Authority For Advance Rulings (Income-Tax), New Delhi
Xyz Ltd., In Re
Section 9, 195, 139
Justice P.K. Balasubramanyan, Chairman And V.K. Shridhar, Member
A.A.R. No. 928 Of 2010
March 13, 2012
RULING
V.K. Shridhar, Member – Applicant, a tax resident of Hong Kong, belongs to X group of companies. The parent company ABC is having its headquarters in A Country. The group entities are engaged in the business of Inspection, Verification, Testing and Certification (IVTC) services to various customers. The X Trademark is owned by ABC, who had entered into a Trademark License and Support Services Agreement (Support Services Agreement) on 16.12.2005 with all its group entities, separately, including the applicant. The agreement is effective from 1.1.2005.The Support Service Agreement is stated to bring uniform standards, procedures and policies described therein to IVTC Services.
2. It is stated that the Inspection Services are generally performed either at the load port or discharge port of a product or activity and are based on scientific and internationally accepted techniques and as per the clients’ requirements. Verification Services are used to evaluate whether the product services are system compliant with given regulations, specifications or condition. Testing Services are used to determine the quality of the product or services as per the customer’s requirements and are carried out in laboratories owned by respective X entities which are accredited to international bodies. Certification Services refers to the confirmation of regulations, standards or contractual specifications of a product or organization or training.
3. The applicant then states that the IVTC Services are provided to the Indian Customer outside India if there is a direct arrangement between the customer and the applicant and the payment is made on the invoice raised by the applicant. But when the arrangement is not direct and is through the X India, then the invoice is raised either on X India or the Indian customer. Explaining it by an example, the applicant states that where a customer approaches X India to have its goods inspected in India and outside India, then X India sub-contracts the inspection to its applicant outside India. The applicant raises invoice on X India for Services provided by it and a consolidated invoice is raised on the customer.
4. The following questions have been raised by the applicant for a ruling by this authority:
(1) Whether, on the facts and circumstances of the case, the payments received/receivable by the applicant in connection with transactions undertaken/proposed to be undertaken in relation to the following services are chargeable to tax in India as “fees for technical services” “FTS” under Section 9(1)(vii)(b) of the Act?
(a) Inspection and Verification services (Refer para A.2.1 of Annexure I);
(b) Testing/Analysis services (Refer para A.2.2 of Annexure I); and
(c) Certification services (Refer para A.2.3 of Annexure I).
(2) Whether, on the facts and circumstances of the case, the payments received/receivable in connection with following costs incurred/proposed to be incurred for and on behalf of X India, are chargeable to tax in India under the provisions of the Act?
(a) Procurement of goods/services (Refer para B.4.1.1 of Annex.1);
(b) Reimbursement of out of pocket expenses incurred by the applicant for and on behalf of X India during the course of provision of services (Refer para B.4.1.2 of Annexure I); and
(c) Reimbursement of other expenses (Refer para B.4.1.3 of Annexure I).
(3) Whether, on the facts and circumstances of the case, recovery of reasonable administrative cost incurred for and on behalf of X India as outlined in Para B.4.2 of Annexure I, be chargeable to tax in India under the Act?
(4) Whether, on the facts and circumstances of the case, in case the applicant is not taxable in India for the services provided/proposed to be provided as outlined in Annexure I, would X India/Indian customers be required to withhold taxes under section 195 of the Act on payments made/proposed to be made to the applicant in connection with the transactions as mentioned in above questions and if yes, at what rate the taxes should be withheld?
(5) Assuming that the applicant has no other taxable income in India, whether, on the facts and circumstances of the case, the applicant will be absolved from filing a tax return in India, under the provisions of Section 139 of the Act with respect to the services outlined in Annexure I.
