2023 (12) TMI 802 - AT - Income Tax

Income taxable India - taxability of receipts from consultancy services and reimbursement of expenses - characterizing receipts as Fee for Included Services ( FIS ) under Article 12(4)(b) of India USA Double Taxation Avoidance Agreement ( DTAA ) as well as section 9(1)(vii) - assessee is a non-resident corporate entity and a tax resident of Unites States of America ( USA ) - Receipts were not offered to tax on the ground that they are in the nature of business profit, hence, in terms with the treaty provisions, are not taxable in India in absence of a Permanent Establishment (PE) - HELD THAT - As decided in own case 2023 (9) TMI 106 - ITAT DELHI Tribunal having analyzed the nature and character of the services rendered and the provisions contained under Article 12(4)(b) of the tax treaty, has concluded that the receipts cannot be treated as FIS/FTS, either under the treaty provisions or under the provisions of the Act. T axability of receipts from business consultancy services , we observe, as per Example 7 of the Memorandum of Understanding to India-USA DTAA, a receipt cannot be treated as FTS merely because the service provider while providing consultancy services has used substantial technical skill and expertise. Because, while providing such services, the American Company is not making available to the Indian Company, any technical expertise, knowledge or skill etc. but is merely transferring commercial information to the Indian Company by utilizing technical skill. Thus, no hesitation in holding that the receipts in dispute are not in the nature of FIS under Article 12(4)(b) of India-USA DTAA. Taxability of reimbursement of expenses payment cannot be treated either as FIS under Article 12(4)(b) of the Tax Treaty or royalty. Addition being receipts from provision of support services as FIS - As per AO not only the services are in the nature of technical/consultancy services, but while rendering such services, the assessee had made available technical knowledge, know-how, skill etc. as the services rendered include training of personnel, thus receipts would qualify as FIS under Article 12(4)(b) of the tax treaty -whether the receipts from provision of support services would qualify as FIS under Article 12(4)(b) of India USA DTAA? - HELD THAT - To qualify as FIS under Article 12(4)(b) of India USA DTAA, two conditions have to be satisfied. Firstly, the nature of services must be technical or consultancy and, secondly, in course of rendition of such services, there must be transfer of technology from the service provider to the service recipient, through which, the service provider makes available technical knowledge, know- how, skill etc. to the service recipient. In the present case as noted it is patent and obvious that from the year 2010 onwards, the assessee is providing support services to Bain India on regular basis. Had it been a case of transfer of technology from the assessee to Bain India by making available technical knowledge, know-how, skill etc. qua the services performed, it would certainly have enabled Bain India to employ such technical knowledge, know-how, skill etc. in performing such services independently without seeking aid and assistance of the assessee. There would have been no necessity for Bain India to continuously avail such services from the assessee since the year 2010 till the current assessment year. Had it been a case of transfer of technology in such a long duration Bain India certainly would have acquired the technical knowledge, know-how, skill etc. to perform such services on its own, without requiring the assessee to provide them. The very fact that Bain India is still dependent upon the assessee for the support services, establishes the fact that the assessee has not made available technical, know-how, skill etc. relating to such services to Bain India, the service recipient. At the time of hearing, assessee has made a statement at bar that prior to the impugned assessment year, in no other assessment year the AO has treated the receipts from support services as FIS and brought it to tax. Thus, on overall consideration of facts and materials on record, we are of the view that the Revenue has not brought on record any materials to establish the fulfillment of make available condition of Article 12(4)(b) of India USA DTAA. Thus services rendered are not in relation to any manufacturing activity. In this view of the matter, the receipts cannot be treated as FIS under Article 12(4)(b) of the tax treaty. The Assessing Officer is directed to delete the addition. As per AO assessee had settled the dispute under the Vivad Se Vishwas Scheme, 2020, thereby tacitly accepting the additions - This observations of the Assessing Officer is not, at all, relevant for deciding the issue, as, settlement of dispute under the Vivad Se Vishwas Scheme, 2020 cannot be construed to mean a tacit acceptability of the additions, in fact, the aforesaid position stands clarified by the CBDT Circular no. 09/2020, dated 22 nd April, 2020. Assessee appeal allowed.

Summary

Issues Involved:
1. Taxability of consultancy services as Fee for Included Services (FIS) under Article 12(4)(b) of India-USA DTAA and Section 9(1)(vii) of the Income-tax Act.
2. Taxability of reimbursement of expenses as FIS under the same provisions.
3. Taxability of receipts from provision of support services as FIS under the same provisions.

Summary:

Issue 1: Taxability of Consultancy Services as FIS

The assessee, a non-resident corporate entity and tax resident of the USA, received Rs. 9,09,98,733/- from consultancy services provided to its Indian subsidiary, Bain India. The Assessing Officer characterized these receipts as FIS under Article 12(4)(b) of the India-USA DTAA and Section 9(1)(vii) of the Income-tax Act, asserting that the services rendered were consultancy services and involved the transfer of technical knowledge. However, the Tribunal, referencing its decision in the assessee's case for the assessment year 2018-19, concluded that the services provided, such as market research and strategic planning, did not make available technical knowledge, skill, or know-how to Bain India. Therefore, the receipts were not taxable as FIS under the tax treaty or the Act.

Issue 2: Taxability of Reimbursement of Expenses as FIS

The assessee also received Rs. 10,39,89,404/- as reimbursement of expenses from Bain India. The Assessing Officer treated these receipts as FIS under Article 12(4)(b) of the tax treaty and Section 9(1)(vii) of the Act, arguing that the services rendered included consultancy elements. The Tribunal, following its earlier decision, held that the reimbursement of expenses did not qualify as FIS since there was no transfer of technical knowledge or skill that Bain India could utilize independently. Consequently, these receipts were not taxable as FIS.

Issue 3: Taxability of Receipts from Provision of Support Services as FIS

The assessee received Rs. 18,54,90,269/- for providing support services to Bain India under an agreement dated 1st April 2010. The Assessing Officer argued that these services were technical/consultancy services and involved the transfer of technical knowledge, thus qualifying as FIS under Article 12(4)(b) of the tax treaty. The Tribunal, upon examining the nature of the services, determined that while some services might fall under technical or consultancy categories, there was no evidence of transfer of technical knowledge or skill enabling Bain India to perform these services independently. The Tribunal noted that Bain India's continued reliance on the assessee for these services since 2010 indicated no transfer of technology. Therefore, the receipts were not taxable as FIS under the tax treaty.

Additional Observations:

The Tribunal dismissed the relevance of the assessee settling similar disputes under the Vivad Se Vishwas Scheme, 2020, as it does not imply tacit acceptability of the additions. The appeal was allowed in favor of the assessee.

Conclusion:

The Tribunal held that the receipts from business consultancy services, reimbursement of expenses, and provision of support services were not taxable as FIS under Article 12(4)(b) of the India-USA DTAA and Section 9(1)(vii) of the Income-tax Act.

Order Pronounced:

Order pronounced in the open court on 12th October, 2023.