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TMI Blog2008 (11) TMI 751X X X X Extracts X X X X X X X X Extracts X X X X ..... so that the services could be provided to or received from the other members within the Group. Hence, the Global Management Services Agreement ('GMSA') was entered into between Intertek Testing Services Management Limited, U.K. and the subsidiaries of Intertek, specified in Schedule-1 to the Agreement on 6-10-2006. The applicant and its Labtest division find place in the list of subsidiaries in Schedule-I. The applicant states that one of the key central points for the provision of services is Intertek Group's head office in London. The applicant avers that within the framework of GMSA, the relevant services would be provided to the applicant by Intertek Testing Management Limited ('ITM') which is a subsidiary of Intertek Group Plc., UK. However, the applicant describes ITM as Group's corporate head office in London (vide Note attached to supplementary written submissions). It is stated that such services are provided either directly or by deputing personnel of any other group company subject to the control and supervision of ITM, UK. It is further stated in the application that broadly, the nature of services provided under the GMSA by the UK company to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services, Divisional Global and Regional Services in the field of executive commercial, financial, marketing and administrative management system and technique . It is also made clear that the applicant is not seeking ruling in respect of payments made to any other company located outside UK. Apart from taking note of this statement, there is one more point to be clarified. Though in the application as well as in the written submissions dated 14-4-2008, the three categories of services mentioned in Schedule 2 to the Agreement are stated to have been performed by ITM, UK as per GMSA, it is doubtful whether Divisional Regional Services are also performed. It is clarified by the applicant's counsel that the global headquarters of the applicant's Lab test division is London whereas the regional headquarter is Hong Kong. 'Divisional Global Services' are provided to various divisions from the global headquarters of a division whereas the 'Divisional Regional Services' are provided from the regional headquarters of a division. If so, insofar as the services provided by ITM, UK are concerned, Divisional Regional Services do not come into the picture at all. Apparen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess plans and capital expenditure projects in order to liaise with Corporate Head Office to facilitate support from Bankers, Investors, and other financial institutions of secure investment to finance working capital requirements; and Arrangement and co-ordination of global business sector initiatives to build upon group contacts and areas of expertise to drive success at the local level. All the above activities are for co-ordination amongst group companies within a region - Benefit to the applicant Co. is merely incidental, if any Stewardship activity. Financial Advising the Divisional regional management team on financial matters and the production of management accounts; Advice and explanation/interpretation of accounting policies; Design of divisional reporting systems and provision of updates by local currency for local management use; Provision of accounting and financial services, where required and control procedures; Identification of intercompany balance differences assistance in preparation of, and processing monthly quarterly and annual results and budgets, and Preparation and circulation of monthly divisional financial digest and business sector reports. Advice on int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rading activities, advise on contractual/commercial claims against the Company and providing significant support and co-ordination in relation to legal transactions. Information Technology Providing centralised services to the Group, managing and centralizing e-mail, video conferencing, developing system design and net works and updating desktop and internet standards. Also includes management of the global internet site in order to provide a key point of contact for new customers. 5. At the outset, we may mention that an objection has been raised by the Department that the question raised by the applicant is the subject-matter of pending appeals before CIT(A)-X, Mumbai in respect of the assessment years 2003-04 and 2004-05, and therefore, the application is not maintainable in view of the proviso to section 245R of the Income-tax Act, 1961. It is seen from the assessment orders filed along with the comments of the jurisdictional Commissioner that the Assessing Officer did not accept the plea of the applicant that the inspection charges paid to foreign associate entities which carried out inspection on behalf of the applicant were not in the nature of fees for technical services an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. Moreover, the objection as to the maintainability was not taken at the time when the Commissioner was put on notice before passing an order under section 245R(2) of the Act. For all these reasons, we find no legal bar to give the ruling on merits. 