per the MSA did not ‘make available’ any technical knowledge, experience or skill to Aircom India. In the absence of definition of ‘make available’ in the Indo-UK DTAA, the Applicant has taken the interpretation of the term from the MoU to the Indo-US DTAA which excludes any service that does not enable the person acquiring the service to apply the technology contained therein, from the definition of FTS. It was stated that technical services would employ a service requiring expertise in technology whereas managerial services were more towards adoption and carrying out the policies of an organisation. The Applicant has placed reliance on the following judicial precedents which have distinguished between technical services and managerial services and on the issue of services being made available:

(i) Boston Consulting Group Pte. Ltd. (93 TTJ 293)

(ii) P. No. 28 of 1999 (242 ITR 208 -AAR)

(iii) AEG Telefunken (233 ITR 129- Karnataka High Court)

(iv) Ernst & Young (P) Ltd. (323 ITR 184 (AAR))

(v) McKinsey & Co. (99 ITD 549)

(vi) Raymond Ltd. (86 ITD 791)(Delhi)

(vii) National Organic Chemicals Industries Ltd. (96 TTJ 765)

(viii) Akamai Technologies Ink (404 ITR 495)(AAR)

(ix) Bombardier Transportation Sweden AB (60 CCH 314)

(x) US Technology Resources (P) Ltd. (407 ITR 327)(Kerala HC)

(xi) CLSC v. CIT (80 TTJ 806 (CAL))

(xii) Anapharm Inc. (AAR No. 746 of 2007)

(xiii) Bharti AXA General Insurance Co. Ltd. (326 ITR 477)

12. The Applicant thus contended that on the facts and circumstances of the case the payment received by it from Aircom India under the MSA was not liable to tax in India under the definition of FTS under Article 13.4 of the India-UK DTAA.

13. On the issue of royalty, the Ld. A.R. submitted that the payment made to the Applicant by Aircom India does not fall within the definition of ‘Royalty’ as per Explanation 2 to Section 9(1)(vi) of the Act or within the meaning of the term in Article 13 of India-UK Treaty. It was explained that the term ‘Royalty’ as defined in the Act necessitates the transfer of a right from the owner of such right to another person for commercial exploitation. The Ld AR explained that the payments were neither for use or right to use any intangible or tangible property, nor do the services involve the right to use copyright, patent, design, knowhow or equipment and there was no transfer of any technical plan or design. Further, that the IT support services relating to maintenance of the Groups IT inirastructure, did not develop/customise/modify any software and did not transfer any technical design or plan. It was explained that the agreement for provision of global support services was to ensure uniformity in systems/practices followed by Aircom Group globally and not for the use of a “process” or “formula”. The Ld AR urged that under the MSA, the Applicant did not divulge any special knowledge or experience (i.e. the source code, algorithms etc.) to Aircom India, and the contract was not for use of or right to use industrial, commercial or scientific experience by Aircom India as no know-how had been transferred to Aircom India or other entities of the Aircom Group on account of the services provided under the MSA.

14. With regard to Question No. 3 the Applicant has submitted that it does not have a permanent establishment (PE) in India as per the provisions of Article 5 of the India-UK DTAA and no business was carried on in India. Therefore, Aircom India was not required withhold tax on the payments made to the Applicant.

Submission of the Revenue

15. On the other hand the Revenue has submitted that the nature of Applicant's services under the MSA not only fall within the ambit of technical and consultancy services but the services rendered were also ‘made available’ to Aircom India. It was stated by the Revenue that the Applicant was requested to provide evidence for rendering of services from UK in form of copy of emails but the Applicant did not provide all information and had provided selective emails and that no emails were furnished which could show the exact nature of the services rendered by Aircom UK to Aircom India. The CIT in his reports has qualified that the comments were provided without full assistance from the Applicant with regard to the services for which answer is sought from this Authority.

16. The Revenue has drawn our attention to the business profde of the Applicant & Aircom India and the details available in Form 3CEB Reports of Aircom India to emphasize that the Applicant was providing technology and consultancy services to Aircom India. According to Revenue, Aircom India was engaged in providing consultancy and support services to wireless network operators in South Asian countries by offering end-to-end wireless solutions through a blend of software consulting and training services and the Applicant was helping Aircom India to render its functions, which were technical in nature. It was submitted that services in the nature of Software Testing Services, Software Consultancy Services, Software Deployment Service/Product Delivery and Software Trading Activity (Sub-licensing) were provided by Aircom India to its clients with assistance from the Applicant through the services specified in the MSA.

17. The Revenue contended that the services rendered by the Applicant under the MSA were not only in the nature of technical and consultancy services but they also ‘made available’ technology to Aircom India on many counts, as under:

(i) The Functional Analysis provided in the Transfer Pricing Report for the FY 2013-14 shows that all functions right from Conceptualisation to Design Review to Marketing were technical functions. The Revenue has contended that under the head ‘Receipt of Management Support Services’, the Indian subsidiary has conducted, all the services as per the MSA, which were incidental to business and enabled Aircom India to conduct its business operations in an effective manner.

(ii) The clause of the MSA on Intellectual Property Ownership involves grant of IPR which was in the nature of ‘Royalty’ as it involved use or right to use Intellectual Property. A per clause 4.2, the parent (Aircom UK) licenses each subsidiary to use (IPRs) as is reasonably necessary for such subsidiary to enjoy the benefit of the services. Thus the Applicant was admittedly the beneficial owner of IPRs for which it was giving right to use to its subsidiaries and for which service fees was payable by the subsidiaries.

(iii) The Schedule 2 to the MSA provides the allocation formula for the Service Fees which is computed considering the Software Licence, Maintenance and Technical Support Services Agreement (SLA), as well. Thus, the consideration has direct reference to the Software License Agreement such that the services provided under MSA were ancillary and subsidiary to the Services provided under the SLA.

18. In view of above, the Revenue contended that the IPRs held by Aircom UK were provided to its subsidiaries with a right to use to further their business, for a consideration which had a direct and inherent link with the services provided under Software Licence Agreement. Thus, the services provided under MSA were directly and inherently linked to services under SLA and thereby were ancillary and subsidiary to such software products and services.

19. The Revenue has referred to the emails exchanged between the Applicant and Aircom India to draw the point that the services were in the nature of technical consultancy services and not purely managerial and that such technical services pass the test of ‘make available’. It was contended that email communications demonstrate as to how in the garb of so called marketing, promotional and training activities; technical inputs including software products, software services, technical training and legal inputs were provided by Aircom UK to Aircom India. We will revert to such communications as pointed out by the Revenue to examine their nature and the contention of the Revenue. According to Revenue, though the services were nomenclatured as General Managerial, Legal, Finance, Sales, Marketing, IT Services etc. in MSA; what was being actually provided was software products, software services, technical consultancy services, legal consultancy services, technical training services etc. Further that the words ‘Technical’ and ‘Consultancy’ were carefully avoided in the MSA to take benefit of the amended provisions of India-UK DTAA where the “Managerial” services have been taken out of purview of “Fees for Technical Services”.

