Income Tax Appellate Tribunal - Mumbai
Mckinsey And Co., Inc. (Phillippines) ... vs Assistant Director Of Income Tax on 31 October, 2005
Equivalent citations: [2006]99ITD549(MUM), [2006]284ITR227(MUM), (2006)99TTJ(MUM)857
ORDER
Pramod Kumar, A.M.
1. The short issue that I am required to adjudicate in all these appeals is whether or not the CIT(A) was justified in holding that the monies received by these companies from India branch office of Mckinsey & Co. Inc. constitute "fees for included services" within the meaning of Article 12(4) of the India-US treaty, and, are accordingly liable to be taxed in India.
2. The appellant-companies are residents of the United States of America and are covered by the India-USA Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion [(1991) 187 ITR (St.) 102] referred to as 'the India-US treaty' in this order. There is no dispute about this factual position, as also the fact that the appellant-companies did not have any permanent establishment in India. The appellant-companies have rendered certain services to the Indian branch office of Mckinsey Inc. (referred to McKinsey India, in short). McKinsey Inc. is worldwide engaged in the business of providing strategic consultancy services. McKinsey India carries on this business and renders these services to its clients in India. In the course of rendering these services, McKinsey India needs some information inputs from other group companies, such as the appellant-companies before us which specialise in respect of particular geographical locations as the names of the appellant-companies also indicate and the payments are made for supply of the said information inputs. A typical example of this information requisition, as evident from copy of the e-mail placed at p. 8 of the paper book, is as follows :
Sub : Dyestuff companies Hello from Mumbai:
We are trying to put together some information on dyestuff companies. The companies that we are looking for are mid-sized companies in terms of size, i.e., excluding the top six players such as BASF, Hoechst, Bayer, Crompton, Knowles, etc. While the attached Excel sheet gives a list of such companies in various countries, this list is flexible.
In India, there is something called the manufacturers directory which gives the basic profiles of such companies. You might have a similar directory for your country or an alternate publication/database for this information. Right now, it would be sufficient if you restrict yourself to secondary source of information.
It is important that you inform me who is handling the request. Also, it would be best if you could send me the replies by Tuesday (28th October). Since I will not be in office for a week from 29th October (our time) onwards, if you send it on 29th October (your time) onwards, please send it directly to G* with a copy to me if you are sending it by e-mail. Or fax it to G* at Delhi office number (91-11-******) with a cc to me. Do give me a call at the Mumbai office (91-22-******-Ext ****) if something is unclear. The charge code is ZXE332.
The information required is as indicated below. (Please indicate the value in US $ or indicate the conversion rate).
Indicators of the size of the company
-Turnover
-Assets
-Number of employees
-Plant locations/capacities
-Exports Listed/unlisted Nature of business
-Companies could be in chain of activities; manufacturing, blending, distribution
-Combination of above Customer Profile
-Industries covered (textile, leather, paper)
-Size of customer
-Number of customer Recent mergers and acquisitions
-Tie-ups/alliances, etc., for marketing/sourcing Attachment :
Dyestuff companies - Excel sheet Thanks for your help and regards, S* (*complete names and phone number not reproduced) Some of the replies to this e-mail, copies of which were placed before us in the paper book and which throw more light on the nature of services rendered by the appellant-companies, are as follows :
Re : Dyestuff companies Hello S* & G* I have made enquiries regarding the list you sent me, with the following results :
Com union Lantaron. This factory belongs to General Quimica SA.
Mora la Nueva, This factory belongs to Manuel Villaseca SA.
Badalona. This is a town in the province of Barcelona. I called the town hall where they informed me that the only dye company in that area in Lorilleux Lefranc. This company must be very small, since it does not appear in our database; they informed me over the phone that they only make dyes for paper.
Palafolls. This town is located near Barcelona. At town hall, they gave me the only dye factory within their area of jurisdiction, Escolor. Escolor told me that they do not manufacture dyes they only dye products for the textile industry.
I am sending you information on these three companies. Please let me know if you want me to send any more.
