AAR : Requirements of ‘make available’ in tax treaty is met if technology, knowledge or expertise can be applied independently by person who obtained services

Authority For Advance Rulings (Income Tax), New Delhi

Endemol India (P.) Ltd., In Re

Section : 9, 195

Justice Dr. Arijit Pasayat, Chairman

And T.B.C. Rozara, Member

A.A.R. No. 1075 Of 2011

December  6, 2013

RULING

T.B.C. Rozara, Member – The applicant M/s Endemol India Private Limited (EIPL) is a resident company incorporated under the Companies Act, 1956. It is engaged in the business of providing and distributing television programmes. It mainly produces reality shows and has also ventured lately into soap operas. The company started its operation in 2006 with the non-fiction format show Bigg Boss (Big Brother) and has also other reality shows in India such as Fear Factor – Khatron Ke Khiladi etc.

2. Endemol Holding B.V (Endemol Holding) is a non-resident company incorporated in Netherlands and is a tax resident of Netherlands.

3. Endemol Group has adopted a lean organization structure and relies on the concept of centralized shared services which provide services to group companies across the world. The applicant EIPL also has a lean organization in India and requires assistance from Endemol Holding to carry out its business efficiently and in a profitable manner and for that purpose entered into an agreement, hereafter referred to as Consultancy Agreement, with Endemol Holding on 10.01.2011 to be effective from 1st January, 2011. The agreement was for procuring certain consultancy services from Endemol Holding. The agreement would allow the applicant to consult Endemol Group on various issues. As per the Schedule 1 of the agreement, Endemol Holding will provide the following services to the applicant:—

(a) General Management

(b) International Operations

(c) Legal advisory

(d) Tax Advisory

(e) Controlling and Accounting & ‘reporting

(f) Corporate Communications

(g) Human Resources

(h) Corporate Development, Mergers & Acquisitions

4. Projecting aforesaid facts and circumstances of the case, the applicant seeks ruling from the Authority for Advance Rulings on the following questions:—

(1) Whether the payments made by the applicant to Endemol Holding for availing routing administrative services under the terms of the Consultancy Agreement would be in the nature of Fees for Technical Services (FTS) within the meaning of the term in Article 12 of Convention between the Government of Republic of India and the Kingdom of Netherlands for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on incoming and capital (India-Netherlands Tax Treaty).

(2) If the answer to the question above is in negative, will such payment be treated as Business Income, and in view of the facts as stated in Annexure III, and also in light of the declaration provided by Endemol Holding, since it does not have a Permanent (‘PE’) in India in terms of the India-Netherlands Tax Treaty, whether the payments made by the Applicant to Endemol Holding would be chargeable to tax in India?

(3) If the answer to Question 1 is in negative, would the payments made by the Applicant to Endemol Holding suffer withholding tax under section 195 of the Act, and at what rate?

5. The application was admitted under section 245R (2) of the Income-tax Act, 1961 (in the short the “Act”) and while admitting the application the Authority reserved for consideration the question whether the transaction is designed for avoidance of tax in India. The applicant was also directed to take out notice of the application along with a copy of the admission order to Endemol Holding and to file an affidavit affirming service of such notice on Endemol Holding. A No Objection Certificate was accordingly filed from Endemol Holding BV which stated as under:—

“We refer to the application for an advance ruling filed with the Authority for Advance Rulings by Endemol India Private Limited for the determination of withholding tax in India on various amounts received by us from Endemol India Private Limited towards administrative services rendered under the Consultancy agreement dated 10 January 2011.

In connection with the same, we Endemol Holding B.V., with our office at Medi Arena 1, 1099 CZ Amsterda Zuidoost, The Netherlands, wish to certify that we do not have any objection to the filing of such application for the advance ruling in relation to the afore-stated payments and acknowledge that the information contained in such application is true to the best of our knowledge.

The above statement is certified on the understanding that the same is required to proceed with the advance ruling as stated above and is provided on the specific request of the Authority for Advance Rulings and in no manner whatsoever, will impact any existing contractual obligations between Endemol Holding B.V and Endemol India Private Limited or create any other liability whatsoever under any other existing agreements.”

