Over the last two decades, several MNCs have expanded their footprint in India by setting up wholly-owned subsidiary companies. Quite often, such Indian companies require the support of the group on matters relating to management and administration of the business. As a consequence, a management services agreement is entered into between the Indian companies and the overseas parent/group company for services such as day-to-day assistance in administrative, legal, finance, human resources and other related matters. As consideration for such services, Indian companies pay management fees outside India, the taxability of which has been a matter of intense judicial scrutiny in the recent few years.
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)