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2024 (6) TMI 1434 - AT - Income TaxIncome deemed to accrue or arise in India - make available any technical knowledge experience skill know-how or processes to group companies - receipts from GIT infrastructure charges ( GIT charges ) by the assessee from its group companies for the use of various software are taxable as Fee for Included Services ( FIS ) or Fee for Technical Services ( FTS ) under section 9(1)(vii) of the Income Tax Act 1961 and Article 12 of the India-Canada DTAA HELD THAT - Assessee do not make available any technical knowledge experience skill know-how or processes to group companies which may enable them to apply any technology contained therein without recourse to the Appellant. The amounts received as GIT charges is only for providing use of third-party software and is not in the nature of FIS as envisaged under Article 12(4)(b) of India-Canada DTAA. Whether the receipts can be considered as royalty as per Article 12 India-Canada DTAA has also been examined. We find that the facts of the assessee are covered by the decision in case of Engineering Analysis Centre of Excellence Private Limited 2021 (3) TMI 138 - SUPREME COURT after determining various clauses of EULA/ Distribution agreement held that payments made by the Appellant to non-resident vendors shall not be taxable as Royalty under the relevant DTAA. We hold that payment made by Indian group entities to the Appellant is in consideration for use of software provided by third party vendor and is towards the copyrighted article without any copyrights being granted for its commercial exploitation hence the same shall not qualify as Royalty as per Article 12(3) of the India-Canada DTAA. Appeal of assessee allowed.
ISSUES PRESENTED and CONSIDERED
The core legal issues considered in this judgment include:
ISSUE-WISE DETAILED ANALYSIS 1. Taxability of GIT Charges as FIS/FTS Relevant legal framework and precedents: The assessment of whether the GIT charges qualify as FIS/FTS under the India-Canada DTAA hinges on Article 12(4), which defines FIS as payments for technical or consultancy services that make available technical knowledge, experience, skill, know-how, or processes. Court's interpretation and reasoning: The Tribunal examined the definition of FIS under Article 12(4) and the concept of 'make available' as interpreted in various judicial precedents, including the Memorandum of Understanding of the India-USA DTAA. The Tribunal noted that for services to qualify as FIS, they must enable the recipient to apply the technology independently in the future. Key evidence and findings: The Tribunal found that the GIT charges were for the use of third-party software licenses and did not involve the transfer of technical knowledge or skills to the group companies that would enable them to use the technology independently. Application of law to facts: The Tribunal applied the 'make available' test and concluded that the GIT charges did not meet the criteria for FIS under Article 12(4)(b) of the India-Canada DTAA. Treatment of competing arguments: The Tribunal considered the Revenue's argument that the GIT charges were for IT services, but found no basis for this claim in light of the 'make available' requirement. Conclusions: The Tribunal concluded that the GIT charges are not taxable as FIS under the India-Canada DTAA. 2. Taxability of GIT Charges as Royalty Relevant legal framework and precedents: The Tribunal referred to the Supreme Court's decision in Engineering Analysis Centre of Excellence Private Limited v. CIT, which held that payments for the use of software do not constitute 'Royalty' under similar DTAA provisions. Court's interpretation and reasoning: The Tribunal interpreted Article 12(3) of the India-Canada DTAA, which defines 'Royalty' and concluded that the payments for the use of software do not grant any rights to use the copyright itself, thus not qualifying as 'Royalty'. Key evidence and findings: The Tribunal found that the payments were for the use of copyrighted software articles, not for the right to use the copyright. Application of law to facts: The Tribunal applied the Supreme Court's reasoning and concluded that the GIT charges do not qualify as 'Royalty' under the India-Canada DTAA. Treatment of competing arguments: The Tribunal rejected the Revenue's position that the payments were for 'Royalty', aligning with the Supreme Court's interpretation. Conclusions: The Tribunal concluded that the GIT charges are not taxable as 'Royalty' under the India-Canada DTAA. 3. Penalty Proceedings under Section 270A Relevant legal framework and precedents: Section 270A of the Income Tax Act pertains to penalties for underreporting of income. Court's interpretation and reasoning: The Tribunal did not find sufficient grounds for initiating penalty proceedings, given the substantive legal findings in favor of the assessee regarding the non-taxability of GIT charges. Conclusions: The Tribunal implicitly rejected the initiation of penalty proceedings by allowing the appeal on substantive grounds. SIGNIFICANT HOLDINGS Preserve verbatim quotes of crucial legal reasoning: "The amounts received as GIT charges is only for providing use of third-party software and is not in the nature of FIS as envisaged under Article 12(4)(b) of India-Canada DTAA." Core principles established: The Tribunal reaffirmed the principle that for payments to qualify as FIS under the India-Canada DTAA, the services must 'make available' technical knowledge, enabling the recipient to apply it independently. It also reinforced the Supreme Court's interpretation that payments for the use of software do not constitute 'Royalty' under similar DTAA provisions. Final determinations on each issue: The Tribunal allowed the appeal, holding that the GIT charges are neither taxable as FIS nor as 'Royalty' under the India-Canada DTAA, and implicitly negated the basis for penalty proceedings under section 270A.
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