2022 (4) TMI 1279 - AT - Income Tax

Income accrued in India - Amount received for providing Support Service treated as Fees for Included Services (FIS) - addition to income the amount of support services as per Services Agreement and reimbursement of expenses as per Cost Reimbursement Agreement as Fees for Included Services ( FIS ) under Article 12(4)(b) of India-USA DTAA - whether such services meet the condition of make available of technical knowledge, experience, skill, knowhow, etc.? - Reimbursement of Training Expenses treated as FIS - HELD THAT - There is no categorical finding of the Ld.FAA that the support services were in the nature of consultancy or technical services. Rather it observed in Para 5.5.3 In fact the receipts from services clearly indicate that the same cover a large spectrum of area and would necessarily qualify as managerial services. . As managerial services are not mentioned in Article 12 of the Treaty, so certainly by classifying the receipts to be from managerial services and then to include them in FTS, on basis of sub-clause 4(a) of Article 12, the Ld. FAA has committed the error. On perusal of licensing agreement effective from 1st January, 2012 submitted by the assessee it can be observed that the intangible referred to in Article 1 means the intellectual property set forth on appendix (i) hereto, which may be amended from time to time . Appendix I shows that it is a trade mark for use of which the licensing agreement was executed. There is no recital in the agreement which would indicate that the use of tangible by Indian Associate was in any way necessary for the effective application or enjoyment of right, property or information, for which the royalty was agreed to be paid. The services rendered were not customarily provided and it is also not so otherwise established by the Revenue on the basis of any cogent evidence that such services are customarily provided in cases of licensing agreements for the use of Trade Mark. The consideration for these services cannot be considered to be insubstantial portion, rather the matter of fact is that for assessment year 2013-14, the assessee received in respect of support services and royalty income. The most important factor being that there are separate agreements for the licensing of the intangible and the service agreement. The copy of service agreement on record for the assessment year 2014-15, show that this agreement was effective from 1st January, 2011 while the licensing agreement was later in time in terms of being effective from 1st January, 2012. Thus, FAA has fallen in error in squaring up the case of assessee in terms of memorandum to the Treaty and giving a finding that the predominant factor is the grant of license to use the name which gives rise to royalty and all other payments and agreement flow from principal licensor licensee agreement. Thus the finding of Ld FAA, that the five determining factors for the classification of the consideration under paragraph 4(a) are clearly satisfied in the appellant's case is not sustainable. Thus, the findings of the learned FAA deserve to be reversed. The ground is sustained. Coverage of training fees by 'make available' clause in the definition of technical services - HELD THAT - FAA had failed to appreciate that this training was not part of the main contract of licensing agreement for royalty and there was no corresponding recital in the licensing agreement, which required the Indian Associates and the assessee to enter into any agreement for providing the training. The appellant provided relevant training and workshops to newly recruited consultants who joined the Indian Associate and the purpose of this training was not to provide any specific technical training or share any technical knowledge, expenses, skills, know how or processes neither by way of training, there was any transfer of any technical plan or technical design. The findings of Ld. FAA skill is being imported to the receipt and at the same time to the Indian entity the service is being rendered are not sustainable. The trainees were only sansitised to understand their job responsibility, the business model, policies and procedures, under which the new recruits were expected to work. The training cannot strictly be even called managerial or leadership training so as to enhance any productivity or profits, but were more of a orientation program at the time of induction of the new recruit. Merely because the training program was of boarding nature, that cannot change the nature of program to fall in the purview of services, for which consideration should be FIS. Rather the consideration was in the form of reimbursement of expenses on actual basis of constituents like travelling, food, boarding and lodging of consultants employed by Indian Counterpart. The cost of training recovered from the Indian Associate was due to these expenditures on the trainees. Thus, in regard to the additions the findings of the learned FAA deserve to be reversed.

Summary

Issues Involved:
1. Treatment of amount received for providing 'Support Service' as Fees for Included Services (FIS).
2. Treatment of reimbursement of 'Training Expenses' as FIS.

Detailed Analysis:

Issue 1: Treatment of Amount Received for Providing 'Support Service' as Fees for Included Services (FIS)

Background:
- The appellant is a US-based company providing human resources advisory services and management support services to its group companies.
- The appellant filed its income tax return showing royalty income from an Indian associate company under a Licensing Agreement for the use of Intellectual Property Rights (IPRs).

Assessment and Appeal:
- The Deputy Commissioner of Income Tax assessed the income, adding support services and reimbursement of expenses as Fees for Included Services (FIS) under Article 12(4)(b) of the India-USA DTAA.
- The Commissioner of Income Tax (Appeals) upheld the addition of support services as FIS under Article 12(4)(a) of the DTAA, stating that these services are ancillary and subsidiary to the application and enjoyment of the right in Article 12(3).

Arguments by Appellant:
- The appellant contended that the support services do not meet the condition of "make available" under Article 12(4)(b) and should not be treated as FIS.
- The appellant argued that the services provided were managerial in nature, which is not chargeable to tax under Article 12 of the India-US DTAA.
- The appellant cited various case laws to support its contention that managerial services are excluded from the definition of FIS.

Tribunal's Findings:
- The Tribunal observed that the definition of FIS under Article 12(4) does not include managerial services and is restricted to technical or consultancy services.
- The Tribunal found that the support services provided by the appellant were managerial and not technical or consultancy services.
- The Tribunal noted that the services were required by the Indian associate on a day-to-day basis for running its business and were not ancillary or subsidiary to the licensing agreement.
- The Tribunal concluded that the findings of the Commissioner of Income Tax (Appeals) were erroneous and reversed the decision, holding that the support services should not be treated as FIS under Article 12(4)(a) of the DTAA.

Issue 2: Treatment of Reimbursement of 'Training Expenses' as FIS

Background:
- The appellant incurred administrative expenses for training and workshops for the Indian associate's new joiners, which were subsequently reimbursed on a cost-to-cost basis.

Assessment and Appeal:
- The Commissioner of Income Tax (Appeals) held that the reimbursement of training expenses met the requirement of "make available" under Article 12(4)(b) of the India-US DTAA and treated it as FIS.

Arguments by Appellant:
- The appellant argued that the training expenses were administrative in nature and did not involve any transfer of technical knowledge, experience, skill, or know-how.
- The appellant cited various case laws to support its contention that training expenses do not constitute FIS under the DTAA.

Tribunal's Findings:
- The Tribunal found that the training provided was for familiarizing the new recruits with their job profile and business model, and did not involve any transfer of technical knowledge or skills.
- The Tribunal observed that the training was more of an orientation program and did not enhance productivity or profits.
- The Tribunal concluded that the reimbursement of training expenses should not be treated as FIS under Article 12(4)(b) of the DTAA and reversed the findings of the Commissioner of Income Tax (Appeals).

Conclusion:
The Tribunal allowed the appeals, holding that both the support services and the reimbursement of training expenses should not be treated as Fees for Included Services (FIS) under the India-US DTAA. The Tribunal reversed the findings of the Commissioner of Income Tax (Appeals) on both issues.