Attachment : General Quimica, SA. xls Regards, CP* (Page 20 of paper book) Sub : Swedish dyestuff companies Attachment: dyestuff. xls Hello, In this attachment, you will find some of the information that you have asked for. We have not been able to find any answers to the more customer-oriented questions.
As you can see, the companies you specified are very small. If you find that this is not what you were looking for, please contact us again and specify more closely what kind of dyestuff you are looking for. None of the above companies includes the dying of pulp for instance.
If you have any questions regarding the material, please contact AS* in the Stockholm office since I will be out of office for the rest of the week.
Best regards, E* (Page 26 of paper book) Sub : Dyestuff companies S* Please find attached a spreadsheet containing information on the UK Dyestuff companies you listed.
In most cases, companies are reluctant to talk about capacity or production figures, or customer profiles. I asked a third party broker to call each company and only XX* were prepared to give production and capacity figures.
Hope this is useful.
Regards, R* Attachment: dyestuffZ. xls (Page 28 of the paper book) Sub : Dyestuffs Italian companies Hello, Attached you can find an Excel sheet with the companies which are in the dyestuff activity (excluding the biggest).
Please let me know the ones that you are interested in.
I will order for an AR for 1996 (hope to find them all) through a database of the chamber of commerce; the cost of each AR is more or less 30 US$.
If I do not find all the information you need, should I contact the companies directly and do a small interview ?
Please send me an e-mail as soon as possible with a specific deadline.
Regards, ET-IT/ML Attachment: dye. xls (Page 35 of the paper book) The AO's stand is that the services so rendered by the appellant-companies are covered by the scope of Article 12(4) of the India-US treaty and are accordingly liable to be taxed in India. The stand of the AO is that the services rendered by the appellants is covered by Clause (b) of Article 12(4) as the "the expression 'made available' would mean that the person providing the service merely enables the acquirer to use knowledge and the provider does not participate in the act of doing the job himself". The AO also elaborately discussed the MoU between the US and Indian Governments on the scope of the treaty provisions and concluded that the said MoU "does not in any manner restrict the scope of consultancy services". It was also the contention of the AO that in case non-technical services are not to be included in the scope of Article 12(4)(b) this clause will be rendered redundant in the sense that the scope of Article 12(3)(a) will be the same as that of Article 12(4)(a), but then "it is settled law that any construction, which renders other provisions of the statute meaningless, has to be avoided". The AO further placed on record his perception that "the distinguishing feature between Sub-article (3) and Sub-article (4) of Article 12 is that, in the former, consideration is paid to the grantor by the licensee for granting 'know-how' so that the licensee can use them for his own account and the grantor plays no part in the application of know-how/formulae granted, whereas, in the latter case, there is a provision of service which the provider of service undertakes to use the customary skills of his calling to execute work himself for the other party" and that "it is in this context that the expression "made available" has been used in Clause (b) of Sub-article (4) of Article 12 of the DTAA". "To interpret this expression in any other manner, except for the clarification given in the MoU", according to the AO, "would be doing violence to the clause". The AO also noted that the assessees have not filed complete documentary evidence/proof to ascertain the nature of services and that, "in the absence of the relevant information, reliance could be placed on the classification mentioned on TDS certificates as fees for consultancy services". It was in this backdrop that the payments so received by the assessee-companies were held to be taxable in India. Aggrieved, assessee-companies carried the matter in appeal before the CIT(A) but without any success. The CIT(A) has confirmed and approved the stand so taken by the AO. Not satisfied with the orders of the CIT(A), the assessees are in further appeal before me.
3. I have heard Shri Porus Kaka, learned counsel for the assessee, and Shri R.K. Singh, learned Departmental Representative. I have also carefully perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
4. I consider it desirable to reproduce the Article 12(4) of the India-US treaty which is as follows :
(4) For the purposes of this article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in para 3 is received; or
(b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.
