2017 (3) TMI 1742 - AT - Income Tax

IT Support Fee Not Taxable in India: Tribunal Rules in Favor of Swedish Company

M/s. AB Sandvik Materials Technology, (Formerly known as AB Sandvik Steel) Versus Deputy Commissioner of Income Tax, (International Taxation) –I, Pune

M/s. AB Sandvik Materials Technology, (Formerly known as AB Sandvik Steel) Versus Deputy Commissioner of Income Tax, (International Taxation) –I, Pune - ... Issues Involved:1. Taxability of the fee received by the assessee under the India-Sweden Double Taxation Avoidance Agreement (DTAA).2. Classification of the fee as 'Royalty' under Article 12 of the India-Sweden DTAA.3. Determination of whether the fee qualifies as Fee for Technical Service (FTS) under Article 12 of the India-Sweden DTAA.Detailed Analysis:1. Taxability of the Fee Received by the Assessee:The assessee, a non-resident company incorporated in Sweden, provided IT support services to its affiliate, Sandvik Asia Private Limited, and received a fee of Rs. 5,42,070/-. The assessee claimed the fee was non-taxable in India, arguing it had no Permanent Establishment (PE) in India. The Assessing Officer (AO) disagreed, stating the fee was taxable as 'Royalty' under Article 12 of the India-Sweden DTAA and Section 9(1)(vi) of the Income Tax Act, 1961. The Dispute Resolution Panel (DRP) upheld the AO's decision, leading to the assessee's appeal.2. Classification of the Fee as 'Royalty':The AO and DRP classified the fee as 'Royalty,' arguing the assessee provided a license to use customized software, which qualifies as royalty under both the Income Tax Act and the India-Sweden DTAA. The DRP noted the assessee maintained an Enterprise Resource Planning (ERP) system, which was essential for managing sales data and devising marketing strategies. The DRP concluded that the payment for the use of this database constituted 'Royalty' as it involved the commercial exploitation of intellectual property.3. Determination of Fee as Fee for Technical Service (FTS):The assessee contended the fee did not qualify as FTS under Article 12 of the India-Sweden DTAA, as it did not 'make available' technical knowledge, skills, or processes to the service recipient. The assessee argued the services were limited to IT support and did not involve the transfer of technical knowledge enabling the recipient to use it independently. The assessee cited the case of its sister concern, Sandvik Australia Pty. Ltd., where the Tribunal held similar services were not taxable in India.Tribunal's Decision:The Tribunal examined the nature of services provided by the assessee, which included IT support and advisory services. It referred to the Delhi High Court's decision in DIT vs. Infrasoft Ltd., which distinguished between royalty paid for copyright rights and consideration for copyrighted articles. The Tribunal concluded the assessee's services did not involve the transfer of copyright or technical knowledge, and the fee was not 'Royalty' or FTS under the DTAA.The Tribunal also relied on its previous decision in Sandvik Australia Pty. Ltd., where it held that similar services were not taxable in India. It emphasized that the services provided by the assessee did not meet the criteria for 'Royalty' or FTS under the DTAA.Conclusion:The Tribunal allowed the assessee's appeal, holding that the fee received was neither 'Royalty' nor FTS and therefore not taxable in India under the India-Sweden DTAA. The decision was pronounced on 24th March 2017.