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2024 (7) TMI 31 - AT - Income TaxIncome deemed to accrue or arise in India - Royalty/FIS - provision of services of on-going technical support and on-demand professional support satisfies the criteria technical support - scope of make available clause - India-USA DTAA - services provided by the assessee which are customized and differentiated in its services to different customers - HELD THAT - We find that the facts of the assessee are covered by the decision 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. Hence, we hold that the receipt from subscription of cloud based services is not taxable under Article 12(4)(b) of India-US DTAA. Decided in favour - Decided n favour of assessee.
Issues Involved:
1. Whether the assessee satisfies the "make available" clause as per the India-US DTAA. 2. Whether the services provided by the assessee qualify as Fee for Included Services (FIS) under Article 12(4) of the India-US DTAA. 3. Whether the receipts from the subscription of cloud-based services can be considered as royalty under Article 12 of the India-US DTAA. Detailed Analysis: 1. Whether the assessee satisfies the "make available" clause as per the India-US DTAA: The core issue revolves around whether the services provided by the assessee meet the "make available" criteria under the India-US DTAA. The assessee provides cloud-based services under a SaaS model, which includes software subscriptions, implementation services, and user training. The Assessing Officer (AO) argued that the "make available" clause was satisfied, primarily based on the responses from the customers, such as Cipla Ltd., which indicated that the services involved human elements and were customized to some extent. The Dispute Resolution Panel (DRP) supported the AO's view, noting that the services rendered by the assessee included operational training and ongoing technical support, which involved human intervention and thus satisfied the "make available" clause. The DRP emphasized that the nature of services provided by the assessee was customized and differentiated, involving mimicking human ability and intelligence. 2. Whether the services provided by the assessee qualify as Fee for Included Services (FIS) under Article 12(4) of the India-US DTAA: Article 12(4) of the India-US DTAA defines Fee for Technical Services (FTS) and includes payments for services that "make available" technical knowledge, experience, skill, know-how, or processes. The DRP concluded that the services provided by the assessee, including technical support and professional services, fell under the category of FIS as they involved ongoing technical support and the provision of technical knowledge. However, the Tribunal referred to the Memorandum of Understanding (MOU) of the India-US DTAA and judicial precedents, which clarified that for services to be considered as "made available," the recipient must be able to apply the technology independently in the future without the service provider's assistance. The Tribunal noted that the assessee's services did not transfer any enduring technical knowledge or skills to the customers, enabling them to perform the services independently. 3. Whether the receipts from the subscription of cloud-based services can be considered as royalty under Article 12 of the India-US DTAA: The Tribunal examined whether the receipts from the subscription of cloud-based services could be classified as royalty under Article 12 of the India-US DTAA. The Tribunal referred to the Supreme Court's decision in the case of Engineering Analysis Centre of Excellence Private Limited vs. CIT, which held that payments for software subscriptions under similar agreements did not constitute royalty as per the DTAA definitions. The Tribunal also considered various other judicial precedents, including decisions from the Delhi High Court and other ITAT rulings, which consistently held that payments for cloud-based services and software subscriptions do not amount to royalty. The Tribunal concluded that the receipts from the assessee's cloud-based services did not qualify as royalty under Article 12 of the India-US DTAA. Conclusion: The Tribunal held that the assessee's services did not "make available" technical knowledge, skills, or processes to the customers, as required under Article 12(4)(b) of the India-US DTAA. Consequently, the receipts from the subscription of cloud-based services were not taxable as Fee for Included Services (FIS) or royalty under the India-US DTAA. The appeal of the assessee was allowed, and the addition made by the AO was deleted. Order Pronounced in the Open Court on 26/06/2024.
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