2016 (8) TMI 166 - HC - Income Tax

TDS u/s 195 - withholding of tax - payments made/ to be made to Steria France under the Management Services Agreement - whether the payment made by Steria (India) for the management services provided by Steria France will not be taxable in India in the hands of Steria France as per the provisions of the DTAA entered into between India and France? - Held that - AAR appears to have failed to notice that the wording of Clause 7 of the Protocol makes it self-operational. It is not in dispute that the IndiaFrance DTAA was itself notified by the Central Government by issuing a notification under Section 90 of the Act. It is also not in dispute the separate Protocol signed between India and France simultaneously forms an integral part of the Convention itself. The preamble in the Protocol, which states the undersigned have agreed on the following provisions which shall form an integral part of the Convention , makes this position clear. Once the DTAA has itself been notified, and contains the Protocol including para 7 thereof, there is no need for the Protocol itself to be separately notified or for the beneficial provisions in some other Convention between India and another OECD country to be separately notified to form part of the IndoFrance DTAA. The Court is, therefore, unable to agree with the conclusion of the AAR that the Clause 7 of the Protocol, which forms part of the DTAA between India and France, does not automatically become applicable and that there has to be a separate notification incorporating the beneficial provisions of the DTAA between India and UK as forming part of the India- France DTAA. What is being provided by Steria France to the Petitioner in terms of the Management Services Agreement is managerial services. It is plain that once the expression managerial services is outside the ambit of fee for technical services , then the question of the Petitioner having to deduct tax at source from payment for the managerial services, would not arise. It is, therefore, not necessary for the Court to further examine the second part of the definition, viz., whether any of the services envisaged under Article 13(4) of the Indo-UK DTAA are made available to the Petitioner by the DTAA with France. As regards the nature of the service being provided under the Management Services Agreement, again the Court is unable to find any case made out by the Revenue before the AAR that what was provided was anything other than the managerial service which in any event stands excluded in the definition of the fees for technical services under the IndoUK DTAA. Consequently, this question also does not survive for consideration. Thus the payment made by the Petitioner to Steria France for the managerial services provided by the latter cannot be taxed as fee for technical services and are not liable to withholding of tax under Section 195 of the Act. - Decided in favour of assessee

Issues Involved:
1. Taxability of payments made by Steria (India) Limited (SIL) to Steria France under the Double Taxation Avoidance Agreement (DTAA) between India and France.
2. Applicability of the "make available" clause from the India-UK DTAA to the India-France DTAA via the Protocol.
3. Requirement for withholding tax under Section 195 of the Income Tax Act, 1961.
4. Validity of the orders passed under Sections 201(1) and 201(1A) of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Taxability of Payments under the India-France DTAA
The core issue was whether the payments made by SIL to Steria France for management services should be taxed in India under the DTAA between India and France. The DTAA defines "fees for technical services" to include managerial services. However, the petitioner argued that the definition should be interpreted in light of the Protocol, which could incorporate more restrictive definitions from other DTAAs with OECD member states.

Issue 2: Applicability of the "Make Available" Clause
The petitioner contended that Clause 7 of the Protocol to the India-France DTAA should allow the more restrictive definition of "fees for technical services" from the India-UK DTAA to apply. The India-UK DTAA excludes managerial services and includes a "make available" clause, which necessitates the transfer of technical knowledge or skills. The AAR disagreed, stating that the Protocol did not automatically incorporate these provisions without a separate notification.

The Court, however, found that Clause 7 of the Protocol is self-operational and does not require additional notification. The Protocol explicitly states that more restrictive provisions from other DTAAs with OECD countries should apply, thereby making the "make available" clause from the India-UK DTAA applicable to the India-France DTAA.

Issue 3: Withholding Tax under Section 195
Given that managerial services are excluded from the definition of "fees for technical services" under the India-UK DTAA, the Court held that payments for such services by SIL to Steria France are not subject to tax in India. Consequently, there is no requirement for SIL to withhold tax under Section 195 of the Income Tax Act, 1961.

Issue 4: Validity of Orders under Sections 201(1) and 201(1A)
The Court set aside the orders passed under Sections 201(1) and 201(1A) of the Income Tax Act, 1961, which had imposed tax liabilities on SIL based on the AAR's ruling. The Court found these orders unsustainable in law, given its interpretation of the DTAA and the Protocol.

Conclusion:
The Court concluded that:
1. The payments made by SIL to Steria France for managerial services cannot be taxed as "fees for technical services" under the India-France DTAA.
2. SIL is not liable to withhold tax under Section 195 of the Income Tax Act, 1961, for these payments.
3. The orders passed on 21st November 2014 under Sections 201(1) and 201(1A) are set aside.

The writ petition was allowed, and the application was disposed of with no order as to costs.

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