2025 (6) TMI 243 - HC - Income Tax

Indian customers' receipts not taxable under India-USA DTAA Section 9(1)(vii) as no technical services rendered

Delhi HC upheld ITAT's decision regarding taxability of receipts from Indian customers under India-USA DTAA and Section 9(1)(vii). Court found no ... Income deemed to accrue or arise in India - receipts of the assessee from Indian customers - whether taxable as Fee for Technical Services as per India -USA DTAA as well as Section 9 (1) (vii) of the Act? HELD THAT:- The issue involved in the present case is covered by the several decisions of this court including CIT v. Relx Inc. [2024 (3) TMI 105 - DELHI HIGH COURT] We find no infirmity with the view of the learned ITAT in regard to taxability of repair and maintenance charges as FIS. Corporate allocation charges - ITAT had accepted the Assessee’s case that it was not rendering any services, which absolved the recipients from availing similar services in future. The learned ITAT also unequivocally stated that none of its employees had visited India for rendering any training. The findings as returned by the learned ITAT in respect of allocation of charges are essentially fact centric. We also do not find any material to indicate that the Assessee had received any amount for transfer of skill, knowledge, knowhow or process to its associate entity in India which could be construed as FIS within the meaning of Article 12 (4) of the India-USA DTAA. No substantial question of law. The core legal questions considered by the Court in the present appeal under Section 260A of the Income Tax Act, 1961, relate primarily to the taxability of certain receipts of a foreign company, a tax resident of the United States, from Indian customers for services rendered. The key issues are:A. Whether the receipts from Indian customers constitute fees for technical services (FTS) under Section 9(1)(vii) of the Income Tax Act and the India-USA Double Taxation Avoidance Agreement (DTAA), thereby attracting tax in India.B. Whether the payments satisfy the 'make available' criterion under Article 12(4) of the India-USA DTAA, which is essential for classifying such receipts as fees for included services (FIS) and consequently taxable.C. Whether the payments involve development and transfer of technical plan or technical design within the meaning of Article 12(4) of the India-USA DTAA, thereby fulfilling the 'make available' test and attracting tax.These issues arise from the facts that the Assessee, a U.S. resident company engaged in repair and maintenance of aircraft equipment, received substantial amounts from Indian airline operators and others for repair services and corporate allocation charges. The Assessing Officer (AO) contended that these receipts were taxable as FTS under the Act and DTAA, while the Income Tax Appellate Tribunal (ITAT) disagreed, leading to the Revenue's appeal before the High Court.Issue-wise Detailed Analysis1. Taxability of Receipts as Fees for Technical Services under Section 9(1)(vii) of the Act and India-USA DTAAThe legal framework involves Section 9(1)(vii) of the Income Tax Act, which taxes income deemed to accrue or arise in India, including fees for technical services, and Article 12 of the India-USA DTAA, which governs royalties and fees for included services. Article 12(4) defines 'fees for included services' as payments for rendering technical or consultancy services that either (a) are ancillary and subsidiary to the use or enjoyment of rights or property, or (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of development and transfer of technical plans or designs.The AO's interpretation was that the repair and maintenance services provided by the Assessee involved imparting technical knowledge and skill, thus constituting FTS. The AO observed that the services were advisory and supportive, entailing transfer of knowledge, and that the agreements included training obligations.The ITAT, however, rejected this view. It analyzed the nature of the services, noting that the Assessee's repair services involved receiving faulty equipment from Indian customers, repairing it at the Assessee's facility in the U.S., and returning the equipment. The services were highly specialized and customer-specific but did not involve any activity performed in India or transfer of technology or know-how enabling the Indian customers to independently perform such repairs in the future.The ITAT relied on the interpretation of the 'make available' clause, emphasizing that mere provision of services involving technical skill or experience does not amount to making available technical knowledge or processes unless the recipient is enabled to apply the technology independently thereafter. The ITAT held that the services provided did not satisfy the 'make available' criterion, and thus, the receipts did not constitute FIS under Article 12(4)(b) of the DTAA.In this context, the Court referred to the authoritative precedent of CIT v. De Beers India Minerals P. Ltd., where the Karnataka High Court elucidated the 'make available' test. The court explained that to qualify as FTS, the service must transmit technical knowledge or skill such that the recipient can use it independently in the future without the service provider's aid. The mere fact that services require technical expertise does not suffice; the knowledge must remain with the recipient post-contract.The Court also relied on recent decisions including CIT v. Relx Inc. and CIT v. Bio-Rad Laboratories (Singapore) Pte. Ltd., which affirmed that access to a service or database or receipt of managerial or technical services does not automatically satisfy the 'make available' test unless the recipient is enabled to apply the technology or know-how independently. The recurring need for the same services over several years indicated no transfer of enduring technical knowledge or skill.Applying these principles to the facts, the Court agreed with the ITAT that the repair and maintenance services rendered by the Assessee did not amount to FIS under the DTAA or FTS under the Act. The services were specialized and technical but did not transfer technology or know-how enabling