2009 (11) TMI 673 - AT - Income Tax

Double Taxation Avoidance Agreement between India and UK - Double taxation relief - assessee entered into an agreement with another group of company, i.e., WNS, U.K. for the purpose of availing sale support and account handling services for the assessee-company - Assessing Officer was of the view that the services so rendered by the WNS, U.K., were covered by the provisions of section 9(1)(vii) read with Explanation 2 of the Act thereto as also the article 13(4)(c) of Indo-U.K. Tax Treaty - assessee directed to deduct tax at source at the rate of 15 per cent from the remittance to WNS, U.K. in respect of marketing and management services - assessee contended that services rendered by WNS, U.K. did not make available technical knowledge, experience, skill know-how to it and, as such, article 13(4)(c) had no application Held that - In terms of article 12 of Indo-UK DTAA, technical services are treated as having been made available when recipient of such technical services is enabled to perform such services without recourse to service provider - services rendered by WNS, UK, did not meet aforesaid test, Commissioner (Appeals) was justified in holding that impugned receipts could not be taxed as fees for technical services

Issues Involved:
1. Establishment of Service Permanent Establishment (PE) under Article 5(2)(k) of the India-UK Treaty.
2. Consideration of Tax Deducted at Source (TDS) on payments for marketing and management services under Article 7 of the India-UK Double Taxation Avoidance Agreement (DTAA).
3. Reduction of the tax withholding rate from 15% to 0.08%.

Detailed Analysis:

1. Establishment of Service Permanent Establishment (PE) under Article 5(2)(k) of the India-UK Treaty:

The assessee, a resident company and part of the WNS Group, entered into an agreement with WNS, UK for sales support and account handling services. Employees of WNS, UK visited India for more than thirty days, thus constituting a service PE under Article 5(2)(k) of the Indo-UK Tax Treaty. The Assessing Officer (AO) was approached to ascertain the tax withholding rate for remittances to WNS, UK. The AO viewed the services as technical services under Section 9(1)(vii) of the Income-tax Act and Article 13(4)(c) of the Indo-UK Tax Treaty, directing a 15% tax deduction at source. The CIT(A), however, agreed with the assessee that these services did not "make available technical knowledge, experience, skill know-how" and thus did not fall under Article 13(4)(c).

2. Consideration of TDS on payments for marketing and management services under Article 7 of the India-UK DTAA:

The CIT(A) held that the services provided by WNS, UK were neither technical nor consultancy services and did not make available any knowledge, skill, or experience to the assessee. Consequently, the income attributable to the service PE in India should be considered as business profits under Article 7 of the India-UK DTAA. The CIT(A) directed the AO to consider TDS on payments for marketing and management services under Article 7, and to verify and apply the reduced rate of 0.08% as contended by the assessee.

3. Reduction of the tax withholding rate from 15% to 0.08%:

The assessee contended that the net profit from the remittance was only 0.08% of the gross receipts, and the CIT(A) upheld this contention. The CIT(A) directed the AO to examine and verify the working of the 0.08% rate and apply it accordingly. The AO's appeal against this direction was dismissed by the Tribunal, which found no reason to interfere with the CIT(A)'s conclusion. The Tribunal noted that the services did not meet the test of "making available" technical knowledge, as outlined in the Raymond Ltd. case, and thus could not be taxed as fees for technical services under Article 13(4)(c). The Tribunal upheld the CIT(A)'s order and allowed the AO to verify the figures provided by the assessee regarding the actual rate of income embedded in these payments.

Outcome:

Both appeals filed by the revenue were dismissed, upholding the CIT(A)'s directions and findings. The Tribunal agreed with the CIT(A) that the services did not qualify as technical services under Article 13(4)(c) and should be taxed under Article 7, with the reduced withholding rate of 0.08% subject to verification by the AO.

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