2017 (1) TMI 780 - AT - Income Tax

Fee for Technical Services (FTS) - deduction of tax at source under section 195 - Payment made towards various IT support services received from the Holding Company and associated enterprises of the group concerns - Held that - We find that the related payments made by the assessee to BT Canada were in the nature of reimbursements, and, as evident from the details taken to record earlier in this order, there were specific cost allocations which were borne by the assessee. These payments, by no stretch of logic, could be viewed as payments for right to use the equipment. The assessee was entitled to certain services, during rendition of which even if certain equipment were to be used, but that by itself did not result in any use of or right to use the equipment by the assessee. The service may involve use of equipment but that does not vest right in the assessee to use the equipment. Even if a part of consideration can be said to be on account of use of equipment by breaking down all the components of economic activity for which consideration is paid, it is neither practicable, nor permissible, to assign monetary value to each of the segment of this economic activity and consider that amount in isolation, for the purpose of deciding character of that amount. The payment, as we have observed earlier, is for the activity of specialized data processing. It is neither practicable, nor permissible, to assign monetary value to each of the segment of this economic activity and consider that amount in isolation, for the purpose of deciding character of that amount. Therefore, neither the impugned payment can be said to be towards use of, or right to use of, the mainframe computer, nor is it permissible to allocate a part of the impugned payment, as attributable to use of, or right to use of, mainframe computer. Accordingly, the provisions of art. 12(3)(b) cannot have any application in the matter. Going by this logic even if one proceeds on the basis that any equipment is used in rendition of these services, such a payment, or part thereof, cannot be treated as payment for use of equipment. Revenue s case is thus acceptable as payment for use of equipment. In any case, the details furnished by the assessee also support the fact of reimbursement. When recipient does not have any income embedded in the related payment as reimbursement, there cannot be any occasion for deduction of tax at source under section 195. In view of these discussions, as also approving the reasoning adopted by the CIT(A), we uphold the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter.- Decided against revenue Royalty payment - make available clause - Payment made towards providing of services to use of equipment and right to use equipment received from the Holding Company and associated enterprises of the group concerns are not in the nature of - Held that - In order to invoke article 12(4)(a) it is necessary that such services should make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design The services provided by BT Canada were simply management support or consultancy services which did not involve any transfer of technology. It is not even the case of the Assessing Officer that the services were such that the recipient of service was enabled to perform these services on its own without any further recourse to the service provider. It is in this context that we have to examine the scope of expression make available . Its not even the case of the Assessing Officer that the assessee, i.e. recipient of services, was enabled to use these services in future without recourse to BT Canada. There mere fact that there were certain technical inputs or that the assessee immensely benefited from these services, even resulting in value addition to the employees of the assessee, is wholly irrelevant. The expression make available has a specific meaning in the context of the tax treaties and there is, thus, no need to adopt the day to day meaning of this expression, as has been done by the Assessing Officer. In view of these discussions, and as we concur with the well reasoned findings of the learned CIT(A), we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter on this count as well. The order of the CIT(A) stands confirmed. - Decided against revenue

Summary

Issues Involved:
1. Whether the payment of ?9,19,96,649/- for IT support services is in the nature of Fee for Technical Services (FTS).
2. Whether the payment of ?7,21,21,518/- for services related to the use of equipment and right to use equipment constitutes Royalty.

Issue-wise Detailed Analysis:

1. Payment for IT Support Services as Fee for Technical Services (FTS):

The primary issue was whether the payment of ?9,19,96,649/- made towards various IT support services received from the Holding Company and associated enterprises are in the nature of Fee for Technical Services (FTS). The assessee, a wholly-owned subsidiary of Bombardier Transportation (Holdings) Singapore Pte Ltd, made payments to Bombardier Transportation Canada Inc (BTCI) for IT support services. The Assessing Officer (AO) contended that these payments were taxable as royalties under section 9(1)(vi) of the Income Tax Act and article 12(3) of the India-Canada Double Taxation Avoidance Agreement (DTAA). However, the CIT(A) concluded that these payments were reimbursements for standard services and did not involve the transfer of any rights or intellectual property.

The Tribunal upheld the CIT(A)’s decision, noting that the payments were reimbursements and did not constitute a right to use any equipment or process. It was emphasized that the services did not transfer any technology or rights to the assessee, and thus, could not be considered royalties. The Tribunal further referenced the case of Kotak Mahindra Primus Ltd vs DDIT, where it was held that payments for data processing services did not constitute a right to use the equipment involved. Consequently, the Tribunal dismissed the AO’s appeal on this ground.

2. Payment for Services Related to Use of Equipment as Royalty:

The second issue was whether the payment of ?7,21,21,518/- made towards providing services related to the use of equipment and the right to use equipment received from the Holding Company and associated enterprises constituted Royalty. The AO argued that these services were technical in nature and made available technical knowledge, skill, and experience to the assessee, thus falling under the definition of 'fees for technical services' in the DTAA.

The CIT(A) disagreed, stating that the services provided did not enable the assessee to perform these services independently in the future, which is a requirement for the 'make available' clause in the DTAA. The CIT(A) relied on various judicial precedents, including the Ahmedabad Tribunal’s decision in Shell Global Solutions International BV vs. ITO, which held that services not involving the transfer of technology do not qualify as fees for technical services under the DTAA.

The Tribunal concurred with the CIT(A), emphasizing that the services provided by BT Canada were management support or consultancy services and did not involve any transfer of technology. The Tribunal referenced the Karnataka High Court’s decision in CIT Vs De Beers India Pvt. Ltd, which clarified that for services to be considered as 'making available' technical knowledge, the recipient must be able to apply the technology independently in the future. Since the AO did not establish that the services enabled the assessee to use the technology independently, the Tribunal upheld the CIT(A)’s decision and dismissed the AO’s appeal on this ground.

Conclusion:

The Tribunal dismissed the AO’s appeal, confirming that the payments made for IT support services and services related to the use of equipment did not constitute Fee for Technical Services or Royalty under the relevant provisions of the Income Tax Act and the India-Canada DTAA. The Tribunal upheld the CIT(A)’s findings that these payments were reimbursements for standard services and did not involve the transfer of any rights or technology.