$~26
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ W.P.(C) 4793/2014 & CM APPL. 9551/2014
STERIA (INDIA) LTD. ..... Petitioner
Through: Mr. S. Ganesh, Sr. Advocate with Mr. S.
Sukumaran, Mr Anand Sukumar and Mr. Bhupesh
Kumar Pathak, Advocates.
versus
COMMISSIONER OF INCOME TAX-VI & ANR. ..... Respondents
Through: Mr. Rahul Chaudhary, Sr. Standing
Counsel and Mr. Raghvendra Kishore, Advocate.
CORAM:
JUSTICE S.MURALIDHAR
JUSTICE NAJMI WAZIRI
ORDER
% 28.07.2016
Dr. S. Muralidhar, J.:
1. The challenge in this petition is to the order dated 2 nd May, 2014 passed
by the Authority for Advance Rulings (Income Tax) (,,AAR) in A.A.R. No.
1055 of 2011 and to the consequential orders dated 21 st November, 2014
under Section 201(1) and 201(1A) of the Income Tax Act, 1961 (,,Act).
2. The facts in brief, are that the Petitioner Steria (India) Limited (,,SIL) is
a public limited company registered in India providing IT driven services for
its clients' core businesses. It is stated that the Petitioner is assessed to tax as
a resident in India. Groupe Steria SCA (,,Steria France) is a non-resident
company incorporated in France as a limited liability partnership. It is stated
that Steria France centralizes technical skills for carrying on management
W.P.(C) 4793/2014 Page 1 of 12
functions such as legal finance, human resources, communication risk
control, information systems, controlling and consolidation, delivery and
industrialization, technology and management information services. It is
also stated that the Steria France does not have any office presence or
personnel in India and that it does not have a Permanent Establishment
(,,PE) in India as defined in the Double Taxation Avoidance Agreement
(,,DTAA) between the India and France entered into on 29 th September,
1992.
3. A Management Service Agreement was entered into on 1 st January, 2009
between the Petitioner and Steria France. Under the said agreement, Steria
France was to provide various management services to the Petitioner with a
view to rationalise and standardise the business conducted by the Petitioner
in India. Services under the broad category of General Management Services
included Corporate Communication Services, Group Marketing Services,
Development Services, Information System and Services, Legal Services,
Human Relation Services etc. It is stated that these services are provided by
Steria France through telephone, fax, e-mail etc. and no personnel of Steria
France visited India for providing such services.
4. An application was filed by the Petitioner before the AAR under Section
245Q(1) of the Act seeking a ruling on the following questions:
(i) On the facts and circumstances of the case whether the payment
made by Steria (India) for the management services provided by
Steria France will not be taxable in India in the hands of Steria France
as per the provisions of the DTAA entered into between India and
France?
W.P.(C) 4793/2014 Page 2 of 12
(ii) On the facts and circumstances of the case, if the consideration for
management services is not subject to tax in the hands of Steria
France in India, whether Steria India will be liable to withhold tax as
per the provisions of Section 195 of the Act from the payments made/
to be made to Steria France under the Management Services
Agreement?
5. In support of the above application, the Petitioner placed reliance on the
provisions of the DTAA including a "Protocol" executed by India and
France which formed part of the DTAA.
6. It is not in dispute that another DTAA was entered into between India
and United Kingdom (,,UK) in which the scope and ambit of the term
,,fees for technical services was more restrictive than the India- France
DTAA in two important aspects:
i. The India-France DTAA included fees for managerial
services in "Fees for Technical Services", whereas, in
contrast, the India-UK DTAA expressly excludes fees for
managerial services from "Fees for Technical Services".
ii. The India-UK DTAA contained a - "make available"
clause, for a service to constitute "technical service" i.e.
that the provider of the service, must "make available"
technical knowledge, experience, skill, know how or
processes to the persons to whom the service is rendered,
or must have developed and transferred a technical plan or
technical design to the person to whom the service is
rendered. In contrast, the India-France DTAA did not
incorporate any such "make available" requirement or
criterion and, therefore, ambit of the term "Fees for
Technical Services" is much more restricted in the India-
UK DTAA as compared to the India-France DTAA.
