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2019 (6) TMI 1623 - AAR - Income TaxAdvance ruling application - Income taxability in India - taxability of payments to be made by Perfetti India for the costs to be allocated by the applicant under the service agreement - DTAA between India and the USA - Applicant had relied on the provisions of article 12(5)(b) of the DTAA to canvass that in the absence of a make available condition, the payments would not partake of the character of fees for technical services and further in the absence of any permanent establishment (PE) (in terms of article 5 of the DTAA) of the applicant, such payments would not be taxable in India - HELD THAT - As services rendered under the service agreement when read with TTKLA, fall within the purview of article 12(5)(a) of the DTAC as such services are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 4 of this article is received by the applicant. Whether the services also make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design, which enables the persons acquiring services to apply the technology contained therein? - The exercise to segregate the services which make available the technical knowledge, experience, skill, know-how, processes etc. and enable the recipient to apply the same without reference to the service provider and the advisory services which fail to fulfil this yardstick, will only be an academic exercise. As already mentioned earlier the service charge received by the applicant is taxable under article 12(5)(a) of the DTAC between India and the Netherlands and it is not necessary that the clause of article 12(5)(b) should also be simultaneously satisfied. The exercise to identify the services which satisfy the 'make available' clause would have been relevant, if the article 12(5)(a) would not have been found to be applicable. The questions posed to us for a ruling are answered as under Question No. 1 The payment to be made by Perfetti India for the cost to be allocated by the applicant is taxable under article 12(5)(a) of the DTAC between India and the Netherlands. Though some of the services are also taxable article 12(5)(b) of the DTAC, such services are not segregated as they are already taxable under article 12(5)(a). Question No. 2 As the answer to question No.1 is in affirmative, the payment made by Perfetti India would be chargeable to tax in India. Question No. 3 Perfetti India is liable to withhold taxes under section 195 of the Act on the payments to be made towards the costs to be allocated by the applicant. Question No. 4 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 made by Perfetti India to Perfetti Van Melle Holding BV under the Double Taxation Avoidance Agreement (DTAA) between India and the Netherlands. 2. Nature of the payments as income and their chargeability to tax in India. 3. Liability of Perfetti India to withhold taxes under section 195 of the Income-tax Act. 4. Requirement for the applicant to file a tax return in India and applicability of transfer pricing provisions. Detailed Analysis: 1. Taxability of Payments under DTAA: The applicant, Perfetti Van Melle Holding BV, sought a ruling on whether payments made by Perfetti India for allocated costs under a service agreement are taxable in India under the DTAA between India and the Netherlands. The Authority for Advance Rulings (AAR) had previously ruled that such payments are taxable as "fees for technical services" under Article 12(5)(a) of the DTAA. The Delhi High Court remitted the matter back to AAR to reconsider the applicability of the "make available" clause from the India-USA DTAA and the India-Portugal DTAA. 2. Nature of Payments and Chargeability to Tax: The applicant argued that the services provided under the service agreement were managerial and not technical or consultancy services, thus not falling under Article 12(5) of the DTAA. The applicant relied on various judicial precedents to support this argument. However, the AAR found that the services provided were technical and consultancy in nature, and they were ancillary and subsidiary to the application or enjoyment of the right, property, or information for which royalty was paid under the Technology and Trademarks Licence Agreement (TTKLA). 3. Liability to Withhold Taxes under Section 195: Given that the payments were deemed taxable as "fees for technical services," Perfetti India was held liable to withhold taxes under section 195 of the Income-tax Act on the payments made towards the allocated costs. 4. Requirement to File Tax Return and Applicability of Transfer Pricing Provisions: Since the payments were taxable in India, the applicant was required to file a tax return under the provisions of the Income-tax Act. Additionally, the transfer pricing provisions of sections 92 to 92F of the Act were applicable to the payments made by Perfetti India. Findings and Ruling: The AAR concluded that: - The payments made by Perfetti India to the applicant are taxable under Article 12(5)(a) of the DTAA between India and the Netherlands. - Perfetti India is liable to withhold taxes under section 195 of the Income-tax Act. - The applicant is required to file a tax return in India, and the transfer pricing provisions are applicable. The ruling was pronounced on June 21, 2019.
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