20. The Revenue has drawn our attention to MoU concerning Article 12 (FIS) of India U.S Treaty, and explained that where an American company provides the formula of manufacturing to Indian entity, the test of “make available” was satisfied. Similarly, where American company sends experts to India to show engineers how to produce extra strong Wall Board, the make available test was satisfied. Similarly, make available test was also satisfied when an American consultant helps an Indian Company to arrive at its proper marketing strategy (instead of providing marketing strategies). On the contention of the Applicant that just because the services/discussions were continuous it cannot be said that the technological services were made available; the Revenue averred that if it was a prolonged discussion, the technology was made available for a longer period of time. It was further submitted that once certain issues were discussed with the employees of Aircom India and technical solutions were suggested, the employee of Aircom India gained the technical knowledge of resolving the same issue in future, independently. On the stand of the Applicant that the services provided were continuous because new issues kept coming up every now and then, it was argued that this does not mean that service recipient did not learn from the previous experience. The Revenue submitted that by advising/guiding the employees of Aircom India in project management or for resolving issues in technical services on a regular basis, the Applicant had ‘made available’ the technology to the Indian subsidiary. The Revenue relied upon the following decisions in support of the contention that the services rendered fulfilled the test of “make available”:

a) Shell India Marketing Pvt. Ltd. (AAR) 2012-LL-0117-28

b) US technology resources Pvt. Ltd. (Cochin ITAT) 20T3-LL-0927-130

c) Oberoi India Hotels Pvt. Ltd. (231 ITR 148 (SC))

d) Andaman Seafood Pvt. Ltd. (SLP No. 36385/2014) (SC)

21. According to the Revenue, the services under MSA made available technical knowledge, experience, skill, know-how in nature of software products services, legal services and the related sales, marketing & provisional services. Since the Applicant and the subsidiary were engaged in a highly technology intensive telecom industry, the predominant nature of all activates was technical in nature. The Applicant not only conceptualized, designed and developed products; it also helped the subsidiaries to understand the technical features of its latest upgrades. It provided handholding to the subsidiaries for explaining such technical features to their respective clients and to arrive at the most appropriate marketing and sales strategies. It also helped the subsidiaries to arrive at the most prudent legal/contractual agreement and gave inputs to the subsidiaries for Core marketing and Brand building. According to Revenue, as per Article 13(4)(a) and 13(4)(b) of India-UK DTAA, definition of FTS included amounts paid as consideration for rendering of any technical or consultancy services including the provision of services of a technical or other personnel which were ancillary and subsidiary to the application or enjoyment of the right, property or information which was use or right to use of any information concerning industrial, commercial or scientific experience. According to Revenue, in the instant case, the Applicant was providing services which were technical in nature and which were made available to the subsidiary to enable them to function independently. The other services as mentioned in MSA were primarily in the nature ancillary and subsidiary to the technical information provided by the Applicant to Indian entity.

22. On the issue of royalty, the Revenue has submitted that payment by Aircom India to Applicant was for the use of information concerning industrial, commercial or scientific experience and hence it was covered within the ambit of ‘Royalty’ under India-UK DTAA. In support of this argument, the Revenue has submitted that the Applicant had passed on its experience in network planning, optimization, open source software (OSS) and consultancy for mobile networks to Aircom India which was engaged in providing consultancy and support services to wireless network operators in South Asian countries by offering end-to-end wireless solutions through a blend of software consulting and training services. Hence, it is sharing its past industrial/commercial/scientific experience with Aircom India which was within the ambit of ‘Royalty’ under the India-UK Treaty.

23. According to the Revenue, Aircom UK was the beneficial owner of IPRs relating to services & their provisions, and the right to use these IPRs was given to its subsidiaries. The title over use of these intangible rights (IPRs) remained with the Applicant during use of these IPRs by subsidiaries and the consideration was being paid by the subsidiary for use of these IPRs to the parent. Further, the consideration was payable based on the amount of use of these IPRs as determined under provisions of schedule 2 of MSA, which had direct reference to the Software License Agreement such that the services provided under MSA were ancillary and subsidiary to the Services provided under the software license Agreement. The Revenue has relied on the following case laws in support of its contention that the consideration was royalty.

(i) Oncology Services India Pvt. Ltd. [TS-209-ITAT-2017]

(ii) TNT Express Worldwide (UK) Limited [TS-253-ITAT-2016]

24. The Revenue has further submitted that the payment made by Aircom India to the Applicant was also licensing for software and this would be ‘Royalty’ under the Explanation 4 to Section 9(l)(vi) inserted on 01.04.2012 with retrospective effect from 01.06.1976. To support its contention, the Revenue has relied on the following cases:

(i) Synopsys India (P) Ltd. (2016-LL-0405-63)

(ii) Samsung Electronics Co. Ltd. (245-CTR-481-HC-201l)

(iii) Millennium IT Software Ltd. (338 ITR 391) (AAR)

(iv) ING Vysya Bank Ltd. (61-DTR-401) (Bang)

(v) Skillsoft Ireland Ltd. (AAR No. 985 of 2010)

25. On the issue of PE, the Revenue has averred that there was a service PE as per Article 5(2)(k) of the India-UK Treaty. As per this Article, if the employees of Applicant were in India for more than 30 days for rendering service in any twelve-month period, it will create service PE. The Revenue has contended that from the list of employees of the Applicant present in India submitted by the Applicant, it was evident that they were in India for more than 30 days in a twelve-month period and, therefore, there was service PE in India.

Rebuttal of the Applicant:

23. In the rejoinder the Applicant submitted that the Revenue had misunderstood the services rendered by the Applicant to Aircom India with the business operations of Aircom India. The Applicant reiterated that the services rendered were as per Schedule-3 of the MSA and the exact role of the Applicant and the benefit to subsidiary by availing those services was as under:

(i) General management support services-

• Strategic management support; target setting;

• Direct customer negotiation;

• Business review and consultation;

• Key executive decision making;

• Provision of central services for regional requirement.

It has further been submitted that services under this head allow the entities of the Aircom Group (including Aircom India) to gain benefit of the skills, expertise, experience, information etc. possessed by the Applicants to ensure that the international best praetices are followed globally.

(ii) Group-led sales, marketing and business development services-

• Vendor management;

• Brochure production for all countries;

• Exhibition used for advertising products and services;

• PR campaigns;

• Creation and maintenance of websites for all countries;

• Sales presentations.

It has been submitted that by leveraging on the central repository, the Indian subsidiary benefits from using global expertise for its marketing strategy and activities.

(iii) General Treasury and financial management advice and services-

• Provision of finance advice and expertise;

• Overall management of banking and cash facilities for all regions;

• Tax advice;

• Leasing;

• Financial management;

• Budgeting;

• Accounting MIS direct support;

• Contract management.

It has been submitted that by utilising these services, Aircom India receives multiple benefits complying with international best practice, such as accurate financial reporting, avoidance of complex reconciliations and simplification of process and efficient and effective debtors and inventory management.

(iv) Legal services-

• Contract management;

• Contract negotiations and advice;

• Legal compliance assistance which comprises of review of agreements from various aspects such as legal aspect, payment terms, liabilities clause etc.

It is submitted that the key benefits received from these services are protection of the companies interest, specialised legal expertise and protection from liabilities and claims that Aircom India may be vulnerable to. It is also stated that the Applicants provides ethics training material, anti-bribery ethics training material etc. every month to its group entities.

(v) Human Resource Services-

• Support and organising various leadership development programmes;

• Support in formulation of standard policies and processes across the Aircom Group;

• Feedback and support regarding evaluation of performance and support in further development of human resources;

• Deciding the composition and benefits for the employees of Aircom India. It has been submitted that these services provide standard policies and processes in relation to compensation and benefits,

• Providing pre-requisites or minimum criteria for recruiting personnel at various levels, performance evaluation, training and development etc.

(vi) Information Technology (IT) services-

• Wide area network;

• Server management;

• Exchange systems;

• Help desk; and

• Direct technical advice, support and management including implementation.

It has been submitted that the Applicant acts as a co-ordinating agency for the global software licences, servers and softwares procured for the operating systems from Microsoft, Blackberry etc. that are purchased from independent vendors and receives payments for the direct purchase cost of licences and the relevant services from its subsidiaries.