7. Before the AAR, the Petitioner contended that having regard to Clause
W.P.(C) 4793/2014 Page 3 of 12
7 of the ,,Protocol the less restrictive definition of the expression ,,fees
for technical services appearing in the Indo-UK DTAA, must be read as
forming part of the India- France DTAA as well. The AAR, by the
impugned order, disagreed with the Petitioner. It ruled that the Protocol
could not be treated as forming part of the DTAA itself. It further held
that restrictions imposed by the Protocol were only to limit the taxation at
source for the specific items mentioned therein. The restriction was only
on the rates. Further, the ,,make available clause found in the Indo -UK
DTAA could not be read into the expression ,,fee for technical services
occurring in the India-French DTAA unless there was a notification
under Section 90 of the Act issued by the Central Government to
incorporate the less restrictive provisions of the Indo-UK DTAA into the
India-France DTAA. In other words, the plea of the Petitioner that
Clause 7 of the Protocol did not require any separate notification and
could straightway be operationalised was not accepted by the AAR.
8. Consequent on the above ruling of the AAR orders under Section
201(1) and 201(1A) were passed against the Petitioner which have been
challenged by the Petitioner by amending the writ petition.
9. The submissions of Mr. S. Ganesh, learned Senior Counsel appearing
for the Petitioner and Mr. Rahul Chaudhary, learned Counsel for the
Revenue, have been heard.
10. At the outset, the Court would like to refer to the definition of ,,fee for
technical services occurring in the DTAA between India and France
W.P.(C) 4793/2014 Page 4 of 12
which reads as under:
"ARTICLE 13- Royalties and fees for technical services
and payments for the use of equipment
**** **** ****
(4) The term "fees for technical services" as used in this
Article means payments of any kind t o any person, other
than payments to an employee of the person making the
payments and to any individual for independent personal
services mentioned in Article 15, in consideration for
services of a managerial, technical or consultancy nature"
11. The corresponding provision in the DTAA between the India and the
UK reads as under:
"ARTICLE 13- Royalties and fees for technical services-
**** **** ****
4. For the purposes of paragraph 2 of this Article, and
subject to paragraph 5, of this Article, the term "fees for
technical services" means repayments of any kind of any
person in consideration for the rendering of any technical
or consultancy services (including the provision of services
of a technical or other personnel) which:
(a) are ancillary and subsidiary to the application or
enjoyment of the right, property or information for
which a payment described in paragraph 3(a) of this
article is received; or
(b) are ancillary and subsidiary to the enjoyment of the
property for which a payment described in paragraph
3(b) of this Article is received; or
(c) make available technical knowledge, experience,
skill know-how or processes, or consist of the
development and transfer of a technical plan or
technical design.
W.P.(C) 4793/2014 Page 5 of 12
5. The definition of fees for technical services in paragraph
4 of this Article shall not include amounts paid:
(a) for services that are ancillary and subsidiary, as well
as inextricably and essentially linked, to the sale of
property, other than property described in paragraph
3(a) of this Article;
(b) for services that are ancillary and subsidiary to the
rental of ships, aircraft, containers or other equipment
used in connection with the operation of ships, or
aircraft in international traffic;
(c) for teaching in or by educational institutions;
(d) for services for the private use of the individual or
individuals making the payment; or
(e) to an employee of the person making the payments
or to any individual or partnership for professional
services as defined in Article 15 (independent personal
services) of this Contention"
12. At this juncture, it is necessary to refer to Clause 7 of the Protocol
executed separately between India and France which forms part of the
DTAA. Clause 7 thereof which is relevant for the present purposes reads as
under:
"At the time of proceeding to the signature of the
Convention between France and India for the avoidance of
double taxation with respect to taxes on income and on
capital, the undersigned have agreed on the following
provisions which shall form an integral part of the
Convention.
.......
