Cummins Ltd., In re  A.A.R NO. 1152 OF 2011 (dated 12.01.2016)

Background:

• Cummins Limited, UK is a company incorporated in the UK. Cummins Technologies India Limited (CTIL) is a company incorporated in India.
• CTIL is engaged in the business of manufacture and sale of turbochargers. CTIL purchases turbocharger components directly from third party in UK and US and in relation to such purchases, Cummins Limited provides supply management services vide Material Suppliers Management Service Agreement. 
• As per the agreement CTIL pays supply management service fees calculated at 5% of the base prices from the suppliers
• As per the agreement, Cummins Ltd, UK is responsible for following activities:
  – Finalization of supplier prices from UK and US suppliers and ensuring market- competitive pricing from suppliers;
  – Ensuring that the approved suppliers have the necessary manufacturing capacities and infrastructure to provide for the raw material requirements;
  – Assisting in ensuring on-time delivery of components by the suppliers to Cummins India as well as resolution of delivery performance issues with suppliers, if any
  – Ensuring that suppliers maintain strict compliance with the standards, procedures and processes and support in obtaining response from supplier to any quality control violation issue; and
  – Performance review of the supplier 
• Cummins Ltd does not have a permanent establishment (PE) in India in respect of the supply management services as per the provisions of the India-UK Treaty.

Questions before AAR:

Whether the supply management service fees received by Cummins Limited, UK from CTIL is in the nature of “Fees for Technical Services” or “royalties” within the meaning of the term in Article 13 of the India- UK double tax avoidance agreement (‘India-UK treaty’)?

Assessee-Applicant’s contentions:

• The services rendered by them are purely managerial in nature and even if the same are held to be technical in nature, they do not ‘make available’ any skill, technical know-how, knowledge or design and hence cannot be construed as taxable services under the India-UK Treaty. 
• Reliance is placed on the MOU to the India-US Treaty to interpret the concept of ‘make available’ in respect of FTS and has stated that various judicial precedents have upheld the reliance on MOU to the India-US Treaty for this purpose.

Revenue’s arguments:

• Turbocharger is a technical industrial product and for rendering supply management services for purchase of components of turbocharger the applicant has to use its technical knowledge and expertise.
• The applicant is imparting its technical knowledge and experience to CTIL. The services rendered as per agreement were made available to CTIL. 
• The Revenue has relied on the ruling of the AAR in the case of Perfetti Van Melle Holding BV and Steria India Limited 45 Taxman.com 281.

AAR’s Ruling:

• The agreement shows that the CTIL is working with the applicant only to ensure market competitive pricing from the suppliers. The applicant maintains contract supply agreement with suppliers after identifying the products availability, capacity to produce and competitive pricing. 
• The applicant is not imparting its technical knowledge and expertise to the Indian company based on which the Indian company will acquire such skills and will be able to make use of it in future. Therefore, the ‘make available’ clause under India-UK Treaty is not satisfied.
•  It is also relevant to point out that the services rendered in this case are managerial in nature and managerial services was taken out from the ambit of FTS from India-UK Treaty w.e.f. 11th February 1994 and a clause relating to ‘make available’ was inserted. 
• This clearly shows that the intention was to introduce such clause and exclude managerial services. 
• The reliance of the Revenue on the rulings in the case of Perfetti and Steria would not help because in the case of Perfetti the ruling has been set aside and in the case of Steria the facts were different. 
• As regards services being royalty and covered under Article 13(3), it must be said that the nature of services related to identification of products and competitive pricing cannot qualify as royalties under the provisions of Article 13 under India-UK Tax Treaty because it is not related with the use of, or the right to use any copyright, patent, trademark, design or modal, plan, secret formula or process etc.