2014 (9) TMI 256 - AT - Income Tax

Payments to US Company Taxable in India as Fees for Included Services under India-USA DTAA

US Technology Resources Pvt Ltd Versus ACIT.

US Technology Resources Pvt Ltd Versus ACIT. - [2013] 28 ITR (Trib) 26 (ITAT [Coc]) Issues Involved:1. Disallowance of Rs. 85,22,743 on account of non-deduction of tax under section 40(a)(ia) of the Income-tax Act.2. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and USA.3. Interpretation of 'fees for included services' under Article 12 of the India-USA DTAA.4. Determination of whether the services provided by the US company constituted 'technical or consultancy services.'Issue-wise Detailed Analysis:1. Disallowance of Rs. 85,22,743 on Account of Non-Deduction of Tax:The assessee, engaged in software development services, claimed a deduction for payments made to a US-based company for management services. The Assessing Officer disallowed this payment under section 40(a)(ia) of the Act, presuming it to be consultancy fees requiring tax deduction under section 195. The CIT(A) confirmed this disallowance.2. Applicability of DTAA between India and USA:The assessee argued that the payment should be governed by the DTAA between India and USA, which would override the provisions of the Indian Income-tax Act if more beneficial. The assessee cited section 90(2) and section 5(2) of the Act, emphasizing that the income of a non-resident includes income deemed to accrue in India as defined in section 9.3. Interpretation of 'Fees for Included Services' under Article 12 of the India-USA DTAA:The assessee contended that the term 'managerial service' is excluded from 'fees for included services' as per Article 12(4) of the DTAA. They argued that the services provided did not 'make available' technical knowledge, skills, etc., to the assessee, which is a requirement under the DTAA for the services to be taxable.4. Determination of Whether the Services Provided Constituted 'Technical or Consultancy Services':The Tribunal examined whether the services rendered by the US company were technical in nature. The Tribunal noted that the US company provided assistance in management decision-making, financial decision-making, legal matters, public relations, treasury services, and risk management. The Tribunal referred to various judgments and definitions to determine that these services involved technical knowledge and expertise.Key Findings:A. Nature of Services:The Tribunal found that the services provided by the US company were technical and consultancy services. It noted that the managerial advice involved technical knowledge, experience, and skills, which were made available to the assessee and used in their decision-making processes.B. Technical Knowledge and Expertise:The Tribunal emphasized that the technical knowledge and expertise provided by the US company were absorbed and utilized by the assessee. This constituted 'making available' technical knowledge, thus falling within the definition of 'fees for included services' under Article 12(4)(b) of the DTAA.C. Precedents and Legal Interpretations:The Tribunal referred to various judgments, including the Andhra Pradesh High Court in G.V.K. Industries Ltd. and the Karnataka High Court in De Beers India Minerals Pvt Ltd, to support its conclusion that the services rendered were technical in nature. It distinguished these cases based on the facts and the nature of services provided.D. Conclusion:The Tribunal concluded that the payment made by the assessee to the US company constituted 'fees for included services' as per the DTAA and was taxable in India. Consequently, the assessee was required to deduct tax at source under section 195 of the Act.Final Judgment:The Tribunal upheld the disallowance of Rs. 85,22,743 and dismissed the appeal of the assessee, confirming the order of the lower authority. The services provided by the US company were deemed technical and consultancy services, making the payments taxable in India under the DTAA provisions.