7. In respect of articles 11 (Dividends), 12 (Interest) and
13 (Royalties, fees for technical services and payments for
W.P.(C) 4793/2014 Page 6 of 12
the use of equipment), if under any Convention,
Agreement or Protocol signed after 1-9-1989 between
India and a third State which is a member of the OECD,
India limits its taxation at source on dividends, interest,
royalties, fees for technical services or payments for the
use of equipment to a rate lower or a scope more
restricted than the rate of scope provided for in this
Convention on the said items of income, the same rate or
scope as provided for in that Convention Agreement or
Protocol on the said items income shall also apply under
this Convention, with effect from the date on which the
present Convention or the relevant Indian Convention,
Agreement or Protocol enters into force, whichever enters
into force later."
13. What is immediately apparent on a plain reading of Clause 7 is that it
applies in respect of three different kinds of payments i.e. dividend under
Article 11, interest in Article 12 and Royalties, Fees for Technical Services
and payments for use of equipments under Article 13. In respect of any of
the above payments, if any convention agreement or protocol is signed
between India and a OECD member State under which India limits its
taxation at source on the above "to a rate lower or a scope more restricted
than the rate of scope provided for in this Convention on the said items or
income, the same rate or scope as provided for in that Convention,
agreement or Protocol on the said items income shall also apply under this
Convention, with effect from the date on which the present Convention,
Agreement or Protocol enters into force, whichever enters into force later".
14. An attempt has been made by Mr. Rahul Chaudhary, learned Counsel
for the Revenue, to urge that if a reference is made to one Convention
signed after 1st September, 1989 between India and another OECD member
W.P.(C) 4793/2014 Page 7 of 12
State for the purposes of ascertaining if it had a more restrictive scope or a
lower rate of tax, then that Convention alone has to be referred to for both
purposes. He submitted that in certain Conventions where the tax base was
restricted the rate of tax would be higher and vice-versa i.e. where the tax
base is larger the rate of tax would be lower. In other words, he contended
that it is not permissible for the Petitioner, in terms of Clause 7 of the
Protocol, to rely upon one Convention between India and an OECD member
State for the purposes of taking advantage of a lower rate of tax and then
refer to another Contention between India and another OECD member State
to take advantage of a more restricted scope.
15. The Court finds no warrant for the above restrictive interpretation
placed on Clause 7 of the Protocol. The words "a rate lower or a scope more
restricted" occurring therein envisages that there could be a benefit on either
score i.e. a lower rate or more restricted scope. One does not exclude the
other. The other expression used is "if under any Convention, Agreement or
Protocol signed after 1-9-1989 between India and a third State which is a
member of the OECD". This also indicates that the benefit could accrue in
terms of lower rate or a more restrictive scope under more than one
Convention which may be signed after 1st September 1989 between India
and a State which is an OECD member. The purpose of Clause 7 of the
Protocol is to afford to a party to the Indo-France Convention the most
beneficial of the provisions that may be available in another Convention
between India and another OECD country.
16. The AAR appears to have failed to notice that the wording of Clause 7
W.P.(C) 4793/2014 Page 8 of 12
of the Protocol makes it self-operational. It is not in dispute that the India-
France DTAA was itself notified by the Central Government by issuing a
notification under Section 90 of the Act. It is also not in dispute the separate
Protocol signed between India and France simultaneously forms an integral
part of the Convention itself. The preamble in the Protocol, which states
"the undersigned have agreed on the following provisions which shall form
an integral part of the Convention", makes this position clear. Once the
DTAA has itself been notified, and contains the Protocol including para 7
thereof, there is no need for the Protocol itself to be separately notified or
for the beneficial provisions in some other Convention between India and
another OECD country to be separately notified to form part of the Indo-
France DTAA.
