Support services does not ‘make available’ any technology to the Applicant

Summary of a recent ruling of the Authority for Advance Rulings (AAR) in the case of Ernst and Young Pvt. Ltd. (Applicant) on the taxability of payments made for support services provided by an affiliate in the UK to the Applicant. The AAR held that the provision of support services does not ‘make available’ any technology to the Applicant and, hence, the payments made are not taxable in India as ‘fees for technical services’ (FTS) under the India-UK tax treaty (Tax Treaty).

Background and facts of the case

The Applicant is a company incorporated in India and is engaged in providing consultancy services. The Applicant is one of the member entities of Ernst & Young Global (EYG).

Ernst & Young (EMEIA) Services Ltd. (EY EMEIA), a limited liability company incorporated in the UK, is also a member of EYG. It provides support services in various fields such as area, global and market development etc. to the other member entities of EYG (Support Services). The member entities gain access to standardized human, financial and other resources to maintain uniformity in practices/approaches in business and to ensure that consistent, high quality professional services are provided to the client base of all member entities of EYG.

The Support Services are provided under an area services and market development agreement (Agreement) entered between EY EMEIA and the other member entities of EYG. Under the Agreement, costs incurred for providing the services are allocated to the member entities, in accordance with an agreed formula.

The Support Services are provided from the UK. EY EMEIA does not have a permanent establishment (PE) under the Tax Treaty or any fixed base in India.

Under the Tax Treaty, technical or consultancy

services received by a UK resident from an Indian resident are taxed as FTS, if such services ‘make available’ technical knowledge, skill, experience etc. to the recipient of the services.

Issue before the AAR :-Whether payment of the costs allocated by EY EMEIA to the Applicant for providing the Support Services is taxable in India.

Contentions of the Applicant

The Support Services rendered by EY EMEIA to the Applicant does not satisfy the ‘make available’ requirement under the Tax Treaty as they do not result in transfer of any technical know-how, technical plan/design to the Applicant. A technology is considered ‘made available’ only when the person acquiring the service is enabled to apply the technology.

Hence, the payments made to EY EMEIA for the Support Services rendered to the Applicant do not qualify as FTS under the Tax Treaty.

The payments received are in the nature of business profits of EY EMEIA since it is engaged in the business of providing access to central resources and services to various member entities. However, in the absence of a PE of EY EMEIA in India, the business profits are not taxable in India under the Tax Treaty.

Ruling of the AAR

Some of the categories of the Support Services provided by EY EMEIA are in the nature of management services. However, services of managerial nature are not included within the FTS definition of the Tax Treaty. The Tax Treaty covers only technical or consultancy services. Many of the Support Services could be technical or consultancy in nature. However, the more important question is whether EY EMEIA has ‘made available’ to the Applicant the technical knowledge, skill, know-how, experience etc. by providing the Support Services.

The provision of the Support Services is aimed at facilitating uniformity and seamless quality in the business dealings of the member entities. It does not amount to ‘making available’ the technical knowledge and experience of EY EMEIA to EYG member entities.

There is no transfer of technical know-how nor can it be said that the Applicant has been enabled to apply the technology which is possessed by EY EMEIA.

The ‘make available’ requirement under the Tax Treaty is not satisfied and, hence, the payment received by EY EMEIA is not taxable as FTS under the Tax Treaty.

In the absence of a PE of the UK entity in India, such payments are not taxable in India.

Comments

While payments to a non-resident for managerial, technical or consultancy services are generally taxed in India as FTS under the domestic tax law, a number of tax treaties restrict the taxability of FTS to only technical or consultancy services that ‘make available’ technical knowledge, skill, experience, know-how etc. to the service recipient. The concept of ‘make available’ has been subject to several decisions of the second appellate authority as well as the AAR. These decisions have confirmed that a service can be ‘made available’ only if the recipient of the service is enabled to apply the technology or know-how contained in the service.

The present ruling reinforces the principles that have emerged from earlier case laws and clarifies that disseminating information, furnishing guidelines and suggesting plans aimed at uniformity and quality do not amount to ‘making available’ technical knowledge and experience.

A ruling by the AAR is binding only on the Applicant, in respect of transaction in relation to which the ruling is sought and on the Tax Authority, in respect of the Applicant and the said transaction. However, it does have persuasive value and the courts in India, the Tax Authority and the appellate authorities do recognize the principles and ratios laid down by the AAR, while deciding similar cases.