5. A plain reading of the above clause makes it clear that only such technical and consultancy services are covered by Article 12(4) as either (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information referred to in Article 12(3), or (b) 'make available' technical knowledge, experience, skill, know-how, etc. It is not even Revenue's case, nor could it have been so on the facts of the situation before me, that the appellants' cases have anything to do with Article 12(3). The case of the Revenue, therefore, hinges on the applicability of Article 12(4)(b) which applies to rendering of only such technical or consultancy services as 'make available' technical knowledge, experience, skill or know-how, etc. In other words, in order to attract the taxability of an income under Article 12(4)(b), not only the payment should be in consideration for rendering of technical or consultancy services, but, in addition to the payment being consideration for rendering of technical services, the services so rendered should also be such that 'make available' technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.
6. The question then arises as to what are connotations of the expression 'make available' appearing in Article 12(4)(b) of the India-US treaty.
7. The connotations of expression 'make available' were considered by the Tribunal in the case of Raymond Ltd. v. Dy. CIT (2003) 80 TTJ (Mumbai) 120. The Tribunal, after elaborate analysis of all the related aspects, observed that "Thus, the normal, plain and grammatical meaning of the language employed, in our understanding, is that a mere rendering of services not roped in unless the person utilizing the services is able to make use of technical knowledge, etc., by himself in his business and or for his own benefit and without recourse to the performer of services, in future". In Raymond's case (supra), the Tribunal also held that rendering of technical services cannot be equated with making available the technical services. This is precisely what the authorities below have ended up doing. In the case of CESC Ltd. v. Dy. CIT (2003) 80 TTJ (Cal)(TM) 806: (2003) 87 ITD 653 (Cal)(TM) also, the question regarding the scope of expression 'making available' came up for the consideration of the Tribunal. In that case, the Tribunal was dealing with the scope of Article 13(4)(c) of the Indo-UK tax treaty which is admittedly in pan materia with Article 12(4) of the India-USA tax treaty with which I am presently concerned. The majority view was that in order to be attracted by the provisions of the said article of the tax treaty, "not only the services should be technical in nature but should be such as to result in making the technology available to person receiving the technical services in Question". The Tribunal also referred to, with approval the extracts from protocol to the Indo-US tax treaty to the effect that "generally speaking, technology will be considered 'made available', when the person acquiring the service is enabled to apply the technology'". The majority view in CESC's case (supra) was also on the same lines.
8. I now take up the specific issues raised by the AO in his order. First, the AO has drawn a distinction between the scope of Article 12(3)(a) vis-a-vis Article 12(4)(b) and based on this distinction interpretated scope of Article 12(4)(b). He has observed that "the distinguishing feature between Sub-article (3) and Sub-article (4) of Article 12 is that, in the former, consideration is paid to the grantor by the licensee for granting 'know-how' so that the licensee can use them for his own account and the grantor plays no part in the application of know-how/formulae granted, whereas, in the latter case, there is a provision of service which the provider of service undertakes to use the customary skills of his calling to execute work himself for the other party" and that "it is in this context that the expression "made available" has been used in Clause (b) of Sub-article (4) of Article 12 of the DTAA". Undoubtedly, so far as Article 12(3)(a) is concerned, grantor does not play an active role in application of know-how, copyrights and information regarding industrial commercial or scientific experience is concerned but then it is difficult to understand as to on what basis the AO comes to the conclusion that Article 12(4)(b) visualizes a situation in which "there is a provision of service which the provider of service undertakes to use the customary skills of his calling to execute work himself for the other party". The interpretation so canvassed by him is diametrically opposed to the understanding arrived at between the respective Governments entering into this tax treaty, set out in MoU concerning fees for included services in Article 12 dt. 15th May, 1989, which states that the scope of Article 12(4)(b) "excludes any service that does not make technology available to the person acquiring the service" and that "generally speaking, technology will be considered to be 'made available' when the person acquiring the service is enabled to apply the technology". I am, therefore, unable to approve the stand of the AO on this issue. His observations to the effect that "the expression 'made available' would mean that the person providing the service merely enables, the acquirer to use knowledge and the provider does not participate in the act of doing the job himself" are also, accordingly, unsustainable in law. Once an expression has received an authoritative interpretation from the