Draft assessment order threshold and "make available" test under the India-USA treaty governed taxability of service receipts.

Under the pre-Finance Act 2020 text of section 144C(1), a draft assessment order was required only when the Assessing Officer proposed a prejudicial variation in returned income or loss, so no draft order was needed where the returned income was accepted and only the treaty taxability of a receipt was disputed. On the treaty issue, marketing support and research receipts were not fees for included services under Article 12(4)(b) of the India-USA DTAA because the service provider did not make technical knowledge, skill, know-how or processes available to the recipient for independent use; specialised assistance alone was insufficient. The assessment was therefore sustained on jurisdiction, but the addition on service receipts was deleted.

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Issues: (i) Whether, for the assessment year prior to the amendment by the Finance Act, 2020, the Assessing Officer was required to pass a draft assessment order under section 144C(1) where no variation was made to the returned income but the taxability of a component of income was disputed. (ii) Whether the receipts from marketing support and research services constituted fees for included services under Article 12(4)(b) of the India-USA DTAA on the basis that technical knowledge, experience, skill, know-how or processes were made available to the Indian service recipient.

Issue (i): Whether, for the assessment year prior to the amendment by the Finance Act, 2020, the Assessing Officer was required to pass a draft assessment order under section 144C(1) where no variation was made to the returned income but the taxability of a component of income was disputed.

Analysis: The statutory scheme of section 144C(1), as it then stood, applied where the Assessing Officer proposed to make a variation in the income or loss returned that was prejudicial to the assessee. On the facts, the returned income was accepted in computation terms and the dispute related to the taxability of one receipt under the treaty. The pre-amendment language tied the draft order mechanism to a proposed variation in returned income or loss, and the later omission of those words was prospective. The absence of any contrary precedent and the coordinate bench decisions supported the view that no draft assessment order was required in such a situation.

Conclusion: The assessee's challenge to the validity of the assessment failed on this issue, and the assessment was not rendered void for want of a draft assessment order.

Issue (ii): Whether the receipts from marketing support and research services constituted fees for included services under Article 12(4)(b) of the India-USA DTAA on the basis that technical knowledge, experience, skill, know-how or processes were made available to the Indian service recipient.

Analysis: The agreement showed deployment of advisory personnel to assist the Indian entity in its business and research functions, but it did not establish that the personnel imparted training or transferred technical capability so that the recipient could apply the technology independently. A service is not treated as making available technical knowledge merely because it involves specialised expertise or technical input. The finding that skill or know-how had been made available was not supported by substantive evidence and rested on conjecture rather than proof of transfer of technical capability.

Conclusion: The receipts did not fall within fees for included services under Article 12(4)(b) of the India-USA DTAA, and the addition was deleted on this issue.

Final Conclusion: The assessment was sustained on the procedural jurisdictional issue under section 144C, but the treaty-based addition treating the service receipts as fees for included services was set aside, resulting in partial relief to the assessee.

Ratio Decidendi: Under the pre-amendment section 144C regime, a draft assessment order is required only when the Assessing Officer proposes a variation in returned income or loss prejudicial to the eligible assessee, and treaty taxation as fees for included services arises only when the recipient is enabled to apply the technical knowledge or skill independently, not merely because specialised services were rendered.

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