Consultancy services which are not of a technical nature cannot be treated as technical services

Citation of the Case:-  Shell Global Solutions International BV vs. ITO (ITAT Ahmedabad), Income tax (Appeal) no. 1283 of 2010, Date of Judgment: 10/11/2015

Brief of the Case

ITAT Ahmedabad held In the case of Shell Global Solutions International BV vs. ITO that as clearly stated in the MoU to the Indo US tax treaty, which stands incorporated in the Indo Dutch tax treaty as well by the virtue of MFN clause, consultancy services which are not of a technical nature cannot be treated as technical services. Also it is clear that as long as the services rendered by the assessee are managerial or consultancy services in nature, which do not involve or transmit the technology, the same cannot be brought to tax as fees for technical services. In the given case, the overall consideration is for a package as a whole which consists of several physical deliverables and several commercial services which cannot be brought to tax as fees for technical services. Accordingly, matter remanded back to the AO for segregation of such services.

Facts of the Case

The Shell Global Solutions International BV, is a company incorporated in, and tax resident of, the Netherlands. During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that while the assessee has duly accepted taxability of its receipts aggregating to Rs 65,21,62,165 as fees for technical services, the assessee has claimed receipts aggregating to Euros 16,75,781, i.e. Rs 17,26,50,194, as non taxable in nature. The non taxable receipts included reimbursement of expenses, aggregating to Rs 1,78,40,156, received from Hazira Port Pvt Ltd, Hazira LNG Pvt Ltd and Welspun Gujarat Stahl Rohren Limited, in addition to fees for commercial services aggregating to Rs 7,69,29,360 received from Reliance Industries Limited.

So far as the reimbursements receipts are concerned, the matter was decided in favour of the assessee, in principle, by the CIT(A) and the matter rests there. With regard to second aspect, i.e. receipts for commercial services aggregating to Rs 7,69,29,360, the Assessing Officer required the assessee to show cause as to why this receipt was not offered to tax in the hands of the assessee. The assessee explained that these services are not in technical in nature and are not covered in India Netherland tax treaty as such they not make available any technical knowledge, experience , skill , knowhow while rendering these services. The Assessing Officer then proceeded to deal with memorandum to the India United States Double Taxation Avoidance Agreement [(1991) 187 ITR (Statute) 102; Indo US tax treaty] which provides that in the case of ‘technical training’, technology will be deemed to have been ‘made available’. On the basis of this analysis, the Assessing Officer finally treated the entire amount as taxable @ 10% on gross basis under Article 12 of the Indo Dutch tax treaty.

Held by CIT (A)

CIT (A) held that the appellant’s claim to seek non-taxability of 50% of its receipts from the sale of Basic Refinery Package as exempt from taxation is rejected on the ground that – i) The agreement for Basic Refinery Package has to be read as a composite one, ii) The appellant has no basis to claim that 50% of the services rendered were commercial, iii) The appellant’s attempt to bifurcate its service into technical and nontechnical part is devoid of any basis, logic and is selfcontradictory, iv) The argument of “make available” either do not apply or cannot be pinpointed by the appellant, v) Neither there is any relevance of Memorandum of Understanding to Indo- US DTAA in facts of the case nor can this Memorandum of Understanding in that context extendableto Indo-Holland Treaty.”

Held by ITAT

It is important to note that the Most favoured nation (MFN) clause set out in the Indo Dutch tax treaty is a clause which does not need anything other than a greater relief, vis-àvis the scope and rate of ‘fees for technical services’ in the Indo Dutch tax treaty, being given in any other tax treaty with another OECD country. Any such relief being extended automatically incorporates such beneficial arrangement being read into the Indo Dutch tax treaty as well.

This MFN clauses clearly stipulates that in the event of India extending any benefits to another OECD country, inter alia, directly by reducing the rate or “indirectly, by reducing the rate or the scope of the Indian tax allowed under the Convention or Agreement in question on payments as meant in Article 12 of this Convention with the levy, either in full or in part” then, as from the date on which the relevant Indian tax treaty enters into force, “such relief as provided for in that Convention or Agreement shall also apply under this Convention”.

Therefore, whatever benefit is extended under Indo US tax treaty is, by the virtue of MFN clause, stands incorporated in Indo Dutch tax treaty as well. In other words, to decide the scope of ‘fees for technical services’, we have to see the scope of taxability of similar payments in the Indo US tax treaty and unless that Indo Netherlands treaty is more beneficial to the assessee, the provisions of the Indo US tax treaty will apply here as well. In any event, as held by a coordinate bench of this Tribunal in the case of DCIT Vs ITC Limited [(2002) 82 ITD 239 (Kol)], even without this notification, this legal situation automatically prevails as a result of the MFN clause.

As for the connotations of ‘make available’ clause in the treaty, this issue is no longer res integra. There are at least two non-jurisdictional High Court decisions, namely Hon’ble Delhi High Court in the case of DIT Vs Guy Carpenter & Co Ltd ([(2012) 346 ITR 504 (Del)] and Hon’ble Karnataka High Court in the case of CIT Vs De Beers India Pvt Ltd [(2012) 346 ITR 467 (Kar)] in favour of the assessee, and there is no contrary decision by Hon’ble jurisdictional High Court or by Hon’ble Supreme Court. In these cases it was held that the fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service

CIT(A) was thus clearly in error in holding that the provisions of the Indo US tax treaty cannot be read into the provisions of Indo Dutch tax treaty. As clearly stated in the MoU to the Indo US tax treaty, which stands incorporated in the Indo Dutch tax treaty as well by the virtue of MFN clause, “under paragraph 4(b), consultancy services which are not of a technical nature” cannot be treated as technical services. Accordingly, fees for non technical consultancy services cannot be treated as covered by the scope of ‘fees or technical services’.

