2016 (1) TMI 792 - AAR - Income Tax

Supply management service fees received - is in the nature of Fees for Technical Services or royalties within the meaning of the term in Article 13 of the India-UK double tax avoidance agreement ( India-UK treaty )? - concept of make available - Held that - The objection of the Revenue that the agreement entered into by the applicant with CTIL is a scheme for tax avoidance is without any merits. To say that the applicant has entered into contract with Indian company with the main purpose to take advantage of India-UK Treaty is factually incorrect. The facts as stated by the applicant in the application show that the applicant maintains Global Cummins contract supply agreement with suppliers and is responsible for finalization of supplier prices to Cummins Turbo Technologies worldwide, including CTIL , from UK and US suppliers. There is no mandate for CTIL to source the components from the approved suppliers only and if CTIL finds a better pricing from an alternate supplier, it shall be free to source the component from them. It is incorrect to say that such arrangement has been done with the main purpose to avoid tax. Therefore, the objection of the Revenue on this count fails. As regards services being royalty and covered under Article 13(3), it must be said that the nature of services related to identification of products and competitive pricing cannot qualify as royalties under the provisions of Article 13 under India-UK Tax Treaty because it is not related with the use of, or the right to use any copyright, patent, trademark, design or modal, plan, secret formula or process etc. The Supply Management Services fees received by the applicant is not in the nature of FTS or royalties under the India-UK Tax Treaty. In view of the fact that the applicant has no PE in India, the fees received are not taxable in India. CTIL is not required to withhold tax under section 195 of the Indian Income-tax Act.

Summary

Issues Involved:
1. Nature of Supply Management Service Fees: Whether it qualifies as "Fees for Technical Services" (FTS) or "royalties" under Article 13 of the India-UK Double Tax Avoidance Agreement (DTAA).
2. Taxability in India: Whether the payments received by Cummins Limited, UK, are chargeable to income-tax in India in the absence of a Permanent Establishment (PE).
3. Applicability of Transfer Pricing Provisions: Whether Sections 92 to 92F of the Income-tax Act apply if the fees are not liable to income-tax in India.
4. Requirement to Withhold Tax: Whether CTIL is required to withhold tax under Section 195 of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Nature of Supply Management Service Fees:
The applicant, Cummins Limited, UK, provides supply management services to Cummins Technologies India Limited (CTIL) under an agreement dated 7th December 2010. The applicant argued that these services are managerial and do not qualify as FTS or royalties under Article 13 of the India-UK DTAA. Article 13(4) defines FTS as payments for technical or consultancy services that make available technical knowledge, experience, skill, know-how, or processes. The applicant contended that their services do not "make available" any technical knowledge to CTIL, as CTIL cannot independently use the knowledge post-agreement termination. The Revenue argued that the services involve technical knowledge and expertise, thus qualifying as FTS. However, the ruling concluded that the services provided are managerial and do not impart technical knowledge or skills to CTIL, hence not qualifying as FTS or royalties.

2. Taxability in India:
The applicant claimed it does not have a PE in India as per Article 5 of the India-UK DTAA. The ruling agreed, stating that since the services do not qualify as FTS or royalties and there is no PE, the fees are not taxable in India.

3. Applicability of Transfer Pricing Provisions:
Given the conclusion that the fees are not taxable in India, the provisions of Sections 92 to 92F of the Income-tax Act related to transfer pricing do not apply.

4. Requirement to Withhold Tax:
Since the fees are not taxable in India, CTIL is not required to withhold tax under Section 195 of the Income-tax Act.

Conclusion:
The ruling pronounced that the supply management service fees received by Cummins Limited, UK, are not in the nature of FTS or royalties under the India-UK DTAA. Consequently, the fees are not taxable in India due to the absence of a PE, and CTIL is not required to withhold tax under Section 195 of the Income-tax Act.