Are business support services from foreign companies to Indian affiliates taxable in India ?
The taxability of business support services (BSS) provided by a foreign group entity (F Co.) to an Indian group entity (I Co.) as fees for technical services (FTS) has been a contentious issue. The key question is whether these services can be considered as ‘making available’ technical knowledge, experience, etc., thereby taxable as FTS in India.
The Bombay High Court in a recent ruling addressed this issue and held that the provision of BSS on an ongoing basis does not ‘make available’ technical knowledge, experience, etc., and hence, not taxable as FTS under the provisions of the India-UK Tax Treaty.
In the case at hand, the I Co. remunerated F Co. for BSS provided under a Cost Contribution Agreement (CCA). The Authority for Advance Rulings (AAR) held that these payments are taxable, as F Co. collaborated closely with I Co.’s employees, allowing I Co. to use the know-how generated from the BSS independently of the service provider.
On a further appeal, the Hon’ble High Court overturned the ruling of the AAR while observing:
🔹 Under Article 13(4) of the India – UK Tax Treaty, the FTS refers to payments made for technical or consultancy services that make available technical knowledge, experience, etc.
🔹 Based on the principle of “𝘯𝘰𝘴𝘤𝘪𝘵𝘶𝘳 𝘢 𝘴𝘰𝘤𝘪𝘪𝘴”, even if consultancy is ‘stand-alone’, the bunch of words indicates that the said ‘consultancy’ relates to a consultancy that makes available technical or any other knowledge, experience, etc., excluding consultancy on managerial issues.
🔹 BSS in the instant case (i.e., management support, legal services, marketing support, etc.) relates to managerial services not involving anything of a technical nature.
🔹 Consultancy services that are not technical cannot be FTS. Accordingly, Article 13 of the India – UK Tax Treaty is wholly inapplicable in this instance.
🔹 The view of the AAR that F Co. works closely with employees of I Co. and hence, makes available the services, suffers from fallacy since the agreement continues to operate to date.
This judgment provides much-needed clarity on the taxability of intra-group payments made for shared services. This is a welcome ruling and reaffirms the proposition that only technical or consultancy services of a technical nature, which make available technical knowledge, experience, etc., can be considered as FTS under the India – UK Tax Treaty or similar treaties (e.g., USA, Netherlands, Canada, etc.).
It would be further interesting to see how this ruling is applied by the Courts in other Tax Treaties (e.g., Singapore) that also cover ‘managerial’ services in the definition of the term FTS with a ‘make available’ clause and how jurisprudence evolves in such cases.
