Article 13 of India-UK DT AA – Amount received for rendering ‘managerial services’ and ‘procurement service’ not FTS – Routine managerial services cannot be classified as royalty if no intellectual property is created – Service PE not established as period of stay does not exceed the threshold
Facts:
Taxpayer, a company incorporated in the United Kingdom (UK), was engaged in the business of development and supply of intrinsic safety explosion protection devices, field bus and Industrial networks, lightning and surge protection and gas analysis equipment. Taxpayer had a subsidiary in India (I Co) which was engaged in the business of manufacturing industrial control equipment used for process control in hazardous environments.
Taxpayer entered into two service agreements with ICo. Under Agreement 1, Taxpayer was required to provide following services to I Co
- Strategy and direction of business development of ICo;
- Attendance in person or by phone at regular operational meetings to discuss progress of activities, both financial and operational;
- Management of personnel including conducting staff interviews, setting individual targets and carrying out performance appraisals; and
- Any other services related to the above.
The services under Agreement 1 were to be provided through one of the employees of Taxpayer who was designated as Group Operational Director (GD). GD provided services through telephone calls, e-mails and occasional visits to India. It was not disputed that the total presence of GD in India was less than 30 days. As part of its services GD also monitored financial and operational progress of I Co along with overseeing human resource matters of I Co and also undertook quality and design reviews for I Co.
Under the Agreement 2, the Taxpayer provided procurement services to I Co. The Taxpayer constituted a procurement team in UK to look into the global sourcing requirement of raw materials for all its group entities including I Co to consolidate the group’s purchase requirements resulting in cost savings for the group.
The Taxpayer contended that the services provided did not satisfy the make available condition and hence they did not constitute FTS under India-UK DTAA .
The Tax Authority contended that services rendered by the Taxpayer were in the nature of technical and consultancy services. Further, as the Taxpayer was required to provide report containing the technical details and plans to I Co, it would satisfy the make available condition. Additionally, services of the Taxpayer also partake the character of royalties for the use of plan, or for information concerning industrial, commercial or scientific experience under India-UK DTAA .
Held:
India-UK DTAA was amended to exclude “managerial services” from the definition of FTS and to include the make available condition in the DTAA for taxation of FTS. Thus post-amendment, managerial services are not covered in the definition of FTS and even the technical or consultancy services cannot be treated as FTS if they do not meet the criteria of ‘make available’.
Services provided under both the agreements are managerial in nature. The activities are routine managerial and procurement activities and cannot be classified as technical or consultancy services. Moreover, by providing such services, taxpayer was not making available any technical knowledge of enduring benefit in nature which would enable employees of ICO to apply them on their own in future.
Further, services provided under both the agreements were general and routine in nature and did not create any intellectual property. Thus payments made to the Taxpayer did not qualify as ‘royalty’ under the India- UK DTAA .
Since visits to India were not for more than 30 days in a year, ‘Service PE’ would not be constituted in India.
