2024 (8) TMI 810 - AT - Income Tax

Accrual of income in India - Training and Consultancy Fees FIS - Make available Clause - assessee claimed to have offer consultancy services pertaining to organizational strategy, assessment cessation, talent acquisition, leadership professional development, evaluation of Rewards benefits like ESOPs and compensation, payment structure - AO held that the amount under the purview of FIS under Article 12 of India-USA DTAA - HELD THAT - Mere rendering of services is not roped into FIS unless the person utilizing the services is able to make use of the technical knowledge, etc., by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill, etc. must remain with the person utilizing the services even after the rendering of the services has come to an end. Thus, the consideration for technical services can be taxed as FIS under the India- USA DTAA) only when the person acquiring the service is able to apply the technology on its own i.e. the recipient acquires a means to an end. This means that the recipient in this situation is able to reproduce and make use of the technical knowledge, etc. by itself in the business or for their own benefit and without recourse to the performer of the services, in future. Make available is akin to the concept of transfer and involves the transfer of technical knowledge, experience, skill, knowhow, or processes to the recipient by the service provider so that the recipient can apply the same on his own. Merely because the rendering of consulting service requires any expertise by the person providing the service would not per se mean that technology has been made available to the service recipient. In the instant case, the assessee has received payment for rendition of consultancy service in the field of organizational strategy, talent, reward and benefits etc. While rendering of such services, the assessee does not transmit any knowledge, skill or technical know-how in a manner that clients/customers are able to perform the aforesaid functions in future on its own without recourse to the service providers and hence, the element of make available in absent in such services. The same is clearly evident from the fact that such services are rendered on continuous basis from preceding years. In the present case, assessee is merely providing consulting services such as organizational strategy, talent strategy, consulting in relation to rewards and benefits and related leadership and development consulting services for which clients / service recipients need to come back to assessee, as and when they have such requirement and service recipients do not get equipped in providing such services. We find that the assessee has provided services to Deloitte, Flipkart and gone through the work order and the scope of service, details of project team and cost of services. On going through the entire details, we find no technical knowledge has been made available to the client. Similarly, the review of ESOPs is a continuous process taking into consideration various parameters. Even in that, it cannot be said that the assessee Korn Ferry has made the clients enriched by imparting or passing permanently any technical inputs. From the terms of agreements and also from the conduct of the party, it cannot be said that the make available requirement has been satisfied. Hence, we hold that the services rendered were not in nature of FIS under Article 12(4)(b) of the India-USA DTAA. Reimbursements on account of General Management Charges - As submitted that the assessee received from Future step Recruitment Services Pvt. Ltd. and from Hay Consultant India Pvt. Ltd. which are the only one subsidiary of the assessee - HELD THAT - We find that the assessee procures services from third parties and relevant costs was passed on to by the assessee to the affiliates benefiting from such services. The assessee paid to the sellers and in turn got the money reimbursed from their associates. Hence, the same cannot be taxed. Even otherwise also, it would not partake the character of fee for inclusive services (FIS) as no knowledge or know-how was made available to the associates. The appeal of the assessee on this ground is allowed.

Summary

Issues Involved:
1. Jurisdictional Ground
2. Taxation of Training and Consultancy Fees as Fees for Included Services (FIS)
3. Taxation of Reimbursements on account of General Management Charges as FIS
4. Levy of interest under section 234B of the Act
5. Initiation of penalty proceedings under section 274 read with section 270A of the Act

Issue-wise Detailed Analysis:

1. Jurisdictional Ground:
The assessee raised a jurisdictional ground contending that the directions dated 28.04.2023 passed by the DRP were void ab initio and non-est as they were issued without a valid Document Identification Number (DIN), violating CBDT Circular No. 19/2019 dated 14.08.2019. This ground was not pressed by the assessee during the proceedings.

2. Taxation of Training and Consultancy Fees as Fees for Included Services (FIS):
The assessee received INR 7,18,00,010 as consultancy and training fees, which the AO/DRP taxed as FIS under Article 12 of the India-USA DTAA read with section 9(1)(vii) of the Act. The AO contended that the services provided enabled the clients to perform better in their areas of work, making the clients capable enough to solve problems independently in the future. The AO relied on the judgments of the ITAT in the cases of H.J. Heinz Company and Mersen India Pvt. Ltd. The DRP affirmed the AO's view, stating that the "make available" clause was satisfied as the services provided enabled the clients to perform independently in the future.

Upon appeal, the Tribunal analyzed Article 12 of the India-USA DTAA, which defines FIS as payments for rendering technical or consultancy services that "make available" technical knowledge, experience, skill, know-how, or processes. The Tribunal observed that merely rendering services does not constitute FIS unless the recipient can independently apply the technical knowledge or skills in the future. The Tribunal concluded that the services provided by the assessee did not transmit any knowledge or skills that enabled the clients to perform the functions independently without recourse to the service provider. Therefore, the services did not satisfy the "make available" condition and were not taxable as FIS under Article 12(4)(b) of the India-USA DTAA.

3. Taxation of Reimbursements on account of General Management Charges as FIS:
The assessee received INR 55,29,572 as General Management Charges, which the AO/DRP taxed as FIS under Article 12 of the India-USA DTAA and section 9(1)(vi) of the Act. The AO held that these payments were not mere reimbursements but were linked to the core services provided by the assessee, thus taxable as FIS. The AO relied on the judgment in the case of Rieter Machine Works Limited.

Upon appeal, the Tribunal found that the assessee procured services from third parties and passed on the relevant costs to its affiliates, which did not involve any element of income. The Tribunal held that these payments were reimbursements and did not constitute FIS as no knowledge or know-how was made available to the affiliates. Therefore, the appeal on this ground was allowed.

4. Levy of Interest under Section 234B of the Act:
The assessee contended that the AO erred in levying interest under section 234B of the Act. However, since the primary grounds of appeal were decided in favor of the assessee, the Tribunal did not specifically address this issue.

5. Initiation of Penalty Proceedings under Section 274 read with Section 270A of the Act:
The assessee contended that the AO erred in initiating penalty proceedings under section 274 read with section 270A of the Act. Similar to the interest issue, this was not specifically addressed by the Tribunal due to the favorable outcome on the main grounds.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the consultancy and training fees were not taxable as FIS under Article 12(4)(b) of the India-USA DTAA, and the reimbursements for general management charges did not constitute FIS. Consequently, the Stay Application filed by the assessee was dismissed as infructuous. The order was pronounced in the Open Court on 29/07/2024.