1997 (8) TMI 517 - AAR - Income Tax

Is any part of the amount invoiced by XYZ to AB in terms of the management provision agreement liable to tax in India ?

Summary

Issues Involved
1. Tax liability of the amount invoiced by XYZ to AB under the management provision agreement.
2. Tax liability of the amount paid on behalf of the employees towards Indian taxes.
3. Nature of the invoiced amounts as reimbursement of expenses.
4. Refund of taxes withheld by AB.
5. Entitlement to interest on the refund.
6. Requirement for XYZ to file a return of income.

Detailed Analysis

1. Tax Liability of the Amount Invoiced by XYZ to AB
The primary issue was whether the amount invoiced by XYZ to AB under the management provision agreement is liable to tax in India. The applicant argued that the fees paid to XYZ are merely reimbursements for expenses incurred towards salaries, allowances, and emoluments of its expatriate employees, and thus do not constitute taxable income. Furthermore, XYZ claimed that it does not have a permanent establishment in India and that the services provided do not fall under "included services" as defined in Article 12 of the DTAA between India and the USA. The Authority, however, concluded that the services rendered by XYZ through its employees do constitute a permanent establishment under Article 5(2)(l) of the DTAA. Consequently, the amount invoiced is assessable as business profits under Article 7 of the DTAA, not under Article 12.

2. Tax Liability of the Amount Paid on Behalf of the Employees Towards Indian Taxes
This issue was not pressed during the course of the arguments and hence was not adjudicated upon by the Authority.

3. Nature of the Invoiced Amounts as Reimbursement of Expenses
XYZ claimed that the amounts invoiced are purely reimbursements and thus not taxable. However, the Authority found that XYZ is engaged in providing management and consulting services to B's subsidiaries and affiliated companies worldwide. The agreement between XYZ and AB was for furnishing managerial services, and the payments made to XYZ were for services rendered through its employees, not merely reimbursements. Therefore, the invoiced amounts are considered taxable business profits.

4. Refund of Taxes Withheld by AB
XYZ sought a ruling on whether it could claim a refund of the taxes withheld by AB, despite not having filed a return of income. This issue was not pressed during the arguments and hence no ruling was provided.

5. Entitlement to Interest on the Refund
Similarly, the question of XYZ's entitlement to interest on the refund of taxes withheld by AB was not pressed and no ruling was given.

6. Requirement for XYZ to File a Return of Income
XYZ questioned whether it was required to file a return of income, aside from the necessity of claiming a refund of taxes withheld by AB. This issue was also not pressed and hence no ruling was provided.

Conclusion
The Authority ruled that the amount invoiced by XYZ to AB under the management provision agreement is assessable as business profits under Article 7 of the DTAA. The Authority refrained from ruling on the issues related to the refund of taxes, interest on the refund, and the requirement to file a return of income, as these were not pressed by the applicant. The Authority also left open the possibility for the concerned authorities to re-examine the nature of the services rendered by XYZ's employees in appropriate proceedings to determine if they fall under "technical or consultancy" services, which could then be taxed under Article 12.