2021 (4) TMI 446 - AT - Income Tax

Income deemed to accrue or arise in India - Taxability of certain amount received from the Indian subsidiary - PE in India - royalty or/and fees for technical services (FTS) - assessee is a company incorporated in Singapore and is also a tax resident of that country - HELD THAT - On a careful reading of Article 12(4) of the tax treaty, it becomes very much clear that Article 12(4)(a) and 12(4)(c) are not applicable to the present case. Insofar as Article 12(4)(b) is concerned, it clearly denotes that a payment can be treated as FTS, if it makes available technical knowledge, experience, skill, know-how or process which enables the person acquiring the services to apply the technology contained therein - most crucial factor which requires examination is, while rendering services, whether the assessee has made available any technical knowledge, experience, skill, know-how or process in terms of section 12(4)(b) - material on record would not persuade one to conclude so. The true meaning of the aforesaid provision is, not only the payment is received for providing technical or managerial services, but, while doing so the service provider also makes available any technical knowledge, experience, skill, know-how or process, etc. to the recipient of services, which enables the person acquiring such services to apply the technology contained therein independent of the service provider. In other words, the service recipient must be in a position to apply the technical knowledge, experience, skill, know-how, etc. without requiring the permission or presence of the service provider. In the facts of the present case, there is nothing on record to suggest that Atos India can use any technical knowledge, experience, skill, know-how or process, etc. independently on its own without requiring the involvement of the assessee. Therefore, in our considered opinion, the tests and conditions of Article 12(4)(b) are not satisfied. That being the case, the payment received by the assessee from various projects related services would not qualify as FTS either. That being the case, the payment received by the assessee has to be treated as business profits; hence, would not be taxable in absence of a permanent establishment in India. Definitions of royalty and FTS have been given under Article 12(3) and 12(4) of the tax treaty. Of course, Article 12(2) provides for taxation of royalty and FTS in the source country. However, in our considered view, Article 12(2) has to be read in conjunction with Article 12(1), 12(3) and (4) of the tax treaty and not on standalone basis. In our view, Article 12(2) will get triggered only if the amount received qualifies as royalty and FTS under the treaty provisions. Since, in the facts of the present case we have held that the payment received towards various project related services does not qualify as royalty and FTS under the treaty provisions, the applicability of Article 12(2) of the tax treaty would not arise. Payment being the cost recharge pertaining to the salary of Mr. Thomas Boutard - We find from record, the learned DRP has very categorically observed that inspite of the fact that the assessee was specifically asked to provide the details of services rendered by Mr. Thomas Boutard, the assessee has neither furnished nature of services provided nor furnished other details - it is the case of the assessee that Mr. Thomas Boutard is an employee of the assessee, who assisted the employees of Atos India for finalizing annual accounts. However, the nature of services provided by Mr. Thomas Boutard needs to be examined. It also requires examination whether while rendering such services, the concerned person has made available any technical knowledge, skill, know-how, etc to the employees of Atos India to treat the payment received towards cost recharge as FTS. The learned Counsel has submitted before us that similar payment made to the concerned person in subsequent assessment years has been allowed by the assessing officer. All these factors need to be properly verified by the assessing officer to come to a definite conclusion, whether the payment received by the assessee towards cost recharge of salary paid to Mr. Thomas Boutard shall qualify as FTS under Article 12(4)(b) of India-Singapore Tax Treaty. Accordingly, this issue is restored to the assessing officer for fresh adjudication, after due opportunity of being heard to the assessee. Addition made of the payment received towards various project related services by treating them as royalty and FTS is hereby deleted - Whereas, the issue relating to payment of cost recharge pertaining to salary of Mr. Thomas Boutard is restored back to the assessing officer. Grounds 1, 2 3 are disposed of accordingly. Levy of surcharge and education cess on the tax liability computed - It is the case of the assessee that the total tax payable cannot exceed the tax rate as prescribed under Article 2 of India-Singapore Tax Treaty - HELD THAT - Admittedly, this issue has been raised for the first time before us. Further, in case, the assessing officer decides the issue of cost recharge pertaining to the salary paid to Mr. Thomas Boutard in favour of the assessee, the issue will become academic. Keeping in view the aforesaid facts, we restore this issue to the assessing officer for adjudication after due opportunity of being heard to the assessee. Ground 4 is allowed for statistical purpose.

Summary

Issues Involved:
1. Taxability of payment received as royalty or fees for technical services (FTS).
2. Nature of services rendered and their classification under India-Singapore DTAA.
3. Cost recharge pertaining to the salary of an employee.
4. Levy of surcharge and education cess.
5. Initiation of penalty proceedings under section 271(1)(c).

Issue-wise Detailed Analysis:

1. Taxability of Payment Received as Royalty or FTS:
The assessee, a Singapore-based company, provided services to its Indian subsidiary, Atos India Pvt. Ltd., and received payments for these services. The primary issue was whether these payments could be classified as royalty or FTS under the India-Singapore Double Taxation Avoidance Agreement (DTAA). The assessing officer classified the payments as royalty and FTS, while the assessee argued that the payments should be treated as business profits and not taxable in India due to the absence of a permanent establishment (PE) in India. The tribunal concluded that the payments received for project-related services and managed services do not qualify as royalty under Article 12(3) of the India-Singapore DTAA as the services rendered did not involve the transfer of any right to use industrial, commercial, or scientific equipment or any copyright.

2. Nature of Services Rendered and Their Classification Under India-Singapore DTAA:
The services provided by the assessee included data center and mailbox hosting services, which involved remote monitoring and maintenance of servers and databases located outside India. The tribunal noted that the services rendered were purely IT infrastructure management and mailbox hosting services, which do not fall under the definition of royalty or FTS as per Articles 12(3) and 12(4) of the India-Singapore DTAA. The tribunal emphasized that for a payment to be classified as FTS, the services must make available technical knowledge, experience, skill, know-how, or processes to the recipient, enabling them to apply the technology independently, which was not the case here.

3. Cost Recharge Pertaining to the Salary of an Employee:
The cost recharge related to the salary of Mr. Thomas Boutard, who assisted Atos India in finalizing annual accounts. The tribunal restored this issue to the assessing officer for fresh adjudication, as the exact nature of services rendered by Mr. Boutard and whether they involved making available technical knowledge, skill, or know-how to Atos India's employees needed further examination. The tribunal directed the assessing officer to verify whether the payment qualifies as FTS under Article 12(4)(b) of the India-Singapore DTAA.

4. Levy of Surcharge and Education Cess:
The assessee contended that the total tax payable should not exceed the tax rate prescribed under Article 2 of the India-Singapore DTAA. The tribunal restored this issue to the assessing officer for adjudication, noting that it was raised for the first time before the tribunal and would become academic if the cost recharge issue was decided in favor of the assessee.

5. Initiation of Penalty Proceedings Under Section 271(1)(c):
The tribunal dismissed the issue of initiation of penalty proceedings under section 271(1)(c) as premature at this stage.

Conclusion:
The tribunal partly allowed the appeals, deleting the additions made by treating the payments received for various project-related services as royalty and FTS. The issue of cost recharge pertaining to the salary of Mr. Thomas Boutard was restored to the assessing officer for fresh adjudication. The issue of levy of surcharge and education cess was also restored to the assessing officer for adjudication. The initiation of penalty proceedings under section 271(1)(c) was dismissed as premature.