Authority For Advance Rulings (Income-Tax), New Delhi
Measurement Technology Ltd. United Kingdom, In re
Justice V. S. Sirpurkar, Chairman And A.K. Tewary, Revenue Member
A.A.R. No. 966 Of 2010
July 29, 2015
A. K. Tewary, Revenue Member – Measurement Technology Ltd (the applicant) is a company incorporated in UK and engaged in the development and supply of intrinsic safety explosion protection devices, field bus and Industrial networks, lightning and surge protection and gas analysis equipment. It is a wholly owned subsidiary of MTL Instruments Group Ltd., UK.
2. MTL Instruments Private Limited (‘MTL India’) is an Indian company, incorporated under the Companies Act, 1956. It is also a subsidiary of MTL Instruments Group Ltd., UK and is engaged in the business of manufacturing industrial control equipment’s used for process control in hazardous environments. The applicant entered into two service agreements with MTL India for providing certain services. The applicant has sought ruling on the following questions arising in respect of these two service agreements:—
(1) On the facts and in the circumstance of the case, whether the amount received/receivable by Measurement Technology Limited (hereinafter referred to as “Applicant” or “MTL UK” from MTL Instruments Private Limited (‘MTL India’), for services rendered, as per Schedule 2 to ‘MTL Instruments Intra-Group Agreement for Products and Services’ effective April 1, 2005 [subsequently substituted by ‘MTL Instruments Intra-Group Agreement for Products and Services’ effective April 1, 2005 (hereinafter collectively referred to as ‘Agreement#1’), is chargeable to tax in India as per the provisions of Double Taxation Avoidance Treaty entered into between India and United Kingdom (‘India UK Tax Treaty’)?
(2) In case of Ruling of the Hon’ble AAR to Question (1) above is yes, what is the rate of tax applicable for computing the amount of income tax chargeable in manner and respect of aforesaid amount received/receivable by the Applicant?
(3) On the facts and in the circumstances of the case, whether the amount received/receivable the Applicant from MTL India, for services rendered, as per Intercompany Service Agreement effective March 16, 2009 (hereinafter referred to as Agreement#2′), is chargeable to tax in India as per the provisions of UK Treaty?
(4) In case the Ruling of the Hon’ble Authority for Advance Ruling (‘Authority’) to Question (3) above is yes, what is the rate of tax applicable for computing the amount of income-tax chargeable in manner and respect of aforesaid amount received/receivable the Applicant?
3. The first agreement between the applicant and MTL India is MTL instruments Intra Group agreement for products and services according to which the nature of services provided by the applicant is as under:-
Strategy and direction of business development of MTL India;.
Attendance in person or by phone at regular operational meetings to discuss progress of activities, both financial and operational;
Management of personnel including conducting staff interviews, setting individual targets and carrying out performance appraisals; and
Any other services related to the above.
4. The above mentioned services are provided through one of the employees of the applicant based in UK and designated as Group Operations Director (GD) by means of telephone calls, e-mails, occasional visits to India for review of operations of MTL India and giving general guidance. As part of such services, GD provides general guidance as regards the business of MTL India. While sitting in the UK, he monitors financial and operational progress of activities of MTL India. GD also renders services as regards human resource matters of MTL India such as hiring new personnel, setting up individual performance targets, assisting in performance appraisal etc. He is also involved in Quality and Design reviews.
As per Schedule 2 of Agreement #1, MTL India shall compensate the Applicant for providing the “Management Services” at cost plus 5% and for this purpose only 50% of the cost (total remuneration of the GD) is allocated by MTL UK. Therefore, MTL UK recovers only 50% of cost of GD plus 5% as consideration for providing “Management Services” to MTL India as per Agreement No.1.
5. The second agreement is called Intercompany Services Agreement (Procurement Services) for providing procurement services with a view to reduce cost and to avoid duplication of procurement efforts within MTL Group. As per the agreement, the applicant has constituted a procurement team in the UK to look into the global sourcing requirements of raw materials within MTL Group including MTL India. The Procurement team travels to different countries to visit suppliers and distributors to determine the best price that would be available to MTL group. Their services include setting up material supply chain, logistics support and providing support to resolve technical issues with supplies from global sources. It would set up communications channel and link MTL’s Group Companies with the selected vendors. The procurement team thus attempts to consolidate the purchase requirements and their efforts result in cost savings on material purchases to the individual entities in the MTL Group.
