2023 (9) TMI 106 - AT - Income Tax

Taxability as Fee for Included Service (FIS) u/A 12 of India-USA DTAA - services in nature of technical or consultancy - nature and character of identical receipts if it requires withholding of tax? - assessee is a non-resident corporate entity and a tax resident of USA engaged in the business of providing consultancy services to global clients based in the USA or having USA operations - Assessee submitted, non-technical consultancy services are not covered under Article 12(4)(b) of the Tax Treaty - HELD THAT - As departmental authorities have not brought any material on record to demonstrate that while rendering services, the assessee had made available technical knowledge, expertise, skill, knowhow etc. to Bain India to apply such technology, knowhow etc. independently without the aid and assistance of the assessee. The fact that Bain India is still dependent on the assessee for such services is established from the fact that since the year 2010, the assessee had been providing such services to Bain India on year to year basis. Had assessee made available the technical knowledge, knowhow skill etc. to Bain India, there would not have been any occasion for the assessee to provide such services on year to year basis as the making available or transfer of such technical knowledge, knowhow, skill etc. would have enabled Bain India to apply them on its own without requiring the assessee to continue with providing them. As per Example 7 of the Memorandum of Understanding to India-USA DTAA, a receipt cannot be treated as FTS merely because the service provider while providing consultancy services has used substantial technical skill and expertise. Because, while providing such services, the American Company is not making available to the Indian Company, any technical expertise, knowledge or skill etc. but is merely transferring commercial information to the Indian Company by utilizing technical skill. Thus, no hesitation in holding that the receipts in dispute are not in the nature of FIS under Article 12(4)(b) of India-USA DTAA. We order accordingly.

Summary

Issues Involved:
1. Taxability of an amount as Fee for Included Service (FIS) under Article 12 of India-USA Double Taxation Avoidance Agreement (DTAA).
2. Addition of an amount as FIS under Article 12(4)(b) of India-US DTAA.

Summary:

Issue 1: Taxability of an amount as Fee for Included Service (FIS) under Article 12 of India-USA Double Taxation Avoidance Agreement (DTAA)

The assessee, a non-resident corporate entity and tax resident of the USA, challenged the taxability of Rs. 5,24,00,942 as FIS under Article 12 of the India-USA DTAA. The Assessing Officer (AO) treated the amount received from consultancy services as FIS under Article 12(4) of the Tax Treaty, asserting that the assessee made available technical knowhow, knowledge, and skills to the service recipient. Despite objections, the Dispute Resolution Panel (DRP) upheld the AO's draft assessment order.

The assessee argued that the services provided were basic business advisory services and not technical in nature, thus not covered under FIS as per Article 12(4)(b) of the Tax Treaty. The assessee also contended that even if the services were considered consultancy services, they did not make available any technical knowledge or skills to the recipient, a crucial condition under Article 12(4)(b). The Tribunal, upon analyzing the consulting service agreement and relevant precedents, concluded that the services provided did not qualify as technical services and the make available condition was not satisfied. Consequently, the receipts were not treated as FIS under Article 12(4)(b) of the India-USA DTAA.

Issue 2: Addition of an amount as FIS under Article 12(4)(b) of India-US DTAA

The assessee also challenged the addition of Rs. 10,98,97,261 as FIS under Article 12(4)(b) of the DTAA. The AO categorized the receipts from Bain India towards reimbursement of client-related expenses as FIS. The assessee argued that these receipts were reimbursements of actual costs without any markup and did not involve any technical skill or knowhow.

The Tribunal referred to a prior decision where similar receipts were held not to be FIS or royalty, and no withholding tax was required. Following this precedent, the Tribunal concluded that the receipts in question were not in the nature of FIS under Article 12(4)(b) of the Tax Treaty.

Conclusion:

The Tribunal allowed the appeal, holding that the amounts in question were not taxable as FIS under Article 12(4)(b) of the India-USA DTAA. The decision was pronounced in the open court on 29.08.2023.