Authority For Advance Rulings (Income Tax), New Delhi
Shell India Markets (P.) Ltd., In Re
Section 9, 90
Justice P.K. Balasubramanyan, Chairman And V.K. Shridhar, Member
A.A.R. No. 833 Of 2009
January 17, 2012
RULING
V.K. Shridhar, Member – Applicant, Shell India Marketing Private Ltd (SIMPL) is an Indian company. It has a network of retail fuel stations in India. Shell International Petroleum Company Ltd (SIPCL) is a Shell Group Company incorporated in UK. It is in the business of providing consultancy services to various Shell operating companies. The applicant has entered into Cost Contribution Agreement (CCA) on 1.4.2008 with SIPCL for the provision of Business Support Services. Applicant submits that General Business Support Services (General BSS) under clause 4 of CCA are described in Appendix 2 to CCA. These are primarily in the nature of management support services. Any research and development, technical advice and services may be provided by a separate arrangement. The Specific BSS are provided on a specific request and are not subject matter of the questions raised in the present application.
2. According to the applicant, it is entitled to claim the application of Double Taxation Avoidance Convention between India and UK (DTAC), the contract being with a company incorporated in UK. It has therefore relied on paragraph 4 of Article 13 of DTAC, to contend that the General BSS received by it from SIPCL do not fall within the purview of Article 13.4(c) of DTAC. Applicant submits that the benefits of services rendered by SIPCL are for the Shell Group entities. The services are provided at cost and reimbursed by the Shell Group entities. No income CIT v. Dunlop Rubber Co. Ltd. [1983] 142 ITR 493/[1982] 10 Taxman 179 (Cal.); ITO v. Vidogum & Chemicals Ltd. [1987] 23 ITD 255 (Delhi); Sedco Forex International Drilling Inc. v. Dy. CIT [2000] 72 ITD 415 (Delhi) can be said to arise to SIPCL under the present arrangement in view of the decisions on the subject. Construing the General BSS as management support services of advisory nature, the applicant submits that rendering of such services would not ‘make available’ MOU between India-US DTAC; Raymond Ltd. v. Dy. CIT [2003] 86 ITD 791 (Mum.); National Organic Chemical Industries Ltd. v. Dy. CIT [2005] 96 TTJ 765/[2006] 5 SOT 317 (Mum.) any technical knowledge, skill, experience, etc. to enable the applicant to apply the technology contained therein. Hence General BSS would not be in the nature of fees for technical services within the meaning of Article 13.4 of the DTAC. By contributing to the cost, the applicant and other cost sharers become the economic owners of the knowhow/intellectual property resulting from the services provided to it. This may be applied to by the applicant in its activities and hence the question of granting a right by SIPCL to use such intellectual property by the applicant would not arise to constitute royalty under section 9(1) of the Income-tax Act, (Act) or under Article 13 of the DTAC. The payments received are also not taxable as SIPCL does not have a permanent establishment in India. In the absence of any income chargeable to tax the provision under section 195 of the Act would not apply. This Authority, by an Order dated 19.10.2009, allowed the application under Section 245R(2) of the Act to rule on the following questions:-
i. Whether the payments made by the Applicant to Shell International Petroleum Company Limited, (‘SIPCL’) for availing General Business Support Services (“General BSS”) under the terms of the Cost Contribution Agreement (“CCA”), would constitute “income” in the hands of SIPCL within the meaning of the term in Section 2(24) of the Act?
ii. If the answer to Question 1 is in the affirmative, whether the payments made by the Applicant to SIPCL for availing General BSS under the terms of the CCA would be in the nature of Fees for Technical Services (“FTS”) within the meaning of the term in Article 13 of ‘Convention between the Government of the Republic of India and the Government of the Republic of India and the Government of United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains’ (“the India-UK Tax Treaty”)?
iii. Whether the payments made by the Applicant to SIPCL for availing General BSS under the terms of the CCA would be in the nature of “royalty” within the meaning of the term in Explanation 2 to clause (vi) of Section 9(1) of the Act?
iv. Whether the payments made by the Applicant to SIPCL for availing General BSS under the terms of the CCA would be in the nature of “royalty” within the meaning of the term in Article 13 of the India-UK Tax Treaty?
v. Based on the answers to Questions (1) to (4) above, and in view of the facts as stated in Attachment III, and also in light of the declaration provided by SIPCL that it does not have a permanent establishment in India in terms of Article 5 of the India-UK Tax Treaty, whether the payments received by SIPCL would be chargeable to tax in India? If the answer is in the affirmative, would the payments made by the Applicant to SIPCL suffer withholding tax under section 195 of the Act and at what rate?