There are a large number of decisions by the coordinate benches which reiterate this proposition. In the case of Boston Consulting 2005) 94 ITD 31 (Mum), it was stated that “advising on “marketing strategies” is held to be outside the scope of technical services” and that as for the “business of rendering strategy consulting services, such as business strategy, marketing and sales strategy, portfolio strategy” carried on by the assessee “the nature of these services is materially similar”. All these services were held to be outside the scope of fees for technical services taxable under the Indo US tax treaty. In the case of Bharat Petroleum Corporation Ltd vs JDIT [(2007) 14 SOT 307 (Mum)], another coordinate bench of this Tribunal, inter alia, held that market study covering study of supply and demand analysis, domestic refining capacity, price forecast etc did not constitute fees for technical services as it did not transmit the technical knowledge. In the case of Ernst & Young Pvt Ltd In Re [(2010) 189 Taxman 409 (AAR)], the Authority for Advance Ruling, inter alia, observed that “some of the services enumerated have the flavor of managerial services” but “services of managerial nature are not included in Article 13 (of Indo UK tax treaty, which is in pari materia with the treaty provision before us) unlike many other treaties”.

We are in considered agreement with the views so expressed by the Authority for Advance Ruling. On the same lines are various decisions of this Tribunal in the cases of ICICI Bank Limited Vs DCIT [(2008) 20 SOT 453 (Mum)] and McKinsey & Co Inc Vs ADIT [(2006) 99 ITD 549 (Mum)]. What essentially follows, therefore, is that as long as the services rendered by the assessee are managerial or consultancy services in nature, which do not involve or transmit the technology, the same cannot be brought to tax as fees for technical services.

None of the above deliverables involve any transfer of technology even though certainly these deliverables are crucial for success of the client’s business. The consideration for these services is included in the consideration for the basic refinery package. Similarly, so far as physical deliverables by way of manuals and newsletters are concerned, consideration for such deliverables cannot be brought to tax as fees for technical services either. The fact that these services or physical deliverables are interlinked with certain technical services, in our considered view, does not alter the basic character of these services and physical deliverables.

As for the fact that these services are interlinked, as we have noted above, the mere fact that commercial ormanagerial services are linked with the technical services does not change the character of commercial or managerial services. That’s what the MoU to Indo US tax treaty, as noted earlier, also states. Whether the technical and non technical services can be segregated or not, we find guidance from Hon’ble Supreme Court’s judgment in the case of Continental Services Limited Vs CIT [(1992) 195 ITR 81 (SC)].

Clearly, therefore, the consideration for basic refinery package is to be apportioned between the various deliverables under the overall package. The mere fact that the overall package is considered as a whole and the services are interlinked cannot be excuse enough for not apportioning the consideration. The overall consideration is for a package as a whole which, as noted above, consists of several physical deliverables and several commercial services which cannot be brought to tax as fees for technical services. It is, to borrow the words of Hon’ble Supreme Court, “duty of the revenue, and right of the assessee” to see that the consideration paid for the package attributable to such services and deliverables is apportioned and the assessee is given the benefit of non taxability in respect of the same.

We have noted that the Assessing Officer, at the time of issuing order under section 195(2) in respect of the remittances of consideration under the basic refinery package to the assessee, had held that fifty percent of consideration for basic refinery package can be treated as attributable to the services which are not taxable as ‘fees for technical services’. However, during the assessment proceedings, this aspect of the matter was not examined at all. In the course of the appellate proceedings, learned CIT(A) has rejected the apportionment on the ground that it is not possible to do so. He has observed that “the underlying purpose of the package is operationalising the refinery “ and “ obviously in such a scenario the various services are interdependent and complimentary and cannot be segregated”. We have also noted that there is no specific discussion about the values to be assigned to the consultancy services which are non technical in nature and to the physical deliverables.

We have also noted that in the 195(2) order, the Assessing Officer has categorically observed that “only a part of the total services under the agreement are taxable on account of its being a composite contract and also because the commercial services rendered by the assessee are saved from taxation in view of Article 12 of the Indo Dutch DTAA read with protocol to DTAA between India and USA” and then proceeded to adopt 50% of total payment under basic refinery package as non taxable, on a best judgment basis. No doubt this order does not bind the Assessing Officer but then it cannot be open to him to simply brush it aside, without any cogent material, to come to a conclusion directly opposed to the stand taken therein. As long as the Assessing Officer can demonstrate, after collecting necessary details from the assessee, that the non taxable consideration component (i.e. consideration for physical deliverables, consideration for services other than technical services and consideration for services which donnot transmit the technical know how etc) is less than fifty percent of the overall consideration paid by the assessee for basic refinery package, he can certainly come to that conclusion.

It is, therefore, necessary that all the requisite details, as may be available to the assessee and as may be requisitioned by the Assessing officer, must be taken into account to facilitate this apportionment. We are, however, not inclined to conduct this exercise directly at the stage of second appeal. We, therefore, remit the matter to the file of the Assessing Officer by upholding the plea of the assessee in principle and directing the Assessing Officer to apportion the consideration for basic refinery package on the above lines.

Accordingly appeal of the assessee allowed for statistical purpose.

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CA Deepak Aggarwal