By Geeta Jani, Dhishat B. Mehta Chartered Accountants
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Article 12, India-Canada DTAA – On facts, ‘reimbursement’ by Indian subsidiary to parent company held FIS since Indian company was not the exclusive beneficiary of the services procured by parent company from third party.
Facts:
The taxpayer was an Indian company, which was a subsidiary of a Canadian company (“Canada Co”). The taxpayer was set-up as an R & D Design Centre for providing captive services to its parent. The services provided mainly included design, development and support for software and hardware solutions. During the relevant tax years, the taxpayer had made certain payments to the parent company towards software and engineering services without withholding any tax. According to the taxpayer, an Indian third party had provided engineering services to the taxpayer and the payment for the same was made by the parent company. Thus, the payment made by the taxpayer to the parent company was merely reimbursement of that payment and since there was no element of profit, no tax was required to be withheld.
After further examination and noting his findings, the AO concluded that payments to the parent company were “income from other sources” under the Act and under Article 21(3) of India-Canada DTAA and the taxpayer was required to withhold tax from the payments.
Held:
No agreement was entered into either between the taxpayer and the Indian third party or between the taxpayer and the parent company. The taxpayer was to render chip designing and software development services. Since the taxpayer did not have requisite skill set, the parent company was to provide the required portion of the services by procuring from third parties. Master Transfer Pricing Agreement entered into between the taxpayer and parent company clearly provided that services contracted by one party from a third party were also meant for the benefit of other member of the group. Findings of Commissioner of Service Tax showed that benefit of services rendered by Indian third party was availed by the taxpayer. These findings were not disputed by the tax authority. Since the services procured by the parent company from the Indian third party were for the benefit of the taxpayer, the amount paid by the taxpayer to the parent company was not extra profit/cash.
However, as the benefit of services contracted from third parties was to be available to all group companies and not only the taxpayer, it cannot be said that it was a case of pure reimbursement. Thus, the parent company had also substantially benefited from the services. Further, under Contractor Services Agreement, the Indian third party had agreed that all innovations and contract work product resulting from its services will be sole and exclusive property of the parent company and had assigned all rights in favour of the parent company.
Accordingly, the payment made by the taxpayer to the parent company was neither a gratuitous payment nor reimbursement of actual expenses without any element of profit. Therefore, the payment was in nature of FIS in terms of India-Canada DTAA. Consequently, the taxpayer had defaulted by not withholding tax.
