2022 (7) TMI 1330 - AT - Income Tax

Appeal allowed: Management fee excluded from taxable income under tax treaty criteria. Importance of technology transfer emphasized.

The tribunal allowed the appeal, directing the exclusion of the management fee from the appellant's taxable income as the services did not meet the 'make ... Income deemed to accrue or arise in India - management fee received by the Appellant is taxable as fees for technical services (FTS) under Income Tax Act, 1961 as well as under India - Singapore Double Tax Avoidance Agreement (DTAA) - “make available' clause - claim of the assessee was in view of the make available clause in the Indo Singapore tax treaty, and in view of the fact that the said clause was not satisfied on the facts of the present case, no part of the amount so received by the assessee was taxable in India on the facts of the present case - HELD THAT:- Unless the recipient of the services, by virtue of rendition of services by the assessee, is enabled to provide the same services without recourse to the service provider, the services cannot be said to have made available the recipient of services. A mere incidental advantage to the recipient of service is not enough. The test is the transfer of technology, but then it is not even the case of the revenue that there is a transfer of technology, and what is highlighted is the incidental benefit to the assessee, which is treated as an enduring advantage. As observed in the binding judicial precedents referred to above, in order to invoke “make available‟ clause, “to fit into the terminology 'making available', the technical knowledge and skill must remain with the person receiving the services even after the particular contract comes to an end” and “the technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider”. Technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology. In our considered view, that condition is not satisfied on the facts of the present case. We, therefore, hold that that “make available‟ clause in the Indo-Singapore tax treaty cannot be invoked on the facts of the present case- as no case is even made out by the revenue that as a result of rendition of these services to the Indian entity, there is any transfer of skill or technology. An incidental benefit or enrichment which may add to the capabilities is not sufficient; the critical factor triggering the taxability in the source jurisdiction is the transfer of skills. That is what the Hon’ble Karnataka High Court has held in the case of De Beers [2012 (5) TMI 191 - KARNATAKA HIGH COURT] and this judicial precedent, in the absence of anything to the contrary having been held by Hon’ble jurisdictional High Court, is binding on this forum. That condition about the transfer of skills and absorption of kill by the recipient of service, in our humble understanding, is not satisfied. Once the taxability fails in terms of the treaty provisions, there is no occasion to refer to the provisions of the Income Tax Act, 1961, as in terms of Section 90(2), “where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee”. The taxability of impugned receipts, under section 9, is thus wholly academic. We leave it at that. We uphold the plea of the assessee, and direct the Assessing Officer to exclude the sum from his taxable income as fees for technical services. The assessee thus gets the relief accordingly.- Decided in favour of assessee. Issues Involved:1. Taxability of management fee as Fees for Technical Services (FTS) under the Income Tax Act, 1961, and the India-Singapore Double Tax Avoidance Agreement (DTAA).2. Adequacy of opportunity provided to the appellant in the assessment proceedings.Detailed Analysis:1. Taxability of Management Fee as Fees for Technical Services (FTS):Ground No. 1: Income earned by Appellant by way of management fee - Not FTS - Not Taxable- Appellant's Argument: The appellant contended that the management fee received should not be taxed as FTS under both the Income Tax Act, 1961, and the India-Singapore DTAA. The appellant argued that the services rendered did not 'make available' any technical knowledge, skill, or process to the Indian entity, Dimension Data India Pvt Ltd (DD India), as required by Article 12 of the DTAA.- Assessing Officer's Stand: The Assessing Officer rejected the appellant's claim, stating that the services provided did indeed make available technical knowledge, experience, skill, or processes to DD India, which could be used independently by the recipient. The officer emphasized that the services rendered were comprehensive and enabled the recipient to apply the knowledge without further recourse to the service provider.- Dispute Resolution Panel (DRP) Findings: The DRP upheld the Assessing Officer's decision, stating that the services provided were managerial, technical, and consultancy services, which enriched the recipient with enduring knowledge and skills. The DRP referenced various judicial precedents, including the Supreme Court's observations in National Cement Mines Industries vs. CIT, to support their conclusion that the true nature of the transaction should determine its taxability.- Tribunal's Analysis: The tribunal referred to the 'make available' clause in the Indo-Singapore tax treaty, emphasizing that for services to be taxed as FTS, they must enable the recipient to apply the technology independently. The tribunal cited several judicial precedents, including the Karnataka High Court's decision in CIT v. De Beers India (P.) Ltd., which clarified that the transfer of technology or skills must be such that the recipient can use them independently in the future.- Tribunal's Conclusion: The tribunal concluded that the services rendered by the appellant did not meet the 'make available' criterion, as there was no transfer of technology or skills to the Indian entity. Consequently, the management fee could not be taxed as FTS under the DTAA. The tribunal directed the Assessing Officer to exclude the sum of Rs 121,14,85,623 from the appellant's taxable income.2. Adequacy of Opportunity Provided to the Appellant:Ground No. 2: Inadequate Opportunity- Appellant's Argument: The appellant argued that the Assessing Officer and the DRP did not provide sufficient and adequate opportunity to present their case, thereby breaching the principles of natural justice. The appellant claimed that the conclusions were based on incorrect factual averments and judicial decisions that were not applicable to their case.- Tribunal's Analysis: The tribunal did not find explicit details on how the issue of inadequate opportunity was addressed. However, it can be inferred that the tribunal's detailed examination of the facts and legal positions, as well as the ultimate decision to allow the appeal, implicitly addressed the appellant's concerns regarding the adequacy of the opportunity provided.Conclusion:The tribunal allowed the appeal, directing the exclusion of the management fee from the appellant's taxable income, as the services rendered did not meet the 'make available' criterion under the Indo-Singapore tax treaty. The tribunal's decision emphasized the importance of the transfer of technology or skills for services to be taxed as FTS, aligning with judicial precedents that require the recipient to be able to use the technology independently. The issue of inadequate opportunity, while not explicitly detailed, was implicitly resolved in favor of the appellant through the comprehensive analysis and favorable judgment.