2025 (4) TMI 214 - AT - Income Tax

Income deemed to accrue or arise in India - Income from providing IT support services - Whether taxable as fees for technical services (FTS ) under Article 13 of the India- United Kingdom Double Taxation Avoidance Agreement (DTAA )? - HELD THAT - We find that the issues involved are covered in favour of the assessee by the decision of ITAT in assessee s own case 2024 (8) TMI 1424 - ITAT DELHI held condition of make available was not satisfied for services when provided by assessee did not enabled the AEs to apply the technology independently on conclusion of the yearly contract. The services availed by Petitioner cannot be said to the technical services and Article 13 is wholly inapplicable in the facts and circumstances of the present case. There is nothing to show in the assessment order that the AO had made any enquiry on his own or relied any provisions of the Master Inter- Company Services Agreement (in short MSA ) to show that the training as imparted was of such nature that it made available the technology to the associate enterprises so that on conclusion of the training the employees of AE s will be unable to use technology on their own. Also fee received by the Assessee is in the nature of reimbursement as it is simply allocation of costs without any mark-up and thus same not be treated as income of the Assessee. The tax authorities below have fallen in error in not appreciating that the reimbursement was on cost to cost basis. Assessee appeal allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

1. Whether the income from providing IT support services is taxable as fees for technical services (FTS) under the India-United Kingdom Double Taxation Avoidance Agreement (DTAA).

2. Whether the reimbursement of costs for providing IT support services is taxable in India as fees for included services (FIS) under the India-USA DTAA.

3. Whether the assessment of tax liabilities, including interest and penalties, was correctly computed under the relevant sections of the Income Tax Act, 1961.

ISSUE-WISE DETAILED ANALYSIS

1. Taxability of IT Support Services as Fees for Technical Services (FTS)

Relevant legal framework and precedents:

The relevant framework involves Article 13 of the India-United Kingdom DTAA, which addresses the taxation of fees for technical services. The Tribunal also referenced previous decisions, including those in the cases of Aircom International Ltd, H.J. Heinz Company, and Shell India Markets Pvt Ltd.

Court's interpretation and reasoning:

The Tribunal found that the services provided were routine IT management services that did not "make available" technical knowledge or skills to the Indian associated enterprises (AEs). The Tribunal emphasized that the recurring nature of the contract indicated that no technical knowledge was transferred, as the AEs continued to require the services annually.

Key evidence and findings:

The Tribunal noted that the services were routine and recurring, and there was no evidence that the AEs were enabled to apply the technology independently.

Application of law to facts:

The Tribunal applied the "make available" test from the DTAA, concluding that the services did not meet this criterion, thus not qualifying as FTS.

Treatment of competing arguments:

The Tribunal distinguished the present case from the precedents relied upon by the tax authorities, noting that the facts were different and the "make available" condition was not satisfied.

Conclusions:

The Tribunal concluded that the income from IT support services was not taxable as FTS under the India-United Kingdom DTAA.

2. Taxability of Reimbursement of Costs as Fees for Included Services (FIS)

Relevant legal framework and precedents:

The issue involved Article 12 of the India-USA DTAA, which pertains to fees for included services. The Tribunal considered the decision in Bio Rad Laboratories Inc. v. ACIT and the ruling of the Hon'ble Bombay High Court in Shell India Markets Pvt Ltd.

Court's interpretation and reasoning:

The Tribunal found that the reimbursement was a cost-to-cost allocation without any profit element, and thus, it should not be treated as income. The Tribunal relied on the decision in Planetcast International Pte. Ltd. v. ACIT, which held that reimbursements without profit elements are not chargeable to tax.

Key evidence and findings:

The Tribunal examined the Master Inter-Company Services Agreement (MSA) and found that the allocation of costs was based on logical methodologies, ensuring no profit element was embedded.

Application of law to facts:

The Tribunal applied the principle that reimbursements without profit elements are not taxable, aligning with the DTAA provisions.

Treatment of competing arguments:

The Tribunal rejected the reliance on the AAR ruling in Shell India Markets Pvt Ltd, noting that it was overturned by the Bombay High Court.

Conclusions:

The Tribunal concluded that the reimbursement of costs was not taxable as FIS under the India-USA DTAA.

3. Computation of Tax Liabilities, Interest, and Penalties

Relevant legal framework and precedents:

The Tribunal considered the provisions under sections 234A, 234B, and 270A of the Income Tax Act, 1961, regarding interest and penalties.

Court's interpretation and reasoning:

The Tribunal found errors in the computation of tax liabilities and interest, noting that the correct tax rate under the DTAA should have been applied.

Key evidence and findings:

The Tribunal noted discrepancies in the tax computation and emphasized the need for accuracy in applying the DTAA rates.

Application of law to facts:

The Tribunal applied the correct DTAA rates to the facts, resulting in adjusted tax liabilities.

Treatment of competing arguments:

The Tribunal found the tax authorities' computations to be incorrect and adjusted the liabilities accordingly.

Conclusions:

The Tribunal concluded that the tax liabilities, interest, and penalties were incorrectly computed and needed revision.

SIGNIFICANT HOLDINGS

The Tribunal's significant holdings include:

- The income from IT support services is not taxable as FTS under the India-United Kingdom DTAA as it does not "make available" technical knowledge.

- The reimbursement of costs for IT support services is not taxable as FIS under the India-USA DTAA, as it is a cost-to-cost allocation without profit.

- The tax liabilities, interest, and penalties were incorrectly computed, requiring adjustment to align with the DTAA provisions.

The Tribunal allowed the appeals filed by the assessee, emphasizing the importance of adhering to the DTAA provisions and accurately computing tax liabilities.