Amounts receivable by a British company is not liable to be taxed under the Income Tax Act as fee for `included services'

Indo-UK Treaty : Amounts receivable by a British company (EMEIA) from the applicant under the Area Services & Market Development Agreement are not liable to be taxed under the Income Tax Act as fee for `included services' or as business profits, having regard to the provisions of DTAA between India and UK.

Dissemination of informations, furnishing guidelines and suggesting plans of action aimed at uniformity and seamless quality in business dealings of participating group entities do not per se amount to making available to them technical knowledge and experience possessed by EMEIA to a substantial extent; There is no transfer of technical know-how in that process nor can it be said that the recipient of these coordinated/centralized services has been enabled to apply the technology which EMEIA is possessed of.

AUTHORITY FOR ADVANCE RULINGS (INCOME-TAX) NEW DELHI

Ernst & Young (P.) Ltd., In re

AAR No. 820 of 2009
March 19, 2010

R U L I N G

(By Hon'ble Chairman)

1. The applicant, Ernst & Young Private Ltd. (EYPL) is a company incorporated in India and is engaged in providing consultancy services (such as chartered accountancy and management studies). The applicant is one of the member entities of Ernst & Young Global (EYG). EYG has such member entities in various countries. All member entities (including EYPL) use the brand `Ernst & young' (EY) and adopt the international practices followed by the EY organization worldwide for providing consultancy services to their clients. Such membership enables the member companies to co-operate, collaborate and work closely 1.together to achieve the provision of seamless, consistent, high-quality client service within the Area.

1.1. Ernst & Young (EMEIA) Services Limited is a limited liability company incorporated under the laws of England and Wales. This Company has been formed specifically to facilitate the objective of providing support in various fields such as Area, Global and Market Development etc. to all the member entities of the EY organization so that they may gain access to standardized human, financial and other resources to ensure that consistent, high quality professional services are provided to the client base of all members of the EY organization. EMEIA, inter alia, provides Area Services, Market Development Support Services and Global Services as detailed in the Schedule to the Area Services and Market Development Agreement. Such support is provided from UK and it does not have any Permanent Establishment or fixed base in India. The terms and conditions under which all EY member entities would get such support from EMEIA are documented in the form of the Area Services and Market Development Agreement (for short, `the Agreement') which has been filed. Under the Agreement, costs incurred for providing the services are allocated to EY member entities and they reimburse such costs to EMEIA, UK.

1.2. It is submitted that EMEIA does not earn any income from providing access to centralized Ernst & Young resources, facilities and services. The cost allocation is done in accordance with agreed formula. The applicant states that the payment is made by way of reimbursement of the cost incurred on behalf of the applicant company by EMEIA.

2. The following questions (as revised) are raised by the applicant for the purpose of advance ruling:

(1) Whether the amount payable by the applicant in accordance with the agreement entered into with Ernst & Young (EMEIA) Services Limited is chargeable to tax in India under the provisions of the Income-tax Act, 1961 (`the Act') and Double Taxation Avoidance Agreement between India and UK?

(2) Whether the amount receivable by Ernst & Young (EMEIA) Services Limited from Ernst & Young (P) Ltd., inter alia, on account of Area Services, Market Development Support Services and Global Services as detailed in the Schedule to the Area Services and Market Development Agreement

is chargeable to tax in India as "fees for technical services"

under section 9(1)(vii) of the Income-tax Act, 1961.

3. The applicant contends that the amount received by EMEIA for Services rendered in terms of the Agreement dated 5 th May, 2009 with the applicant company is not `fees for technical services' as per Article 13 of the DTAA (Tax Treaty) between India and U.K. Though it gives rise to business profit for the reason that EMEIA is in the business of providing access to central resources and services to various member entities, in the absence of permanent establishment of EMEIA in India, the receipt is not taxable in India by virtue of the provisions in Article 7 of the DTAA.

