First, from an Indian transfer pricing standpoint, the revenue authorities expect the Indian companies to demonstrate the benefit which is derived from this payment along with suitable documentary evidence for such benefit. In the absence of such demonstration, the eligibility of management fees can be questioned in the transfer pricing assessments. However, even if benefits are derived and demonstrated, the taxability of management fees in India in the hands of the recipient foreign company and the consequent withholding tax obligation of the Indian company needs to be examined independently.
Under the provisions of the Income Tax Act, in most cases, the management fee payments are treated as Fees for Technical Services (FTS)a term which is defined widely to include managerial, consultancy or technical services. However, complexities arise when the foreign company is from a country with which India has signed a tax treaty. In such cases, the taxability or otherwise of such payments need to be examined under the tax treaty provisions as well. Interestingly, India has agreed to a rather restrictive definition of FTS in its tax treaty with certain countries like the US, the UK, Singapore, Netherlands, etc, in as much as the services can be treated as FTS under the tax treaty only if they make available technical knowledge, skill, know-how, etc. This restrictive phrase of make available has, in turn, been interpreted by several courts in India in the context of management fee payments.
Certain recent rulings of the Authority for Advance Rulings (AAR) as well as from the Cochin Tribunal have held that services which involve providing technological inputs, passing on of special knowledge, expertise or experience would satisfy the make available test as in such cases, the Indian company is in a position to utilise knowledge or know-how. In fact, the Cochin Tribunal on the facts of that case observed that managerial services can be technical in nature when such services assisted the Indian company to take decisions towards achievement of desired objectives and business goals. In one of the judgments, the Bangalore Tribunal held that the term make available refers only to the willingness of service provider and does not refer to the acceptance by the service recipient. In these cases, the courts have therefore concluded that management fee payments are also FTS under the tax treaties with India despite the restrictive definition and hence, taxable in India in the hands of the foreign company.
In another set of decisions, the AAR as well as Tribunals have taken a contrary view (i.e., in favour of the taxpayer) and have held that the taxability of such services is a mixed question of law and fact. The Courts have held that the services offered may be due to intense technical effort and, a lot of technical knowledge and experience of the foreign service provider may have gone into it but that is not enough to fall within the description of services that make available technical knowledge, etc. For the services to be taxable as FTS, the services should result in transmitting the knowledge to the service recipient in such a way that the service recipient is able to apply the technology himself in future without the aid of the service provider. In one case, while dealing with information technology support services, the Pune Tribunal held that, though these services are technical in nature, they did not result in making available or transferring technical knowledge to the service recipient. Interestingly, in a couple of recent decisions, the Mumbai and Ahmedabad Tribunals have held that even training services cannot be regarded as FTS under the India-US and India-UK tax treaties since training did not involve transfer of technology which is a pre-condition for treating the service as FTS.
Clearly, the position regarding management fee taxability in India is far from settled and the Indian judiciary seems to be divided in its views on the subject. Undoubtedly, a lot also depends on the precise nature of services and the definition of FTS under the particular tax treaty. Given these complexities, taxpayers are advised to carefully formulate their intra-group service arrangements not only considering the overall objectives of the group but also the ratio laid down by the Indian courts under various situations.
With inputs from Rakesh Jain, senior manager, PwC India
The author is executive directorDirect Tax, PwC India