Section 9(1)(vii) of the Act; Article 12 of India- Netherlands DTAA – while in terms of the Act, the consideration paid for the services was FTS, since the recipient was not enabled to independently apply the technology, knowledge or expertise, the payment was not FTS under India-Netherlands DTAA, which in absence of PE in India, was not taxable in India.
Facts:
The Applicant was an Indian tax resident company and a member of an international group of companies. The Applicant was engaged in the business of providing and distributing television programmes and it mainly produced reality shows and recently, also soap operas. DutchCo was also a member company of the Group. The Applicant entered into Consultancy Agreement with DutchCo under which DutchCo was to provide certain services such as, General Management, International Operations, Legal and Tax Advisory, Controlling and Accounting, Corporate Communications, Human Resources, Corporate Development, Mergers & Acquisitions, etc. These services were provided by DutchCo outside India. According to the Applicant these were administrative services.
The Applicant approached the AAR for its ruling on the following issues.
(i) Whether the payments made by the Applicant to DutchCo for administrative services would be in the nature of FTS under Article 12 of India- Netherlands DTAA?
(ii) If the payments were not FTS, would they be Business Income, which in absence of PE of DutchCo in India, would not be chargeable to tax in India?
(iii) If the payments were not FTS, would they be subject to withholding under section 195 of the Act?
Held:
As regards the Act The services rendered by DutchCo require technical knowledge, experience, skill, know-how or processes and hence, cannot be termed merely as administrative and support services as tried to be made out by the Applicant.
As per The consultancy agreement, DutchCo was to render its ‘considerable experience, knowledge and expertise’ and the payments were to be made therefor.
The definition of FTS in Explanation 2 to section 9(1)(vii) of the Act, includes managerial, technical or consultancy services. Hence, the consideration paid for the services rendered by DutchCo were covered by the said definition of FTS.
As regards India-Netherlands DTAA
Definition of FTS in Article 12(5) of India-Netherlands DTAA, contains ‘make available’ clause, which would require that the Applicant should be enabled to independently apply the technology, knowledge or expertise. The Applicant merely took assistance of DutchCo in its business activities and there was nothing to suggest that it was enabled to independently apply the technology, knowledge or expertise and thus, ‘make available’ requirement was not satisfied.
DutchCo did not have any PE in India. Hence, the consideration paid for the services rendered was not taxable in India.
