2009 (8) TMI 973 - AT - Income Tax

Payments to Sun Microsystems Not 'Technical Services'; No Tax in India Required Under DTAA with Singapore.

Sun Microsystems India Pvt. Ltd. Versus Income-tax Officer, International Taxation

Sun Microsystems India Pvt. Ltd. Versus Income-tax Officer, International Taxation - [2010] 3 ITR 808, [2010] 125 ITD 196 Issues Involved:1. Classification of payments as 'fees for technical services' under Article 12(4) of the Double Taxation Avoidance Agreement (DTAA) between India and Singapore.2. Liability of the appellant to deduct tax at source under section 195(1) of the Income-tax Act.3. Nature of services rendered by Sun Microsystems Pte. Ltd., Singapore, and whether they make available technical knowledge, experience, skill, know-how, and processes to the appellant.Issue-wise Detailed Analysis:1. Classification of Payments as 'Fees for Technical Services':The learned Commissioner of Income-tax (Appeals) classified the charges paid by the appellant to Sun Microsystems Pte. Ltd., Singapore, as 'fees for technical services' under Article 12(4) of the DTAA between India and Singapore. This article defines 'fees for technical services' as payments for managerial, technical, or consultancy services that make available technical knowledge, experience, skill, know-how, or processes enabling the recipient to apply the technology. The appellant argued that the services provided were mere logistics services and did not make available any technical knowledge or skills that the appellant could apply independently in the future.2. Liability to Deduct Tax at Source:The appellant denied its liability to deduct tax at source on payments made to Sun Microsystems Pte. Ltd., Singapore, under the logistics services agreement. The Commissioner of Income-tax (Appeals) held that the appellant was liable to deduct tax at source under section 195(1) of the Income-tax Act. The appellant filed an appeal under section 248 of the Income-tax Act, which allows an appeal after deducting and depositing the tax at source. The Commissioner of Income-tax (Appeals) relied on a previous order and concluded that the services rendered were technical in nature and enabled the appellant to apply the technology, thus falling under 'fees for technical services' liable for tax deduction.3. Nature of Services Rendered:The services provided by Sun Microsystems Pte. Ltd., Singapore, included inventory management, spares planning, defective repair services, technical consultation, and supply chain management. The Commissioner of Income-tax (Appeals) concluded that these services were technical and made available technical knowledge and processes to the appellant. The appellant argued that the services did not enable it to perform these functions independently, as the agreement was still in force and the appellant had not absorbed the technical knowledge.Tribunal's Findings:The Tribunal examined whether the services rendered made available technical knowledge, experience, skill, or know-how to the appellant. It referred to various legal precedents and interpretations of similar terms in other DTAA agreements, particularly the India-US treaty. The Tribunal noted that 'make available' means providing something that the recipient can use independently. The Tribunal found no evidence that the appellant acquired the necessary skills to use the technical knowledge independently. The services were rendered off-shore, and Sun Microsystems Pte. Ltd., Singapore, did not have a permanent establishment in India. Therefore, the payments were not taxable in India under Article 7 of the DTAA between India and Singapore.Conclusion:The Tribunal concluded that the payments made by the appellant to Sun Microsystems Pte. Ltd., Singapore, were not liable to be taxed under 'fees for technical services' as per Article 12(4) of the DTAA between India and Singapore. Consequently, the appellant was not required to deduct tax at source under section 195 of the Income-tax Act. Both appeals of the assessee were allowed.