2023 (7) TMI 84 - AT - Income Tax

Income taxable in India - Taxability of certain receipts earned - Fees for Technical Services (FTS) under Article 13 of India United Kingdom (UK) Double Taxation Avoidance Agreement (DTAA) - interpretation of make available Clause - assessee is a non-resident corporate entity and a tax resident of UK - HELD THAT - As from the nature of services rendered, it is quite clear that they are in the nature of advisory services in certain areas as per the terms of the agreement. From the nature of services, it is quite evident that assessee s role in the services provided is purely to assist the Indian AE or other participating group entities in making correct decision on the aspects specifically referred to in the agreement. Thus, the nature of services provided to the Indian AE does not seem to be falling in the category of either technical or consultancy services. In fact, in the assessment orders, AO himself has stated that some of the services are of the nature of FTS. Thus, AO clearly admits that all the services rendered by the assessee are not in the nature of FTS. In spite of that the AO has treated the entire receipts as FTS and added at the hands of the assessee. This, in our view, is unacceptable. Whether the other condition of Article 13(4) of India UK treaty is fulfilled? - As in course of rendition of service, the service provider must transfer the technology, technical know-how, skill etc. to the service recipient to the extent that service recipient can perform such services in future without required the assistance of the service provider and without depending upon the service provider. Meaning thereby, the service recipient must be in a position to acquire technical knowledge, knowhow, skill etc., so as to independently apply it. In the facts of the present case, evidently, the services provided by the assessee to the Indian AE are merely for enabling and assisting the Indian AE in making the correct decisions on certain aspects as specifically provided under the group service agreement. Such rendition of services do not result in transfer of technical knowledge, know-how, skill etc. to the Indian AE. The make available condition provided under Article 13(4)(c) remains non-compliant. That being the position, the receipts would not fall within the definition of FTS as provided under Article 13(4) of India UK DTAA. The receipts, not being in the nature of FTS under Article 13(4) of India UK DTAA, are not taxable at the hands of the assessee in India - Decided in favour of assessee.

Summary

Issues involved:
1. Taxability of certain receipts as Fees for Technical Services (FTS) under Article 13 of India - United Kingdom (UK) Double Taxation Avoidance Agreement (DTAA).

Summary:

Taxability of Receipts as Fees for Technical Services (FTS):

The appeals were filed by the assessee challenging the final assessment orders for assessment years 2018-19 and 2019-20, where the Assessing Officer (AO) categorized certain receipts as FTS under Article 13 of India - UK DTAA. The assessee, a non-resident corporate entity and tax resident of the UK, received amounts for services related to human resources, finance, legal and compliance, and internal audit assurance work rendered to its associated enterprise in India. The AO considered these services as technical or consultancy services and taxed them at a gross rate of 10%.

The assessee contended that the services rendered do not qualify as FTS as they do not make available technical know-how, knowledge, skill, etc., to the service recipient as per Article 13(4)(c) of the India - UK DTAA. The term 'make available' was interpreted with reference to the Memorandum of Understanding (MoU) between India and the USA under the India - USA DTAA and various judicial precedents.

The Dispute Resolution Panel (DRP) upheld the AO's decision in a cryptic and unreasoned manner. The assessee argued that the services rendered were standard services provided under a group service agreement on a cost-sharing basis and did not fall under the category of technical or consultancy services. The Departmental Representative maintained that the services rendered were not routine and involved technical processes, thus falling under the category of technical or consultancy services.

Upon reviewing the submissions and the nature of services rendered, it was noted that the services provided by the assessee were mainly advisory and did not involve transferring technical knowledge, skill, or know-how to the Indian AE. The services were aimed at assisting the Indian AE in making correct decisions rather than enabling them to perform the services independently in the future. Therefore, the 'make available' condition under Article 13(4)(c) was not satisfied.

Consequently, it was held that the receipts in question do not qualify as FTS under Article 13(4) of the India - UK DTAA and are not taxable in India. The appeals were allowed.

Conclusion:

In conclusion, the receipts were not considered FTS under Article 13(4) of the India - UK DTAA, and thus, not taxable in India. The appeals were allowed in favor of the assessee.