(vii) Any other services- These include general support services in relation to insurance charges and strategic development and project team support (as required), project executive, central sourcing of computer equipment, software licences etc. It is reiterated that the services help the Aircom Group in following globally consistent policies and provide access to central platforms and systems to the group entities.

26. The Applicant further submitted that it had provided all the facts including the details of the nature of the services rendered by the Applicant and also substantiated the same with the emails to illustrate each type of service rendered by the Applicant. The Applicant filed additional email evidences along with the submission dated 03.11.2017. It was contended that these email communications clearly substantiate the precise nature of the management support services rendered by the Applicant and were in line with the description as mentioned in the MSA.

27. The Ld. A.R. submitted that the support services provided by the Applicant were merely general management advisory services in nature and did not make available technical knowhow to the recipient of such services. These services were aimed at assisting Aircom India in carrying on its business operations in line with the model, software (Information Technology) policies and best practices followed by the Aircom group. According to the Ld. A.R., the services rendered were only managerial in nature and did not qualify as FTS as per the provisions of India-UK DTAA. It was further submitted that even if some of the services are held to be in the nature of consultancy or technical services, they do not satisfy the criteria of “make available” as envisaged in India-UK DTAA.

28. The Ld. AR reiterated that the Revenue had erroneously linked the business operations of Aircom India with that of the services rendered by the Applicant under the MSA. The Ld. AR explained that under each of the core services viz. Software Testing Services, Software Deployment Services, Consultancy Services etc, the Applicant only provides necessary guidelines and instructions for rendering of the services by the Indian subsidiary, for which the Applicant charges the subsidiary the costs incurred along with a markup. It was submitted that if the Applicant had provided technical inputs under MSA as alleged by the Revenue, it would result in duplicity of services, which was not a viable commercial proposition.

29. The Ld. AR reiterated that the services rendered under MSA were only managerial in nature and did not ‘make available’ any technology to Aircom India. In its supplementary legal paperbook, the Applicant has further relied on the following decisions in support of its contention that the services were ‘managerial’ in nature and did not ‘make available’ technology to Aircom India:

(i) A.P. Moller Maersk AS (392 ITR 186)(SC)

(ii) SCA Hygiene Products AB (123 Taxmann.com 152 (Mumbai)) dated 08/01/2021.

(iii) Kotak Securities Ltd. (388 ITR 1)(SC)

(iv) DTZ Debenham Tie Leung Ltd. (AAR No. 1371/NCR/2012 dated 19/07/2019).

(v) John Deere Pvt. Ltd. (102 Taxmann.com 267 (ITAT Pune)).

(vi) Invensys Systems Inc. (317 ITR 438 (AAR)).

(vii) Intertek Services (307 ITR 418 (AAR)).

Findings and Rutins

30. We have carefully considered the facts of the case, the submissions of the Applicant, the objections raised by the Revenue and the material details brought on record in the course of this proceeding. The Applicant is engaged in development of software, network planning, optimization, open source software and consultancy for mobile network from conceptualisation to the final product, which is highly technology intensive. The Indian subsidiary provides software testing services, consultancy services to the Applicant as well as third parties which include software deployment services and software trading services for which it charges the Applicant the cost along with the mark-up. This transaction between the Applicant and Aircom India is not the subject matter of this application. The Applicant also renders management support services to its subsidiaries including Aircom India in order to conduct its business operations in an effective and uniform manner. The services under the MSA allow the entities of the Aircom Group (including Aircom India) to gain benefit of the skills, expertise, experience, information etc. possessed by the Applicants to ensure that the international best practices are followed globally and uniformly. We are concerned with the services rendered under MSA only.

31. Aircom UK is providing various services to Aircom India in terms of the MSA effective from 01.07.2007 and the first question to be decided is whether the service charges received by the Applicant under the MSA would be characterised as FTS under Article 13(4) of the India-UK DTAA. The services being provided as per the MSA are stated to be supportive in nature in the backdrop of which Aircom India carries out its business activities. The Revenue has submitted that Aircom UK conceptualises and designs a software product and provides the right to use to its subsidiaries, which in turn serve the clients, based on technical inputs supplied by Aircom UK. The core activity of the Applicant and Aircom India is software related services and the type of services was explained by the Applicant as under:

32. The software development services by Aircom India were done exclusively for the Applicant i.e. Aircom UK, while the software deployment services/product delivery were rendered exclusively to associated enterprises (AEs). The software consultancy services were rendered both to associated enterprises as well as to the third parties. Under software sub-licensing, Aircom UK had sub-licensed ‘Enterprise suite’ and other software such as Asset 3G, ILSA, Advantage, Connect, OSS Expert, Arraywizard and Optima on P2P basis to Aircom India. Aircom India had in turn further sub-licensed these products to third party clients in India. According to the Applicant under each of these core services viz. Software Testing Services, Software Deployment Services, Consultancy Services etc, the Applicant was only providing necessary guidelines and instructions for rendering of the services by the Indian subsidiary, for which the costs incurred along with a mark up was being charged. Apart from these technical services Aircom UK was providing Management Support Services to all its affiliates including Aircom India. In the present application, we are concerned only with the services rendered under MSA and not with the core software related technical services. The contention of the Revenue is that the Applicant was providing technical inputs to Aircom India in the garb of various services rendered under MSA, which we have to examine.

33. The Revenue has referred to Clause 4 of the Agreement in respect of Intellectual Property Ownership and Schedule 2 regarding service fee payable and contended that the consideration being paid under MSA was for the use of the IPRs of the parent. According to the Revenue, the consideration had a direct reference to the Software License Agreement (SLA), which makes the services provided under MSA as ancillary and subsidiary to the services provided under the SLA. The Clause 4 of the agreement regarding IPR is found to be as under:

1. Each Subsidiary acknowledges and agrees that the Parent (or its licensors) is the beneficial owner of the Intellectual Property Rights subsisting in and associated with the Services and their provision.

2. The Parent hereby licenses each Subsidiary to use the Intellectual Property Rights as is reasonably necessary for such Subsidiary to enjoy the benefit of the Services.

34. The above clause merely stipulates that the parent i.e. the Applicant is the beneficial owner of the IPRs subsisting in and associated with the services and their provisions. As the services were being provided by the parent to various subsidiaries this clause merely enabled the subsidiaries to use the IPR to enjoy the benefit of the services. The contention of the Revenue that the Applicant had given right to use these IPRs to the subsidiaries and for which service fee was payable by the subsidiaries, is not found correct. What the Applicant had agreed under MSA was for the provision of various services to the subsidiaries and the clause regarding IPR merely entitled the subsidiaries to enjoy the benefit of the services without violation of IPR rights of the Applicant. The payment under the MSA was in respect of actual rendering of the services and not towards right to use the IPR. If no service was rendered to any subsidiary nothing was payable by it.

35. The mechanism of service fee as per Schedule 2 of the MSA agreement prescribed that fee payable by the subsidiary shall be calculated as per formula which was based on total gross trading revenue of the subsidiary and the parent. The ‘total gross trading revenue’ excluded the effect of transfer pricing under the SLA (Software License, Maintenance and Technical Support Services Agreement) entered into between the Parent and the relevant Subsidiary. Only because the transfer pricing under the SLA was excluded from the ‘total gross trading revenue’ for the purpose of calculating the service fee payable under MSA, it does not establish that the services provided under MSA were ancillary and subsidiary to the services under SLA. Therefore, this contention of the Revenue is not found acceptable and is rejected.

36. So far as taxability of the services under MSA is concerned there is no dispute that the services are taxable under section 9(l)(vii) of the I. T. Act. However, the definition of FTS is narrower under the India-UK DTAA than under the Act and the Applicant has sought to avail that benefit under Section 90(2) of the IT Act, which stipulates that provisions of the DTAA shall apply to the extent they are more beneficial to the assessee. Article 13 of Indo-UK DTAA defines royalties and lees for technical services. As per the definition in Article 13.3 of the convention the term “royalties” means:

(a) 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, including cinematography films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and

(b) payments of any kind received as consideration for the use of or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic.

