2024 (9) TMI 1712 - AT - Income Tax

Payments received for General Business Support Services (BSS) - Fees for Technical Services (FTS) liable to be taxed in India under the Income Tax Act 1961 and the India-UK Double Taxation Avoidance Agreement (DTAA) - HELD THAT - As services rendered by the assessee are not in the nature of technical service and are merely managerial in nature though in the case of SIMPL 2012 (2) TMI 98 - AUTHORITY FOR ADVANCE RULINGS the same has a binding effect on the assessee for the reason that it arises out of the same CCA for availing General BSS. As the ruling of Hon ble AAR 2012 (2) TMI 98 - AUTHORITY FOR ADVANCE RULINGS holding that the same is liable to be taxed in India as fee for technical service has been reversed by the Hon ble High Court we find no reason to uphold the order of the ld. A.O. who in fact has relied on the Hon be AAR s ruling to decide the issue in hand. We therefore deem it fit to allow the grounds of appeal raised by the assessee. Appeal filed by the assessee is allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

• Whether the payments received by the assessee for General Business Support Services (BSS) constitute 'income' in the nature of 'Fees for Technical Services' (FTS) liable to be taxed in India under the Income Tax Act, 1961 and the India-UK Double Taxation Avoidance Agreement (DTAA).
• Whether the receipts from General BSS are in the nature of cost-recharge and thus not chargeable to tax in India.
• Whether the services provided by the assessee 'make available' technical knowledge, skill, experience, etc., to the service recipient under Article 12 of the India-UK DTAA, thereby subjecting them to tax in India.
• The initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.
• Whether the assessment order is barred by limitation.
• Whether the existence of a 'permanent establishment' under Article 7 of the DTAA was properly considered.

ISSUE-WISE DETAILED ANALYSIS

1. Payments as 'Fees for Technical Services' (FTS)

Relevant legal framework and precedents: The determination of whether payments constitute FTS is guided by the Income Tax Act, 1961, and the India-UK DTAA. Article 13 of the DTAA defines 'fees for technical services' and outlines the tax implications.

Court's interpretation and reasoning: The Tribunal relied on the Hon'ble Jurisdictional High Court's decision, which quashed the Authority for Advance Ruling's (AAR) order that categorized the payments as FTS. The High Court clarified that the services provided were managerial, not technical, and did not 'make available' technical knowledge.

Key evidence and findings: The Tribunal noted the High Court's analysis of the Cost Contribution Agreement (CCA) and the nature of services listed, which were managerial and not technical.

Application of law to facts: The Tribunal applied the High Court's ruling that the services were not technical and thus not taxable as FTS under the DTAA.

Treatment of competing arguments: The Departmental Representative acknowledged the High Court's decision favoring the assessee, while the assessee's representative highlighted the High Court's reversal of the AAR's ruling.

Conclusions: The Tribunal concluded that the payments were not taxable as FTS, aligning with the High Court's decision.

2. Nature of Receipts as Cost-Recharge

Relevant legal framework and precedents: The characterization of receipts as cost-recharge involves understanding whether they constitute income under section 2(24) of the Income Tax Act.

Court's interpretation and reasoning: The Tribunal accepted the assessee's contention that the payments were cost-recharges without markup, thus not constituting income.

Key evidence and findings: The Tribunal considered the CCA terms, which specified cost allocation without markup.

Application of law to facts: The Tribunal found that the payments were reimbursements, not income, and thus not taxable.

Treatment of competing arguments: The Tribunal noted the Departmental Representative's agreement with the High Court's ruling.

Conclusions: The Tribunal held that the payments were not income and thus not taxable.

3. 'Make Available' Clause under DTAA

Relevant legal framework and precedents: The 'make available' clause in Article 13 of the DTAA determines whether services provided impart technical knowledge enabling independent use by the recipient.

Court's interpretation and reasoning: The Tribunal followed the High Court's interpretation that the services did not 'make available' technical knowledge.

Key evidence and findings: The Tribunal cited the High Court's analysis of the CCA, which listed managerial services not meeting the 'make available' criteria.

Application of law to facts: The Tribunal applied the High Court's reasoning, concluding the services did not meet the 'make available' test.

Treatment of competing arguments: The Tribunal acknowledged the Departmental Representative's concession on this point.

Conclusions: The Tribunal concluded that the services did not 'make available' technical knowledge and were not taxable under the DTAA.

4. Penalty Proceedings under Section 271(1)(c)

The Tribunal did not specifically address this issue in detail, as the primary focus was on the taxability of the payments as FTS.

5. Assessment Order Barred by Limitation

The additional ground regarding limitation was not pressed by the assessee and thus not adjudicated by the Tribunal.

6. Permanent Establishment under Article 7 of DTAA

Relevant legal framework and precedents: The existence of a permanent establishment affects tax liability under Article 7 of the DTAA.

Court's interpretation and reasoning: The Tribunal noted that the issue of permanent establishment was not raised by either party in the appeal and declined to adjudicate on it.

Key evidence and findings: The Tribunal referenced the High Court's direction allowing the Department to explore this issue separately.

Application of law to facts: The Tribunal did not apply the law to this issue due to its absence in the grounds of appeal.

Treatment of competing arguments: The Tribunal acknowledged the Departmental Representative's suggestion but adhered to the principle of adjudicating only on raised issues.

Conclusions: The Tribunal did not address the permanent establishment issue, leaving it open for separate proceedings.

SIGNIFICANT HOLDINGS

The Tribunal's significant holdings include:

• The payments received for General BSS are not 'fees for technical services' under the Income Tax Act or the India-UK DTAA, as they do not 'make available' technical knowledge.
• The receipts are in the nature of cost-recharge and do not constitute income chargeable to tax in India.
• The Tribunal allowed the appeal, reversing the lower authorities' reliance on the AAR's ruling, which was quashed by the High Court.
• The Tribunal declined to adjudicate on the permanent establishment issue, as it was not part of the grounds of appeal.