MTL UK is compensated for the aforesaid “Procurement Services” on cost to cost basis (without any mark-up) and for this purpose only 30% of cost of the procurement term is allocated to MTL India. Therefore, MTL UK is compensated for providing “Procurement Services” at 30% of the cost of procurement team only.
6. The stand of the applicant in respect of agreement No.1 is that the compensation received for providing “Management Services” is not in the nature of Fees for Technical Services (FTS) under Article 13 of India-UK Tax Treaty. Article 13 of the Treaty reads as under:—
“The term “fees for technical services” means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which:
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information of which a payment described in paragraph 3(a) of this article is received; or
(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or
(c) make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design.”
The applicant has argued that as per Article 13 of the Treaty FTS does not include ‘Managerial Services’ and for technical or consultancy service to fall under the definition of FTS, it must meet the condition of ‘make available’ technical knowledge, experience, skill, know-how and processes etc. It has been further pointed out that the India-UK Tax Treaty was amended w.e.f. 11.02.1994 and in the Pre-amendment India-UK Tax Treaty ‘Managerial Services’ was specifically covered within definition of FTS but, however, under the Post amendment Treaty ‘Managerial Services’ are not included with the definition of FTS. The Article 13(4) of the Pre-amendment Treaty reads as under:—
Article 13(4). The term “fees for technical services” as used in this Article means payments of any kind to any person, other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 15 (Independent personal services), in consideration for services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel.
7. It has been further stated that after the amendment even if the services rendered are of the nature of technical or consultancy but do not meet the criteria of ‘make available’, the same cannot be treated as FTS. As regards ‘Managerial Services’ it has been stated that the concept of services PE has been introduced in the post amendment Treaty and the ‘Managerial Services’ will now be taxable provided the same are physically rendered in India for more than 90 days in case the service recipient is unrelated and more than 30 days in case the service recipient is a related concern.
8. It has been explained by the applicant that under agreement No.1, the applicant provides day to day managerial services through GD from the UK to MTL India through either telephone or e-mails and such services include review and general guidance, monitoring, financial and operational progress, human resource matters including hiring new personnel, setting up individual targets and performance appraisal etc. Such functions of GD do not require his physical presence in India for long duration and it has been confirmed that the number of day’s presence of GD in any year is less than 30 days. The applicant has furnished sample e-mails from GD to MTL India to show that the e-mails generally pertain to issues like review of salary, targets, post controls, fund management, quality reviews, design review and human resource and administrative review. Based on the role of GD it has been contended that such services cannot be considered as technical or consultancy services. The applicant has relied upon the rulings of this Authority in the case of Intertek Testing Services India (P.) Ltd., In re  307 ITR 418/175 Taxman 375 (AAR – New Delhi) and Invensys Systems Inc., In re  183 Taxman 81/317 ITR 438 (AAR – New Delhi). The applicant has admitted that the services provided by the GD are in the nature of ‘Managerial Services’ but do not meet the criteria to ‘make available’ and, therefore, such services was not chargeable to tax as FTS. The applicant has further emphasized that to qualify as ‘make available’ the services should be aimed at and result in transmitting the technical knowledge etc. so that the payer of services could derive enduring benefit and utilize the knowledge and know-how in future of its own without the aid of service provider. As this is not the case here, the applicant has stated that services would not qualify as FTS. The applicant has relied upon the judgment of Hon’ble Karnataka High Court in the case CIT v. De Beers India Mineral (P.) Ltd.  346 ITR 467/208 Taxman 406/21 taxmann.com 214 Para 22 of the judgment is reproduced as under:—
What is the meaning of “make available”. The technical or consultancy service rendered should be of such a nature that it “makes available” to the recipient technical knowledge, know-how and the like. The service 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 and the aid of the service provider. In other words, to fit into the terminology “making available”, the technical knowledge, skill, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. 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. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is 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. In other words, payment of consideration would be regarded as “fee for technology/included services” only if the twin test of rendering services and making technical knowledge available at the same time is satisfied.
