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TMI Blog2012 (2) TMI 173X X X X Extracts X X X X X X X X Extracts X X X X ..... year and tax withheld accordingly. - A.A.R. No. 876 of 2010 - - - Dated:- 7-2-2012 - Justice P.K. Balasubramanyan, V.K. Shridhar, JJ. RULING Mr. V.K. Shridhar, Member AREVA T D SAS France (French Company) is a global player in design, engineering, manufacturing and supply of electric equipments that help in transmission and distribution of power, commissioning and servicing of transmission and distribution system on turnkey basis. It is submitted that it has 72 industrial sites and has presence in more than 100 countries catering to nearly 30000 customers across the world. AREVA T D India Ltd, the Applicant, is its subsidiary in India, its activities overlaps with the French Company and has 9 manufacturing locations with 4,300 employees in India. 2. The French Company is proposing to enter into an Information Technology Sharing Services Agreement ("IT Agreement") with the Applicant in order to provide support services in the area of information technology. A central team of the French Company with the help of a service provider would be giving necessary assistance to all its subsidiaries, the group companies, in the world. The support services would be: worldwid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Income-tax Act, 1961? vi. If the answer to question (iv) is in the negative what will be withholding tax rate as per DTAA? vii. Whether the portion of consideration payable to AREVA T D SAS representing mere reimbursement of cost, can be considered as outside the purview of tax? 5. The Applicant submits that payment for wide area network or messaging system or license user rights or application support do not fall under clause (iva) of Explanation 2 to section 9 of the Income-tax Act, 1961(Act), as the payment does not amount to right to use industrial, commercial or scientific equipment and hence cannot be brought under the definition of 'royalty'. While exercising the option available to it under section 90(2) of the Act to choose the DTAA provisions which are more beneficial, the Applicant submits that these services may potentially qualify as payments for the use of equipment or right to use the equipment under Article 13 of Indo-French DTAA. Referring to clause7 of the protocol to Indo-French DTAA, the Applicant submits that if the rate of tax or scope provided in a Treaty with a third state on 'royalties' and 'fees for technical services' is less restricte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing certain standards. The proposed payment would not fall under fee for technical services and is not chargeable to tax in India. As the reimbursements are on actual cost basis, no tax is required to be withheld under section 195 of the Act. 8. It is argued by the learned counsel of the Revenue that neither the French Company nor the Applicant are in the business of providing services in the area of information technology. Notwithstanding, it has set up exclusive and confidential system for instant managing of various customized software and access to 3D and 2D data to the group companies and no third party is allowed access to the portal. In the absence of the nature of the data continuously exchanged amongst the group companies, the assumption is that the real time data and customized softwares installed on the system have direct connection with the business requirement of the Applicant. The business of the Applicant being that of executing projects for transmission and distribution of power on turnkey basis, it is obvious that the French Company and other group companies continuously upgrade designs, model and other engineering plans and formulae which are used by the Appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business. The use of equipment is with the usual condition of warranty and the network could be managed by the Applicant. The equipment installed is to be integrated into "Areva Net Global Network" which is managed and controlled by the French Company. The equipment installed at gateway sites in Noida and Chennai constitute PE in India as the equipment has been used by the French company in the course of its business in providing technical data to the group companies. A detailed and a proper inquiry is called for in case the Assessing Officer is directed to quantify the extent of attribution of income if it is held that the French Company has a PE in India. 11. Regarding the contention that the payment is only by way of reimbursement of expenditure incurred by the French Company on behalf of the Applicant and hence not taxable as income in its hands, the learned counsel for the Revenue submits that despite repeated requests, the Applicant has not furnished Annexure-2 of the service agreement between the French holding company and the Applicant which, as it turns out, is the price list of the services as defined in Appendix-2 of the Agreement. Appendix -2 has also not been furni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he French Company has the capacity and the resources to provide and co-ordinate IT Services to the Applicant. There is nothing on record from which we could infer that the present transaction is in the nature of reimbursement. 16. In our view if the French Company has a Permanent Establishment in India, the payment by the Applicant to the French company under the IT Agreement will be treated as Business Income and will be liable to be taxed accordingly. 17. Under the IT Agreement, there is a very vague description of the services. For providing services under both WAN and Lotus Notes, some hardware is to be utilized. Under Clause 3.1 of the IT Agreement, WAN Services costs include costs for local loop lines rentals. The payment that will be made by the Applicant includes cost for depreciation and maintenance of hardware. In the clarifications provided by the Applicant, the Applicant has submitted that WAN services are provided through an undersea cable infrastructure. Under Clause 3.2, Lotus Notes Service costs include costs such as SMTP gateway. As submitted in the clarifications, each gateway consists of a link and router and the same will belong and will be controlled by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce provider, all equipment under the IT Agreement, whether owned or hired by the French Company, will be at the disposal of the French Company. Further, Rajesh Kadakia, NileshModi, The law and Practice of Tax Treaties: An Indian Perspective, (2008) on Pg 209 states " if the personnel operate and maintain the leased equipment under the responsibility and direction of the foreign lessor, a PE may exist if such operation or maintenance satisfy the tests of PE." In our opinion, since the tests of PE are satisfied, whether it is equipment leased or it is owned by the French Company, will be of no consequence. 22. As per the discussion above, a PE of the French Company will be formed in India, if the French Company enters into the proposed IT Agreement. Then, under Article 7 of the Indo -French DTAA, the profits of the French Company, so much of it as is attributable to that permanent establishment in India, shall be taxable in India. Now, under the IT Agreement, the Applicant has submitted that the services provided by the French Company could be categorized as FTS in view of Explanation 2 to section 9 of the Act. But taking benefit of the MFN clause in the protocol attached to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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