37. The Article 13.4 of the Indo-UK convention stipulates that “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.

38. Thus, the services will qualify as FTS in the following conditions only:

(i) they are ancillary and subsidiary to the services rendered for which royalty [as referred in para 13.3(a)] is being paid; or,

(ii) they are ancillary and subsidiary to the enjoyment of property for which royalty [as referred in para 13.3(b)] is being paid; or,

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

39. In order to include FTS under clause (a) and clause (b) of Article 13.4 of the Treaty, there has be payment of royalty and the services have to be ancillary and subsidiary to the services for which royalty is being paid. There is no payment involved in this case as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment. Therefore, the clause (b) of Article 13.4 of the Treaty is clearly not attracted. There is payment on account of consideration for the use of, or the right to use, technology under Software License, Maintenance and Technical Support Services Agreement but there is no royalty payment as per this agreement. As explained by the Applicant only the costs incurred for these services along with a mark up was being charged and there was no stipulation of payment of any royalty. Further, the sub-licensed softwares were being traded by Aircom India and the Applicant was getting only a part of the turnover. The Revenue has also not brought on record any evidence that the Applicant was receiving any royalty from Aircom India. In the absence of any royalty payment, the clause (a) of Article 13.4 of the Treaty is also not getting attracted. This leaves us with clause (c) of Article 13.4 of the Treaty. On an analysis of Article 13.4 read with clause (c) it follows that FTS is a 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. There are two limbs to this Article, firstly, it is required to be established whether the consideration is for rendering of technical/consultancy services and secondly, whether those services ‘make available’ the technology to the recipient.

40. The Applicant has contended that the services rendered as per the MSA were not technical or consultancy services but were managerial in nature. However, it has not been demonstrated as to how the services rendered were managerial and not technical or consultancy services. The MoU to the Indo-USA DTAA explains that technical services means services requiring expertise in the technology whereas the consultancy services means advisory services and that the two services might be overlapping. Further, the technical or consultancy services will be considered “included services” to the extent:

(a) They are ancillary and subsidiary to the application or enjoyment of a right, property or information for which the royalty payment is made, or;

(b) They make available technical knowledge, experience, skill, knowhow or processes or consist of the development and transfer of a technical plan or a technical design.

41. The MoU further clarifies that in order for a service fee to be considered “ancillary and subsidiary”, the service must be related to the application or enjoyment of the right, property or information. Thus, the pre-dominant purpose of the arrangement under which the payment of service fees is made must be the application or enjoyment of the right, property or information for which royalty is being paid. As no royally payment is involved in this case, we have to examine whether any of the services are technical in nature and whether it makes available technical knowledge, experience, skill, knowhow or processes or consist of the development and transfer of a technical plan or a technical design. The consultancy services which are not of a technical nature cannot be included service under the clause (b) above.

42. It is found that the MSA is in the nature of support services being provided by the holding company to the group entity specific to software solutions and consultancy business in the area of telecommunications. The service agreement specifically recognises the existence of proprietary knowledge and processes belonging to Aircom Group and that the specified services were required to be rendered to use such proprietary knowledge and processes. The meaning and scope of the term technical and consultancy services was considered by this Authority in the case of Intertek Trading Services India (P) Ltd. in re (2008) 307 ITR 418, and held that the expression “technical services” cannot be construed in a narrow sense. It has been observed therein that the term “technical” ought not to be confined only to technology relating to engineering, manufacturing or other applied sciences. Professional service imbued with expertise could be regarded as technical service. To reproduce from the order:

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.

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 India (P.) Ltd., [1998] 97 Taxman 453, 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 the 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.

There is a decision of Andhra Pradesh High Court in which the ambit of expression ‘technical service’ was considered. In G.V.K. Industries Limited v. Income-Tax Officer, (1997) 228 ITR 564 (AP), SSM 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).

10.7 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 informations 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).

43. We must appreciate the law in the light of the facts before us. When we apply the yardstick given in the above ruling, these services giving knowledge and experience of the telecommunication industry to Aircom India is not found to be managerial but rather mostly technical in nature. The list of services rendered under the agreement is enumerated in Schcdule-3 of the MSA, which is claimed by the Applicant as managerial in nature. The Agreement explains the underlying objective of the Agreement is to rationalise and standardise the business conducted by Aircom India in accordance with the international best practices. Further, the MSA was aimed to facilitate the smooth business operations aligning it with the global standards of the Aircom Group. There are nine types of services categorized in Schedule 3 of the MSA and it was clarified that the Applicant did not render services related to the pricing of software consultancy services which are rendered by Aircom India to its third party customers. We have looked into the services detailed in the schedule to the Agreement with which we are concerned. In the course of hearing the Ld Counsel of the Applicant was required to provide full description of each constituent of the intra-group of service by explaining what was the nature of service and how it got rendered to Aircom India. The Applicant was also required to provide evidence of rendering services and if it was done through e-mail, a copy of such e-mail was called for. The Applicant has provided the brief description of various services along with the cost-allocation and copy of e-mails in support of the services rendered vide letters dated 18.08.2017 and dated 03.11.2017, which have been considered.

44. The Revenue has contended that the Applicant did not give the complete documentary evidence i.e. e-mail correspondences. On the other hand, the Applicant has submitted that it has made available the complete evidences as available with him. What was required to be provided by the Applicant was the copy of complete e-mails pertaining to services rendered. Obtaining the entire e-mail correspondence, which are not connected with the services rendered, will have no relevance as we have to only examine the correspondence pertaining to the services rendered. If the Revenue had apprehension that relevant details regarding nature of services rendered were not provided by the Applicant, nothing prevented it to obtain the required details from Aircom India, to whom the services were rendered. The Applicant has certified vide its submission dated 03.11.2017 that the complete trajectory of e-mail correspondences for various categories of services rendered to Aircom India has been provided. The Applicant has provided evidence in respect of all ten categories of services provided. It has also filed a status on the particular sub-category of service availed or not availed by the recipient vide submission dated 18.08.2017 (Annexure-3 to that letter) and tagging with people visiting India/people providing services from overseas.

45. According to the Revenue, the Applicant and the subsidiary were dealing in the software products for Telecom Industry and the predominant character of all the activities was highly technical in nature. Even in the activities of Sales or Marketing, the predominant character of the discussions was the comparative advantage of software product/services which cannot be comprehended by a layman. Such services were not only technical but were rendered only by a technically competent person trained in the relevant field. The Revenue has also submitted that legal advice was not provided in the shape of a readymade solution from Aircom UK to Aircom India. Instead, Aircom UK had provided option A and option B by stating the implications of both options and thereby helped and enabled Aircom India to choose the most suitable option. Therefore, the legal advice or contract management or customer negotiations were invariably technical in nature as the predominant element of service was in respect of technical products and their comparative advantage. We find considerable force in the arguments of the Revenue. The nature of services rendered has already been mentioned earlier. The services rendered in setting-up and maintaining strategic management support, target setting, direct customer negotiation, business review and consultation, sales, marketing and business development services including vendor management, sales presentations, general treasury and financial management advice and services, legal services including contract management, contract negotiations and advice, legal compliance assistance, consulting including advice on pricing, customer negotiations, customer management etc., human resource services, information technology (IT) and solution services including network sharing development and strategic development, advice on sales presentations, training of IT engineers/employees etc. are all technical services which cannot be provided without the domain knowledge of the relevant field. Thus, the majority of the services arc technical in nature and the remaining one are in the area of consultancy. Therefore, we cannot agree with the submission that they were only managerial in nature and not in the nature of technical or consultancy services.

