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TMI Blog2019 (6) TMI 1623X X X X Extracts X X X X X X X X Extracts X X X X ..... ication seeking a ruling from the Authority for Advance Rulings ("AAR") in respect of taxability of payments to be made by Perfetti India for the costs to be allocated by the applicant under the service agreement. The question of taxability was raised in context of the Double Taxation Avoidance Agreement between India and the Netherlands ("DTAA"). The applicant had relied on the provisions of article 12(5)(b) of the DTAA to canvass that in the absence of a "make available" condition, the payments would not partake of the character of "fees for technical services" and further in the absence of any permanent establishment (PE) (in terms of article 5 of the DTAA) of the applicant, such payments would not be taxable in India. The Authority, vide ruling dated December 9, 2011 had ruled on the taxability of the payments to be made by Perfetti India to the applicant and had held that such payments would partake of the character of "fees for technical services" within the meaning of the term as contained in article 12(5)(a) of the DTAA. The questions raised by the applicant and the ruling thereon were as under : Q. No. Question raised by the applicant Ruling thereon 1. On the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder : "This writ petition is directed against the ruling dated December 9, 2011 in A. A. R. No. 869 of 2010 ([2012] 342 ITR 200 (AAR)) given by the Authority for Advance Rulings. One of the pleas raised by the petitioner was that the said authority had not considered the Double Taxation Avoidance Agreement between India and Portugal which is an OECD country. The learned counsel for the petitioner submitted that any agreement between India and an OECD country could be looked into while construing the Indo-Netherlands Double Taxation Avoidance Convention. The learned counsel for the petitioner had also raised the plea that the memorandum of understanding concerning fees for included services referred in article 12(4) of the Indo- USA DTAA concerning the expression "make available" was also not considered by the Authority for Advance Rulings. It was submitted that the said Authority refused to look into the Indo-Portuguese DTAA or the Indo-USA DTAA and the memorandum of understanding between India and the USA on the ground that only the Indo- Netherlands DTAC needed to be looked into. The learned counsel for the respondent states that the Authority for Advance Rulings was correct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Perfetti SPA also had a licence to manufacture confectionery namely candies, chewing gums, bubble gums, jelly candies, lollipops under those trademarks in a few territories which included India. - Perfetti Van Melle Holding BV, (the applicant) is a company based in the Netherlands and is primarily engaged in the business of managing of manufacture and sale of sugar confectionery and gum and provision of operational and other support services for the benefit of companies in the Perfetti Van Melle group situated in various countries. - A Technology and Trademarks Licence Agreement ("TTLA") dated July 1, 2005 was entered into between Perfetti SPA and Perfetti India (a subsidiary of the applicant), as per which licence was granted to Perfetti India to manufacture and sell various kinds of confectionery and also allowed use of its technology and know-how in manufacture of the products. Clause 12 of the said TTLA provided that Perfetti India would pay royalty to Perfetti SPA subject to the ceiling of 5 per cent. on domestic sales and 8 per cent. on export sales. The royalty payable was to be mutually agreed between the parties on year to year basis subject to the overall cap of 5 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they were nothing but "managerial services". Hence, there was no applicability of the provisions of article 12(5) of the DTAA. The applicant relied upon the following decisions in this context : - Steria (India) Ltd. v. CIT [2016] 386 ITR 390 (Delhi) - Measurement Technology Ltd., In re [2015] 376 ITR 461 (AAR) ; - Cummins Limited, In re [2016] 381 ITR 44 (AAR) ; and - Koninklijke Philips Electronics N. V. v. Dy. CIT (International Taxation) [2018] 13 ITR (Trib)-OL 485 (Kolkata) (I. T. A. No. 1889/Kol/2012, order dated October 25, 2018) 6. The applicant has drawn our attention to the fact that in the original ruling dated December 9, 2011 the payments under the services agreement were treated to be in the nature of "fee for technical services" under article 12(5)(a) of the DTAA since the services provided under the services agreement were inextricably linked with the right to use the trademark, technology and know-how under the TTKLA dated April 1, 2010 and as such the payments made under the services agreement fell within the scope of article 12(5)(a). The applicant contended that the services rendered under the services agreement were not at all linked with the TTKLA an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tanding and it was contended that for services to be characterised as "fees for included services" under article 12(4)(a) of the India-USA DTAA, the payments allocable to such services should not form a substantial part of the total consideration payable under the contractual arrangement/s. It was brought to notice that for the assessment year 2011- 12, the payment of royalty under the TTKLA was INR 2.37 crores whereas the payments under the service agreement were to the tune of INR 9.48 crores. Thus, the payment under the services agreement was substantial in comparison with the royalty under the TTKLA. Further that the services must necessarily be related to the application or the enjoyment of the intangible ?. Further that if the services were related to improving the effectiveness of processes, only then they would fall within the scope of article 12(5)(a) of the India-Netherlands DTAA, which was not the case here. 9. The applicant relied on the Tribunal judgment rendered by the Bombay Bench of the Income-tax Appellate Tribunal in the case of Spencer Stuart International BV v. Asst. CIT (I. T. A. No. 1696/Mum/2015 dated June 1, 2018), which dealt with the provisions of the Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of CIT v. De Beers India Minerals Pvt. Ltd. [2012] 346 ITR 467 (Karn). Furthermore, in the said case, the hon'ble High Court, while dealing with the phrase "make available" as contained in article 12(5)(b) of the India-Netherlands DTAA observed that "the test is whether the recipient of the service is equipped to carry on his business without reference to the service provider, if he is able to carry on his business in future without the technical service of the service provider in respect of services rendered then, it would be said that technical knowledge