2022 (12) TMI 1558 - AT - Income Tax

Indian affiliate's IT service payments don't qualify as taxable technical services under Singapore treaty without genuine technology transfer

M/s. Bio Rad Laboratories [Singapore] Pvt. Ltd. Versus A.C.I.T Circle 1 (1) (2) International Taxation New Delhi

ITAT Delhi ruled in favor of the assessee regarding IT and administrative services provided to its Indian affiliate. The AO had treated these as Fees for ... Accrual of income in India - receipts on account of provision of information technology and other administrative services to its affiliate in India are in the nature of Fees for Technical Services [FTS] under the India Singapore DTAA - AO concluded by holding that the services in the nature of managerial services provided by the assessee to its Indian AE and such technical knowledge, experience, skill, know-how etc. were made available by the assessee to the Indian affiliate and, therefore, they are in the nature of FTS being taxable @ 10% under the provisions of the DTAA. HELD THAT:- In order to qualify as FTS, the services rendered ought to satisfy the ‘make available’ test. Therefore, in our considered opinion, in order to bring the alleged managerial services within the ambit of FTS under the India-Singapore DTAA, the services would have to satisfy the ‘make available’ test and such services should enable the person acquiring the services to apply the technology contained therein. Mere incidental advantage to the recipient of services is not enough. The real test is the transfer of technology and on the given facts of the case, there is no transfer of technology and what has been appreciated by the AO/CIT (A) is the incidental benefit to the assessee which has been considered to be of enduring advantage. In our understanding, in order to invoke make available clauses, 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. We are of the considered view that the service recipient of the assessee is unable to make use of the said technology only by itself in its business or for its own benefit without recourse to the assessee year after year. The receipts of the assessee on account of provision of information technology and other administrative services to its affiliate in India are not in the nature of Fees for Technical Services under the India Singapore Double Taxation Avoidance Agreement and we, accordingly, direct the AO to delete the same. Appeal of assessee allowed. ISSUES PRESENTED and CONSIDEREDThe core legal issue considered in these appeals was whether the income received by the assessee from its Indian affiliate for the provision of information technology and administrative services qualified as 'Fees for Technical Services' (FTS) under the India-Singapore Double Taxation Avoidance Agreement (DTAA). The primary question was whether these services 'made available' technical knowledge, experience, skill, know-how, or processes to the Indian affiliate, thereby making them taxable under the DTAA.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe legal framework centered around Article 12 of the India-Singapore DTAA, which defines FTS as payments for managerial, technical, or consultancy services that 'make available' technical knowledge, experience, skill, know-how, or processes. The Tribunal referred to precedents, including decisions from the Karnataka High Court in De Beers India Minerals (P.) Ltd. and the Delhi High Court in DIT Vs. Guy Carpenter & Co. Ltd., to interpret the 'make available' clause.Court's Interpretation and ReasoningThe Tribunal interpreted the 'make available' clause to mean that for services to qualify as FTS, they must enable the recipient to apply the technology independently. The Tribunal emphasized that the mere provision of services does not suffice; there must be a transfer of technology that allows the recipient to utilize the knowledge or skills without further assistance from the service provider.Key Evidence and FindingsThe Tribunal examined the General Services and Cost Allocation Agreement, effective from 2010, which outlined the nature of services provided by the assessee. The services included information technology, sales and marketing, finance and accounting, human resources, regulatory and quality assurance, legal, education and training, treasury, and materials management. The Tribunal found that despite the continuous provision of these services, the Indian affiliate was not enabled to apply the technology independently, as evidenced by the recurring need for services each year.Application of Law to FactsThe Tribunal applied the 'make available' test to the facts, concluding that the services did not result in the transfer of technology or skills to the Indian affiliate. The Tribunal noted that the recipient could not perform the services independently, indicating that the services did not meet the criteria for FTS under the DTAA.Treatment of Competing ArgumentsThe Tribunal considered the Department's reliance on various judgments, including Shell India Markets (P.) Ltd. and CBDT vs. Oberoi (India) (P) Ltd. However, the Tribunal found these cases inapplicable, as they either did not pertain to the DTAA or had been overruled by higher courts. The Tribunal also addressed the Department's reliance on the Perfetti Van Melle Holding B.V. case, which had been reversed by the Delhi High Court.ConclusionsThe Tribunal concluded that the services provided by the assessee did not qualify as FTS under the India-Singapore DTAA because they did not 'make available' technical knowledge or skills to the Indian affiliate. Consequently, the income received by the assessee was not taxable as FTS, and the Tribunal directed the Assessing Officer to delete the related tax demand.SIGNIFICANT HOLDINGSThe Tribunal held that for services to be considered FTS under the DTAA, they must satisfy the 'make available' test, which requires that the recipient be enabled to apply the technology independently. The Tribunal emphasized that the mere provision of services, without the transfer of technology, does not meet this criterion.Core Principles EstablishedThe judgment reinforced the principle that the 'make available' clause in DTAAs requires a transfer of technology or skills that enables the recipient to utilize them independently. The Tribunal clarified that incidental benefits or continuous service provision do not suffice to meet this requirement.Final Determinations on Each IssueThe Tribunal's final determination was that the receipts from the provision of information technology and administrative services to the Indian affiliate did not constitute FTS under the India-Singapore DTAA. The appeals were allowed, and the tax demand was deleted.