authorities no less than the respective Governments which have entered into the tax treaty in which the said expression is used, there is no longer any scope of any other interpretation on any other basis. The expression 'make available' is a defined expression in the India-US treaty document itself. There is nothing before me to even remotely suggest that the expression 'made available' has been used in this context, as claimed by the AO. On the contrary, the protocol to India-US treaty is very clear that "generally speaking, technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology" and various Benches of the Tribunal have consistently taken that view of the matter. Next, the AO has laid emphasis on the wide scope of expression 'consultancy services' but then I am unable to understand as to how does it help the case of the Revenue. For the reasons I have discussed elsewhere in this order, merely because the assessee renders consultancy services in India, it can (not) be said that the 'fee for included services', within meanings of that expression under Article 12(4)(b), has arisen in India unless the consultancy services so rendered are technical in nature. The issue raised by the regarding the scope of 'consultancy services' is thus somewhat academic in the present context. Thirdly, the issue raised by the AO is that if non-technical services are to be excluded from the scope of Article 12(4)(b), the scope of Article 12(4)(b) will be rendered redundant in the sense that the scope of Article 12(3)(a) will be the same as that of Article 12(4)(a). Interestingly, as I have taken note of earlier in this order as well, the AO himself has noted, while discussing the distinction between the Article 12(3) vis-a-vis Article 12(4), that so far as scope of Article 12(3) is concerned "consideration is paid to the grantor by the licensee for granting 'know-how' so that the licensee can use them for his own account and the grantor plays no part in the application of know-how/formulae granted". The AO has thus rightly noticed that so far as Article 12(3) is concerned, the role of the assessee is non-participative or passive. In Article 12(4), the role of the assessee is participative or active, in the sense that 'rendering of services' is the basic precondition for application of Article 12(4). The scope of these two provisions are thus mutually exclusive and clearly distinct-article 12(3) deals with the consideration for granting use or right to use certain physical or intellectual properties, whereas Article 12(4) deals with rendering of managerial, technical or consultancy services under certain specific conditions. The AO is not correct in being of the view that if non-technical services are excluded from the scope of Article 12(4)(b), its scope will be the same as that of Article 12(3)(a). His observations that "it is settled law that any construction, which renders other provisions of the statute meaningless, has to be avoided" are also, therefore, irrelevant. I am, therefore, not inclined to uphold this objections raised by the AO either.
9. Having carefully perused the material on record, I find that the nature of assessee's activities is furnishing of geographical specific data and information inputs which are commercial and industrial information in nature. This fact is clear from my perusal of the copies of e-mail communications and attachments thereto, exchanged between the appellant-companies and McKinsey India. In any event, there is no material before me to suggest that the payment is for any such services which enable the recipients of these services to apply the technology. In the landmark judgment in the case of Motorola Inc. and Ors. v. Dy. CIT (2005) 96 TTJ (Del)(SB) 1, Special Bench of this Tribunal has also held that "DTAA is only an alternate tax regime and not an exemption regime" and, therefore, "the burden is first on the Revenue to show that the assessee has a taxable income under the DTAA and then the burden is on the assessee to show that its income is exempt even under the DTAA". The onus is thus on the Revenue to demonstrate that the assessee has a taxable income even under the DTAA. This onus, in my considered view, has not been discharged by the Revenue in the present case. Merely because the assessees have rendered certain consultancy services to the McKinsey India does not by itself can be reason enough to conclude that the consideration for such consultancy services is taxable in India under Article 12(4)(b) as 'fees for included services'. As for the non-technical consultancy services, as I will now point out, it is specifically agreed to between the Governments of India and the USA that such services shall not be covered by Article 12(4)(b). In the protocol note attached to and forming part of the aforesaid DTAA, Government of India has confirmed that MoU between India and USA with regard to interpretation of Article 12 (royalties and fees for included-services) also represents the views of the Indian Government. This memorandum, inter alia, provides as follows :
Article 12 includes only certain technical and consultancy services. By technical services, we mean, in this context, services requiring expertise in a technology. By consultancy services, we mean, in this context, advisory services. The categories of technical and consultancy services are to some extent overlapping because a consultancy service could also be technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in technology is required to perform it.
