By Geeta Jani, Dhishat B. Mehta
Chartered Accountants
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Article 13.4 of India-UK DTAA; Section 9 of Income-tax Act
(i) Since provision of services required special knowledge and human intervention, they were consultancy services.
(ii) As the applicant was free to utilise the knowhow/ intellectual property generated from services and independent of service provider, service can be regarded as ‘made available’.
(iii) Even if the provision of services does not have any element of profit, the consideration was taxable, both under Income-tax Act and under India-UK DTAA.
Facts:
The applicant was an Indian company and a member of Shell Group. The applicant entered into Cost Contribution Agreement (‘CCA’) with a Shell Group Company in UK (‘UKCo’) for providing Business Support Services (‘BSS’). BSS were primarily in the nature of management support services. UKCo was providing BSS to other Shell Group Companies also. Under CCA, UKCo provided services at cost and without charging markup.
Before the AAR, the applicant contended as follows:
The services excluded R&D, technical advice and services. Hence, they were only managerial services, which were excluded from Article 13.4(c) of India-UK DTAA.
Services were provided at cost, which was reimbursed by Group Companies. Hence, no income had arisen to UKCo in terms of certain judicial decisions1.
Due to cost contribution, the contributing companies became economic owners of knowhow/ intellectual property. Hence, question of UKCo granting right to use such intellectual property to applicant did not arise.
UKCo did not have a PE in India. In absence of any chargeable income, payment received by UKCo should not be taxable in India.
The issues before the AAR pertained to the nature of services provided by UKCo; whether the services were ‘made available’ in the context of India-UK DTAA; and whether any income accrued even if there was no element of profit.
Held:
The AAR ruled as follows:
Nature of services:
Advice given for taking a commercial decision is technical or consultancy services. The services provided by UKCo were of specialised nature. Consultancy services require special knowledge or expertise and human intervention. Provision of services through staff visits and interchanges was important ingredient under CCA which indicated that they were consultancy services. Certain services may not have been such services. However, since all the services were bundled and cannot be segregated, services as a whole would be consultancy services.
Make available under India-UK DTAA:
In Perfetti Ven Melle Holding BV (AAR No. 869 of 2010), the AAR has held that ‘make available’ means recipient should be in a position to derive enduring benefit and to utilise the knowledge or know-how in future on its own. In case of BSS, UKCo closely works with employees of the applicant and advises them. Further, as the applicant’s own averment, the applicant is able to use know-how/intellectual property generated from BSS independent of the service provider and hence services can be regarded as ‘made available’ to the applicant. Also, since a DTAA relates only to the rights and duties of subjects/citizens of respective States, one cannot rely on the meaning assigned to ‘make available’ under India-USA DTAA.
Income accruing and CCA:
The AAR held2 that even if the provision of services do not have any element of profit, the consideration would be taxable. Hence, the consideration was taxable as FTS, both under the Income-tax Act and India-UK DTAA and the applicant was obliged to deduct tax at source.
