2025 (4) TMI 346 - AT - Income Tax

Data management charges and expense reimbursements to non-resident without permanent establishment don't constitute fee for technical services under section 9(1)(vii)(b)

ITAT Chennai held that data management charges and expense reimbursements received by a non-resident assessee without permanent establishment in India do ... Taxing remittances as fee for technical services u/s.9(1)(vii)(b) - income was in the shape of data management charges and reimbursement of expenses - as per assessee it would be ‘business income’ which would be taxable only when the assessee has permanent establishment (PE) in India which was not the case - HELD THAT:- Admittedly, the assessee is a non-resident and having no PE in India. We have gone through the decision of De Beers India Minerals (P) Ltd [2012 (5) TMI 191 - KARNATAKA HIGH COURT] referred by the ld. counsel for the assessee and noted that the Hon’ble Supreme Court while interpreting the India US DTAA has held that the principle requirement of ‘make available’ technical services is made only if the service recipient is unable to independently apply the technical knowledge, skill, etc., in future without the aid of service provider, the same cannot be held as ‘make available’ and such technical services would not fall within the definition of technical services in term of DTAA and not liable to tax. Correct TDS credit as reported in Form No.26AS - as stated that the assessee has not received any refund and Ld. AO has erred in noting the correct fact - As it would suffice on our part to direct AO to grant TDS credit in accordance with law and determine the correct figures of refund as available to the assessee. These grounds stand allowed for statistical purposes. ISSUES PRESENTED and CONSIDEREDThe core legal issue in this judgment is whether the income received by the assessee, a USA-incorporated company, from its Indian counterpart should be classified as 'fees for included services' (FIS) under Article 12(4) of the India-USA Double Taxation Avoidance Agreement (DTAA) and thus be subject to taxation in India. The Tribunal also considered whether the services rendered by the assessee made available technical knowledge, skill, or know-how to the Indian entity, which would qualify the income as FIS under the DTAA.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe legal framework involves the interpretation of Article 12(4) of the India-USA DTAA, which defines 'fees for included services'. The provision requires that the services rendered must make available technical knowledge, experience, skill, know-how, or processes to the recipient for the income to be classified as FIS. The Tribunal referred to previous decisions, including those in the assessee's favor for earlier assessment years, which interpreted similar agreements under the same DTAA provisions.Court's Interpretation and ReasoningThe Tribunal noted that for income to be categorized as FIS under the DTAA, the services must make available technical knowledge or skills to the recipient, which they can utilize independently. The Tribunal emphasized the 'make available' clause, indicating that the recipient must be able to apply the technical knowledge or skills independently after the contract ends.Key Evidence and FindingsThe Tribunal examined the nature of services provided by the assessee, which included IT support, data management, and other related services. It was determined that these services did not enable the Indian entity to independently apply any technical knowledge or skills, as the services required continuous recourse to the assessee. Therefore, the services did not meet the 'make available' criterion under Article 12(4) of the DTAA.Application of Law to FactsThe Tribunal applied the legal principles from the DTAA and previous case law to the facts, concluding that the services provided did not qualify as FIS because they did not make available any technical knowledge or skills to the Indian entity. The Tribunal noted that the Indian entity could not independently manage the IT environment without the assessee's ongoing assistance.Treatment of Competing ArgumentsThe Tribunal considered the arguments from the Revenue, which maintained that the services were technical and had a nexus with the compensation received. However, the Tribunal found that the mere provision of technical services does not automatically result in FIS classification unless the 'make available' condition is satisfied. The Tribunal favored the assessee's argument that the services did not make available technical knowledge or skills.ConclusionsThe Tribunal concluded that the services rendered by the assessee did not fall within the definition of FIS under Article 12 of the India-USA DTAA and were not taxable in India. The Tribunal allowed the appeal on merits, subject to verification of figures by the Assessing Officer (AO).SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal ReasoningThe Tribunal stated, 'The nature of services provided by assessee which the company merely centralizes the IT related services to achieve a standardized IT environment and payment towards access to developed standard business / engineering applications, data management by providing disaster recovery / back up services, helpdesk support services, user administration, maintenance of IT infrastructure support services, telecom services do not make available any technical knowledge, experience, skills, etc., to the recipient.'Core Principles EstablishedThe Tribunal reaffirmed the principle that for services to be classified as FIS under the DTAA, they must make available technical knowledge or skills to the recipient, enabling independent application. The Tribunal emphasized the requirement of the 'make available' clause in determining the taxability of technical services under the DTAA.Final Determinations on Each IssueThe Tribunal determined that the income received by the assessee did not qualify as FIS under the DTAA and was not taxable in India. The Tribunal directed the AO to verify the figures reported in Form No. 15CA and Form No. 26AS for reconciliation purposes. Additionally, the Tribunal instructed the AO to grant TDS credit in accordance with the law and determine the correct refund figures for the assessee.