2011 (12) TMI 17 - AAR - Income Tax

Double taxation Agreements - Meaning of fees for technical services (FTS) - allocation of cost - the Applicant will incur cost in providing various operational and other support services for the benefit of group companies by drawing its own resources as well as on those available from other Group Companies or third parties and will invoice the cost incurred for providing such services on cost to cost basis without charging any mark up. The employees and other personnel engaged by the Applicant for providing these services will not visit India. - held that - the applicant is taxable under Article 12.5(a) and as also under Article 12.5(b) - the payment made by Perfetti India would be chargeable to tax in India. - As the applicant is liable to tax in India, it is required to file a tax return under the provisions of the Act and the transfer pricing provisions of sections 92 to 92F would be applicable in respect of the payment to be made by Perfetti India.

Issues Involved:
1. Taxability of payments under the India-Netherlands DTAA.
2. Nature of income and chargeability to tax in India.
3. Obligation of Perfetti India to withhold taxes under Section 195 of the Act.
4. Filing of tax return and applicability of transfer pricing provisions.

Issue-wise Detailed Analysis:

1. Taxability of Payments under the India-Netherlands DTAA:

The applicant, a Netherlands-based company, entered into a Service Agreement with Perfetti Van Melle India Pvt. Ltd. (Perfetti India) to provide operational and support services. The applicant contended that these services are managerial and not technical or consultancy in nature, thus falling outside the purview of Article 12 of the DTAA. The Revenue argued that the services provided under the agreement are technical, as they equip Perfetti India with the knowledge and expertise to manage its services efficiently. The Authority held that the services are technical as they provide Perfetti India with the global experience and expertise of the group companies, thus falling within the scope of Article 12.5(a) of the DTAA.

2. Nature of Income and Chargeability to Tax in India:

The applicant argued that the payments received under the Service Agreement are not taxable in India as they do not "make available" technical knowledge, experience, skill, know-how, or processes. The Authority, however, held that the services provided under the agreement do make available technical knowledge and skills to Perfetti India, enabling it to independently apply this knowledge. Thus, the payments are considered fees for technical services (FTS) under Article 12.5(a) and 12.5(b) of the DTAA and are chargeable to tax in India.

3. Obligation of Perfetti India to Withhold Taxes under Section 195 of the Act:

Given the ruling that the payments are taxable in India as FTS, Perfetti India is obligated to withhold taxes under Section 195 of the Income-tax Act, 1961, on the payments made to the applicant. The Authority confirmed that Perfetti India must comply with the withholding tax provisions.

4. Filing of Tax Return and Applicability of Transfer Pricing Provisions:

Since the payments are taxable in India, the applicant is required to file a tax return under the provisions of the Income-tax Act, 1961. Additionally, the transfer pricing provisions of sections 92 to 92F of the Act would be applicable to the payments made by Perfetti India to ensure that the transactions are conducted at arm's length.

Conclusion:

The Authority ruled that the payments made by Perfetti India to the applicant are taxable under Article 12.5(a) and 12.5(b) of the India-Netherlands DTAA. Consequently, Perfetti India is required to withhold taxes under Section 195 of the Act, and the applicant must file a tax return in India, with transfer pricing provisions being applicable to the transactions.

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