TDS Not Liable To Be Deducted On Business Support Services As Not Taxable As FTS: Bombay High Court

The Bombay High Court has held that business support services are not taxable as a fee for technical services (FTS), and no TDS is liable to be deducted.

The bench of Justice K. R. Shriram and Justice Neela Gokhale has observed that even if it is fees for technical or consultancy services, it can be only where fees are paid in consideration for making available technical knowledge, experience, etc. Thus, the view of the AAR that the petitioner, Shell International Petroleum Company Limited (SIPCL), works closely with and advises the employees of the petitioner and hence makes available the services is not correct. The AAR's view, in fact, suffers from fallacy since the agreement continues to operate to date. If the view of AAR is to be held correct, then the contract must be concluded, as once the services and the know-how, skills, etc. are transferred to the petitioner, the need to continue to render services must end.

The issue raised concerns in respect of the determination of tax liability for the payments made by Petitioner to its non-resident group company, Shell International Petroleum Company Limited (SIPCL), for availing of General Business Support Services (BSS) under a Cost Contribution Arrangement (CCA) between Petitioner and SIPCL.

On an application made by Petitioner seeking such determination, the Authority for Advance Rulings (Income Tax), New Delhi (AAR), by its Order held that payments made by Petitioner to SIPCL towards BSS under the CCA constitute income in the hands of SIPCL being in the nature of fees for technical services within the meaning of Article 13.4(c) of the Double Tax Avoidance Agreement (DTAA) between India and UK and are chargeable to tax in India.

The AAR held that the petitioner is under an obligation to withhold tax under Section 195 of the Income Tax Act, 1961.

The petitioner contended that AAR has erred in concluding that transactions contemplated under the CCA involve rendering technical and consultancy services and thus fall within the scope and ambit of Article 13 of the India-UK DTAA. The AAR has failed to appreciate that the CCA is only an approach adopted by the group entities as part of their group business strategy for standardizing and carrying out global quality business in a cost-effective manner. Services availed by the petitioner are neither intended nor result in placing the petitioner in a position where it could independently carry on services without SIPCL. Services that make available technical knowledge, skills, know-how, etc. are distinct from services shared under the CCA that may involve technology or industry expertise, but neither can be construed as technical services nor satisfy the requirement of making available technical knowledge as commonly understood.

The respondent contended that the AAR has dealt with in detail the submissions of the petitioner regarding the definition of the term 'Fees for Technical Services' and has rightly concluded that the transactions contemplated under the CCA involve rendering services of a technical nature that fall within the scope of Article 13 of the India-UK DTAA. The petitioner is able to use the know-how and intellectual property generated from the General BSS independently of the service provider, and hence, the services have been 'made available' to the petitioner. The CCA does not contain any exhaustive description of services covered under the General BSS to be availed by the petitioner, and Appendix 2 of the CCA only gives broad headings, not specifying any information regarding the type of service being provided to the petitioner. In the absence of this information, AAR has rightly inferred the nature of services to be 'consultancy services or 'technical services'.

The court held that the AAR has interpreted the requirements to be satisfied for 'make available' based on its own general notion of the said term without appreciating the applicable law on the subject and also reached the erroneous conclusion that the services availed are technical services.

The court stated that the AAR has not dealt with the issue relating to the 'Permanent Establishment' of SIPCL and there is no determination on the same. Of course, that was not a subject of reference before AAR.

Counsel For Petitioner: Jehangir D. Mistri

Counsel For Respondent: Suresh Kumar

Case Title: Shell India Markets Private Limited Versus Union of India

Case No.: Writ Petition No. 10788 Of 2012

Click Here To Read The Order