2024 (3) TMI 216 - HC - Income Tax

Challenge AAR ruling - Income taxable in India or not? - TDS liability u/s 195 - determination of tax liability of the payments made by Petitioner to its non-resident group company for availing General Business Support Services ( BSS ) under a Cost Contribution Arrangement ( CCA ) - AAR held that Petitioner is under obligation to withhold tax u/s 195 - scope and ambit of Article 13 of the India-UK DTAA whether the finding of the AAR that services availed by Petitioner from non-resident group company or payments made by Petitioner to it are of/for technical/ consultation services? and whether such services are made available to Petitioner? HELD THAT - AAR has not gone into but prima facie has accepted the declaration provided by SIPCL that it does not have permanent establishment in India and in any case that was not the issue before AAR. There is no discussion or finding pertaining to the status of SIPCL non-resident group company as having permanent establishment in India in terms of Article 5 of the DTAA. Hence, determination by the AAR on this issue remains inconclusive. A perusal of the list of services relate to managerial services not involving anything of a technical nature. The AAR has discussed the services appearing in the CCA and has concluded that these activities in a retail business are at the core of retail marketing and hence advice tendered in taking a decision of commercial nature is a consultancy service. AAR has further considered the definition of the word Consultancy as defined in the Oxford English dictionary and has observed that a consultant is a person who gives professional advice or services in a specialized field. However, the AAR failed to appreciate that the word Consultancy appearing in the Article is to be interpreted in the context of consultancy which makes available technical knowledge, etc. and not of managerial nature. The reading of the Article clearly indicates that the consultancy service must be which makes available technical knowledge, etc. Sub-para (c) to Article 13(4) restricts such services to those which make available technical knowledge or consist of development and transfer of a technical plan or technical design. The services availed by Petitioner cannot be said to be technical services and Article 13 is wholly inapplicable in the facts and circumstances of the present case. Even if it is fees for technical or consultancy services, it can be only where fees are paid in consideration for making available technical knowledge, experience etc. Thus the view of the AAR that SIPCL works closely and advises the employees of Petitioner and hence makes available the services is not correct. This view in fact suffers from fallacy since the agreement continues to operate till date. If the view of AAR is to be held as correct then the contract must stand concluded as once the services and the know how, skill etc is transferred to Petitioner, the need of continuing to render said services must end. This is factually not so as the CCA is in effect till date. As it is clear that the AAR has interpreted the requirements to be satisfied for 'make available' based on its own general notion of the said term without appreciating the applicable law on the subject and also reached an erroneous conclusion that the services availed are technical services. AAR has not dealt with the issue relating to the 'Permanent Establishment' of SIPCL and there is no determination on the same. Of course, that was not a subject of reference before AAR. Thus, we have no hesitation in holding that the impugned order of AAR suffers from legal infirmity and is quashed and set aside.

Issues Involved:

1. Determination of tax liability for payments made by Petitioner to SIPCL for General Business Support Services (BSS) under a Cost Contribution Arrangement (CCA).
2. Nature of payments as "Fees for Technical Services" (FTS) under Article 13 of the India-UK DTAA.
3. Obligation to withhold tax under section 195 of the Income Tax Act, 1961.
4. Whether services provided were technical or managerial in nature.
5. Interpretation of "make available" clause in the context of technical services.
6. Status of SIPCL's Permanent Establishment (PE) in India.

Summary:

1. Determination of Tax Liability and Nature of Payments:
The High Court addressed the question of whether payments made by the Petitioner to SIPCL for availing General Business Support Services (BSS) under a Cost Contribution Arrangement (CCA) constituted income in the hands of SIPCL and if they were in the nature of "Fees for Technical Services" (FTS) under Article 13 of the India-UK Double Tax Avoidance Agreement (DTAA). The Authority for Advance Rulings (AAR) had earlier ruled that these payments were indeed FTS and thus taxable in India, obligating the Petitioner to withhold tax under section 195 of the Income Tax Act, 1961.

2. Nature of Services - Technical vs. Managerial:
The Petitioner argued that the services availed were managerial and excluded technical services. The High Court found that the services listed in the CCA, such as management support, marketing support, financial advice, and legal services, were managerial in nature and did not involve technical expertise. The Court emphasized that consultancy services under Article 13 must make available technical knowledge, skill, know-how, or processes, which was not the case here.

3. Interpretation of "Make Available" Clause:
The Court highlighted that for services to be considered as "made available," the recipient must be able to apply the technical knowledge independently in the future. The AAR's conclusion that the services were made available because SIPCL worked closely with the Petitioner's employees was deemed incorrect. The Court noted that the ongoing nature of the CCA indicated that the services were not made available in the sense required by the DTAA.

4. Permanent Establishment (PE) Status:
The AAR had not conclusively determined whether SIPCL had a Permanent Establishment (PE) in India. The High Court noted that this issue was not addressed by the AAR and remained inconclusive.

Conclusion:
The High Court quashed the AAR's order, holding that the payments made by the Petitioner to SIPCL for availing General BSS under the CCA did not constitute "Fees for Technical Services" under Article 13 of the India-UK DTAA and were not taxable in India. The Court declared that the transactions under the CCA were managerial in nature and did not involve the transfer of technical knowledge, skill, or processes. The Department was given the liberty to take necessary steps regarding the applicability of Article 7 of the DTAA, and the time taken in these proceedings would be excluded for the purpose of limitation.

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