Case Note & Summary
The petitioner, McKinsey & Company, Inc. (United States), a non-resident company incorporated under US laws, is part of the McKinsey Group providing international management consultancy services. Its parent, McKinsey and Company Inc., has a branch in India (McKinsey India). The petitioner provided two types of services to the Indian branch: (i) borrowed services (consultancy services rendered to clients) and (ii) firm function services (central administrative and support services covering legal, taxation, and administration support worldwide). For borrowed services, the Assessing Officer consistently held that payments constituted fees for included services under the Indo-US Treaty, taxable at 15% on a gross basis. However, the Income Tax Appellate Tribunal (ITAT) on 26 April 2006 ruled that borrowed services payments were normal business income, not fees for included services, relying on the Memorandum of Understanding (MoU) dated 15 May 1989 between India and the US, which clarified that non-technical consultancy services are not included services. The present petition challenged the imposition of withholding tax (TDS) on payments for firm function services. The petitioner argued that firm function services are purely administrative and support services, not technical or consultancy services, and thus not taxable in India. The Revenue contended that such payments were subject to TDS. The Bombay High Court, per Dr. D.Y. Chandrachud and J.P. Devadhar, JJ., allowed the petition. The court held that firm function services, being central administrative and support services, do not fall within the definition of 'fees for included services' under Article 12 of the Indo-US DTAA. The court quashed the order of the Assessing Officer requiring deduction of tax at source and directed the Revenue to refund any amounts deducted. The decision was based on the MoU and the ITAT's earlier ruling on borrowed services, which was not challenged by the Revenue.
Headnote
A) International Taxation - Withholding Tax - Firm Function Services - Article 12 of Indo-US DTAA - The issue was whether payments for central administrative and support services (firm function services) provided by a US parent to its Indian branch constitute 'fees for included services' under the Indo-US Tax Treaty. The court held that such services, being administrative and support in nature, do not qualify as technical or consultancy services and thus are not taxable in India. The Assessing Officer's order requiring deduction of tax at source was quashed. (Paras 1-6) B) Double Taxation Avoidance Agreement - Interpretation - Memorandum of Understanding - Article 12(4b) - The court relied on the MoU dated 15 May 1989 between India and the US, which clarifies that consultancy services of a non-technical nature are not included services. The court held that firm function services fall outside the ambit of 'fees for included services' and are therefore not subject to withholding tax. (Paras 3-6)
Issue of Consideration
Whether payments made by the Indian branch of a US company to its US parent for firm function services (central administrative and support services) are subject to withholding tax under the Income Tax Act, 1961 and the Indo-US Double Taxation Avoidance Agreement.
Final Decision
The petition is allowed. Rule is made absolute. The order of the Assessing Officer requiring deduction of tax at source on payments for firm function services is quashed. The Revenue is directed to refund any amounts deducted.
Law Points
- Withholding tax
- Tax Deducted at Source
- Fees for Included Services
- Indo-US Double Taxation Avoidance Agreement
- Article 12
- Memorandum of Understanding
- Firm Function Services
- Non-resident taxation
- Business income
