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2023 (6) TMI 173 - AT - Income TaxIncome deemed to accrue or arise in India - amounts received by the assessee from its Indian subsidiary towards IT and SAP charges - Whether can be treated as Fees for Technical Services (FTS) under India Israel Double Taxation Avoidance Agreement (DTAA) read with India- Portugal DTAA? - assessee is a non-resident corporate entity incorporated in Israel - HELD THAT - FAA while coming to the conclusion that the services rendered under IT and SAP Services Agreement are ancillary and subsidiary to royalty agreement, has completely misconceived the facts, as, he was under an impression that the Technical Collaboration Agreement existed prior to IT and SAP Service Agreement. Whereas, factually, it is not so. FAA aso fell into such factual error because while invoking Article 12(4)(a) of India Portugal DTAA, he did not afford any opportunity to the assessee to have his say. As examining the nature of services rendered under the IT and SAP Service Agreement and the Technical Collaboration Agreement, we are convinced that the services rendered under IT and SAP Services Agreement are not ancillary and subsidiary to the services rendered under the Technical Collaboration Agreement. Moreso, when the IT and SAP Services Agreement was in existence much prior to the Technical Collaboration Agreement. The receipts in dispute cannot be treated as FTS under Article 12(4)(a) of India Portugal DTAA and made taxable at the hands of the assessee in India. Accordingly, the disputed additions in both the assessment years are deleted. Assessee appeal allowed.
Issues Involved:
1. Whether the amounts received by the assessee from its Indian subsidiary towards IT and SAP charges can be treated as Fees for Technical Services (FTS) under India-Israel Double Taxation Avoidance Agreement (DTAA) read with India-Portugal DTAA. Summary: Issue 1: Treatment of IT and SAP Charges as FTS under DTAA: The assessee, a non-resident corporate entity and tax resident of Israel, received fees from its Indian subsidiary for IT and SAP services. The Assessing Officer (AO) treated these receipts as FTS under Article 13 of the India-Israel DTAA. The assessee argued that under the Most Favoured Nation (MFN) clause in the Protocol to the India-Israel DTAA, the more restricted definition of FTS under the India-Portugal DTAA, which includes the 'make available' condition, should apply. The AO rejected this, stating that the 'make available' condition cannot be imported without a specific notification from the Government of India. The Commissioner of Income Tax (Appeals) (CIT(A)) disagreed with the AO, holding that the MFN clause applies even without a specific notification, thus the restricted scope of FTS under the India-Portugal DTAA should be applicable. However, the CIT(A) concluded that the receipts under the IT and SAP Service Agreement were ancillary and subsidiary to the Technical Collaboration Agreement and thus fell under Article 12(4)(a) of the India-Portugal DTAA, which does not require the 'make available' condition. The assessee contended that the IT and SAP Service Agreement and the Technical Collaboration Agreement were independent of each other, with the former existing prior to the latter, and thus the receipts should not be considered ancillary and subsidiary to the royalty income. Tribunal's Decision: The Tribunal noted that the assessee is governed by the India-Israel DTAA, but due to the MFN clause, the more restricted scope of FTS under the India-Portugal DTAA applies. The Tribunal found that the services under the IT and SAP Service Agreement were for day-to-day IT support and maintenance, which are distinct from the services under the Technical Collaboration Agreement related to drip irrigation systems. Therefore, the IT and SAP services were not ancillary and subsidiary to the Technical Collaboration Agreement. The Tribunal concluded that the CIT(A) erred in linking the IT and SAP services to the Technical Collaboration Agreement and held that the receipts from the IT and SAP Service Agreement do not qualify as FTS under Article 12(4)(a) of the India-Portugal DTAA. Consequently, the disputed additions were deleted, and the appeals were allowed. Order Pronounced: The order was pronounced in the open court on 31st May, 2023.
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