2023 (1) TMI 42 - AT - Income Tax

Income deemed to accrue or arise in India - FTS under the India-USA DTAA - receipts on account of provision of information technology and other administrative services to its affiliate in India are in the nature of Fees for Included Services FIS under the India USA Double Taxation Avoidance Agreement DTAA - assessee is incorporated under the laws of USA and is engaged in the manufacture and supply of life science research, healthcare, analytical chemistry and other markets with broad range of products and systems - HELD THAT - Facts on record show that the recipient of the services is not enabled to provide the same service without recourse to the service provider, i.e, the assessee. In our humble opinion, mere incidental advantage to the recipient of services is not enough. The real test is the transfer of technology and on the given facts of the case, there is no transfer of technology and what has been appreciated by the Assessing Officer/ld. CIT(A) is the incidental benefit to the assessee which has been considered to be of enduring advantage. In order to invoke make available clauses, technical knowledge and skill must remain with the person receiving the services even after the particular contract comes to an end and the technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. As relying on GUY CARPENTER CO. LTD. 2012 (5) TMI 31 - DELHI HIGH COURT and DE BEERS INDIA MINERALS (P.) LTD. 2012 (5) TMI 191 - KARNATAKA HIGH COURT we are of the considered view that the service recipient of the assessee is unable to make use of the said technology only by itself in its business or for its own benefit without recourse to the assessee year after year. We find that the Assessing Officer has referred to various decision which are based upon the decision of the Authority for Advance Rulings in the case of Perfetti Van Melle Holding B.V. 2011 (12) TMI 17 - AUTHORITY FOR ADVANCE RULINGS which has subsequently been reversed by the Hon'ble High Court of Delhi 2015 (1) TMI 239 - DELHI HIGH COURT and hence is no longer a good law. We are of the considered view that the receipts of the assessee on account of provision of information technology and other administrative services to its affiliate in India are not in the nature of Fees for Technical Services under the India USA Double Taxation Avoidance Agreement and we, accordingly, direct the Assessing Officer to delete the same. Appeal of assessee allowed.

Summary

Issues Involved:
1. Determination of the nature of receipts from the provision of information technology and other administrative services as Fees for Included Services (FIS) under the India-USA Double Taxation Avoidance Agreement (DTAA).
2. Application of the "make available" clause under Article 12 of the DTAA.
3. Evaluation of the applicability of judicial precedents and explanatory notes to the Memorandum of Understanding (MOU) between India and the USA.

Detailed Analysis:

1. Determination of the nature of receipts from the provision of information technology and other administrative services as Fees for Included Services (FIS) under the India-USA Double Taxation Avoidance Agreement (DTAA):

The assessee, a USA-based company, provided information technology and administrative services to its affiliate in India. The Assessing Officer concluded that these services were managerial and technical, making available technical knowledge, skill, and know-how to the Indian affiliate, thus qualifying as Fees for Technical Services (FTS) taxable at 10% under the DTAA. However, the assessee contended that the services provided did not make available any technical knowledge, skill, etc., and thus should not be taxed under the Treaty or the Act.

2. Application of the "make available" clause under Article 12 of the DTAA:

Article 12(4) of the DTAA defines "fees for included services" as payments for rendering technical or consultancy services if such services make available technical knowledge, experience, skill, know-how, or processes enabling the recipient to apply the technology. The Tribunal emphasized that to qualify as FTS, the services must satisfy the "make available" test, meaning the recipient should be able to apply the technology independently after the service period ends. The Tribunal found that the services provided did not enable the Indian affiliate to apply the technology on its own, as the services were required year after year since 2009, indicating no transfer of technology.

3. Evaluation of the applicability of judicial precedents and explanatory notes to the Memorandum of Understanding (MOU) between India and the USA:

The Tribunal referred to various judicial decisions, including the Hon'ble Karnataka High Court's decision in De Beers India Minerals (P.) Ltd. and the Hon'ble Delhi High Court's decision in Guy Carpenter & Co. Ltd. These cases clarified that mere incidental benefits or technical input by the service provider do not constitute "making available" technical knowledge. The Tribunal also considered the Explanatory Notes to the MOU, which state that technology is considered "made available" when the recipient can apply it independently. The Tribunal concluded that the services provided by the assessee did not transfer any technical knowledge or skills that the Indian affiliate could use independently, thus not qualifying as FTS under the DTAA.

Conclusion:

The Tribunal held that the receipts from the provision of information technology and other administrative services to the Indian affiliate were not in the nature of Fees for Technical Services under the India-USA DTAA. The Tribunal directed the Assessing Officer to delete the addition made on this account. The appeals of the assessee were allowed.