46. Next, we have to examine whether these services were being ‘made available’ to Aircom India. The Revenue has brought to our notice specific instances of services on the basis of E-mail communications that demonstrate that the nature of services rendered were not only technical or consultancy in nature but such services were also made available to Aircom India. We have gone through these instances and the communications brought to our notice and our comments thereon are as under:

Sl. No. Page No Contention of the Department Our observation 1 408-410 These emails are illustration as to how Mr. Antonin Huart, Contract Manager Aircom International limited UK, is guiding employees of Aircom India to finalize the drafting of contract with the Indian client AKD Technologies. The initial request for the draft contract is made by Mr. Akshat (Indian employee) to Mr. Antonin at page 410. Then on page 409 Mr. Antonin talks about conversation earlier which has resulted in some changes in the draft agreement. He has then requested Mr. Akshat to make those changes. Thus quite clearly, the Applicant is making available technical skill contract is given to Aircom India. The contract is finalized by Aircom India using technical expertise of the Applicant. The legal service rendered is consultancy in nature. However, the service is not being made available. 2 413- 414 These emails are illustration as to how Mr. Antonin is guiding employees of Aircom India to finalize a purchase order. The initial request is at page 414 by Mr. Akshat. Then on the same page, Mr. Antonin shares his concerns is case there is no limitation of liability. Then he explains the significance of unlimited contractual liability and then he gives two options to Mr. Akshat. Then on page 413, Mr. Akshat accepts option “B. Similar emails are on page 415 to 418 regarding assistance in finalization or purchase order. Other subsequent emails are also about finalization of purchase order/emails etc. Thus quite clearly, the Applicant is making available technical skill and experience of finalizing a purchase order, etc. It is not a case where finalized purchase order is given to Aircom India. The purchase orders are finalized by Aircom India using technical expertise of Applicant. The legal service rendered is consultancy in nature. However, the service is not being made available. 3 436-438 These emails are illustration as to how Mr. Benjminand Mr. Yewboon of Applicant are assisting/guiding Mr. Somesh Mittal and Mr. Akshat of Aircom India to finalise BTD sheet which is about engagement with Bliarti Airtel. The guidance is provided as to what should be the price, how much resources should be committed, etc. Thus, quite clearly, the Applicant is making available technical skill and experience of finalzing a business strategy. It is not a case where finalized business strategy is given to Aircom India. The business strategy is finalized by Aircom India using technical expertise of Applicant. The consultancy service rendered in this instance cannot be said to be made available. 4 447- These emails are illustration as to how employees of the Applicant are assisting employees of Aircom India to resolve technical issues that are arising during the training that Aircom India is providing to its client. At page 449 Ishan, employee of Aircom India, writes to Tom/Billy of Aircom International about a strange issues that he facing regarding Asset GSM/UMTS training. Aircom India is providing technical training to customers but certain issues are coming up GSM cell layers, terminal types, Nth best server etc. Due to this training is getting hampered. Then on page 448, the assistance is provided by the Applicant to resolve the issues. Some part of the assistance has been blacked out. But what is clear is that technical assistance is provided to resolve the issues. At page 447, Tom is talking about problem to do with component libraries not working. Then Adam Moore of the Applicant is asking Ishan to give a call so that he can help him in resolving the issues. Thus, quite clearly, the Applicant is making available technical skill and experience of fixing an issue. It is not a case where the issue is fixed by the Applicant and finalized result is given to Aircom India. The fixing is done by Aircom India using technical expertise of Applicant. This is part of IT service and beyond the scope of global nature of the IT service as defined in the MSA. In this case service is in respect of client specific issue i.e. the technical issue arising in the course of training. The service is not only technical in nature but it is also being made available in this case. 5 453-454 The Applicant has submitted that these emails pertain to the resolution of a query raised by a client regarding availability of a tool for converting certain reports into a specified format. This is in the nature of sales support service which has been rendered by the Applicant to Aircom India. It has been further submitted that since the product is not developed by Aircom India, it is required to avail such support services from the Applicant repeatedly, and therefore, it cannot be said that in this case the Applicant has made available technical consultancy services to Aircom India. In our support we would like to draw the attention of Hon'ble AAR to actual content of the email. The facts are that on page 454, Aircom India is requiring assistance in power tool/utility to convert TEMS LP/Pathloss data into Connect format. This power tool is supplied by the Applicant. Then there are subsequent discussion about use of this tool and improvement of this tool. It then says at page 453 that “Bharti has not specified any requirement as of yet. They just wanted to know if it is feasible. Also they might be looking for direct import. pl4 files from Pathloss to CONNECT. The utility we have is to convert pathloss reports in .csv & excel to XML files. We will discuss with them in details once we have some clarity on the deal and can try to convince on .csv format instead of .pl4 files. “Quite clearly these are resolution of technical query by Aircom India with the help of the Applicant through discussion and guidance. Strategies arc also suggested. Thus, quite clearly, the Applicant is making available technical skill and experience of providing service to a client. It is not a case where finalized product is given to Aircom India. The service to its client is provided by Aircom India using technical expertise of Applicant. This service is in respect of Sales and in nature of sales support service. A query was raised by a client regarding availability of a tool for converting certain reports into a specified format and the correspondence is in that regard. Even if the nature of correspondence is in respect of technical aspect of the query, there is no conclusive evidence that this service was actually rendered and the technical input was provided. Once a query is raised by the client the same has to be responded. The service is in the nature of Sales support and even if rendering of technical service is discussed, it is found not made available in this case. 6 461 This page illustrates various training programs being organized by Applicant for Aircom India. It talks about new starter training being carried out in India which will evolve into the official OPTIMA delivery programme to certify all OPTIMA engineers and ensure they are up to date on all the latest release improvements. It also talks about training and delivery schedule being update for the OPTIMA v7.0 release. There is no doubt that during training technical skill and experience is made available by the trainer to the trainee. This training program is in respect of release of OPTIMAv7.0 to ensure that all OPTIMA engineers are up to date on all the latest release improvements. We don't find any technical skill being made available in this case. 7 470-541 These emails are provided by the Applicant to support the business trip of Priya Nair to India in July 2014. The Applicant in its reply (Page 845) has submitted that these email exchanges pertain to certain version of interface of software which is used by some of the clients of Aircom Group. It further submitted that these are discussions made on time effort cost matrix and timelines associated with regard to certain projects. According to the Applicant these emails pertain to project management activities, which can never be classified as technical or consultancy services. Further, it was submitted that Aircom India would be required to avail such services from the Applicant time and again, and therefore, the test of make available is not satisfied. From these emails it can be clearly seen that the trip to India was made for the purpose of giving technical assistance of employees of Aircom India in their project management including resolving issues regarding Aircom products. There is no doubt that advising/guiding employees of Aircom India in project management or for resolving issues is technical services. Further, since employees are provided with regular guidance, the technology is made available This correspondence is part of Information Technology & Solutions service and explained to be pertaining to project management activities. In this case direct technical advice is found to be provided to employees of Aircom India. The solution to the problem faced by the client is provided through the employees of Aircom India which makes available the technical knowledge and expertise in this instance. 8 890 This email is an illustration as the Applicant has announced that enterprise v7.0 for the planning product has been launched. It was further mentioned in this email that it has a very high quality and an extensive features set. It is further mentioned that V7.0 is the largest product relapsed Aircom has ever done and it has various technology services i.e. LTE Technology support across the planning and optimization module including asset, advances and financial analysis. It again incorporates a new module in the form of carried traffic analysis providing an insight into backhaul and transmission network requirements that these new technologies other features including Google Earth support and extended corrector set available across enterprises. It enables Aircom to increase market penetration through diverse offering options and features developed in connection with leading equipment vendors. It is further mentioned it was done by the R&D Team in product engineering, software development and QA for achieving, The above discussion shows that the Aircom International has sent this mail to Aircom employees which are very much technical in nature. From the above details it is quite clear that Aircom International has provided all the above technical mobile products details to Aircom employees. Hence, in this way the technical help is being provided to Aircom employees and this help is fully make available to the Aircom India. This is part of General Management & Advice services and pertains to features of Enterprise v7.0 suite, which is part of sub-licensing activity. This mail sent to Aircom employees might be technical in nature explaining the features of the new version, but the service is part of General Management & Advice and the services are also not made available in this case. 9 947-948 This Email has been shown under the head sales. This email has been sent from Aircom International to Chandra Mishra etc. In this email, it is mentioned that the revised resource plan needs to be considered fast and if Aircom want to position itself in these projects then the Applicant have to sacrifice some margin and deliver some quality. In this email the performance of some employees was discussed as far as performance is concerned it was mentioned that some engineers were below average, some were very serious and most of them have so many escalation. It is further mentioned that they need expertise the Aircom has asked two months to trained the engineer but still the result were not satisfactory. The above discussion shown that the Aircom is providing highly technical nature services and for this purpose the engineers has been appointed. Further the performance of engineer is being monitored and after that they are being trained. This shows that the technical service is being made available to its client with the help of training and after monitoring the same. This correspondence is part of Sales service. The monitoring of performance of sales engineers and requirement of their training needs discussed in this correspondence makes it neither a technical service nor the service is being made available. There is no conclusive evidence that training was imparted in this case by the Applicant. Rather an exit plan for non performing resource was to be worked out. The service cannot be better than consultancy. 10 954 The assessee has given this email under the head sale while on perusal of this, it was noticed that it has the details of meeting with various persons and there mobile numbers and headset details. This shows that after conducting a meet or conference the skill is being transferred through training. It makes clear that it is nothing but training for the employees of the Aircom India so that they will be able to deal with the various things. In this way the make available clause is being satisfied. This correspondence is in respect of training of sales personnel about new features of ASSET 8.1 and CONNECT 8.1 as part of pre-sales activity. No technical skill can be said to made available in such training. 11 958 This email has been sent to Aircom employees related to the new release the Aircoms planning and optimization software and the update of both ASSET 7.0 and CONNECT 7.0 with Wimex and LTE mobile broadband technologies. This email has been shown under the head marketing while on perusal of it was notice that it has mentioned many technical nature advice and guidance this shown the rendered services are technical in nature and they are being make available through training. This is part of Marketing service relating to new release of software. We don't find any training imparted in this case. The new release was to be posted on the website, which can't be considered as training. Nothing is made available in this case. 12 968-969 This email is the illustration of make available through marketing. In this email has been shown under the head marketing while on this email free Webinar to the customer have been mentioned. It is further noticed that 500+ has already given signed up and the last Webinar held on last month with the title of LTE Network Architecture which was attended by 226 people over to time zone sessions. It is further mentioned that the recording has been view over 650 times and the slide over 1150 times. The above discussion shows that the technical nature training title LTE Network Architecture has been given to the various clients many times. Further for the simple non technical man, it not needed to understand the difficulties and features of LTE Network Architecture. It will be learned by the technicians only and for purpose the training is being organized. It shows that the highly technical nature services are being provided though training and the make available clause is being satisfied simultaneously. This is part of Marketing service and pertains to free Webinar to customers. This Webinar was meant for the clients/prospects and industry professionals and can't be considered as service rendered to Aircom India. It was part of global training activity of the Applicant. 13 1009-1010 This email has been shown under the head marketing. On perusal of it was noticed that it is a small cell case study where the prediction of 20 fold increase in data traffic growth over the next 5 year has been discussed and for this purpose a planning strategy to ensure capacity requirements were discussed. The case study was demonstration of how to plan the transport capacity for a small cell LTE layer on top of an existing UMTS/LTE Macro Cell and how to choose backhaul topology and routing. The above discussion shows that the planning and strategy is being discussed as well as transferred to various clients for inbuilt their decision making and help of policy making through case law. This case law study also pertains a part of training which the client make available for using the services received from the Applicant. It is further noticed that the above case study is not related to a common man. It is highly technical in nature it is specialized for the specific person. Though this is part of Marketing service the inputs were technical to plan strategies for future. The planning and strategies discussed through case studies may make it technical in nature but we don't find any inherent skill being made available. The case study was only to demonstrate how to plan the transport capacity for small cell LTE. 14 1017 This email has been shown under the head marketing while on perusal of it, some technical challenges, the videos from the sales training details have been mentioned. It again shows that the technical help and challenges are being solved through training; hence, the technical nature and make available clause are being satisfied for charging fee for technical services. Only the Demo videos for sales & pre-sales training were available on Pulse for navigation. Even if the contents are technical in nature, the placement of videos/Demos on website can't be considered as the service being made amiable. 15 1025 This email has been again shown under the head marketing while on perusal of it was notice in this email technical competent of the staff resourcefulness, inadequate work, has been detailed. It is further mentioned that the technical team is coming. It shows that the technical nature services are being provided. Only the required skills for marketing workforce are discussed. No evidence of service being made available. 16 1027 This was shown as illustration of marketing in which 5 bullet points related to Bharti have been mentioned and these points are related to scaling of systems, better utilization of resources within the integrated planning system, capability to speed up planning system, a definitive roadmap towards upgrades and features, availability to grow up and advanced capabilities as IVLP, PM states, MYRAID, IB wave, local presence and support. The above discussion shows that the services provided by the assessce are technical in nature and helpful for decision making for the client. This is part of Marketing service. Even if the contents of correspondence are technical in nature, we don't find any evidence of the service being made available. 17 1153 This mail has been shown under the head training on perusal of it was notice that various more technical session detailed has been mentioned. In this paper it was clearly mentioned “more technical details”. It shows that they are technical and services are being made available through training. It was only a Global Pre-Sales and Sales training for new features of ASSET & CONNECT 8.1. No technical service was rendered and make available condition not found satisfied.

