N.M. ROTHSCHILD & SONS LIMITED ,LONDON vs. DCIT, CIRCLE INT. TAXATION 2(2)(2), NEW DELHI

Captioned appeals have been filed by the assessee

challenging the final assessment orders passed under section

ITA Nos.517 & 1382/Del/2022 AYs: 2018-19 & 2019-20

143(3) read with section 144C(13) of the Income-tax Act, 1961 (in

short ‘the Act’) pertaining to assessment years 2018-19 and 2019-

20, in pursuance to the directions of learned Dispute Resolution

Panel (DRP).

taxability of certain receipts earned by the assessee as Fees for

Technical Services (FTS) under Article 13 of India – United

Kingdom (UK) Double Taxation Avoidance Agreement (DTAA).

Briefly the facts, more or less, common in both the assessment

years are the assessee is a non-resident corporate entity and a tax

resident of UK. While verifying the return of income filed by the

assessee for the impugned assessment year, the Assessing Officer

noticed that, though, the assessee had received an amount of

Rs.1,54,35,120/- and Rs.2,45,19,751/- for the assessment years

2018-19 and 2019-20 respectively, however, he has not offered

them to tax. On further verification of facts, he found that the

aforesaid amounts were received by the assessee towards

rendition of services pertaining to human resources, finance, legal

and compliance and conducting of internal audit assurance work

to its associated enterprise, viz., Rothschild & Co. India Pvt. Ltd.

(Rothschild). Being of the view that such receipts are in the 2 | P a g e

ITA Nos.517 & 1382/Del/2022 AYs: 2018-19 & 2019-20

nature of FTS under Article 13 of India – UK DTAA, the Assessing

Officer called upon the assessee to explain, why the receipts

should not be brought to tax in India. In reply to the show-cause

notice, the assessee submitted that the services rendered do not

qualify as FTS, since they are neither technical, nor consultancy

services. Further, the assessee submitted that as per Article

13(4)(c) of the India – UK DTAA to qualify as FTS, the services

rendered must make available technical know-how, knowledge,

skill etc. to the service recipient. After verifying the nature of

services rendered by the assessee, the Assessing Officer observed

that some of the services rendered by the assessee to the India AE

are in the nature of FTS. Such services are as under:

i. Assistance in relation to Human Resource Management

(HRM)

ii. Assistance in relation to Accounting

iii. Assistance in Tax and Legal Support

technical or consultancy services in terms of Article 13(4) of India

– UK DTAA, the Assessing Officer brought them to tax on gross

basis by applying the rate of 10%. Accordingly, he framed the

draft assessment orders. Against the draft assessment orders, the 3 | P a g e

ITA Nos.517 & 1382/Del/2022 AYs: 2018-19 & 2019-20

assessee raised objections before learned DRP. Learned DRP

disposed of assessee’s objections in cryptic and unreasoned

manner by upholding the decision of the Assessing Officer.

assessee drew our attention to the group service agreement

entered with the Indian AE, under which certain services were

rendered on cost sharing basis. He submitted, the services

rendered under the group services agreement are standard

services and all participating companies in the group shared the

cost. Drawing our attention to Article 13(4) of India – UK DTAA,

learned counsel submitted, the services of the nature of technical

or consultancy can be treated as FTS. He submitted, the services

rendered by the assessee to the Indian AE can neither fall in the

category of technical or consultancy services. He submitted, even

assuming that services rendered may fall in the category of

consultancy services, however, as per Article 13(4)(c) of the

Treaty, such services must make available the technical

knowledge, know-how, skill etc. to the service recipient to make it

FTS under the treaty provisions. He submitted, while rendering

services, the assessee has not made available any technical

knowledge, know-how, skill etc. to Indian AE. Therefore, the 4 | P a g e

ITA Nos.517 & 1382/Del/2022 AYs: 2018-19 & 2019-20

receipts from rendition of services cannot be treated as FTS. He

submitted, the term ‘make available’, though, is not defined in

India – UK DTAA, however, it has been explained in Memorandum

of Understanding (MoU) between India and USA under India –

USA DTAA as well as various judicial precedents. In this regard,

he drew our attention to the explanation of the term ‘make

available’ in the MoU to India – USA DTAA. Thus, he submitted,

Revenue has failed to establish fulfillment of ‘make available’

condition, hence, receipts cannot be treated as FTS under India –

UK DTAA. In support of such contention, learned counsel relied

upon the following decisions:

Officer and learned Departmental Representative as well as the

nature of services rendered under the group services agreement,

learned Departmental Representative submitted that the services

rendered by the assessee are not routine day to day services. He

submitted, the services have been rendered remotely through 5 | P a g e

ITA Nos.517 & 1382/Del/2022 AYs: 2018-19 & 2019-20

technical process. He submitted, the nature of services rendered

will also fall in the category of technical or consultancy services.