5. The learned counsel argued that the applicant merely provides analysis reports to X India/Indian customers. By doing so, technical knowledge, experience, skill, know-how or process are not transferred. X India/Indian customers have to approach the applicant again if they require the services in future as the expertise rests with the applicant and the expertise in performing the services is not made available to the X India/customer. The customers are not allowed to use applicant’s trademark. The applicant uses its own technical, industrial, commercial or scientific knowledge, experience or skill in providing the report. In the report, facts are stated by applying a benchmark of international standard through its personnel. Thus, the report does not impart any information in the nature of royalty as defined under section 9(1)(vi) of the Act. It is argued that the IVTC Services provided by the applicant outside India to its customers are in the nature of routine commercial services rather than technical services. Rendering services by using technical knowledge or skill is different from charging fee for technical services. Providing report by conducting IVTC Services is not sharing the knowledge and experience, otherwise the customer would not come back in case he needs the IVTC Services, again. In support, reliance has been placed on a number of decisions of ITAT benches and of the Madras High Court CIT v. Aktiengesellschaft Kuhnle Kopp & Kaush [2003] 262 ITR 513/[2002] 125 Taxman 928 (Mad.). Without recourse to the applicant, the knowledge and experience of the applicant cannot be used by X India/customers. The payment is not Royalty under section 9(1)(vi) of the Act. It is not Fees for Technical Services (FTS) under section or 9(1)(vii) as the amount payable by a person who is a Resident in India in respect of services utilized by such person for the purpose of earning any income from any source outside India is not covered under the ambit of taxability in India in view of clause (b) of Section 9(1)(vii) of the Act.
It is the applicant’s contention that the payments received are business receipts and in the absence of any business connection, the same are not taxable in India under section 5(2) read with section 9(1)(i) of the Act.
5.1 It is argued by the learned counsel that the expenses recovered by the applicant from X India are on account of procurement of goods, cost of air tickets, freight, courier charges and travelling expenditure incurred in connection with the provision of services for and on behalf of X India. No element of income is involved while these expenses are reimbursed and hence there is no obligation to withhold tax under section 195 of the Act.
6. Revenue submits that ABC, the parent company, is in the business since 1878. It has presence everywhere in the world through its 45 affiliates. The website of ABC shows its expertise in 10 verticals focusing on quality and productivity. The affiliates are given territorial licenses by its parent company through the Support Services Agreement (mentioned supra). The affiliates depend on each others for the services; only players (affiliates) change as per the location of the services. The contract for services is subject to Swiss jurisdiction. The affiliates have to compulsorily follow the norms, as a robot, which are standardized to conduct the services. None of the affiliates is taxed in Switzerland and all of them together may even form an association of persons under the Indian tax laws. The Support Services Agreement is to bring out high standards of services which require a licence to preserve them. The control over the procedures is by the parent company. The affiliates need industrial, commercial and scientific experience to share with the 3rd parties. The 3rd parties who use such experience do not start doing themselves as they are not a brand like X. The experience is periodically updated and standardized. These are professional services with technical inputs and are made available to the customer to enable him to decide whether to buy or not, apply in its business or not. Any work beyond a territory is to be subcontracted to other. X India cannot render any of the services in other territory assigned to a X. It is thus an international support service. The work is performed in the country having expertise.
6.1 It is argued that IVTC services are called ‘X Services’ and are not specific to X India or any other X. These are executed as per the general procedures which are set by its own set of procedures developed over the years. The employees are trained. The sharing of scientific experience in determining the residual life of a machine, its efficiency, safety and emission norms are not routine services, as claimed. Without acquiring technical knowledge, these services cannot be rendered. Certificate of quality is issued using in-house methods, that too after due modification. The tests are not routine and general in nature, but ones which are developed and fine tuned. Certification services also recommend improvement. Relevant aspects of factory inspection are covered. All this is possible only when qualified persons are employed who make available their knowledge and experience. The provision of training means that the experience is parted with.
6.2 When X India subcontracts the work, then all the documents for loading and unloading are required, the Indian exporter pays to X India who in turn pays to a X of another territory. While subcontracting, the transaction is between associate enterprises. Work is undertaken by X India and thereafter given to associate X. The resident of India is not earning any income outside India when he makes payment for it. This would also not apply to imports made by the resident of India when X India subcontracts the services in India. Therefore, the exception under section 9(1)(vii)(b) would not apply. When ISO accreditation applies to all 10 verticals and is from start to finish, it cannot be said that source of income is outside India.
6.3 Regarding reimbursements, it is stated that expenses like software cost is incurred by the parent company and given to the affiliates. It is not being reimbursed but payment of royalty. Similarly courier charges are for sending the reports. The nature of expenditure has to be seen and cannot be labeled in general as administrative expenses.
It is Revenue’s contention that the payments are in the nature of FTS; alternatively, as Royalty. Exception under section 9(1)(vii)(b) does not apply. Reimbursements and administrative expenses are taxable. The issue of PE may be kept open.
7. Section 9(1)(vii)(b) of the Act reads as under:
“9. Income deemed to accrue or arise in India.