47. The meaning and scope of the term ‘make available’ was interpreted by this Authority in the case of Intertek Trading Services India (P) Ltd.in re, (2008) 307 ITR 418, as under:

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.

48. When we examine the facts of the case on the yardstick of ‘make available’ as decided in the case of Intertek, it is found that the nature of services in this case are such that the technical knowledge, skills etc. was not passed on or did not remain with the recipient of the service, except in the case of “Direct Technical Advice, Support and Management” which is part of I.T. services. The training provided by the Applicant is found to be in respect of technical aspect of new launch of various software programmes and was meant for sales personnel. Such training cannot be said to have made available any technical knowledge based on which such new software modules could be developed by Aircom India independently. Similarly, in the legal and financial services some input from the other party is necessary to provide the service. In the case of contract management/negotiations, financial management etc. advice has to be given on the basis of the relevant facts and there has to be two-way communication. Therefore, even if the Applicant has sought certain clarifications or given options to Aircom India while rendering such services it does not mean that the inherent legal or financial competence of the Applicant was passed on to Aircom India. The consultancy services which are merely advisory in nature and which merely involve discussion and advice of routine nature or exchange of information, do not fulfil the requirement of “make available”. However, such competence is made available when a ‘Direct Technical Advice & Support’ was given under Information Technology services.

49. It is found that the Applicant was rendering the following specific services under I.T. services:

a) Wide Area Network.

b) Server Management.

c) Exchange System.

d) Help Desk, and

e) Direct Technical Advice, Support and Management including implementation.

