ABB tax ruling: Fee for Technical Services taxable only in the year of receipt under India-Germany tax treaty

MUMBAI/NEW DELHI: In what could help several multinational companies with clarity around transfer pricing, a Bangalore tax tribunal has ruled that Fee for Technical Services or FTS is only taxable in the year the company receives it.

As per the detail of the case Germany headquartered arm of ABB, the Swedish-Swiss multinational, had received some money for testing and inspection charges. These were categorised as FTS, but the company did not include this in the tax filings in the country. ABB is one of the largest companies globally that is into robotics, power, heavy electrical equipment, and automation technology.

The amount—FTS—was to be paid by the Indian arm of ABB—ABB India—to the German arm-- ABB AG.

As per the global tax regulations such international transactions between two subsidiaries of multinationals are subjected to transfer pricing. Transfer pricing is essentially a mechanism that determines at what price should a subsidiary buy and sell services or prodicts from another group company.

The tax department noted that Indian arm had also created a provision in its financial accounts. The tax department wanted the German arm to add this particular amount to its total income. This would mean that that the company’s tax liability could go up in India.

The German arm of ABB however said that it had not received any money from the Indian subsidiary. The German arm also said that it was under the impression that the amount is only taxable when they actually receive it. The company also cited India-Germany tax treaty to support its argument.

The ITAT ruled that that FTS is only taxable in the year of receipt as per the provisions of India-Germany DTAA.

“The ITAT’s order sheds light on the fact that FTS is taxed only on the receipt basis owing to the overriding effect of the tax treaties over the provisions of the Income Tax Act. The judgement has established that a legitimate benefit under the law shall be accorded to the taxpayers entitled to receive the same,” a tax research by Nangia Anderson, a tax advisory firm said.