Article 13 of India-UK DTAA – Fee for supply management service was neither Fee for Technical Services (FTS) nor royalties in terms of Article 13 of India-UK DTAA – not taxable in India in absence of Permanent Establishment (PE) in India.
Facts
The applicant was a company incorporated in the UK. An Indian company (“IndCo”) was engaged in the production of turbochargers. IndCo purchased turbocharger components directly from suppliers in UK and US. The applicant had entered into Material Suppliers Management Service Agreement with IndCo. In terms of the Agreement, IndCo paid supply management service fee @5% of the base prices of the suppliers to the applicant.
The issues before the AAR were:
(i) Whether supply management service fee was FTS or royalties in terms of Article 13 of India-UK DTAA ?
(ii) Depending on answer to (i), as the applicant did not have PE in India, whether the payments were chargeable to tax in India?
(iii) If supply management service fee was not chargeable to tax in India, whether they were subject to transfer pricing provisions under the Act?
(iv) Depending on answer to (i) and (ii), whether IndCo was liable to withhold tax on supply management service fees?
Held
IndCo engaged the applicant only to ensure market competitive pricing from the suppliers. The applicant maintained contract supply agreement with suppliers after identifying the products availability, capacity to produce and competitive pricing. The applicant did not impart its technical knowledge and expertise to IndCo which enabled it to acquire such skills and use them in future. Therefore, the services did not satisfy the ‘make available’ condition under India-UK DTAA .
Relying on the decisions in De Beers India Minerals Private Ltd. (346 ITR 467) and Measurement Technologies Limited (AAR No.966 of 2010), services in the nature of procurement services can never be classified as technical or consultancy in nature and they do not make available any technical knowledge, experience, know-how etc.
The services rendered in this case were managerial in nature. With effect from 11th February, 1994, managerial services were taken out from the ambit of FTS under India-UK DTAA and ‘make available’ clause was inserted. This clearly showed the intention to exclude managerial services and include ‘make available’ requirement.
As the services were related to identification of products and competitive pricing and not to the use of, or the right to use any copyright, patent, trademark, design or model, plan, secret formula or process etc., they cannot qualify as royalties under Article 13 of India-UK DTAA .
Since the applicant had no PE in India, service fee was not chargeable to tax in India and hence, IndCo was not liable to withhold taxes.
PS: AAR held that the issue whether transfer pricing provisions applies is not applicable.
