IT support services, fees for technical services and permanent establishment findings made the income taxable in India.

Centralised IT support services were treated as fees for technical services because the arrangement made available technical knowledge, experience and skill to the Indian recipient under the treaty test, and the payment therefore fell within section 9(1)(vii). The use of equipment and infrastructure in India was held to place those facilities at the disposal of the foreign enterprise, constituting a permanent establishment under the fixed place/disposal test; the income attributable to that establishment was thus taxable in India under section 44DA. The consideration was also held not to be a mere reimbursement, as the material did not show a pure pass-through cost arrangement.

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Issues: (i) Whether the proposed information technology sharing services constituted fees for technical services under the Income-tax Act and the applicable tax treaty; (ii) whether the foreign enterprise had a permanent establishment in India so that the income would be taxable as business profits and governed by section 44DA; (iii) whether the consideration was merely a reimbursement of cost and therefore outside the tax net.

Issue (i): Whether the proposed information technology sharing services constituted fees for technical services under the Income-tax Act and the applicable tax treaty.

Analysis: The services under the agreement were not treated as a mere common facility. The arrangement contemplated centralized technical support in information technology for the Indian entity and other group companies. The provision of such support was held to provide technical knowledge and experience to the recipient in a manner that satisfied the treaty test of making available technical knowledge, experience and skill. On that basis, the character of the payment was held to fall within the statutory and treaty concept of fees for technical services.

Conclusion: The services were held to fall within section 9(1)(vii) of the Income-tax Act, 1961 and to constitute fees for technical services.

Issue (ii): Whether the foreign enterprise had a permanent establishment in India so that the income would be taxable as business profits and governed by section 44DA.

Analysis: The agreement contemplated the use of equipment and infrastructure in India for the IT services, and the equipment was treated as being at the disposal of the foreign enterprise for the business carried on through that arrangement. Applying the fixed place and disposal tests, the presence of such equipment and infrastructure was held sufficient to constitute a permanent establishment. Once a permanent establishment was found, the treaty rules on business profits became applicable and the income attributable to that establishment was taxable in India. The income from fees for technical services was therefore to be computed under section 44DA.

Conclusion: The foreign enterprise was held to have a permanent establishment in India, and the income was held taxable under section 44DA of the Income-tax Act, 1961.

Issue (iii): Whether the consideration was merely a reimbursement of cost and therefore outside the tax net.

Analysis: The agreement and surrounding material did not establish a pure pass-through reimbursement without markup or commercial element. The structure of the arrangement, including the basis of allocation and the absence of clear material showing a simple reimbursement mechanism, led to the conclusion that the payment was consideration for services and not a mere reimbursement of expenses.

Conclusion: The payment was held not to be a mere reimbursement of cost and was held taxable in India.

Final Conclusion: The ruling held the IT support arrangement taxable in India as fees for technical services, with the income attributable to the Indian permanent establishment to be computed under the special business income provisions, and the treaty article relied on for exemption was held inapplicable.

Ratio Decidendi: Technical support arrangements that transmit usable technical knowledge to the recipient and are carried on through equipment or infrastructure at the disposal of the foreign enterprise can constitute fees for technical services and a permanent establishment, making the attributable income taxable in India under the special computation provision.

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