2023 (1) TMI 261 - AT - Income Tax

Fees for technical services ( FTS ) - sum received from HR and Marketing Consultancy services and Employee Training services as chargeable to tax in India as fees for technical services - India-Sweden DTAA - assessee contended that since it rendered Managerial and Training services to its two Indian AEs, the amount did not fall within the ambit of FTS under the DTAA read with DTAA between India and Portuguese - HELD THAT - Managerial services along with technical and consultancy services are also covered within the ambit of FTS. It is not the case of the assessee that the receipt is not taxable under the Act. The assessee has made out a case that the sum is not chargeable to tax in the hue of the DTAA, which is more beneficial than the provisions of the Act and section 90(1) of the Act permits choosing a more beneficial provision. If the amount in question also falls within the definition of the fees for included services under the DTAA - In order to make available technical services, it is sine qua non that the recipient of the services must acquire such technical knowhow etc. which he himself can use in future without any assistance of the provider and the same should not be anything which vanishes or disappears with its provision by the payee itself. Adverting to the facts of the extant case, we find from the nature of services rendered by the assessee that these are primarily pertaining to Human Resources, Marketing Consultancy services and Training services etc. Obviously, managerial services are not part of Article 12(4) of the DTAA between India-Portuguese. As regards the other services, it can be seen that such services are albeit laced with some technical knowledge and lead to their sharing during the training etc., but do not make available any technical knowledge, know-how, experience, skill etc. to the Indian entities so as to apply it in future without any aid or assistance from the assessee. The conclusion drawn by the AO is not proper because the training simply advances the skill of the recipient-employees but falls short of providing any technical knowledge, experience, skill that enables the employees to apply the technology contained therein . As such, we hold that that decision of the AO in treating Rs.38.16 lakh as FTS, is not correct because such consideration does not fall within the purview of FTS under Article 12(4) of the DTAA read with Article 12(4) of the DTAA between India- Portuguese. This addition is directed to be deleted. Addition of claimed to be reimbursement of expenses - We find that though the assessee made out a case of reimbursement but could not successfully prove the same before the AO. AR submitted that the assessee has got all the relevant documents and can prove the same before the AO. Under the given circumstances, we set-aside the impugned order and remit the matter to the file of the AO for giving one more opportunity to the assessee to prove that sum was in the nature of reimbursement in the terms discussed above. Needless to say, the assessee will be allowed reasonable opportunity of hearing. Treating as income chargeable to tax, as against the assessee s contention of the same being recovery of expatriates salary cost - A perusal of the mandate of the above provision clearly ingrains that any amount paid as a consideration which is income of the recipient chargeable to tax under the head Salaries , cannot constitute FTS. Though the assessee has been arguing before the authorities below that the said amount of Rs.64.19 lakh was offered by the employees for taxation in India as their salary, but did not furnish any conclusive evidence to prove the same. It can be seen from the impugned order that the assessee filed certain details of the salaries paid by the employees but did not establish any correlation between the amount under consideration and the amount offered for taxation as Salary by such employees - we are of the considered opinion that it would be in the fitness of the things if the impugned order on this score is set-aside and the matter is remitted to the file of the AO. We order accordingly and direct him to decide this issue afresh as per law after allowing reasonable opportunity of hearing to the assessee. Appeal is partly allowed.

Summary

Issues Involved:
1. Taxability of Rs.38,16,447/- as 'fees for technical services' (FTS).
2. Confirmation of addition of Rs.20,84,698/- claimed as reimbursement of expenses.
3. Taxability of Rs.64,19,453/- as income chargeable to tax, claimed as recovery of expatriates' salary cost.

Issue-wise Detailed Analysis:

1. Taxability of Rs.38,16,447/- as 'fees for technical services' (FTS):

The first issue revolves around whether the sum of Rs.38,16,447/- received by the assessee from HR and Marketing Consultancy services and Employee Training services should be taxed in India as 'fees for technical services' (FTS). The assessee, a company incorporated in Sweden, argued that the amount should not be chargeable to tax under Article 12 of the India-Sweden Double Taxation Avoidance Agreement (DTAA) read with the Protocol importing Article 12 of the DTAA between India and Portuguese, an OECD member nation. The assessee contended that the services rendered did not fall within the ambit of FTS under the DTAA.

The Assessing Officer (AO) rejected this contention, holding that the services rendered "made available" technical knowledge to the Indian entities, thus qualifying as FTS. The Dispute Resolution Panel (DRP) upheld the AO's decision. However, the Tribunal examined the nature of services rendered, which included HR and Marketing Consulting Services, Employee Training expenses, and Legal & Professional expenses. It concluded that these services, although involving some technical knowledge, did not "make available" technical knowledge or skills enabling the Indian entities to apply the technology independently in the future. Thus, the Tribunal held that the amount did not fall within the purview of FTS under Article 12(4) of the DTAA read with the India-Portuguese DTAA and directed the deletion of the addition.

2. Confirmation of addition of Rs.20,84,698/- claimed as reimbursement of expenses:

The second issue pertains to the addition of Rs.20,84,698/- claimed by the assessee as reimbursement of expenses. The assessee received this amount from its Indian entities, claiming it as reimbursement without any mark-up. The AO treated this amount as FTS due to insufficient evidence provided by the assessee to establish the reimbursement claim. The DRP also upheld this view.

The Tribunal noted that the assessee failed to establish a correlation between the reimbursed amount and the expenses incurred by third parties. It highlighted that for an amount to qualify as reimbursement, it must be a third-party cost incurred by the first person and recovered from the other without any mark-up. The Tribunal set aside the impugned order and remitted the matter to the AO, allowing the assessee another opportunity to prove the reimbursement claim with relevant documents.

3. Taxability of Rs.64,19,453/- as income chargeable to tax, claimed as recovery of expatriates' salary cost:

The third issue addresses the taxability of Rs.64,19,453/-, which the assessee claimed as recovery of expatriates' salary cost. The assessee argued that this amount was part of the salary of certain expatriates deputed to Indian entities and that it was recovered from Indian companies without any mark-up. The AO rejected this claim due to a lack of supporting evidence showing that the amount was offered for taxation by the employees as salary in India. The DRP upheld the AO's decision.

The Tribunal referred to Explanation 2 to section 9(1)(vii), which excludes consideration chargeable under the head "Salaries" from being treated as FTS. It noted that the assessee failed to provide conclusive evidence correlating the amount under consideration with the amount offered as salary by the employees. Consequently, the Tribunal set aside the impugned order and remitted the matter to the AO for a fresh decision, directing the AO to allow reasonable opportunity of hearing to the assessee.

Conclusion:

In summary, the Tribunal directed the deletion of the addition of Rs.38,16,447/- as FTS, remitted the issue of Rs.20,84,698/- claimed as reimbursement of expenses back to the AO for re-examination, and similarly remitted the issue of Rs.64,19,453/- claimed as recovery of expatriates' salary cost for fresh consideration by the AO. The appeal was partly allowed.