2019 (4) TMI 605 - AT - Income Tax

Taxability of Fees for technical services - amount received towards common cost recharge and consulting engineering services - PE in India - India UK tax treaty(DTAA) - Whether development and transfer of a technical plan or technical design simplicitor without making available technical knowledge, experience, skill, knowhow or processes, etc., would be in the nature of fees for technical services? - HELD THAT - In the present case, the amount received by the assessee, which has been treated as fees for technical services is towards supply of technical drawings/designs/plans. On a careful reading of Article 13(4)(c) of the India UK tax treaty it becomes clear that the words or consists of the development and transfer of a technical plan or technical design , appearing in the second limb has to be read in conjunction with make available technical knowledge, experience, skill, knowhow or processes . The reasoning of the Assessing Officer that the second limb of Article 13(4)(c) of the India UK tax treaty has to be read independently, in our view, cannot be the correct interpretation of the said Article. Whether by supply of technical, designs, drawing, plans, the assessee has made available technical knowledge, experience, skill, knowhow or processes? - HELD THAT - As per the settled principle of law, technology is considered to have been made available when the recipient of such technology is competent and authorised to apply the technology contained therein independently as an owner without depending upon the service provider. The recipient of technology should be able to make use of technical knowledge, experience, skill, knowhow or processes by himself in his business or for his own benefit and without recourse to the service provider in future and for this purpose a transmission of the technical knowledge, experience, skill, knowhow or processes, from the service provider to the service recipient is necessary. Undisputedly, in the present case, as revealed from the material on record, the technical design/drawings/plans supplied by the assessee to the Indian entity are project specific, hence, cannot be used by the Indian entity in any other project in future. Therefore, the claim of the assessee that it has not made available any technical knowledge, experience, skill, knowhow or processes while developing and supplying the technical drawings/designs/plans has to be accepted. It is worth mentioning, while deciding a dispute of identical nature concerning fees for technical services as per India USA tax treaty under which definition of fess for included services as per Article 12(4)(b) is identically worded like Article 13(4)(c) of the India UK tax treaty, the Tribunal, Pune Bench, in Gera Developments Pvt. Ltd. v/s DCIT 2016 (8) TMI 1009 - ITAT PUNE has held that mere passing off project specific architectural, drawings and designs with measurements does not amount to making available technical knowledge, experience, skill, knowhow or processes. The Tribunal held that unless there is transfer of technical expertise skill or knowledge along with drawings and designs and if the assessee cannot independently use the drawings and designs in any manner whatsoever for commercial purpose, the payment received cannot be treated as fees for technical services - Thus the amount received by the assessee has to be treated as business profit and in the absence of a PE in India, it cannot be brought to tax in India. Since, we have held the amount received towards consulting engineering services to be not in the nature of fees for technical services, the reasoning of the departmental authorities with regard to cost recharge would also fail, since, they have treated it as ancillary and incidental to consulting engineering services. Once, the Departmental Authorities have treated the amount received towards cost recharge to be in the nature fees for technical services, it implies rendering of service- amount received towards consulting engineering services to be not in the nature of fees for technical services we hold that the amount received towards cost recharge cannot be brought to tax in India in the absence of PE. - Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of the amount received towards common cost recharge as fees for technical services.
2. Taxability of the amount received towards consulting engineering services as fees for technical services.

Detailed Analysis:

Issue 1: Taxability of Amount Received Towards Common Cost Recharge as Fees for Technical Services

The assessee challenged the taxability of ?1,01,44,808 received towards common cost recharge. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) treated this amount as fees for technical services under Article 13(4)(c) of the India-UK Double Taxation Avoidance Agreement (DTAA). The assessee argued that the amount received was a cost allocation on a cost-to-cost basis without any profit element and hence not taxable in India.

The AO rejected the assessee's claim, stating that the allocation of cost lacked a pre-determined apportionment key and supporting evidence. The AO concluded that the cost recharge was ancillary to consulting engineering services and thus taxable as fees for technical services. The Commissioner of Income Tax (Appeals) concurred with the AO, stating that the cost recharge was incidental to consulting engineering services.

The Tribunal, however, held that the amount received towards cost recharge was not taxable in India. The Tribunal reasoned that since the amount received towards consulting engineering services was not considered fees for technical services, the cost recharge, being ancillary to it, could not be taxed either. The Tribunal emphasized that the cost recharge was a business profit and, in the absence of a Permanent Establishment (PE) in India, it could not be brought to tax.

Issue 2: Taxability of Amount Received Towards Consulting Engineering Services as Fees for Technical Services

The assessee contested the taxability of ?1,09,03,039 received towards consulting engineering services. The AO and the Commissioner of Income Tax (Appeals) treated this amount as fees for technical services under Article 13(4)(c) of the India-UK DTAA. The assessee argued that the services provided did not make available technical knowledge, experience, skill, knowhow, or processes to BHEI, and thus the amount should be characterized as business income under Article 7 of the DTAA.

The AO interpreted Article 13(4)(c) to mean that payment for the development and transfer of a technical plan or design is considered fees for technical services, irrespective of making available technical knowledge. The Commissioner of Income Tax (Appeals) further noted that the services rendered involved technical personnel in India, thus making available technical services.

The Tribunal, however, held that the amount received towards consulting engineering services was not taxable in India. It reasoned that the words "or consists of the development and transfer of a technical plan or technical design" in Article 13(4)(c) must be read in conjunction with "make available technical knowledge, experience, skill, knowhow or processes." The Tribunal found that the technical designs/drawings/plans provided by the assessee were project-specific and could not be used independently by BHEI in future projects. Therefore, the services did not make available technical knowledge or processes, and the amount received was treated as business profit. In the absence of a PE in India, such business income could not be taxed in India.

Conclusion:

The Tribunal concluded that both the amounts received towards common cost recharge and consulting engineering services were not taxable in India. The assessee's appeal was allowed, and the additions made by the AO were deleted. The Tribunal emphasized the need for proper evidence to establish that technical knowledge was made available, which the Department failed to provide. The decision was pronounced in the open court on 15.02.2019.