(1.) Rule. With the consent of the learned Counsel appearing on behalf of the petitioner and the learned Counsel appearing on behalf of the Revenue, the petition is taken up for hearing and final disposal. Counsel for the respondents waives service.
(2.) The petitioner is a non-resident company incorporated under the laws of the United States. The petitioner forms part of the McKinsey Group and provides international management consultancy services. The parent of the petitioner is McKinsey and Company Inc. McKinsey and Company Inc. has a branch in India McKinsey India. Broadly speaking, the petitioner provides two kinds of services to the Indian Branch: (i) Borrowed services which are services rendered by the petitioner to McKinsey India as part of the consultancy services, which the latter provides to its clients; (ii) Firm function services, which constitute a central support function that is dedicated to provide a range of administrative and support services for the worldwide offices of McKinsey Group, including the Indian branches of McKinsey Inc. The firm function services comprehend administrative support provided worldwide on legal issues, taxation and administration. In so far as the borrowed services are concerned, the consistent view of the Assessing Officer's was that such services amounted to technical fees for included services under the Indo-US Treaty and were chargeable in India at the rate of 15% on a gross basis.
(3.) The Income Tax Appellate Tribunal by its decision dated 26 April 2006 came to the conclusion that the payments made to the petitioner for borrowed services would have to be regarded as normal business income and not as fees for included services. In arriving at this conclusion, the Tribunal placed reliance on the Memorandum of Understanding concerning fees for included services entered into on 15 May 1989 between the Governments of India and United States. The MoU inter alia clarifies that under Article 12(4b) of the US India Tax Treaty, consultancy services which are not of a technical nature could not be regarded as included services.