Facts
AREVA T&D India Ltd. („the Applicant‟) is a subsidiary of AREVA T&D SAS, France (Areva France) and both are engaged in design, engineering, manufacturing and supply of electric equipment that help in transmission and distribution of power, commissioning and servicing of transmission and distribution system on turnkey basis.
Areva France proposed to enter into an Information Technology Sharing Services Agreement (IT Agreement) with the applicant in order to provide support services in the area of information technology,
such as Wide Area Network (WAN), Lotus Notes (LN), License User Rights and Application Support. These services will be provided across the world to its various group companies from France.
Under the IT Agreement, the services could be provided by any Areva group company or a third party service provider. The applicant also placed on records one such agreement entered into between Areva France and France Telecom SAA.
Under the agreement, the amounts payable by the applicant were to be determined based on various costs incurred viz. service provider‟s invoices, indirect cost based on IP Bandwidth, license user rights and including the cost of personnel, travel and equipment related to the services.
Issues before the Authority for Advance Rulings (‘AAR’)
Whether payments to be made by the Applicant to Areva France for services rendered under the proposed IT Agreement are taxable as „Royalty‟ or as „FTS‟ under the Income Tax Act 1961 (Act) and under the provisions of the India-France DTAA ? And if taxable, what will be the applicable rate of withholding under section 195 of the Act?
Whether the amounts payable to Areva France as reimbursement of costs could be considered as outside the purview of tax?
Observations and Ruling of the AAR
The service agreement between Areva France and France Telecom was not relevant as there is nothing on record to show that any services have been rendered under this agreement in India.
The preamble to the IT Agreement states that the Areva France has the capacity and the resources to provide and co-ordinate IT Services to the Applicant. However, there is nothing on record from which it could be inferred that the transaction was in the nature of reimbursement of costs.
The complete factual details of the proposed transaction have not been provided by the Applicant. Under the IT agreement, there is a vague description of services. For providing services in relation to WAN and Lotus Notes, certain hardware would be utilized. The WAN costs include costs for local loop rental and payments to be made by the applicant include the cost for depreciation and maintenance of hardware.
Thus, while charges for services would include depreciation cost, the nature of equipment and to what extent it would be to be used had not been mentioned by the Applicant. Hence, it was being presumed that Areva France may either own the equipment or hire the equipment but the same will be under exclusive control of the French company.
Para 17 of Organisation for Economic Co-operation and Development („OECD‟) Model commentary lays down that a Permanent Establishment (PE) may exist if the business of the enterprise is carried on mainly through automatic equipment and the activities of the personnel are restricted to setting up, operating, controlling and maintaining such equipment. Further, under the „Power of Disposition‟ test, as per the UN Commentary (2001), it was seen that as there would be no contractual relation between the Applicant and other service provider, all equipment under the IT Agreement, whether owned or hired by Areva France, will be at the disposal of Areva France.
Accordingly Areva France would constitute a PE in India under the proposed IT agreement and so much of the profits as is attributable to the PE would be taxable in India.
Areva France was to provide support services through a central team in the area of Information Technology to the Applicant and its worldwide subsidiaries. Thus information technology relating to design, engineering, manufacturing and supply of electric equipment that help in transmission and distribution of power, commissioning and servicing of transmission and distribution system being provided by Areva France, would be applied by the Applicant in running its business. The employees of the Applicant would get equipped to carry on these systems on their own without reference to Areva France when the IT agreement would come to an end. In this respect, the expression „make available‟ only means that the recipient of the service should be in a position to derive an enduring benefit and be in a position to utilize the knowledge or know-how in future on his own. Thus the provision of support services by Areva France could be considered as being „made available‟ the technical knowledge and experience to the Applicant and that the same would qualify as FTS under India-France DTAA.
The services provided under the IT agreement were in the nature of FTS and taxable under the DTAA as well as under the Act. Since, the Applicant had a PE in India; the income by way of FTS would be taxed in India under the provisions of section 44DA of the Act.
Conclusion
The existence of equipment in India, utilized to provide IT services by Areva France to its Indian subsidiary, such equipment being at the disposal of the overseas company would create a PE of the overseas company in India.
The provision of IT services would qualify as FTS and such services „make available‟ to the recipient the technical knowledge/experience and would be liable to tax under section 44DA of the Act.
