India: Training cost reimbursements not taxable as fees for included services under India-U.S. treaty

A tribunal decision concerning training cost reimbursements under India-U.S. treaty

A tribunal decision concerning training cost reimbursements under India-U.S. treaty

The Delhi Bench of the Income-tax Appellate Tribunal held that training cost reimbursements were not taxable as “fees for included services” under the India-U.S. income tax treaty because the training services were not in the nature of consultancy or technical services. In addition, the services were not ancillary and subsidiary to the application or enjoyment of a right for which royalties were paid.

The case is: Russell Reynolds Associates Inc. v. DCIT.

The taxpayer, a U.S.-based entity, is engaged in the business of providing human resources advisory services on recruiting and retaining senior level executives and further assisting them in mitigating the risks associated with senior level appointment. It also provided management support services to its group companies.

During the tax years at issue, the taxpayer entered into a “services agreement” with a related Indian company to provide training services for an amount equal to provider cost (i.e., without any mark-up). The taxpayer also received royalty income from the related Indian company for the use of certain intellectual property rights like trademarks, trade names and databases.

The tribunal held that the training provided by the taxpayer was not managerial or leadership training to enhance productivity or profits but was more of an orientation program for new recruits. Thus, the cost reimbursement payments received by the taxpayer from the related Indian company with respect to training could not be treated as “fees for included services” under the India-U.S. income tax treaty.

In addition, the tribunal concluded that the training services provided by the taxpayer were not ancillary and subsidiary to the application of enjoyment of the right to use the intellectual property rights licensed by the taxpayer to the related Indian company. The tribunal based its decision on the facts that the licensing agreement did not include any language indicating such a connection between the training services and the intellectual property rights and that such training services were not customarily provided in connection with the licensing of such intellectual property rights.

Read a May 2022 report [PDF 558 KB] prepared by the KPMG member firm in India

 

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