2024 (6) TMI 936 - AT - Income Tax

Taxability of Payment as FTS - TDS u/s 195 - assessee has made payments towards royalty, IT, technical services and administrative service fees to its parent company in USA without deducting TDS - proceedings u/s 201(1) - AO held that the services rendered by the AE were managerial, technical, and consultancy in nature, falling within the definition of FTS as per section 9 of the Act, thus taxable in India - CIT(A) affirmed the AO's view, observing that the services rendered by the AE were not merely administrative but included advice incorporated by the assessee in its business - assessee finally contended that AE has not make available any knowledge, experience etc, while providing administrative services and hence as per the Article 12(4)(b) DTAA of Indo Us the payments made are out of the purview of FTS HELD THAT - After referring to the judgment of D-Beers 2012 (5) TMI 191 - KARNATAKA HIGH COURT and Raymond 2002 (4) TMI 891 - ITAT MUMBAI for interpreting the expression make available . The coordinate Bench has held that in order to attract taxability of an income under Article 12(4)(b), not only payments should be in consideration for the rendering of technical services or consultancy services but in addition to that the payment being consideration for rendering of technical services the services so rendered should also be such that make available technical knowledge, experience, skill, know how or process consist of the development and transfer of a technical plan or technical design. n the present case though the AO has observed that the AE has make available the technical knowledge to assessee. However, failed to bring on record any material to support this averment. Therefore, the case of the assessee is squarely covered by the judgment of Tyco( 2023 (2) TMI 247 - ITAT BANGALORE We also observed that the judgment of Shell ( 2012 (2) TMI 98 - AUTHORITY FOR ADVANCE RULINGS as relied upon by the AO at the time of assessment has already stands overruled by the Hon ble Bombay High Court. So far as other judgment of EON Technology Vs DCIT relied upon by the AO there the issue was regarding the taxability of commission payments made to AE. Which is not the case herein before us. Thus we are of the view that payments made by assessee were not in the nature of FTS hence we allow the appeal of the assessee.

Summary

Issues Involved:
1. Whether the payment made by the assessee to its AE for obtaining administrative services is taxable as Fees for Technical Services (FTS) in India.
2. Applicability of Article 12(4)(b) of the DTAA between India and USA.
3. Interpretation of the term "make available" under Article 12(4)(b) of the DTAA.

Summary:

Issue 1: Taxability of Payment as FTS
The AO initiated proceedings u/s 201(1) of the Income Tax Act, 1961, against the assessee for making payments towards royalty, IT, technical services, and administrative service fees to its AE without deducting TDS. The AO held that the services rendered by the AE were managerial, technical, and consultancy in nature, falling within the definition of FTS as per section 9 of the Act, thus taxable in India. Consequently, the AO held the assessee liable to pay tax and interest u/s 201 and 201(1A) on an amount of Rs 21,50,93,900/-. The CIT(A) affirmed the AO's view, observing that the services rendered by the AE were not merely administrative but included advice incorporated by the assessee in its business.

Issue 2: Applicability of DTAA Provisions
The assessee contended that the payments were reimbursements without any markup and argued that the AO incorrectly relied on section 9(1)(vii) of the Act. The assessee emphasized that the AE did not "make available" any knowledge or experience, thus the payments were outside the purview of FTS as per Article 12(4)(b) of the DTAA between India and USA. The Tribunal noted that if there is a conflict between the provisions of the DTAA and the Income Tax Act, the provisions of the treaty would override the domestic law provisions, as supported by CBDT Circular No.333 and various judgments.

Issue 3: Interpretation of "Make Available"
The Tribunal referred to the Bangalore Bench's decision in Tyco Fire and Security India Pvt. Ltd., which interpreted Article 12(4)(b) of the DTAA. It was held that for payments to be considered FTS, the services rendered must "make available" technical knowledge, experience, skill, or processes to the recipient. The Tribunal observed that the AO did not provide material evidence to support that the AE made available technical knowledge to the assessee. Furthermore, the judgment of Shell India Markets Pvt. Ltd., relied upon by the AO, was overruled by the Hon'ble Bombay High Court. Consequently, the Tribunal concluded that the payments made by the assessee were not in the nature of FTS.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the payments made were not taxable as FTS in India under the provisions of Article 12(4)(b) of the DTAA between India and USA. The appeal filed by the assessee was allowed.