M/S. Invensys Systems Inc. Vs. Director of Income-tax, (international Taxation) Chennai - Court Judgment

Excerpt:

Judgment:

Honble Chairman

1. The applicant is a Company based in United States of America which is engaged in the business of manufacture of process control instruments, engineering and research and technology based services, cooperative or consortium services etc. The applicant entered into an Agreement titled as Cost Allocation Agreement with Invensys India (P) Ltd. (for short “IIPL”), which is part of the Invensys Group. This Company was incorporated in India on 19/12/96. The applicant incurs expenditure in relation to the functions enumerated in Schedule I to the said Agreement for the benefit of the Group as a whole. Pursuant to the Agreement the applicant raises invoice on IIPL for the amounts worked out on the basis of the formula in the Agreement. It is stated that none of the personnel of the applicant visited nor would in the future visit India for providing the centralized assistance to IIPL.

2. On these facts stated in the application, the applicant seeks advance ruling on the following two questions:

“1. On the facts and in the circumstances of the case whether the payment made by IIPL towards the costs allocated by the Applicant is taxable in India as per the provisions of the Double Taxation Avoidance Agreement (‘DTAA) entered into between India and USA?

2. On the facts and in the circumstances of the case whether IIPL is liable to withhold tax at source under section 195 of the Income-tax Act, 1961 (‘the Act) on the payments made by IIPL towards the cost allocated by the Applicant?”

3. The Centralized Assistance functions are enumerated in Schedule-I of the Agreement. 19 functions are mentioned therein. The same have been categorized by the applicants counsel into five broad categories. They are set-out herein:-

Table

3.1. In the chart furnished by the applicants counsel, the nature of various services have been further elaborated under the head “Description of Services”.

4. We may refer briefly to the relevant clauses in the Cost Allocation Agreement dated 01.04.2007 entered into between Invensys Systems Inc. the applicant, (referred to as ‘Assistance Provider) and Invensys India Private Limited (referred to as recipient). The recitals therein may be noted.

A. It is recognized that the Centralised Assistance Provider incurs specific cost for the benefit of group entities situated in various countries. The assistance includes activities specified in Schedule I of this Agreement.

B. Therefore the Parties wish to document in writing that the Centralised Assistance Provider supports the operations of the Recipient, and have done on a regular basis since April 1,2007. This Agreement sets out the detail of the arrangements already in existence, and includes the terms on which the costs of such Centralised Assistances are to be calculated and charged.

C. It is agreed that the cost incurred by the Centralised Assistance provider would be allocated on a cost-to-cost basis and without any margin.

Clauses 2.1 and 2.2 provide;

2.1.1 Since the Effective Date and from time to time thereafter, the Providing Party provides on request to the Receiving Party all or any of the Centralized Assistances under the terms set out in this Agreement.

2.1.2 The relevant Centralized Assistances are provided through correspondence, telephone, and telefax.

Clause 3 deals with ‘compensation. It says that the recipient shall pay to the Centralized Assistance Provider an amount determined in accordance with Schedule 2. Broadly the formula is this: to the extent the Centralized Assistance is provided directly to Invensys India, the entire cost will be charged by that Indian company. To the extent the Centralized Assistance cannot be specifically identified, the cost would be allocated pro-rata based on turnover or headcount.

The agreement will be in force for a primary term of 5 years from its effective date (i.e. 01.04.2007) and it will automatically continue thereafter unless and until terminated by written notice in advance in accordance with the provisions of agreement.

5. It is the contention of the learned counsel for the applicant that the various services provided by the applicant to its Indian group company are managerial in nature and they cannot be considered to be technical or consultancy services. The services, therefore, fall outside the ambit of Article 12 of the India-USA DTAA. It is next contended that even assuming that technical or consultancy services are involved, the essential ingredient in clause (b) Article 12.4 is not satisfied because the applicant by rendering such services does not “make available” technical knowledge, skill, know-how and the like. Reference has been made to the decisions/rulings interpreting the expression ‘make available. It is submitted that the provisions of the DTAA relating to ‘fees for included services (including technical services) being more beneficial than the provisions in the Income-tax Act, 1961, the applicant is entitled to invoke the benefit under the treaty provisions in accordance with the settled law on the subject. It is further contended on the basis of the Supreme Courts decision in the case of Ishikawajima Harima Heavy Industries ((2007) 288 ITR 408)that the entirety of services/assistance having been rendered from outside India, the amount received by the applicant cannot be subjected to tax under the provisions of section 9(1) or section 5 of the Income-tax Act, 1961 inasmuch as the services are not rendered in India. Relying on the observations in that judgment in which section 9(1)(vii) was interpreted, the learned counsel submits that it is not sufficient that the services are utilized in India but they must also be rendered in India.

