Article 12(4), India-USA DTAA – Provision of advisory services in relation to assisting in management and decision making are technical in nature and satisfies the test of ‘make available’ as stipulated under the India-US DTAA. Accordingly it is taxable as fees for included services (FIS).
Facts:
The Taxpayer is an Indian company (ICo) engaged in providing software development services to the customers based in India.
ICo had engaged an American company (FCo) to provide assistance, advice and support to ICo in management, decision making, sales and business development, financial decision making, legal matters and public relations activities, treasury service, risk management service and any other management support as may be mutually agreed between the parties.
For the above services, ICo made certain payments to FCo without deducting taxes and claimed the deduction for the same. I Co contended that the services rendered by FCo are mainly in the form of assistance in decision making; therefore, such services are clearly in the nature of management services, which is outside the ambit of definition of “FIS” under India USA DTAA. Further, it was argued that these services do not ‘make available’ any technical knowledge or expertise such that the person acquiring the service is enabled to apply the technology.
However the Tax Authority disallowed the payments on the grounds that such payments to non-residents were in the nature of consultancy fees on which tax was required to be withheld u/s. 195 of the Act. Also as soon as the advice or support is received, the same is available to ICo for using them in the decision making process of the management. Therefore, it may not be correct to say that the technical services were not ‘made available’ to ICo.
In terms of Article 12(4) of India-USA DTAA, FIS means payments of any kind to any person in consideration for rendering of any technical or consultancy services (including through the provision of services of technical or other personnel), if such services made available technical knowledge, etc.
Held:
Memorandum of Understanding between India and USA makes it clear that only services which are technical in nature can be considered for included services. Even consultancy services should be technical in nature.
The services rendered by FCo were used by ICo for making various management decisions. Tribunal also referred to the definitions of terms “management” and “decision making” from various management authors and observed that “Decision making is an act of selecting the suitable solution to the problems from various available alternative solutions to guide actions towards achievement of desired objectives”.
The knowledge accumulated by FCo through study, experience and experimentation with regard to management, finance, risk, etc. of a particular business is nothing but technical knowledge. In the era of technology transformation, the information/ experience gathered by FCo relating to financial risk management of business is technical knowledge. The knowledge and expertise of FCo would be used to support ICo in selecting suitable solution after considering all the alternatives available. Further FCo was giving training to the employees of ICo in making use of the inputs, experience, experimentation, etc. for taking better decision in order to achieve the desired objectives/goals.
The information and expertise made available to ICo was very much available with them and it could be used in future whenever the occasion arises.
Thus the management services provided by FCo were in the nature of FIS as per India-USA DTAA and subject to withholding tax in India.
