2025 (5) TMI 812 - AT - Income Tax

UK company's engineering consultancy services qualify as business income under Article 7, not taxable technical services

Buro Happold Limited C/o Sudit K Parekh & Co LLP Versus Deputy Commissioner of Income-tax (International Taxation) -1 (3) 2), Mumbai

Buro Happold Limited C/o Sudit K Parekh & Co LLP Versus Deputy Commissioner of Income-tax (International Taxation) -1 (3) 2), Mumbai - TMI 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in the appeal are:(a) Whether the amount received by the assessee for Consulting Engineering Services (CES) qualifies as Fees for Technical Services (FTS) under Section 9(1)(vii) of the Income-tax Act, 1961 and Article 13 of the India-UK Double Taxation Avoidance Agreement (DTAA), thereby making it taxable in India.(b) Whether the amounts received as management fees and common cost recharge should be treated as both Royalty and Fees for Technical Services under Section 9(1)(vi) and 9(1)(vii) of the Act and Article 13 of the India-UK DTAA, thus taxable in India.(c) Whether the tax rate applied by the Assessing Officer (AO) and Dispute Resolution Panel (DRP) at 15% under the DTAA was erroneous, and whether a beneficial rate of 10.608% under the Act should have been applied.(d) Whether the levy of consequential interest under Section 234B of the Act was erroneous.2. ISSUE-WISE DETAILED ANALYSISIssue (a) - Taxability of Consulting Engineering Services (CES) as Fees for Technical Services (FTS)Relevant legal framework and precedents: The primary legal provisions are Section 9(1)(vii) of the Income-tax Act, 1961, which deals with income deemed to accrue or arise in India by way of Fees for Technical Services, and Article 13 of the India-UK DTAA, particularly Article 13(4)(c), which defines FTS as payments for technical and consultancy services involving the development and transfer of technical plans or designs.Precedents relied upon include the coordinate bench decisions of the Income Tax Appellate Tribunal (ITAT), Mumbai, in the assessee's own case for assessment years 2012-13 to 2021-22, notably ITA No.1296/Mum/2017 for AY 2012-13 dated 15/02/2019. In that ruling, the Tribunal held that mere provision of project-specific architectural drawings and designs without making available technical knowledge, skill, or processes does not constitute FTS. The Tribunal emphasized that unless the recipient can independently use the designs commercially, the payments do not fall within the scope of FTS but rather constitute business profits under Article 7 of the DTAA.Court's interpretation and reasoning: The Tribunal noted that the assessee is a UK tax resident providing integrated engineering and consultancy services to an Indian entity. The AO and DRP treated the CES income as FTS taxable in India at 15% per the DTAA. However, the Tribunal observed that the services rendered did not involve the making available of technical knowledge, skills, or processes to the Indian recipient. The assessee's services were managerial and consultative in nature, and the drawings/plans supplied could not be independently exploited by the recipient for commercial purposes.Key evidence and findings: The assessee and Buro India had a specific agreement delineating the scope of services. There was no Permanent Establishment (PE) of the assessee in India. The Tribunal relied heavily on earlier decisions where identical facts were considered, and the income was held to be business income not taxable in India due to absence of PE and non-qualification as FTS.Application of law to facts: Applying the legal definitions and precedents, the Tribunal concluded that the payments for CES did not meet the criteria of FTS under the DTAA. Consequently, the income should be treated as business profits and not taxable in India in the absence of PE.Treatment of competing arguments: The revenue argued that the payments constituted FTS under Article 13(4)(c) and were taxable at 15%. The AO noted that the department had not accepted the ITAT decision for AY 2012-13 but had not appealed to the High Court due to low tax effect. The DRP upheld the AO's view citing consistency with its earlier orders. The Tribunal rejected these contentions, emphasizing judicial discipline and the binding nature of coordinate bench decisions in the absence of contrary higher judicial rulings.Conclusions: The Tribunal allowed the ground challenging taxability of CES income as FTS and held that such income is not taxable in India.Issue (b) - Taxability of management fees and cost recharge as Royalty and FTSRelevant legal framework and precedents: Section 9(1)(vi) and 9(1)(vii) of the Act, and Article 13 of the India-UK DTAA, which define Royalty and FTS respectively. The same coordinate bench ITAT decisions for earlier years were relied upon, where management fees and cost recharge were considered ancillary and incidental to CES and thus not taxable in India.Court's interpretation and reasoning: The Tribunal reasoned that since the CES income was held not to be FTS, the management fees and cost recharge, which were ancillary to the CES, could not be treated as FTS or Royalty either. The revenue's reliance on need test, benefit test, and other criteria to justify taxation was found unacceptable, especially as the department had already treated these amounts as fees for services rendered.Key evidence and findings: The management fees and cost recharge related to various corporate and operational functions such as IT, business development, finance, HR, and project management. No PE existed in India. The Tribunal accepted that these were reimbursements or cost allocations incidental to the main consulting services.Application of law to facts: Applying the logic that the underlying CES payments were not FTS, the ancillary receipts could not be taxed as such. The absence of PE further negated Indian tax jurisdiction.Treatment of competing arguments: The revenue's argument that these receipts constituted taxable FTS or Royalty was rejected as inconsistent with the treatment of CES and lacking evidentiary support.Conclusions: The Tribunal allowed the ground challenging taxability of management fees and cost recharge as FTS or Royalty and held them not taxable in India.Issue (c) - Erroneous tax rate appliedThis ground was contingent on the income being taxable. Since the Tribunal held that the CES and management fees were not taxable in India, this ground became infructuous and was dismissed accordingly.Issue (d) - Levy of consequential interest under Section 234BThe interest was consequential upon the tax demand. The Tribunal held that since the tax demand was set aside, the levy of interest did not require separate adjudication and dismissed this ground accordingly.3. SIGNIFICANT HOLDINGS'The Department has failed to establish on record that through development and supply of technical designs / drawings / plans the assessee has made available technical knowledge, experience, skill, knowhow or processes to the service recipient so as to bring the amount received within the meaning of fees for technical services under Article-13(4)(c) of the India-UK Tax Treaty. Therefore, in our considered opinion, the amount received by the assessee has to be treated as business profit and in the absence of a PE in India, it cannot be brought to tax in India.''Once, the Departmental Authorities have treated the amount received towards cost recharge to be in the nature fees for technical services, it implies rendering of service by the assessee. Therefore, applying the very same reason on the basis of which we have held the amount received towards consulting engineering services to be not in the nature of fees for technical services as discussed above, we hold that the amount received towards cost recharge cannot be brought to tax in India in the absence of PE.''Judicial discipline requires that the decisions of the coordinate benches of the Tribunal be respected and followed in the absence of any contrary decision brought on record.'Core principles established include:Income received for consulting engineering services that does not result in making available technical knowledge, skill, or processes is not FTS under the India-UK DTAA.Ancillary management fees and cost recharge linked to such consulting services cannot be taxed as FTS or Royalty in the absence of PE.Business profits arising to a non-resident without PE in India are not taxable in India under the DTAA.Decisions of coordinate benches of the Tribunal are binding unless overturned by higher judicial authority.Final determinations:Amounts received for consulting engineering services and management fees/common cost recharge are not taxable in India as FTS or Royalty under the India-UK DTAA.The tax rate issue is rendered infructuous and dismissed.The levy of interest under Section 234B is consequential and dismissed accordingly.The appeal is allowed in favor of the assessee on the substantive taxability issues.