50. The first four functions were general in nature but the ‘direct technical advice and support’ was in respect of specific technical issue. It is found from the copy of correspondences made available that direct technical advice and support was in respect of the specific issue flagged by Aircom India. The technical advice in respect of the problem faced by the clients was rendered through the employee of Aircom India only. Thus, the services in the nature of “direct technical advice, support and management including implementation” were not only technical in nature but were also made available to Aircom India. Such advice was not in respect of any outage on the Aircom network or troubleshooting of malfunctions in the I.T. infrastructure; rather it was in respect of the specific technical problem faced by the clients of Aircom India, which was flagged to the Applicant for resolution and the solution of which was provided through the employees of Aircom India. Therefore, this service was not only technical in nature but was also made available.

51. The Applicant has submitted that the Revenue had misunderstood the nature of services rendered under MSA and that the objection was based on the services rendered under software services and was not in respect of MSA services. This contention of the Applicant is not found correct. The evidences in the form of copy of e-mail communications were filed in respect of services rendered under MSA only and not in respect of software services. Therefore, the specific instance of technical service rendered and made available as pointed out by the Revenue is found to be in respect of MSA services only and these were not in respect of software services.

52. The next exercise will be to quantify the amount in respect of the technical services which fulfil the make available condition. As discussed earlier only a part of the I.T. services is found to have imparted and made available technical knowledge, experience, skill, know-how, process etc. which could enable the recipient to apply the same without reference to the service provider. The Applicant has filed copy of quarterly invoice raised for management support services along with the back-up calculations for each invoice. It is found that in the back up calculation the cost of each service has been separately computed. Therefore, one can assign the cost of technical service that were made available on the basis of this back up calculation for various services as available in each invoice. We refrain from doing this exercise as it will tantamount to determination of fair market value of property and, therefore, it is left to the Assessing Officer to work out the value of the “direct technical advice, support and management services” that were rendered and made available.

53. The Applicant has relied upon various decisions in support of the contention that services were only managerial in nature and also that no service was made available. The decisions cited by the Applicant with regard to the services being managerial are distinguishable on the basis of facts of those cases. In most of the cases the support services were of general nature which only provided a facility and, therefore, were more in the nature of managerial. The fact here is that the services under the MSA leverage on the Applicant's technical and technological expertise and, therefore, are in the nature of technical/consultancy services. In the case of A.P. Molar Maersk AS (supra), the issue involved was maintenance of global telecommunication facility which was vertically integrated communication system. It was an automated software-based communication system shared with various agents. On this specific fact it was held that the use of this facility was not a technical service and this finding was upheld by the Apex Court. In the case of SCA Hygiene Products A.B. (supra) consultancy service in the nature of hardware and software for various ERP system, CRM systems and other business systems were provided to Indian subsidiary at cost and it was held that the make available clause was not satisfied in this case. In the case of John Deere India Private Limited (supra) the payment was made for provision of I.T. support charges i.e., internet charges, use of e-mail charges, backup support services etc. On these specific facts, it was held that no technology was made available and further that in the web-based training no technical knowledge was imparted by the service provider and there was no transfer of technology. In the case of Invensys Systems Inc., the services rendered are found to be different in nature. The facts of other relied upon decisions are also found to be different.

54. The Applicant has strongly relied upon the ruling of this Authority in DTZ Debenham Tie Leung Limited (AAR No. 1371 of 2012 dated 19.07.2019)). In that case, managerial services with regard to Article 13.3 and 13.4 of the India-UK DTAA were exhaustively dealt with along with the relative case laws. This Authority held in that case that payment received for various services in terms of the services agreement was not in the nature of “fee for technical services” under Article 13.4 of India-UK Tax Treaty as the services rendered by the non-resident company do not meet the requirement of ‘make available’ under the treaty. However, unlike the present case no IT services were rendered in the case of DTZ Debenham Tie Leung Limited (supra). In the present case not only IT service was rendered but “direct technical advice, support and management” service is found made available. To this extent the facts are different and the ratio of that decision cannot be applied to this case.

55. On the other hand the Revenue has placed reliance on the case of Shell India Marketing Private Limited (AAR) (supra). In that case Shell India was receiving General Business Support Services from Shell International Petroleum Company Limited, a UK company under cost contribution arrangement. The services rendered were in the form of general finance advice, taxation advice, legal advice, advice on Information Technology, media advice, assistance in contract and procurement and assistance in marketing, which were held as consultancy services. The Authority had held in that case that while providing General BSS, SIPL worked closely with the employees of the Applicant and supported/advised them and therefore, the General BSS was made available to the Applicant. However, as discussed earlier there was no close working or rendering of service through the employees in this case. Further, in the case of Shell India the recipient had contended that it became the owner of any know-how generated from General BSS and there was no question of any royalty payment. On these facts the Authority had held that General BSS were made available in that case. However, in the present case there is no such claim of generation of any know-how or IPR through rendering of the services. As the facts of the case are distinct, the ratio of this decision cannot be applied to the present case.

56. The revenue has also relied upon the decision of Kochi ITAT in the case of US Technology Resources (P) Ltd. (supra). In this case the services offered by the US company to the Indian company were (i) management decision making, (ii) financial decision making, (iii) legal matters and public relation activities, (iv) treasury services and (v) risk management services; which were held as ‘technical and consultancy services’, by the ITAT, Cochin. The ITAT had also held that the clause of ‘make available’ was satisfied in this case. However, the Hon'ble Kerala High Court (407 ITR 327) has reversed this decision of the ITAT and held that the mere fact that the provision of a service may require technical input by the service provider does not per se mean that the technical knowledge, skills, etc. are made available to the person availing such services.

57. The decision of the Apex Court in the case of Oheroi Hotels (India) (P.) Ltd. (231 ITR 148) was already referred in the decision of Intertek Trading Services India (P) Ltd., discussed earlier. In the case of Andaman Sea Food Pvt. Ltd. v. CIT (SLP no 36385/2014), the Supreme Court dismissed the SLP against Calcutta High Court judgment wherein it was had held that payment of consultancy fees to Singaporean company for forex derivative transaction services was taxable as ‘Fees for technical services’ (‘FTS’). Thus the facts of the cases relied upon by the Revenue are also found different from the facts of the present case.

58. In view of the foregoing discussions, we are of the view that payment received for various services in terms of the MSA was not managerial but technical in nature. However, we also hold that only “direct technical advice, support and management including implementation” service provided under Information Technology (IT) service meets the requirement of make available’ in clause (c) of Article 13.4 under the treaty. Therefore, only this particular service is found to be in the nature of “fee for technical services” under Article 13.4(c) of India-UK Tax Treaty.

Whether Royalty?

59. The Revenue has contended that payment by Aircom India to Applicant was for the use of information concerning industrial, commercial or scientific experience and hence it was within the ambit of ‘Royalty’ under India-UK DTAA. According to Revenue the Applicant has passed on its experience in network planning, optimization, open source software (OSS) and consultancy for mobile networks to Aircom India which was engaged in providing consultancy and support services to wireless network operators in South Asian countries by offering end-to-end wireless solutions through a blend of software consulting and training services and hence it was sharing its past industrial/commercial/scientific experience with Aircom India, which was within the ambit of ‘Royalty’ under the India-UK Treaty. The Revenue has also submitted that Aircom UK was the beneficial owner of IPRs relating to services & their provisions and it had given right to use these IPRs to its subsidiaries. The title over use of these intangible rights (IPRs) remained with owner during use of these IPRs by subsidiaries. There was a consideration being paid by the subsidiary for use of these IPRs to the parent, based on the amount of use of these IPRs as determined under provisions of schedule 2 (clauses 1 & 2) of MSA. The consideration had direct reference to the Software License Agreement such that the services provided under MSA were ancillary and subsidiary to the services provided under the Software License Agreement. The Applicant on the other hand, has vehemently opposed the contention of the Revenue and submitted that the Revenue has misunderstood the scope of services as envisaged in the MSA and that the argument was based on the services being rendered by Aircom India, which was not the subject matter of this application. The Applicant has submitted that from the services rendered as per the Schedule in the MSA, it is apparent that the services of the Applicant were limited to information on various business and commercial matters, guidelines, templates, best practices and strategies for uniformity and seamless quality in business dealings of participating network entities, which amounted to mere provision of internal support services. Referring to Para 2 of OECD Commentary on Article 12, which is identical as in the case of Indo-UK Treaty applicable in the case, it was submitted that as know-how had not been transferred under the MSA, the services does not qualify as ‘Royalty’.

