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Direct Tax Alert: Payment towards intermediary services not taxable in India; no PE in India as disposal test not satisfied

05 November 2020


In order to achieve economies of scale, many Multinational Enterprises set up a ‘Hub’ entity in one jurisdiction. From this entity, it would render various services like marketing, administration, procurement, quality, program management etc. for a fee. Generally, these services are termed as intermediary services.

Recently, the Delhi Tax Tribunal1 had an occasion to examine whether such intermediary services are taxable in India or not. Further, it has also examined the Permanent Establishment (PE) exposure of such entities in India. We, at BDO in India, have summarised the ruling of Delhi Tax Tribunal and provided our comments on the impact of this decision hereunder:

Facts of the case

The taxpayer, is a Swedish Company, engaged in the business of manufacturing of train control and signalling systems for mass transit system. It is a HUB entity for the Rail Control Solutions [RCS] businesses of the Group and it houses functional heads for various functional areas like administration, procurement, engineering, quality, program management and marketing, each catering to worldwide RCS business. During the fiscal year 2010-11, it had rendered intermediary services to its Indian Associated Enterprise (AE). Relying on Protocol 7 (i.e. Most Favoured Nation Clause) of the Double Tax Avoidance Agreement (tax treaty) between India and Sweden, the taxpayer took benefit of the India-Portuguese tax treaty which provides for taxing services only if it makes available technical know-how to the service recipient. The taxpayer contended that since the services provided by it do not make available any know-how to the service recipient, the same is not taxable in India. However, the tax officer rejected the taxpayer’s claim by opining that it is not only technical knowledge or skill that must be made available, but even common place ‘experience’, ‘know-how’ or ‘processes’ if made available can result in taxability of FTS. Accordingly, the tax officer passed the order. The taxpayer filed an objection before the Dispute Resolution Panel (DRP) against the order passed by the tax officer. While the DRP upheld the action of the tax officer, the DRP also enhanced the income by concluding that the taxpayer has a PE in India. Aggrieved by the DRP’s direction, the taxpayer filed an appeal before the Delhi Tax Tribunal

Tribunal ruling

After hearing the contentions of the taxpayer and the tax officer, the Delhi Tax Tribunal deleted the additions made and observed that:

Re. Taxability of intermediary services

  • Since the taxpayer is a tax resident of Sweden, it is entitled to benefits of India-Sweden tax treaty and protocols thereof, and Protocol 7 of the Tax Treaty provides scope of taxability of FTS which is restricted on account of agreement between India and a third state.
  • Under the India-Portuguese Tax Treaty, the scope of FTS is restricted on account of requirement of ‘Make Available’ clause.
  • The First Appellate Authority for fiscal year 2009-10 has categorically observed that the intermediary services rendered by the taxpayer do not satisfy ‘make available’ clause and does not amount to Fees for Technical Services.
  • The technical or consultancy services rendered should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology.
  • Payment of consideration would be regarded as 'fee for technical/included services' only if the twin test of rendering services and making technical knowledge available at the same time is satisfied.
  • The intermediary services rendered by the taxpayer do not make available any technical knowledge, skill etc. to the Indian AE and the Indian AE is not equipped to apply technology contained in services rendered by the taxpayer. Therefore, the intermediary services provided by the taxpayer to the Indian AE do not tantamount to FTS and accordingly, shall not be taxable in India.

Re. Permanent Establishment exposure

  • The supplies made under the BS-02 agreement were offshore supplies.
  • Courts2 have held that only such part of the income as is attributable to the operations carried out in India can be taxed in India.
  • As per the BS-02 agreement, scope of work between the taxpayer and its Indian AE are clearly bifurcated.
  • The taxpayer does not have any place of business in India and all business activities with respect to offshore supplies are carried outside India.
  • The equipment supplied has been manufactured at an overseas manufacturing facility of the taxpayer and sale of equipment has occurred outside India and payment has also been received by the taxpayer outside India.
  • The DRP was misdirected in considering the contract RS 02. This contract is between the Indian AE and the German AE of the taxpayer and DMRC and for this contract, the German AE has raised invoices on the Indian AE for offshore manufacture and supply of equipment whereas the contract under consideration is between DMRC and Consortium of the taxpayer and Indian AE towards offshore supply train control and signalling equipment.
  • The seconded employee was for RS 02 contract and not BS 02 contract, which is under consideration.
  • The entire findings of the DRP are based on erroneous appreciation of wrong facts and on such erroneous appreciation of wrong facts, the DRP held that the Indian AE is the PE of the taxpayer in India without appreciating the true facts that the taxpayer has no place of disposal in India in the office of its Indian AE from where the taxpayer could have conducted its business in India.

BDO comments

Whether the provision of a particular service can tantamount to make available any technical knowledge to the service recipient is a vexed issue. The taxpayer needs to maintain proper documentation to substantiate that the services rendered by it does not make available any technical know-how to the service recipient. It is imperative to note that the Delhi Tax Tribunal have ruled that the intermediary services are not taxable because they don’t make available any technical knowledge to the recipient. However, there is no guidance from the Delhi Tax Tribunal on whether such intermediary services could be taxed in India or in respect of tax treaties where make available clause is not there. Thus, where any intermediary services are rendered from a jurisdiction in which the tax treaty does not have a make available clause, one needs to analyse the taxability independently. Furthermore, one should also check whether there is Most Favoured Nation Clause in the tax treaty and its impact before coming to the conclusion on the taxability of the FTS.

The Delhi Tax Tribunal has reiterated that only such part of the income is taxable in India as is attributable to the operations carried out in India. The Delhi Tax Tribunal has made an important observation that if the disposal test is not satisfied, the taxpayer cannot be said to have PE in India. It is imperative to observe that under the disposal test, some space in India should be at the disposal of the taxpayer. This space need not be owned by the taxpayer or its Indian AE.


1Bombardier Transportation Sweden AB vs DCIT (ITA No. 859/DEL/2016)

2Ishikawajima HarimaHeavy Industries Ltd 158 Taxman 259 (SC)

   Nortel Networks India International Inc & Ors 386 ITR 0353