(1) The following incomes shall be deemed to accrue or arise in India:-
** ** **
(vii) income by way of fees for technical services payable by
(a)** ** **
(b) A person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India;”
** ** **
Thus, when a resident of India is engaged in a business carried on outside India or earns any income from any source outside India, makes a payment by way of a fee falling under the definition of FTS, then such a payment despite being in the nature of FTS, would be out of the purview of charge to tax in India. In the present case, if a resident of India buys and sells or buys a product for his business carried on outside India and in that process pays a fee falling under FTS for X Services utilized outside India, then such a payment would not be taxable in India. Likewise, if the source of income of a resident in India is outside India, the fees falling under FTS for X Services payable to earn the income from that source will be out of the purview of charge to tax in India. However, if the fee falling under FTS for X Services is paid for services utilized by a resident of India in its business carried on by it in India, irrespective of the place where the services are rendered, the amount of fee would be deemed to accrue and arise in India. Likewise, if the source of income of a resident in India is in India, the fee falling under FTS for X Services payable to earn the income from that source would be deemed to accrue and arise in India. This is the test to be applied in respect of the payment made to the applicant by the Indian customer/X India.
In the case of Aktiengesellschaft relied on by the applicant, the receipts for special engineering services were held to be exempt under the proviso to section 9(1)(vi) as the amount was paid under a pre-1976 Agreement. But here it is a case under section 9(1)(vii)(b), and hence the decision does not help the applicant.
8. IVTC Services: To explain the nature of services, the applicant has placed before us samples of correspondence relating to 30 customers for perusal. Wherefrom we notice that the products are crude oil, high speed diesel, kerosene, fuel oil, crude palm oil, iron ore, soya bean extraction, rice, carbon black feed and machineries of different make and kind. When a customer desires to obtain any services, X discusses the scope of services, the procedure to be adopted, the billing charges and preparation of invoice and the sharing of inspection fee with the supplier/receiver. Upon finalization, a surveyor/inspector is appointed depending on the nature of the product/activity. The Inspection is carried out and a report is prepared. When the cargo is a petroleum product, the certificate of quality tests carried out are in respect of density, gravity, flashpoint, distillation, sulpher and water contents, viscosity, cetane index, salt contents, sediments, ash content, carbon residue etc. The density, gravity, relative density at various temperatures is measured. The tests carried out in accordance with API-MPMS standard or any other standard is mentioned. Samples are drawn, sealed, delivered on board for receivers, shipmaster and retained for a specific period. At the time of loading, if the person carrying out the inspection is unable to enter the vessel for the reason that the tanks are not clean or gas free and therefore unsafe to enter, then the inspection is limited to a visual inspection from the deck level via tank hatches and manually sounding residues on tank bottoms to form the opinion that the tanks were well drained of previous cargo. The X Inspector reports on the history of cargo loaded, calculates Vessel Experience Factor on the basis of qualified voyages undertaken by the vessel in the past to calculate difference in actual bill of lading and delivery. OBQ, SLO report containing height of each tank, ullage and volume is prepared. Bunker Report showing volume and density at various temperatures at loading port from the Chief Engineer upon arrival and departure of the ship is taken on the basis of which invoice for „loading supervision’ services is prepared.
8.1 When IVTC Services relate to machinery inspection, an X Inspector is appointed to carry out the services as required by the customer. The scope of inspection of a used „Injection Mould for foldable crate base’ of Australian make, apart from visual inspection, includes expressing opinion on residual life of the mould, and findings on estimation of efficiency and its present value. In the inspection report of Tomography Scanner, its stated that the market value recommendation is based in a documentary price comparison/verification, considering the estimated useful life, average residual life, comparison with the similar equipment value inspected in the past and available in the market, enquiry with original manufacturer, reconditioning/refurbishing if any. In another case inspection report advised replacement of certain parts for Asian MMC Instrument.
8.2 When the IVTC Services relate to commodities, the scope includes acid value, moisture and impurities, beta carotene, AOCS, PFA, physical parameters of the grains. The inspection of the ship tank done by the Surveyor involves testing of steam heating coils. The moisture content analysis is carried out by Toulene Distillation method. Samples are kept. The remittance information narration in the Bank’s document shows nature of the remittance as “Quality Analysis Fee”.
8.3 The IVTC Services Specific to certification with reference to a Factory Assessment Services extends to production capability, quality system, health and safety measures and is carried out as per ISO9001 standards. Findings on Factory strengths/weaknesses and recommendations for improvements/development is also stated.
