2025 (3) TMI 865 - AT - Income Tax

UK company's software license reimbursements not taxable as technical services under India-UK tax treaty

Atkins Realis UK Limited [formerly known as Atkins Limited] Versus The Dy. Commissioner of Income Tax, Intl. Taxation, Circle (1), Bengaluru

Atkins Realis UK Limited [formerly known as Atkins Limited] Versus The Dy. Commissioner of Income Tax, Intl. Taxation, Circle (1), Bengaluru - TMI ISSUES PRESENTED and CONSIDEREDThe core legal issue presented and considered in this judgment revolves around whether the reimbursement of GIS Charges (Software License Payment) by the Indian associated enterprises (AEs) to the foreign assessee qualifies as Fees for Technical Services (FTS) under the India-UK Double Taxation Avoidance Agreement (DTAA). The Tribunal also considered whether the levy of fees under Section 234F of the Income Tax Act was appropriate.ISSUE-WISE DETAILED ANALYSIS1. Classification of GIS Charges as Fees for Technical Services (FTS)Relevant legal framework and precedents: The determination of whether payments qualify as FTS under the India-UK DTAA involves analyzing the nature of services rendered, the presence of technical or managerial expertise, and whether any technical knowledge is 'made available' to the recipient. The Tribunal referenced the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT, which clarified that payments for software licenses should not be treated as royalty.Court's interpretation and reasoning: The Tribunal found that the payments made by the Indian AEs were reimbursements for costs incurred by the assessee in procuring software licenses for group companies. The Tribunal emphasized that the mere subletting of software licenses does not involve the transfer of technical knowledge, experience, or skill to the Indian entities. The Tribunal also noted that the assessee did not provide any additional services such as training, customization, or technical support to Indian entities.Key evidence and findings: The Tribunal considered the lack of evidence provided by the assessee to substantiate its claim of cost-to-cost reimbursement. The Tribunal also noted the absence of any specialized services being provided beyond cost allocation.Application of law to facts: The Tribunal concluded that the receipts do not fall within the ambit of FTS as defined under the India-UK DTAA. The procurement and allocation of software licenses were deemed administrative functions rather than services involving specialized expertise or skill.Treatment of competing arguments: The Tribunal rejected the AO's reliance on the 'make available' clause, stating that no technical knowledge or know-how was imparted to the Indian entities. The Tribunal also dismissed the argument that TDS deduction at DTAA rates automatically classifies payments as FTS, emphasizing the need to examine the underlying nature of the transaction.Conclusions: The Tribunal held that the GIS Charges received by the assessee do not qualify as Fees for Technical Services under the India-UK DTAA. The subletting of software licenses does not involve the transfer of technical knowledge, expertise, or skill, and therefore, the payments cannot be taxed as FTS. The addition made by the AO and upheld by the DRP was deleted.2. Levy of Fees under Section 234F of the Income Tax ActRelevant legal framework: Section 234F of the Income Tax Act pertains to the levy of fees for delayed filing of income tax returns.Court's interpretation and reasoning: The Tribunal considered the arguments regarding the appropriate fee to be levied under Section 234F, with the assessee contending that the fee should be 5000 instead of 10,000.Conclusions: The Tribunal set aside the issue to the file of the AO to levy the fee under the provisions of Section 234F of the Act as applicable for the year under dispute, allowing the ground of appeal for statistical purposes.SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: The Tribunal noted, 'The subletting of software licenses does not involve the transfer of technical knowledge, expertise, or skill, and therefore, the payments cannot be taxed as FTS.'Core principles established: The characterization of a transaction must be based on its substance rather than its label. Payments for software licenses that do not involve the transfer of technical knowledge or skill should not be classified as FTS under the India-UK DTAA.Final determinations on each issue: The Tribunal concluded that the GIS Charges do not qualify as FTS and deleted the addition made by the AO. The issue of fees under Section 234F was remanded to the AO for reconsideration in accordance with the law.