He submitted, merely because services rendered are part of

intragroup services, they cannot be excluded from the purview of

FTS as the nature of services rendered has to be looked into.

condition is not satisfied, learned Departmental Representative

submitted, the nature of service rendered clearly establishes that

while rendering such services the assessee has issued necessary

guidance to the India AE regarding the mode and manner of

certain activities to be carried out. Thus, essentially, the assessee

has made available the technical, knowledge, know-how, skill etc.

to enable the Indian AE to perform such services indepentedly.

Thus, he submitted, the receipts are taxable as FTS.

decisions relied upon and perused the materials on record.

Undisputedly, the assessee has entered into intragroup services

agreement with various group entities, including the Indian AE. In

terms with the group services agreement, the assessee renders

following services:

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� Human resourcemanagement: NMR manages payroll processes, recruitment, performancemanagement, pensions, learning and development for operating entities including Rothschild India; � Internal Audit: NMR is responsible for conduct of global internal audit assurance programme; � Corporate events: NMR manages corporate events, memberships, sponsorships and hospitality functions in order to perform event management services at a centralized level; � Group Finance: NMR is responsible for management reporting (including forecasts, planning and budgeting), financial reporting and capital planning. These include balance sheet reporting, funding, liquidity and regulatory issues, P&L reporting, covering actual results, forecasts and budgets, with the focus on divisional performance; � Global Finance: NMR produces global management information for financial advisory business of the Group. It provides decision support for the management and co-ordinates global fee sharing, global expense policies and pipeline reporting; � Legal and compliance: NMR provides legal and regulatory advice in terms of monitoring of compliance with legal and regulatory matters. It includes liaisoning with regulators, new client acceptance and name protection/trademarks. It also provides services to implement compliance rules within the Group and assist local teams to be compliant. � Global Planning: Under this, NMR supports management committees annual planning process; � Marketing: NMR provides support for collating credentials for marketing to clients, which includes league tables, tombstones, deal announcements, regional performance slides, preparation of marketing materials such as global divisional, sector and product brochures and flyers, crisis management etc. 8. The cost incurred by the assessee for performing this

services are allocated to the group companies, including the India

AE on the basis of applicable allocation keys, such as, time spent,

activity level or head count. The costs incurred are cross charged

to the group companies on cost plus 5% basis. The short issue

arising for consideration is, whether the amount received by the

assessee through cost recharge from Indian AE is in the nature

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ITA Nos.517 & 1382/Del/2022 AYs: 2018-19 & 2019-20

of FTS under Article 13(4) of India – UK DTAA. Before we proceed

to decide this issue, it is necessary to look into the definition of

FTS under Article 13(4) of the Treaty, which reads as under:

“Article 12 (4): For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term "fees for technical services" means payments of any kind of any person in consideration for the rendering of any

are ancillary and subsidiary to the application or enjoyment of the right, property or (a) information for which a payment described in paragraph 3(a) of this article is received ; or are ancillary and subsidiary to the enjoyment of the property for which a payment (b) described in paragraph 3(b) of this Article is received ; or make available technical knowledge, experience, skill know-how or processes, or (c) consist of the development and transfer of a technical plan or technical design.”

means payments of any kind in consideration for rendering of any

technical or consultancy services, which firstly, are ancillary and

subsidiary to the application or enjoyment of the right, property

or information for which a payment of the nature of royalty is

received. Secondly, they must be ancillary and subsidiary to the

enjoyment of the property for which the payment in the nature of

royalty is received. Thirdly, the services ‘make available’, technical

knowledge, experience, skill, knowhow or processes or consists of

development and transfer of a technical plan or technical design.

