2018 (9) TMI 1758 - AT - Income Tax

Disallowance u/s 40(a)(i) - technical on-call assistance charges paid by assessee to its AE - DTAA - Held that - It is observed that assessee is providing annual maintenance in respect of equipments manufactured by AE. In respect of the same, assessee entered into an agreement with AE dated 01/04/10, whereby technical on-call advisory services are obtained from AE, in case of problems of outrage, emergency, technical support or system compromised on the basis of priority of cases. Under the agreement, AE is required to provide support services in case of critical/emergency issues to customers of assessee, through call centres remotely. Assessee in view of such services rendered made payments to AE, on which no TDS was deducted, as according to assessee, there is no requirement of withholding tax on such payments. It has also been submitted by Ld.Counsel that AE do not have a PE in India, and therefore is not taxable under India US DTAA. Provisions of India-US treaty provide for a restrictive meaning of fee for included services vis-a-vis meaning of fee for technical services (FTS) under the Act, in as much as, only those technical/consultancy services which are ancillary and subsidiary to application/enjoyment of right, property or information or which make available technical knowledge, skill, knowhow, process etc. would be liable to tax. Thus, in accordance with MOU, technology will be considered to be made available when the person acquiring the service is able to apply such technology on his own. Adverting to facts of case before us, service rendered by AE to assessee is as per agreement dated 01/04/10. According to the agreement, furnished by assessee placed at page 54-62 of paper book, services provided by AE to assessee are in nature of assistance in troubleshooting, isolating the problem and diagnosing related trouble and alarms and equipment repair services wherein the equipments will be shipped to US by assessee as and when required. It has been agreed between the parties that AE would be providing such services remotely and no on-site support services would be provided to customers of assessee. It appears from the above description of services rendered by AE that there is use of technical knowledge and/or skill, utilised by AE qualifies as fee for technical services , as defined under Explanation 2 to section 9(i)(vii) of the Act. As India has double taxation avoidance agreement with US, and Article 12(4) of India-USA DTAA deals with fee for technical services , to determine taxability of income received by AE for services rendered in India, the services rendered should satisfy the requirements under Article 12 (4), which requires technical knowledge, experience, skill etc., to be made available to the recipient of such services. On a careful perusal of the agreement dated 01/04/10 between AE and assessee, it appears that services rendered therein by AE does not satisfy the make available requirement as per article 12 (4) of the Act. Revenue received by AE in view of services rendered to assessee s customer is not taxable in India as per Article 12 (4) of India US DTAA, applicability of section 195 of the Act is not possible. Therefore, we are of the considered opinion, that section 40(a) (i) disallowance is uncalled for. In the result grounds raised by assessee for the year under consideration stands allowed.

Summary

Issues Involved:
1. Completion of assessment at a higher income than returned.
2. Disallowance of technical on-call assistance charges under Section 40(a)(i) of the Income Tax Act, 1961.
3. Applicability of the amendment to Section 40(a)(ia) of the Act and Article 26 of the India-US Double Taxation Avoidance Agreement (DTAA).
4. Charging of interest under Section 234D and recovery of interest paid under Section 244A of the Act.

Detailed Analysis:

1. Completion of Assessment at a Higher Income:
The appellant contended that the Assessing Officer (AO) erred in completing the assessment at an income significantly higher than the returned loss/income for the respective assessment years. The Commissioner of Income Tax (Appeals) [CIT(A)] further confirmed the addition made by the AO. The Tribunal noted this ground as general and did not require specific adjudication.

2. Disallowance of Technical On-Call Assistance Charges:
The primary issue revolved around the disallowance of technical on-call assistance charges paid by the appellant to its Associated Enterprise (AE) under Section 40(a)(i) of the Act. The AO disallowed these charges on the grounds that they constituted fees for technical services, and tax was not deducted at source as required under Section 195.

The Tribunal examined the nature of the services provided under the agreement dated 01/04/2010 between the appellant and its AE. It was noted that the services involved remote troubleshooting, diagnosis, and repair of equipment, provided without any physical presence in India, thus not constituting a Permanent Establishment (PE).

The Tribunal analyzed the provisions of the India-US DTAA, specifically Article 12(4), which defines fees for included services. It concluded that the services rendered did not "make available" technical knowledge, experience, skill, or know-how to the appellant, a requirement under the DTAA for the services to be taxable in India. Thus, the payments were not subject to withholding tax under Section 195, and consequently, the disallowance under Section 40(a)(i) was not justified.

3. Applicability of Amendment to Section 40(a)(ia) and Article 26 of India-US DTAA:
The appellant argued that even if the disallowance were applicable, it should be restricted to 30% of the sum payable, considering the amendment to Section 40(a)(ia) and the non-discrimination clause under Article 26 of the India-US DTAA. The Tribunal, having concluded that the payments were not taxable in India, found this ground moot and did not require further adjudication.

4. Charging of Interest under Section 234D and Recovery of Interest Paid under Section 244A:
The appellant contested the AO's action of charging interest under Section 234D and recovering interest paid under Section 244A. Given the Tribunal's decision on the primary issue of disallowance, the grounds related to interest charges were also resolved in favor of the appellant.

Conclusion:
The Tribunal allowed the appeals for all three assessment years (2012-13, 2013-14, and 2014-15), concluding that the disallowance of technical on-call assistance charges was unwarranted as per the provisions of the India-US DTAA. Consequently, the related grounds of appeal concerning the higher assessed income and interest charges were also resolved in favor of the appellant. The Tribunal's decision emphasized the importance of the "make available" clause in determining the taxability of technical services under international tax treaties.