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2024 (12) TMI 1429 - AT - Income Tax
Income deemed to accrue or arise in India - fees for technical services ('FTS') / Fees for Included Services ('FIS') under Article 12 of the India - US Double Taxation Avoidance Agreement ('DTAA') - receipts accruing to the Appellant on account of provision of Global Information Services (GIS) being services in the nature of general maintenance of software and hardware including services procured from third party and overhead thereof ('routine GIS Services') to its affiliate in India - HELD THAT - DRP and learned AO concluded receipts accruing to the assessee/appellant on account of provision of GIS being services in the nature of general maintenance of software and hardware procured from 3rd party and other head thereof ( routine GIS services ) to is affiliate in India are in the nature of Fees for Technical Services ( FTS ) / Fees for Included Services ( FIS ) under Article 12 of the India US Double Taxation Avoidance Agreement ( DTAA ). Undisputedly, learned DRP and AO did not sought details of the invoices. It is the fact that HD India had shut down its business of distribution of motor cycles, spare parts and accessories in India in the year under consideration. It is clearly evident that the contentions of the learned AO as well as the learned DRP that such services provided enduring benefit or enable the employees of HD India to apply the technology embedded in such services in the future is devoid of any merit. The matter is restored to the file of AO for fresh decision in accordance with law. Appeal filed by the assessee is allowed for statistical purposes.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this judgment are:
- Whether the receipts amounting to Rs. 14,33,10,396/- for the provision of Global Information Services (GIS) by the appellant to its Indian affiliate qualify as Fees for Technical Services (FTS) or Fees for Included Services (FIS) under Article 12 of the India-US Double Taxation Avoidance Agreement (DTAA).
- Whether the services provided by the appellant 'make available' technical knowledge, experience, skill, know-how, or processes to the recipient, thereby satisfying the 'make available' clause in the DTAA.
- Whether the GIS service charges, recovered on a cost-to-cost basis without any markup, are chargeable to tax under the Act.
2. ISSUE-WISE DETAILED ANALYSIS
Issue 1: Classification of GIS Receipts as FTS/FIS
- Relevant Legal Framework and Precedents: The determination of whether the receipts qualify as FTS/FIS hinges on Article 12 of the India-US DTAA, which requires that services must 'make available' technical knowledge, experience, skill, know-how, or processes.
- Court's Interpretation and Reasoning: The court examined whether the services provided by the appellant enabled the Indian affiliate to perform the services independently in the future. The appellant argued that the services did not satisfy the 'make available' clause as they did not impart enduring benefits or enable the recipient to apply the technology independently.
- Key Evidence and Findings: The appellant provided evidence, including the GIS agreement and invoices, to support its claim that the services were routine maintenance and did not make available any technical knowledge.
- Application of Law to Facts: The court considered the repetitive and ongoing nature of the services, suggesting that they did not make available technical knowledge or skills to the Indian affiliate.
- Treatment of Competing Arguments: The appellant cited various judicial precedents to support its position, while the department argued that the services provided enduring benefits and should be taxed as FTS/FIS.
- Conclusions: The court found merit in the appellant's argument that the services did not satisfy the 'make available' clause and thus should not be classified as FTS/FIS under the DTAA.
Issue 2: Taxability of GIS Service Charges
- Relevant Legal Framework and Precedents: The appellant argued that the GIS service charges were recovered on a cost-to-cost basis without any markup, and therefore, no income element was embedded, making them non-taxable.
- Court's Interpretation and Reasoning: The court considered whether the absence of a markup in the service charges precluded them from being taxable under the Act.
- Key Evidence and Findings: The appellant provided detailed breakdowns of the costs involved in providing the GIS services, emphasizing the lack of profit element.
- Application of Law to Facts: The court analyzed the nature of the transactions and the cost allocation mechanism to determine the taxability of the receipts.
- Treatment of Competing Arguments: The department maintained that the services provided enduring benefits, while the appellant contended that the services were routine and did not involve any profit element.
- Conclusions: The court concluded that the matter required further examination by the Assessing Officer to determine the taxability of the service charges.
3. SIGNIFICANT HOLDINGS
- Preserve Verbatim Quotes of Crucial Legal Reasoning: "The services which do not make available any technical knowledge/technology are excluded from the ambit of the term fee for included services as defined in Article 12(4)(b) of the DTAA."
- Core Principles Established: The judgment reinforces the principle that for services to be classified as FTS/FIS under the India-US DTAA, they must 'make available' technical knowledge or skills to the recipient.
- Final Determinations on Each Issue: The court restored the matter to the file of the learned AO for a fresh decision in accordance with the law, emphasizing the need for a detailed examination of the facts and evidence.
In conclusion, the judgment highlights the importance of the 'make available' clause in determining the taxability of cross-border services under the India-US DTAA and underscores the necessity for detailed factual analysis in such cases.