2025 (4) TMI 1431 - AT - Income Tax

Accrual of income in India - fee for technical services u/s 9(1)(vii) of the Act read with Article 12 of Tax Treaty of India-Netherlands - Taxability of CHR Recruitment Fees Taxability of External Information Services Taxability of Real Estate Corporate Travel Services Taxability of Health Ecotox Services and Taxability of IT Services - HELD THAT - As in view of observations made we are of the considered view that in respect of the aforesaid services the condition of make available is not satisfied and the Department has not brought anything on record to demonstrate that in the instant case the technology was made available to the recipient of services so as to fall within the ambit/definition of FTS under the India-Netherlands tax treaty. Accordingly in our considered view the aforesaid services do not qualify as FTS under the India Netherlands tax treaty. Taxability of Health Ecotox services as FTS under the Act read with taxability of IT Services - We are of the considered view that in respect of the aforesaid services the condition of make available is not satisfied and the Department has not brought anything on record to demonstrate that in the instant case the technology was made available to the recipient of services so as to fall within the ambit/definition of FTS under the India-Netherlands tax treaty.

Summary

The core legal questions considered by the Appellate Tribunal (AT) in this appeal relate primarily to the taxability under the Income Tax Act, 1961 ("the Act") and the India-Netherlands Double Taxation Avoidance Agreement ("DTAA" or "Tax Treaty") of various cost recoveries received by the assessee from associated enterprises for services rendered. The key issues include:

1. Whether the final assessment order dated 18-10-2023 was issued beyond the prescribed time limit under section 153 of the Act, rendering it time-barred.

2. The validity of the total income assessment including impugned additions amounting to INR 147,18,47,338.

3. Whether various cost recoveries received for services such as CHR Recruitment Fees, Internal Communication Fees, Remuneration and Benefit Fees, Talent and Development Fees, External Information Services, Real Estate and Corporate Travel Services, Health Ecotox Services, IT Services, Brand Advertising, Media Relations, Social Performance, ER Strategy and Planning, and Manage and Lead ER Function services qualify as Fees for Technical Services ("FTS") under Article 12 of the India-Netherlands DTAA.

4. Whether the amounts received for these services are mere reimbursements/allocation of costs without markup and hence not chargeable to tax in India.

5. The correctness of levying interest under sections 234A and 234B of the Act.

6. The issue of short credit of Tax Deducted at Source (TDS) under section 199 read with Rule 37BA of the Income-tax Rules, 1962.

7. The correctness of considering an amount as refund already issued when no such refund was made.

8. The initiation of penalty proceedings under section 270A of the Act.

Issue-wise Detailed Analysis

1. Time-barred Assessment (Ground No. 1)

The assessee initially challenged the validity of the final assessment order on the ground that it was passed beyond the time limit prescribed under section 153 of the Act. However, the assessee later withdrew this ground and it was dismissed as not pressed. No further adjudication was required.

2. General Ground on Assessment (Ground No. 2)

This was a broad challenge to the assessment order and additions made. The Tribunal found no specific adjudication necessary and dismissed this ground.

3. Taxability of Various Services as Fees for Technical Services (Grounds 3 to 15)

The primary and most detailed issues concerned whether the cost recoveries for various services rendered by the assessee to associated enterprises qualify as FTS under section 9(1)(vii) of the Act read with Article 12 of the India-Netherlands DTAA.

Relevant Legal Framework and Precedents:

Section 9(1)(vii) of the Act taxes income by way of fees for technical services. Article 12 of the India-Netherlands DTAA defines FTS as payments for technical or consultancy services, including provision of personnel services, but crucially includes a "make available" clause. This clause requires that the services rendered must "make available" technical knowledge, experience, skill, know-how, or processes to the recipient, enabling them to perform the services independently in the future without recourse to the service provider.

The Tribunal relied heavily on earlier decisions by coordinate Benches of the Tribunal in the assessee's own case for assessment years 2009-10 to 2018-19 and 2020-21, which had considered similar issues and services. The Tribunal also referred to authoritative judicial precedents including:

• GVK Industries Ltd. v. ITO (Supreme Court) regarding consultancy services.
• Raymond Ltd. v. Dy. CIT (ITAT) on the interpretation of "make available".
• Star Rays (Gujarat High Court) and Ad2pro Media Solutions (Supreme Court) on the scope of "make available" under DTAA.
• Intertek Testing (Authority for Advance Rulings) on the wide meaning of "technical".

