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ITAT Rules Management Services Not Taxable as 'Royalty' under India-Netherlands DTAA

Introduction

The Income Tax Appellate Tribunal (‘ITAT’), while differentiating between technical know-how and management services, has, in the matter of Van Oord Dredging and Marine Contractors BV v. ACIT[i], held that rendering management services does not fall within the meaning of ‘royalty’ as defined in the a. 12(4) of the India-Netherlands double taxation avoidance agreement (‘DTAA’). Therefore such services are not taxable in India.

Brief Facts

  • Van Oord Dredging & Marine Contractors BV (‘Appellant’), registered in the Netherlands, signed a service agreement with its subsidiary in India, Van Oord India Private Limited (‘VOIPL’) to provide personal and organization support, operational assistance, quality assurance, IT Support, marketing and administrative services relating to marine construction activities.

  • The Appellant charged approximately Rs. 39 crores to VOIPL for such services and claimed these as reimbursement of costs without any markup. However, the assessing officer (‘AO’) considered these charges as ‘royalty’, which was deemed to be taxable in India as per the DTAA.

  • Aggrieved by the AO’s order, the Appellant filed an appeal before the Dispute Resolution Panel (‘DRP’), contending that the services provided to VOIPL did not qualify as royalty under the DTAA, and were merely reimbursement of actual costs, while the AO contended that these fees constituted royalty payments as per a. 12(4) of the DTAA.

  • The order passed by the AO was subsequently upheld by the DRP, thus compelling the Appellant to file an appeal before the ITAT for the determination of the issue mentioned below:

Issue

Were the management service fees received by the Appellant taxable as royalty in India under the DTAA?

Held

  • The ITAT, after reviewing the nature of the transaction and the services provided by the Appellant, held that the consideration received under the service agreement was based on the allocation of actual cost and could not be classified as payment towards ‘royalty’. Thus the appeal filed by the Appellant was allowed.

  • It was further observed by the ITAT that the services rendered by the Appellant did not involve the imparting of technical knowledge or expertise, and thus, did not qualify as royalty under the DTAA. Further, the fees charged by the Appellant were merely reimbursements of the actual costs incurred, and the same had been duly certified by the auditors.

Our Analysis

This judgment brings clarity to the determination process of the nature of payments in cases involving services rendered by foreign entities to Indian entities. It underscores the necessity for the Assessing AO to thoroughly determine the nature of transactions before levying taxes to adjudicate issues correctly.





End Note

[i] [2024] 161 taxmann.com 308 (Mumbai - Trib.)





Authored by Priyam Gandhi, Intern at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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