Reimbursement towards services attracts tax withholding requirements

 Reimbursement towards services in the nature of assistance, professional and administrative consultation and training @ attracts tax withholding requirements

In a recent AAR ruing in case of Mersen India Private Limited, it was held that--under Article 13 of the India-France DTAC, there is no stipulation that managerial services should 'make available' any, knowledge experience, skills, and know-how before the consideration paid for it can be taxed. In other words, mere rendering of managerial services to the applicant would invite the liability to be taxed in India for the consideration received for that service. Advice on business strategy, on general management, on marketing and commercial matters, on financial control and accounting matters, and on purchase and sales, environment and safety and the giving of training to optimize sales techniques to the employees of the applicant, are all capable of being put to use by the applicant on its own and hence can be said to be 'made available' to applicant and taxable in terms of Article 13.4 of India-France DTAC read with para 4 of Article 12 of India-US DTAC.

In short, reimbursement towards with services in the nature of assistance, professional and administrative consultation and training @ attracts tax withholding requirements.

[2012] 20 taxmann.com 475 (AAR - New Delhi) AUTHORITY FOR ADVANCE RULINGS (INCOME TAX), NEW DELHI

Mersen India (P.) Ltd., In re JUSTICE P.K. BALASUBRAMANYAN, CHAIRMAN

A.A.R. NO.1074 OF 2010

RULING

________________________________________

1. The applicant is a company incorporated under the companies Act 1956. It is a 100% subsidiary of a French company. The French company in turn has another 100% subsidiary incorporated in France. The said subsidiary is now known as Mersen Corporate Services. The applicant originally entered into what is called a "Services agreement" on 1.1.2008, which was to be in force for a period of one year. On the expiry of one year, another agreement was entered into which was also to be for one year. With effect from 1.1.2010, the applicant has entered into a fresh agreement with the French company. Though the agreement stipulates the term of one year, unlike the earlier agreements, it provides for an automatic renewal of its terms for one year at a stretch. The applicant has also produced the agreement dated 30.12.2009 which is to come into effect on 1.1.2010, which is the agreement currently governing the relationship between the parties. The applicant and its parent company in France, are both in the business of manufacturing electrical components. The applicant is doing its business in Bangalore and Chennai for over a decade.

2. Under the services agreement, Mersen has undertaken to provide the applicant with services in the nature of assistance, professional and administrative consultation and training. The applicant has to pay the expenses incurred by Mersen for the services rendered to the applicant plus 5% of that amount. The invoice was to be in Euro and the money had to be remitted to a bank in Paris in France. The payment had to be made free of and without withholding taxes and duties and other charges and if such withholding was necessary, the same had to be borne by the applicant and there could be no deduction of the same from the amount to be paid to Mersen. The applicant had also entered into another agreement with Mersen wherein Mersen had undertaken transactions in the nature of E-Sourcing, Mail messaging, ERP maintenance etc. The applicant was not seeking an advance ruling in respect of that transaction. The applicant was seeking a ruling on the transaction evidenced by the services agreement.

3. After hearing the applicant and the Revenue which raised no objection to the allowing of the application under section 245R(2) of the Income-tax Act, this Authority allowed the application for giving a ruling on the following questions:

(1) Whether, pursuant to the "Services Agreement" entered into by the Applicant with Mersen, France, the payment made by the Applicant to Mersen, France, towards advisory services is 'fees for technical services' as per Article 13 (4) of the India-French DTAA read with the protocol to the said DTAA?

(2) If the answer to query 1 is in the affirmative, what is the rate at which the Applicant is required to deduct tax at source from such payment under Section 195(1) of the Income tax Act, 1961 (hereinafter referred to as the IT Act)?

(3) If the answer to query 1 is in the negative, is the above payment in the nature of business profits dealt with by Article 7 of the Indo-French DTAA?

(4) If the answer to query 3 is in the affirmative, is the above payment not taxable in India as Mersen, France does not have a permanent establishment in India as per Article 5 of the India-French DTAA?

(5) If the answer to query 4 is in the affirmative, is the Applicant required to deduct tax at source under section 195(1) in respect of the aforesaid payment to Mersen, France?

