2024 (12) TMI 1483 - AT - Income Tax

Income deemed to accrue or arise in India - income received by the assessee from Indian customers for providing a cloud-native machine data analytics solution qualifies - Fees for Technical Services (FTS) under the Income Tax Act, 1961 and the India-US Double Taxation Avoidance Agreement (DTAA) - HELD THAT - We observe that the assessee has submitted TRC and also offered income generated in India in the resident country and offered the same as income and it does not make any difference whether the global income assessed to tax are income or loss, as long as, the income generated are offered in the resident country as business income which is the requirement of law. In view of the above discussions we hold that receipt did not qualify as FTS under Article 12(4) of the India-US tax treaty. Thus, grounds of appeal nos. 1 to 6 filed by the assessee are allowed. TDS credit - We observe that TDS granted by the Assessing Officer and claimed by the assessee are different. We direct the Assessing Officer to verify the same and allow the same as per law.

1. ISSUES PRESENTED and CONSIDERED

The legal judgment revolves around the following core issues:

Whether the income received by the assessee from Indian customers for providing a cloud-native machine data analytics solution qualifies as "Fees for Technical Services" (FTS) under the Income Tax Act, 1961 and the India-US Double Taxation Avoidance Agreement (DTAA).
Whether the income is taxable in India given the provisions of the India-US DTAA.
Whether the assessee's income was effectively taxed in the USA, considering the global losses reported by the parent company.
Whether the assessee is entitled to Tax Deducted at Source (TDS) credit as claimed.
Whether any penalty under Section 270A of the Income Tax Act is applicable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Taxability of Income as FTS

Relevant Legal Framework and Precedents: The assessment hinges on the interpretation of "Fees for Technical Services" under both the Income Tax Act and the India-US DTAA. The DTAA requires that services must "make available" technical knowledge or skills to be classified as FTS.
Court's Interpretation and Reasoning: The tribunal referenced prior decisions, notably the case of Coursera Inc., to determine that providing access to a platform does not constitute making available technical knowledge or skills.
Key Evidence and Findings: The assessee provides a cloud-native data analytics solution, but there was no evidence that it transferred any technology or technical knowledge to Indian customers.
Application of Law to Facts: The tribunal concluded that the services did not meet the "make available" criterion under the DTAA, hence not qualifying as FTS.
Treatment of Competing Arguments: The tribunal considered the Revenue's argument that the income should be taxed as FTS due to the lack of effective taxation in the USA but found it unpersuasive.
Conclusions: The income does not qualify as FTS under Article 12(4) of the India-US DTAA.

Issue 2: Taxability in India

Relevant Legal Framework and Precedents: The India-US DTAA provisions were central, particularly the "make available" clause.
Court's Interpretation and Reasoning: The tribunal emphasized that mere provision of access to a service does not constitute a transfer of technology.
Key Evidence and Findings: The tribunal noted that the assessee had submitted a Tax Resident Certificate (TRC) and offered the income in the USA.
Application of Law to Facts: The tribunal found that the income should not be taxed in India as it did not meet the DTAA's requirements for FTS.
Treatment of Competing Arguments: The tribunal dismissed the Revenue's argument that the income was not effectively taxed due to global losses.
Conclusions: The income is not taxable in India under the DTAA.

Issue 3: TDS Credit Entitlement

Relevant Legal Framework and Precedents: The issue was procedural, involving verification of TDS credits.
Court's Interpretation and Reasoning: The tribunal directed the Assessing Officer to verify and allow TDS credits as per law.
Conclusions: The issue was remitted back for verification.

Issue 4: Penalty under Section 270A

Relevant Legal Framework and Precedents: Section 270A pertains to penalties for underreporting income.
Court's Interpretation and Reasoning: The tribunal deemed the penalty issue premature.
Conclusions: The penalty issue was dismissed as premature.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "The expression 'make available' must be construed as an enablement, conferral of knowledge and which would lead to the payer becoming skilled to perform those functions independently."
Core Principles Established: The tribunal reinforced the principle that mere access to a service does not constitute FTS unless it involves the transfer of technical knowledge or skills.
Final Determinations on Each Issue: The income from Indian customers does not qualify as FTS under the DTAA and is not taxable in India. The TDS credit issue was remanded for verification, and the penalty issue was dismissed as premature.

In conclusion, the tribunal ruled in favor of the assessee, establishing that the income derived from Indian customers does not qualify as FTS under the India-US DTAA, and hence, is not taxable in India. The tribunal also directed procedural verification for TDS credits and dismissed the penalty issue as premature.

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