2008 (11) TMI 751 - AAR - Income Tax

Summary

Issues Involved:
1. Taxability of service fee as "Royalties & Fee for Technical Services" under Article 13 of the DTAA between India & the UK.
2. Requirement to deduct tax at source on the service fee under section 115A(1)(b)(BB) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Taxability of Service Fee as "Royalties & Fee for Technical Services":

The applicant, a subsidiary of Intertek Holding U.K. Limited, sought an advance ruling on whether the service fee paid to Intertek Testing Management Limited (ITM), UK under the Global Management Service Agreement (GMSA) is taxable as "Royalties & Fee for Technical Services" under Article 13 of the Double Taxation Avoidance Agreement (DTAA) between India and the UK.

- Applicant's Contention: The applicant argued that the payments made to ITM for various services do not fall under "fee for technical services" as defined in the DTAA and, therefore, no income tax can be charged in India, absolving the applicant from deducting tax at source.

- Department's Objection: The Department contended that the question raised by the applicant was the subject matter of pending appeals before CIT(A)-X, Mumbai, and thus, the application was not maintainable. However, the Authority found no merit in this objection as the nature of services considered in the pending appeals had no direct bearing on the questions raised in the present application.

- Interpretation of Article 13.4(c) of DTAA: The Authority analyzed the definition of "fee for technical services" under Article 13.4(c), which requires that the services rendered should "make available" technical knowledge, experience, skill, know-how, etc., to the recipient. This definition is narrower than the one under section 9(1)(vii) of the Income-tax Act, which merely requires the rendering of specified services.

- Meaning of "Make Available": The Authority emphasized that for services to "make available" technical knowledge, the recipient must be able to utilize this knowledge independently in the future without the provider's aid. Examples included training staff on accounting software and developing IT-related systems design.

- Lack of Detailed Information: The Authority noted that the applicant did not provide detailed information on the exact services rendered by ITM, UK. Consequently, a broad analysis was conducted, identifying that many services listed were technical or consultancy services but did not "make available" technical knowledge to the applicant. However, some services did meet this criterion.

- Managerial Services: The applicant contended that managerial services were excluded from the definition of "fee for technical services" under the new DTAA. The Authority agreed but noted that the applicant did not demonstrate that specific services fell within managerial services.

2. Requirement to Deduct Tax at Source:

- Principle Laid Down: The Authority interpreted Article 13(4)(c) of the DTAA and laid down the principle that services making available technical knowledge, experience, etc., are taxable as "fee for technical services" under the Treaty.

- Classification of Services: The Authority broadly classified various services, indicating which ones fell under technical, consultancy, or managerial services. However, some services remained in a grey area due to insufficient details.

- Application Under Section 195: The Authority suggested that the applicant approach the competent authority to determine the issue of tax deduction at source by filing an application under section 195 of the Income-tax Act. The appropriate authority would then determine the extent and rate of tax deduction based on the principles laid down in the ruling.

In conclusion, the Authority provided a nuanced ruling, indicating that while many services did not fall under "fee for technical services," some did, and the applicant should seek a determination from the competent authority for specific tax deduction requirements.