SHELL TECHNOLOGY INDIA PRIVATE LIMITED RMZ CENTENNIAL CAMPUS B - 8B, KUNDANAHALLI MANIN ROAD, BANGALORE - 5560046, MR. RAJAN VORA, S.RULES BATLOIBOI & CO. AND ORS. Vs. MS. MEERA SRIVASTAVA, JCIT (I.T), BANGALORE

JUDGEMENT

(1.) THE applicant is a company incorporated in India and is a tax resident of India. Its associated enterprises are Shell Global Solutions International BV (SGSI BV) and Shell International Exploration and production BV (SIEP BV). The applicant mainly renders technical services to overseas Shell group companies using desktop based IT applications and claims to be eligible for tax holiday under section 10B of the Income -tax Act in respect of income generated from export of services to the overseas Shell group entities. Shell had set up as part of its global finance functional plan, Shell Shared services (Asia) BV(SSSABV). That company incorporated in Netherlands is supporting the global finance functions of Shell by carrying out common activities across the countries in one sector by bringing them all into one export specialist area. It is designed with the aim of standardization of processes within a strong control framework. It is also aimed at cost effective deployment of standard system and processes while maintaining control to a high standard with clear accountabilities. SSSABV in turn has set up a branch office in Philippines to provide a range of business support services to various Shell Group entities. The SSSABV branch is registered with the Philippines Economic Zone Authority. Currently, the branch performs the back - office finance services related to accounts payable, accounts receivable, supply accounting, credit and collection, general ledger accounting and taxation. The applicant has entered into a service level agreement with the SSSABV Philippines branch, whereby that branch provides business support services to the applicant. The services to be provided, include invoice processing, monitoring operational execution, SOX (Business Controls - Board) and goods receipts/invoice receipts and other services relating to accounts payable/receivable. It also includes general accounting and credit management. For rendering these services, SSSABV charges a monthly operation fee based on the on -going tariff or on -going charges/rates agreed on the basis of the full time equivalent resources allocated for the services. The applicant has approached this authority with a view to ascertaining the taxability in India of the payments being so made to SSSABV and consequently on its obligation if any for withholding tax. This authority, after hearing both sides, by order dated 13.01.2010, allowed the application under section 245R(2) of the Act to rule on the following questions:

(2.) ACCORDING to the applicant, it was entitled to claim the application of the Double Taxation Avoidance Convention (DTAC) between India and Netherlands, its contract being with a company incorporated in Netherlands and which is controlled from Netherlands. It was therefore entitled to rely on paragraph 5 of Article 12 of the India - Netherlands treaty read with the protocol thereto, relating to the most favored nation clause, to contend that the services received by it from SSSABV do not fall within the purview of Article 12.5(a) of the India -Netherlands Convention. What the applicant was receiving was not technical or consultancy services in terms of the Convention. Moreover, the services were not being made available to the applicant within the meaning of the said paragraph of Article 12. Therefore, the business support services provided to it by SSSABV, is not technical services and the remuneration paid by it for receiving such services was not fees for technical services under Article 12 of the Convention. Since SSSABV did not have a permanent establishment in India in terms of Article 5 of the convention, the payment made by the applicant to SSSABV being the business income of SSSABV, is not taxable in India. Since the payment was not taxable in India as income, the applicant has no obligation to withhold tax in terms of section 195 of the Act.

(3.) IN its comments, the Revenue submitted that the applicant is receiving high technical services which result in benefit to it by cost effective deployment of standard systems and in standardizing processes. Therefore, what was being provided was technical services. Whether the technology was made available to the applicant could not be determined on the scanty facts disclosed by the applicant. Information on whether the employees of the applicant were being trained for making use of the services, the exact nature of the services being provided and the manner in which they are being provided and were being utilized and what was the impact of such services on the functioning of the applicant, all are relevant facts not disclosed by the applicant. It was therefore relevant to know the practices earlier being followed by the applicant which have been replaced under the agreement and what was its impact in terms of manpower, machines and profitability. Alternatively, on a look at the fee structure, it could be seen that the service charges include start -up charges. That amount had to be paid by all customers at the same rate. It appeared that there was a highly specialized technical system developed by the service provider for providing the services to the applicant. Therefore the payment made by the applicant will be royalty within the meaning of section 9(1)(vi) of the Income -tax Act. If it was royalty or fees for technical services, the question of taxability had to be considered as also the liability to withhold tax.