17. Reliance is rightly placed by the Petitioner on the following passage at
page 32 in the commentary by Klaus Vogel on "Double Taxation
Conventions":
"As previously mentioned, (final) protocols and in some
cases other completing documents are frequently attached to
treaties. Such documents elaborate and complete the text of a
treaty, sometimes even altering the text. Legally they are
part of the treaty, and their binding force is equal to that of
the principal treaty text. When applying a tax treaty,
therefore, it is necessary carefully to examine these additional
documents"
18. The Court is, therefore, unable to agree with the conclusion of the AAR
that the Clause 7 of the Protocol, which forms part of the DTAA between
India and France, does not automatically become applicable and that there
has to be a separate notification incorporating the beneficial provisions of
W.P.(C) 4793/2014 Page 9 of 12
the DTAA between India and UK as forming part of the India- France
DTAA.
19. The next question that arises is concerning to extent to which the benefit
under the India-UK DTAA can be made available to the Petitioner. As
already noticed, the definition of "fee for technical services" occurring in
Article 13(4) of the Indo-UK DTAA clearly excludes managerial services.
What is being provided by Steria France to the Petitioner in terms of the
Management Services Agreement is managerial services. It is plain that
once the expression 'managerial services' is outside the ambit of ,,fee for
technical services, then the question of the Petitioner having to deduct tax
at source from payment for the managerial services, would not arise. It is,
therefore, not necessary for the Court to further examine the second part of
the definition, viz., whether any of the services envisaged under Article
13(4) of the Indo-UK DTAA are "made available" to the Petitioner by the
DTAA with France.
20. Mr Ganesh, learned Senior Counsel made a reference to the decision of
the ITAT in DCIT v. ITC Ltd. (2002) 82 ITD 239 (ITAT Kolkata), where
the Protocol separately executed between the India and France which
formed part of the DTAA between the two countries was interpreted. It was
held by the ITAT, and in the view of this Court correctly, that the benefit of
the lower rate or restricted scope of fee for technical services under the
Indo-French DTAA was not dependent on any further action by the
respective governments. It was held that the more restricted scope of fee for
technical services as provided for in a DTAA entered into by India with
W.P.(C) 4793/2014 Page 10 of 12
another OECD member country shall also apply under the Indo-French
DTAA with effect from the date on which the Indo-French DTAA or such
other DTAA enters into force.
21. It has been contended by Mr. Chaudhary that the question as to the
exact nature of the services provided by the Petitioner under the
Management Services Agreement has not yet been examined by the AAR.
It is further pointed out that the contention raised regarding Steria France
having a PE in India and its income being taxable under Article 7 of the
DTAA has not been addressed.
22. As rightly pointed out by Mr Ganesh, the question whether Steria France
has a PE would arise only if it is the case of the Revenue that Steria France
earns any business income in India. That is not even the case of the
Revenue. The case projected is that what has been paid by the Petitioner to
Steria France partakes the character of "fee for technical services".
Therefore, the question whether Steria France has a PE in India and whether
its business income is taxable under Article 7 of the DTAA , does not arise.
23. As regards the nature of the service being provided under the
Management Services Agreement, again the Court is unable to find any case
made out by the Revenue before the AAR that what was provided was
anything other than the managerial service which in any event stands
excluded in the definition of the "fees for technical services" under the Indo -
UK DTAA. Consequently, this question also does not survive for
consideration.
W.P.(C) 4793/2014 Page 11 of 12
24. For all of the above reasons, this Court finds that the impugned order
dated 2nd May, 2014 of the AAR holding that the payment made by the
Petitioner for the managerial services provided by Steria France should be
treated as fee for technical services in respect of which tax had to be
withheld under Section 195 of the Act, is unsustainable in law. The
questions posed by the Petitioner before the AAR are accordingly answered
as under:
(i) The payment made by the Petitioner to Steria France for the
managerial services provided by the latter cannot be taxed as fee for
technical services; and
(ii) The said payments are not liable to withholding of tax under
Section 195 of the Act.
25. Consequently, the further orders passed on 21 st November, 2014 against
the Petitioner under Sections 201(1) and 201(1)(1A) of the Act are hereby
set aside.
26. The writ petition is allowed and the application is disposed of in the
above terms. In the circumstances, there shall be no order as to costs.
S.MURALIDHAR, J
NAJMI WAZIRI, J
JULY 28, 2016/kk
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