Routine Business Support Services Are Not Taxable As Fees For Technical Services: Delhi ITAT

The Bench held that when a tax rate is prescribed under the Double Taxation Avoidance Agreement (DTAA), education cess and surcharge cannot be levied.

The appellant/assessee Magotteaux International SA, a tax resident of Belgium, is engaged in the business of providing consultancy and other services. It entered into an agreement with Magotteaux Industries Pvt Ltd (MIPL) to rendered such services to it in India. The appellant filed its income tax return showing nil taxable income, stating that the services were provided by it to MIPL from outside India. During the scrutiny assessment proceedings undertaken by the Assessing Officer (AO), the AO noted that group management fees was received by the appellant for rendering different services to MIPL. The AO formed an opinion that the services in respect of which the group management fees was received by the appellant were technical in nature, apart from being in the nature of managerial and consultancy services. The AO opined that the said services were taxable as fees for technical services (FTS) under the India-Belgium DTAA and under the provisions of Section 9(1)(vii) of the Income Tax Act, 1961.

The appellant Magotteaux International contended before the AO that in accordance with Article 12 of the India-Belgium DTAA, for the service to qualify as fees for technical services (FTS), the service provided by the appellant must make some technology, know-how or skills available to MIPL. The appellant submitted before the AO that no such technology, know-how or skills were made available by the appellant to MIPL. The AO dismissed the contentions of the appellant that the services provided by it were not in the nature of FTS. The AO, therefore, held that the amount received by the appellant as group management fees was in the nature of FTS and accordingly taxable as per the India-Belgium DTAA.

The appellant raised objections against the order of the AO before the Dispute Resolution Panel (DRP), which was rejected by the DRP. The appellant filed an appeal against the order of the AO before the ITAT.

The appellant Magotteaux International submitted before the ITAT that the services rendered by the appellant to MIPL were in the nature of routine business support services, which were not very complex in nature, and they did not make any knowledge, experience or know-how available to MIPL. Therefore, the appellant contended that the said services were not taxable as FTS. The appellant also challenged the application of surcharge and cess by the AO on the gross rate of tax applicable as per the India-Belgium tax treaty on the given consideration. The Revenue Department submitted that the services provided by the appellant were not routine services but technical services and, therefore, the findings of the AO should be confirmed.

Article 12 (1) of the India-Belgium DTAA provides that Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other State may be taxed in the other State. Article 12(2) provides that royalties and fees for technical services may also be taxed in the Contracting State in which they arise, but if the beneficial owner is a resident of another State, the tax so charged shall not exceed 10 per cent of the gross amount. Article 12 (3) (b) of the DTAA defines the term "fees for technical services" as payments in consideration for services which are in the nature of managerial, technical or consultancy services.

The ITAT perused the Service Agreement entered into between the appellant and MIPL, under which the appellant was required to render legal services, human resource services, Performance Management services, marketing services, inter alia.

The ITAT held that the said services were routine in nature and did not make any knowledge, experience or know-how available to its recipient MIPL. The ITAT observed that the DRP had itself noted in its order that the services provided by the appellant, as per the said Service Agreement, were in the nature of routine support services.

The ITAT noted that the Protocol to the India- Belgium tax treaty provides for taxation of fees for technical services (FTS) in accordance with the provisions of the DTAA between India and a member of OECD, entered into force after 1^st January, 1990, if such provisions provide for a lower rate or restrictive scope of taxation on FTS. The ITAT noted that under the India Portugal Trade Tax Treaty, an amount can be taxed as "fees for included services" if it is received in consideration for rendering any technical or consultancy services that makes any technical knowledge, skill, know-how, etc., available to the receipt of the services.

The ITAT thus ruled that since the services received by MIPL did not make any technology, skill or know-how available to it, therefore, such services could not be considered to be in the nature of managerial, technical or consultancy services.

The ITAT, therefore, held that the business support services rendered by the appellant from Belgium did not qualify the test of "make available" under the tax treaty and could not be taxed as FTS. The ITAT thus directed the AO to delete the additions made by it to appellant's taxable income.

The ITAT also ruled that when a tax rate is prescribed under the DTAA, education cess cannot be levied. The ITAT directed the AO to apply the rate prescribed under the DTAA without applying surcharge and cess.

The ITAT thus allowed the appeal of the appellant Magotteaux International.

Case Title: Magotteaux International SA, Belgium versus Dy. C.I.T, International Taxation, New Delhi

Dated: 17.02.2022 (Delhi ITAT)

Representative for the Appellant: Vishal Kalra, Advocate

Representative for the Respondent: N.C. Swain, CIT- DR

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