4. Though in the application, as part of its contentions, a contention is raised that what is payable under the services agreement to the French company was not fees for technical services within the meaning of section 9(1)(vii) of the Income-tax Act, at the hearing, learned counsel for the applicant did not dispute the position that the payment would be fees for technical services within the meaning of the Act. It was also agreed that going by the Double Taxation Avoidance Convention between India and France the amount would qualify as fees for technical services under paragraph 4 of Article 13 of the Convention. What was mainly contended for was that in terms of clause 7 of the protocol annexed to the DTAC, the applicant was enabled to claim the benefit of the limiting of the scope for taxation of technical services and if one restricted it to the convention between India and the United States, for satisfying the definition of included services in that Convention, it had also to be shown that the know-how was made available to the applicant before the payment for it could qualify as fees for included services under that Convention. It was also pointed out that managerial services were not included in the concept of "included services" under the India-US Convention and hence, the payments could be understood only as the business income of the French company and the payments to it could not be taxed in India in the absence of that company having a permanent establishment in this country.

5. On behalf of the Revenue it was contended that going by the definition contained in the Income-tax Act and the DTAC between India and France, payments made under the services agreement, would be fees for technical services and taxable as such. The exemption contained in section 9(1)(vii) of the Act did not apply and the transaction was liable to tax in India. In terms of the DTAC, what was inter alia being provided was consultancy services and the same fell within the concept of included services as now put forward. As regards the protocol, it is submitted that it will make no difference to the situation and the payments were taxable in India.

6. As per explanation 2 to section 9(1)(vii) of the Income-tax Act, fees for technical services means any consideration for the rendering of any managerial, technical or consultancy services. Under paragraph 4 of Article 13 of the Convention between India and France also, fees for technical services means payment of any kind as consideration for services of a managerial, technical or consultancy nature. Learned counsel is right in his submission that the position under the Convention and under the Act are the same regarding the nature of the payment. He has, therefore, rightly pitched his arguments on the modification brought about by the protocol to the DTAC wherein it is provided as follows:

"7. In respect of articles 11 (Dividends), 12 (Interest) and 13 (Royalties, fees for technical services and payments for the use of equipment), if under any Convention Agreement or Protocol signed after 1.9.1989, between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, fees for technical services or payment for the use of equipment to a rate lower or a scope more restricted than the rate of (?) scope provided for in this Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items of income shall also apply under this Convention, with effect from the date on which the present Convention or the relevant Indian Convention, Agreement or Protocol enters into force, which ever enters into force later."

7. It is curious to see that the convention between India and France was signed on 29.9.1992. The protocol was also signed on the same day with a preamble that the same was to form an integral part of the Convention. But a look at clause 7 of the protocol indicates that if any other Convention, agreement or protocol had been signed by India after 1.9.1989 (a date preceding the signing of the DTAC between India and France) with a third state, which is a member of the OECD, in which India limits its taxation at source on fees for technical services (relevant for our purpose) to a rate lower or scope more restricted than the rate of (?) scope provided for in this Convention, the same rate or scope as provided for in that Convention, was also to apply under the DTAC.

8. Learned counsel for the applicant submitted that the DTAC between India and the United States was entered into on 12.9.1989, a date later than 1.9.1989 referred to in clause 7 of the protocol and that the applicant was relying on the relevant clause of that Convention, which had a more restricted scope for taxation of such fees. He submitted that in Article 12 of the Convention between India and the US, what was taxable was fees for included services. He pointed out that paragraph 4 of Article 12 of that Convention, provides that fees for "included services" means payment of any kind in consideration for the rendering of any technical or consultancy services, if such services are ancillary and subsidiary to the application or enjoyment of the right, property or information for which the payment described as royalty is received or make available technical knowledge, experience, skill, know how or consists of the development and transfer of a technical plant or technical design. His submission was that even though the DTAC between India and the French Republic did not insist on the making available of the technical knowledge etc., by virtue of the protocol, this concept had also to be taken note of while deciding the question whether the payment made is fees for technical services. Similarly, the Convention between India and the US has not taken in managerial services as part of included services the payment in consideration of which would be fees for technical services and consequently, notwithstanding the relevant paragraph in the India-France DTAC, payment made for managerial services, cannot be taxed as fees for technical services.