9. Besides this for the same view on the concept of ‘make available’ the applicant had relied on the following judgments:—
DIT v. Guy Carpenter & Co. Ltd.  346 ITR 504/207 Taxman 121/20 taxmann.com 807 (Delhi)
Endemol India (P.) Ltd., In re  361 ITR 340/223 Taxman 183/40 taxmann.com 345 (AAR – New Delhi) .
Worley Parsons Services (P.) Ltd., In re  313 ITR 74/180 Taxman 296 (AAR – New Delhi) .
Shell Technology India (P.) Ltd., In re  345 ITR 206/204 Taxman 314/ 16 taxmann.com 345 (AAR – New Delhi) .
DIT v. WNS Global Services (UK) Ltd.  214 Taxman 317/32 taxmann.com 54 (Bom.)aaaaaa.
Wokhardt Ltd v. Asstt. CIT  10 taxmann.com 208 (Mum. ITAT) .
Sandvik Australia (P.) Ltd v. Dy. DIT (International Taxation)  141 ITD 598/31 taxmann.com 256 (Pune – Trib.) .
RR Donnelley India Outsource (P.) Ltd., In re  335 ITR 122/199 Taxman 255/11 taxmann.com 94 (AAR – New Delhi) .
Joint Accreditation System of Australia and New Zealand, In re  326 ITR 487/194 Taxman 11 (AAR – New Delhi)
10. In respect of agreement No. 2 also the applicant is of the view that procurement services do not meet the criteria of ‘making available’ and are not taxable as FTS. The procurement team in the UK, as part of procurement services, looks into the global sourcing requirements of all the raw materials within MTL India. It identifies the best material for MTL India at the best available prices. Such services do not provide any enduring benefit to MTL India or ‘make available’ any technical knowledge, experience, skills, know-how and processes etc.
11. As regards PE, the applicant has mentioned that it does not have any fixed place of business in India. As per Article 5(2)(k) of the India-UK Tax Treaty a services PE of a non-resident is constituted where managerial or other services not covered under Article 13 (Royalty and FTS) are furnished in India through its employees for aggregate period of 30 days in the case of associated enterprises within any 12 month period. The applicant has confirmed that the visit of GD for each of these management and procurement services separately has been for periods less than 30 days in a year. As regards visit of other employees of the applicant, it has been mentioned that it is a question of fact requiring determination of number of days of other visits to India and the Income Tax Department can in the course of assessment proceedings ascertain the facts and determine the applicability of ‘service PE’ under Article 5(2)(k) of India-UK Tax Treaty.
12. As regards royalty, the applicant has mentioned that the services provided under two agreements mentioned above are routine in nature and do not lead to creation of an intellectual property and, therefore, does not fall within the purview of information concerning industrial, commercial or scientific experience in order to qualify as ‘royalty’ as per the provision of Article 13 of India-UK Tax Treaty.
13. The Revenue has argued that the services provided are in the nature of assistance to MTL India and managerial services provided to manage day to day general and administrative functions. According to the Revenue the applicant is providing management consultancy through the analysis of existing organizational problems and development of plans for improvement. As the applicant is providing knowledge and experience of global standardization to MTL India, Revenue is of the view that such professional services imbued with expertise would be regarded as technical service. Revenue has relied on the ruling given in Intertek Testing Services India (P.) Ltd. (supra) where it was held that the term ‘technical’ ought not to be confined only to technology relating to engineering, manufacturing or other applied sciences. Revenue has further relied upon GVK Industries Ltd. v. ITO  228 ITR 564/ 96 Taxman 179 (AP) wherein it was held that the advice given by financial consultancy firm on the modalities of procuring loans shall be regarded as technical and consulting services. As regards applicability of ‘make available’ clause, the Revenue has stated that the applicant renders the consultancy services by analyzing the project and submitting a detailed report thereon which contain technical details and plans which are made available to MTL India.
14. As regards PE, the Revenue has offered no comments saying that it is a question of facts and such facts can be ascertained only during the course of assessment proceedings.
