Authority For Advance Rulings
Bharati AXA General Insurance Co. Ltd., IN RE
DTAA between India & Singapore, arts. 12.3 & 12.4;Â
Section 90
AAR No. 845 of 2009
P.V. Reddi, J., Chairman; J. Khosla & V.K. Shridhar, Members
6th August, 2010
Counsel appeared :
Rajan Vora, Anil Lukose & Manoneet Dalal, for the Applicant : Ms. Meera Srivastava & Pankaj Kumar, for the CIT concerned
RULING
P.V. Reddi, J., Chairman :
The applicant (BAGI) is a company incorporated in India on 13th July, 2007 to undertake the business of general insurance. AXA Asia Regional Centre (P) Ltd. (AXA ARC) is a company incorporated in Singapore and it is a part of the AXA group of companies. It acts as a central service organization which caters to the requirements of AXA group companies in the region. The applicant entered into a service agreement with AXA ARC for receiving assistance such as business support, marketing information technology support services and strategy support etc. from AXA ARC. The applicant states that these services are merely advisory in nature and are procured with the intention of carrying on business in line with the best practices followed by other AXA group entities globally. The applicant submits that the services provided by AXA ARC are not “a one off transaction” but they are meant to support the applicant’s functioning on a continuous basis. For providing these services no employee of AXA ARC will physically visit India. AXA ARC has no business establishment in India. The applicant has stated that for the services rendered by it, AXA ARC charges a fee based on the actual cost incurred plus a markup of 5 per cent. As per service agreement, the “actual costs and expenses” includes cost incurred directly or indirectly by AXA ARC in providing the services and includes labour cost, office expenses, utilization of IT hardware and software, telecommunications, training and printing and stationery, professional services, depreciation of assets etc. The total cost is apportioned amongst various affiliate entities.
The applicant desires to know if AXA ARC has any liability to pay tax in India in respect of the fee received from the applicant. The following questions are framed for seeking advance ruling :
“1. Whether the payments made by the applicant to AXA ARC for various services under the terms of the service agreement is in the nature of ‘fees for technical services’ within the meaning of the term in art. 12 of the ‘Convention between the Government of Republic of India and the Government of Republic of Singapore for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income’ (“the India-Singapore tax treaty) ?
Whether the payments made by the applicant to AXA ARC for providing access to applications and to the server hardware system hosted in Singapore and related support under the terms of the service agreement is in the nature of ‘royalty’ within the meaning of the term in Expln. 2 to cl. (vi) of s. 9(1) of the Act ?
Whether the payments made by the applicant to AXA ARC for providing access to applications and to the server hardware system hosted in Singapore and related support under the terms of the service agreement is in the nature of ‘royalty’ within the meaning of the term in art. 12 of the India-Singapore tax treaty ?
Based on the answers to question Nos. (1), (2) and (3) above, and in view of the facts as stated in Attachment III and also in the light of the declaration provided by AXA ARC and it does not have a PE in India in terms of art. 5 of the India-Singapore tax treaty, whether the payments received by AXA ARC are chargeable to tax in India ?
Based on the answer to question No. (4) above, would the receipts by AXA ARC from BAGI suffer withholding tax under s. 195 of the Act, and at what rate ?”
4. The applicant has summarized the nature of services covered under the service agreement as follows (vide written submissions dt. 12th July, 2010). Business line support AXA ARC provides underwriting, HR support and marketing support to member entities. The services specifically procured by BAGI from AXA ARC in this regard are given below : Product approval process—when a new insurance is developed by the applicant or an existing product requires development or review, BAGI makes a formal submission in a prescribed format providing details of the product in question. Subsequently, discussions are held between applicant and AXA ARC, where AXA ARC provides suggestions and inputs via email or conference calls to improve the product developed by BAGI to bring it in line with the practices by other AXA entities around the globe. Lines of business— Periodical reviews are carried out by BAGI with ARC’s involvement based on the projections and the results for each line of business viz. marine, health, fire, etc. Guidelines in connection with settlement of claims, marketing and risk analysis for the respective lines of business are tailored to adopt the best practices followed by AXA entities worldwide. Product pricing—Based on periodical profitability reviews conducted by BAGI product pricing guidelines are developed by BAGI which are then reviewed by AXA, ARC. AXA ARC does not issue any documents or mandates which have to be compulsorily adopted by BAGI. AXA ARC merely provides suggestions and inputs on the strategies developed by BAGI. HR support—AXA ARC provides BAGI with HR support assistance with developing appropriate performance appraisal procedures, review of job profiles and other related HR support services.