9. I find it some what strange that in spite of having entered into a DTAC with United States on 12.9.1989, preceding the signing of the Convention with France, the language or scope of the Convention between India and United States was not adopted for the India-France Convention. If the intention was to adopt the Convention as contained in the India-US DTAC, there would have been no difficulty in adopting the relevant clause in the India-France Convention as well. From the fact that in the India–France Convention, the bargaining countries struck to the definition as it is found in the Convention and parallel to the one found in the Indian Income-tax Act, surely, the intention must be taken to be not to adopt the concept as in the India-US DTAC. When this logical interference follows, in steps the protocol, providing for adopting the scope of taxation from any other treaty entered into after 1.9.1989, a date almost 3 years prior in point of time to the signing of the DTAC between India and France. I find it strange that if the intention was to have an identical regime of taxation, and nothing stood in the way of enacting an Article in the India–France DTAC along the same lines as the one found in the India–US DTAC, why that intention was not given effect to. If one were to draw the interference that the intention was not to adopt the parallel provision found in the India-US Convention, in steps the protocol with its abjuration that the other Convention must be given effect to. It is not clear why this confusing process has been adopted. It has also created considerable difficulty in understanding what exactly was the intention behind wording Article 13 in the Convention between India and France in the manner in which it is done. No doubt, as indicated by the Supreme Court in Azadi Bachao Andolan (263 ITR 706), the approach of a diplomat has to be adopted in interpreting a Convention between nations. Even such an approach does not appear to be capable of removing the confusion created by the circuitous process adopted, while entering into the Convention and signing the protocol with France.

10. Clause 7 of the protocol reads:

"…………………… India limits its taxation at source on dividends, interest, royalties, fees for technical services or payments for use of equipment to a rate lower or a scope more restricted than the rate of scope provided for in this convention on the said items of income the same rate or scope as provided…."(Emphasis supplied)

Can one take what is contained in the emphasized portion, a printer's devil? Or, is it deliberate to show that only provision for lower rate is intended to be applicable? The copy of the protocol provided by the applicant and the publications available in this Authority all show this expression. Counsel for the applicant submits that this is only a printing error, and the expression is really 'rate or scope', and reading it so, will be consistent with the use of the expression in the other parts of the clause. The representative for the revenue submitted that only provision for a lower rate of taxation is roped in and the scope of the provision in the DTAC for taxation cannot be whittled down by using this clause.

11. One supposes that reading the clause as a whole, it would be appropriate to read the expression 'rate of scope' as 'rate or scope' in the context. One also supposes that it is open to this Authority or a court to 'iron out the creases' if warranted, to give a meaning to the provision. On making that approach, I am inclined to accept the submissions of Counsel for the applicant that both rate of taxation and scope of taxation are brought within the purview of clause 7 of the protocol.

12. Going by the submissions of Counsel for the applicant, what has to be considered is whether the payments made by the applicant to the French Company is 'fees for technical services' In Article 12 of the India-US DTAC which provides for taxation of 'Fees for Included Services' paragraph 4 explains that 'fees for included services' means payment of any kind to any person in consideration for the rendering of any technical or consultancy services, if such services make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design. So, notwithstanding the absence of a 'make available' stipulation in the Indo-French Convention, the applicant can rope in the concept of 'make available.' But this can be done only for technical and consultancy services which alone are embraced by the India-US Convention and from the 'Make Available' stipulation, Managerial Services are left out. It is the case of the applicant that consideration for managerial services paid to the French service provider, will only be business income and can be taxed in India only if it has a Permanent Establishment in India.

13. The applicant, receiving services from the French Company, can claim the application of the DTAC between India and France, or the provisions of the Income-tax Act which ever is more beneficial to it. The applicant has claimed the benefit of the DTAC. Now, under the DTAC, managerial services are taxable as 'Fees for Technical Services' under paragraph 4 of Article 13 which says that fees for technical services means payments in consideration for 'services of a managerial, technical or consultancy nature'. So, managerial services are taxable under the DTAC as FTS and under paragraph 2 of Article 13 read with paragraph 7 thereof, the same can be taxed in India as provided therein. By the strength of the protocol it has also claimed the benefit of the India-US Convention. In respect of technical and consultancy services, it is entitled to insist on the 'make available' requirement. This leaves out managerial services to be taxed under the DTAC between India and France. Managerial services are specifically dealt with under Article 13 of that DTAC. So, it is not possible to resort to Article 7 or Article 23 to look for a Permanent Establishment in this country before it being taxed.

14. Under Article 13, there is no stipulation that managerial services should be made available before the consideration paid for it can be taxed. In other words, mere rendering of managerial services to the applicant would invite the liability to be taxed in India for the consideration received for that service.

15. I will now briefly consider the services that are being provided or are to be provided under the services agreement. They include:

(1) Advice and assistance on business strategy and on general management.

(2) Advice and assistance on marketing and commercial matters.

(3) Advice and assistance on international relationship matters.

(4) Advice and assistance on financial matters

(5) Advice and assistance on finance control and accounting matters.

