Sum received by UK based Co. for allowing Indian telecom operators to use its Virtual Voice Network wasn’t FTS

Facts

a)    Assessee (Interroute Communications Ltd.), a UK based Company, was engaged in the business of providing international telecommunication network connectivity to various telecom operators around the world.

b)    It entered into an agreement with the Indian telecom operators, viz., Vodafone Essar South Limited and Tata Telecommunications Ltd to allow them to use its Virtual Voice Network (VVN), i.e., a facility used to connect the call to the end-operators.

c)    Assessee contended that sum received by it under the aforesaid agreement was in nature of business income and should not be taxable in India in absence of its permanent establishment in India.

d)    Assessing Officer (AO) opined that the payment received by the assessee for allowing Indian telecom operators to use its VVN should be taxable as royalty or FTS as per Article 13 of the India-UK Double Taxation Avoidance Agreement (DTAA).

e)    The CIT(A) confirmed the order of the AO. Aggrieved assessee filed the instant appeal before the tribunal.

Payment made to foreign co. to conduct navigation studies at Indian port won’t satisfy ‘make available’ clause; no FTS

Payment made by assessee to foreign company for navigation studies at Indian port to determine pre-existing conditions could not taken as fee for technical services as per Article 13 of India-UK DTAA.

Facts:

a)The assessee had entered into an agreement with a foreign company (Wallingford) for morphological studies, sedimentation assessment, navigation and mooring assessment in respect of a port.

b)The assessee did not deduct tax on payments made for said studies as it was of the view that said fee was not in the nature of ‘fee for technical services’ (FTS). However, the Assessing Officer opined that services provided by Wallingford were in nature of FTS.

c)On appeal, the CIT(A) reversed the order of Assessing Officer and held that the assessee would not be liable to withholding tax under section 195(1). The aggrieved-revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)Article 13 of India-UK DTAA provides that 'FTS' arising in a contract State and paid to a resident of other contracting State may be taxed in that other State if it is made available to the recipient.

2)In the case of Mahindra & Mahindra Ltd. v. Dy. CIT [2010] 122 ITD 216 (Mum.) (SB), the meaning of expression 'make available' had been analyzed by discussing decision of Intertek Testing Services India (P.) Ltd. In re [2008] 175 Taxman 375 (AAR - New Delhi) wherein it was held that the service had to be aimed at and results in transmitting the technical knowledge, etc., so that the receiver of service could derive an enduring benefit and utilize the knowledge or know-how in future on his own without the aid of the service provider.

3)It was undisputed that assessee was supposed to receive only a report on pre-existing condition in relation to port. There was a clause of confidentiality in the agreement, which provided that the report so prepared by Wallingford would not be transferable by the assessee.

4)The agreement further provided that the assessee couldn’t not use the know-how in performing services for any other client in future. Even the assessee was not entitled to sub-license any of the rights granted in the report.

5)Thus, in the instant case, the fees for technical services was not paid for making available the technical knowledge, experience and know-how to the assessee. Therefore, the payment made by the assessee was out of the ambit of the provisions of section 195. The view taken by CIT(A) was to be affirmed. – ITO (INTERNATIONAL TAXATION) V. ADANI PORT INFRASTRUCTURE (P.) LTD [2014] 47 taxmann.com 17 (Ahmedabad - Trib.)

Family pension received from UK based bank would fall under residuary Article 23 of India-UK DTAA - taxable in UK only

Where the assessee received family pension from the employer of the deceased wife, i.e., from RBS, UK on which tax was deducted in the source country (i.e., UK), said income could not be taxed for a second time in India.

Facts:

The issue before the Tribunal was:

Whether family pension received by assessee from the employer of his deceased wife (i.e., RBS, UK) on which tax was deducted in source country (i.e., UK) could be taxed again in India?

The Tribunal held as under:

1)Article 20 of India-UK DTAA (‘treaty’) was related to pensions, which means that the payment received by the employee in consideration of past employment. It had no relevance to the family pension, which is generally received by the spouse or family members or legal dependent of the deceased employee from the employer of deceased family member.

2)The Article 23(3) of treaty is related to the items of income which are not included in the foregoing articles of the treaty. Such income arising in the other contracting State may be taxed in that other State. Thus, 'family pension' which was not within the ambit of foregoing articles of India-UK Treaty and arose in the other contracting State, could be taxed in other state.

3)The expression ‘may be taxed’ mentioned in Article 23(3) of treaty authorizes only the State of source to tax such income. Accordingly, the family pension received by the assessee from the employer of his deceased wife was rightly taxed at source in UK and no amount of family pension was, thus, taxable in India.

4)In the instant case, the source country had deducted tax on family pension and, consequently, assessee had received amount after deduction of tax. Thus, the same income could not be taxed second time in the other contracting State, i.e., in India. – ACIT V. KARAN THAPAR [2014] 46 taxmann.com 46 (Delhi - Trib.)

