2025 (10) TMI 1050 - AT - Income Tax

Network fees held not taxable as technical service fees or royalty under tax law and India-Netherlands DTAA; addition deleted

ITAT, Mumbai (AT) deleted the assessing officer's addition of network fees, holding that such receipts are not taxable in India as fees for technical ... Income deemed to accrue or arise in India - Treatment of network fees earned during the year by the assessee - treated as fees for technical services and royalty under the Act as well as under the India-Netherlands Double Taxation Avoidance Agreement (DTAA) - HELD THAT:- Co-ordinate Bench has elaborately dealt with the provisions of the Act as well as articles of the DTAA relevant to the issue contested in the appeal. It has also referred to various decisions in the case of assessee as well as its other group companies noted above for its finding. It referred to the decision for A.Y.2017-18 and 2020-21 and in the final analysis held that addition made on account of receipt of network fees from the India entity is not liable to tax in the hands of the assessee. Respectfully following the decision of the Co-ordinate Bench in assessee's own case for A.Y. 2021-22 [2024 (8) TMI 1136 - ITAT MUMBAI], there being no material change in the factual matrix and the provisions of the law, both under the Act and the treaty, we delete the addition so made by the ld. AO on account of receipt of network fees treated as fees for technical services and royalty. Accordingly, ground nos. 1 and 2 raised by the assessee are allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the 'network fee' received by the assessee constitutes 'fees for technical services' (FTS) or 'royalty' under the Income-tax Act, 1961 and the relevant Article of the India-Netherlands Double Taxation Avoidance Agreement (DTAA), and thus is taxable in India. 2. Whether the coordinate-bench decisions in the assessee's own earlier years and related group-company decisions are binding or distinguishable so as to permit taxation of the network fee in the present year. 3. Whether the limitation objection under Section 144C read with Section 153 of the Act renders the assessment void or infirm (raised but not pressed in the present appeal). 4. Ancillary/comsequential issues (tax rate, interest under Sections 234B/234C, initiation of penalty under Section 270A) - identified but not adjudicated as they are consequential or premature. ISSUE-WISE DETAILED ANALYSIS - Network Fee: Characterisation as FTS/Royalty v. Business Income Legal framework: The statutory provision relied upon is Explanation 2 to Section 9(1)(vii) of the Income-tax Act, 1961 defining FTS as 'any consideration for rendering any managerial, technical or consultancy services', and the DTAA Article dealing with 'royalties' and 'fees for technical services' (Article 12). Article-12 definitions include: (i) 'royalties' as payments for use of or right to use intellectual property/information concerning industrial, commercial or scientific experience; (ii) 'fees for technical services' as payments for rendering technical/consultancy services and, where relevant, the 'make available' requirement and sub-clauses (a) and (b) describing ancillary/subsidiary services and making available technical knowledge, know-how or processes. Precedent treatment: The Tribunal relied on a series of coordinate-bench decisions in the assessee's own case and related group companies for multiple assessment years (notably AYs 2013-14, 2017-18, 2018-19, 2019-20 and 2020-21) which held that identical or substantially similar 'network fee' receipts were neither royalty nor FTS and therefore not taxable in India. Revenue and the DRP had in earlier years treated the receipts as FTS/royalty; the Tribunal in the cited coordinate-bench decisions distinguished that treatment and deleted the additions. Interpretation and reasoning: The Tribunal analysed the Network Agreement clauses (remuneration formula, Appendix-3, addenda) and factual matrix showing: (a) network fee calculated as CM1 (gross margin) less company costs and a contractual mark-up (10%); (b) network fee payable only where surplus exists and, where negative, the local company retained 'cost + 10% mark-up' with the assessee bearing the commercial risk; and (c) the network fee structure operates as a profit-sharing/surplus-sharing arrangement rather than a charge for discrete managerial/technical/consultancy services or for making available technical know-how. The Tribunal observed that the receipts reflect allocation of commercial profits arising from integrated operations and the compensation mechanism is designed to achieve an arm's-length outcome and to insure the Indian entity against shortfall, rather than to pay for a proprietary technical service or transferred information. The Article-12 language was applied: the payments did not fall within the definition of 'royalties' (no payment for use of IP or information) and did not satisfy the FTS 'make available' or technical/consultancy service criteria (managerial/administrative