9. Explanation 2 to section 9(1)(vii) of the Act reads as under:
“For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration ….”
With the description of services before us it is not difficult to come to the conclusion that the services which the applicant is rendering for a fee is a technical service rendered by carrying out tests and certifying that the goods imported/exported conformed to certain specifications. Inspection and survey of imported/exported cargo and certifying in relation to quality and price – Overseas Merchandise Inspection Co. India (P) Ltd. v. Dy. CIT [2002] 80 ITD 176 (Cal.); laboratory testing – Searle (India) Ltd. v. Central Board of Direct Taxes [1984] 145 ITR 673 / 12 Taxman 300 (Bom.); certification services for assuring quality – NQA Quality Systems Registrar Ltd. v. Dy. CIT [2005] 2 SOT 249/[2004] TTJ 946 (Delhi); testing of samples – Cochin Refineries v. CIT [2001] 222 ITR 354 (Ker.); Union Carbide Corpn. v. Inspecting Asstt. Commissioner [1994] 50 ITD 437 (Cal.); rendering technical assistance in preparation of project reports – Central Mine Planning & Design Institute Ltd. v. Dy. CIT [1998] 67 ITD 195 (Pat.) are held to be “technical services” [Law and Practice of Tax Treaties-Rajesh Kadakia, Nilesh Modi]. We notice that reports are produced by experienced surveyors, coordinators, chemists and inspectors. The reports are highly technical in nature and help the customers to protect their immediate and long term financial interests during cargo loading/unloading and storage, transport custody and other business activities. The purpose for which the report is prepared is not diluted or perish soon after evaluating the quality and quantity of the cargo/product, but is useful to evaluate contracts to secure maximum commercial value for each deal, post deal reconciliation, demurrage calculation and negotiations. The reports are cargo/activity specific for which fee for IVTC Services is arrived at/calculated after negotiations. These are admittedly customized services and not routine commercial services. Thus, the technical services provided to the customers/X India for which a fee is charged is covered under the term “fee for technical services” under section 9(1)(vii) of the Act.
The expenses incurred, whether in the form of reimbursement or sharing administrative cost, are in connection with the provision of IVTC Services. For example, the invoice issued by X Thailand to PQR India Pvt. Ltd. for certification/inspection fee for “Injection Mould for foldable crate base” includes expenditure incurred on travelling, hard copy of the certificate and for additional copy of the report/certificate provided to the customer. These are the kind of expenses referred in Question no.2 and 3 raised before us. The issue is not whether any amount over and above the expenditure incurred is charged. The crux of the issue is whether the expenditure is in connection Cochin Refineries’ case (supra) with the IVTC Services. When it is applicant’s own admission that it is in connection with the provision of IVTC Services, then it makes no difference whether such expenditure is included in the fee or charged separately. The employees are seconded to render services. The expenditure is wholly and exclusively laid out to perform the IVTC Services. Hence, the expenditure incurred even when it does not involve any element of profit – DECTA v. CIT [1999] 237 ITR 190 / 103 Taxman 525 (AAR – New Delhi), bear the same character as fee for technical services and chargeable to tax under section 9(1)(vii) of the Act. Amongst the affiliates, X India is not before us. The determination of the nature of the transactions between X India and Overseas X/ABC are not a subject matter before us. We, therefore, accept for the purpose of this ruling the applicant’s stated position that it does not have a business connection in India. The Revenue’s assertion that the applicant with other X affiliates forms an association of persons under the Act is a subject matter which is not covered by the questions posed for a ruling by this authority and hence is not pronounced upon. It is open to the Revenue to pursue it.
We answer the questions as under:
Que.No.1 The payment received/receivable by the applicant in connection with IVTC Services are taxable as FTS under section 9(1)(vii) of the Act. The exception provided under section 9(1)(vii)(b) of the Act is not available to the applicant.
Que.Nos.2&3 The payments received/receivable in connection with the cost incurred and recovery of administrative cost for and on behalf of X India are chargeable to tax as FTS under section 9(1)(vii) of the Act.
Que.No.4 As the applicant has tax presence in India, X India/Indian customers are required to withhold taxes under section 195 of the Act at the rate in force mentioned in the Finance Act for the relevant year on the payment made/proposed to be made to the applicant.
Que.No.5 As the applicant has taxable income in India, it is required to file tax return under the provision of section 139 of the Act.
Accordingly, ruling is given.
[Citation : 348 ITR 20]
