2023 (1) TMI 9 - AT - Income Tax

Income deemed to accrue or arise in India - nature and description of services rendered by PTAI - payments to be made by the assessee company would clarified as fees for included services (FIS) as per Article 12(4)(b) of Indo-US DTAA - Satisfaction of conditions of Article 12(4)(b) of Agreement for Avoidance of DTAA between India and US of make available of technical service - assessee submitted that the AO has wrongly inferred the website of PTAI to hold that the said company as make available any kind of skills to the assessee company - HELD THAT - From the perusal of the agreement as well as nature of services rendered by the non-resident company PTAT we find that the payment is purely towards benchmarking of the services of SPI and such benchmarking study merely enables the clients to undertake further course of action to improve its qualitative capacity of personnel. PTAI does not provide any know how or technical knowledge albeit prompt its clients to take corrective action in the above areas. It merely provides implementing the benchmarking study in its organisation. PTAI is not a subject domain expert in the area in which the assessee operates. It only collects data from various entities engaged in similar business and makes benchmarking study report which indicates the percentile in which the assessee operates in terms of various facets of its operations. MOU to the India US DTAA elaborates on the concept of make available which specifies that technology will be considered made available when the person acquiring the service is able to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge skills etc. are made available to the person within the meaning of paragraph 4(b). Similarly the use of a product which embodies technology shall not per se be considered to make the technology available. Thus the services rendered by PTAI are neither ancillary nor subsidiary to the application or enjoyment of any right property or information and therefore same are not covered under Article 12(4)(a). Merely providing commercial information through a benchmarking study does not in any manner makes available any technical knowledge experience skill know how or processes nor consist of the development and transfer of a technical plan or technical design. Thus the services of PTAI cannot be said to be FIS under covered Article 12. Accordingly we hold that the payment made by the assessee to PTAI towards benchmarking services constitute business profit which are not liable to tax in India under the provision of Article 7 of the India USA DTAA and neither it has any business connection in India as defined in Explanation 2 of Section 9(1)(i) of the Act. Accordingly the grounds of appeal raised by the revenue are dismissed.

Summary

Issues Involved:
1. Nature of payments made by the assessee to PTAI for benchmarking services.
2. Classification of payments under the India-USA DTAA as 'business profits' or 'fees for included services (FIS)'.

Detailed Analysis:

Issue 1: Nature of Payments Made by the Assessee to PTAI for Benchmarking Services
The assessee company, engaged in oil exploration and manufacturing, sought authorization for payment to PTAI for 'Benchmarking services' under an agreement. The assessee argued that these payments were commercial in nature, not involving any technical element or fees for technical services (FTS), and thus should be subject to NIL tax deduction at source.

The Assessing Officer (AO) reviewed the agreement and services provided by PTAI, which included a range of activities such as web-based training, data collection, analysis, and development of reports and presentations. The AO concluded that these services fell under Article 12(4)(b) of the India-USA DTAA, classifying them as 'fees for included services' (FIS) because they 'make available technical service'.

Issue 2: Classification of Payments Under the India-USA DTAA
The CIT(A) disagreed with the AO, stating that the benchmarking services provided by PTAI did not 'make available technical service' as per Article 12(4)(b) of the DTAA. The CIT(A) emphasized that PTAI merely collected data and provided a benchmarking report without imparting any technical knowledge or proprietary information that the assessee could use independently. The CIT(A) supported this view by referencing previous ITAT and High Court decisions.

The CIT(A) further clarified that under Article 12(4) of the DTAA, 'fees for included services' are defined as payments for technical or consultancy services that either:
a) Are ancillary and subsidiary to the application or enjoyment of a right, property, or information, or
b) Make available technical knowledge, experience, skill, know-how, or processes.

The CIT(A) concluded that the services provided by PTAI did not meet these criteria, as they did not make available any technical knowledge or skills to the assessee. Instead, they only provided a comparative analysis based on data collected from various entities.

Tribunal's Conclusion:
The Tribunal reviewed the findings and arguments from both parties. It agreed with the CIT(A) that the services rendered by PTAI were purely for benchmarking and did not involve the transfer of technical knowledge or skills. The Tribunal noted that PTAI's services helped the assessee identify areas for improvement but did not provide any actionable technical know-how.

The Tribunal referenced the MOU to the India-US DTAA, which specifies that technology is considered 'made available' only when the recipient can apply it independently. Since PTAI's services did not meet this criterion, the payments could not be classified as FIS under Article 12.

The Tribunal concluded that the payments to PTAI constituted business profits, not liable to tax in India under Article 7 of the India-USA DTAA, as PTAI did not have a permanent establishment in India. Consequently, the Tribunal dismissed the revenue's appeal.

Final Judgment:
The appeal filed by the revenue was dismissed, and the payments made by the assessee to PTAI for benchmarking services were classified as business profits, not subject to tax in India under the India-USA DTAA. The judgment was pronounced in the open court on 19th May 2022.