4. The term `fees for technical services' is defined in para 4 of Article 13 to mean "payment of any kind in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which :

……………….. (c) make available technical knowledge, experience, skills, know-how or processes or consist of the development and transfer of a technical plan or technical design". The definition of "fees for included services" in the India-USA Treaty bears the same wordings. In the MOU reached between the Governments of India and USA concerning "fees for included services" (Article 12), the import and connotation of the first part of definition in clause (b) of para 4 i.e. "make available" technical knowledge, experience etc. has been explained. The MOU clarifies that technology will be considered `made available' when the person acquiring the service is enabled to apply the technology. The MOU further clarifies that the fact that the provision of the service may require technical input

by the person providing the service does not per se mean that technical knowledge, skills, etc. are made available to the person paying for the service.

5. It is the contention of the applicant that the services rendered to the applicant by EMEIA does not satisfy the test of `make available' under Article 13 of the DTAA as they do not result in transfer of any technical know-how, technical plan/design, though some of the services broadly answer the description of consultancy or technical services. The applicant submits that the work of EMEIA is confined to providing support and access to central resources for developing business strategies and plans at Area level, providing support in implementation of Priority Account Strategies and Industry Sector Strategies, knowledge Management and Sharing, Market Development Support, Assistance in the implementation and monitoring of common standards, policies and tools, Assistance in Recruitment and training and retention of operating Global methodologies and applications and procuring on a centralized basis goods and services.

5.1 In the course of arguments, the learned counsel for the applicant while reiterating the above contentions of the applicant, submitted that EMEIA does not create any system or technology nor does it make its contribution by refining or improving on it. It merely gathers and collates the information from the systems already available and place them before the members entities who have entered into agreement for their guidance and implementation. The idea is to maintain uniformity in practices and approaches in business among the E&Y Group entities by providing the requisite templates, power points, accounting practices etc. EMEIA serves as a common platform for globalizing the standards and ensuring uniformity in practices and systems. The total expenditure will be shared by all the entities. The nature of services listed in the Agreement would clearly indicate that no technical knowledge, experience, skills or know-how is being made available by EMEIA to the member entities.

5.2 The learned counsel has drawn our attention to the passages in the recent ruling of this Authority in Intertek Testing 1 , which are extracted below:

"Rendering technical or consultancy service is followed by a relative pronoun "which" and it has the effect of qualifying the services. That means, the technical or consultancy service rendered should be of such a nature that "makes available" to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting the technical knowledge, etc., so that the payer of service could derive an enduring benefit and utilize the knowledge or know-how in future on his own without the aid of the service provider. By making available the technical skills or know-how, the recipient of the service will get equipped with that knowledge or expertise and be able to make use of it in future, independent of the service provider. In other words, to fit into the terminology "make available", the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. The services offered may be the product of intense technological effort and a lot of 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."

In the case of Anapharm Inc. in re 2 , this Authority observed: It is, thus, fairly clear that mere provision of technical services is not enough to attract article 12(4)(b). It additionally requires that the service provider should also make his technical knowledge, experience, skill, know-how, etc. known to the recipient of the service so as to equip him to independently perform the technical function himself in future, without the help of the service provider. In other words, payment of consideration would be regarded as

"fee for technical/included services" only if the twin tests of rendering services and making technical knowledge available at the same time is satisfied."

6. Looking at the list of services enumerated in the Agreement, it appears to us that the criterion laid down in para 4(c) of Article 13 (of UK Treaty) is not satisfied. The Agreement contains an elaborate preamble explaining the underlying objective of the Agreement. There are two types of services categorized in the schedule; they are area services and global services. Both of them almost overlap. Global services are more relevant for the purposes of this case. The applicant's counsel has taken us through the global services and broadly explained the scope of each service. The learned counsel at the outset pointed out some inaccuracy in the definition of `global services' because it refers to the services set out in the EYGSLLP Management Services Agreement. The learned counsel has stated that the global services are enumerated in a self-contained Schedule to the relevant agreement i.e. Area Services and Market Development Agreement and, therefore, the reference to some other earlier agreement is not appropriate. In any case, the learned counsel has clarified that practically, there is no difference between the services mentioned in both these agreements and if at all the enumeration in the present agreement is more comprehensive. A chart containing comparative analysis of these two agreements has been furnished to clarify this point.