3. There is no representation on behalf of the Revenue. No written submissions on merits have been filed even though sufficient time was allowed and the hearing was fixed more than a dozen times since November, 2009. However, detailed information regarding General BSS appearing in appendix 2 to CCA was called for by the Revenue and were filed by the Indian company SIMPL on 23.12.2009.
4. In the additional submissions, the applicant submitted that the definition of FTS as per India-UK Tax Treaty is similar to the definition of the term “fee for included services” under the India-US Tax Treaty. Since India being the common signatory to the US and UK Treaties, the identically defined terms should not carry different interpretations. This Authority has held the same view in Intertek Testing Services India (P.) Ltd. In re [2008] 307 ITR 418/ 175 Taxman 375 (AAR – New Delhi) and other decisions on the subject.
5. We must first decide the nature of services provided under the CCA. Appendix 2 to CCA gives 13 examples of various services covered under General BSS. It is stated that these examples exclude any research and development and technical advice and service; meaning thereby that the nature of the services are ‘managerial services’ and out of the purview Article 13.4 of the DTAC.
6. Under Appendix 1, the activities under the agreement cover all types of activities with respect to all downstream products and/or chemical business carried on by SIMPL. Let us look into the services under “Contract and Procurement” (C&P). The activities of C&P would extend from creating, approval, confirmation of purchase order to the receipt of material, invoicing and payment release. These activities in a retail business are at the core of the retail marketing. The advice tendered in taking a decision which is commercial in nature is a technical or consultancy service. Take the example of Taxation Advice Services under which tax matters are to be overseen and coordinated globally and regionally. The said advice to be procured would include matters like new market entries, mergers and acquisitions, financing and refinancing structures; and above all, tax policies and guidelines. Legal Advice would be on specific projects or business proposals, tax advice. The advice on information technology will include identifying opportunities for the Applicant to successfully utilize cost advantaged locations and resources for application development. Thus, the services are of a highly specialized nature and involve special knowledge of the Applicant’s business and industry.
7. In the case of Intertek Testing Services India (P.) Ltd. (supra), the following has been held by this Authority “advisory services which merely involve discussion and advice of routine nature or exchange of information cannot appropriately be classified as ‘Consultancy services’ under the Article. An element of expertise or special knowledge on the part of the consultant is implicit in the consultancy services.” In International Hotel Licensing Co, In re [2007] 158 Taxman 231 (AAR – New Delhi), this Authority has also held that services for marketing and promotion are consultancy services.
Further, in the case of CIT v. Bharti Cellular Ltd. [2009] 319 ITR 139/[2008] 175 Taxman 573 (Delhi) the Court while relying on the definition of ‘consultancy’ in Oxford English Dictionary, Fifth Edition observed the following “the word “consultancy” has been defined in the said Dictionary as “the work or position of a consultant; a department of consultants.” “Consultant” itself has been defined, inter alia, as “a person who gives professional advice or services in a specialized field.” It is obvious that the word “consultant” is a derivative of the word “consult” which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as “ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from for a proposed action.” It is obvious that the service of consultancy also necessarily entails human intervention.”
Even in the case of Linde A.G. v. ITO [1997] 62 ITD 330 (Mum.) the court held that the expression “consultancy” service involves giving of an advice or advisory services by a professional.
