2012 (2) TMI 98 - AAR - Income Tax

Double Taxation Avoidance Convention between India and UK Cost Contribution Agreement ( CCA ) with SIPCL (company incorporated in UK) for availing General Business Support Services (General BSS) - determination of nature of payments made to SIPCL and its taxability - FTS or royalty whether tax to be withhold u/s195 - Held that - The special knowledge and use of expertise on the part of SIPCL is clearly evident from the explanation of each service as is provided by the Applicant. In our opinion, the services being rendered are consultancy services. Therefore, payments made to SIPCL for availing the General BSS under the CCA would constitute income in the hands of SIPCL and is in the nature of fees for technical services within the meaning of Article 13.4 (c) of the DTAC between India and UK; and not in the nature of royalty within the meaning of the term in Explanation 2 to Clause (vi) of Section 9(1) of the Act and under Article 13 of DTAC. Further, payment received by SIPCL is chargeable to tax in India and the declaration provided by SIPCL that it does not have a Permanent Establishment (PE) in India in terms of Article 5 of DTAC, we rule that the applicant is under obligation to withhold tax u/s 195 of the Act.

Issues Involved:
1. Whether the payments made by the Applicant to SIPCL for availing General Business Support Services (General BSS) under the Cost Contribution Agreement (CCA) constitute "income" under Section 2(24) of the Income-tax Act.
2. Whether such payments are in the nature of Fees for Technical Services (FTS) under Article 13 of the India-UK Tax Treaty.
3. Whether such payments are in the nature of "royalty" under Explanation 2 to clause (vi) of Section 9(1) of the Income-tax Act.
4. Whether such payments are in the nature of "royalty" under Article 13 of the India-UK Tax Treaty.
5. Whether the payments received by SIPCL are chargeable to tax in India and if so, whether the Applicant is required to withhold tax under Section 195 of the Income-tax Act.

Detailed Analysis:

Issue 1: Income under Section 2(24) of the Income-tax Act
The Authority ruled that the payments made by the Applicant to SIPCL for availing General BSS under the terms of the CCA constitute "income" in the hands of SIPCL within the meaning of Section 2(24) of the Act. The Authority noted that the services provided by SIPCL include general finance advice, taxation advice, legal advice, advice on information technology, media advice, assistance in contract and procurement, and assistance in marketing. These services are specialized and involve special knowledge of the Applicant's business and industry, thus qualifying as consultancy services. Therefore, the payments for these services constitute income.

Issue 2: Fees for Technical Services (FTS) under Article 13 of the India-UK Tax Treaty
The Authority determined that the payments made by the Applicant to SIPCL for availing General BSS are in the nature of FTS within the meaning of Article 13.4(c) of the India-UK Tax Treaty. The services provided by SIPCL were found to be consultancy services, which involve the use of expertise and special knowledge. The Authority emphasized that the services make available technical knowledge, experience, skill, know-how, or processes to the Applicant, enabling them to apply the knowledge independently in the future. Therefore, the payments qualify as FTS under the treaty.

Issue 3: Royalty under Explanation 2 to Clause (vi) of Section 9(1) of the Income-tax Act
The Authority ruled that the payments made by the Applicant to SIPCL for availing General BSS are not in the nature of "royalty" within the meaning of Explanation 2 to Clause (vi) of Section 9(1) of the Act. The services provided do not grant the Applicant any right to use intellectual property or know-how. Instead, the Applicant becomes the economic owner of any know-how generated through the services, negating the characterization of the payments as royalty.

Issue 4: Royalty under Article 13 of the India-UK Tax Treaty
Similarly, the Authority ruled that the payments made by the Applicant to SIPCL for availing General BSS are not in the nature of "royalty" under Article 13 of the India-UK Tax Treaty. The reasoning was consistent with the explanation provided under Issue 3, where the services do not involve granting the right to use intellectual property or know-how, thus not constituting royalty.

Issue 5: Taxability in India and Withholding Tax under Section 195 of the Income-tax Act
Based on the conclusions for Issues 1 and 2, the Authority ruled that the payments received by SIPCL are chargeable to tax in India as FTS. Despite SIPCL not having a Permanent Establishment in India, the payments are taxable under the India-UK Tax Treaty. Consequently, the Applicant is obligated to withhold tax under Section 195 of the Income-tax Act on these payments.

Conclusion:
The Authority ruled that the payments made by the Applicant to SIPCL for availing General BSS under the CCA constitute income and are in the nature of FTS under the India-UK Tax Treaty. These payments are not considered royalty under either the Income-tax Act or the treaty. Consequently, the payments are chargeable to tax in India, and the Applicant must withhold tax under Section 195 of the Act.

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