- There can be no straight jacket formula to determine what is meant by "provision of service," which may include where services are i) provided; ii) rendered; or iii) utilized.
- The expression 'provision of services' is much wider than 'provision of rendering of services,' and covers the services even if they are not rendered in India as long as they are used in India.
Recently, the Authority for Advance Rulings ("AAR") in the matter of Guangzhou Usha International Ltd.1 ("Guangzhou") held that the service fee received by Guangzhou in return for providing expert services in connection with procurement of goods from China are taxable as Fees for Technical Services ("FTS") under the India-China Tax Double Taxation Avoidance Agreement ("India – China Tax Treaty").
Guangzhou is a company registered under the laws of the People's Republic of China. It is a wholly owned subsidiary of Usha International Limited ("UIL"), an Indian company incorporated under the laws of India. Apart from carrying on the business of import and export, Guangzhou also provides services relating to the business of household electronic appliances and equipment, household goods and accessories etc., to UIL. In relation to this, Guangzhou entered into a Memorandum of Understanding ("MoU") with UIL for providing services in connection with procurement of goods by UIL from vendors in China. However, the MoU was later converted into a service agreement under which services to be rendered by the applicant company to UIL included, inter alia, identification and evaluation of products and suppliers requested by UIL, generation of new products and ideas, market research, resolution of pricing issues, safety/endurance tests, review of quality systems and interaction with vendors. Under the services agreement, services were not actually performed in India but wholly undertaken in China.
Pursuant to the services agreement, UIL while making payment of service fee to Guangzhou deducted tax at source at the rate of 10% considering the payment in the nature of FTS under the India – China Tax Treaty. However, Guangzhou approached the AAR to decide on:
- Whether the service fee received by Guangzhou for providing services in connection with procurement of goods for UIL from China and other related services provided in China is taxable in India and Guangzhou is liable to pay tax thereon in India.
- Whether the services rendered fall within the definition of FTS under the India-China Tax Treaty.
- Whether the service fee received by Guangzhou is chargeable to the extent of the full amount received by it or only to the extent of the mark-up received at 10% over and above the actual cost incurred by the applicant.
With regard to the first issue, the AAR held that the services provided by Guangzhou would fall within the scope of FTS as provided for under the India-China Tax Treaty. It held that the scope of the expression "provision of services" as provided under the India-China Tax Treaty is much wider in scope than the expression "provision of rendering of services" and will cover the services even when these are not rendered in the other contracting state, as long as these services are used in the other contracting state.
The AAR relied significantly on one of its earlier rulings, Inspectorate (Shanghai) Limited.2 In this matter, the AAR had observed that, by following the principles of interpretation of a tax treaty, the scope of the expression 'provision of services' is definitely much wider than 'provision of rendering of services' in that it covers the services even if they are not rendered in India as long as they are used in India. The AAR in Inspectorate (Shanghai) Limited had arrived at this conclusion by referring to the deeming provision in Article 12(6) of the India-China Tax Treaty which states that Royalties or fees for technical services shall be deemed to arise in the Contracting State when the payer... is a resident of that Contracting State. This clause was interpreted to mean that irrespective of where the technical services are rendered, the fees will be deemed to have accrued in the taxing jurisdiction of the payer (in this case, India).
Furthermore, the AAR in Inspectorate (Shanghai) Limited had also observed that there is some ambiguity in the expression "provision of service" which can either refer to where services are i) provided; ii) rendered; or iii) utilized. However, the AAR did not provide further clarity in this regard. In fact, it observed that there can be no straight jacket formula, and that the interpretation of the expression would depend on the factual scenario of each case. Based on the merits of that case, the AAR had held that the scope of the expression "provision of service" is much wider than "provision of rendering of service" and as such, it would cover the services even when these are not rendered in the other contracting state, as long as these services are used in the other contracting state.