‘Most Favoured Nation’ clause can be referred to interpret treaties and not to import ‘make available’ clause

Facts:

a)The applicant entered into a Management Service Agreement with 'S' France for various management services.

b)It was submitted that the 'make available' clause was not satisfied in the case and, hence, the services would not fall under the technical services as per the India-France Treaty.

c)Applicant stated that, although there was no 'make available' clause in the India-France Treaty, yet, pursuant to protocol signed between India and France, the restricted scope of FTS in the India-UK DTAA would be applicable.

d)Therefore, in absence of such 'make available' of the technical knowledge, experience, skill, know-how or processes, the services rendered by S would not fall under the definition of technical services.

The Authority held in favour of Revenue as under:

1)A Protocol cannot be treated as the same with the provisions contained in the treaty itself, though it may be an integral part of the Treaty.

2)Protocol to the said DTAA puts restrictions on the rates and 'make available' clause cannot be read in the items.

3)The Notification ratifying the protocol did not include anything about the 'make available' provision. Had the intention of the Protocol or the Government been to include 'make available' clause in the Tax Treaty between India and France, it would have been done so in the said Notification.

4)Protocol or Memorandum of Association can be used for interpreting provision of the Treaty. It will not be correct/proper to import words, phrases or clause, that are not available into the Treaties between two Sovereign nations, on the basis of Treaties with another countries.

5)Therefore, the payments made by the applicant for the services rendered would come under the definition of fees for technical services both under the Act and the Treaty and would be liable to tax in India.- STERIA (INDIA) LTD., IN RE [2014] 45 taxmann.com 281 (AAR - New Delhi)

Payment to seconded employees is FTS; Foreign co. is real employer if Indian co. can cancel secondment agreement only

Overseas entity was the real employer of seconded employees when Indian entity had only the right to terminate the secondment without conferring the right to terminate the original employment. Reimbursement of salary of seconded employees to the overseas entities was to be regarded as FTS when they rendered quality control services till the necessary skills were acquired by the resident employee group.

Facts:

a)  The CIOP ('petitioner'), incorporated in India, was wholly owned subsidiary of Centrica Plc. (a company incorporated in the UK).The BSTL and DEML were other subsidiaries of Centrica Plc.

b)  These overseas entities outsourced their back office support functions to third party vendors in India. To ensure that the Indian vendors complied with quality guidelines, the petitioner was established in India.

c)  Accordingly, the petitioner entered into a secondment agreement with these overseas entities, wherein employees continued to remain on the payrolls of the overseas entities. The petitioner was required to reimburse salary costs to the overseas employers.

d)  The issue which arose for the consideration in the instant case was:

Whether the secondment of employees by the overseas entities, would fall within Article 12 of the India-Canada and Article 13 of the India-UK DTAAs?

The High Court held in favour of revenue as under:

1)  Sums paid to the overseas entities for the seconded employees could be covered by the India-Canada DTAA, when it was established that not only technical services were performed, but the enterprise made available the skills behind that service to the other party;

2)  The India-UK DTAA defines Fees for Technical Services ('FTS') as "payments of any kind of any person in consideration for therendering of any technical or consultancy services (including the provision of services of a technical or other personnel)". In this case, the overseas entities had, through the seconded employees, provided technical services to the petitioner including the provision of services of personnel;

3)  The nature of the services rendered by the CIOP was in the nature of "business support services" and was covered within the fold of "technical or consultancy" services. The CIOP and seconded employees were to oversee the quality of service rendered by vendors to the overseas entities, which would fall within the scope of the technical or consultancy services.

4)  It was admitted by the petitioner that the reason for entering into the secondment agreement was to provide support for the initial years of operation, till the necessary skills were acquired by the resident employee group;

5)  All direct costs of such seconded employee's, social security plans, other benefits and costs were ultimately to be paid by the overseas entity. The petitioner was given the right to terminate the secondment only, excluding the right to terminate the original employment relationship (the services of the secondee vis-à-vis the overseas entities);

6)  The Division Bench in DIT v. E-Funds IT solutions [2014] 42 taxmann.com 50 (Delhi) highlighted that the nature of activity undertaken by the employees was determinative of whether it constituted a service. In the present case, the overseas entities outsourced their back office support functions to third party vendors in India. The seconded employees were to oversee quality control of the work of such vendors. This work could not be characterized as mere stewardship;

7)  What could have been left to the petitioner to do was, in fact, being done through the seconded employees, whose expertise and training lent quality and content to the Indian entity. Therefore, the real employer of these seconded employees continued to be the overseas entity concerned. And the payment made by the petitioner to the overseas entities was to be treated as FTS. - Centrica India Offshore (P.) Ltd. v. CIT [2014] 44 taxmann.com 300 (Delhi)