6. The main submission of the applicant is that the payment made by it to Endemol Holding is for utilizing its administrative services under the Consultancy Agreement which does not fall within the purview of Article 12 of the India Netherlands Tax Treaty. It was stated that the term “Fees for Technical Services” (in short ‘FTS’) has been defined both in the Explanation 2 to section 9(1) (vii) of the Act as well under Article 12(5) of the India and Netherlands Tax Treaty. Though the definition in the explanation 2 to section 9(1)(vii) of the Act and that under Article 12(5) of the India-Netherlands Tax Treaty are more or less similar, make available clause is included in the definition of FTS in Article 12(5) of the Tax Treaty. It was submitted that since the definition of FTS is narrower under the India-Netherlands Tax Treaty than under Indian Income-tax Tax, the provisions of the India-Netherland Tax Treaty are more beneficial and the applicant has preferred to invoke the provisions under the Indian-Netherlands Tax Treaty as permitted under section 90(2) of the Act. According to the learned counsel of the applicant, the services will fall within the category of Fees for Technical services under the India Netherland Tax Treaty, if all the following conditions are satisfied:—

(i) The services need to be either managerial or technical or consultancy in nature;

(ii) The services need to make available technical knowledge, experience, skill, know-how, that enables the person receiving the services to apply the technology.

(iii) The services rendered by Endemol Holding to the applicant should enable the applicant to apply the technology contained therein.

7. Relying on the decision of the ITAT Mumbai Bench in the case Raymond Ltd. v. Dy. CIT [2003] 86 ITD 791 the counsel argued that the Memorandum of Understanding contained in the India-USA Tax Treaty can be used as a guide in interpreting the definition of FTS in other Treaties as well, which use similar language as the definition contained in the India-USA Tax Treaty. It was submitted that the term “Fees for included services” as per the India-USA Tax Treaty being similar to the definition of the term FTS in the India-Netherlands Tax Treaty, the MOU as contained in the India-USA Treaty as applicable to “fees for included services” can be used to interpret the term FTS in the India-Netherlands Tax Treaty. The learned Counsel of the applicant reiterated that India-Netherlands Tax Treaty specifically provides that the service should enable the recipient to apply the technology. It was, therefore, submitted that as the service rendered by the non-resident company, namely, Endemol Holdings to the applicant does not satisfy the “make available” condition as defined in the Raymond Ltd’s case (supra), the payment for service rendered by Endemol Holding would not fall within the definition of “Fees for Technical Services”. Reference was also made to the decision of ITAT Mumbai in the case of National Organic Chemical Industries Ltd. v. Dy. CIT [2006] 5 SOT 317 and ruling of the Authority in the cases of Bharati AXA General Insurance Co. Ltd., In re [2010] 326 ITR 477/194 Taxman 1 (AAR – New Delhi), Invensys Systems Inc. , In re [2009] 317 ITR 438/183 Taxman 81 (AAR – New Delhi)Intertek Testing Services India (P.) Ltd., In re [2008] 307 ITR 418/175 Taxman 375 (AAR – New Delhi), Anapharm Inc., In re [2008] 305 ITR 394/174 Taxman 124 (AAR – New Delhi), Ernst & Young (P) Ltd., In re [2010] 323 ITR 184/189 Taxman 409 (AAR – New Delhi).

8. The Revenue on the other hand submitted that the services rendered by Endemol Holding was not merely administrative but technical in nature. It was stated that as per clause (b) of “General part of consultancy agreement” between Endemol Holding BV and the applicant, the applicant will be provided “certain consultancy services” as described in schedule 1 of the consultancy agreement. This shows that the services availed by the applicant are consultancy services and are squarely covered under the definition of “Fees for Technical Services” even as per the Article 12 of the India-Netherland Tax Treaty. It was contended that as per its own admission, the holding company is making available technical knowledge, experience, skill, know-how and administrative processes which clearly fall within the definition of ‘Fees for Technical Services’. This was disputed by the Ld. Counsel of the applicant. The Revenue further argued that the price of services is calculated by apportioning the budget cost to pro-rata part of its turn-over compared to the turn-over of all group companies. In other words the applicant is billed as per the hours spent by the holding company which means the holding company charges the applicant as per the consultancy time provided to the applicant and the method of billing also supports the view that the services are not only consultancy in nature but also billed like-wise. It was submitted that the applicant had not specified the exact place of services rendered, the project involved and method of delivery of the services in spite of specifically asked for. In its submission the Department relies on the following judgments:

A. In the case of Mersen India (P.) Ltd., In re [2013] 353 ITR 628/[2012] 208 Taxman 486/20 taxmann.com 475 (AAR – New Delhi).

