2021 (6) TMI 3 - AT - Income Tax

Accrual of income in India - Taxability of SAP License Charges as Royalty - Sale of software or mere reimbursement of expenses - Indo Swedish tax treaty - HELD THAT - The Tribunal in assessee's appeal 2021 (1) TMI 323 - ITAT MUMBAI after examining the facts of the case concluded that the receipts of SAP Licence by the assessee from Indian subsidiary is reimbursement and is not taxable as royalty either under domestic tax laws or under the provisions of Indo-Swedish Tax Treaty. Taxability of consultancy services as FTS - HELD THAT - The Tribunal in assessee's appeal 2021 (1) TMI 323 - ITAT MUMBAI held that , just because the Indian entity is interacting with the project leader and getting inputs from him does not mean that the Indian entity is transferred the technology of being a project leader of this type and next time Indian entity can perform similar services without recourse to the same-which is the core test for the fulfillment of 'make available' clause. We are unable to approve the stand of the authorities below on this point. In our considered view, in the light of the discussions above, the make available clause is not satisfied, in the course of rendition of services by the assessee, and, as such, the consultancy fees nnot be brought to tax, in the hands of the assessee, under article 12 of Indo Swedish tax treaty. Taxability of IT Support services as FTS/Royalty - HELD THAT - Indo-Swedish Tax Treaty and the terms of agreement held that the payments received on account of IT Support services are neither taxable as FTS nor Royalty - As decided in own case 2021 (1) TMI 323 - ITAT MUMBAI the person selling the SAP software is Be One Solution, Switzerland, whereas the person providing the services in question is the assessee. Article 12(4)(a) will not, therefore, come into play at all - therefore, the taxation under article 12 in the present case can come into play only when the make available clause is satisfied, but then the AO's justification for the satisfaction of 'make available' clause, for the detailed reasons set out earlier in this paragraph, does not meet our judicial approval. In view of these discussions, as also bearing in mind the entirety of the case, we uphold the plea of the assessee on this point as well. Accordingly, we hold that the income on account of Information Technology Services is also not taxable under article 12. - Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of SAP Licence charges as royalty.
2. Taxability of consultancy services as Fees for Technical Services (FTS).
3. Taxability of IT Support services as FTS/Royalty.

Detailed Analysis:

1. Taxability of SAP Licence charges as royalty:
The assessee, a Swedish company, contended that the SAP Licence charges received from its Indian subsidiary were reimbursements and not taxable as royalty. The Assessing Officer disagreed and added the amount as royalty income. The Dispute Resolution Panel (DRP) upheld this view, relying on a previous year's decision. However, the Tribunal found that the SAP Licence was purchased from a third party and supplied on a cost-to-cost basis without markup, thus constituting a reimbursement. The Tribunal cited the case of CIT vs. Siemens AG, affirming that reimbursements without profit elements are not taxable. Consequently, the Tribunal ruled that the SAP Licence charges were not taxable as royalty under domestic laws or the Indo-Swedish Tax Treaty, and allowed the assessee's appeal on this ground.

2. Taxability of consultancy services as Fees for Technical Services (FTS):
The assessee argued that consultancy services provided did not qualify as FTS under the Indo-Swedish tax treaty. The Tribunal noted that for services to be considered FTS, they must "make available" technical knowledge enabling the recipient to perform the services independently in the future. The consultancy services in question involved project management and coordination, which did not transfer any technical knowledge or skills to the recipient. The Tribunal referenced its earlier decision, which concluded that such services did not meet the "make available" criterion. Therefore, the consultancy fees were not taxable as FTS, and the assessee's appeal on this ground was upheld.

3. Taxability of IT Support services as FTS/Royalty:
The Assessing Officer categorized IT Support services as FTS/Royalty, arguing they were linked to the SAP system and provided enduring benefits. The Tribunal disagreed, stating that the "make available" clause was not satisfied as the services did not enable the recipient to perform them independently. Furthermore, the IT Support services were not ancillary to the SAP Licence, and the payment for these services was a reimbursement. The Tribunal referenced its previous ruling, which held that such reimbursements were not taxable under Article 12 of the Indo-Swedish Tax Treaty. Thus, the Tribunal ruled that the IT Support services were not taxable as FTS or Royalty, allowing the assessee's appeal on this ground.

Conclusion:
The Tribunal allowed the assessee's appeal, ruling that the SAP Licence charges, consultancy services, and IT Support services were not taxable under the provisions of the Income Tax Act or the Indo-Swedish Tax Treaty. The decisions were based on the principles of reimbursement without profit elements and the "make available" clause for FTS. The Tribunal's rulings were consistent with previous decisions in similar cases.