- Supply Management Services are not in the nature of fees for technical services because they do not meet 'make available' requirement under the India – UK Tax Treaty.
- For a service to qualify 'make-available', the service should transmit technical knowledge, skill etc. allowing the recipient to utilize the knowledge or know-how on his own in the future without the aid of the service provider.
- Services which are managerial in nature do not qualify as FTS under India – UK treaty.
- Recently, the Authority for Advance Ruling ("AAR") in the case of Cummins Ltd.1 has ruled that supply management service fees paid to a UK resident is not in the nature of Fees for Technical Services ("FTS") under the India – UK double taxation avoidance agreement ("Tax Treaty") because it does not meet the requirement of 'make available' as provided under the definition of FTS in the Tax Treaty. They also do not qualify as royalties under the Tax Treaty.
Cummins Limited ("Cummins") is a company resident in the UK whereas Cummins Technology India Limited ("CTIL") is a company resident in India. CTIL is engaged in the manufacture and sale of turbochargers which it purchases from third party suppliers in the UK and the US. In relation to these purchases, Cummins provides supply management services to CTIL under a Supply Management Service Agreement ("Agreement"). CTIL pays Cummins supply management service fees at 5% of the base prices charged by suppliers.
Cummins approached the AAR for a ruling on whether the payments made by CTIL to Cummins for supply management services should be taxable in India as FTS or royalty.
Scope of services under the Agreement
Under the Agreement, Cummins is responsible for the following:
- finalising supply prices from UK and US based suppliers and ensuring market competitive pricing from them;
- ensuring it has necessary manufacturing capacities and infrastructure;
- ensuring on-time delivery of components by suppliers to CTIL; and
- ensuring strict compliance with standards, procedures and processes by suppliers.
The AAR held that the payments made by CTIL to Cummins are not in the nature of FTS under the Tax Treaty. It held that the supply management services do not meet the 'make available' requirement under the Tax Treaty for the payments to be considered as FTS. The AAR also held that such payments are not in the nature of royalties under the Tax Treaty. Accordingly, in the absence of Cummins having a Permanent Establishment ("PE") in India, the payments received by the Cummins from CTIL should not be taxable in India. It based its ruling on the following:
1. Services do not 'make available' technical knowledge, experience, skill etc.: Article 13 of the Tax Treaty defines FTS as payments in consideration for rendering of "technical or consultancy services". An added requirement to be met under the Tax Treaty is that the service must "make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design".
For examining the scope of "make available" AAR relied on Karnataka High Court's judgment in CIT v. De Beers India Pvt. Ltd.2 and the AAR's ruling in Intertek Testing Services India (P) Ltd.3 In these cases, "make available" has been interpreted to mean that the service should transmit technical knowledge, skill etc. so that the payer of the service could derive an enduring benefit enabling him to utilize the knowledge or know-how on his own in the future without the aid of the service provider, even after the particular contract comes to an end.
AAR noted that under the Agreement, Cummins maintains contract supply agreements from the suppliers after identifying the products' availability, capacity to produce and competitive pricing. Hence, the supply management services do not impart any technical knowledge and expertise to CTIL which would enable it to perform such services without the aid of Cummins. Accordingly, the payments for these services should not be considered as FTS as the requirement of 'make available' under the Tax Treaty is not met.
2. 'Managerial services' absent from FTS definition in UK treaty: The definition of FTS only includes "technical or consultancy services". 'Managerial services' were excluded from the ambit of FTS in the Tax Treaty in the year 1994 and the clause relating to 'make available was introduced.
AAR ruled that supply management services which are rendered under the agreement are purely managerial in nature. It placed reliance on an earlier AAR ruling in Measurement Technologies Ltd.4 where it had ruled that procurement services can neither be classified as technical or consultancy in nature nor as making available any technical knowledge, experience etc.
3. There is no scheme for tax avoidance: The Revenue had argued that the Cummins entered into the Agreement with CTIL only to take benefit of the Tax Treaty since FTS defined under the Income Tax Act, 1961 includes 'managerial services'. Further, neither of the treaties with Canada, Portugal, UK and USA expressly include 'managerial services' in the definition of FTS. It also invoked Article 28C of the protocol under Tax Treaty which makes benefits under the Tax Treaty unavailable to transactions having their main purpose of obtaining treaty benefits.
The AAR, however, dismissed the objection of the Revenue and observed that Cummins is responsible for finalising supply prices from UK and US suppliers to Cummins Turbo Technologies worldwide, including CTIL. Hence, the Agreement with CTIL is not with the main purpose of avoiding tax.
4. Payments are not royalties under the UK treaty: The Payments do not qualify as royalties under Article 13 of the UK treaty because they are not related with the use of, or the right to use any copyright, patent, trademark, design or model, plan, secret formula, process etc.
5. Transfer Pricing not Applicable: Based on the ruling on the above points, the AAR briefly held that Transfer Pricing provisions will not apply in this case.
The AAR has followed a consistently held view on the scope of the 'make available' clause which is present in various treaties. This clause is found in Indian double tax avoidance treaties with countries like Australia, Canada, Cyprus, Malta, Netherlands, Singapore, UK and US. The scope of FTS in light of the 'make available' clause has been explained in the Memorandum of Understanding ("MoU") in respect of the India – US treaty. Courts have upheld the import of the meaning as explained in the MoU to treaties with other countries which have the 'make available' clause. The treaty with Singapore also explains 'make available' as an act which "enables the person acquiring the services to apply the technology contained therein". This meaning is now settled under the Indian jurisprudence and has been uniformly applied by various High Courts, Tribunal benches and the AAR.
1 AAR No. 1152 of 20112
2 (2012) 346 ITR 467
3 307 ITR 418
4 AAR NO. 966 of 2010
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