Mumbai ITAT Ruling: Managerial Services Not Taxable as FTS under India-UK DTAA

Introduction

The Mumbai Income Tax Appellate Tribunal (ITAT) held that managerial services provided by the taxpayer, a resident of the UK, are not taxable in India as they fall outside the ambit of Fees for Technical Services (FTS) as defined under Article 13 of the India-UK Double Taxation Avoidance Agreement (DTAA). This significant ruling was made in the case of ESAB Holding Limited¹ v/s DCIT, dated 24 October 2024. This ruling highlights the importance of understanding ‘make available’ clause closely in case of cross-border transactions.

Facts of the case

• ESAB Holdings Limited (Assessee), a company incorporated in the UK and a tax resident of the UK as per Article 4 of the India-UK DTAA.
• The Assessee is engaged primarily in the business of providing managerial services to its group companies. During AY 2020-21 the Assessee provided managerial services in various domains such as finance, accounting, sales, HR, IT, manufacturing, and quality assurance to EWAC Alloys Ltd. (EWAC), an Indian company. The Assessee earned revenue amounting to INR 10.98 crore from the rendering of these services to EWAC.
• The Assessee claimed that income from managerial services rendered to EWAC was not taxable in India as these services were rendered outside India and did not result in the transfer of any technical knowledge or skills to EWAC.
• Assessee did not have a Permanent Establishment (PE) in India.
• The Assessing Officer (AO) determined that services rendered by the Assessee qualified were in the nature FTS under Section 9(1)(vii) and Article 13 of the India-UK DTAA, based on the performance nexus rule, and hence would be taxable in India in the hands of the Assessee at the beneficial rate of 10%.
• Aggrieved by the order of the AO, the Assessee preferred appeal before the Commissioner of Income Tax (Appeals) (CIT(A)). After considering the facts, CIT(A) passed an order in favour of the Assessee. AO challenged the order of CIT(A) by filing an appeal with Mumbai ITAT.

Assessee’s Contention

• The services rendered were managerial in nature, aimed at standardizing and improving business operations within the group, and hence, not covered under the definition of FTS under the India-UK DTAA.
• Recipient was continuously availing the services of the Assessee rendered on a year on year and recurring basis.
• Revenue earned from rendering these services (INR 10.98 crore) was not taxable in India, since no personnel travelled to India neither any technical knowledge was made available to EWAC. The services rendered did not ‘make available’ any technical knowledge, skill, or expertise to the Recipient.
• Income from services rendered would be considered as Business Income and would not be taxable in the absence of a PE in India

Revenue’s Contention

• The services provided by the Assessee had a performance nexus with India, as they were used to benefit an Indian company (EWAC). Assessee’s claim of non-taxability under the DTAA was not valid as the services were effectively rendered in India to EWAC.
• These services were in the nature of Fees for Technical Services (FTS) as per Section 9(1)(vii) of the Income Tax Act, 1961, as well as Article 13 of the DTAA. Therefore, the income earned would be taxable in India at the beneficial rate of 10%.

References made:

• N.M. Rothchild & Sons Ltd v. DCIT
• CIT v. De Beers India (P) Ltd.
• US Technology Resources (P) Ltd v. CIT
• CIT v. Jefferies LLC
• NTT Asia Pacific Holdings Pte Ltd v. ACIT

Issues raised before the ITAT

1. Whether the managerial services rendered by the Assessee to EWAC qualified as fees for technical services and were taxable in India as per the India-UK DTAA?

Decision of the ITAT

• The ITAT observed that there was a continuous and recurring nature of services being rendered by the Assessee to EWAC, indicating that technical knowledge or skills were not transferred for independent use.
• The services provided were purely managerial in nature, and did not involve the transfer of technical knowledge, skills, or expertise. As such, they were excluded from the ambit of FTS under Article 13 of the India-UK DTAA.
• The ‘make available’ clause was not satisfied, as EWAC was not enabled to independently utilize the knowledge or skills provided by the Assessee.
• Further, the absence of a PE in India further supported the non-taxability of the business income in India.

Consequently, the ITAT confirmed that CIT(A) was correct in passing an order in the favor of the Assessee as services performed were managerial and advisory in nature, and hence outside the ambit of FTS under Article 13 of the India-UK DTAA. Even if considered FTS the services do not “make available” technical knowledge, skills or processes to enable EWAC to independently use them.

Conclusion

This ruling by the ITAT provides clarity on the tax treatment for cross-border managerial services rendered by a UK based company to a company based out of India. It reinforces the principle that managerial services, which do not involve the transfer of technical knowledge or expertise, are not taxable as Fees for Technical Services under the India-UK DTAA. Taxpayers engaging in similar arrangements can draw comfort from this judgment, provided their services do not meet the ‘make available’ criteria as per the India-UK DTAA.

¹ https://itat.gov.in/public/files/upload/1730871866-RuUGeB-1-TO.pdf