Generally, a Multinational Group enters into a Support Services Agreement with its various entities located in different countries. Under this Agreement, it provides support from HR, finance services, information technology services etc. Taxability of the amount received under such an agreement has been a contentious issue. Recently, the Delhi Tax Tribunal1 had an occasion to examine whether amount received towards provisions of support services is taxable in India or not. We, at BDO in India, have summarized the ruling of the Delhi Tax Tribunal and have provided our comments on the impact of this decision hereunder..
FACTS OF THE CASE
The taxpayer is a company incorporated in the United States of America (‘USA’). It is engaged in the business of providing human resources advisory services to its client on recruiting and retaining senior-level executives and assisting them in mitigating the risks associated with the senior-level level appointment. It also provides management support services to its group companies. It has executed the following agreements with its Indian concern:
- Licensing agreement for use of Intellectual Property Rights like trademarks/tradenames
- Information technology Licensing Agreement for use of databases
- Service Agreement for providing support services like finance services
- Cost Reimbursement Agreement for reimbursement of expenses
While the taxpayer offered income from (i) and (ii) Agreement to tax as Royalty income, it treated the amount received under the agreement (iii) and (iv) as not taxable. However, the tax officer brought the amount received under all four agreements to tax. Hence, the taxpayer filed an appeal before the First Appellate Authority (‘CIT(A)’) in respect of the addition made by the tax officer. While granting part relief, the CIT(A) held:
Re. Service Agreement
The said services do not meet the condition of “make available” in Article 12(4)(b) of India-USA DTAA but upheld the addition as Fees for Included Services (‘FIS’) under Article 12(4)(a) of India-USA DTAA by alleging that the said services are ancillary and subsidiary to the application and enjoyment of the right in Article 12(3) of the India-USA DTAA.
Re. Cost Reimbursement Agreement
CIT(A) confirmed the assessment order by holding that it meets the requirement of “make available” under Article 12(4)(b) of the India-USA DTAA.
Hence, the taxpayer filed an appeal before Delhi Tax Tribunal.
TAX TRIBUNAL RULING
The tax tribunal held that the amount received by the taxpayer in terms of agreements referred to in (iii) and (iv) is not taxable under India-USA DTAA. While coming to this conclusion, it made the following observations:
Re. Service Agreement
- The bare perusal and patent interpretation of Article 12(4)2 of the DTAA make it explicit that it is only regarding rendering any technical or consultancy services, a finding can be given that they are ancillary and subsidiary for para 4(a). The CIT(A) has fallen in error in distinguishing para 4(a)2 and para 4(b)2 in a manner that as for para 4(a) there is no requirement that the services should be of technical or consultancy nature and only receipt of royalty as per para 3 of the DTAA makes para 4(a) applies.
- ‘Intangible’ referred to in Article 1 of Licensing agreement effective from 1 January 2012 means “the intellectual property outlined in the appendix (i) hereto, which may be amended from time to time”. Appendix I shows that it is a trademark for use. There is no recital in the agreement which would indicate that the use of tangible by an Indian entity was in any way necessary for the effective application or enjoyment of right, property or information, for which the royalty was agreed to be paid. The services rendered were not customarily provided and it is also not so otherwise established by the Tax Authority based on any cogent evidence that such services are customarily provided in cases of licensing agreements for the use of Trademarks.
- There are separate agreements for the licensing of the intangible and the service agreement. The service agreement was effective from 1 January 2011 while the licensing agreement was later in terms being effective from 1 January 2012. The CIT(A) has fallen in error in squaring up the case of the taxpayer in terms of memorandum to the DTAA and giving a finding that the predominant factor is the grant of license to use the name, which gives rise to royalty and all other payments and agreement flow from principal licensor – licensee agreement.
Re. Cost Reimbursement Agreement
- The training was not part of the main contract of licensing agreement for royalty and there was no corresponding recital in the licensing agreement, which required the Indian concern and taxpayer to enter into any agreement for providing the training.
- The training was provided to the newly recruited consultants who joined the Indian concern. There was no transfer of or sharing of any technical knowledge, experiences, skills, knowledge how or processes by way of training.
- The trainees were only sanitized to understand their job responsibility, the business model, policies and procedures, under which the recruits were expected to work. Merely because the training program was boarding, that cannot change the nature of the program to fall in the purview of services, for which consideration should be FIS. Rather the consideration was in the form of reimbursement of expenses on the actual basis of constituents like travelling, food, boarding and lodging of consultants employed by Indian concern. The cost of training recovered from the Indian concern was due to these expenditures on the trainees.
The Tax Tribunal has reiterated that if the services do not make available any technical know-how, the same should not be taxable under India-USA DTAA. The Tax Tribunal has also observed that the term managerial service is not included in Article 12(4)(b) of the India-USA DTAA.
1 Russell Reynolds Associates Inc. Vs DCIT (International Taxation) (ITA No.1165/Del/2019) (Delhi)
2 4. For purposes of this Article, "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 provision 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 described in paragraph 3 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.