Tax Insights from India Tax & Regulatory Services Financial, legal and risk management services not covered with in the meaning of FIS under the India-USA tax treaty August 30, 2018 In brief In a recent decision,1 the Kerala High Court (HC) has held that management services such as (i) management decision making, (ii) financial decision making, (iii) legal matters and public relation activities, (iv) treasury services and (v) risk management services provided by a non-resident would not be covered within the meaning of “fees for included services” (FIS), as defined under Article 12 of the Double Taxation Avoidance Agreement (tax treaty) entered into between India and USA. The HC has held that the mere fact that the provision of a service may require technical input by the service provider does not per se mean that the technical knowledge, skills, etc., are made available to the person availing such services. In detail under section 5(2) and non-resident in its decision- 9(1)(vii) of the Act and making process of financial Facts disallowed the expenditure and risk management, etc. The taxpayer made claimed by the taxpayer Thus, it held that the payment to a USA company under section 40(a)(i) of services so rendered being (non-resident) for the Act, relying on a ruling technical in nature would providing management, of the Authority for be covered within the ambit financial, legal, public Advance Rulings (AAR).2 of clause 4(b) of Article 12 relations, treasury and risk of the tax treaty. The Commissioner of management services. Income-tax (Appeals) Aggrieved, the taxpayer The taxpayer claimed that upheld the TO’s order. appealed before the HC. the aforesaid services were On further appeal, the Issues before the High not chargeable to tax, Income-tax Appellate Court therefore no taxes were Tribunal (the Tribunal) withheld on the payments Whether the management relied on the Andhra under section 195(1) of the services “made available” any Pradesh HC’s decision3 and Income-tax Act, 1961 (Act). technical knowledge, held that the taxpayer was experience or skill to the The tax officer (TO) using the advice, input taxpayer, and therefore, are considered the said experience, covered within the ambit of payment as income deemed experimentation and FIS under Article 12 of the tax to accrue or arise in India assistance rendered by the treaty? 1 I.T.A. No. 38 of 2014 2 Wallace Pharmaceuticals Private Limited, In re [2005] 148 Taxman 347 (AAR-New Delhi) 3 GVK Industries Limited v. ITO [1998] 96 Taxman 179 (Andhra Pradesh) www.pwc.in Tax Insights Taxpayer’s contentions FTS, as defined under the Act. the present tax treaty in question was never a relevant Although management and The HC observed that the factor in that decision. financial services are definition of FIS, as given in categorised as “technical” or the tax treaty, is narrower than In the Karnataka HC’s “consultancy” services and are the definition of FTS given decision5 facts were more covered within the ambit of under the Act, as there is an similar to that of the present “fees for technical services” additional condition of case. In the present case, the (FTS) under the provisions of services being made available services provided by the non- the Act, but these services are to the recipient in case of FIS. resident was merely advisory excluded from the meaning of in nature, which assist the Referring to a few examples “FIS” under the tax treaty, as taxpayer in making correct given in the MoU, the HC they do not make technology decisions related to observed that a technology available to the person management, financial and would be considered to be acquiring these services. legal matters and no transfer “made available” only when of technology, plan or strategy The taxpayer relied on the the person acquiring the would be made available to the explanation provided in the service is enabled to apply the taxpayer by the non-resident. Memorandum of technology. Understanding (MoU) of the The HC specifically disagreed The HC held that the mere fact tax treaty on FIS. with the Revenue’s contention that the provision of a service that the non-payment of taxes Revenue’s contentions may require technical input by in the USA could not the service provider did not The tax treaty provisions automatically enable taxation per se mean that the technical specifically grants relief from in India. taxation by both countries. knowledge, skills, etc., were However, the taxpayer in this made available to the person The takeaways availing such services. case has not established that The decision reaffirms the the non-resident had paid Based on the MoU and the position that the mere provision taxes in the USA. Hence, the narrow definition of FIS, the of general support and routine benefit of availing the HC held that the services advisory services related to provisions of tax treaty did not provided by the US Co. to the finance, management and legal arise. taxpayer were beyond the matters by a non-resident will not Further, sub-section (3) of ambit of Article 12 of the tax be considered as “making section 90 makes it mandatory treaty, and accordingly, these available” technical knowledge or to follow the definition of services would not be taxable skill to the taxpayer. This decision “technical and consultancy in India. also reaffirms that technology services” as given in the Act, It was also observed that the would be considered “made and hence, the analysis in the Andhra Pradesh HC’s available” only when the person Tribunal ruling should sustain. decision3 relied upon by the acquiring the service is enabled to Tribunal (which was affirmed apply the same to its business. High Court’s decision 4 by the Supreme Court ), was Let’s talk The HC, after referring to the not relevant in the present terms of the agreement, case, as the said decision was For a deeper discussion of how confirmed that the impugned on the interpretation of a this issue might affect your services were in the nature of definition under the Act, and business, please contact your local PwC advisor 4 GVK Industries Ltd. v. ITO [2015] 371 5 CIT v. De Beers India Minerals (P) ITR 453 (SC) Limited [2012] 208 Taxman 406 (Karnataka) 2 pwc Tax Insights Our Offices Ahmedabad Bengaluru Chennai 1701, 17th Floor, Shapath V, 6th Floor 8th Floor Opp. Karnavati Club, Millenia Tower ‘D’ Prestige Palladium Bayan S G Highway, 1 & 2, Murphy Road, Ulsoor, 129-140 Greams Road Ahmedabad – 380051 Bengaluru – 560 008 Chennai – 600 006 Gujarat Karnataka Tamil Nadu +91-79 3091 7000 +91-80 4079 7000 +91 44 4228 5000 Hyderabad Kolkata Mumbai Plot no. 77/A, 8-2-624/A/1, 4th 56 & 57, Block DN. PwC House Floor, Road No. 10, Banjara Hills, Ground Floor, A- Wing Plot No. 18A, Hyderabad – 500034, Sector - V, Salt Lake Guru Nanak Road(Station Road), Telangana Kolkata - 700 091 Bandra (West), Mumbai – 400 050 +91-40 44246000 West Bengal Maharashtra +91-033 2357 9101/ +91-22 6689 1000 4400 1111 Gurgaon Pune For more information Building No. 10, Tower - C 7th Floor, Tower A - Wing 1, Contact us at 17th & 18th Floor, Business Bay, Airport Road, [email protected] DLF Cyber City, Yerwada, Pune – 411 006 Gurgaon – 122002 Maharashtra Haryana +91-20 4100 4444 +91-124 330 6000 About PwC At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 158 countries with more than 236,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com In India, PwC has offices in these cities: Ahmedabad, Bangalore, Chennai, Delhi NCR, Hyderabad, Jamshedpur, Kolkata, Mumbai and Pune. For more information about PwC India's service offerings, visit www.pwc.com/in PwC refers to the PwC International network and/or one or more of its member firms, each of which is a separate, independent and distinct legal entity. Please see www.pwc.com/structure for further details. ©2018 PwC. All rights reserved Follow us on: For private circulation only This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwCPL, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. Without prior permission of PwCPL, this publication may not be quoted in whole or in part or otherwise referred to in any documents. © 2018 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity. .