2009 (7) TMI 1277 - AT - Income Tax

Summary

Issues Involved:
1. General nature of the first ground.
2. Addition made by the Assessing Officer regarding payments considered as fees for technical services.
3. Applicability of CBDT circulars to the non-chargeability of commission paid to KGL.
4. Nature of payments made to KGL as Fees for Technical Services (FTS).
5. Reimbursement claims by the assessee.
6. Taxability of 5% mark-up fees.
7. Assessment order objections by the assessee before the first appellate authority.
8. Determination of whether payments made to KGL amount to making available technical skill or know-how under the India-UK tax treaty.

Detailed Analysis:

1. General Nature of the First Ground:
The first ground is general in nature and does not call for any specific dealing as such.

2. Addition by Assessing Officer Regarding Payments as Fees for Technical Services:
The assessee, a domestic company engaged in providing customized publishing-related solutions, entered into a Master Services Agreement (MSA) with KGL, a UK-based company. The agreement entailed three types of payments: compensation fee (2% on gross revenue), reimbursement of specific expenses, and a 5% mark-up on expenses. The Assessing Officer held that these payments were fees for technical services under Explanation 2 to Section 9(1)(vii) of the Income Tax Act, 1961, and Article 13.4(c) of the India-UK DTAA. The services rendered were deemed technical and consultancy in nature, making technical knowledge, skill, and experience available to the assessee.

3. Applicability of CBDT Circulars:
The assessee contended that the commission paid to KGL should not be taxed, relying on CBDT Circular No.23 of 1969 and Circular No.786 of 2000. The Assessing Officer rejected this contention, stating that the circulars apply to principal-to-principal arrangements, which was not the case here as both companies were part of the same group.

4. Nature of Payments as Fees for Technical Services:
The assessee argued that the payments did not fall under the definition of FTS as per Article 13.4 of the India-UK DTAA, which requires making available technical knowledge, experience, skill, know-how, or processes. The Commissioner of Income-tax(A) held that the services provided by KGL did not involve making available any technical knowledge or skills to the assessee. The employee profiles did not indicate technical expertise, and no credible evidence was presented to substantiate the Assessing Officer's conclusion.

5. Reimbursement Claims:
The Assessing Officer held that the reimbursement of expenses was not entertainable as the liability to pay the costs was KGL's, not the assessee's. The reimbursement was seen as a part of the payment for services rendered, thus taxable as FTS. The Commissioner of Income-tax(A) disagreed, stating that the reimbursement did not involve making available technical knowledge or skills.

6. Taxability of 5% Mark-up Fees:
The Assessing Officer considered the 5% mark-up fees as another mode of payment for services rendered, thus taxable as FTS. The assessee admitted that this amount might be chargeable to tax under the Act but argued it did not fall under the purview of DTAA due to the lack of "making available" technical knowledge.

7. Assessment Order Objections:
The assessee objected to the assessment order on three counts: the taxability of commission/marketing fee disregarding CBDT circulars, the aggregate of commission, reimbursement, and mark-up being taxable, and the aggregate payments amounting to making available technical skill or know-how under the India-UK tax treaty. The Commissioner of Income-tax(A) rejected the applicability of the CBDT circulars and held that the services rendered did not make available any technical knowledge or skills.

8. Determination of Making Available Technical Skill or Know-how:
The Tribunal, relying on various decisions, held that mere rendering of services does not amount to making available technical knowledge, skill, or experience. The payments made to KGL did not involve transferring any technical knowledge or skills to the assessee that could be used independently in the future. Consequently, the aggregate payments could not be brought into the tax net as FTS under the India-UK DTAA.

Conclusion:
The Tribunal concluded that the aggregate of the commission/marketing fee, reimbursement of expenses, and mark-up could not be taxed as FTS since no technical knowledge, expertise, skill, know-how, or process was made available to the assessee. The appeal by the revenue was dismissed.