2024 (8) TMI 1119 - AT - Income Tax

Accrual of income in India - Taxability of certain amounts received by the assessee from Indian customers as Fee for Technical Services (FTS)/Fee for Included Services (FIS) in terms with section 9(1)(vii) of the Act and Article 12(4) of India USA Double Taxation Avoidance Agreement - AO observed, the assessee is not merely providing Content Services to the customers of India, but is also providing a whole range of User Services , which are user specific, and involve a high degree of human intervention - HELD THAT - As could be seen from the highlighted portion of the observation of AO, without properly implementing the directions of learned DRP, he has merely stated that the agreement with Gandhi Institute of Technology and Management has been discussed in the draft assessment order. By these observations what the AO implies is, learned DRP has issued directions without proper application of mind. This, in our view, is highly objectionable and against the provision contained u/s 144C(13) of the Act. AO s findings/observations on the role of assessee are self-contradictory. While on one hand, the AO has acknowledged the fact that the assessee is an aggregation service provider and not a content creator, in the same breath, he says that assessee s contention that it is a mere aggregator of educational courses is not correct. AO has not brought on record any material to establish the fact that the assessee provides technical services through its online platform. Merely because the assessee has a customized landing page, it does not mean that the assessee provides technical services, that too, through human intervention. AO in our view, has not been able to prove such fact. Even, assuming for argument s sake, the services provided by the assessee is of technical nature, that by itself would not be enough to bring such receipts within the purview of Article 12(4) of India USA DTAA, unless the make available condition is satisfied. Burden is entirely on the Revenue to prove that in course of rendition of services, the assessee has transferred technical knowledge, know-how, skill etc. to the service recipient, which enables him to utilize such technical knowledge, know-how, skill etc. independently without aid and assistance of the service provider. As relying on Relx Inc. 2023 (4) TMI 239 - ITAT DELHI and Elsevier Information Systems GmbH 2019 (5) TMI 405 - ITAT MUMBAI we hold that the receipts do not qualify as FIS under Article 12(4) of India USA tax treaty. Assessee appeals are allowed.

Summary

Issues Involved:
1. Taxability of amounts received by the assessee from Indian customers as Fee for Technical Services (FTS)/Fee for Included Services (FIS).
2. Interpretation of Section 9(1)(vii) of the Income Tax Act, 1961, and Article 12(4) of the India-USA Double Taxation Avoidance Agreement (DTAA).
3. Compliance with the directions of the Dispute Resolution Panel (DRP) by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Taxability of Amounts Received as FTS/FIS:
The core issue revolves around whether the amounts received by the assessee from Indian customers qualify as Fee for Technical Services (FTS) or Fee for Included Services (FIS) under Section 9(1)(vii) of the Income Tax Act, 1961, and Article 12(4) of the India-USA DTAA. The assessee, a non-resident corporate entity from the USA, operates a global online learning platform offering courses and degrees from various universities. The assessee contended that the receipts amounting to Rs. 75,66,52,591/- are neither in the nature of royalty nor FIS and hence not taxable in India. The AO, however, concluded that the services provided by the assessee, including Content Services and User Services, involve a high degree of human intervention and technical skill, thereby qualifying as FIS under Article 12(4) of the DTAA.

2. Interpretation of Relevant Provisions:
The AO's interpretation was that the services provided by the assessee made available technical knowledge, skill, and knowhow to the customers, satisfying the "make available" test under Article 12(4) of the DTAA. The assessee argued that it merely aggregated content and provided a platform without any human intervention or creation of content. The DRP directed the AO to verify the agreement with Gandhi Institute of Technology and Management to determine whether the services provided were technical in nature. The AO, in the final assessment order, reiterated his earlier stance without adequately addressing the DRP's directions.

3. Compliance with DRP Directions:
The DRP noted that the AO had not properly considered the agreement with Gandhi Institute of Technology and Management and directed the AO to verify the terms and conditions to ascertain if the assessee provided technical services. However, the AO, in the final assessment order, merely referenced the draft assessment order without conducting a proper verification, thereby not complying with the DRP's directions. This non-compliance was highlighted by the tribunal, emphasizing that the AO's findings were self-contradictory and lacked substantial evidence to prove that the assessee provided technical services through human intervention.

Tribunal's Findings:
The tribunal observed that the assessee acted merely as a facilitator, providing access to content created by universities and companies without any technical services or human intervention. The tribunal relied on precedents like CIT Vs. Bharti Cellular Ltd. and others to conclude that the services did not qualify as FTS/FIS under Article 12(4) of the DTAA. The tribunal criticized the AO for not following the DRP's directions and for making contradictory statements regarding the nature of services provided by the assessee.

Conclusion:
The tribunal held that the receipts in question do not qualify as FIS under Article 12(4) of the India-USA DTAA and allowed the assessee's appeals. The decision applies mutatis mutandis to the related appeal ITA No. 3646/Del/2023. The tribunal's order was pronounced on 21st August 2024.