Under para 4, technical and consultancy services are considered included services only to the following extent : (1) as described in para 4(a), if they are ancillary and subsidiary to the application or enjoyment of a right, property or information for which a royalty payment is made; or (2) as described in para 4(b), if they make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. Thus, under para 4(b), consultancy services which are not of a technical nature cannot be included services. (emphasis, italicised in print, supplied by me now) It is thus clear that so far as the India-US tax treaty is concerned, consultancy services, which are not technical in nature, cannot be treated as 'fees for included services'. The stand taken by the Revenue, right from the assessment stage, is that the services rendered by the appellant-companies are 'consultancy services', though non-technical and for that reason the consideration for these services is taxable as 'fees for included services'. In fact, the AO specifically observes that "the fees received by the assessee in respect of the services (which are consultancy/advisory services with no technology in it) rendered fall in the category of 'fees for included services' in terms of Clause (4) of Article 12". There is an inherent contradiction in this stand. Even if the services are consultancy services but are non-technical in nature, the same cannot be held to be taxable under Article 12(4)(b) since the MoU, relevant extracts from which have been reproduced above, specifically provides that, "under para 4(b), consultancy services which are not of a technical nature cannot be included services". As I have taken note of, in the preceding paragraph, what is supplied by the appellant-companies to McKinsey India is nothing but geographical specific data and information inputs which are commercial and industrial information in nature. As to whether or not furnishing of such data and information can be considered to be 'making available' included services, example No. 7 given in the MoU throws some more light on the understanding of the Governments of India and the USA on the subject. This example is as follows :
Facts : The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol-free oil and wishes to market this product worldwide. It hires an American marketing consultancy firm to do computer simulation of the world market for such oil and to advise it on marketing strategies. Are the fees paid to the US company for included services ?
Analysis : The fees would not be for included services. The American company is providing a consultancy which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc., nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. The fact that technical skills were required by the performer of the service in order to perform the commercial information does not make the service a technical service within meanings of para (4)(b).
This example, set out in the MoU between Indian and US Governments, also makes it clear that consideration for supply of commercial and industrial information inputs cannot be treated as fees for included services under Article 12(4)(b). Having come to the conclusion that the appellant-companies have received consideration for supply of commercial and industrial information, I have to hold that the monies so received by the appellant-companies are not taxable under Article 12(4)(b). I may also add that in the case of Dy. CIT v. Boston Consulting Group (Pte) Ltd. (2005) 93 TTJ (Mumbai) 293 : (2005) 94 ITD 31 (Mumbai) and while articulating the views of the Division Bench of this Tribunal, I had observed that "...the scope of fees for technical services under Article 12(4)(b) [which is materially the same as the scope of fees for included services under Article 12(4)(b) of the India-US treaty] does not cover consultancy services unless these services are technical in nature". In coming to this conclusion, the Division Bench was guided by the MoU on the India US treaty as the provisions of the India-Singapore treaty, which the Division Bench was considering in that case, were in pan materia with the provisions of the India US "treaty. It cannot thus be open to me to make any other view of the matter when the provisions of India-US treaty itself are being considered in the present case.
10. For the reasons set out above, I am of the considered view that the CIT(A) indeed erred in holding that the monies received by the appellant-companies from McKinsey India constitute "fees for included services" within the meaning of Article 12(4) of the India-US treaty and are accordingly liable to be taxed in India. In my view, the payments in question, for the detailed reasons set out above cannot be treated as 'fees for included services'. Since the appellant-companies do not have any permanent establishment in India, the incomes so arising to them in India cannot be taxed under Article 7 as 'business profits' either. Therefore, I direct the AO to delete the impugned additions. The assessees get relief accordingly.
11. In the result, all the six appeals are allowed.