B. The ITAT Mumbai Bench ‘L’ in the case of Bajaj Holdings & Investments Ltd. v. Addl. DIT (International Taxation) [2013] 141 ITD 62/30 taxmann.com 176 (Mum.) .

C. The ITAT Mumbai Bench in the case of Avion Systems Inc. v. Dy. DIT (IT) [2012] 138 ITD 57/24 taxmann.com 34.

D. The ITAT Ahmadabad Bench in the case of Sintex Industries Ltd. v. Asstt. Director of International Tax [2013] 141 ITD 98/30 taxmann.com 290.

E. In the case of Target Corpn. India (P) Ltd., In re [2012] 348 ITR 61/209 Taxman 601/24 taxmann.com 152 (AAR – New Delhi).

9. We have considered the rival contentions and submissions of the applicant and the Revenue. The Consultancy Agreement states that the applicant is an operating and subsidiary company of Endemol Holding B.V., a company registered in Netherlands with the main business of producing television programmes and interactive production of high level of complexity relating to production process. The applicant has requested the holding company to provide certain consultancy services, hereinafter referred to as the “services” and the services rendered/to be rendered are listed out in schedule 1 to the agreement as noted (supra). Article 1 of the Consultancy Agreement under the head “general provision” states that the holding company has considerable expertise, knowledge and expertise in the field of management, production, exploitation and development of formats in television programmes and interactive productions, and has established as one of its tasks to disseminate such experience, knowledge and expertise in other operating companies within the Endemol Group. Operating company is not sufficiently staffed and equipped to carry out certain activities deemed necessary for efficient and profitable conduct of its business and therefore requires assistance from the holding company in relation to the services and the holding company is willing to render the services to the operating company on a regular basis. Article 1 of the consultancy agreement clearly shows that it is the “considerable experience, knowledge and expertise” of the holding company that is to be rendered and for which payments are to be made. It is also made clear that the services that are provided are certain consultancy services as described in Schedule 1 as shown in para 3 above. The definition of “Fees for technical Services” in Explanation 2 to section 9(1)(vii) of the Act, contains three elements, namely managerial, technical or consultancy. The consideration paid for the services rendered by the non-resident company in this case is covered by the broad definition of Fees for Technical Services in the Act.

10. Article 12 (5) of the India-Netherlands Tax Treaty states:

“For purposes of this Article, ‘fees for technical 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 4 of this Article 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.”

Article 12(6) of the Treaty reads as follows:

‘Notwithstanding paragraph 5, “fees for technical services” does not include amounts paid:

(a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property;

(b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic;

(c) for teaching or by educational institutions;

(d) for services for the personal use of the individual or individuals, making the payment; or

(e) to an employee of the person making the payments or to any individual or partnership for professional services as defined in Article 14 (Independent Personal Services) of this Convention.’

11. The “exclusion clause” of fees for technical service in Article 12 (6) of the Tax Treaty does not cover the services rendered by Endemol Holding BV to the applicant. The issue, therefore, is whether the services rendered comes under the definition of Fees for Technical services in Article 12(5) of the Tax Treaty. On a plain reading of the definition, consultancy services is clearly included in the Fees for Technical Services. The make available clause as mentioned in clause (b) of the article also throws light on what services can be included as technical services. These are – technical knowledge, experience, skill, know-how or processes, or the development and transfer of a technical plan or technical design. Material evidences of the actual services rendered have not been furnished by the applicant. The Revenue stated that the required details for determination of the actual nature of service were not given by the applicant. In such circumstance, we have to go by the services mentioned in the Consultancy Agreement between the applicant and the non-resident company. Nature of the services listed in Schedule 1 to the Management Consultancy Agreement require technical knowledge, experience, skill, know-how or processes. They can not be termed as merely administrative and support services as tried to be made out by the applicant. It is noticed that several attempts were made in the past to interpret the meaning of “technical services” and also the ‘make available’ clause in Tax Treaties. This is apparent from the case decisions cited by both the applicant and the Revenue in this very case. Broad consensus of the interpretation relate to services that require special expertise, skill and knowledge which are not in possession of ordinary person. This being the case the services rendered by Endemol BV to the applicant cannot but be technical in nature. We, therefore, hold that the services rendered in this particular case are technical services both under the provision of the Income-tax Act and under the India-Netherlands Tax Treaty subject to fulfillment of requirements of the “make available” clause in the treaty. We now come to interpretation of ‘make available’ clause. Here again the broad consensus of the interpretation of the clause seems to be that requirements of “make available” in the tax treaty is met if the technology, knowledge or expertise can be applied independently by the person who obtained the services. In this case the applicant merely took assistance of the Holding company in its business activities outside India and there is no material to suggest that the technical know-how, skill, knowledge and expertise are transferred to the applicant so as to enable the applicant to apply this technical know-how etc. independently. We, therefore, hold that requirement of the ‘make available’ clause in the Article 12(5) of the India-Netherlands Tax Treaty is not satisfied in this case and hence the payment for the services rendered by Endemol BV will not come under ‘fees for technical services’ under the ‘Tax Treaty’.

