2025 (3) TMI 865 - AT - Income Tax

Business income v/s FTS - Treating the reimbursement of GIS Charges - Asessee is a foreign company based in United Kingdom and has two AEs in India - assessee contended that it purchases various types of software products like Civil-3D Navisworks Microsoft office products etc. from third party venders for the usage of group companies globally - primary contention of the assessee is that such receipts represent mere reimbursements and do not qualify as taxable income HELD THAT - The mere subletting of software licenses does not involve any transfer of technical knowledge experience or skill from the assessee to the Indian AEs. The assessee has not provided any additional services such as training customization or technical support to Indian entities. Consequently the receipts do not fall within the ambit of FTS. Even assuming that the assessee has sublet the software licenses and earned a markup such activity does not involve any managerial technical or consultancy services. The procurement and allocation of software licenses do not require specialized expertise or skill but are mere administrative functions. AO s reliance on the make available clause is misplaced as no technical knowledge or know-how has been imparted to the Indian entities. Deduction of TDS by the Indian AEs at DTAA rates does not automatically classify the payments as FTS. TDS deduction is a procedural compliance and the underlying nature of the transaction must be examined to determine taxability. In the present case there is no element of technical or managerial service in the reimbursement of software license costs. We also note that the payments in question were for software licenses procured for group use and even if a markup was applied the nature of the receipts remains that of a business transaction rather than FTS. The assessee has not provided any specialized services beyond cost allocation. Therefore the taxation of such receipts should be examined under business income principles rather than FTS. The Hon ble Supreme Court ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT clarifies that payments for software licenses should not be treated as royalty. Similarly we find that the reimbursement of software license costs does not constitute FTS as no technical services were rendered. AO and DRP have erred in mischaracterizing these receipts as FTS without sufficient basis. Characterization of a transaction must be based on its substance rather than its label. In this case the absence of technical involvement by the assessee in providing the software licenses demonstrates that the payments are in the nature of cost reimbursements or business transactions and not technical services. Hence the AO s conclusions are based on assumptions rather than verifiable evidence. GIS Charges received by the assessee do not qualify as Fees for Technical Services under the India-UK DTAA. The subletting of software licenses does not involve the transfer of technical knowledge expertise or skill and therefore the payments cannot be taxed as FTS. Furthermore the reliance placed by the AO and DRP on the make available clause is unfounded as no technical knowledge was transferred. Accordingly the addition made by the AO and upheld by the DRP is deleted. Hence the ground of appeal of the assessee is hereby allowed. Levying higher fees u/s 234F - DR did not raise any objection if the issue is set aside to the file of the AO to levy the fees under section 234F in accordance to the provisions of law. We are inclined to set aside the issue to the file of the AO to levy the fee under the provisions of section 234F as applicable for the year under dispute. Hence the ground of appeal of the assessee is hereby allowed for statistical purposes.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issue presented and considered in this judgment revolves around whether the reimbursement of GIS Charges (Software License Payment) by the Indian associated enterprises (AEs) to the foreign assessee qualifies as Fees for Technical Services (FTS) under the India-UK Double Taxation Avoidance Agreement (DTAA). The Tribunal also considered whether the levy of fees under Section 234F of the Income Tax Act was appropriate.

ISSUE-WISE DETAILED ANALYSIS

1. Classification of GIS Charges as Fees for Technical Services (FTS)

Relevant legal framework and precedents: The determination of whether payments qualify as FTS under the India-UK DTAA involves analyzing the nature of services rendered, the presence of technical or managerial expertise, and whether any technical knowledge is "made available" to the recipient. The Tribunal referenced the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT, which clarified that payments for software licenses should not be treated as royalty.

Court's interpretation and reasoning: The Tribunal found that the payments made by the Indian AEs were reimbursements for costs incurred by the assessee in procuring software licenses for group companies. The Tribunal emphasized that the mere subletting of software licenses does not involve the transfer of technical knowledge, experience, or skill to the Indian entities. The Tribunal also noted that the assessee did not provide any additional services such as training, customization, or technical support to Indian entities.

Key evidence and findings: The Tribunal considered the lack of evidence provided by the assessee to substantiate its claim of cost-to-cost reimbursement. The Tribunal also noted the absence of any specialized services being provided beyond cost allocation.

Application of law to facts: The Tribunal concluded that the receipts do not fall within the ambit of FTS as defined under the India-UK DTAA. The procurement and allocation of software licenses were deemed administrative functions rather than services involving specialized expertise or skill.

Treatment of competing arguments: The Tribunal rejected the AO's reliance on the "make available" clause, stating that no technical knowledge or know-how was imparted to the Indian entities. The Tribunal also dismissed the argument that TDS deduction at DTAA rates automatically classifies payments as FTS, emphasizing the need to examine the underlying nature of the transaction.

Conclusions: The Tribunal held that the GIS Charges received by the assessee do not qualify as Fees for Technical Services under the India-UK DTAA. The subletting of software licenses does not involve the transfer of technical knowledge, expertise, or skill, and therefore, the payments cannot be taxed as FTS. The addition made by the AO and upheld by the DRP was deleted.

2. Levy of Fees under Section 234F of the Income Tax Act

Relevant legal framework: Section 234F of the Income Tax Act pertains to the levy of fees for delayed filing of income tax returns.

Court's interpretation and reasoning: The Tribunal considered the arguments regarding the appropriate fee to be levied under Section 234F, with the assessee contending that the fee should be 5000 instead of 10,000.

Conclusions: The Tribunal set aside the issue to the file of the AO to levy the fee under the provisions of Section 234F of the Act as applicable for the year under dispute, allowing the ground of appeal for statistical purposes.

SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: The Tribunal noted, "The subletting of software licenses does not involve the transfer of technical knowledge, expertise, or skill, and therefore, the payments cannot be taxed as FTS."

Core principles established: The characterization of a transaction must be based on its substance rather than its label. Payments for software licenses that do not involve the transfer of technical knowledge or skill should not be classified as FTS under the India-UK DTAA.

Final determinations on each issue: The Tribunal concluded that the GIS Charges do not qualify as FTS and deleted the addition made by the AO. The issue of fees under Section 234F was remanded to the AO for reconsideration in accordance with the law.