2024 (7) TMI 1666 - AT - Income Tax

FTS Under India-US DTAA Sent Back for AO to Verify Nature of Services Rendered in Dispute Year

ITAT Delhi remitted the issue of fee for technical services (FTS) under the India-US DTAA back to the AO for factual determination of the exact nature of ... Fee for Technical Services - consideration received for administrative support functions - India-US DTAA - make available clause - HELD THAT:- We find that the nature of serviced provided to the assessee have been broadly described in the Master Agreement of 2005. Actual nature of services rendered can only be ascertained from the facts of the case for each year. The nature of services may differ from year to year and, therefore, we have to examine the nature of services of the impugned year to determine whether “make available” clause is satisfied or not. We find that the AO tried to ascertain the exact nature of services that were rendered in this year and sought details, such as, emails exchanged between the parties on the issue of services and the same was not supplied by the assessee. Unless the nature of services is factually determined, we would not be in a position to ascertain whether the services were managerial or technical or consultancy or mixture of all. Once the nature of services is finally determined, we would be in a position to apply the provisions in the India-US DTAA treaty. We find that the AO has taken the services as managerial and/or consultancy services whereas the US treaty does not have managerial services as FTS but it contains consultancy services which can be treated as FTS. We are of the view that unless the basic facts are ascertained, we cannot proceed further on the issue of whether the services were FTS as per the DTAA treaty and “make available” clause is satisfied. We therefore, following the decision of H.J. Heinz Company [2019 (8) TMI 1264 - ITAT DELHI] find it expedient to remit the matter back to the file of the AO to determine the exact and factual nature of services rendered. The assessee is directed to cooperate with the department and furnish all information sought to determine the nature of services. We, accordingly, set aside the issue of services rendered as FTS to the file of the AO. Grounds raised by the assessee are allowed for statistical purposes. ISSUES: Whether consideration received for administrative support functions constitutes Fees for Technical Services ('FTS') under Article 12 of the India-USA Tax Treaty.Whether the 'make available' condition under the India-USA DTAA is satisfied by the administrative support services rendered.Whether tax deducted at source (TDS) was correctly added on a grossing-up basis despite the fee being paid gross of tax.Whether interest under section 234B of the Income-tax Act is leviable when tax was deducted at source on the entire income of a non-resident.Whether penalty for furnishing inaccurate particulars of income is justified in the circumstances. RULINGS / HOLDINGS: On the nature of services and FTS characterization: The Assessing Officer held that the administrative support services are in the nature of managerial and/or consulting services and therefore constitute FTS under section 9(1)(vii) of the Act, relying on Explanation 2 which includes managerial, technical, or consultancy services within FTS. The Dispute Resolution Panel (DRP) confirmed that the services were 'made available' to the recipient, satisfying the necessary ingredient for application of Article 12(4)(b) of the DTAA.On the 'make available' condition: The assessee contended that the services do not 'make available' technical knowledge, skills, or expertise, citing judicial precedents where similar administrative support services were held not to fulfill the 'make available' requirement under the DTAA. The Tribunal observed that the factual nature of services must be determined year-wise to assess fulfillment of the 'make available' clause.On TDS grossing up: The addition of TDS on a grossing-up basis was upheld by the AO and DRP, but the assessee argued that the fee was paid 'gross of tax' and no additional amount beyond the stated fee was payable.On interest under section 234B: The AO and DRP levied interest under section 234B, but the assessee argued that since tax was deducted at source on the entire income, section 234B interest is not applicable.On penalty for furnishing inaccurate particulars: The AO initiated penalty proceedings, but the Tribunal did not adjudicate this issue on merits in the present order.On procedural compliance and determination of nature of services: The Tribunal found that the Assessing Officer had sought detailed evidence such as emails to ascertain the exact nature of services, which was not furnished by the assessee, thereby impeding proper determination. Consequently, the Tribunal set aside the issue and remitted the matter to the Assessing Officer for factual determination of the nature of services rendered, directing the assessee to cooperate and provide all relevant information. RATIONALE: The Tribunal applied the statutory framework under section 9(1)(vii) of the Income-tax Act and the Explanation 2 thereto, which defines Fees for Technical Services to include managerial, technical, or consultancy services but excludes salaries and certain other categories.The India-USA DTAA provisions, specifically Article 12(4)(b), were examined with respect to the 'make available' condition, which requires that the service must enable the recipient to apply technical knowledge or expertise independently.Judicial precedents from various courts and tribunals were considered, including rulings on the interpretation of 'make available' and the taxability of administrative support services under similar treaties (e.g., India-UK DTAA, India-France DTAA). The Tribunal noted that managerial services are generally excluded from FTS under the India-USA DTAA, while consultancy services may be included.The Tribunal recognized the necessity of a factual inquiry into the nature of services rendered for each assessment year, emphasizing that the mere existence of a long-term agreement or continuity of services does not automatically satisfy the 'make available' condition.The Tribunal followed the precedent set in H.J. Heinz Company, which held that where the assessee fails to furnish critical evidence (such as emails) to establish the nature of services, the matter should be remitted for proper fact-finding.No doctrinal shift or dissenting opinion was recorded; the Tribunal's approach was procedural and fact-specific, emphasizing the need for evidence-based determination rather than summary conclusions.