2025 (1) TMI 1469 - AT - Income Tax

Accrual of income in India - FTS under Article 12 of the India-Netherlands DTAA - cost recoveries received by the assessee from its affiliates - technical knowledge experience and skill - scope of make available clause - HELD THAT - We concur with the view of the assessee that there is no specific reference as to how the make available under the India-Netherlands Tax Treaty has been satisfied while rendering the above services so as to fall within the ambit of FTS under the India-Netherlands Tax Treaty. Accordingly in view of our observations in the preceding paragraphs while dealing with the issue for A.Y. 2009-10 to 2018-19 vide order dated 20.03.2024 we are of the considered view that the make available clause has not been satisfied in the instant facts and therefore the services mentioned above do not qualify as FTS under India-Netherlands Tax Treaty. In the result we hold that the above services did not qualify as FTS under the India-Netherlands Tax Treaty since the make available clause has not been satisfied in the instant facts. Ground Nos. 3 4 5 6 7 8 9 10 11 12 13 14 and 15 of the assessee s appeal are allowed since the services do not qualify as FTS under the India-Netherlands Tax Treaty. Whether services are merely cost allocation / reimbursement are taxable? - We have decided this issue against the assessee for previous assessment years and therefore held assessee has not been able to demonstrate that only the precise cost incurred for rendering services has been recovered and therefore there is no income element at the India level during the course of rendering of the services. Accordingly we are not inclined to agree with the aforesaid argument of the assessee. levy of surcharge education cess and secondary and higher education cess on the tax levied - Rate of tax on total income @ 12% instead of 10% - We observe that this issue has been decided in favour of the assessee in the aforesaid order 2024 (3) TMI 1066 - ITAT AHMEDABAD as held Article 12 read with Article 2 of the Tax Treaty makes it clear that the rate of tax at 10% would encompass surcharge and education cess as it is also in the nature of tax. Therefore we hold that levy of surcharge and cess over and above the taxable rate of 10% on royalty and FTS is not permissible as per the Treaty provisions. Short Credit of TDS Arithmetical inaccuracy in calculating tax liability and Incorrect Adjustment of Refund - The issue is restored to the file of the Ld. AO to verify the facts after giving due opportunity of hearing to the assessee to present the complete set of facts and thereafter pass an order in accordance with law.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this appeal were:

• Whether the final assessment order issued by the Assessing Officer (AO) was time-barred under Section 153 of the Income Tax Act.
• Whether the various cost recoveries received by the assessee from its affiliates qualify as "Fees for Technical Services" (FTS) under Article 12 of the India-Netherlands Double Taxation Avoidance Agreement (DTAA).
• Whether the rate of tax applied to the total income was correct as per the treaty rate under Article 12 of the India-Netherlands DTAA.
• Whether the levy of interest and penalties was justified.
• Whether there were computational errors in the tax liability and credit for Tax Deducted at Source (TDS).

2. ISSUE-WISE DETAILED ANALYSIS

Time-barred Assessment Order

The issue of whether the final assessment order was time-barred was not pressed by the assessee and was therefore dismissed.

Taxability of Cost Recoveries as FTS

The primary issue was whether various cost recoveries received by the assessee from its affiliates should be treated as FTS under Article 12 of the India-Netherlands DTAA. The relevant legal framework involves the definition of FTS under the DTAA, which requires that services "make available" technical knowledge, experience, skill, know-how, or processes to the recipient.

The Court examined whether the services rendered by the assessee, such as CHR Recruitment Fees, External Information Services, Real Estate Corporate Travel Services, Health Ecotox Services, IT Services, and others, satisfied the "make available" clause. The Tribunal referred to previous rulings, including those for assessment years 2009-10 to 2018-19, where it was held that the services did not make available technology to the recipient, thus not qualifying as FTS under the DTAA.

The Tribunal concluded that the Department failed to demonstrate that the services made available technology to the recipients, and therefore, these services did not qualify as FTS under the India-Netherlands DTAA.

Rate of Tax Under the DTAA

The issue was whether the tax rate of 12% applied by the AO was correct. The Tribunal held that as per Article 12 of the India-Netherlands DTAA, the tax on royalties and FTS should not exceed 10%. The Tribunal referenced previous decisions supporting the view that surcharge and cess should not exceed the treaty rate of 10%.

Levy of Interest and Penalties

The Tribunal did not provide specific adjudication on the levy of interest under sections 234A and 234B, as these were considered consequential issues.

Computational Errors in Tax Liability

Regarding the short credit of TDS, arithmetical inaccuracies in calculating tax liability, and incorrect adjustment of refunds, the Tribunal restored these issues to the file of the AO for verification and correction after allowing the assessee an opportunity to present the facts.

3. SIGNIFICANT HOLDINGS

The Tribunal's significant holdings were:

• The services rendered by the assessee did not qualify as FTS under the India-Netherlands DTAA because they did not satisfy the "make available" clause.
• The tax rate on the services should not exceed 10% as per the treaty provisions, including surcharge and cess.
• The issues related to computational errors were remanded to the AO for verification and correction.
• The appeal was partly allowed for statistical purposes, with several grounds decided in favor of the assessee.

This judgment reinforces the interpretation of the "make available" clause in tax treaties and emphasizes the importance of adhering to treaty-prescribed tax rates, including considerations of surcharge and cess. The Tribunal's decision highlights the necessity for clear evidence to support the classification of services as FTS and the application of appropriate tax rates under international agreements.