7.7. We have looked into the global services detailed in the schedule to the Agreement with which we are concerned. We shall refer to them (14 in number) in brief one by one:

1. Strategy – Firmwide & Service Lines - Developing, leading and overseeing plans and strategies for the Member Firms of Ernst & Young Global in order to achieve seamless, consistent, high- quality services Formulating global planning processes and encouraging their adoption. Overseeing execution of plans and strategies with global consistency while differentiating the EY brand in the marketplace. Developing strategies for each Service Line, clearly defining and identifying the existing and future core global Service Lines.

Aligning the global sub-Service Lines, integrating service delivery across global Service Lines connecting and integrating Service Line, Industry and Account activities.

2. Accounts, Industry & Business Development –

Formulating Priority Accounts strategy for the Member Firms of Ernst & Young Global focused on enhancing Industry effectiveness, driving profitable revenue growth; Formulating Industry Sector Strategy for the Member Firms of Ernst & Young Global focused on enhancing Industry effectiveness, driving profitable revenue growth; Development of ASQ strategy for the Member Firms of Ernst & Young Global. Policy enshrines a common methodology and framework to measure the quality of services provided to clients.

3. Knowledge Management and Sharing

Driving the delivery of a globally consistent knowledge strategy and plan to enable "our people", Service Line, Sector, Account and Business Development priorities. Global knowledge enables the delivery of strategic analysis and research, global competitive and market intelligence analysis and reporting.

4. Marketing

Supporting the Market Leadership strategy for the Member Firms of Ernst & Young Global by enhancing EY's reputation among key stakeholders.

5. Internal Communications

Delivering a global internal communications program that connects and engages the partners and people of the Member Firms of Ernst & Young Global around their shared cultural, strategic and organizational priorities. Provision of appropriate internal communications programs and materials to support EY people in their client-facing activities.

8.6. Public Relations

Protecting and enhancing brand and reputation of the Member Firms of Ernst & Young Global in collaboration with EYG leaders, Global Industry and Service Line Leaders and with execution through and by Area/country PR teams. Managing communication around sensitive media issues, including developing messages etc.

7. Public Policy

Working with regulators across multiple jurisdiction to ensure the EY network is able to contribute to important decisions affecting the way the profession is governed.

8. Quality and Risk Management

Development and supervision of common standards and policies for the EY network, including strategies and programmes to embed quality and risk management throughout the EY Global network, such as independence infrastructure, quality review programmes and client and engagement acceptance and continuance policies and tools. Providing practice manuals and other reference materials and otherwise assisting in the adoption and consistent application of common standards and policies.

9. People

Developing and overseeing common programmes and policies for Resourcing (Recruiting and Mobility), Learning and Development and People Infrastructure. This includes global people surveys, strategic resourcing and recruiting, globally aligned Performance Management and Development processes, partner development, etc.

10. Core Business Services

Provision of services in relation to Human Resources, Events Planning, Facilities Management, IT Support, Information Distribution and Graphics Support.

11. Legal

Advice and strategic input on a wide range of competencies to support the EYG functions, including regulatory, risk and crisis management; dispute resolution; project management; regulatory matters; company and partnership law; financial and treasury advice; and commercial and IP law.

12. Finance

Developing and overseeing common financial treasury, budgeting and accounting systems, practices and policies, and providing advice and assistance in connection with such systems, practices and policies. Providing value-added financial information and support to Global, Area and country leaders, including in relation to supporting technology. Creating policies for, and implementing, a common client invoicing and settlement procedure by Member Firms.

13. Technology and Infrastructure

Providing wide range of technology applications and support services to the Member Firms, including global data center support services.

9. Centralized procurement of software licenses from third party vendors, such as e-mail systems, computer security systems, voice mail connectivity and internet services. Development and deployment of Global applications and methodologies, including Global Financial Information System.

14. Centralized Procurement Services

Procuring on a global basis goods and services that can be advantageously so procured, including credit facilities, health benefits, and other financial services required by Member Firms or their employees.