services do not qualify; no evidence of transfer or making available of technical know-how or processes). The Tribunal further noted that the same factual and contractual framework was present in the prior coordinate-bench decisions and that revenue did not rebut the asserted similarity. Ratio vs. Obiter: Ratio - The Tribunal's core holding, founded on contractual analysis and application of the statutory/DTAA definitions, that the network fee is not 'royalty' nor 'fees for technical services' and therefore is not taxable as such in India, constitutes the ratio decidendi. Observations about the commercial risk allocation, profit-sharing mechanism and the absence of 'make available' are integral to the ratio. Obiter - ancillary remarks regarding the history of prior DRP/Assessing Officer positions and the summary of financial year splits, while informative, are incidental to the legal ratio. Conclusion: Following the coordinate-bench precedents and on the facts and contractual provisions in the Network Agreement, the network fee is held not to be taxable in India as FTS or royalty under the Act or the India-Netherlands DTAA; the impugned additions are directed to be deleted (ground nos. 1 and 2 allowed). ISSUE-WISE DETAILED ANALYSIS - Role and Effect of Coordinate-Bench Precedent Legal framework: Principles of judicial precedent applied within the Tribunal's coordinate-bench system and the requirement to consider whether facts or law materially differ so as to distinguish prior decisions. Precedent treatment: The Tribunal placed reliance on recent coordinate-bench decisions in the assessee's own case for AY 2021-22 and other years which reached the same conclusion; those decisions are treated as directly on point and controlling absent material change. Interpretation and reasoning: The Tribunal compared factual matrices and the Network Agreement terms and found no material change between the present year and the prior years decided in favour of the assessee. The learned Departmental Representative could not demonstrate any distinguishing factual or legal feature warranting departure from those decisions. In light of identical contractual terms and identical legal issues under Section 9(1)(vii)/Explanation 2 and Article-12, the Tribunal applied the earlier coordinate-bench findings. Ratio vs. Obiter: Ratio - The application of coordinate-bench precedent to identical facts is part of the Tribunal's decision-making and constitutes binding reasoning in the present appeal. Obiter - narrative on the sequence of DRP/AO reiterations and unsuccessful revenue attempts are incidental. Conclusion: Coordinate-bench decisions are followed; no departure warranted, resulting in deletion of the assessment addition. ISSUE-WISE DETAILED ANALYSIS - Limitation under Section 144C r.w.s. 153 Legal framework: Section 144C (DRP provisions) read with Section 153 (limitation for assessment) were invoked by the assessee to challenge validity/limitation of the assessment order. Precedent treatment: The limitation ground was raised before the Tribunal and was also present in earlier coordinate-bench proceedings for a related year; however, in the present appeal the assessee expressly disclaimed pressing that ground. Interpretation and reasoning: Because the substantive taxability issue was decided in favour of the assessee on merits by following coordinate-bench precedent, the Tribunal left the legal issue on limitation open and did not adjudicate it. The assessee's concession not to press the limitation ground resulted in dismissal of that ground as not pressed. Ratio vs. Obiter: Obiter - The Tribunal's non-decision on the limitation question is procedural; no ratio on limitation is laid down. Conclusion: Limitation objection under Section 144C r.w.s. 153 was not adjudicated (ground not pressed) and therefore remains open for future consideration. ISSUE-WISE DETAILED ANALYSIS - Other Grounds (Tax Rate, Interest, Penalty) Legal framework: Grounds challenging application of tax rate (20% v. 10% under Section 115A(1)(b)), interest under Sections 234B/234C, and initiation of penalty under Section 270A were pleaded. Precedent treatment and reasoning: These grounds are consequential on the determination of taxability. As taxability was decided in the assessee's favour, and because these grounds were premature or consequential, the Tribunal did not adjudicate them on merits. Ratio vs. Obiter: Obiter - No adjudication or ratio on these ancillary grounds was provided. Conclusion: Ancillary grounds (tax rate, interest, penalty) left unadjudicated as consequential or premature. FINAL CONCLUSION The Tribunal, following coordinate-bench precedent and on analysis of the Network Agreement and factual matrix, concludes that the network fee is neither 'royalty' nor 'fees for technical services' under the Income-tax Act or the India-Netherlands DTAA and directs deletion of the impugned addition; the limitation ground was not pressed and remains unadjudicated, and consequential grounds were not decided.