60. We have considered the submissions of the Applicant, the objections raised by Revenue, and the details of the Agreements submitted with the application. Article 13(3) of India-UK tax treaty defines ‘royalty’, which has already been reproduced earlier. For a payment to be construed as “royalty”, the same would need to be in relation to the use or right to use or transfer of all or any rights in relation to:

-Copyright, patent, trademark, design or model, plan, etc; or

-Any secret formula or process; or

-Information concerning industrial, commercial or scientific experience; or

-Industrial, commercial or scientific equipment.

61. In this case the Applicant had entered into a MSA with Aircom India to provide certain services as stated therein with the intention to help the Aircom Group in following globally consistent policies and provide access to central platforms and systems, so that the individual entities of the Aircom Group need not invest their own resources. Revenue has contended that the payment was for the supply of information concerning industrial, commercial or scientific experience, and hence royalty. We have carefully considered the MSA and the factual matrix of the case and are of the considered view that the services rendered by the Applicant in the MSA are not intended to supply any knowledge or information or any nature whatsoever concerning industrial, commercial or scientific experience. The scope of MSA states that the Applicant has to provide information on various business and commercial matters, guidelines, templates, best practices and strategies that could be adopted by the Aircom Group and is aimed at providing uniformity and seamless quality in business dealings of the participating network entities. By no stretch of logic, it could be said that payment for these services under MSA was for the supply of any knowledge or information. We don't find the passing on of Applicant's experience in network planning, optimization, open source software (OSS) and consultancy for mobile networks etc. to Aircom India in the scope of MSA, as alleged by Revenue. These core activities were not part of MSA and were not rendered by the Applicant under MSA. The Revenue could not point out any legally sustainable reason on the basis of which the payment for the services under MSA can said to be covered by Article 13.3 of India-UK DTAA. Thus, we agree with the contentions of the Applicant in this regard.

62. The issue of IPR in the MSA has already been discussed earlier and held that the Applicant had only agreed under MSA for provision of various services to the subsidiaries and the clause regarding IPR had merely entitled the subsidiaries to enjoy the benefit of the services without violation of IPR rights of the Applicant. Further, the payment under the MSA was in respect of actual rendering of the services and not towards right to use the IPR. It was also held that only because the transfer pricing under the SLA was excluded from the ‘total gross trading revenue’ for the purpose of calculating the service fee payable under MSA, it did not establish that the services provided under MSA were ancillary and subsidiary to the services under SLA. We are, therefore, of the view that the amount received by the Applicant towards the services rendered under the MSA would not be in the nature of ‘Royalty’.

63. In the case of Oncology Services India Pvt. Ltd. (supra) relied upon by Revenue, Oncology Service Europe had matured validated standard procedures, (SOP) accepted by regulatory body and which would take 7-10 years to establish validated clinical trial procedure on its own. The company had purchased the copyrighted SOP from the Oncology Service Europe (Germany) and was allowed to view only SOP established by Oncology Service Europe, which was non transferable. It was held that consideration for sharing of scientific, or for that purpose industrial and commercial experiences, in this case was taxable in India as royalty under article 13(3) of India-Germany DTAA. Thus the facts of that case are found to be totally different.

64. In the case of TNT Express Worldwide (UK) Ltd. (supra), the U.K. Company had entered into a Management Services Agreement with a company TNT to provide advice, assistance and sales support services. The AO had asked the assessee to submit details to justify that said services did not fall within purview of royalty, but assessee had failed to produce relevant information, details and record to support its case. It was held that since information was necessary to segregate such part of payment which might not be falling under purview of royally, Assessing officer had rightly treated entire consideration received by assessee as royalty in the absence of requisite details. Thus the facts of this case are also distinct.

65. Regarding reliance placed by the Revenue on other judicial precedents, we observe that most of cited decisions were rendered in the context of software distribution transactions where there was a copy of software or computer programme, distributed by a third-party intermediary, to the end user who used it for its internal purposes. The services provided by the Applicants under the MSA do not involve distribution of computer software nor use of such software. Hence, the ratio of other decisions as relied upon by Revenue are not applicable to the facts of the present case.

Whether Business Income?

66. The Revenue has contended that there was a service PE as per Article 5(2)(k) of the India-UK Treaty. As per this Article, if the employees of Applicant were in India for more than 30 days for rendering service in any twelve-month period, it would create service PE. On the other hand the Applicant has denied existence of any PE in India as per the provisions of Article 5 of the India-UK DTAA and contended that no business was carried on in India.

The Article 5(2)(k) of the Treaty reads as under:

“The term Permanent Establishment shall include specially:

(k) the furnishing of services including managerial services, other than those taxable under Article 13 (Royalties and fees for technical services), within a Contracting State by an enterprise through employees or other personnel, but only if:

(i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period; or (ii) services are performed within that State for an enterprise within the meaning of paragraph I of Article 10 (Associated enterprises) and continue for a period or periods aggregating more than 30 days within any twelve-month period”

67. We have considered the facts of the case and the rival contentions. In order to constitute a Service PE in India the services including managerial services must be furnished by the Applicant for a period or periods aggregating more than 30 days within any twelvemonth period in the case of an Associated enterprise. The Revenue has submitted that from the list of employees of the Applicant present in India furnished by the Applicant, it was evident that they had been in India for more than 30 days in a twelve-month period and, therefore, there was service PE in India. However, no substantive evidence of stay of any particular employee and rendereing of service by them for more than 30 days in a twelvemonth period has been pointed out or brought on record by the Revenue. A mere stay of an employee doesn't establish that he had rendered the service all the time. In order to attract this provision there has to be concrete evidence to establish that the service was rendered through an employee for 30 days or more. In the absence of any such concrete evidence we can't hold that a Service PE was created in this case. The contention of Revenue is based on mere suspicion and not on hard facts. Further, as already discussed earlier the part of the services under MSA is found covered under Article 13 of the DTAA. We are, therefore, in agreement with the Applicant that it does not have a PE in India. As no business was carried out in India and in the absence of any PE, the payment for the services rendered under MSA cannot be considered as business income.

68. In view of the foregoing, the questions posed to us for a Ruling are answered as under:

Que. 1 The payment made by Air com India to the Applicant under the MSA for the services specified there under would be characterized as “fee for technical services”(“FTS”) under Article 13(4) of the convention between India and UK only in respect of “direct technical advice, support and management including implementation “service provided under Information Technology (IT) service. The other services rendered under MSA are not found taxable under the convention.

Que. 2 The payments made by Air com India to the Applicant for availing the services specified under the MSA are not in the nature of “Royalty” within the meaning of the term in Article 13 of the India-UK Treaty.

Que. 3 The payments received by the Applicant are not business income.

Que. 4 The payments made by Air com India to the Applicant would suffer withholding tax under section 195 of the Act only in respect of component of “direct technical advice, support and management including implementation “service provided under Information Technology (IT) service at the applicable rate.

69. Accordingly, the ruling is given and pronounced on this the 4 day of February, 2021.