15. Without prejudice of the stand taken in respect of FTS as mentioned above, the Revenue has also mentioned that the strategy developed by the applicant and implemented by MTL India also partakes the character of royalties under Article 12(3)(a) being payment for the use of plan, or for information concerning industrial, commercial or scientific experience. According to the Revenue the information provided by the applicant (like accounting policies, HRD policies, market researches, bank information etc.) is its proprietary information which the applicant would not share with any other person or is available in public realms.
16. We have carefully gone through the submissions made by the applicant and Revenue and the arguments put forward by them during the course of hearing. We have to consider whether services provided by the applicant to MTL India under the two agreements are in the nature of FTS or not under the India-UK Tax Treaty. We notice that India-UK Tax Treaty dated 11th November, 1981 was amended w.e.f. 11th February, 1994. Under Article 13(4) of the Treaty dated 11th November, 1981 the FTS meant payments of any kind to any person, other than payments to an employee of the person making the payments and to any individual for independent personnel services mentioned in Article 15 (Independent Personnel Services), in consideration for services of a managerial, technical or consultancy in nature, including the provision of services of technical or other personnel. The Treaty was amended w.e.f. 11th February, 1994 and ‘managerial services’ was taken out from the ambit of FTS and a clause relating to ‘make available’ was inserted saying that in order to qualify as FTS such services should make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design. Therefore after the amendment effective from 11 February, 1994 managerial services are not covered in the definition of FTS and even the technical or consultancy services, if they do not meet the criteria of ‘make available’, cannot be treated as FTS. In this case the services provided by both agreements are managerial in nature only. The services under agreement No.1 relate to review by GD and general guidance given by him on financial, operational, human resource, setting up targets and performance appraisal related matters. GD is providing these services from the UK mainly, his visits during a year are generally for short duration having aggregate number of days of visit in a year never exceeding 30 days. The applicant has provided sample e-mails sent by GD to MTL India which show that his services generally related to human resource matters, cost control, fund management, quality and design reviews etc. These are routine managerial activities and cannot be classified as technical or consultancy services. This authority had ruled in the case of Invensys Systems Inc. (supra) that even though some of the services may have the trappings of technical or consultancy service, looking at the nature and the predominant nature of the services, they primarily fall under the category of managerial services. Similar is the case in respect of services provided by GD. Moreover, by providing such services he is not making available any technical knowledge of enduring benefit in nature which would enable employees of MTL India to apply them on their own in future.
17. We have also analyzed the procurement services provided through agreement No.2. The procurement team travels to different countries to visit suppliers and distributors to determine the best price that would be available to entire MTL Group including MTL India. These types of services can never be classified as technical or consultancy in nature and surely are not making available any technical knowledge, experience, know-how etc. The reliance of the Revenue on the rulings in the case of Intertek Testing Services India (P.) Ltd. (supra) and GVK Industries Ltd. (supra) is misconceived and out of place.
18. As regards PE the Revenue has not offered any comments in the absence of facts but the applicant has stated that GD has never visited India for more than 30 days in a year and, therefore, his visit would not constitute a ‘service PE’. As regards visits by other employees, the applicant has also agreed that the Income-tax Department may ascertain the facts in the course of assessment proceedings and determine the applicability of Article 5(3)(k) of the India-UK Tax Treaty.
19. The Revenue has given an alternative argument that services provided may be covered under ‘Royalties’ because various services provided by the applicant are of commercial experience which involved confidential information or experience from commerce, business, science or industry. This is a very far-fetched argument because services provided under both agreements are general and routine in nature and do not create any intellectual property. It cannot even be imagined that rendering of such services would qualify as ‘Royalties’ as per the provisions of Article 13 of the India-UK Treaty.
20. After careful consideration of the issues involved we are of the view that the questions raised should be answered in favour of the applicant as under:—
(1)The amount received by the applicant for services rendered as per agreement No.1 is not chargeable to tax in India as per the provisions of the India-UK Tax Treaty.
(2) In view of answer to question No.(1) above, this question does not arise.
(3)The amount received for services rendered as per agreement No.2 is not chargeable to tax in India as per the provisions of the India-UK Treaty.
(4) In view of answer to question No.(3) above, this question does not arise.
[Citation : 376 ITR 461]