Court's Interpretation and Reasoning:

The Tribunal observed that the services rendered by the assessee, such as CHR Recruitment Fees, External Information Services, Real Estate and Corporate Travel Services, Health Ecotox Services, IT Services, and others, were technical or consultancy in nature involving expertise and skill. However, the decisive factor under the India-Netherlands DTAA was whether these services satisfied the "make available" clause.

The Tribunal noted that the Department failed to establish that the services rendered "made available" technology or technical knowledge to the recipients such that they could independently perform the services in the future without further assistance. The services were found to be ongoing assistance or consultancy rather than transfer of technology or know-how. The Tribunal emphasized that mere rendering of technical services is insufficient; there must be a transmission of durable technical knowledge or skill to the recipient.

The Tribunal rejected the Revenue's reliance on the GVK Industries case, clarifying that it pertained to domestic law and did not consider the "make available" clause under the DTAA. The Tribunal also rejected the contention that the services were managerial and thus outside the scope of FTS, holding that the services were technical/consultancy in nature and managerial services are not included in the definition of FTS under the treaty.

Regarding the assessee's argument that the services were rendered on a cost-to-cost basis without markup and hence no income element existed, the Tribunal found that the assessee failed to convincingly demonstrate that only precise costs were recovered. The profit and loss accounts were considered self-serving and insufficient to negate the existence of an income element.

Key Evidence and Findings:

The Tribunal relied on the nature and description of services, cost sharing arrangements, and prior coordinate Bench decisions. It found no evidence that technology or technical knowledge was made available in a manner contemplated by the DTAA. The Tribunal also noted the absence of valid agreements clearly defining the nature of services and the "make available" aspect.

Application of Law to Facts:

Applying the "make available" requirement, the Tribunal held that the services did not qualify as FTS under the India-Netherlands DTAA and thus were not taxable as such in India. This conclusion was consistent across all the services challenged, including those rendered for the first time in the relevant assessment year.

Treatment of Competing Arguments:

The Tribunal considered the Revenue's arguments regarding the technical nature of services and the presence of income element but found them unsubstantiated. It also addressed the assessee's submissions regarding the non-technical/managerial nature of services and cost-to-cost basis, rejecting these on the facts and law.

Conclusions:

The Tribunal allowed Grounds 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, and 15 in favor of the assessee, holding that the services did not constitute FTS under the India-Netherlands DTAA due to failure to satisfy the "make available" clause.

4. Reimbursement of Costs (Ground No. 16)

The assessee contended that the amounts received were mere reimbursements/allocation of costs without markup and hence not taxable. However, following earlier decisions against the assessee on this issue, the Tribunal dismissed this ground, holding that the assessee failed to establish that the amounts were pure reimbursements without any income element.

5. Interest under Sections 234A and 234B (Ground No. 17)

This ground was consequential to the additions and did not require separate adjudication. The Tribunal dismissed it accordingly.

6. Short Credit of TDS and Erroneous Refund Adjustment (Grounds 18 and 19)

The Tribunal restored these issues to the Assessing Officer for fresh verification and adjudication after giving the assessee an opportunity to present facts. This was due to factual disputes regarding TDS credit and refund adjustments.

7. Penalty Proceedings under Section 270A (Ground No. 20)

Being consequential to the assessment order, the Tribunal dismissed this ground without specific adjudication.

Significant Holdings

"The services have not 'made available' technology to the recipient of services, so as to fall within the definition of FTS under the India-Netherlands tax treaty."

"The mere rendering of technical or consultancy services is insufficient to constitute FTS under the DTAA unless the recipient is enabled to perform the services independently in the future without recourse to the service provider."

"The services rendered by the assessee are technical/consultancy in nature and do not qualify as managerial services, which are excluded from the scope of FTS under the India-Netherlands tax treaty."

"The assessee failed to prove that the amounts received were mere reimbursements without any income element; hence, such amounts are taxable as income."

"The earlier coordinate Bench decisions in the assessee's own case for prior assessment years are binding and applicable to the present assessment year, particularly regarding the interpretation of the 'make available' clause and taxability of the services."

"Issues relating to short credit of TDS and erroneous refund adjustments require factual verification and are remitted to the Assessing Officer for fresh adjudication."

In conclusion, the Tribunal allowed the appeal of the assessee partly, specifically holding that the various services rendered did not qualify as Fees for Technical Services under the India-Netherlands DTAA due to failure to satisfy the "make available" clause, and dismissed other grounds either as not pressed, consequential, or restored for factual verification.