The New Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that managerial and business support services rendered to Heinz India did not transfer any technical knowledge or know-how capable of independent use, and therefore could not be taxed as Fees for Included Services under the India-US DTAA. Emphasising that managerial services are not automatically taxable as FTS/FIS under the India-US DTAA, the Tribunal found that the services primarily related to human resources, finance, strategic planning, marketing, supply chain and information systems support.
Stating that support services and royalty arrangements must be examined separately, the Tribunal rejected the Revenue’s attempt to treat the support services as ancillary and subsidiary to the trademark and technology licence agreement. Emphasising that the services did not transfer any technical knowledge, skill, expertise, process, or know-how that enabled the Indian entity to perform the functions independently in the future, the Court found that Heinz India continued to require the assessee’s assistance year after year, indicating that no enduring technical capability had been passed on.
The Tribunal also held that cost reimbursements for business support services cannot be taxed as FIS merely because they benefit the Indian recipient, and taxability under Article 12 of the India-US DTAA requires satisfaction of specific treaty conditions, which were absent in the present case.
Briefly, the assessee, Kraft Heinz Foods Company, a US tax resident, had entered into two separate arrangements with Heinz India Pvt Ltd. Under a Trademark and Technology Licence Agreement (TTLA), it licensed certain products and received royalty of Rs. 40.43 lakh, which was offered to tax in India. Separately, under a Support Services Agreement (SSA), it provided services relating to supply chain, human resources, strategic planning, marketing, finance and information systems, and received Rs. 10.03 crore on a cost-to-cost reimbursement basis without any markup.
The assessee did not offer this reimbursement amount to tax, contending that it was merely a recovery of costs. However, the Assessing Officer treated the amount as Fees for Technical Services (FTS)/Fees for Included Services (FIS) and royalty, resulting in an addition of Rs. 10.03 crore.
The Division Bench comprising Vikas Awasthy (Judicial Member) and Naveen Chandra (Accountant Member) observed that the support services rendered by the US company largely related to human resources, strategic planning, marketing, finance, information systems and other management functions. Such services were essentially managerial in nature. Under the India-US DTAA, managerial services are not covered within the definition of ‘Fees for Included Services’. Therefore, merely rendering these management-related services could not make the receipts taxable as FIS.
The Tribunal further noted that the Revenue’s attempt to link the Support Services Agreement with the Trademark and Technology Licence Agreement was misplaced. The two agreements served entirely different purposes. While the TTLA concerned licensing of specific products and earned royalty only from sales of ‘Tomato Ketchup’, the support services under SSA were utilized across Heinz India’s entire business operations. The support services were not product-specific and were not confined to the licensed products covered by the royalty agreement.
A significant factor noticed by the Tribunal was that sales of Tomato Ketchup, on which royalty was payable to the assessee, constituted only about 1-2% of Heinz India’s overall turnover. The support service charges, however, related to the whole business. This demonstrated that the support services were not ‘ancillary and subsidiary’ to the royalty-generating licence arrangement, as alleged by the Revenue.
The Tribunal also found that the mandatory ‘make available’ condition under Article 12(4)(b) of the India-US DTAA was not satisfied. The services were being provided on an ongoing basis and Heinz India continued to depend on the assessee for such assistance every year. There was no evidence that technical knowledge, skill, expertise, know-how, processes, technical plans or designs had been transferred in such a manner that Heinz India could thereafter perform those functions independently.
Relying on several judicial precedents, the Tribunal reiterated that mere rendering of advice or support services is insufficient. To qualify as FIS, the service provider must impart technical knowledge or skills in a lasting manner so that the recipient can use them independently in future. That requirement was absent in the present case.
