V. K. Shridhar (Member) - (1.) THE applicant, a tax resident of Hong Kong, belongs to the X group of companies. The parent company ABC is having its headquarters in A country. The group entities are engaged in the business of inspection, verification, testing and certification (IVTC) services to various customers. The X trade mark is owned by ABC, who had entered into a trade mark license and support services agreement (support services agreement) on December 16, 2005, with all its group entities, separately, including the applicant. The agreement is effective from January 1, 2005. The support services agreement is stated to bring uniform standards, procedures and policies described therein to IVTC services. It is stated that the inspection services are generally performed either at the load port or discharge port of a product or activity and are based on scientific and internationally accepted techniques and as per the clients' requirements. Verification services are used to evaluate whether the product services are system compliant with given regulations, specifications or condition. Testing services are used to determine the quality of the product or services as per the customer's requirements and are carried out in laboratories owned by respective X entities which are accredited to international bodies. Certification services refers to the confirmation of regulations, standards or contractual specifications of a product or organization or training.
(2.) THE applicant then states that the IVTC services are provided to the Indian customer outside India if there is a direct arrangement between the customer and the applicant and the payment is made on the invoice raised by the applicant. But when the arrangement is not direct and is through X India, then the invoice is raised either on X India or the Indian customer. Explaining it by an example, the applicant states that where a customer approaches X India to have its goods inspected in India and outside India, then X India sub -contracts the inspection to its applicant outside India. The applicant raises invoice on X India for services provided by it and a consolidated invoice is raised on the customer. The following questions have been raised by the applicant for a ruling by this Authority : (1) Whether, on the facts and circumstances of the case, the payments received/receivable by the applicant in connection with transactions undertaken/proposed to be undertaken in relation to the following services are chargeable to tax in India as 'fees for technical services' 'FTS' under section 9(1)(vii)(b) of the Act? (a) inspection and verification services (refer para. A. 2.1 of annexure I); (b) testing/analysis services (refer para. A. 2.2 of annexure I); and (c) certification services (refer para. A. 2.3 of annexure I). (2) Whether, on the facts and circumstances of the case, the payments received/receivable in connection with the following costs incurred/proposed to be incurred for and on behalf of X India, are chargeable to tax in India under the provisions of the Act? (a) procurement of goods/services (refer para. B. 4.1.1 of annexure I); (b) reimbursement of out of pocket expenses incurred by the applicant for and on behalf of X India during the course of provision of services (refer para. B. 4.1.2 of annexure I); and (c) reimbursement of other expenses (refer para. B. 4.1.3 of annexure I). (3) Whether, on the facts and circumstances of the case, recovery of reasonable administrative cost incurred for and on behalf of X India as outlined in para. B. 4.2 of annexure I, be chargeable to tax in India under the Act? (4) Whether, on the facts and circumstances of the case, in case the applicant is not taxable in India for the services provided/proposed to be provided as outlined in annexure I, would X India/Indian customers be required to withhold taxes under section 195 of the Act on payments made/proposed to be made to the applicant in connection with the transactions as mentioned in the above questions and if yes, at what rate the taxes should be withheld? (5) Assuming that the applicant has no other taxable income in India, whether, on the facts and circumstances of the case, the applicant will be absolved from filing a tax return in India, under the provisions of section 139 of the Act with respect to the services outlined in annexure I?.
(3.) THE learned counsel argued that the applicant merely provides analysis reports to X India/Indian customers. By doing so, technical knowledge, experience, skill, know -how or process are not transferred. X India/Indian customers have to approach the applicant again if they require the services in future as the expertise rests with the applicant and the expertise in performing the services is not made available to X India/customer. The customers are not allowed to use the applicant's trade mark. The applicant uses its own technical, industrial, commercial or scientific knowledge, experience or skill in providing the report. In the report, the facts are stated by applying a benchmark of international standard through its personnel. Thus, the report does not impart any information in the nature of royalty as defined under section 9(1)(vi) of the Act. It is argued that the IVTC services provided by the applicant outside India to its customers are in the nature of routine commercial services rather than technical services. Rendering services by using technical knowledge or skill is different from charging fee for technical services. Providing report by conducting IVTC services is not sharing the knowledge and experience, otherwise the customer would not come back in case he needs the IVTC services, again. In support, reliance has been placed on a number of decisions of the Income -tax Appellate Tribunal Benches and of the Madras High Court (CIT) v. Aktiengesellschaft Kuhnle Kopp and Kausch : [2003] 262 ITR 513 (Mad)). Without recourse to the applicant, the knowledge and experience of the applicant cannot be used by X India/customers. The payment is not royalty under section 9(1) (vi) of the Act. It is not fees for technical services (FTS) under section 9(1)(vii) as the amount payable by a person who is a resident in India in respect of services utilized by such person for the purpose of earning any income from any source outside India is not covered under the ambit of taxability in India in view of sub -clause (b) of section 9(1)(vii) of the Act. It is the applicant's contention that the payments received are business receipts and in the absence of any business connection, the same are not taxable in India under section 5(2) read with section 9(1)(i) of the Act. 4.1 It is argued by the learned counsel that the expenses recovered by the applicant from X India are on account of procurement of goods, cost of air tickets, freight, courier charges and travelling expenditure incurred in connection with the provision of services for and on behalf of X India. No element of income is involved while these expenses are reimbursed and, hence, there is no obligation to withhold tax under section 195 of the Act.;