2022 (6) TMI 1411 - AT - Income Tax

Taxability of Consultancy Services as FTS - pre-requisites for deriving the benefit of the MFN clause in the Protocol to India s DTAAs with certain countries - Issue decided in favour of assessee in its own earlier AY's - DR referring to CBDT Circular No.3/2022 has disputed the applicability of earlier orders of the Tribunal in the impugned assessment year - HELD THAT - We find that in the case of GRI Renewal Industries SL 2022 (2) TMI 769 - ITAT PUNE Tribunal considered the impact of CBDT Circular No.3/2022 held requirement contained in the CBDT circular No.03/2022 cannot primarily be applied to the period anterior to the date of its issuance as it is in the nature of an additional detrimental stipulation mandated for taking benefit conferred by the DTAA. It is a settled legal position that a piece of legislation which imposes a new obligation or attaches a new disability is considered prospective unless the legislative intent is clearly to give it a retrospective effect - it is ambiguously clear that there is no requirement of separate notification for importing the beneficial treatment from the agreement. Hence, in the facts of the case and the decision referred above, we find no merit in the arguments forwarded by the ld. Departmental Representative. The conditions set out in CBDT Circular 3/2022 would not apply in the impugned assessment year. Consequently, ground No.1 of the appeal is allowed. Taxability of SAP Licence charges as royalty - HELD THAT - We find that this issue is recurring. On identical set of facts, the Tribunal deleted the addition in preceding assessment years. The Tribunal in assessment year 2016-17 following the order in assessee s own case in 2021 (1) TMI 323 - ITAT MUMBAI deleted the addition as held receipt of software licence fees by the assessee, from its Indian subsidiary, is reimbursement of software licence fees paid by the assessee to a third party, and, therefore, it cannot constitute income taxable in the hands of the assessee. Decided in favour of assessee. Taxability of IT Support Services as FTS/Royalty - HELD THAT - The Tribunal in assessment year 2016-17 following the order of Co-ordinate Bench in assessment year 2015-16 deleted the addition as held the taxation under article 12 in the present case can come into play only when the make available clause is satisfied, but then the Assessing Officer's justification for the satisfaction of 'make available' clause, for the detailed reasons set out earlier in this paragraph, does not meet our judicial approval - we uphold the plea of the assessee on this point as well - income on account of Information Technology Services is also not taxable under article 12. Decided in favour of assessee. Taxability of reimbursement expenses treated as FTS/royalty - HELD THAT - Both sides are unanimous in stating that the DRP has not given any directions on this issue. DRP while considering objections of the assessee on Taxability of reimbursement of expenses as FTS/Royalty has dealt with the issue the directions. DRP has given finding without referring to the reimbursed expenses. Consequently, the issue raised allowed for statistical purpose.

Summary

Issues Involved:
1. Taxability of consultancy services as Fees for Technical Services (FTS).
2. Taxability of SAP Licence Charges as Royalty.
3. Taxability of IT Support services as FTS/Royalty.
4. Taxability of reimbursement of expenses treated as FTS/Royalty.

Issue-wise Detailed Analysis:

1. Taxability of Consultancy Services as Fees for Technical Services (FTS):
The assessee argued that consultancy services provided to its Indian AE for setting up a manufacturing plant should not be classified as FTS. The services included managerial tasks such as project administration and coordination with vendors. The Tribunal had previously ruled in favor of the assessee for the assessment years 2015-16 and 2016-17, concluding that the services did not "make available" technical knowledge or skills to the recipient. The Tribunal reiterated that the consultancy services did not enable the recipient to perform similar services independently in the future. Consequently, the Tribunal held that the consultancy fees could not be taxed under article 12 of the Indo-Swedish tax treaty. The Tribunal also dismissed the Department's reliance on CBDT Circular No.3/2022, stating it was not applicable for the year under consideration.

2. Taxability of SAP Licence Charges as Royalty:
The assessee contended that SAP Licence charges were merely reimbursements and not taxable as royalty. The Tribunal noted that the SAP software licence was purchased from a third party and provided to the Indian subsidiary on a cost-to-cost basis without any markup. The Tribunal referenced the decision in the assessee's own case for the assessment years 2015-16 and 2016-17, where it was held that such reimbursements could not be taxed as income. The Tribunal reiterated that reimbursements, being devoid of any income element, are not taxable. Therefore, the Tribunal allowed the appeal on this ground, following the principle that reimbursements of expenses cannot be regarded as revenue receipts.

3. Taxability of IT Support Services as FTS/Royalty:
The assessee challenged the taxability of IT Support Services as FTS/Royalty. The Tribunal noted that similar additions were made in the preceding assessment years 2015-16 and 2016-17, where it was held that IT Support Services did not satisfy the "make available" clause and thus could not be taxed under article 12. The Tribunal emphasized that the incidental benefits such as improved efficiency or enduring benefits to the Indian entity were irrelevant for the "make available" test. The Tribunal also clarified that the IT Support Services were not ancillary to the SAP system and were provided by the assessee, not the software vendor. Hence, the Tribunal allowed the appeal on this ground, maintaining consistency with its earlier rulings.

4. Taxability of Reimbursement of Expenses Treated as FTS/Royalty:
The assessee disputed the taxability of reimbursement of expenses treated as FTS/Royalty. Both parties agreed that the Dispute Resolution Panel (DRP) did not provide clear directions on this issue. The Tribunal found that the DRP had not adequately addressed the reimbursement of expenses. Consequently, the Tribunal restored this issue to the Assessing Officer/DRP for fresh examination and adjudication. The appeal on this ground was allowed for statistical purposes.

Conclusion:
The appeal by the assessee was partly allowed. The Tribunal ruled in favor of the assessee on the taxability of consultancy services, SAP Licence charges, and IT Support services, following its earlier decisions. The issue of reimbursement of expenses was remanded to the Assessing Officer/DRP for reconsideration. The order was pronounced in the open court on June 10, 2022.