The applicant points out that the advice/suggestions provided by AXA ARC to various AXA entities including BAGI are purely recommendatory in nature except certain services that are provided in connection with positioning certain aspects of the AXA brand. AXA ARC only gives its comments/suggestions after reviewing various strategies/plans developed by BAGI. Reinsurance BAGI develops reinsurance programmes or projects which provide detailed guidance on matters relating to reinsurance such as the minimum/maximum threshold of risk beyond which the risk would need to be reinsured with a reinsurer, the amount of premium that is required to be ceded as obligatory reinsurance, the partners/parties to the reinsurance programme, the mix/proportion in the reinsurance programme, etc. AXA ARC helps BAGI choose the reinsurers and reviews the reinsurance programme drafted by BAGI to provide suggestions for improvements, if any. Further, AXA ARC assists BAGI with choosing the most cost effective reinsurance partners in connection with the reinsurance premium and commission. Direct channel Services include providing advice and expertise on market research, development of a business plan, marketing strategies and requisite technical support in developing a model for online sale of insurance products/policies through BAGI’s website directly and download the policy and related documents. AXA ARC provides its comments and suggestions to ensure that the strategies/business plans are in line with the global plans and practices adopted by other AXA entities. Claims Claims settlement strategies are drawn up by AXA entities which cover the policies and guidelines to be followed in the process of claim handling from the moment a claim arises till it is settled. These strategies/policies are reviewed by AXA ARC to ensure that global AXA policies and practices such as thresholds for immediate cash settlements, ideal limits for maintaining reserves, internal control measures etc. are addressed in these claim settlement strategies.
It is stated that no such services have so far been utilized by the applicant. Single actuarial organization Actuaries mathematically evaluate the likelihood of events and quantify the contingent outcomes in order to minimize losses, emotional and financial, associated with uncertain undesirable events. Since many events, including natural such as an earthquake, etc. cannot be avoided, it is helpful to take measures to minimize their financial impact when they occur. Actuaries help in estimating the damage in order to accurately price property insurance. BAGI develops actuarial methodologies based on their understanding and experience in the relevant insurance market. AXA ARC reviews the actuarial methodologies developed by BAGI and provides suggestions and inputs to ensure that standard actuarial practices are adopted by all AXA entities worldwide. IT support services The insurance software application system comprises of software applications which have been approved, adopted and put to common use by the AXA Group entities worldwide. The software applications are procured when they satisfy certain technical and commercial criteria required for usage by the AXA Group entities and subsequently, an agreement is concluded to globally leverage the usage of these applications. AXA ARC obtains a license for the software applications. AXA ARC is either granted global unlimited licenses or limited licenses enabling it to grant affiliates such as the applicant access to the applications. AXA ARC is assigned as the licensee, which, in turn, is permitted to enable access for its affiliates (i.e. such affiliate does not own the license but is granted access to it). By virtue of the applicant being an affiliate of AXA ARC and pursuant to the service agreement, the applicant is also granted access to the software applications. The applicant is also provided the related services to maintain and support the software applications. The software maintenance will include corrective, adaptive, perfective maintenance and provision of new releases, while software support will include vendor standard, remote telephone helpdesk service and corrective action support service with specified response times.
The applicant submits that while the development of the software for assisting in the printing of policies, such as Jetform, are covered under the regional project costs, the maintenance and other related support services in this regard are covered under the print management services. Print management services are support services that are rendered in connection with the printing software/applications. As regards SmartLink XR software, the applicant submits that in order to use the various software applications provided by AXA, ARC, the member entities are required to have a common online platform that will recognize and allow the software application to function correctly. SmartLink XR is a web based application that provides this common platform for the AXA entities.
5. The sheet-anchor of the applicant’s case rests on art. 12.4 of the India-Singapore tax treaty (Convention between Government of Republic of India and Goverment of Republic of Singapore for Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect of Taxes on Income) which defines ‘fees for technical services’ as payments of any kind to any person in consideration for services of managerial, technical, or consultancy nature (including through the provisions 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 para 3 is received; (b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein; or (c) consist of the development and transfer of a technical plant or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein.
6. Obviously, neither cl. (a) nor cl. (c) is attracted in the instant case. Hence, the contentious issue is whether cl. (b) of the definition of ‘fee for technical services’ (FTS) can be invoked by the Revenue. The definition of fee for technical services under the IT Act, 1961 is wider as the expression ‘FTS’ is defined to mean consideration for rendering of services of managerial, or consultancy services (including the provision of technical or other personnel). The services rendered by AXA ARC may well be brought within the scope of this definition clause because they answer the description of consultancy services or some of them may be categorized as technical service also. But, when we come to the treaty provision the qualifying words “make available technical knowledge, experience, skills, know-how, which enables the recipients of services to apply the technology contained therein” make material difference. All the technical or consultancy services cannot be brought within the scope of this definition unless they make available technical knowledge, know-how, etc, which in turn facilitates the person acquiring the services to apply the technology embedded therein. The transfer of technology technical plan or know-how squarely falls within the purview of this definition. But, the question is whether in the instant case, the ingredients of cl. (b) of art. 12.4 of the treaty can be said to have been satisfied. As per s. 9(1)(vii) of the IT Act, the income in the nature of ‘royalty’ or FTS is taxable as deemed income irrespective of whether the income actually accrues or arises or is received in India. The fee for technical services paid by an Indian business entity in connection with the services received by it would constitute deemed income. However, it is well-settled that if the provisions of the tax treaty are more beneficial to the assessee, then the provisions of the Act must yield to the tax treaty. The assessee can invoke the more beneficial treaty provisions to avoid taxation in India. In fact, this principle is specifically is recognized in s. 90(2) of the Act.
