By Geeta Jani, Dhishat B. Mehta Chartered Accountants
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Article 12 of India-US DT AA – Business development, market services and other support service do not satisfy make available condition and hence, no Fees for Included Services (FIS) under the DT AA. Where a Permanent Establishment (PE) is created in respect of trading transactions only, income from rendition of services cannot be attributed to the PE
Facts
The Taxpayer, a US Company, was engaged in providing business development, marketing services and other support services to its Indian associated enterprise (AE). The Indian AE was also involved in purchase and sale of Taxpayers’ products in India.
Taxpayer claimed that services rendered to its AE do not satisfy “make available” condition and hence it could not be characterised as FIS under the India-USA DTAA . However, Tax Authority contended that technical services rendered by the Taxpayer to its AE satisfy “make available” condition and thus they are taxable in India.
On further appeal before the Dispute Resolution Panel (DRP), it was held that services constituted FIS under India-USA DTAA . Additionally, without prejudice to FIS taxation, DRP held that since the Indian AE to whom services were rendered was also involved in the purchase and sale of Taxpayer’s products in India, such AE’s would constitute a dependent agent Permanent establishment (DAPE) of the Taxpayer in India and the amounts received for services rendered to the AE (which constituted DAPE for the Taxpayer) would be attributable to the DAPE and is to be treated as profits and gains from business.
Held
Relying on the decision of Karnataka HC in the case of De Beers India (P) Ltd. (2012) 346 ITR 467 (Kar), it was held that consideration for services cannot be brought to tax under the India US DTAA as these services do not enable the recipient of the services to utilise the knowledge or know-how on his own in future without the aid of the service provider. Further the services do not involve transfer of technology. Thus the payment received by the Taxpayer from its AE does not constitute FIS under India-USA DTAA .
Under India-USA DTAA business profits are taxable in Source State but only so much of them as are attributable to (a) that PE (b) sales in the Source State of goods or merchandise of the same or similar kind as those sold through that PE or (c) other business activities carried on in the Source State of the same or similar kind as those effected through that PE. Thus, where a PE is constituted in respect of the trading transactions only, no part of the income earned from rendering of services by the Taxpayer can be attributed to the PE.
Further in the absence of any finding that the Indian AE was paid remuneration less than arm’s length, nothing can be attributed to DAPE of the Taxpayer in India.