6. We may also mention that the comments of the Commissioner are mostly devoted to pre-shipment inspection charges, which is not in issue here. 7. Now, the terms of the Agreement (GMSA) may be referred to. The agreement dated 10-10-2006 is between ITM London and the Subsidiaries ('and together with ITM, the Intertek Group'). The term 'subsidiaries' is defined to mean, excluding ITM, such subsidiary companies of Intertek Group Plc., London, as are identified in Schedule-I. In the list of subsidiaries in Schedule 1, the name of the applicant and its Labtest division is mentioned. The background for entering into the agreement is contained in the preamble which has already been referred to. It is stated in para (B) of the preamble that it is recognized that each company in the Intertek Group, not maintaining the capacity to carry out all of the services, relies on the expertise of an Intertek Group company having such cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted figures. If the difference between budgeted and actual cost is greater than 5 per cent then an additional charge or refund may be made by the Providing Party in the first quarter of the following year. Third party costs specifically incurred on behalf of a receiving party will be recharged at cost to that receiving party. Then, the formula for allocation of fee to various receiving parties/subsidiaries is given in para (ii). 8. Two sample invoices were filed by the applicant covering the period January to July 2006 and July to December, 2006. A consolidated amount with the description 'management fee' is found therein. In order to explain the basis on which the cost is allocated to the various Group companies as per the formula set out above, the applicant has filed the cost analysis statement along with its written submissions. It is stated in the accompanying Note that 'the costs re-charged in the Management Service Agreement are based on the budgeted costs incurred by ITM'. It is also stated that the costs of stewardship are removed from the total costs as they do not benefit the other members of the Group. Further, it is stated that the costs are currently a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design. 9.3 It may be noticed that the language in the definition contained in Explanation 2 to section 9(1)(vii) of the Act and article 13.4(c) of DTAA is not the same. Clause (c) of article 13.4 restricts the scope of fee for technical services ('FTS') by using the expression make available whereas as per Explanation 2, mere rendering of specified service is sufficient to attract the definition of FTS. Article 13.4(c) says that the services rendered should make available technical knowledge, experience, skill, know-how, etc. On an analysis of article 13.4 read with clause (c) it follows that FTS is consideration paid for the rendering of technical or consultancy services, provided that those services make available to the other party, the technical knowledge, experience, know-how, etc. Another point to be noticed is that the offer of a standard facility to a number of customers such as telephone/cell phone users does not amount to rendering any technical service within the meaning of the definition, as held by Madras High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n was whether the expression technical institutions' takes within its fold the medical colleges. The Supreme Court observed that the dictionary meaning of the word technical is also professional and is used in contradistinction with pure sciences to prepare the professionals in applied sciences . However, we would like to observe that it is not any or every professional service that amounts to technical service. Professionalism and an element of expertise should be at the back of such services. There is a decision of Andhra Pradesh High Court in which the ambit of expression 'technical service' was considered. In G.V.K. Industries Ltd. v. ITO [1997] 228 ITR 564 (AP), SSM Quadri, J. speaking for the Division Bench rejected the argument of the assessee's counsel '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'. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical knowledge and experience of the service provider would have gone into it. But, that is not enough to fall within the description of services which make available the technical knowledge, etc. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in future without depending on the provider. Taking some examples, the training given to a commercial aircraft Pilot or training the staff in particular skills such as software development would fall within the ambit of the said expression in clause (c). Supposing, a prescription and advice is given by the doctor after examining the patient and going through the clinical reports. The service rendered by the doctor cannot be said to have made available to the patient, the knowledge and expertise possessed by the doctor. On the other hand, if the same doctor teaches or trains the students on the aspects of diagnosis or techniques of surgery, that will amount to making available the technical knowledge and experience of the doctor. 