November 02, 2009
Payments to Group Company for assistance with day-to-day operations held to be 'Fees for Technical Services'
The Income Tax Appellate Tribunal, Bangalore bench (“ITAT”) in M/s Bovis Lend Lease (India) Pvt. Ltd. v. ITO has expanded the scope of ‘fees for technical services’ (“FTS”) to include services rendered by a group company for assistance with day-to-day operations, where such services are in the nature of administrative, accounting and legal services. However, on grounds that the services were rendered offshore, the ITAT held that the payments were not taxable in India and hence not liable to deduction of tax at source in India.
M/S Bovis Lend Lease (India) Private Limited (“Assessee”) is an Indian company engaged in the business of project and construction management. The Assessee entered into a Management Services Agreement (MSA) with M/s Lend Lease Asia Holdings Pte Limited (“Singapore Company”), a group company in Singapore, for the latter to provide services to the Assessee in relation to day-to-day business operations in administrative, legal, finance and accounting matters. The Assessee was required to reimburse costs incurred by the Singapore Company in providing such services, based on time spent basis and without a mark up being charged to the Assessee. The Singapore Company made an application to the assessing officer for receiving payment from the Assessee without any deduction of tax at source and was granted the same. However, at a later date, the Assessee was issued show-cause notice to explain why the Assessee should not be treated as ‘assessee in default’, for failure to deduct tax at source.
It was the case of the tax authorities that the payments to the Singapore Company were in the nature of FTS under the Indian tax laws as well as the India-Singapore Tax Treaty. Hence the Assessee should have withheld tax at the time of making payments.
On the other hand, the Assessee contended that the payments were in the nature of reimbursements for actual expenses incurred by the Singapore Company and thus, no tax was required to be deducted for the same. Further, in the context of the reimbursements being FTS, the Assessee placed reliance on a catena of judgments and argued that the determining factor for a certain payment to be characterized as FTS was the requirement of ‘making available’ technical, managerial or consultancy services, which was not satisfied in this case.
The ITAT closely examined the clauses contained in the MSA and found that the services provided by the Singapore Company services were 'made available' to the Assessee for its future application. It also held that the dictionary meaning of the word 'make available' is 'able to use or obtain'. It does not mean that the recipient should equally use the technology. In a case where a group owns a number of companies and certain companies provides services to the companies belonging to the group then it becomes the policy of the group to get services of that company, though other group companies might be able to perform the same functions on the basis of the services already provided to them. Hence, the ITAT held that the true character of the payments made to the Singapore Company were in the nature of FTS.
As regards the contention of the Assessee that such payments were in the nature of reimbursements and bereft of any profit element, the ITAT noted the following conditions which need to be cumulatively satisfied for a certain payment to be characterised as ‘re-imbursement’:
(a) actual liability should be of the person reimbursing the money to the original payer;
(b) the liability should be definite and not an estimation or an approximate amount;
(c) the liability should be crystallized;
(d) there should exist a ‘clear ascertainable relationship between the paying and the reimbursing parties’;
(e) the payment should first be made by a person, who did not have the liability to pay it and such person should be reimbursed to ‘square off the account’; and
(f) there should be three parties to such transaction – the payer, the payee and the reimburser.
The ITAT observed that not all of the above-mentioned conditions, specifically (a) and (e), were satisfied in this case. In this context, it was observed that merely because certain employees of the Singapore Company were rendering services to the Assessee, the liability of the Singapore Company to pay salary to such employees was not transferred to the Assessee and the Singapore Company continued to be liable for it. Similarly, no payments were made by the Singapore Company, when it was not liable for the same and the eventually reimbursed by the Assessee.
Having said that, the ITAT relied on the ruling in Ishikawajma1 and Jindal Thermal Power Company2 and held that since the services were provided to the Assessee ‘offshore’ such payments were not taxable in India and consequently, no liability to withhold tax arose.
The ITAT’s finding in this case with respect to categorizing payments towards services for assistance with day to day operations of business such as administrative, legal and accounting services in certain cases as FTS, could have far reaching consequences. The ITAT failed to appreciate that the Singapore Company did not ‘make available’ any skill or experience to the Assessee. Consequently, such payments should be regarded to be in the nature of business profits and should not be taxed in India, in the absence of a permanent establishment in India. While in this case the Assessee escaped the liability to withhold taxes as the services were rendered offshore, this judgment may prompt companies to revisit such inter-company agreements where such services are rendered in India.