2023 (7) TMI 406 - AT - Income Tax

Income chargeable to tax as FIS in India - Taxability of sub-contracting charges received by the assessee under the provisions of India-USA DTAA - scope of make available clause - HELD THAT - The statement of work though not titled as an agreement clearly sets out the obligation of both the parties, overview of the work to be performed by the assessee and the effective date to be 1st January, 2018. The contention of the lower authorities that the assessee has failed to produce an agreement between the parties for rendition of services does not hold good. The assessee has also submitted copies of invoices raised by the assessee on a sample basis before the lower authorities during the assessment proceedings. Hence the contention of the Revenue that the assessee could not produce any other documentary evidence regarding the services provided also does not stand correct. The make available clause is satisfied when the person acquiring the services is enabled to apply the technology independently in the future without the assistance of the service provider. The fact that the provision of the service may require technical/consultancy input by the person providing the service does not per se mean that technical knowledge, skills etc. are made available to the person availing the service. There has to be a transfer of the technical knowledge, experience, skill, know-how or processes or a technical plan or technical design from the service provider to the service recipient and the same should remain with the service recipient even after rendering of the services has come to an end. The e-publishing work in the nature of editorial services comprising of page composition, language polishing, indexing, correcting faulty grammar and punctuation etc. sub-contracted to the assessee involves technical expertise, however, such expertise is not transferred by the assessee which can be independently applied by SPi India in future on its own without recourse to the assessee. The impugned payment is not in relation to any services which make available any technical skill or know-how etc. to SPi India. Thus we are of the view that the sub-contracting charges received by the assessee does not satisfy the make available condition as envisaged under Article 12(4) of the India-USA DTAA and hence are not chargeable to tax as FIS in India in the hands of the assessee. Accordingly, all the grounds of appeal are decided in favour of the assessee.

Summary

Issues Involved:

1. Violation of principles of natural justice and provisions of the Act.
2. Taxability of subcontracting charges under India-USA DTAA.
3. Application of the 'make available' clause in Article 12(4) of the India-USA DTAA.
4. Consistency with previous rulings on similar facts.

Summary:

1. Violation of Principles of Natural Justice and Provisions of the Act:
The assessee argued that the lower authorities erred in finalizing the assessment order, violating principles of natural justice and the provisions of the Income Tax Act, 1961. The order was alleged to be devoid of merits, contrary to facts, and completed without adequate inquiries.

2. Taxability of Subcontracting Charges under India-USA DTAA:
The main issue was whether the subcontracting charges received by the assessee were taxable under the India-USA Double Taxation Avoidance Agreement (DTAA). The Ld. Assessing Officer (AO) initially treated these charges as 'Other Income' under Article 23 of the India-USA DTAA. However, the Dispute Resolution Panel (DRP) later classified the charges as 'Fees for Included Services' (FIS) under Article 12(4)(b) of the India-USA DTAA.

3. Application of 'Make Available' Clause in Article 12(4) of the India-USA DTAA:
The assessee contended that the services provided did not involve any transfer of technical knowledge, plan, or design to SPi India, thus not satisfying the 'make available' condition required under Article 12(4) of the India-USA DTAA. The Tribunal agreed, stating that the e-publishing services provided, such as page composition and language polishing, involved technical expertise but did not transfer this expertise to SPi India for independent future use.

4. Consistency with Previous Rulings on Similar Facts:
The assessee highlighted that in previous years, the DRP had ruled in favor of a group company, Laser words US, on similar facts, concluding that subcontracting charges were not taxable as FIS under the India-US Tax Treaty. The Tribunal found that the DRP misapplied the ruling of the Chennai Bench of the Tribunal regarding marketing fees, not subcontracting fees, and thus the previous favorable ruling should apply.

Conclusion:
The Tribunal concluded that the subcontracting charges received by the assessee did not satisfy the 'make available' condition under Article 12(4) of the India-USA DTAA and hence were not chargeable to tax as FIS in India. All grounds of appeal were decided in favor of the assessee, and the appeal was allowed.