The facts on record reveal that the first two conditions noted

above do not apply to the fees received as such fees are not for 8 | P a g e

ITA Nos.517 & 1382/Del/2022 AYs: 2018-19 & 2019-20

any services, which are ancillary and subsidiary to any payment

made in the nature of royalty. Beside the aforesaid two categories,

where the payment can fit in as FTS is the category where the

services rendered make available technical, experience, skill,

know-how, processes etc. Thus, the first condition, which needs

to be satisfied, is the services rendered must be in the nature of

technical or consultancy services.

assessee provides services in the nature of management, such as,

payroll processes, recruitment, performance management,

pensions, learning and development for operating entities,

including the Indian AE. The assessee also conducts a global

internal audit assurance programme. It also manages corporate

events, memberships, sponsorships and hospitality functions in

order to perform professional event management services at a

centralized level. It also involve intra-group finance activities,

such as, management reporting, financial reporting and capital

planning, which includes, balance-sheet reporting, funding,

liquidity and regulatory issues, profit and loss reporting, covering

actual results, forecast and budges with the focus on divisional

performance. It also produces global management information for 9 | P a g e

ITA Nos.517 & 1382/Del/2022 AYs: 2018-19 & 2019-20

financial advisory business of the group. It provides decision

support for the management and co-ordinates global fee sharing,

global expenses policies and pipeline reporting. The assessee

provides legal and regulatory advice in terms of monitoring of

compliance with legal and regulatory matter, including liaisoning

with regulators, new client acceptance and name

protection/trademarks. It also provides services to implement

compliance rules within the group and assist local teams to be

compliant. The assessee also provides services of global planning

for annual planning process. It also provides support for collating

credentials for marketing to clients. Thus, from the nature of

services rendered, it is quite clear that they are in the nature of

advisory services in certain areas as per the terms of the

agreement. From the nature of services, it is quite evident that

assessee’s role in the services provided is purely to assist the

Indian AE or other participating group entities in making correct

decision on the aspects specifically referred to in the agreement.

Thus, the nature of services provided to the Indian AE does not

seem to be falling in the category of either technical or

consultancy services. In fact, in the assessment orders, the

Assessing Officer himself has stated that some of the services are 10 | P a g e

ITA Nos.517 & 1382/Del/2022 AYs: 2018-19 & 2019-20

of the nature of FTS. Thus, the Assessing Officer clearly admits

that all the services rendered by the assessee are not in the

nature of FTS. In spite of that the Assessing Officer has treated

the entire receipts as FTS and added at the hands of the assessee.

This, in our view, is unacceptable.

condition of Article 13(4) of India – UK treaty is fulfilled. Even

assuming that as per the Assessing Officer’s version, few of the

services are in the nature of technical and consultancy nature,

the crucial factor needs to be examined is whether while

rendering such services the assessee has made available technical

knowledge, experience, skill, know-how or processes to the India

AE. The expression ‘made available’ has not been defined in India

– UK DTAA. However, in this context reference can be made to the

MoU to India – US DTAA wherein the term ‘make available’ has

been explained. For ease of reference such explanation provided

in the protocol to India – USA DTAA is reproduced hereunder:

“Paragraph 4(b) of Article 12 refers to technical or consultancy services that make available to the person acquiring the services, technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design to such person. (For this purpose, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person). This category is narrower than the category described in paragraph 4(a ) because it excludes any 11 | P a g e

ITA Nos.517 & 1382/Del/2022 AYs: 2018-19 & 2019-20

service that does not make technology available to 'the person acquiring the service. Generally speaking, technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available.

judicial interpretation in various decisions. As per the

interpretation given to the said expression, technological skill,

know-how etc. to render the services should get transferred to the

service recipient in a manner so that the service recipient is able

to perform the same services independently on its own in future,

without the aid and assistance of the service provider. In other

words, in course of rendition of service, the service provider must

transfer the technology, technical know-how, skill etc. to the

service recipient to the extent that service recipient can perform

such services in future without required the assistance of the

service provider and without depending upon the service provider.

Meaning thereby, the service recipient must be in a position to

acquire technical knowledge, knowhow, skill etc., so as to

independently apply it. In the facts of the present case, evidently,

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the services provided by the assessee to the Indian AE are merely

for enabling and assisting the Indian AE in making the correct

decisions on certain aspects as specifically provided under the

group service agreement. Such rendition of services do not result

in transfer of technical knowledge, know-how, skill etc. to the

Indian AE. Therefore, in our view, the ‘make available’ condition

provided under Article 13(4)(c) remains non-compliant. That being

the position, the receipts would not fall within the definition of

FTS as provided under Article 13(4) of India – UK DTAA. While

coming to such conclusion, we have drawn support from the

judicial precedents cited before us by learned counsel for the

assessee.

in the nature of FTS under Article 13(4) of India – UK DTAA, are

not taxable at the hands of the assessee in India. Grounds are

allowed.

Order pronounced in the open court on 30th June, 2023

Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT VICE PRESIDENT Dated: 30th June, 2023. RK/- 13 | P a g e

ITA Nos.517 & 1382/Del/2022 AYs: 2018-19 & 2019-20