2025 (3) TMI 706 - AT - Income Tax

TDS u/s 195 - payments made by the assessee to its parent company and other related entities - Fees for Technical Services (FTS) or Fees for Included Services (FIS) - payment made towards management fee charges would be in the nature of FTS and hence chargeable to tax in India - HELD THAT - Some facts in the light of documentary evidences are required to be examined to look into this aspect only then a conclusion can be drawn as to whether the foreign entity has made available the knowledge to the assessee or not. It is also not coming out clearly as to whether the expenses are subcontracting charges or testing charges from the orders of authorities below. Because the legal meaning of both these terms (subcontracting charges or testing charges) carries out different meaning therefore a clarity is must on this aspect also. Therefore we restore the matter to the file of the AO for examining a fresh in accordance with law with a liberty to assessee to file documentary evidences in support of this issue. So far as the reliance placed by the assessee on the certificate 195 is concerned it is observed that the same is not relevant for the impugned year. Whether subcontracting charges/ testing charges are in the nature of royalty? - We observe that the CIT(A) in its order has held that though appellant has paid separate royalty for the use of trade mark to its other AE yet the testing charges are also in the nature of royalty. We are of the view that this aspect also would be examined afresh by the AO. It is the contention of the assessee that it has paid royalty charges to UL Switzerland after deducting the TDS. However the assessee failed to elaborate as to why the testing is done by UL USA and trademark uses charges are paid to Switzerland. We observe that the customers are entitled for using the trademark charges only after the process of testing from UL USA. All these facts require fresh consideration at the end of AO. Taxability of management fee - As assessee has not raised the alternate plea that is reimbursement of global cost before the AO and the CIT(A) has not dealt the alternative plea in a judicious manner. Therefore in the interest of justice we restore this issue also to the file of AO for examining a fresh. Assessee is also at liberty to file documentary evidence before the AO vis- -vis alternate plea. Appeals filed by the assessee are allowed for statistical purposes.

Summary

ISSUES PRESENTED and CONSIDERED

The central issues considered in this judgment revolve around the tax implications of payments made by the assessee to its parent company and other related entities. The primary questions are:

1. Whether the payments made towards testing charges and management fees to non-resident entities qualify as Fees for Technical Services (FTS) or Fees for Included Services (FIS) under the relevant Double Tax Avoidance Agreements (DTAAs), thus necessitating tax deduction at source under Section 195 of the Income Tax Act.

2. Whether the payments towards testing charges can be considered as royalties under the Act and DTAAs, thereby attracting tax liability.

3. Whether the management fees paid are in the nature of FTS, and if they constitute reimbursement of global costs, thus impacting the requirement for withholding tax.

4. The taxability of software payments made by the assessee to UL Inc., and whether these payments fall under the category of royalties requiring tax deduction.

ISSUE-WISE DETAILED ANALYSIS

1. Payments towards Testing Charges and Management Fees as FTS/FIS:

- Relevant Legal Framework and Precedents: The determination of FTS/FIS is guided by the provisions of the Income Tax Act and the relevant DTAAs, particularly Article 12(4) of the India-USA DTAA, which stipulates that FTS/FIS involves the transfer of technical knowledge or skills.

- Court's Interpretation and Reasoning: The Tribunal examined whether the technical knowledge or skills were made available to the assessee. It was argued that the services rendered did not impart any technical knowledge to the assessee, as the results provided by the foreign entities were used for internal purposes without transferring any know-how.

- Key Evidence and Findings: The Tribunal noted the absence of documentary evidence to support the claim that no technical knowledge was transferred. The assessee's reliance on subsequent assessment years where similar payments were accepted as subcontracting charges without TDS was considered.

- Application of Law to Facts: The Tribunal decided that additional evidence was necessary to determine if the knowledge was made available and whether the payments were subcontracting or testing charges.

- Treatment of Competing Arguments: The Tribunal acknowledged the assessee's argument regarding the nature of services and the revenue's emphasis on the corporate service agreement's terms.

- Conclusions: The matter was remanded to the Assessing Officer (AO) for a fresh examination with the opportunity for the assessee to present further evidence.

2. Payments as Royalties:

- Relevant Legal Framework and Precedents: The classification of payments as royalties is governed by Section 9(1)(vi) of the Income Tax Act and the relevant DTAAs.

- Court's Interpretation and Reasoning: The Tribunal noted the CIT(A)'s view that testing charges could be considered royalties, despite separate royalties being paid for trademark use.

- Key Evidence and Findings: The Tribunal observed that the relationship between testing services and trademark use required further examination.

- Application of Law to Facts: The Tribunal directed the AO to reassess whether the payments constituted royalties, considering the nature of transactions and documentary evidence.

- Treatment of Competing Arguments: The Tribunal considered the assessee's argument about separate royalty payments and the need for clarity on the nature of testing charges.

- Conclusions: The issue was remanded to the AO for further examination.

3. Management Fees as FTS and Reimbursement of Global Costs:

- Relevant Legal Framework and Precedents: The classification of management fees as FTS is determined by the Income Tax Act and the India-USA DTAA.

- Court's Interpretation and Reasoning: The Tribunal noted that the assessee's alternative plea of reimbursement of global costs was not adequately addressed by the CIT(A).

- Key Evidence and Findings: The Tribunal observed that the administrative nature of services and the lack of technical knowledge transfer required further scrutiny.

- Application of Law to Facts: The Tribunal remanded the issue to the AO for a fresh examination, allowing the assessee to present evidence supporting the reimbursement claim.

- Treatment of Competing Arguments: The Tribunal acknowledged the revenue's reliance on the CIT(A)'s findings and the need for a detailed examination of the reimbursement claim.

- Conclusions: The matter was remanded to the AO for further consideration.

4. Taxability of Software Payments:

- Relevant Legal Framework and Precedents: The classification of software payments as royalties is guided by the Income Tax Act and relevant DTAAs.

- Court's Interpretation and Reasoning: The Tribunal noted that the CIT(A) had ruled the software payments as non-taxable reimbursements, and the department had not appealed this decision.

- Key Evidence and Findings: The Tribunal found consistency in the CIT(A)'s ruling and the lack of a departmental appeal as significant.

- Application of Law to Facts: The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal.

- Treatment of Competing Arguments: The Tribunal considered the revenue's argument but emphasized the importance of consistency in rulings.

- Conclusions: The revenue's appeal was dismissed, and the CIT(A)'s decision was upheld.

SIGNIFICANT HOLDINGS

- The Tribunal remanded the issues regarding testing charges and management fees to the AO for further examination, allowing the assessee to present additional evidence.

- The Tribunal upheld the CIT(A)'s decision on software payments, emphasizing consistency in the absence of a departmental appeal.

- The Tribunal emphasized the need for clarity on the nature of payments and the transfer of technical knowledge, directing the AO to reassess these aspects.

- The Tribunal's decisions were guided by the principles of fairness and thorough examination, ensuring that all relevant evidence and arguments are considered.