6. In the comments furnished by the DIT (Intl.Taxation) Chennai, the points raised by the applicant have not been squarely met. However, it is contended that the payments made under the Cost Allocation Agreement are in the nature of service fee and it is not entirely on cost-to-cost basis. It is pointed out that it is not merely a case of reimbursement of expenses as the profit element is not ruled out. The stand taken by the Revenue addresses the larger question: whether the receipts under the Agreement are in the nature of income or merely reimbursement of expenses. That question has not been raised in the application and it does call for an answer. Assuming that it is a fee received for rendering certain services, can it be subjected to tax under the provisions of the IT Act, 1961 or the DTAA? That is the question which arises for consideration.

7. At this stage, it would be appropriate to refer to the crucial provisions in the Double Taxation Avoidance Agreement (DTAA) between India and USA:

“Article 7: Business profits: 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment;”

Article 12: Royalties and fees for included services – 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed:

xx xx xx xx

8. On an analysis of the nature of functions that are enumerated in the Agreement, it is fairly clear that many or most of them are managerial in nature. The learned counsel for the applicant has drawn our attention to the dictionary meanings of the word ‘manage. In Intertek Services, In re ((2008) 307 ITR pg.418)this Authority observed:

“First, about the connotation of the term “managerial”. The adjective “managerial” relates to manager or management. Manager is a person who manages an industry or business or who deals with administration or a person who organizes other peoples activity. As pointed out by the Supreme Court in R. Dalmia vs. CIT [1977] 106 ITR 895, “management” includes the act of managing by direction, or regulation or superintendence. Thus, managerial service essentially involves controlling, directing or administering the business.”

In some DTAAs, apart from the terms ‘technical and ‘consultancy, ‘managerial is also included within the FTS clause.

8.1. The contention of the learned counsel for the applicant is that almost all the services to be carried out by the applicant under the Agreement are not technical but are managerial nature and therefore they are out of purview of FTS provision. Learned counsel submits that the purpose of the activities undertaken under the Agreement is to give direction or guidance to the group companies as a whole so that they will adopt or follow standard procedures or templates in various matters. By virtue of such managerial intervention, common benefit accrues to the affiliated companies and their level of performance will consequently improve.

8.2. I find force in the contention of the learned counsel that the services are not really technical or consultancy services. No doubt, the expression “technical services” cannot be construed in a narrow

¹ 317 ITR 418

² 228 ITR 564

³ 118 ITR 312

sense as held by this Authority in Intertek Testing Services India Pvt.Ltd1. It was observed therein that the term “technical” ought not to be confined only to technology relating to engineering, manufacturing or other applied sciences. Professional service imbued with expertise could be regarded as technical service. For instance, in G.V.K.Industries vs ITO2 referred to in Intertek case, it was held that the advice given by a financial consultancy firm on the modalities of procuring loans shall be regarded as technical and consultancy service. It was further pointed out in Intertek that consultancy services could also be regarded as ‘technical in nature and the two expressions “technical” and “consultancy” cannot be placed in water-tight compartments. Though some of the services required to be performed under the agreement have the trappings of technical or consultancy services, looking at the substance and the predominant nature of the services, they primarily fall under the category of ‘managerial.

8.3. Before proceeding further, I may refer to the decision of the Delhi High Court in J.K. (Bombay) Limited vs. CBDT3, cited by the applicants counsel. Therein it was held that services of managing agents cannot be regarded as technical services within the meaning of Section 80-O of the Income-tax Act, 1961. The learned Judges observed: “In the broader sense, technical service may include managerial services; but, in the narrow sense, the word “technical” would exclude the managerial services. Pursuing the example of technical education given in the dictionary, we find that technical education is concerned with teaching applied sciences, special training in applied sciences, technical procedure and skills required for practice of trade or profession, especially those involving the use of machinery or scientific equipment ………… It would appear that managerial services may be professional service like legal or medical service but they would not be technical services like engineering services.” The view expressed by the High Court in that case that narrow meaning has to be placed on the expression “technical service” has to be confined to the context in which the observation was made. Otherwise, it may conflict with the view taken by the Supreme Court in various decisions referred to in Intertek. The reason for giving restricted meaning to the word “technical” was the purpose and object of Section 80-O of the I.T.Act.

9. Assuming that some of the services/functions can be brought within the definition of technical or consultancy services, yet the other ingredient in clause (b) of Art. 12.4. of DTAA viz. “make available” is not satisfied in the instant case. The expression “make available” was construed in Intertek (supra) and Worley

⁴ (2009) 313 ITR 74

. In understanding that expression, this Authority observed that the MOU appended to the India-USA DTAA succinctly explains the scope of the phrase “make available”. It was explained in the MOU: Parson (AAR/748/2007)4

“Generally speaking, technology will be considered “made available” when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available.”

