Article 12 of India-China DTAA – Procurement services involving market research and providing technical advice on product or process upgradation, rendered from outside India, falls within the ambit of Fee for Technical Services (FTS) under Article 12 of India-China DTAA
Facts
The Taxpayer, a Chinese Company, entered into an agreement with its Indian Parent (ICo) for provision of services in relation to procurement of goods from vendors in China. Such procurement services were rendered by the Taxpayer from China. ICo considered the payment as FTS and while paying the fee, suo motu withheld tax @10% from the fee.
The Taxpayer argued that the payment received for procurement services does not accrue or arise in India nor can it be treated as deemed to accrue or arise in India. Further, since the fee for such services is not received in India, income is not taxable in India under the Act. Under Article 12(4) of India-China DTAA , such payment for procurement services does not qualify as managerial, technical or consultancy services. Additionally, since the services are performed in China and not in India, such services would not fall under the definition of FTS under the DTAA .
The issue before the AAR was whether fee paid by ICo to The Taxpayer is taxable in India in terms of Article 12 of India-China DTAA .
Held
FTS is defined in Article 12(4) of India-China DTAA to mean any payment for the provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State.
Procurement services rendered by The Taxpayer included not only identification of the products but also generating new ideas for ICo post conducting market research. It also involved evaluating the credit, organisation, finance, production facility, etc. and giving advice in the form of a report to ICo. The Taxpayer also provided information on new developments in China with regard to technology/ product/process upgrade. These are specialised services requiring special skill, acumen and knowledge.
Further, in GVK Industries vs. ITO [(2015) TIOL-10(SCIT) l-10(SC-IT)], SC had noted that “Consultant” is a person who gives professional advice or services in a specialised field. Services rendered by Taxpayer clearly indicate that the Taxpayer has the skill, acumen and knowledge in the specialised field of evaluation of credit, organisation, finance and production facility, in conducting market research and in giving expert advice with regard to technology/product/process upgradation. Such specialised service clearly falls within the ambit of consultancy services. Accordingly, the payment was FTS in terms of the Act as also the DTAA .
The China-Pakistan DTAA uses the phrase “provision of rendering of services”, whereas the India-China DTAA uses the phrase ‘provision of service’. The present case relates to the India-China DTAA . Any other DTAA cannot influence the scope of India-China DTAA. It is not correct to suggest that income is not sourced from India.
It is not correct to suggest that source rule of the treaty is limited to services rendered in India. The treaty refers to, the phrase ‘provision of service’ which has not been defined anywhere in the DTAA. The phrase “provision of services” has a very broad meaning when compared to the phrase “provision of rendering of services” and it covers services even when they are not rendered in a contracting state (India in this case). As long as services are used in India, they would be included in the phrase “provision of service”. Reliance in this regard was placed on decision of AAR in the case of Inspectorate (Shanghai) Limited (AAR No 1005 of 2010) and Mumbai ITAT decision in the case of Ashapura Minichem (ITA No.2508/Mum/08).
Since the services rendered by the Taxpayer were consultancy services, fee paid by ICo was FTS under Article 12 of the India-China DTAA and was chargeable to tax in India @10%.