is made available." It was submitted that identical view was taken by the hon'ble Delhi High Court in the case of DIT v. Guy Carpenter and Co. Ltd. [2012] 346 ITR 504 (Delhi). For the purposes of article 12(5)(b) to trigger, it is necessary that the recipient of the service should be in a position to derive an enduring benefit and be in a position to utilize the knowledge or know-how in future on his own (Shell India Markets (P.) Ltd., In re [2012] 342 ITR 223 (AAR) ; [2012] 205 Taxman 288 (AAR-New Delhi). However, since in the facts of the present case, the applicant does not render any technical service under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT (S. L. P. (C) No. 36385 of 2014). It was also submitted that the decisions relied upon by the applicant were distinct and different on the facts. Therefore, the ratio of those decisions may not be applied in the present case. 16. It was further contended that the services were not only technical and consultancy in nature but were also ancillary and subsidiary to the application or enjoyment of the right or property or information for which royalty was being paid by the applicant as per TTLA. 17. The Revenue also submitted that earlier there was only one TTLA dated July 1, 2005. However, with effect from April 1, 2010 two separate TTKLA arrangements were made. The terms and clauses of the present TTKLA were similar to those of the earlier TTLA. It was contended that the predominant purpose of the service agreement was enjoyment of the right/ information as per TTKLA and, therefore, the services were ancillary and subsidiary to the main agreement as per which royalty was being paid. It was pointed out that even after the separate services agreement the total payment to the applicant as a percentage of turnover had remained the same which was about 2.3 per cent. of the turnover. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fetti India under the TTKLA and, therefore, the payments made under the service agreement do not constitute "fees for technical services" under article 12(5)(a) of the DTAA between India and the Netherlands. Findings and ruling 21. We have carefully considered the facts of the case and the submissions of the applicant. One of the reasons for remitting the matter by the hon'ble High Court was that the Authority had not considered the amendment made to the Indo-Netherlands DTAC vide Notification No. S. O. 693(E) dated August 30, 1999. It was explained in the said notification that after signing the Convention with the Netherlands, India had subsequently signed Convention with Germany, Sweden, the Swiss Confederation and the U. S. A. which were members of the OECD and which had limited the taxation at source on dividend, interest, royalty fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope as provided in the Convention between India and the Netherlands, on these items of income. Therefore, the original Convention effective from September 21, 1989 was modified vide notification dated September 30, 1999 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gn which enables the person acquiring the services to apply the technology contained therein. 22. Explanation 2 to section 9(1)(vii) of the Income-tax Act defines fees for technical services as under : "Explanation 2.-For the purposes of this clause, 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or con sideration which would be income of the recipient chargeable under the head 'Salaries'." Thus, as per the provisions of the Act the technical services include any managerial, technical or consultancy services (including the provision of services of technical or other personnel). However, the Conventions referred to above exclude "managerial services" from the scope of fees for technical services. Therefore, a conjoint reading of all the Conventions referred to above lead to the conclusion that in order to reply to the questions raised in this application we have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the clause (b) above. The memorandum of under standing further clarifies that in order for a service fee to be considered "ancillary and subsidiary", the service must be related to the application or enjoyment of the right, property or information. Thus, the pre-dominant purpose of the arrangement under which the payment of service fees is made must be the application or enjoyment of the right, property or information for which royalty is being paid. It further prescribes that whether the pre-dominant purpose of the arrangement was application or enjoyment of right, property or information must be determined by reference to the facts and circumstances of each case. The factors which may be relevant for such determination are enlisted in the memorandum of understanding as under : - the extent to which the services in question facilitate the effective application or enjoyment of the right, property or information ; - the extent to which such services are customarily provided in the ordinary course of business arrangement involving royalties ; - whether the amount paid for the services was an insubstantial portion of the combined payments ? - whether the payments made for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d processes belonging to Perfetti group, b. specified services are : Accounting, budgeting, sales, marketing, Foreign Exchange management, loans, human resources, legal support, etc. c. specified services are to be provided on continuous basis. It is thus found that some of the services under the two agreements are overlapping. There already is a provision to provide marketers, salesman, in-house legal counsel and other experienced employees to carry out activities of sales, marketing, legal support to Perfetti India in the TTKLA. There is further provision in the TTKLA to use commercial know-how in the area of manufacturing, sales, advertisement and product promotion which ordinarily should cover accounting, budgeting, Foreign Exchange management, loans, etc. Thus, the service agreement has largely not brought out any thing specifically which is not covered in the broad parameters of the TTKLA. 27. Exhibit A to the service agreement delves into the details of the services, which is as under : Sl. No. Functions/Activities performed Description of services 1 Accounting services * Assistance in setting-up and maintaining accounting policies and procedures in l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les personnel and global performance management system. * Assistance in setting up the benchmarks for the performance standards amongst the group and defining the code of ethics for the recipient. * Assistance in facilitating the personnel mobility within the group and associated contractual support. * Assistance in tasks related to labour conditions. * Support and assistance in personnel related contractual disputes and negotiations. * Enable recipient's international colleagues. Provision of the accommodation and facilitating the complete program like guest speaker etc. 7 Support in co-ordination of local strategy * Advice and support local general and finance managers on operational issues * Undertaking market studies and disseminating information * Review of business plans and advising on marketing and sales strategy. * Updating on market and global business trends. 