2015 (8) TMI 136 - AAR - Income Tax

India-UK DTAA - Compensation received for providing Management Services - Whether is not in the nature of Fees for Technical Services (FTS) under Article 13 of India-UK Tax Treaty? - According to the Revenue the applicant is providing management consultancy through the analysis of existing organizational problems and development of plans for improvement - Held that - The services under agreement No.1 relate to review by GD and general guidance given by him on financial, operational, human resource, setting up targets and performance appraisal related matters. GD is providing these services from the UK mainly, his visits during a year are generally for short duration having aggregate number of days of visit in a year never exceeding 30 days. The applicant has provided sample e-mails sent by GD to MTL India which show that his services generally related to human resource matters, cost control, fund management, quality and design reviews etc. These are routine managerial activities and cannot be classified as technical or consultancy services. This authority had ruled in the case of Invensys Systems (2009 (8) TMI 6 - AUTHORITY FOR ADVANCE RULINGS ) that even though some of the services may have the trappings of technical or consultancy service, looking at the nature and the predominant nature of the services, they primarily fall under the category of managerial services. Similar is the case in respect of services provided by GD. Moreover, by providing such services he is not making available any technical knowledge of enduring benefit in nature which would enable employees of MTL India to apply them on their own in future. Also analyzing the procurement services provided through agreement No.2, procurement team travels to different countries to visit suppliers and distributors to determine the best price that would be available to entire MTL Group including MTL India. These types of services can never be classified as technical or consultancy in nature and surely are not making available any technical knowledge, experience, know-how etc. The reliance of the Revenue on the rulings in the case of Intertek Testing Services (2008 (11) TMI 9 - AUTHORITY FOR ADVANCE RULINGS) and GVK Industries (supra) is misconceived and out of place. As regards PE the Revenue has not offered any comments in the absence of facts but the applicant has stated that GD has never visited India for more than 30 days in a year and, therefore, his visit would not constitute a service PE . As regards visits by other employees, the applicant has also agreed that the Income-tax Department may ascertain the facts in the course of assessment proceedings and determine the applicability of Article 5(3)(k) of the India-UK Tax Treaty. The far-fetched argument of revenue that services provided may be covered under Royalties because various services provided by the applicant are of commercial experience which involved confidential information or experience from commerce, business, science or industry because services provided under both agreements are general and routine in nature and do not create any intellectual property. It cannot even be imagined that rendering of such services would qualify as Royalties as per the provisions of Article 13 of the India-UK Treaty. Thus the amount received by the applicant for services rendered as per agreement No.1 is not chargeable to tax in India as per the provisions of the India-UK Tax Treaty. The amount received for services rendered as per agreement No.2 is not chargeable to tax in India as per the provisions of the India-UK Treaty. - Decided in favour of assessee.

Issues Involved:
1. Taxability of amounts received by Measurement Technology Limited (MTL UK) from MTL Instruments Private Limited (MTL India) under Agreement 1.
2. Applicable tax rate if the amounts under Agreement 1 are chargeable to tax.
3. Taxability of amounts received by MTL UK from MTL India under Agreement 2.
4. Applicable tax rate if the amounts under Agreement 2 are chargeable to tax.

Detailed Analysis:

Issue 1: Taxability of Amounts under Agreement 1

Measurement Technology Limited (MTL UK) entered into an agreement with MTL Instruments Private Limited (MTL India) to provide management services. These services included business strategy, operational meetings, personnel management, and other related services. The applicant argued that these services do not qualify as Fees for Technical Services (FTS) under Article 13 of the India-UK Tax Treaty, which requires that technical knowledge, experience, skill, know-how, or processes be "made available" to the recipient. The applicant contended that the services provided were managerial in nature and did not meet the "make available" criteria. The Authority agreed, stating that the services were routine managerial activities and did not impart any enduring technical knowledge to MTL India. Therefore, the amounts received under Agreement 1 are not chargeable to tax in India.

Issue 2: Applicable Tax Rate for Agreement 1

Since the amounts received under Agreement 1 are not chargeable to tax in India, the question of the applicable tax rate does not arise.

Issue 3: Taxability of Amounts under Agreement 2

MTL UK also entered into a second agreement with MTL India to provide procurement services. These services involved global sourcing of raw materials, setting up supply chains, and logistics support. The applicant argued that these services also do not meet the "make available" criteria under the India-UK Tax Treaty and are not taxable as FTS. The Authority agreed, noting that the procurement services did not impart any technical knowledge, experience, or skills to MTL India. Therefore, the amounts received under Agreement 2 are not chargeable to tax in India.

Issue 4: Applicable Tax Rate for Agreement 2

Since the amounts received under Agreement 2 are not chargeable to tax in India, the question of the applicable tax rate does not arise.

Additional Considerations:

Permanent Establishment (PE):

The applicant argued that it does not have a fixed place of business in India and that the visits of its employees, including the Group Operations Director (GD), were for periods less than 30 days in a year. The Authority noted that the Revenue did not offer comments on this issue due to the absence of facts but agreed that the applicant's visits did not constitute a "service PE."

Royalty:

The Revenue argued that the services provided could be considered royalties under Article 12(3)(a) of the India-UK Tax Treaty. The Authority rejected this argument, stating that the services were routine and did not create any intellectual property.

Conclusion:

The Authority ruled in favor of the applicant, stating that the amounts received under both agreements are not chargeable to tax in India as per the provisions of the India-UK Tax Treaty. Consequently, the questions regarding the applicable tax rates do not arise. The ruling was pronounced on July 29, 2015.

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