12. The next question is whether the payments made by the applicant to Endemol Holding BV can be treated as business income and taxable in India. According to the counsel for the applicant, even if the payment is treated as business income, it cannot be taxed in India as the Endemol Holding BV does not have Permanent Establishment (PE) in India. As per Article 7 of the India-Netherlands Tax Treaty, the consideration received by Endemol Holding under the agreement is taxable in India only if Endemol Holding has a PE in India under Article 5 of the Tax Treaty. The counsel placed reliance on the following case decisions:

(i) Dun & Bradstreet Espana S.A., In re [2005] 272 ITR 99/142 Taxman 284 (AAR – New Delhi)

(ii) Fidelity Advisor Series VIII, In re [2004] 271 ITR 1/[2005] 142 Taxman 111 (AAR – New Delhi)

(iii) Morgan Stanley & Co. International Ltd., In re [2005] 272 ITR 416/142 Taxman 630 (AAR – New Delhi)

13. Submission of the Revenue is that there is no requirement of PE as the payment is squarely covered under the definition of FTS as per India-Netherlands Tax Treaty.

14. In essence, Revenue’s stand is that the provisions have to be read by giving a purposive interpretation to the language used.

The stand is clearly untenable. The Court cannot read anything into a statutory provision which is plain and unambiguous. A statute is an edict of the legislature. The language employed in a statute is the determinative factor of legislative intent. The question is not what may be supposed and has been intended but what has been said. This position was elaborately stated by a Constitution Bench of the Hon’ble Supreme Court in Padmasundara Rao v. State of Tamil Nadu [2002] 255 ITR 147/170 Taxman 303.

15. We have considered the arguments in relation to details as available on record. There is no dispute about the profit arising out of the transaction in the hands of Endemol Holding BV. There is also no dispute about the services rendered outside India for which payments were made by the applicant to Endemol Holding. The applicant is an Indian enterprise and for its business activities outside India, the services on Endemol Holding were utilized. There is no material to show that Endemol Holding has any presence in India. Payments for the services were received by Endemol Holding outside India. There is also no material to suggest that the applicant is fully dependent on Endemol Holding BV. In such circumstances we hold that the company Endemol Holding BV does not have any PE in India. As regards the arguments of the Revenue, we have already held that the payments do not come under ‘Fees for Technical Services’ for the reasons stated in the preceding paragraphs and therefore the arguments that the question of PE does not arise as the payments are squarely covered under FTS does not stand. We agree with the counsel for the applicant that profits arising out of the transaction for the services rendered by Endemol Holding BV are not taxable in India as Endemol Holding BV does not have PE in India.

16. The questions raised by the applicant are answered as follows:—

Question No.1

Ans. The payments made by the applicant to Endemol Holding for availing the services under the terms of the Consultancy Agreement is not in the nature of Fees for Technical Services (FTS) under Article 12 of the India-Netherlands Tax Treaty because the services rendered by the non-resident company do not meet the requirements of ‘make available’ under the treaty.

Question No.2

Ans. The payment will not be treated as business income taxable in India in terms of the India-Netherlands Tax Treaty because Endemol Holding does not have a Permanent Establishment in India.

Question No.3

Ans. Because of our answer to question No.1 and 2, and following ratio of decision of the Hon’ble Supreme Court in the case of Transmission Corpn. of A.P. Ltd. v. CIT [1999] 239 ITR 587/105 Taxman 742, the payment will not be subjected to withholding of tax under section 195 of the Act.

17. Regarding the issue as to whether the transaction is an arrangement for the purpose of avoidance of tax, the issue was reserved at the time of admission of the application, we find that the transaction is for genuine business purpose for the benefit of both the parties. We do not find sufficient materials on facts and circumstances made available to us which suggest that the transaction is an arrangement solely for the purpose of avoidance of tax. The Department also did not press the issue at the time of hearing.

[Citation : 361 ITR 340]