2024 (6) TMI 935 - AT - Income Tax

Fee for technical Services (FTS) u/s 9(i)(vii) - assessee received reimbursement of connectivity charges from Huawei India for provision of connectivity services for international communication - Admittedly, India and Hong Kong did not have any double taxation avoidance of the Agreement during the concerned Assessment Years - contention of the assessee before the A.O. that the services provided do not constitute managerial services, the services provided do not constitute consultancy services and there is no human intervention involved in provision of connectivity services and thus, the services rendered do not constitute technical services. HELD THAT - The contention of the Department that, the Revenue has been treated considering the clauses 2.2(a) to (e) of the Agreement that the Assessee provides plethora of services to its AE right from negotiating agreements with third parties entering into purchase agreement, to issuing inspection certificates certifying the products and services. Revenue treated these services as not only technical in nature but also managerial and consultancy services against the fact that assessee has only paid for connectivity services and the services are merely ancillary to enabling the provision of inter-connect services and part of the processing the product. Hence, in our considered opinion, the amounts cannot be treated as technical or managerial or consultancy services. The Reliance is being placed on the judgment of Bharti Airtel Ltd. 2024 (1) TMI 804 - SC ORDER The assessee has earned 1% markup on the reimbursement of connectivity charges. This is the amount earned by the assessee in the entire transaction. The AO may invoke relevant provisions of the Income Tax Act and the DTAA for taxing of the said income earned.

Summary

Issues:
Assessment of income as Fees for Technical Services (FTS) under section 9(1)(vii) of the Income Tax Act, incorrect application of tax rates, interest levied under section 234A, 234B, and 234C, initiation of penalty proceedings under section 270A.

Analysis:
1. Assessment of Income as FTS: The appeals were filed against the assessment orders for the Assessment Years 2018-19 and 2019-20, challenging the characterization of charges received as Fees for Technical Services (FTS) under section 9(1)(vii) of the Act. The assessee contended that the services provided were only connectivity charges and not FTS. The Department argued that the services rendered by the assessee included managerial and consultancy services, falling within the ambit of FTS. However, the tribunal found that the services provided were ancillary to enabling the provision of inter-connect services and part of the processing of the product, not qualifying as technical or managerial services under the Act.

2. Tax Rate Application: The appellant raised concerns about the tax rate applied, stating that the AO computed tax at 40% instead of the applicable 10% under section 115A of the Act. The tribunal did not provide detailed reasoning on this specific issue in the summary provided.

3. Interest and Penalty Proceedings: The AO levied interest under section 234A, 234B, and 234C of the Act, and also initiated penalty proceedings under section 270A. The tribunal did not delve into the specifics of these issues in the summary provided, but it is noted that the grounds of appeal mentioned interest and penalty proceedings as independent issues.

4. Judicial Precedents and Legal Principles: The appellant relied on judicial precedents to support their argument that connectivity charges payments are not taxable as FTS. The tribunal considered the clauses in the purchasing service agreement between the assessee and Huawei India, concluding that the services provided did not constitute technical or managerial services as contended by the Department. The tribunal referenced the judgment of the Hon'ble Apex Court in CIT Vs. Bharti Airtel Ltd. to support its decision.

5. Decision: The tribunal partly allowed the appeals for statistical purposes, indicating that the characterization of the charges as FTS was incorrect, and the amounts could not be treated as technical or managerial services. The tribunal emphasized that the assessee earned a 1% markup on the reimbursement of connectivity charges, and the AO could invoke relevant provisions for taxing the income earned.

This comprehensive analysis of the judgment highlights the key issues raised, arguments presented by both parties, relevant legal principles applied, and the ultimate decision rendered by the tribunal.