2023 (3) TMI 255 - AT - Income Tax

Income deemed to accrue or arise in India - Fee for Technical Services (FTS)/Fee for Included Services (FIS) u/s 9(1)(vii) and Article 12(4)(b) of India USA Double Taxation Avoidance Agreement (DTAA) - amount received by the assessee towards provision of Marketing Support Services (MSS) - assessee before us is a wholly owned subsidiary of an Indian entity - HELD THAT - The scope of services also provide for expert advice on developing market strategy and marketing campaign, attending meetings, conference etc. for the promotion of parent company s products, providing relevant reliable and current information with regard to the products of parent company with regard to USA market and gathering data for enhancing the marketability of parent company products. They are not of the nature to term them as either technical or consultancy services. Even assuming that some amount of consultancy is involved, however, the question which begs an answer is whether, make available condition of Article 12(4)(b) is satisfied. Article 12(4)(b) provides that a consideration received from provision of technical or consultancy services can be treated as FIS only when it makes available technical knowledge, experience, skill, know-how or processes to the service recipient. The term make available has been interpreted in various judicial precedents to mean that there must be a transfer of technical knowledge, experience, skill, know-how etc. from the service provider to service recipient in a manner so as to enable the service recipient to perform such services in future independently without any aid and assistance of the service provider. Nothing has been brought on record by the departmental authorities to demonstrate that there is complete transfer of technical knowledge, know-how, skill etc. to the recipient of service so as to enable him to use such technical know-how, knowledge, experience, skill etc. independently without the aid and assistance of the service provider. The reasoning based on which, the departmental authorities have proceeded to treat the consideration received as FIS is, provision of such services has resulted in enduring benefit to the parent company. The aforesaid interpretation of the departmental authorities is an antithesis to the interpretation given to the term make available by various judicial authorities. The decisions relied upon by learned counsel appearing for the assessee clearly support this view. We hold that the services provided by the assessee under the marketing support service agreement are neither in the nature of technical or consultancy services under Article 12(4) of India USA Tax Treaty. Even, assuming that it is in the nature of consultancy services, however, the make available condition provided under Article 12(4)(b) of the Tax Treaty is not satisfied. That being the case, the consideration received cannot be treated as FIS under Article 12(4)(b) of the Tax Treaty. Accordingly, we delete the addition made by the Assessing Officer. Appeal of assessee allowed.

Summary

Issues Involved:

1. Whether the amount received by the assessee towards provision of Marketing Support Services (MSS) is in the nature of Fee for Technical Services (FTS)/Fee for Included Services (FIS) under section 9(1)(vii) of the Income-tax Act, 1961 and Article 12(4)(b) of the India-USA Double Taxation Avoidance Agreement (DTAA).

Issue-Wise Detailed Analysis:

1. Nature of Amount Received for Marketing Support Services (MSS):

The core issue is whether the amount received by the assessee for providing MSS is categorized as FTS/FIS under section 9(1)(vii) of the Act and Article 12(4)(b) of the India-USA DTAA. The assessee, a non-resident corporate entity incorporated in the USA and a subsidiary of an Indian company, received Rs. 5,91,71,530/- towards MSS. The assessee argued that the amount, being business profit, is not taxable in India due to the absence of a permanent establishment (PE). The Assessing Officer (AO) disagreed, viewing the services as consultancy services that provided strategic and operational benefits to the parent company, thus satisfying the 'make available' condition under Article 12(4)(b) of the DTAA. Consequently, the AO added the amount to the assessee's income. The Dispute Resolution Panel (DRP) concurred with the AO, rejecting the assessee's contention that the income falls within exceptions under section 9(1)(vii)(b) of the Act.

2. Assessee's Argument and Legal Precedents:

The assessee's counsel argued that the services provided were neither technical nor consultancy services and did not involve any transfer of technical knowledge, skill, or experience. The services were purely commercial and regulatory in nature, not enabling the parent company's employees to utilize the knowledge independently. The counsel cited several legal precedents, including DIT Vs. Guy Carpenter & Co. Ltd., CIT Vs. De Beers India Minerals (P) Ltd., and others, to support the claim that the services do not qualify as FIS under Article 12(4)(b) of the DTAA. Additionally, the counsel pointed out that in the previous assessment year 2016-17, the AO had accepted that the income from MSS was not FTS/FIS, urging consistency in the assessment.

3. Department's Argument:

The Departmental Representative argued that the services rendered were consultancy services that provided enduring benefits to the parent company, thus satisfying the conditions of FIS under Article 12(4)(b) of the DTAA. The representative contended that the services made available technical know-how, experience, and skill to the parent company.

4. Tribunal's Analysis and Decision:

The Tribunal examined the scope of services under the MSS agreement, which included market research, regulatory updates, marketing strategy advice, and data analysis. The Tribunal noted that these services were not technical or consultancy services as per Article 12(4) of the DTAA. Even if considered consultancy services, the 'make available' condition was not satisfied, as there was no transfer of technical knowledge or skill enabling the parent company to perform the services independently. The Tribunal emphasized that the 'make available' condition requires a transfer of technical knowledge, skill, or experience, which was not demonstrated by the Department. The Tribunal also highlighted that in the previous assessment year, the AO had accepted that the income from MSS was not FTS/FIS, supporting the assessee's claim for consistency.

Conclusion:

The Tribunal concluded that the services provided by the assessee under the MSS agreement were neither technical nor consultancy services under Article 12(4) of the India-USA DTAA. Even if considered consultancy services, the 'make available' condition was not satisfied. Therefore, the amount received could not be treated as FIS under Article 12(4)(b) of the DTAA. The Tribunal deleted the addition made by the AO and partly allowed the appeal. The remaining grounds were dismissed as infructuous or consequential.