2023 (4) TMI 844 - AT - Income Tax

ITAT rules IT services payments not taxable under India-USA DTAA

Atos IT Solutions and Services Inc C/o. Atos India Pvt. Ltd. Versus DCIT (IT) -1 (1) (2), Mumbai

Atos IT Solutions and Services Inc C/o. Atos India Pvt. Ltd. Versus DCIT (IT) -1 (1) (2), Mumbai - TMI Issues Involved:1. Taxability of payments as 'Royalty' under Section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-USA DTAA.2. Taxability of payments as 'Fees for Technical Services' (FTS) under Section 9(1)(vii) of the Income-tax Act, 1961 and Article 12 of the India-USA DTAA.3. Classification of payments as 'Business Profits' under Article 7 of the India-USA DTAA and the requirement of a Permanent Establishment (PE) in India.4. Levy of surcharge and education cess on the rate prescribed under Article 12 of the DTAA.5. Proposal to initiate penalty proceedings under section 271(1)(c) of the Income-tax Act, 1961.Detailed Analysis:1. Taxability as 'Royalty':The assessee, a US-based company, provided support services to its group company in India, Atos India, and received payments for cost recharge of Microsoft license fees and coordination services. The Assessing Officer (AO) treated these payments as 'royalty' under Section 9(1)(vi) of the Income-tax Act and Article 12 of the India-USA DTAA. The assessee argued that the payments were for the use of copyrighted articles, not for the use of copyright itself, and thus should not be classified as royalty.The Dispute Resolution Panel (DRP) upheld the AO's decision, stating that the payments for Microsoft licenses were for access to software managed by the assessee, not an outright sale. The DRP concluded that these payments fell within the definition of 'royalty' under Article 12(3) of the India-USA DTAA.However, the ITAT referred to the Supreme Court judgment in 'Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT' and the Delhi High Court judgment in 'EY Global Services Ltd. v. ACIT,' which held that payments for the use of software do not constitute royalty if no copyright is transferred. The ITAT concluded that the payments for Microsoft licenses did not fall under the category of royalty or copyright and directed the AO to delete the proposed addition.2. Taxability as 'Fees for Technical Services' (FTS):The AO also treated the payments for coordination services related to the Tower Watson project as FTS. The assessee argued that these services did not involve the transfer of technical knowledge or skill, which is a requirement under Article 12(4) of the India-USA DTAA for a payment to be classified as FTS.The DRP rejected the assessee's argument, stating that the services provided involved the use of intellectual property and technical knowledge, which were made available to Atos India. The DRP concluded that these payments fell within the definition of FTS under Article 12(4) of the India-USA DTAA.The ITAT, however, observed that the service desk services provided by the assessee to Tower Watson employees were separate from the subcontract agreement with Atos India. The ITAT concluded that these services did not involve the transfer of technical knowledge or skill to Atos India and thus did not qualify as FTS. The ITAT directed the AO to delete the addition related to these services.3. Classification as 'Business Profits':The assessee contended that the payments received were in the nature of 'Business Profits' under Article 7 of the India-USA DTAA and were not taxable in India as the assessee did not have a Permanent Establishment (PE) in India.The ITAT agreed with the assessee's argument, stating that the payments for Microsoft licenses and service desk services were business receipts and not taxable in India in the absence of a PE. The ITAT directed the AO to delete the additions made on this ground.4. Levy of Surcharge and Education Cess:The assessee argued that the AO erred in levying surcharge and education cess on the rate prescribed under Article 12 of the DTAA. The ITAT did not specifically address this issue in the judgment, as the primary issues were resolved in favor of the assessee.5. Penalty Proceedings:The AO proposed to initiate penalty proceedings under section 271(1)(c) of the Income-tax Act. The ITAT did not specifically address this issue, as the primary issues were resolved in favor of the assessee.Conclusion:The ITAT allowed the appeal filed by the assessee, concluding that the payments received for Microsoft licenses and service desk services did not constitute 'royalty' or 'fees for technical services' under the India-USA DTAA. The payments were classified as 'business profits' and were not taxable in India in the absence of a PE. The ITAT directed the AO to delete the proposed additions and resolved the primary issues in favor of the assessee.