7.1 In the course of hearing we have asked the learned counsel for the applicant to explain various items in the form of a note and supporting documents to illustrate the contents of each service. The learned counsel has accordingly filed a Paper Book containing 89 pages. We shall refer to the clarifications given by the applicant with reference to some of the services.

2. Accounts, Industry and Business Development. Re: Priority accounts: para 2.1

• An overall key account framework and plan from EY Global,

• Visits by Global account leaders to India subsidiaries and affiliates,

• Templates/frameworks on accounts planning and

development. Best practices in approaching these large MNCs as a Global firm.

Re: Industries and Business Development: Para 2.2

Global formulates plans for achieving higher profitability and thought leadership, while Area works in liaison with the member firm to get the plans implemented. The various services rendered are as under:

• Relationship, knowledge and Credentials support in

pursuits/proposals to large clients,

• Service frameworks pertaining to the focus sectors.

Re: Assessment of Service Quality (ASQ) – para 2.3

This contemplates provision of common methodologies and framework for quality services to be provided to the clients and Area, in liaison with

the member firms. The same gets implemented at Area level.

Written questionnaires and interviews are used for this exercise. The support received from Global is in terms of a Global policy that drives the survey process including questionnaires, assessment templates to be used.

ASQ is a Global framework and is used to determine the level of satisfaction of services provided by EY to its clients.

13. Technology and Infrastructure

13.1 Providing wide range of technology applications and support services to the Member Firms, including global data center support services.

13.2 Centralised procurement of software licences from third party vendors, such as email systems, computer security systems, voice mail connectivity and internet services.

13.3 Development and deployment of Global applications and methodologies, including Global Financial Information System.

13.4 Maintaining Global datacenters.

Under this clause, various types of software, e.g., centrally hosted application service (CHAS), Global Mail Template, Global Systems Management Server, Internet mail service, Global corporate data base, Service Offering Reference Tool (SORT), Global TAS Templates etc. are provided to the member entities. It is stated that the service provider, namely, EMEIA sources common technology and application systems referred to above and allow all the member firms including the Applicant to use the same. No technology is made available. All member firms are allowed to use it in a uniform manner. Sample screen shorts of the various applications and support services received from time to time are placed on record.

3. Knowledge Management and Sharing

The various services rendered are : Analysis on focus markets, competitive intelligence within a particular sector /country.

The purpose of above services is stated to be to respond better to moves from competitors and stay better informed on the sectors and to provide higher quality service to clients.

8. First of all, some of the services enumerated above have the flavour of management services. Services of managerial nature are not included within Article 13 unlike many other treaties. Only technical and consultancy services are included. Many of them do answer that description. However, the more important question is whether EMEIA, U.K. has made available to the applicant any technical knowledge, experience, skills or know-how by providing the `support services' noted above. In our view, that question admits only of an answer in the negative. What all is provided by EMEIA is informations on various business and commercial matters, guidelines, templates, best practices and strategies that could be adopted in various spheres of their business which ultimately lead to protection of EY image and client relations. Dissemination of informations, furnishing guidelines and suggesting plans of action aimed at uniformity and seamless quality in business dealings of participating group entities do not per se amount to making available to them technical knowledge and experience possessed by EMEIA to a substantial extent. There is no transfer of technical know-how in that process nor can it be said that the recipient of these coordinated/centralized services has been enabled to apply the technology which EMEIA is possessed of. In fact, EMEIA has not developed any technology of its own nor does it innovate anything.

9. In the light of above discussion, the questions are answered as follows:

Both the questions are answered in the negative and it is ruled that the amounts receivable by Ernst and Young EMEIA Services Ltd. from the applicant under the Agreement are not liable to be taxed under the Income Tax Act as fee for `included services' or as business profits, having regard to the provisions of DTAA between India and UK. However, the Income-tax authorities are not precluded from making inquiry into the question whether the cost contribution is fixed on arm's length basis and such determination can be made in the assessment proceeding of the applicant.

Accordingly, ruling is given and pronounced on this the 19th day of March, 2010.