While agreeing with the reasoning of the AAR in Inspectorate (Shanghai) Limited, the AAR in this case found that as the present matter was concerned only with the India-China Tax Treaty, definitions of the above expression could not be imported from other tax treaties. However, since the counsel for Guangzhou stressed on making a distinction between the India-China Tax Treaty and the Pakistan-China Tax Treaty, the AAR observed that the expression 'provision of services' under the India-China Tax Treaty was much wider in scope than the expression 'provision of rendering of services' as under the Pakistan-China Tax Treaty. Based on this distinction, and the previous ruling in Inspectorate (Shanghai) Limited, the AAR concluded that the expression 'provision of services' will include services even when they are not rendered in the other contracting state ( in the instant case – India ), as long as they are used in the other contracting state. In this case, Guangzhou primarily provided services in relation to gathering and supplying information to UIL, which UIL could then use to better market its business. As such, the services were being used in India and therefor are subject to FTS.
On the second issue, the AAR ruled that the services provided by Guangzhou to UIL was highly specialized and technical, and hence would fall squarely within the ambit of 'consultancy services' and therefore should be taxable as FTS under the India-China Tax Treaty. The AAR observed that from the list of services rendered by Guangzhou to UIL, it can be concluded that the applicant is not only identifying new products and suppliers in response to UIL's instructions, but is also generating new ideas for UIL after conducting the relevant market research. Further, Guangzhou is also charged with the additional mandate of evaluating the credit, finances, organization and production facility of the potential manufacturer, and forwarding a report to UIL based on the same. Thus, the AAR was of opinion that such a technical evaluation can only be made by an expert in the field and such kind of specialized services require a high degree of skill, acumen and knowledge and hence are in the nature of consultancy services. The test as identified by the AAR was whether UIL, in light of its inability to undertake a detailed technical and financial evaluation of various organizations, intended and desired to utilize expert services of qualified and experienced professionals. Therefore, since UIL was unable to perform these technical/specialized functions on its own, it approached Guangzhou who provided these services. In coming to the conclusion the services rendered by the Applicant fall within the scope of 'consultancy services', the AAR relied on the Supreme Court case of GVK Industries & Anr vs ITO & Anr3.
With regard to the final issue, the AAR relying on earlier cases, held that the gross amount will be chargeable to tax at the rate of 10% and not only the mark-up cost.
While an AAR ruling does not have binding effect on subsequent matters that come before the AAR, it is significant to note that it relied almost exclusively on the previous AAR ruling of Inspectorate (Shanghai) Limited, thereby adding further authority to the interpretation that Article 12(4) of the China-India DTAA includes even those FTS for services performed wholly outside of India. Thus, even if a company does not have a PE in India, such company may still be liable to pay tax on fees received for services rendered or performed wholly outside India. An interpretation of this kind plays an important role in the structuring of MNCs.
Most surprisingly, the AAR issued this order without properly addressing the issue of what constitutes "provisions of service." By merely relying on the previous AAR ruling in Inspectorate (Shanghai) Limited, the AAR failed to address the issue that the facts in the previous case were different than those in the present one. Whereas, the service provided in the Inspectorate (Shanghai) Limited case were of spot inspection, the services under investigation in the current case were in the nature of procurement of goods. While they may have also had certain aspects which required technical skill, primarily the service that was used by UIL was to procure commercially viable goods into India.
Even taking for granted that the services were technical in nature, the AAR failed to enter into a proper analysis of the difference between providing a service and rendering a service. Instead, it merely relied on the fact that the scope of the phrase "provision of service" may be wider than the scope of the phrase "provision for rendering service." While this may be true, the AAR should have assessed how the provision of a service may include in its meaning the utilization of that service. From an ordinary interpretation of the words, it seems that while "provision of service" may encompass the rendering and providing of a service, it may not as readily also encompass the use of that service.
Lastly, it is interesting to note that while Guangzhou presented several other cases4 in which the same expression "provision of services" was interpreted to mean that tax would only be levied in a contracting state if the service was actually rendered or performed in that contracting state, the AAR found those cases irrelevant as they dealt which tax Treaties between India and countries other than China. However, the AAR itself, relied upon the China-Pakistan Tax Treaty to reach its final holding.
1 Guangzhou Usha International Ltd. (AAR No. 1508 of 2013)
2 Inspectorate (Shanghai) Limited (AAR No. 1005 of 2010)
3 GVK Industries & Anr vs ITO & Anr 2015(2)SCALE534
4 Both the India-Japan and India-Austria Tax Treaties use the expression "provision of services" under article 12(4).
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