(6) Advice and assistance on tax and legal matters.

(7) Advice and assistance on insurance matters.

(8) Advice and assistance on purchases and sales, environment and safety matters.

(9) Advice and assistance on human resources matters.

16. In addition, the French company is to provide the applicant with services other than those mentioned when requested, if the French company had sufficient expertise and knowledge to render such services. The applicant is also entitled to seek specific services from the French company which it had agreed to provide. Various elements under which all these heads are recited in the services agreement, make it clear that the services to be rendered under any particular head, are not limited to what are enumerated in the agreement but that what are enumerated are to be included. In other words, the services agreement provides to the applicant advice and assistance on management, on marketing, on international relationship, on finance, on financial control and accounting, on taxation and law, on insurance, on purchases and sales, environment and safety and on human resources issues. I have noticed that the applicant is in the business of manufacturing electrical components. A reference to the areas covered by advice and assistance to be made available by the French Company to the applicant, would show that the advice and assistance pervades the entire business of the applicant. One thing to be noticed is that under some of the heads training is also imparted. A reference to the various clauses under each head would also show the pervasiveness of the area of advice and assistance by the French Company. It appears to me that the services rendered take in technical, managerial and consultancy services. The clauses contain provisions for services which relate to over all management and direction, marketing and managing the accounts and financial operations of the applicant. I am, therefore, satisfied that managerial services, within the meaning of paragraph 13 of India-France DTAC, are provided by the French Company to the applicant for a consideration equivalent to the cost incurred by the French Company plus 5% thereof as mark up.

17. It is also clear from a reading of the obligations undertaken by the French Company under the agreement, that it is rendering consultancy services. The services rendered on marketing, on strategy and the training provided to optimize sales techniques all would come within the purview of consultancy services. Though on reading some of the items of advice and assistance, it may even be possible to say that technical services are also rendered, the predominant purpose of the services agreement appears to be to provide managerial and consultancy services.

18. I have already held that for taxing the payment made for managerial services under the India-France DTAC, it is not necessary to make available such services within the meaning of that expression as generally understood with reference to fees for technical services. On the terms of the agreement it is even possible to say that the services are made available so as to satisfy even that test. Suffice it to say, that payments made for managerial services are liable to be taxed in terms of paragraph 4 of Article 13 of the DTAC between India and France.

19. As regards consultancy services, the question is whether such services are made available in the context of the DTAC between India and France read with the DTAC between India and US relied on by the applicant. It is seen that the advice and assistance rendered by the French Company to the applicant are not transient in nature and are capable of being used by the applicant on its own. It is true that some of the consultancy services rendered may not have that quality of permanency and may be a one time assistance, but advice on business strategy, on general management, on marketing and commercial matters, on financial control and accounting matters, and on purchase and sales, environment and safety and the giving of training to optimize sales techniques to the employees of the applicant, are all capable of being put to use by the applicant on its own. The services are enduring and they help in promoting the business of the applicant. The employees of the applicant are in a position to, actually they are expected to use the knowledge gained, in the business of the applicant. Thus, knowledge and know-how are made available to the applicant. Hence, on an understanding of the over all effect of the services agreement, it has to be held that the consultancy services are made available to the applicant.

20. Thus on a true construction of the services agreement between the applicant and the French company, I hold that the French company is rendering managerial and consultancy services to the applicant. The managerial services are taxable under paragraph 4 of Article 13 of the DTAC. They are taxable even if one were to invoke the concept of 'make available' for making the payments for such services taxable. The consultancy services provided are taxable in terms of Article 13.4 of the DTAC between India and France read with paragraph 4 of Article 12 of the India-US DTAC.

21. In the light of what is stated above, I rule on question no. 1 that the payments made by the applicant to Mersen France towards advisory services is fees for technical services in terms of paragraph 4 of Article 13 of the India-French DTAC read with the protocol to the said DTAC.

22. On question number 2, I rule that in terms of paragraph 2 of Article 13, the tax charged is not to exceed 10% of the gross amount of the fees. The deduction under section 195(1) of the I.T. Act has to be on that basis.

23. On question no. 3, I rule that the payments in terms of the services agreement are not in the nature of business profits dealt with in Article 7 of the India-French DTAC.

24. On question no.4, I rule that the question of existence of a permanent establishment does not arise in view of the finding that the payments are liable to be taxed as fees for technical services.

25. On question no. 5, I rule that the applicant is required to deduct tax at source under section 195(1) of the Income Tax Act, 1961.