independent use by Indian customers. Consequently, the receipts were not taxable as FTS.2. Interpretation of the 'Make Available' Criterion under Article 12(4) of the India-USA DTAAThe 'make available' criterion is pivotal in determining whether fees for technical or consultancy services are taxable. The Court examined the scope and application of this clause in detail.The DTAA's Article 12(4)(b) includes making available technical knowledge, experience, skill, know-how, or processes, or the development and transfer of technical plans or designs. The Court noted that the enduring benefit and shelf life of such knowledge or skill differ; transfer of technical design or know-how has a longer-lasting effect than mere imparting of skill or experience.The DRP had held that the services rendered by the Assessee involved imparting skill and experience, which had a comparatively short shelf life, and thus satisfied the 'make available' test. However, the ITAT disagreed, holding that the services did not enable the Indian customers to independently provide similar services in the future, negating the 'make available' criterion.The Court endorsed the ITAT's reasoning, emphasizing that the 'make available' test requires the recipient to be enabled to apply the technology or knowledge independently. The fact that the Indian customers repeatedly availed the same services over years indicated no transfer of enduring benefit. The Court quoted the Tribunal's observation that 'mere incidental advantage to the recipient of services is not enough' and that 'the real test is the transfer of technology,' which was absent.The Court also highlighted that the services were rendered entirely outside India, with no activities performed within India by the Assessee, further weakening the claim of 'make available.'3. Taxability of Corporate Allocation ChargesThe corporate allocation charges represented reimbursements for costs incurred by the Assessee on behalf of its Indian associate, such as IT expenses, legal charges, and back-office support. The ITAT found that these charges were not payments for technical or consultancy services and did not involve imparting skill or knowledge enabling the recipients to perform independently.The Court accepted the ITAT's fact-based findings that the Assessee did not render any technical or consultancy services or training related to these charges, and no employees visited India to provide such services. The charges were mere reimbursements and did not attract tax under the FTS provisions of the DTAA or the Act.4. Application of Precedents and Legal ReasoningThe Court extensively relied on precedents interpreting the 'make available' clause and the scope of FTS under the DTAA and the Act. The key principles distilled from these precedents include:The 'make available' test requires that the recipient of services be enabled to apply the technical knowledge or skill independently after the contract ends.Provision of technical services involving skill or experience alone does not suffice to constitute FTS unless technology or know-how is transferred.Recurrent receipt of similar services over years indicates absence of transfer of enduring technical knowledge.Payments that are reimbursements or for services ancillary to other transactions do not constitute FTS.The Court found that the facts of the present case squarely fall within these established principles, supporting the ITAT's findings.ConclusionsThe Court concluded that the ITAT had correctly interpreted the law and facts in holding that the receipts from repair and maintenance services and corporate allocation charges were not taxable as fees for technical services under the Income Tax Act or the India-USA DTAA. The 'make available' criterion was not satisfied, and there was no transfer of technical knowledge or skill enabling independent use by Indian customers.Accordingly, the appeal filed by the Revenue was dismissed, with no substantial question of law arising for consideration.Significant Holdings'The technical or consultancy service rendered should be of such a nature that it 'makes available' to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider.''Mere incidental advantage to the recipient of services is not enough. The real test is the transfer of technology and on the given facts of the case, there is no transfer of technology and what has been appreciated by the assessing officer/learned Commissioner of Income Tax (Appeals) is the incidental benefit to the assessee which has been considered to be of enduring advantage.''If the assessee had enabled the service recipient to apply the technology on its own, then why would the service recipient require such service year after year since 2009Rs. This undisputed fact in itself demolishes the action of the assessing officer/Dispute Resolution Panel.''The services provided by way of repair and maintenance are technical in nature and fall under ambit of services under Fee for Technical Services. ... When it comes to services rendered as skill and experience, the make available and enduring benefit, will almost always have a comparatively short shelf life in this context. This being the case, it cannot be ignored that the make available clause and enduring benefits are satisfied and the service is not of the nature which is so highly technical and specialized that it should be taxed as Fee for Technical Services.''The amounts have been received by the assessee as reimbursement from Goodrich Aerospace Services Pvt. Ltd. ... The assessee was not engaged in providing any kind of 'technical' or 'consultancy services' or training which would enable the Indian customer to perform the services independently in future. ... There was no problem solving skill or operations or knowledge or technology which has been made available to the client.'These principles establish that for taxation as FTS under the India-USA DTAA and the Income Tax Act, the critical test is whether the service provider makes available technical knowledge or skill enabling the recipient to independently apply it in the future. Absent such transfer, fees for services-even if technical-do not attract tax under these provisions.