2025 (2) TMI 712 - HC - Income Tax

Reimbursement of Global Account Management charges received by assessee taxable as FTS/FIS and reimbursement of Leaseline charges received by assessee is taxable as Royalty u/s 9 (l) (vi) - HELD THAT - Insofar as questions B and C are concerned it could not be disputed before us that those also formed the subject matter of 2009 (8) TMI 1258 - DELHI HIGH COURT ITA 475/2009 and the decision on which came to be followed in 2010 (7) TMI 1218 - DELHI HIGH COURT ITA 751/2010 wherein appellant could not dispute that question of law proposed to be raised is covered by the judgment in Woodward Governor India Pvt. Ltd. 2009 (4) TMI 4 - SUPREME COURT and judgment of this Court in Skycell Communications Ltd. 2001 (2) TMI 57 - MADRAS HIGH COURT which has been followed in Bharti Celluar Ltd. 2008 (10) TMI 321 - DELHI HIGH COURT The appeal is accordingly dismissed. Income deemed to accrue or arise in India - Freight Logistic Support services provided by the assessee is in the nature of Fee for Technical Services/Fee for Included Services as per Section 9 (1) (vii) of the Income Tax Act 1961 and Article 12(5) of the India-US Double Taxation Avoidance Treaty - HELD THAT - As we had explained in International Management Group FTS is firstly concerned with rendition of specialized knowledge skill expertise and know-how. It is principally concerned with a transfer of knowledge skill and expertise. Those three attributes must be those which are possessed by the service provider and are distinctive and special qualities that it possesses. The second facet of FTS is the make available condition and which envisions an enablement or transfer of specialized knowledge and skill. As was explained in International Management Group the mere furnishing of service would not be sufficient to categorise the service as FTS. It would have to be necessarily accompanied by a transfer of expertise and which would consequently enable the recipient of service becoming skilled in its own right and empowered to perform those functions independently. When tested on those precepts we firstly find that rules and regulations pertaining to clearance of customs frontiers was clearly not specialized skill or knowledge acquired or possessed by the assessee. These rules are in the public domain and have been framed by competent authorities operating in different jurisdictions. A fortiori imparting instructions in respect of those statutory regulations would also not qualify FTS. Similarly we fail to appreciate how the creation of a global ethos or a workforce which is expected to follow a common code could be said to constitute FTS. Insofar as the question of the development of software is concerned we need not render any independent observations except to remind the appellant of the principles which the Supreme Court had come to authoritatively lay down in Engineering Analysis Centre of Excellence (P) Ltd. 2021 (3) TMI 138 - SUPREME COURT - Decided against revenue .

Summary

The legal judgment from the Delhi High Court addresses three principal issues concerning the taxability of certain services and reimbursements under the Income Tax Act, 1961, and the India-US Double Taxation Avoidance Agreement (DTAA). The Court considered whether Freight Logistic Support services qualify as Fee for Technical Services (FTS) or Fee for Included Services (FIS), and whether reimbursements for Global Account Management and Leaseline charges are taxable as FTS/FIS or Royalty.

Issues Presented and Considered:

A. Whether Freight Logistic Support services provided by the assessee qualify as FTS/FIS under Section 9(1)(vii) of the Income Tax Act and Article 12(5) of the India-US DTAA.

B. Whether reimbursement of Global Account Management charges received by the assessee is taxable as FTS/FIS.

C. Whether reimbursement of Leaseline charges received by the assessee is taxable as Royalty under Section 9(1)(vi) of the Act.

Issue-wise Detailed Analysis:

Issue B and C:

The Court noted that the issues concerning the taxability of Global Account Management and Leaseline charges were previously settled in related cases (ITA 475/2009 and ITA 751/2010) where it was determined that these issues were purely factual and did not raise substantial questions of law. The Court reiterated that these matters were conclusively settled against the appellant, and thus, the appeals on these questions were dismissed.

Issue A:

The core issue was whether Freight Logistic Support services fall within the ambit of FTS/FIS under the Income Tax Act and the DTAA. The Tribunal had previously examined this issue and concluded that the services rendered by the assessee did not constitute managerial, consultancy, or technical services as defined under the relevant provisions.

Relevant Legal Framework and Precedents:

The Court examined the provisions of Section 9(1)(vii) of the Income Tax Act and Article 12 of the India-US DTAA. The emphasis was on whether the services rendered involved the application of specialized knowledge, skill, or expertise, and whether such knowledge was "made available" to the recipient, enabling them to perform the functions independently.

Court's Interpretation and Reasoning:

The Court referred to the Tribunal's findings that the Freight Logistic Support services did not involve specialized knowledge or skills unique to the assessee. The rules and regulations for customs clearance were publicly available and did not constitute specialized knowledge exclusive to the service provider. The Court also noted that the creation of a global ethos or workforce did not qualify as FTS.

Key Evidence and Findings:

The appellant argued that the Freight Logistic Support services involved technical knowledge and training, as evidenced by the Transfer Pricing Study. However, the Court found that the services were primarily related to assisting with customs brokerage and did not meet the "make available" condition required for FTS.

Application of Law to Facts:

The Court applied the principles established in previous judgments, emphasizing the "make available" condition. The services must result in the transfer of technical knowledge or skills to the recipient, enabling them to use the knowledge independently. The Court concluded that the services provided did not meet this criterion.

Treatment of Competing Arguments:

The appellant's reliance on the complexity of functions and the development of a global culture was deemed insufficient to classify the services as FTS. The Court highlighted that the mere complexity of a function or the use of technical knowledge does not automatically qualify as FTS unless the knowledge is made available to the recipient.

Conclusions:

The Court concluded that the Freight Logistic Support services did not fall within the definition of FTS/FIS under the Income Tax Act or the DTAA. The appeals were dismissed, affirming the Tribunal's decision.

Significant Holdings:

The Court reiterated the importance of the "make available" condition in determining FTS. It emphasized that the transfer of technical knowledge or skills must enable the recipient to perform the functions independently. The judgment reinforced the principle that the mere provision of services does not constitute FTS unless accompanied by a transfer of expertise.

The appeals were dismissed, with the Court finding no substantial questions of law arising from the issues presented.