9.1. The observations of this Authority in Intertek may also be quoted:

“By making available the technical skills or know-how, the recipient of service will get equipped with that knowledge or expertise and be able to make use of it in future, independent of the service provider. In other words, to fit into the terminology “make available”, the technical knowledge, skills etc. must remain with the person receiving the services even after the particular contract comes to an end. The services offered may be the product of intense technological effort and lot of technical knowledge and experience of the service provider would have gone into it. But, that is not enough to fall within the description of services which make available the technical knowledge, etc. 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 future without depending on the provider. Taking some examples, the training given to a commercial

⁵ [2008] 305 ITR 405

aircraft Pilot or training the staff in particular skills such as software development would fall within the ambit of the said expression in clause (c). Supposing, a prescription and advice is given by the doctor after examining the patient and going through the clinical reports. The service rendered by the doctor cannot be said to have made available to the patient, the knowledge and expertise possessed by the doctor. On the other hand, if the same doctor teaches or trains the students on the aspects of diagnosis or techniques of surgery, that will amount to making available the technical knowledge and experience of the doctor.”

9.2. In the case of Anapharm Inc.5, after explaining the scope of the expression “make available” this Authority observed at paragraph 12.6 :

“In the present case, the applicant renders bioanalytical services which, no doubt, are very sophisticated in nature, but the applicant does not reveal to Sandoz / Ranbaxy as to how it conducts those tests or the inputs that have gone into it , so as to enable them to carry out those tests themselves in future. A broad description or indication of the type of test carried out to reach this conclusion does not enable the applicants client to derive requisite knowledge to conduct the tests or to develop the technique by itself. The mere fact that the tests in question are highly technical in nature will not make a difference. ……………….. From the perusal of the relevant agreements, we have not found any provision which would entitle Sandoz /Ranbxy to know the details of the analytical methods and procedures employed by the applicant in carrying out the bioequivalence tests.”

9.3. Applying the above test, we can hardly find any service which makes available the technical knowledge, experience or skills possessed by the provider of service to the recipient.

Against Sr. No. 15, research and development of new products and services offerings is found in the Chart submitted by the applicants counsel. However, it was explained that this involves communicating the result of the research and development efforts and does not involve any transfer of technical designs, or know-how. Then, against No. 7 (assistance in bid preparation and project acquisition), “providing ability to penetrate higher levels in our customer organization to improve our chances to win” (the bid) has been mentioned. However, the nature of this function has been explained to be that it involves the applicant getting in touch with the customers directly, if required, in order to improve the chances to win. Taking an overall view, the services even if they are technical, do not ‘make available the technical knowledge, etc. within the meaning of Art. 12.4(b) of the Treaty.

10. In view of the conclusion reached on the applicability of Art. 12.4, there is no need to deal with the contention raised by the applicants counsel that even if the services fall within the definition of Art. 12.4, the income cannot be taxed in India in view of the fact that the services are rendered from abroad.

11. There are certain services categorized under the heads ‘B and ‘D which raise a doubt whether any service is really rendered to the Group Company in India or they are merely stewardship or shareholder activities. For instance, in regard to (i) exercising control by the applicant over the local H.R. operations such as submission of weekly time reports and performance appraisal reports (ii) informing the new employees about the history of Invensys and the culture of the organization, (iii) apportionment of over-head costs and costs of maintaining internet and technology facilities, (iv) weekly monitoring and reporting of volume activity for all IPS business groups, (v) periodic business review at selected locations to ensure compliance with Companys policies in financial reporting, and (vi) setting overall corporate strategies with respect to operations, do not appear to involve an element of service so as to commercially and economically benefit the recipient i.e. the Indian company. The so-called services are prima facie activities which either help the applicant as a corporate head (coordinator) with the necessary inputs or merely represent the normal activities undertaken by the parent company. It is not some remote or indirect benefit that accrues to the group companies that matters. The alleged service must cater to the specific needs of the member of the group. Whether Intra-group services in the sense in which it has been explained earlier have in fact been provided or whether the activities are of such nature that a group member (the parent or other holding company) performs them solely because of its ownership interest as shareholder has been the subject matter of debate in the context of transfer pricing provisions. There is an illuminating discussion on this subject in Chapter VII of the OECD Transfer Pricing Guidelines published in March, 1995. For instance, it is specifically stated in para 7.10 that the costs relating to reporting requirements of the parent company including the consolidation of reports will constitute shareholder activities.

11.1. There is no need to pursue the discussion further on this aspect. Assuming that some of the activities are not really services but they are more in the nature of stewardship/shareholder activities, for that reason, the amounts received by the applicant from IIPL in terms of the invoices raised by it cannot be taxed in India in the absence of permanent establishment of the applicant.

12. In view of Art.7.1 of the DTAA, if at all it will only have bearing on the computation of income of IIPL. Nothing in this ruling shall be construed to be an expression of opinion on the tax implications for the Indian company (IIPL) including the adoption of arms-length principle. In the result, both the questions are answered in the negative. That means the applicant is not liable to be taxed in India as per the provisions of DTAA viz. Art. 7.1 and Art. 12.4 (b) and IIPL is not obliged to withhold tax at source under Section 195 of the Income Tax Act, 1961. It is made clear that no view expressed as regards the tax implications concerning IIPL.

Accordingly, the ruling is given and pronounced on this 6^th day of August, 2009.