2016 (5) TMI 1534 - AT - Income Tax

Fees for technical services - services rendered by the assessee for installation of cranes - HELD THAT - As decided in M/S. SANDVIK AB VERSUS DY. DIRECTOR OF INCOME TAX, (INTERNATIONAL TAXATION) -II, PUNE 2014 (12) TMI 388 - ITAT PUNE on the basis of the protocol to the DTAA between the India and Sweden the assessee can claim the benefit of the conditions imposed for bringing to tax the fees for technical services in the treaty between the India and Portuguese. We, therefore, hold that on the principle of the most favoured nation (MFN) clauses the payment of ₹ 5.93 Crores received by the assessee company from its Indian subsidies cannot be brought to tax. Fee charged by the assessee from SAPL for installation of crane, upgradation/service of other equipments does not involve make available of any know how, technology which can be used by the Indian Associate of assessee independently for its benefit in any manner, whatsoever. Accordingly, we direct the Assessing Officer to delete the addition made on account of fee for technical services for installation of machines etc. Royalty towards use of CAD/CAM designing software and IT support - contention of the assessee is that the assessee has purchased the basic version of program/software from the third party and after making certain changes/modification to the basic program has standardized the software to be used by the entire group - basic program has been stored in Sweden and the users have limited accessibility to the program for using it without any further modification - HELD THAT - Authorities below while deciding the issue has not considered the agreement between the assessee and Sandvik Asia Private Limited for the use of program. Thus, we are of the considered view that this issue needs a revisit to the file of AO Assessee shall furnish the details of modifications/changes carried out by the assessee in the program for standardizing the same to be used by all the group concerns and also the terms and conditions for the use of program by SAPL. The Assessing Officer after considering the same shall decide the issue afresh in the light of decision of Co-ordinate Bench of the Tribunal in the case of Sandvik Australia Pty. Ltd. Vs. Deputy Director of Income Tax (International Taxation-II, Pune (supra).

Summary

Issues Involved:
1. Taxability of receipts for repairs and maintenance services as 'Fees for Technical Services' (FTS) under the DTAA between India and Sweden.
2. Taxability of receipts towards the use of CAD/CAM software and IT support as 'Royalty' under the DTAA between India and Sweden.
3. Taxability of product inspection charges as 'Fees for Technical Services' (FTS) under the DTAA between India and Sweden.

Detailed Analysis:

1. Taxability of Receipts for Repairs and Maintenance Services as 'Fees for Technical Services' (FTS):

The assessee received payments from an Indian associate for installation services, upgradation of operating systems, and service costs for specific machinery. The Assessing Officer (AO) categorized these payments as 'Fees for Technical Services' (FTS) under Article 12 of the DTAA between India and Sweden. The assessee argued that these services were inextricably linked to the sale of machinery and did not 'make available' any technical knowledge, skill, or process to the Indian associate, thus failing the 'make available' test required under the DTAA. The Tribunal referenced the case of Sandvik Australia Pty. Ltd. and the High Court of Karnataka's interpretation in M/s. De Beers India Minerals Pvt. Ltd., concluding that the services did not 'make available' technical knowledge or skills to the recipient. Therefore, the Tribunal directed the AO to delete the addition of ?25,92,070/- made on account of 'fees for technical services' for installation services.

2. Taxability of Receipts Towards Use of CAD/CAM Software and IT Support as 'Royalty':

The assessee provided limited user rights for CAD/CAM software to its Indian associate and charged a support fee based on the number of users. The AO treated these payments as 'Royalty' under Article 12 of the DTAA. The assessee contended that the payments were for IT support services and did not involve exploitation of any right or copyright, thus not qualifying as 'Royalty'. The Tribunal cited the decision in Sandvik Australia Pty. Ltd., which held that IT support services do not constitute 'Royalty' or 'FTS' under the DTAA. However, the Tribunal noted that the details of modifications to the software were not provided to the AO or DRP. Consequently, the Tribunal remitted the issue back to the AO for reassessment, directing the assessee to furnish details of modifications and terms of use.

3. Taxability of Product Inspection Charges as 'Fees for Technical Services' (FTS):

For the assessment year 2009-10, the assessee contested the addition of ?3,97,875/- for product inspection charges, arguing that these charges did not meet the 'make available' test for FTS under the DTAA. The Tribunal, referencing its earlier decision in Sandvik Australia Pty. Ltd., agreed that the product inspection services did not 'make available' technical knowledge or skills to the Indian associate. Therefore, the Tribunal allowed this ground of appeal, directing the AO to delete the addition.

Conclusion:

The Tribunal partly allowed the appeals for both assessment years. It directed the AO to delete the additions related to 'fees for technical services' for installation services and product inspection charges, while remitting the issue of 'Royalty' for CAD/CAM software back to the AO for reassessment. The Tribunal emphasized the importance of the 'make available' test under the DTAA and the need for detailed evaluation of the modifications and terms of software use.