Managerial services from a UK Company to an Indian Company cannot be treated as “fees for technical services”

It has recently been held in the case filed by Cummins Limited, 49-51, Gresham Road, Staines, Middlesex, TW18 2BD, United Kingdom being A.A.R. No1152 of 2011 that Managerial services provided by a UK Company to an Indian Company cannot be assessed as “fees for technical services” under Article 13 of the India-UK tax agreement if it does not involve any skill, technical know-how etc.

The judgment has been delivered by the bench comprising of Justice Mr. V.S. Sirpurkar (Chairman) Mr. A.K. Tewary, Member (Revenue) Mr. R.S. Shukla, Member (Law).

Pleaders engaged in the case:

Mr. Rajan R. Vora, C.A., Mr. Ronak Sethi, C.A., Mr. Arvind M. Gaggar appeared for the applicant. On the other hand Ms. Sukhvinder Khanna, C.I.T.DR (AAR), N.D. Mr. S.S. Negi, JCIT-DR (AAR), N.D. Mr. Satish Solanki, J.C.I.T. Mr. Sachin Dhania, D.C.I.T. DR (AAR) appeared for the Department.

Facts and circumstances of the case:

Cummins Limited, UK is a company incorporated in the UK and Cummins Technologies India Limited is a company incorporated in India.

Cummins Technologies India Limited is engaged in the manufacture and sale of turbochargers. The company purchases turbocharger materials directly from third party in UK and Cummins Limited provides supply management services vide an agreement dated 7.12.2010 relating to Material Suppliers Management Service.

The agreement is effective from 1.7.2010. According to the agreement, Cummins Technologies India Limited pays service fees for supply management which is calculated at 5% of the basic cost from the suppliers.

Issues involved in the case:

The applicant, Cummins Limited, UK prayed for ruling on the following issues:
1. As per the facts and circumstances of the case, whether the supply management service provided by Cummins Limited, UK to Cummins Technologies India Limited pursuant to Material Suppliers Management Service Agreement between Cummins Limited and Cummins Technologies India Limited can be considered as “Fees for Technical Services” or “royalties” within the scope of Article 13 of the India-UK double tax avoidance agreement?

2. Whether the payments received by Cummins Limited are chargeable to income tax in India in view of the fact that Cummins Limited does not have a permanent establishment in India as per Article 5 of the India-UK treaty?

3. Whether the provisions of Section 92 to Section 92F of the Act relating to transfer pricing are applicable to the supply management service fees in view of the facts and circumstances of the case?

4. Whether Cummins Technologies India Limited, the payer of supply management service fees is required to withhold tax as per the provisions of section 195 of the Act in view of the facts and circumstances of the case?

Provisions of Article 13 of the India-UK Tax treaty:

Article 13(4) of the India-UK tax treaty defines the term “fees for technical services” as payments of any kind made in consideration of rendering of any technical or consultancy services which are ancillary and subsidiary of the application or enjoyment of the right for which a payment is received or make available for any technical knowledge, knowhow, etc. or consist of the development and transfer of a technical plan or design.

For the purposes of Article13 (4) of the India-UK treaty, the term “royalties” refer to payments received as a consideration for the use of any copyright of an artistic or scientific work, etc. including films or work on other means of reproduction for use in cinematography or work on films for use in connection with radio or television broadcasting or for information relating to industrial or scientific experience.

It also includes payments of any kind received as consideration for the use of any industrial or scientific equipment, other than income gained from the operation of ships or aircraft which operate in international traffic.

Decisions referred by the applicant:

The applicant relied upon the Memorandum of Understanding to the India-US Treaty to interpret the definition of “Fees for Technical Services” or “royalties” and cited the following judicial precedents for the said purpose:
1. Raymond Ltd, (86 ITD 791);
2. Intertek Testing Services India Pvt. Ltd (307 ITR 418);
3. De Beers (India) Minerals Pvt. Ltd (346 ITR 467);
4. CESC Ltd (80 TTJ 806).

The Revenue relied upon the judgment of the AAR in the case of Perfetti Van Melle Holding BV and Steria India Ltd.

Arguments on behalf of the revenue:

The Revenue analyzed the services rendered as per agreement and contended that the technical services were made available to Cummins Technologies India Limited.
The Revenue stated that as per the definition of “fees for technical services”, when sharing of experience or skill possessed by the applicant to Cummins Technologies India Limited takes place, it is considered as making available the “fees for technical services”.

The Revenue also contended that the Applicant entered into contract with the Indian Company to take benefits of the Treaty. As per the explanation 2 to section 9 (1) (vii) of the Information Technology Act, the “fees for technical services” refers to any consideration for rendering managerial, technical or consultancy services.

The judgment:

The Supply Management Services fees covered under Article 13(3) of India-UK Tax Treaty do not qualify as “royalties” as it is not related with the use of any copyright, patent, trademark or process etc. In view of the fact that the applicant does not have a permanent establishment in India, the Supply Management Services fees received are not taxable in India.