8 Support in financial controlling * Help the recipient's finance manager by advising on matters like corporate governance, realization budget, proper accounting working capital control, investment and financing * Assistance in coordinating and collating required documents/information for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere not being separately charged. As per the arrangements made a part of the royalty payment has been transferred to service payment and, therefore, the quantum of payment for service charge becomes inconsequential. In fact the basis of royalty on domestic and export sales in the earlier contract was also tweaked in the subsequent contract and was made dependant on brands, viz. global, regional and local. Further, not much weightage can be given to this factor when all other conditions as mentioned in the memorandum of understanding are found to be against the applicant. It is also found that the nature of services is tailor-made for Perfetti group companies. As clarified by the applicant, it is not providing such services to any third parties but only to PVM group entities. This clearly establishes that the services rendered are ancillary and subsidiary to the enjoyment of right, property or information under the TTKLA. 29. The meaning and scope of the term technical and consultancy services was considered by this Authority in the case of Intertek Testing Services India (P.) Ltd., In re [2008] 307 ITR 418 (AAR), and held that the expression "technical services" cannot be construe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'that the NRC did not render any technical or consultancy service to the petitioner-company and that it merely rendered advice in connection with the procurement of loans by it, which does not amount to rendering technical or consultancy service within the contemplation of the said clause and that the technical or consultancy service should relate to the core of the business of the petitioner-company'. It was observed, 'In our view, advice given to procure loan to strengthen finances would be as much a technical or consultancy service as it would be with regard to management, generation of power or plant and machinery'. From the above discussion it follows that 'success fees' fall in line with any other technical services within the ambit of section 9(1)(vii)(b). The other expression used in clause (c) of article 13(4) (as well as section 9(1)(vii) of the Income-tax Act) is 'consultancy services'. Consultancy services could also be technical in nature. These two expressions are not to be treated as water-tight compartments. However, advisory services which merely involve discussion and advice of routine nature or exchange of information cannot appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with whom the TTKLA is made. 31. The applicant has placed reliance on the decision of the Delhi High Court in the case of Steria (India) Ltd. (supra) in support of the contention that the services rendered as per the service agreement were not technical or consultancy services but were managerial in nature. It is found that in that case a management service agreement was entered into, as per which services provided were corporate communication services, group marketing services, development services, information system services, legal services, human relation services etc. Thus, the nature of services rendered in the case of Steria (India) Ltd. was totally different from the nature of services rendered in the present case. Further the question to be decided in that case was whether managerial service was taxable as per the Indo-France the DTAA, considering that the Indo-UK DTAA expressly excluded fees for managerial services from fees for technical services. Thus, the basic question in this case as well as the facts of the case were different. Therefore, the reliance placed by the applicant on this decision is misplaced. 32. The applicant has also relied upon the decision of Auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services rendered nor has given any detailed reason as to why they are treated as managerial service. Further, the requirement of "make available" was also not found fulfilled in this case. Under the circumstances, this cannot be treated as a binding precedent as the facts of the case are totally different. The facts of the case of Spencer Stuart International BV (supra) relied upon by the applicant are also found to be different as issue of search fee and licence fee was involved in that case and no reason was given by the Department that could lead to the conclusion that search fee was ancillary in nature to the licence fee. 33. On the other hand the Revenue has placed reliance on the case of Shell India Markets (P.) Ltd., In re [2012] 342 ITR 223 (AAR) ; 2012-LL-0117-28. In that case Shell India was receiving general business support services from Shell International Petroleum Company Limited, a UK company under cost contribution arrangement. The services rendered were in the form of general finance advice, taxation advice, legal advice, advice on information technology, media advice, assistance in contract and procurement and assistance in marketing, which were held as consul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In view of the above facts, findings, discussions and the relevant judicial precedents, we are of the opinion that services rendered under the service agreement when read with TTKLA, fall within the purview of article 12(5)(a) of the DTAC as such services "are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 4 of this article is received" by the applicant. This leaves us to examine whether the services also "make available" technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design, which enables the persons acquiring services to apply the technology contained therein. 35. The applicant has contended that as it does not render any technical service under the service agreement, wherein any technology is transferred, there does not arise the question of making available the said technology which could enable Perfetti India to utilize the same in future on its own. Therefore, article 12(5)(b) of the India-Netherlands DTAA does not have any applicability to the facts of the present case. The technical services ..... X X X X Extracts X X X X X X X X Extracts X X X X
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