India: Management Services Not Taxable As ‘Technical Services Under India – UK Tax Treaty: Rules AAR

  • 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.

Background

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.

Ruling

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.

Analysis

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.

Footnotes

1 AAR No. 1152 of 20112

2 (2012) 346 ITR 467

3 307 ITR 418

4 AAR NO. 966 of 2010

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Ashish Sodhani
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions