2024 (8) TMI 1424 - AT - Income Tax

IT support services to associated enterprises don't qualify as fees for included services under India-USA tax treaty Article 12

The ITAT Delhi ruled in favor of the assessee regarding IT support services provided to associated enterprises. The tribunal held that the 'make ... Income taxable in India or not - addition towards reimbursement of cost for providing IT/Support services - addition of fees for included services (FIS) under Article 12 of the India- USA - whether amount received by the Appellant is a cost-to-cost reimbursement and there is no income clement embedded in it? - HELD THAT:- We are of considered view the condition of make available was not satisfied for services when provided by assessee did not enabled the AEs to apply the technology independently, on conclusion of the yearly contract. As with regard to the observations of tax authorities below treating the services rendered by Assessee as FIS on the basis that the Assessee was providing training to the personnel of Invesco Group and thus the 'make available condition stands satisfied in the present case the Ld. Counsel submitted that the Assessee only supports and administers IT training and same does not lead to transmission of specialized knowledge or skill. In regard to IT administration services the assessee was providing services where the IT training and facilities training, were of desktop application tools such as Microsoft Word, excel and power point etc to staff of the group. There is nothing to show in the assessment order that the AO had made any enquiry on his own or relied any provisions of the Master Inter-Company Services Agreement (in short “MSA”) to show that the training as imparted was of such nature that it “made available”, the technology to the associate enterprises so that on conclusion of the training the employees of AE’s will be unable to use technology on their own. Rather we observed that very common softwares used in offices are mentioned for which the training was provided. Then AO has merely relied the assessee’s own submissions to conclude that as the assessee is training personnel of the group. The provisions of make available would become applicable. Thus we are inclined to sustain the contention of the Ld. Counsel. AO has not made any enquiry to rebut the claim of the assessee that the cost incurred by the assessee company for providing IT support services is allocated to its AE’s without any element of profit. In this context as we consider the copy of a MSA dated 20.05.2019 as made available alongwith the copies of debit note made available on pages-150 to 153 of the paper book. We find that it was agreed that remuneration for the services has been calculated with the objective of determining an arms length price for the services provided by using methodology as set forth under ‘service fee clause”. In the light of aforesaid were inclined to hold that the tax authorities below have fallen in error in not appreciating that the reimbursement was on cost to cost basis. Accordingly we sustain this argument of the Ld. Counsel also. Assessee appeal allowed. Issues Involved:1. Taxability of cost reimbursement for IT/Support services under India-USA and India-UK DTAA.2. Classification of services as Fees for Included Services (FIS) or Fees for Technical Services (FTS).3. Satisfaction of the 'make available' clause under Article 12(4)(b) of the India-USA DTAA.4. Initiation of penalty proceedings under Section 274 read with Section 270A of the Income Tax Act.5. Reliance on specific case laws by the AO and DRP.Issue-wise Detailed Analysis:1. Taxability of Cost Reimbursement for IT/Support Services:The assessee, a tax resident of the USA, provided IT services to its AEs globally, including those in India, under a cost-to-cost reimbursement arrangement without any mark-up. The AO added INR 23,35,13,560 to the assessee's income, treating it as taxable in India. The assessee argued that the amount received was a cost reimbursement without any income element. The Tribunal found that the reimbursement was indeed on a cost-to-cost basis, thus not taxable.2. Classification of Services as FIS or FTS:The AO and DRP classified the IT services provided by the assessee as Fees for Included Services (FIS) under Article 12 of the India-USA DTAA and Fees for Technical Services (FTS) under Article 13 of the India-UK DTAA. The Tribunal, however, found that the services rendered were routine IT management services and did not make available any technical knowledge or skills to the Indian AE(s). The Tribunal relied on the decision in Bio Rad Laboratories Inc. v. ACIT, which emphasized that mere incidental advantage does not constitute a transfer of technology.3. Satisfaction of the 'Make Available' Clause:The AO and DRP assumed that the services made available technical knowledge to the Indian AE(s). The Tribunal disagreed, noting that the services were recurring and the AEs required the services year after year, indicating that no technical knowledge was made available. The Tribunal cited the Bio Rad Laboratories case, which clarified that for the 'make available' clause to be satisfied, the recipient must be able to apply the technology independently after the service contract ends.4. Initiation of Penalty Proceedings:The AO initiated penalty proceedings under Section 274 read with Section 270A of the Income Tax Act. The Tribunal did not specifically address the penalty proceedings in the detailed analysis but allowed the appeals of the assessee, which implies that the penalty proceedings may not be sustainable.5. Reliance on Specific Case Laws:The AO relied on the decisions in the cases of Aircom International Ltd, H.J. Heinz Company, and Shell India Markets Pvt Ltd. The Tribunal distinguished these cases, noting that the facts were different. The Tribunal also referred to the decision of the Hon'ble Bombay High Court in Shell India Markets Pvt Ltd, which overturned the AAR ruling, emphasizing that consultancy services must make available technical knowledge to be taxable.Conclusion:The Tribunal allowed the appeals of the assessee, holding that the cost reimbursement for IT services was not taxable as it was on a cost-to-cost basis without any mark-up. The services provided did not satisfy the 'make available' clause under Article 12(4)(b) of the India-USA DTAA, and thus could not be classified as FIS or FTS. The reliance on specific case laws by the AO was found to be misplaced, and the penalty proceedings initiated were not addressed in detail but impliedly rejected. The order was pronounced in the open court on 23.07.2024.