2016 (8) TMI 1348 - AT - Income Tax

Taxability / nature of borrowed service charges - FTS or business income - applicability of treaty benefits under India-US Tax Treaty - PE in India - Held that - It is admitted fact that the assessee has merely supplied data, information etc. to its India counterpart and has not made any technology available which can be used by Mckinsey India. The assessee is providing these services on regular basis for the past several years and the same are held to be business receipts not taxable as per treaty provisions in assessee s own case for different assessment years We allow the appeal of the assessee. The impugned payments do not constitute FTS in the hands of the assessee and fall within the ambit Business Profits and since assessee do not have any PE in India, the same are not taxable as per statutory provisions / Treaty.

Summary

Issues:
Taxability and nature of borrowed service charges, Applicability of treaty benefits under India-US Tax Treaty

Analysis:

Issue 1: Taxability and nature of borrowed service charges

The appeals involved two separate assesses challenging impugned orders related to the Assessment Year 2011-12. The primary issue raised in both appeals was the taxability and nature of borrowed service charges, specifically whether they constituted Fees for Technical Services (FTS) under Section 9(i)(vii) of the Income Tax Act and the India-US Tax Treaty. The dispute centered on services provided by a foreign company to its associated concern in India, involving the analysis of performance, development, and advisory support. The assessee argued that the services were business receipts and not taxable as FTS due to being performed outside India and the absence of a Permanent Establishment (PE) in India. The authorities, however, treated the services as FTS, leading to the assessment of tax at 15%. The assessee contended that the services provided were not technical or consultancy services as defined in the treaty, citing various judicial precedents and agreements under the Mutual Agreement Procedure (MAP) for previous assessment years.

Issue 2: Applicability of treaty benefits under India-US Tax Treaty

The assessee, being a US company eligible for benefits under the India-US Tax Treaty, argued that the borrowed services did not fall under the ambit of Royalty or FTS as they only involved supplying qualitative data and advisory support, not technical expertise. The AR emphasized that the services provided did not make available any technical knowledge or skill to the Indian counterpart. Additionally, the AR relied on past judicial pronouncements and MAP agreements to support the contention that the services were not taxable in India under the treaty provisions. On the other hand, the revenue representative supported the lower authorities' stand on taxability.

Judgment:

After considering the rival contentions and reviewing the facts, the Tribunal found that the services provided by the assessee did not constitute FTS and fell within the category of Business Profits. Since the assessee did not have a PE in India, the payments were not taxable under the statutory provisions or the India-US Tax Treaty. The Tribunal referred to previous cases where similar issues were settled in favor of the assessee under MAP proceedings and judicial precedents. Consequently, both appeals of the assessee were allowed, with the Tribunal holding that the impugned payments were not taxable as FTS and were covered under Business Profits, in line with the treaty provisions.

In conclusion, the Tribunal's decision favored the assessee, emphasizing that the borrowed services provided were not subject to tax as Fees for Technical Services under the India-US Tax Treaty, given the nature of the services and the absence of a Permanent Establishment in India.