2024 (11) TMI 1385 - HC - Income Tax

TDS u/s 195 - Assessee had not deducted tax at source on the payments made to Ciena, US - disallowance u/s 40(a)(i) - addition was premised on the assumption that the payments made to Ciena, US were chargeable to tax, under Section 9 (vii) of the Act, being fees for technical services - ITAT deleted addition on finding that the services rendered by the Ciena, US did not contain an element of make available of the technology - HELD THAT - ITAT had noted that Ciena, US provides technical on-call advisory services. Ciena, US remotely provides support services through call centres, to the customers of the Assessee, in case of problems of outage, or where emergency technical support is required in cases where a system is compromised. However, in cases where the equipment develops any defect and requires repair, the same has to be shipped overseas to Ciena, US for the repairs. It is also relevant to note that Ciena, US is the manufacturer of the equipment supplied to customers in India, and the agreement between the Assessee and Ciena, US, is essential to ensure that the support services are provided to the customers in India. Revenue s contention that Ciena, US directly provides knowledge, technology, skill and experience to the Assessee for it to render services is not supported by the plain language of the Agreement dated 01.04.2010. Thus, the contention that consideration paid by the Assessee was fees for included services as defined under paragraph 4(b) of Article 12 of the DTAA, is not merited. As noted-above, the findings of the learned ITAT regarding the nature of services rendered by Ciena, US are the findings of the fact. It is also important to note that no question regarding whether the said findings are perverse has been projected by the Revenue in this case. Decided against revenue.

Summary

Issues Involved:
1. Whether the payments made by the Assessee to Ciena, US were liable to be disallowed under Section 40(a)(i) of the Income Tax Act, 1961 due to non-deduction of tax at source.
2. Whether the payments constituted "fees for technical services" under Section 9(vii) of the Act and Article 12 of the India-USA Double-Taxation Avoidance Treaty Agreement (DTAA).
3. Whether the services rendered by Ciena, US included the element of "make available" of technology to the Assessee.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(i) for Non-Deduction of Tax:
The primary issue was whether the Assessee was obligated to deduct tax at source on payments made to Ciena, US, which would result in disallowance under Section 40(a)(i) of the Income Tax Act. The Assessing Officer (AO) added the payments to the Assessee's income, asserting they were chargeable to tax as fees for technical services. However, the Income Tax Appellate Tribunal (ITAT) found that the services rendered by Ciena, US did not involve making available technology or expertise to the Assessee, thus negating the requirement for tax deduction at source. The High Court affirmed the ITAT's findings, concluding that the Revenue's contention lacked merit as the services did not meet the criteria for disallowance under the specified section.

2. Characterization as "Fees for Technical Services":
The AO characterized the payments as "fees for technical services" under Section 9(vii) of the Act, arguing that they included technical knowledge and experience. The ITAT, however, determined that the services provided by Ciena, US were limited to remote troubleshooting and equipment repair, which did not qualify as technical services under the DTAA's definition. The High Court upheld this view, emphasizing that the services did not involve the transfer of technology or skills to the Assessee, and therefore, did not constitute fees for technical services.

3. Element of "Make Available" Technology:
A critical aspect was whether the services "made available" technology, knowledge, or skills to the Assessee, as required under Article 12 of the DTAA for taxation. The AO argued that the services included this element, but the ITAT disagreed, finding no evidence that Ciena, US transferred any technology or skills that the Assessee could independently utilize. The High Court supported the ITAT's conclusion, noting that the agreement between the parties did not indicate any such transfer, and the services were primarily advisory and support in nature. Consequently, the payments did not meet the "make available" criterion, exempting them from being taxed as fees for included services.

In conclusion, the High Court dismissed the appeals, affirming the ITAT's findings that the payments were not subject to tax deduction at source, did not qualify as fees for technical services, and did not involve making available technology or expertise to the Assessee. The court found no substantial question of law arising from the appeals, thereby upholding the ITAT's decision in favor of the Assessee.