2025 (10) TMI 573 - AT - Income Tax

Payments to non-resident agent for merchandise procurement not taxable as Fees for Technical Services under India-UK DTAA

M/s. Cochin International Airport Ltd. Versus The Deputy Commissioner of Income Tax, Corporate Circle 1 (1), Cochin

ITAT COCHIN - AT held that commission paid to a non-resident supplier for procuring merchandise for a duty-free shop did not constitute 'fees for ... TDS u/s 195 - agreement for Exclusive Procurement and supply of merchandise entered into with Non residents/Alpha Airport Holdings (UK) Ltd (Alpha) - DTAA between India and UK - HELD THAT:- We are of the opinion that the commission paid to the non-residents M/s. Alpha Airport Holding Ltd., UK for procuring the merchandise for keeping them in the duty free shop would not be termed as “fees for technical services” since there is no transfer of any technical knowledge to the assessee by the non-resident M/s. Alpha Airport Holding Ltd., UK. Therefore the authorities below are not correct in treating the commission paid to M/s. Alpha Airport Holding Ltd., UK as “fees for technical services” when the essential conditions are not fulfilled. We, therefore set aside the order of the CIT(A) insofar as the transaction effected with M/s. Alpha Airport Holding Ltd., UK, a non-resident is also concerned. Appeals filed by the assessee are allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether payments to a non-resident under an exclusive procurement and supply agreement constitute taxable 'fees for technical services' under domestic law (section 9(1)(vii)) and the India-UK DTAA. 2. Whether the non-resident made available technical knowledge, experience, skill, know-how or processes to the payer such that the 'make available' requirement of the DTAA is satisfied. 3. Whether the characterisation of payments as business income or fees for technical services (and consequent tax withholding liability under section 195) depends on existence of permanent establishment or business connection in India or on the substantive nature of services rendered. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of payments as 'fees for technical services' under section 9(1)(vii) and the DTAA Legal framework: Section 9(1)(vii) of the Income Tax Act and Article 13 (Royalties and Fees for Technical Services) of the India-UK DTAA govern taxation of fees for technical services; section 195 imposes TDS obligation on payments to non-residents where income is chargeable to tax in India. Precedent treatment: The Tribunal relied on several High Court and Tribunal decisions which distinguish general business/managerial/marketing support from technical services (examples cited by the Court include authorities holding advisory/marketing/management support not to be technical or not to 'make available' technical know-how). Interpretation and reasoning: The Court examined the written procurement agreement and found: (a) no clause providing for transfer of technical knowledge, skill, processes or plans; (b) the agreement is a procurement/commercial supply arrangement rather than a technical services contract; (c) the payer retained price control and procedural oversight, indicating absence of exclusive technical domain or transfer of enduring know-how; (d) continued reliance on the non-resident for subsequent purchases post-agreement indicates transactional procurement rather than one-time technical transfer enabling independent use. Ratio vs. Obiter: Ratio - Where a contract is confined to procurement/supply activities without provision for transfer of technical knowledge or know-how, payments under that contract are not 'fees for technical services' under section 9(1)(vii) or the DTAA. Obiter - Reliance on comparative authorities (e.g., marketing/managerial services treated similarly) supports but does not expand the ratio beyond the factual contract analysis. Conclusion: Payments under the procurement agreement do not constitute 'fees for technical services' and are not taxable as such under the DTAA or section 9(1)(vii); consequently, TDS under section 195 was not attracted on that basis. Issue 2 - 'Make available' requirement of the DTAA Legal framework: The DTAA requires that for fees to be taxed as FTS they must make available technical knowledge, experience, skill, know-how or processes that the recipient can use independently thereafter. Precedent treatment: The Court cited authorities holding that advisory/managerial/marketing support which does not transfer technical know-how does not satisfy 'make available' (examples include decisions treating general business support, advisory or canvassing as non-technical). Interpretation and reasoning: The agreement lacks clauses effecting transfer of technical plan/design, processes or proprietary know-how; the service provider continued to perform procurement tasks for subsequent years (showing no transfer enabling independent performance); absence of contractual or factual indicia of imparted technical capability means the 'make available' requirement is not met. Ratio vs. Obiter: Ratio - The 'make available' limb of DTAA Article 13 is not satisfied where the non-resident does not transfer the requisite technical knowledge/know-how that enables independent use by the recipient. Obiter - Discussion of continuous reliance on the supplier as an evidential factor, derived from analogous case law. Conclusion: The 'make available' condition is unmet; therefore Article 13 does not permit taxation of the payments as FTS. Issue 3 - Interaction between business connection/PE and taxability of payments for services Legal framework: Taxability of non-resident receipts in India can turn on their classification (business income v. FTS) and on presence of business connection or permanent establishment; DTAA may tax FTS irrespective of PE if Article conditions satisfied, whereas business profits generally require PE. Precedent treatment: Earlier Tribunal remand questioned applying section 9(1)(i) where specific provision section 9(1)(vii) applies; lower authorities had diverged in treatment of payments where a DTAA lacks an explicit FTS clause (noting comparison with India-UAE DTAA where absence of FTS clause led to different result). Interpretation and reasoning: The Court accepted prior factual findings (by AO/Tribunal remand) that non-residents did not have business connection or PE in India. Given absence of FTS characterisation (Issues 1-2), payments cannot be taxed as FTS under DTAA; without PE or business connection, such receipts would not be taxable in India as business profits under the DTAA. Ratio vs. Obiter: Ratio - Taxability under DTAA depends on both (a) the correct characterisation of payments and (b) whether treaty conditions (e.g., PE requirement for business profits) are met; absence of PE/business connection coupled with absence of FTS characterization precludes Indian tax. Obiter - Distinction between treaties that expressly cover FTS and those that do not (applied in comparing UK and UAE DTAAs) supports the analytical framework but follows earlier authorities. Conclusion: In the present facts, absence of PE/business connection and absence of FTS characterization together preclude taxation in India of the procurement commissions at issue. Cross-references and evidential emphasis 1. The Court repeatedly cross-referenced the contractual text as primary evidence; absence of technical transfer clauses is determinative (see Issues 1-2). 2. Comparative authorities were used to confirm the principle that general business/managerial/marketing/advisory support falls outside FTS where no technical know-how is transferred; these authorities were followed to the extent they align with the factual contract analysis. Final Conclusion The payments made under the exclusive procurement agreement are not 'fees for technical services' because there was no transfer or making available of technical knowledge/know-how; accordingly, taxation as FTS and TDS obligation under section 195 are not attracted, and the impugned orders treating such payments as taxable FTS are set aside.