2014 (4) TMI 249 - AAR - Income Tax

Nature of Expenses Fees for technical services or not Article 12 of DTAA between India and Netherlands - Whether the payments made by the applicant to Endemol Holding for availing routing administrative services under the terms of the Consultancy Agreement would be in the nature of Fees for Technical Services (FTS) Held that - Nature of the services listed in Schedule 1 to the Management Consultancy Agreement require technical knowledge, experience, skill, know-how or processes - They cannot be termed as merely administrative and support services as tried to be made out by the applicant - several attempts were made in the past to interpret the meaning of technical services and also the make available clause in Tax Treaties thus, the services rendered are technical services both under the provision of the Income-tax Act and under the India-Netherlands Tax Treaty subject to fulfillment of requirements of the make available clause in the treaty. The broad consensus of the interpretation of the clause seems to be that requirements of make available in the tax treaty is met if the technology, knowledge or expertise can be applied independently by the person who obtained the services - the applicant merely took assistance of the Holding company in its business activities outside India and there is no material to suggest that the technical know-how, skill, knowledge and expertise are transferred to the applicant so as to enable the applicant to apply this technical know-how etc. independently thus, the requirement of the make available clause in the Article 12(5) of the India-Netherlands Tax Treaty is not satisfied and hence the payment for the services rendered by Endemol BV will not come under fees for technical services under the Tax Treaty . The payments made by the applicant to Endemol Holding for availing the services under the terms of the Consultancy Agreement is not in the nature of Fees for Technical Services (FTS) under Article 12 of the India-Netherlands Tax Treaty because the services rendered by the non-resident company do not meet the requirements of make available under the treaty thus, the payment will not be treated as business income taxable in India in terms of the India-Netherlands Tax Treaty because Endemol Holding does not have a Permanent Establishment in India. - Decided in favour of Assessee. Nature of Payments made - Whether the payments made by the applicant to Endemol Holding BV can be treated as business income and taxable in India Held that - The applicant is an Indian enterprise and for its business activities outside India, the services on Endemol Holding were utilized - There is no material to show that Endemol Holding has any presence in India - Payments for the services were received by Endemol Holding outside India - profits arising out of the transaction for the services rendered by Endemol Holding BV are not taxable in India as Endemol Holding BV does not have PE in India. - Decided in favour of Assessee. Whether the transaction is an arrangement for the purpose of avoidance of tax Held that - Relying upon Transmission Corporation of AP Ltd. and others vs. CIT 1999 (8) TMI 2 - SUPREME Court - The transaction is for genuine business purpose for the benefit of both the parties there was no sufficient materials on facts and circumstances made available which suggest that the transaction is an arrangement solely for the purpose of avoidance of tax the payment will not be subjected to withholding of tax u/s 195 of the Act - Decided in favour of Assessee.

Issues Involved:
1. Classification of payments as Fees for Technical Services (FTS) under Article 12 of the India-Netherlands Tax Treaty.
2. Treatment of payments as Business Income and taxability in India in the absence of a Permanent Establishment (PE).
3. Applicability of withholding tax under section 195 of the Income-tax Act.
4. Determination of whether the transaction is designed for tax avoidance.

Detailed Analysis:

Issue 1: Classification of Payments as Fees for Technical Services (FTS)
The applicant, M/s Endemol India Private Limited (EIPL), sought a ruling on whether payments made to Endemol Holding B.V. (a non-resident company in the Netherlands) for consultancy services under a Consultancy Agreement would qualify as Fees for Technical Services (FTS) under Article 12 of the India-Netherlands Tax Treaty. The applicant argued that the services provided did not meet the "make available" condition required for classification as FTS under the treaty. The Revenue contended that the services were technical and consultancy in nature, thus falling under FTS. The Authority concluded that although the services were technical, they did not satisfy the "make available" clause, meaning the payments did not qualify as FTS under the treaty.

Issue 2: Treatment of Payments as Business Income
The applicant argued that even if the payments were considered business income, they would not be taxable in India as Endemol Holding B.V. did not have a Permanent Establishment (PE) in India per Article 7 of the India-Netherlands Tax Treaty. The Revenue's stance was that the payments were covered under FTS, thus the question of PE was irrelevant. The Authority held that since the payments did not qualify as FTS, they should be treated as business income. However, due to the absence of a PE in India, the business income was not taxable in India.

Issue 3: Applicability of Withholding Tax under Section 195
Given the conclusion that the payments did not qualify as FTS and were not taxable as business income due to the absence of a PE, the Authority ruled that the payments would not be subject to withholding tax under section 195 of the Income-tax Act, following the precedent set by the Supreme Court in Transmission Corporation of AP Ltd. vs. CIT.

Issue 4: Determination of Tax Avoidance
The Authority examined whether the transaction was designed to avoid tax. It found that the transaction was for genuine business purposes and benefited both parties. There was insufficient evidence to suggest that the transaction was solely for tax avoidance. The Department did not pursue this issue during the hearing.

Conclusion:
1. Payments made by the applicant to Endemol Holding for consultancy services do not qualify as Fees for Technical Services under Article 12 of the India-Netherlands Tax Treaty.
2. Payments will not be treated as business income taxable in India due to the absence of a Permanent Establishment of Endemol Holding in India.
3. Payments will not be subjected to withholding tax under section 195 of the Income-tax Act.
4. The transaction was not found to be an arrangement for tax avoidance.

The ruling was given and pronounced on December 6, 2013.

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