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Indian Tribunal Holds Fees for Overseas Marketing Services do Not Constitute FTS under Singapore and UK Tax Treaties

The Kolkata Income Tax Appellate Tribunal recently issued a decision on whether fees paid to overseas subsidiaries for marketing support services constitute fees for technical services (FTS). The case involved Batlivala & Karani Securities Pvt. Ltd. (B&K), an India-based brokerage company providing services for institutional clients.

In the year concerned, B&K paid service fees to its subsidiaries in Singapore and the UK for marketing support services for the expansion of its business overseas. The service fees paid covered the costs of the subsidiaries to provide the services plus a markup, with no tax withheld. In auditing B&K, the assessing officer determined that the service fees constituted FTS, and that tax should have been withheld. As a result, the assessing officer disallowed the deduction of the service fees by B&K, and B&K appealed.

In its decision, the Tribunal sided with B&K. It determined that since the marketing support services did not make available any knowledge, experience, skill, know-how or processes to the Indian taxpayer, the service fees could not be treated as FTS. This determination was based on the definition of FTS in India's tax treaty with the UK and Singapore, as well as the MoU with the U.S. on interpreting Article 12 (Royalties and Fees for Included Services) of the India-U.S. tax treaty, which includes a definition of "included services" that is similar to the Singapore and UK treaty definitions of FTS. Based on this and the fact that that neither the Singapore or UK subsidiaries had a permanent establishment in India, the Tribunal held that no withholding tax was due and the deductions should be allowed.

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