8. It cannot be denied that the Applicant receives services in the form of general finance advice, Taxation advice, legal advice, advice on Information Technology, media advice, assistance in contract and procurement and assistance in Marketing. It is trite that these advisory services would be consultancy services if the element of expertise or special knowledge on the part of the consultant is established. In the facts of the case before us, SIPCL, the consultant in the present case, is in the business of providing advice and services to various Shell Operating companies. In fact, while explaining General BSS the word “advice” is used very often. Under clause 4(1) of the CCA, the mode of providing General BSS are also “through visits and other interchanges between members of the offices of the relevant staff”; an important ingredient of consultancy services. The special knowledge and use of expertise on the part of SIPCL is clearly evident from the explanation of each service as is provided by the Applicant. In our opinion, the services being rendered are consultancy services.
9. We may also point out that the Agreement does cover certain other services like management support, development, communication and audit of standards of performance and human resources but it cannot be denied that under the Agreement, all the services come as a bundle and cannot be segregated. In our view, the nature of General BSS, viewed as such, is of Consultancy Services.
10. For the purpose of Article 13.4 (c) of the DTAC, “fees for technical services” means payments of any kind to any person in consideration for the rendering of any “technical or consultancy services” if such services:
(a) make available technical knowledge, experience, skill, know- how or processes,
or
(b) consist of the development and transfer of a technical plan or technical design.
In Perfetti Van Melle Holding B.V, In re [2011] 16 taxmann.com 207/[2012] 204 Taxman 166 (AAR – New Delhi) this Authority held the view that “the expression ‘make available’ only means that the recipient of the service should be in a position to derive an enduring benefit and be in a position to utilize the knowledge or know-how in future on his own”. Here, industry specific expertise is provided to the Indian entity which is applied in running its business and the employees of the Indian entity get equipped to carry on that business model or service model on their own without reference to the service provider, when the service agreement comes to an end. It is not as if for making available, the recipient must also be conveyed specifically the right to continue the practice put into effect and adopted under the service agreement on its expiry.
11. As regards the reliance place by the applicant to the meaning of “make available” in the MOU in India-US DTAC, it may be noted that a Convention is a treaty entered into by two sovereign States relating to rights and duties of subjects or citizens of the respective States in one another’s possession.
12. Having noted that the General BSS are consultancy in nature, we now proceed to examine whether the same are ‘made available’ to the applicant. It is noted that while describing the services, the term ‘advise/advice’ has been repeatedly used and the services are themselves called ‘support services’. This itself indicates that while providing General BSS, SIPL works closely with the employees of the applicant and supports/advises them. Thus we are of the view that General BSS is made available to the applicant. This opinion is further strengthened on an examination of the applicant’s arguments while answering question No. (iii) relating to royalty. The applicant states that since it becomes the owner of any know-how generated through the services, no question of royalty arises. The same is also a part of the contractual understanding of the two parties. If this is so, the applicant will be able to use any know-how/intellectual property generated from General BSS independent of the service provider and hence the services under the agreement are clearly made available to the applicant.
13. The applicant has argued that the cost incurred by SIPCL is shared by the group companies and hence does not involve element of income. It has placed reliance on certain decisions where cost for R&D and Research & Promotional Activities were shared among group entities. Here, what we have noted is that such services are themselves specifically excluded from CCA. However, even if the provision of services did not involve element of profit, this Authority has held it to be taxable as fees for technical services in Timken India Ltd., In re [2005] 273 ITR 67/ 143 Taxman 257 (AAR – New Delhi) and in International Hotel Licensing Co. (supra). We therefore, do not agree with the applicant, as we have held the payment to be in the nature of fees for technical services.
14. We therefore rule on Que. No. (i) & (ii) that the payment made by the applicant to SIPCL for availing the General BSS under the CCA would constitute income in the hands of SIPCL and is in the nature of fees for technical services within the meaning of Article 13.4 (c) of the DTAC between India and UK; and not in the nature of royalty within the meaning of the term in Explanation 2 to Clause (vi) of Section 9(1) of the Act and under Article 13 of DTAC, while we rule on Que. No. (iii) & (iv). Based on answer to Que. No. (i) & (ii) that the payment received by SIPCL is chargeable to tax in India and the declaration provided by SIPCL that it does not have a Permanent Establishment (PE) in India in terms of Article 5 of DTAC, we rule that the applicant is under obligation to withhold tax under section 195 of the Act.
[Citation : 342 ITR 223]
