INSIGHT: Fees for Technical Services under India–Singapore Tax Treaty

The Indian tribunal (tribunal) dealt with the taxability of infrastructure and data center charges, management consultancy services and referral services. The payment to a nonresident for data center services that does not qualify for the use of any copyright is not characterized as a royalty for tax purposes under Indian domestic laws or under the India–Singapore tax treaty (tax treaty).

The tribunal also concluded that management consultancy services and referral fees payable to a nonresident are not taxable as fees for technical services (FTS) in the absence of “make available” conditions satisfied under the tax treaty.

Facts

Edenred Pte Ltd v. DCIT (ITA No. 1718/Mum/2014) (Edenred or taxpayer) is a registered company and a tax resident of Singapore. It is primarily engaged in the business of rendering services of developing, marketing and implementing incentive-based technology strategies for building loyalty and rewarding long-term relationships through the utilization of the internet, wireless technology and offline solutions for its clients.

Edenred also comprises of a consultancy in communication development and sourcing activities for clients focused on providing data center services, IT infrastructure management and referral services for regional clients of its Indian group entities. Data center services are broadly categorized in the nature of administration and supervision of central infrastructure, mailbox and website hosting services.

In the relevant financial year, Edenred entered into data center agreements with its Indian group entities to receive fees from their clients. Under the agreement the taxpayer rendered IT infrastructure management and mailbox/website hosting services to the clients of its Indian group entities performed by the taxpayer’s employees in Singapore for a consideration remitted towards data center service payments directly to the taxpayer’s bank account in Singapore.

Edenred received fees from the Indian group entities towards services rendered under the “Management Agreement” to support the sales activities of the Indian group entities, legal services, financial advisory services, human resource assistance, etc. The taxpayer also received fees towards referral services from the Indian group entities under the agreement entered into with its global clients interested to use customer relationship services.

The tax authorities (revenue) in the tax assessment characterized the data center service charges and the referral fees as royalty whereas management services were described as FTS for tax purposes both under the Indian domestic laws and the tax treaty. The Dispute Resolution Panel upheld the order of the revenue and Edenred filed an appeal with the Mumbai Income-tax Appellate Tribunal.

Tribunal Ruling

Data Center Services

On reviewing the documents filed before the revenue the tribunal observed that Edenred had an infrastructure data center and not an information center in Singapore.

The websites/applications/software hosted by the Indian group entities on the data center in Singapore were a web ordering application, corporate website, and websites created for clients of the taxpayer’s Indian group entities while developing a loyalty program. The taxpayer did not provide a content delivery network system under the data center service agreement without allowing access by the Indian group entities of the taxpayer’s computer system.

The tribunal analyzed that the Indian group entities merely received standard data center services from Singapore but did not use any form of software as the bandwidth and networking infrastructure used to render data center services. Also, the taxpayer did not maintain any form of central data repository capable of information analytics or data management services resulting in Edenred providing only data center services by using its hardware/security devices/personnel.

The Indian entities as an output simply receives usage of such bandwidth and network and not its use. Additionally, the consideration was for data center services and not for any specific program or development of any embedded/secret software by the taxpayer.

The tribunal, relying on numerous decisions such as Bharati Axa General Insurance Co. Ltd. [2010] 326 ITR 477 (AAR), Standard Chartered Bank v. DDIT [2011] 11 ITR(T) 721 (Mum), ExxonMobil Company India (P.) Ltd, Reliance Jio Infocomm Ltd and Intertek Testing Services Indian P Ltd,concluded that consideration received under the data center agreement was not taxable as royalty under the Indian domestic laws and under Article 12(3) of the tax treaty.

In the absence of permanent establishment in India under Article 5 of the tax treaty the data center services provided wholly from Singapore, any consideration for data center charges are not chargeable to tax in India as business profits under Article 7 of the tax treaty.

Management Service and Referral Fees

The tribunal, on review of the service arrangement, recognized that management services are taxable as FTS under the Indian domestic laws though under the tax treaty managerial, technical or consultancy services are taxable as FTS only where such service is regarded as “make available” to the service recipient. In this case, management services were provided only to support Indian group entities for efficiently undertaking business activities to be aligned with the business model, policies and best practices followed by the taxpayer.

The services did not “make available” any technical knowledge, skill, know-how or processes to its Indian group entities, hence, relying on the rationale in cases like IMT Labs (India) (P.) Ltd and Thought Buzz (P.) Ltd 346 ITR 345 (AAR) and De Beers Mineral (P.) Ltd, the tribunal concluded that the management services lacking the capability of independently replicating a similar skill or technology or technique in future without any aid or assistance of the taxpayer for similar such assignments, fees payable cannot be regarded as taxable as FTS under Article 12(4)(b) of the tax treaty.

The tribunal applying a similar analogy of the management services to the referral fees analyzed that referral services under no stretch of the imagination “make available” any technical knowledge, skill, know-how or processes to the Indian entity minus the transmission of technical knowledge, experience, skill, etc. from the taxpayer to the Indian entity or its clients. It was concluded that referral fees were not taxable as royalty or FTS under Indian domestic laws or under Article 12 of the tax treaty.

Key Takeaways

The taxability for standard charges towards simple access of an online database has been a subject of contention before multiple courts. In considering the technological services relating to the data center, it is worth noting that in the case of Atos Information Technology HK Ltd the jurisdiction tribunal confirmed that payment for providing technology services in the form of the data center, infrastructure, connectivity and application technology is not taxable under Indian domestic laws. The tribunal in this case held that infrastructure data center services are not taxable as royalty under Indian domestic laws or the tax treaty.

It is also worth referring to the case of Rackspace, US Inc. whereby the jurisdiction tribunal confirmed that the data center and the infrastructure used to provide services in absence of physical control or possession over the servers and right to operate and manage the infrastructure/servers or the specific location of the server in the data center where the customer application, web mail, websites, etc. are saved is unknown, payment for such services cannot be held as royalty under Indian domestic laws or under Article 12(3)(b) of the Indo–U.S. tax treaty.

The tribunal, also relying on the settled principle by numerous decisions relating to the “make available” concept, held that referral and management services are not taxable as FTS under the tax treaty as these services do not make available any technical knowledge, skill, know-how or processes to the Indian entity and therefore are not taxable as FTS.

The decision remains consistent with the Commentary to the OECD Model tax treaty which provides conceptual guidance that consideration towards non-exclusive and non-transferable access to the data center is not regarded as “royalty” following the rationale of non-involvement of the copyright article particularly after the amendment to the royalty definition under Indian domestic laws being broad enough to include access to the database under Indian domestic laws.

Shailendra Sharma is a chartered accountant associated with a multinational financial services firm, India.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.