The Bangalore Income Tax Appellate Tribunal ( ITAT ) held that payment made by Assessee ( Indian entity ) to its foreign AE ( Parent entity ) for obtaining administrative services would not be taxable as Fees for Technical/ Included Services ( FTS/FIS )in India in terms of Indo USA DTAA, in the absence of ‘make available’ clause in the agreement between both the parties.
Herbalife International India, the assessee is engaged in the business of manufacturing and supplying nutritional products and supplements for personal wellness. Since the assessee has made payments towards royalty, IT, technical services and administrative service fees to its parent company (AE) without deducting TDS, the AO initiated proceedings under section 201(1) of the Income Tax Act.
The AO found that the assessee was not carrying on business outside India nor was it making or earning any income from any source outside India, and that the situs of the services rendered by its AE was in India. The AO held that the foreign party performed all the administrative services as part of the group’s global policies, to maintain control over the employed staff in India.
Since the services for which the payments had been made were managerial, technical and consultancy in nature, these payments fell within the definition of Fees for Technical Services as per section 9 of the Act and were taxable in India on which tax was duly required to be deducted by the payer/ Indian entity. Accordingly, the AO held that the assessee is liable to pay tax and interest under sections 201 and 201(1A) on an amount of Rs 21,50,93,900/-.
Referring to the decision of the Bombay High Court in the case of Shell India Markets Pvt. Ltd. and DTAA between India and the USA, the Bench observed that provisions of treaty would override the domestic law provisions in case of conflict among the provisions of DTAA and Income Tax Act 1961.
Article 12(4) of India USA DTAA states that ‘fees for included services’ means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provisions of services of technical or other personnel) if such services:
a) are ancillary and subsidiary to the application or enjoyment of the right, property, or information for which a payment is received; or
b) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.
Since there is no expression like “managerial services” in Art. 12(4)(b) of the Indo US Treaty and hence the assessee has an option to govern itself by the provisions of treaty instead of Income tax Act.
The two-member Bench of Chandra Poojari (Accountant Member) and Prakash Chandra Yadav (Judicial Member) observed that “if there is any conflict among the provisions of DTAA and Income Tax Act 1961, then provisions of treaty would override the domestic law provisions”. The Bench also referred to the CBDT Circular No.333 dated 02.04.1982 reported in 137 ITR 1, to state that the provisions of DTAA will override the domestic law provisions.
It was explained that Article 12(4)(b) of the India USA DTAA would get attracted so as to render the payments made by Indian assessee to its AE within the purview of FTS, only when the AE has made available any knowledge, experience etc, while providing administrative services.
The Bangalore Tribunal in the case of Tyco Fire and Security India Pvt Ltd. reiterated that “a mere rendering of services is not roped in unless the person utilizing the services is able to make use of the technical knowledge, etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future”.
It was noted that though the AO has merely stated that AE has made available the technical knowledge to assessee, but failed to bring on record any material to support this averment. While allowing the appeal, the ITAT concluded that payments made by assessee were not like FTS, so as to attract TDS liability
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