Source: AREVA T&D India Limited (A.A.R. No.876 of 2010), order dated 7 February 2012
AREVA T&D India Ltd. („the Applicant‟) is a subsidiary of AREVA T&D SAS, France (Areva France) and both are engaged in design, engineering, manufacturing and supply of electric equipment that help in transmission and distribution of power, commissioning and servicing of transmission and distribution system on turnkey basis.
Areva France proposed to enter into an Information Technology Sharing Services Agreement (IT Agreement) with the applicant in order to provide support services in the area of information technology,
such as Wide Area Network (WAN), Lotus Notes (LN), License User Rights and Application Support. These services will be provided across the world to its various group companies from France.
Under the IT Agreement, the services could be provided by any Areva group company or a third party service provider. The applicant also placed on records one such agreement entered into between Areva France and France Telecom SAA.
Under the agreement, the amounts payable by the applicant were to be determined based on various costs incurred viz. service provider‟s invoices, indirect cost based on IP Bandwidth, license user rights and including the cost of personnel, travel and equipment related to the services.
Issues before the Authority for Advance Rulings (‘AAR’)
Whether payments to be made by the Applicant to Areva France for services rendered under the proposed IT Agreement are taxable as „Royalty‟ or as „FTS‟ under the Income Tax Act 1961 (Act) and under the provisions of the India-France DTAA ? And if taxable, what will be the applicable rate of withholding under section 195 of the Act?
Whether the amounts payable to Areva France as reimbursement of costs could be considered as outside the purview of tax?
Observations and Ruling of the AAR
The service agreement between Areva France and France Telecom was not relevant as there is nothing on record to show that any services have been rendered under this agreement in India.
The preamble to the IT Agreement states that the Areva France has the capacity and the resources to provide and co-ordinate IT Services to the Applicant. However, there is nothing on record from which it could be inferred that the transaction was in the nature of reimbursement of costs.
The complete factual details of the proposed transaction have not been provided by the Applicant. Under the IT agreement, there is a vague description of services. For providing services in relation to WAN and Lotus Notes, certain hardware would be utilized. The WAN costs include costs for local loop rental and payments to be made by the applicant include the cost for depreciation and maintenance of hardware.
Thus, while charges for services would include depreciation cost, the nature of equipment and to what extent it would be to be used had not been mentioned by the Applicant. Hence, it was being presumed that Areva France may either own the equipment or hire the equipment but the same will be under exclusive control of the French company.
Para 17 of Organisation for Economic Co-operation and Development („OECD‟) Model commentary lays down that a Permanent Establishment (PE) may exist if the business of the enterprise is carried on mainly through automatic equipment and the activities of the personnel are restricted to setting up, operating, controlling and maintaining such equipment. Further, under the „Power of Disposition‟ test, as per the UN Commentary (2001), it was seen that as there would be no contractual relation between the Applicant and other service provider, all equipment under the IT Agreement, whether owned or hired by Areva France, will be at the disposal of Areva France.
Accordingly Areva France would constitute a PE in India under the proposed IT agreement and so much of the profits as is attributable to the PE would be taxable in India.
Areva France was to provide support services through a central team in the area of Information Technology to the Applicant and its worldwide subsidiaries. Thus information technology relating to design, engineering, manufacturing and supply of electric equipment that help in transmission and distribution of power, commissioning and servicing of transmission and distribution system being provided by Areva France, would be applied by the Applicant in running its business. The employees of the Applicant would get equipped to carry on these systems on their own without reference to Areva France when the IT agreement would come to an end. In this respect, the expression „make available‟ only means that the recipient of the service should be in a position to derive an enduring benefit and be in a position to utilize the knowledge or know-how in future on his own. Thus the provision of support services by Areva France could be considered as being „made available‟ the technical knowledge and experience to the Applicant and that the same would qualify as FTS under India-France DTAA.
The services provided under the IT agreement were in the nature of FTS and taxable under the DTAA as well as under the Act. Since, the Applicant had a PE in India; the income by way of FTS would be taxed in India under the provisions of section 44DA of the Act.
Conclusion
The existence of equipment in India, utilized to provide IT services by Areva France to its Indian subsidiary, such equipment being at the disposal of the overseas company would create a PE of the overseas company in India.
The provision of IT services would qualify as FTS and such services „make available‟ to the recipient the technical knowledge/experience and would be liable to tax under section 44DA of the Act.
Source: AREVA T&D India Limited (A.A.R. No.876 of 2010), order dated 7 February 2012
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