2023 (8) TMI 1391 - AT - Income Tax

Income taxable India - Addition as income by treating the receipts on account of subscription, professional and training services as Fee for Technical Services (FTS) - meaning of expression make available - assessee is a foreign company incorporated under the laws of Netherlands, engaged in the business of providing enterprise cloud computing solutions that define structure, manage and automate services for global enterprises - HELD THAT - We find that Article 12(5)(a) above is not applicable in the instant case. Article 12(5)(b) insist on make available clause to fall within the ambit of FTS. In the instant case, the assessee has only access to software. There is no transfer of technology by the assessee. We are unable to persuade ourselves to accept to the argument of the ld. DR in this regard wherein it was argued that services provided by assessee are standard and customized services and that make available clause is not relevant for the second part of Article 12(5)(b) i.e it is not relevant for development and transfer of a technical plan or technical design. In our considered opinion, make available is for the entire expressions mentioned in Article 12(5)(b) of the India Netherlands Treaty. In the instant case, we find that the assessee had merely granted only access to software and there is no transfer of technology by the assessee. Hence we have no hesitation to hold that the services rendered by the assessee does not fall within the definition of FTS as per the Treaty. In any case, we find that the since assessee had merely granted access to software, it does not fall within the definition of FTS even as per the Act. In this regard, analogy could be drawn from the decision of Kotak Securities Ltd 2016 (3) TMI 1026 - SUPREME COURT wherein it was held that service made available by Bombay Stock Exchange BSE Online Trading (BOLT) System for which transaction charges are paid by members of BSE are common services that every member of Stock Exchange is necessarily required to avail of to carry out trading in securities in Stock Exchange; such services do not amount to 'technical services' provided by Stock Exchange, not being services specifically sought for by user or consumer and, therefore, no TDS would be deductible under section 194J on payments made for such services. Thus we hold that the subscription, professional and training services rendered by the assessee does not fall within the definition of FTS both under the Act as well as under the DTAA and accordingly the same cannot be taxed in India. Accordingly, the Grounds 1 to 3 raised by the assessee are allowed.

Summary

Issues Involved:
1. Justification of addition of Rs 125,11,22,698/- as Fee for Technical Services (FTS).
2. Correct TDS credit.
3. Initiation of penalty proceedings under section 274 read with section 270A of the Income Tax Act.

Summary:

Issue 1: Justification of Addition as FTS

The primary issue was whether the Assessing Officer (AO) was justified in treating the receipts from subscription, professional, and training services as Fee for Technical Services (FTS) and adding Rs 125,11,22,698/- to the income of the assessee. The assessee, a Netherlands-based company, argued that these services do not fall under the definition of 'royalty' or 'fees for technical services' as per Article 12 of the India-Netherlands DTAA. The company contended that the services provided were ancillary and did not make technical knowledge available to customers, and thus should not be taxable in India. The assessee also claimed that it did not have a Permanent Establishment (PE) in India, making the income non-taxable as business profits under Article 7 of the DTAA. The AO, however, concluded that the receipts were for technical services and taxable as FTS.

The Tribunal examined the Master Agreement and various clauses, concluding that the services provided were akin to a copyrighted article and did not involve the transfer of technology. Citing the Karnataka High Court's decision in CIT vs De Beers India Minerals (P) Ltd and the Supreme Court's decision in CIT vs Kotak Securities Ltd, the Tribunal held that the services did not fall within the definition of FTS under the DTAA or the Act. Therefore, the addition made by the AO was not justified, and Grounds 1 to 3 raised by the assessee were allowed.

Issue 2: Correct TDS Credit

Ground No. 4 raised by the assessee concerned the correct TDS credit. The Tribunal directed the AO to grant TDS credit after due verification in accordance with the law. This ground was allowed for statistical purposes.

Issue 3: Initiation of Penalty Proceedings

Ground No. 5 challenged the initiation of penalty proceedings under section 274 read with section 270A of the Act. The Tribunal deemed this issue premature for adjudication and dismissed it.

Conclusion

The appeal was partly allowed for statistical purposes, with the Tribunal ruling in favor of the assessee on the primary issue of FTS and directing the AO to verify and grant correct TDS credit. The initiation of penalty proceedings was dismissed as premature. The order was pronounced on 29th August 2023.