2024 (10) TMI 1475 - AT - Income Tax

FTS/FIS/Royalty receipt - Taxability of the amounts received by the assessee from the Indian customers towards supply of software updates and patches and on-call support services - Fee for Technical Services (FTS)/Fee for Included Services (FIS) under the Income Tax Act as well as under India USA Double Taxation Avoidance Agreement (DTAA) - as submitted by the assessee that on-call support services cannot be treated as FIS either u/Article 12(4)(a) of India USA tax treaty as it is not ancillary to any royalty income or u/Article 12(4)(b) as no technical knowledge, know-how, skill etc. was made available to the service recipient while providing on-call support services. HELD THAT - Being conscious of the fact that the receipts can no more be treated as royalty income in view of change in legal position due to the ratio laid down in case of Engineering Analysis Centre of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT and secondly, it cannot be treated as FIS under Article 12(4)(a) of India USA DTAA, the AO has taken a conscious decision not to invoke Article 12(3) and Article 12(4)(a) of India USA DTAA to tax the receipts. Thus, the only course left open with the AO to rope in the receipts within tax net is to invoke Article 12(4)(b) of India USA DTAA. However, the said provision requires fulfillment of the make available condition. A reading of the assessment orders should reveal that except making general observations that while rendering services the assessee has made available technical knowledge, know-how, skill etc. to the recipient of services, the Assessing Officer has not brought on record any cogent material/ evidence to establish such fact. Even, same is the position with learned DRP as no effort has been made by learned DRP to establish that make available condition stands satisfied. Now, it is fairly well settled that technical knowledge, knowhow, experience, skill etc. are made available to a service recipient when the service recipient is capable of performing such services independently on its own without requiring the aid and assistance of the service provider. No material has been brought on record by the Revenue Authorities to establish that the service recipients, while availing service from the assessee, have also acquired technical knowledge, know-how, skill etc. concerning such services, which enabled them to perform such services independently in future. Assessee continues to provide on-call support services year-after-year goes to prove that the technical knowledge, know-how, skill etc. relating to such services have not been transferred to service recipients. It appears that being conscious of the fact that the receipts cannot be made taxable as royalty income under Article 12(3) or as FIS under Article 12(4)(a) of India USA treaty, the Assessing Officer has made a futile attempt to make the receipts taxable under Article 12(4)(b) by adopting trial and error method. In view of the aforesaid, we hold that the receipts are not taxable as FIS under Article 12(4)(b) of India USA DTAA. Computation of interest on refund u/s 244A - it is the contention of the assessee that interest u/s 244A of the Act has to be computed up to the date of issuance of refund voucher - HELD THAT - Having considered rival submissions, we direct the Assessing to verify assessee s claim and compute interest in accordance with law.

Summary

Issues:
1. Taxability of amounts received by the assessee from Indian customers for software updates and support services under FTS/FIS.
2. Computation of interest on refund under section 244A of the Act.

Analysis:

Issue 1: Taxability of amounts received by the assessee from Indian customers for software updates and support services under FTS/FIS:

The assessee, a non-resident corporate entity incorporated in the USA, received amounts from Indian distributors for software updates and on-call support services. The Assessing Officer considered these amounts as Fee for Technical Services (FTS)/Fee for Included Services (FIS) under the Income Tax Act and the India-USA Double Taxation Avoidance Agreement (DTAA). The Assessing Officer held that the services provided involved technical knowledge transfer and thus were taxable under Article 12(4)(b) of the Treaty. The DRP upheld this view.

The assessee contended that the services provided did not fulfill the 'make available' condition under Article 12(4)(b) of the Treaty. The Tribunal observed that the Assessing Officer incorrectly treated the entire receipts as FIS without proper bifurcation. The Tribunal noted the history of assessment years where similar issues were raised and held that the receipts could not be treated as royalty or FIS under the DTAA. It was emphasized that no evidence was presented to show that technical knowledge was transferred to the service recipients.

The Tribunal concluded that the receipts were not taxable as FIS under Article 12(4)(b) of the India-USA DTAA. The Tribunal highlighted the lack of evidence supporting the transfer of technical knowledge to the service recipients, indicating that the services provided did not meet the 'make available' condition.

Issue 2: Computation of interest on refund under section 244A of the Act:

The assessee argued that interest under section 244A of the Act should be computed up to the date of issuance of the refund voucher. The Tribunal directed the Assessing Officer to verify the assessee's claim and compute interest in accordance with the law, partially allowing the grounds raised by the assessee.

In conclusion, the appeals were partly allowed based on the findings related to the taxability of receipts and the computation of interest on refunds. Other grounds were deemed consequent and premature, not requiring adjudication.

This judgment addressed the taxability of receipts from software updates and support services under FTS/FIS provisions and the computation of interest on refunds under section 244A of the Act, providing detailed analysis and legal reasoning for each issue.