2016 (9) TMI 503 - AT - Income Tax

Nature of services rendered - whether were professional services in nature - what constitutes independent personal services for the purpose of article 15 of Indo-US tax treaty and whether the services rendered by the assessee can fall in this category of services? - Held that - Software development service rendered by an individual, which essentially requires predominantly intellectual skill, dependent on individual characteristics of the person pursuing software development, and based on specialized and advanced education and expertise, is also a professional service. As regards the objection of the Assessing Officer that software development is not specifically covered by article 15(2), as evident from the opening words of this provision to the effect the term professional services includes (emphasis, by underlining, supplied by us) , the specific professions set out therein are only illustrative and not exhaustive. The emphasis is essentially on the nature of services, but then, as we have noted above, that test is satisfied on the facts of this case. While dealing with the scope of services which are covered by article 15, it is important to bear in mind the fact that there could indeed be overlapping effect of the scope of services covered by the other articles but as long as the services are rendered by an individual or group of individuals, generally rendition of such services is covered by article 15. The exclusion clause set out in article 12(5)(e) typically exemplifies this approach. The applicability of article 15, therefore, is also substantially influenced by the status of the recipient- i.e. whether he is an individual or whether he is a corporate entity. In the light of all these discussions, in our considered view, the services rendered by the assessee are in the nature of professional services but then since the conditions set out in article 15(1) are admittedly not satisfied on the facts of this case, the taxability under article 15 does not arise. As a corollary to our finding that the services in question are in the nature of professional services, and by the virtue of exclusion clause in article 12(5)(e), which provides that the income from professional services rendered by an individual or group of individuals (other than a company) cannot be subjected to tax under article 15, the consideration for these services cannot be taxed under article 12(4) either. Revenue s case for taxability under article 12(4) is thus clearly unsustainable in law and on the facts of this case. Learned CIT(A) was thus quite correct in this conclusions. We uphold his conclusions and decline to interfere in the matter.

Issues Involved:
1. Nature of services rendered by the non-resident.
2. Applicability of Article 15 of the India-USA DTAA.
3. Classification of services as technical/ included services under Article 12(4) of the India-USA DTAA.
4. Taxability of income under the Indo-US tax treaty provisions.
5. Impact of the "make available" clause.

Detailed Analysis:

Nature of Services Rendered by the Non-Resident:
The assessee, an individual based in the USA, provided software development services to an Indian entity, Fuse+Media Pvt Ltd (FMPL). The services included database architecture design, virtual server management, website development, and maintenance of video streaming applications. The Assessing Officer (AO) noted that the assessee received ?2,23,96,667 for these services but did not pay taxes in India, claiming protection under the Indo-US tax treaty.

Applicability of Article 15 of the India-USA DTAA:
The CIT(A) concluded that the services rendered by the assessee fell under "independent personal services" as per Article 15 of the India-USA DTAA. The CIT(A) noted that the assessee did not have a fixed base in India nor stayed in India for more than 90 days, thus Article 15's conditions for taxability were not met. The Tribunal upheld this view, emphasizing that software development services, requiring intellectual skill and specialized education, qualify as professional services under Article 15.

Classification of Services as Technical/ Included Services under Article 12(4) of the India-USA DTAA:
The AO argued that the services were technical and thus taxable under Article 12(4) of the DTAA. However, the CIT(A) and the Tribunal found that the services rendered by the assessee were professional in nature and not technical. The Tribunal highlighted that Article 12(5)(e) excludes professional services from the ambit of Article 12, thereby supporting the CIT(A)'s conclusion that Article 15 prevails over Article 12 in this context.

Taxability of Income under the Indo-US Tax Treaty Provisions:
The Tribunal confirmed that the assessee was protected under the Indo-US tax treaty, which overrides the Income Tax Act provisions if more beneficial to the assessee. Since the services were classified under Article 15 and the conditions for taxability under this article were not met, the income could not be taxed in India. The Tribunal also noted that the exclusion clause in Article 12(5)(e) further supported this conclusion.

Impact of the "Make Available" Clause:
The AO contended that the "make available" clause was satisfied, implying that the technical knowledge was made available to the Indian entity. However, the CIT(A) and the Tribunal found this argument moot since the services were classified as professional under Article 15. The Tribunal dismissed the cross-objection filed by the assessee on this issue as infructuous, given the primary finding that the services were professional in nature.

Conclusion:
The Tribunal upheld the CIT(A)'s decision that the services rendered by the assessee were professional services under Article 15 of the Indo-US tax treaty and not technical services under Article 12(4). As the conditions for taxability under Article 15 were not met, the income was not taxable in India. The appeal by the AO was dismissed, and the cross-objection by the assessee was deemed infructuous.

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