7. The definition of FTS in India-Singapore tax treaty is practically borrowed from the US treaty coupled with the clarification stated in the memorandum of understanding (MoU) executed between India and USA. The phrase ‘make available’ has been explained in the MoU as follows : “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 para 4 (b). Similarly, the use of product which embodies technology shall not per se be considered to make technology available.” After referring to the said clarification in the MoU, this Authority observed in the case of Intertek Testing Services India (P) Ltd., In re (2008) 220 CTR (AAR) 540 : (2008) 16 DTR (AAR) 93 : (2008) 307 ITR 418 (AAR) : “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 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 or 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 aircraft pilot or training the staff in particular skills such as software development would fall within the ambit of the said expression in cl. (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 or surgery, that will amount to making available the technical knowledge and experience of the doctor”. Similar views are expressed in a more recent ruling in the case of Ernst & Young (P) Ltd., In re (AAR No. 820 of 2009) [reported at (2010) 230 CTR (AAR) 355 : (2010) 36 DTR (AAR) 313—Ed.] wherein support services were provided by an affiliate in U.K. to EYPL under a global agreement in the field of market strategy, knowledge management and sharing, priority accounts strategy, internal communications, public relations, providing global data centre services etc. This Authority observed that support services were aimed at providing informations and guidelines so as to ensure uniformity and seamless quality in the business dealings of the group entities and by furnishing such services it cannot be held that the technical knowledge and experience possessed by EYK U.K. has been made available to the applicant and the other entities. The definition of FTS as contained in cl. (b) of art. 12.4 is explicitly designed to restrict the scope and ambit of the technical and consultancy services. Even if we proceed on the basis that some of the services have the flavour of imparting technical knowledge and experience to the recipient of service, the further question is whether such provision of services enables the person acquiring the services to apply the technology contained therein. This test specifically laid down in cl. (b), in our view, is not satisfied and the legal position clarified by this Authority while interpreting more or less similar treaty provisions applies with greater force to the present case in view of the narrow language employed in the India- Singapore tax treaty. Providing comments and suggestions after reviewing the strategies and plans developed by the applicant, giving suggestions to the applicant to improve the product developed by it so as to bring it in line with the common practices followed by other AXA entities across the globe, providing HR support assistance, assisting the applicant in choosing cost effective reinsurance partners, reviewing the actuarial methodologies developed by the applicant and providing suggestions and inputs to achieve standard actuarial practices and processing guidelines in connection with the settlement of claims, marketing and risk analysis, fall short of the requirements laid down in the definition of fees for technical services in tax treaty between India and Singapore. It will be too much to say that by providing such services (assuming they are technical or consultancy services), the applicant receiving the services is enabled to apply the technology contained therein i.e. the technology, knowledge, skills, etc. possessed by the service provider or technical plan developed by the service provider. We do not find anything in the IT support services that answer the description of technical services as defined in the treaty
Coming to the payments made by the applicant to AXA ARC for providing access to software applications and to the server hardware system hosted in Singapore for internal purposes and for availing of related support services under the terms of the service agreement, we do not think that the payment can be brought within the scope of the definition of ‘royalty’ in art. 12.3 of the India-Singapore tax treaty. There is no transfer of any copyright contained in the computer software provided by AXA ARC. Applying the principle laid down in Dassault Systems K.K., In re (2010) 229 CTR (AAR) 105 : (2010) 34 DTR (AAR) 218 : (2010) 322 ITR 125 (AAR) and the earlier ruling in FactSet Research Systems Inc., In re (2009) 225 CTR (AAR) 49 : (2009) 25 DTR (AAR) 146 : (2009) 317 ITR 169 (AAR), etc. we are of view that cl. (a) of art. 12.3 of tax treaty relating to ‘use of’ or ‘right to use’, copyright of literary/scientific work is attracted. The payments made for access to the system hosted in Singapore is for availing of the facility provided by AXA ARC and it cannot be said that the applicant has been conferred any right of usage of the equipment located abroad, more so when the server is not dedicated to the applicant. The learned Departmental Representative has contended that AXA ARC provides consultancy services and as a result of the suggestions and sharing of informations with service provider, the applicant utilizes the technology transmitted to the applicant, who can thereby act independently to develop its business is not a convincing argument. This contention cannot be accepted as it amounts to stretching the point to bring the services within the net of FTS as defined in the treaty. One has to look into the substance and the core of the services availed of by the applicant while giving full effect to the definition contained in the treaty. This Authority is, therefore, of the view that the fee paid to the AXA ARC by the applicant does not amount to fee for technical services within the meaning of India-Singapore tax treaty.
In the light of above discussion, the questions are answered as follows : Question Nos. 1 and 3 are answered in the negative by holding that the payments made to AXA ARC does not amount to ‘fee for technical services’ and ‘royalty’ within the meaning of art. 12 of the India-Singapore tax treaty. Question No. 4 : On the facts stated by the applicant AXA ARC does not have a PE in India, and therefore, the payments received by it cannot be taxed as business profits under the treaty. Question No. 5 : The question is answered in the negative.
14. There is no need to record the answer to question No. 2.
[Citation : 326 ITR 477]
