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Payment made by Indian Co. for cost to be allocated to Dutch Co. under service agreement is taxable in India: AAR

February 15, 2021[2021] 124 taxmann.com 329 (AAR - New Delhi)
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INTERNATIONAL TAXATION : Service Agreement being entered between Applicant Netherlands company and Indian subsidiary to provide certain specific operational support services to Indian subsidiary, payment of service charges to be made by Indian subsidiary for cost to be allocated by Applicant under service agreement is taxable in India and, thus, liable to withholding of tax and tax returns; transfer pricing provisions of sections 92 to 92F would be applicable

• Perfetti Group is worldwide manufacturer of confectionary products - Applicant-Perfetti Netherlands is primarily engaged in business of managing of manufacture and sale of sugar confectionery and gum and provision of operational and other support services for benefit of group companies situated in various countries - A Technology and Trademarks License Agreement (TTLA) was entered into between Perfetti SPA and its Indian subsidiary Perfetti India according to which licence was granted to Perfetti India to manufacture and sell various kinds of confectionery and Perfetti India was also allowed use of its technology and know-how in manufacture of products - TTLA provided that Perfetti India would pay royalty to Perfetti SPA at certain percentage of sales being domestic sales and export sales - A separate Service Agreement was also entered into between Applicant and Perfetti India, as per which the Applicant agreed to provide certain specific operational support services to Perfetti India such as Accounting Services, Budgeting and Reporting Services, Forex Management, Global Credit Facility Administration and co-ordination of Global Funding, Organisation of International Finance Manager's meetings, Human Resource Management Services, Support and co-ordination of local strategy, Support in financial controlling, Corporate, Secretarial and Legal Support, Environmental health and safety, Support on Risk Management - Ruled that payment of service charges to be made by Perfetti India for the cost to be allocated by the applicant under service agreement is taxable under Article 12.5(a) of the DTAC between India and the Netherlands; it is not necessary that the clause of Article 12.5(b) should also be simultaneously satisfied. Though some of the services are also taxable under Article 12.5(b) of the DTAC, such services are not segregated as they are already taxable under Article 12.5(a). Thus, such payment made by Perfetti India would be chargeable to tax in India. Perfetti India is liable to withhold taxes under section 195. As the applicant is liable to tax in India, it is required to file a tax return under the provisions of the Act and the transfer pricing provisions of sections 92 to 92F would be applicable in respect of the payment to be made by Perfetti India.

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