10.1 The definition of FTS in India-UK DTAA is similar to the one contained in India-USA DTA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature; in the example, they have elements of both types of services. The services make available to the Indian company technical knowledge, skill, and processes. (2) Facts: An Indian vegetable oil manufacturing company wants to produce cholesterol-free oil from a plant which produces oil normally containing cholesterol. An American company has developed a process for refining the cholesterol out of the oil. The Indian company contracts with the U.S. company to modify the formula which it uses so as to eliminate the cholesterol and to train the employees of the Indian company in applying the new formula. Are the fees paid by the Indian company for included services ? Analysis: The fees are for included services. The services are technical and technical knowledge is made available to the Indian company. (3) Facts: The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol-free oil and wishes to market the product world-wide. It hires an American market consulting firm to do a computer simulation of the world market for such oil and to advise it on marketing strategies. Are the fees paid to the US Company for included services ? Analysis: The fees w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to how it conducts those tests or the inputs that have gone into it, so as to enable them to carry out those tests themselves in future. A broad description or indication of the type of test carried out to reach this conclusion does not enable the applicant's client to derive requisite knowledge to conduct the tests or to develop the technique by itself. The mere fact that the tests in question are highly technical in nature will not make a difference... From the perusal of the relevant agreements, we have not found any provision which would entitle Sandoz/Ranbaxy to know the details of the analytical methods and procedures employed by the applicant in carrying out the bioequivalence tests.... (p. 406) 10.6 In a recent decision in Diamond Services International (P.) Ltd. v. UOI [2008] 304 ITR 201 (Bom.) a Division Bench of Bombay High Court held that the job of grading the diamonds in the laboratory and furnishing grading certificate did not amount to transferring any (technical) skill or knowledge to the customers. Nor did it amount to transfer of any industrial or commercial experience of the Company which issued the certificates. 10.7 In the light of foregoing discussion, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces which can be brought within the ambit of phrase make available . They are training staff on the use of accounting software, feedback passed on to the subsidiary after review of financial information for improving accounting skills, advice on tax planning, developing IT related systems design, implementation of global IT policies and systems, provision of accounting policies manual. There are some services which stand on a border line, e.g., design of regional reporting systems, advice on Production of management accounts , and advice on internal and external audit practices and implementing change where need is identified. In relation to them, unless better particulars are available, it is not proper to express a definite view. 12. By holding that many of the services referred to in the agreement and the note do not satisfy the requirement of 'making available' technical knowledge etc., we shall not be understood to have expressed any view on the aspect whether any services were factually rendered or not. We only go by the averments of the applicant, taking them on their face value. The possibility of some or many of the listed services having been rendered cannot be ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dination of global insurance can perhaps fall under this category, though in the absence of details, we do not want to express firm view. Another point we would like to clarify is that from the nomenclature used in the invoice i.e., 'management fee', it cannot be inferred that all the services under the agreement rendered to the applicant are managerial services. The label given in the invoice is not important, much less decisive. In fact, the expression 'management fee' is not found in the agreement. It is described in the agreement as service charge or fee and the same description is given in the application also. In the note, the applicant stated that management charges relate to 'support services'. Support services are not necessarily equivalent to services of managerial nature. 13.1 Keeping the above observations in view, the classification of services as managerial may have to be undertaken in an appropriate proceeding. 14. There are certain services which may not come under either technical or consultancy or managerial. At any rate, a doubt arises in regard to their classification in the absence of sufficient particulars. For instance, preparation and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore do not fall within the ambit of clause (c) of Article 13.4. But, some of them satisfy the test of making available 'technical knowledge' etc. and therefore taxable as FTS under Article 13.4 of Treaty. There are also services which can be categorized as managerial. There are some which do not fall under either of the three categories. We have given sufficient indication of all such services, on a broad analysis. 16.1 It is made clear that nothing in this ruling shall preclude the concerned Income-tax Authority to determine the cost of services etc. on arms length basis by taking resort to the provisions of section 92 of Income-tax Act, 1961. 2nd Question: As indicated earlier, while discussing question No. 1, it is not possible to hold, on the basis of the material placed before this authority, that all the services rendered do not fall under FTS and that the entirety of service fee charged to the applicant does not constitute the income of ITM, UK under the Treaty. There is some grey area in respect of certain services, as pointed out in the course of discussion supra. However, we have interpreted Article 13(4)(c) of the Treaty and laid down the principle. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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