Charging of Management fee from Indian Subsidiary against Accounting, Admin, HR, IT/System, Tax, Legal support & Business Advisory Services.
Following statutory regulations govern the allowance of Management/consultancy fee payments from India:-
FEMA (Foreign Exchange Management Act).
Income Tax Act, 1961
Service Tax Act and
DTAA between India and Malaysia
Under FEMA Management/consultancy fee can be paid to a non-resident without any monetary ceiling.
Under Income Tax Act these payments are subject to 10% withholding tax. Effective April 1, 2010 withholding tax to apply at higher rate of 20% if Foreign Company does not hold Indian PAN Registration.
Under Service Tax Act the payments are also subject to 10.3% service tax.
According to Article 13 : FEES FOR TECHNICAL SERVICES of DTAA between India and Malaysia
· Fees for technical services arising in a Contracting State which are derived by a resident of the other Contracting State may be taxed in that other State.
· However, fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the fees for technical services.
· The term “fees for technical services” means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provision of services by technical or other personnel but does not include payments for services mentioned in Article 14 and Article 15 of this Agreement.
Further it is important to understand the following factors affecting allowance of management fees by Indian Tax Authorities under Transfer Pricing scrutiny:-
a) VALUE ADDITION: The Management Fee charged on the basis of services which should add value to the business.
b) GENERIC IN NATURE: The services rendered should not be generic in nature. For example accounting, administration services etc.
c) UNIQUE SERVICES: The services should be unique in nature. Special expertise or know-how held by the service provider to be established.
d) PROFITABILITY NOT ABLE TO ACHIEVE: The portion of the profit earned that reflects the expertise and quality of the management services received by the Indian Company
e) ACTUALLY AVAILED SERVICES: The Indian company receiving the services should be able to establish that it has actually availed these services.
f) ACTAULLY BENEFITTED: The Indian company receiving the services should be able to establish that it has actually benefitted from these services.
g) AUDIT ACCOUNTING BY PARENT COMPANY to safeguard their own interest and no management fee is allowed against these services.
h) DETAILED MANAGEMENT SERVICE CONTRACT: Existence of a management-services contract, wherein each function and nature of the management services must be defined clearly. Effort applied and the responsibilities of the provider of the services to be included in the agreement.
i) COMPARITIVE STUDY: A comparison to similar operations in similar markets in terms of efficiency, profits, etc. be provided.
In our opinion, the Indian tax authorities in India do not allow easily deduction against Management fee paid to an Associated Enterprises abroad in view of the stringent requirement stated above. It is very difficult for the Indian Company to demonstrate the value addition to the business from such services which are quite generic in nature. The income tax authorities view these transactions as tax planning tool used between the associated enterprises. The rules are relaxed in case of Management fee paid to non-associated enterprise as the same is not suppose to pass through detailed documentary requirement covered under transfer pricing rules.
Gemplus India Pvt. Ltd vs ACIT (ITA No 352/Bang/2009), of October 21 2010, is a classic example of management fees under scrutiny, where the Bangalore Income Tax Appellate Tribunal held that an Indian associated enterprise (AE) must establish that payments are made in equal amount to the volume and quality of service.
Management Charges to be disallowed if the payment is not commensurate with the actual benefit received. The Taxpayer is a wholly owned subsidiary of Gemplus SA, France, which along with one of its AEs Gemplus Singapore provides certain intra-group services in respect of marketing and sales, customer service, finance, accounting and administration and legal support to the Taxpayer, under a Management Service agreement. The method used for determining the Arm’s Length Price (ALP) was TNMM.
The TPO held that the payment for management services was not justified as the Taxpayer had not provided evidence to substantiate that a service had been rendered by Gemplus Singapore and no basis was provided to demonstrate the benefits derived by the Taxpayer from such services.
On appeal, the Tribunal ruling against the Taxpayer observed that the payment terms prescribed in the agreement are independent of the actual services rendered by Gemplus Singapore, that the cost has been apportioned for different country centers not on the basis of actual services rendered and that Taxpayer had not proved any commensurate benefits against the payments of service charges to its Singapore affiliate.