2018 (11) TMI 1107 - AT - Income Tax

Payments not Fees for Technical Services; No Permanent Establishment; Recharacterization rejected

The Tribunal dismissed the revenue's appeals for A.Y 2001-02 and A.Y 2002-03, affirming that payments received were not Fees for Technical Services (FTS), ... FTS - P.E. in India - “make available” any technical knowledge - payment of fees for the service as made directly by the subscribers to the assessee in foreign exchange - India-U.K tax treaty dealing with taxability of business profit - Held that:- We are of the considered view that the Reuters Dealing 2000-2 is an electronic deal matching system, enabling authorized dealers in foreign exchange such as banks etc. to affect deals in spot foreign exchange with other foreign exchange dealers. The system only provides a platform for the forex dealers to affect deals with other subscribers by entering orders into the system, which may be matched directly by the system with orders entered by other subscribers. We find that the assessee which operates its business through its branch in Geneva where its main server is located does not “make available” any technical knowledge etc. to its customers by rendering the services. We thus, are in agreement with the observations of the CIT(A) that as the rendering of the services by the assessee does not “make available” any technical knowledge etc. to the customers, hence the fees received from providing of such services would not fall within the sweep of the definition of FTS as per Article 13 of the India-U.K tax treaty. The Ground of appeal No. 1 of the revenue is dismissed in terms of our aforesaid observations. P.E in India - Held that:- For constituting a fixed place P.E, either the place should be owned or at the disposal of the assessee. However, in the case before us, as observed by the CIT(A), the assessee was carrying on its business from Geneva and the communication network in India was neither owned by it or at its disposal, but rather was owned by the independent service providers such as VSNL, DoT etc. Further, no personnel of the assessee had visited India during the year under consideration. CIT(A) had rightly concluded that as the assessee did not have a P.E in India during the year under consideration, hence, the fees received from rendering of the services which were not in the nature of FTS, in the absence of a P.E of the assessee in India would not be taxable in India. - Decided against revenue. Issues Involved:1. Characterization of payments received by the assessee from subscribers in India as fees for technical services (FTS).2. Existence of a Permanent Establishment (PE) in India for the assessee.3. Characterization of payments as royalty under the Income Tax Act and the India-UK Treaty.Detailed Analysis:1. Characterization of Payments as Fees for Technical Services (FTS):The revenue argued that the payments received by the assessee from subscribers in India should be characterized as fees for technical services (FTS) under Explanation 2 to section 9(1)(vii) of the Income Tax Act, 1961, and as per the Double Taxation Avoidance Agreement (DTAA) between India and the UK. The Assessing Officer (A.O) contended that the services provided by the assessee were technical in nature and the revenue earned therefrom was FTS. However, the CIT(A) disagreed, stating that mere use of technology in the provision of services does not per se lead to treating the same as technical services. The CIT(A) observed that the services provided did not 'make available' any technical knowledge, skill, or know-how to the subscribers as required by the treaty. Thus, the CIT(A) concluded that the payments could not be characterized as FTS within the meaning of the Income Tax Act and the India-UK tax treaty. The Tribunal upheld the CIT(A)'s decision, agreeing that the services rendered were in the nature of a 'Standard facility' and did not involve any human intervention, thus not qualifying as FTS.2. Existence of a Permanent Establishment (PE) in India:The revenue also argued that the assessee had a Permanent Establishment (PE) in India, as the communication network in India, Reuters Dealing 2002, was owned and at the disposal of the assessee. The CIT(A) found that the communication network in India providing access to the assessee's server in Geneva was neither owned by the assessee nor at its disposal. The CIT(A) further noted that the assessee was rendering services from outside India and had no employees or personnel in India for rendering the services. Therefore, the CIT(A) concluded that the assessee did not have a PE in India. The Tribunal agreed with the CIT(A), stating that for constituting a fixed place PE, the place should be owned or at the disposal of the assessee, which was not the case here. The Tribunal upheld the CIT(A)'s conclusion that the assessee did not have a PE in India during the year under consideration.3. Characterization of Payments as Royalty:The revenue raised additional grounds of appeal, arguing that the payments received by the assessee should be characterized as 'royalty' under section 9(1)(vi) of the Income Tax Act and the India-UK Treaty. The A.O had initially characterized the payments as FTS, but the revenue sought to recharacterize them as royalty. The Tribunal declined to admit the additional grounds of appeal, noting that the A.O had consciously concluded that the fees received by the assessee were FTS after necessary deliberations. The Tribunal held that the A.O could not seek recharacterization of the payments in the garb of an additional ground of appeal before the Tribunal. The Tribunal also noted that the agreement relevant to the years under consideration was materially different from that for the subsequent years, and thus, the view taken by the Tribunal for the later years could not be simply applied to the present case.Conclusion:The Tribunal dismissed the appeals of the revenue for both A.Y 2001-02 and A.Y 2002-03, upholding the CIT(A)'s decision that the payments received by the assessee were not in the nature of FTS, the assessee did not have a PE in India, and the additional grounds of appeal regarding characterization of payments as royalty were not admitted. The Tribunal found no infirmity in the CIT(A)'s well-reasoned order and upheld the same.