The Delhi High Court has held that the services provided by International Management Group ( IMG ) are utilised by the Board of Control for Cricket in India ( BCCI ) outside of India, meaning the income classified as Fee for Technical Services ( FTS ) cannot be deemed to accrue in India and thus cannot be taxed there.
The issue arose from a Memorandum of Understanding (MoU) between IMG and BCCI on September 13, 2007, and a separate Services Agreement dated September 24, 2009, covering advisory and managerial services for the establishment, commercialization, and operation of the IPL.
The assessee consistently argued that the income earned under the Services Agreement constitutes business income and should be taxable as outlined in Article 7 of the India-United Kingdom Double Taxation Avoidance Agreement, asserting that only income attributable to a permanent establishment in India would be taxable. IMG had a service PE under Article 5(2)(k) of the DTAA during all relevant assessment years.
Article 13 of the DTAA stipulates that Articles 13(1) and 13(2) do not apply if FTS is received by a beneficial owner carrying on business in the other contracting state through a PE located there, and the right, property, or contract for which FTS was earned is effectively connected with such a PE. In this case, FTS, per Article 13(6), is exempt from that provision and taxable according to Article 7 or Article 15 of the DTAA.
The Dispute Resolution Panel ( DRP ) found that the “make available” stipulation in Article 13 of the DTAA was satisfied. However, it held that the revenue in question could not be effectively connected to the PE and thus would not escape taxability under Article 13.
The DRP and Tribunal concluded that, beyond the income attributable to IMG’s Service PE, the remaining receipts would be taxable under Article 13 of the DTAA as FTS. The assessee argued that since the services were rendered outside India, the revenue should not be taxed as FTS, emphasising that services must be rendered in India for the revenue to be taxable there.
The department contended that the services performed by IMG fell within the scope of FTS as defined under Article 13 of the DTAA, noting that even if Article 13(4) does not explicitly mention managerial services, the services rendered qualify as technical or consultancy services. The critical point was whether these services had been made available to the Indian payer.
The court observed that while assessing the attribution of income to the Service PE, it was necessary to consider the nature of services provided by IMG UK, separate from those by the Service PE. The appellant did not dispute that part of the advisory work was conducted by its UK office without the Service PE’s involvement.
The Division Bench of Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav noted that the Tribunal erred in determining that the advice and consultancy services provided by IMG enabled BCCI “to absorb and apply the information and advice.” The Tribunal failed to distinguish between the mere use of technical or consulting services to aid business and the necessary transfer, transmission, and enablement for the twin conditions of Article 13 of the DTAA to be met.
It was noted that, “The services which were rendered by IMG in connection with those two events were clearly utilised outside India and were availed of for the purposes of earning income from a source outside India. The geographical shift meant that the services rendered by IMG were utilised outside India and were integral to earning income from sources outside India.”
It was also observed by the Division Bench that, “ In light of the admitted position of a Service PE existing in the relevant AYs‘, the income attributable to that entity was correctly offered to tax under Article 7 of the DTAA. This since the Revenue was concerned with revenue earned from the rendering of services in India and which services, concededly, fell outside the ambit of Article 13. Insofar as the revenue attributable to the UK office is concerned, we have already found that the same does not qualify for taxation under Article 13 since the ―”make available” test does not stand fulfilled.”
Ultimately, the court allowed the appeal, setting aside the order of the Income Tax Appellate Tribunal ( ITAT ), and held that the services do not qualify for taxation under Article 13 of the Double Taxation Avoidance Agreement ( DTAA ) as the “make available” test was not met.
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