2025 (10) TMI 1051 - AT - Income Tax

Support service fees under GFNA not taxable; not royalty/FTS under s.9(1)(vi) or Article 12; no PE under Article 7

ITAT held that support service fees received under the GFNA are not taxable in India: they do not constitute royalty or FTS under s.9(1)(vi) or Article 12 ... Services rendered under the Global Framework Network Agreement (‘GNFA') as royalty income, taxable u/s. 9(1)(vi) - Receipt of income in the nature of fees which has been claimed to be not taxable in India as royalty u/s. 9(1)(vi) of the Act and as per clause (2) read with clause 3(a) of Article 12 of the India-Netherlands DTAA - HELD THAT:- We note that in the preceding assessment years, Revenue has accepted the position taken by the assessee in respect of the addition made by the ld. AO in the present case. It has been held in the assessments for AY 2011-12, 2012-13 and 2013-14 that the nature of services rendered by the assessee are commercial services and do not result in rendering of managerial or specific consultancy. AO in those assessment years has taken considered view that these services are not covered within the provisions of Article 12 of the India-Netherlands DTAA nor it is covered within the provisions of section 9(1)(vi) of the Act, to treat it as royalty, to bring it into tax net. It is also an admitted position that the nature of services rendered by the assessee to BCD Travel India Private Limited is under the same agreement of GFNA which continues to operate in the preceding years as well as in the year under consideration. Thus, there is no material change in the factual position when compared with the preceding years. Assessee has not provided any intellectual property or any other right. Support service fees charged by the assessee is not technical in nature but in the nature of commercial services as accepted by the Department in the assessments for the preceding three assessment years. Accordingly, in the given set of facts, provisions contained in Article 12(4)(a) do not apply. In reference to Article 12(4)(b), it is worth noting that BCD Travel India Private Limited would not be capable to render similar services without getting support from the assessee. The India entity continues to receive such support services from the assessee and therefore, the requirement of make available technical knowledge, skills etc., for the services to be characterized as FTS remains unfulfilled. Accordingly, services which are commercial or business services are not covered in the definition of FTS and hence, not taxable under Article 12 of the DTAA. Support service fee received by the assessee is neither royalty nor FTS. It is also not taxable as business profits under Article 7 of the DTAA, since business profits earned by a foreign company from operations in India are taxable in India only if, there is a permanent establishment (PE) of the foreign company in India. Thus, the business income of assessee would become taxable in India only if it had a PE in India. It is a fact on record that the services rendered by the assessee under GFNA were provided from outside India. Also, assessee does not have any office, employee, bank account or any other form of physical presence in India. Thus, activities of the assessee which have been performed from outside India do not constitute a PE in India and consequently, its income from support services is not taxable in India as business profits under Article 7 of the DTAA. In the conspectus of the above discussion and the factual position including the accepted position of the Revenue in the preceding assessment years arising out of the common GFNA, the support service fee received by the assessee is not taxable both, under the provisions of the Act and the DTAA. Accordingly, grounds raised by the Revenue in this respect are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts received under the Global Framework Network Agreement (GFNA) for provision of global support services qualify as 'royalty' taxable under section 9(1)(vi) read with Explanation 2 of the Income-tax Act. 2. Whether the same amounts constitute 'fees for technical services' (FTS) or royalty under Article 12 (clauses 2 and 3(a)) and Article 12(4) of the India-Netherlands DTAA. 3. Whether the receipts are taxable as business profits under Article 7 of the DTAA by reason of a permanent establishment (PE) in India. 4. Whether reliance on earlier assessment conclusions in the taxpayer's own case and on relevant treaty and commentary (including OECD Commentary and judicial interpretation of 'impart') is permissible in determining the characterisation of the receipts. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation as 'royalty' under section 9(1)(vi) and Explanation 2 Legal framework: Explanation 2 to section 9(1)(vi) defines 'royalty' to include payments for imparting 'information concerning industrial, commercial or scientific experience' and services in connection with activities listed in sub-clauses (i)-(v) (and (iva)). Precedent Treatment: The Tribunal relied on earlier assessment orders in the taxpayer's case (AYs 2011-12 to 2013-14), where Revenue accepted the receipts as non-taxable commercial support services. The Tribunal also considered authoritative judicial interpretation of 'impart' and 'royalty' (as exemplified in prior High Court analysis). Interpretation and reasoning: The Tribunal examined the scope and content of services under GFNA (global account management, marketing, procurement, coordination, administrative facilitation, finance, HR, sales support). These services, as described, were commercial in nature and constituted the application of the group's existing skills and infrastructure rather than any transfer or grant of rights or disclosure of proprietary know-how as envisaged by Explanation 2. The Tribunal applied the distinction between imparting undisclosed 'know-how' (which contemplates transfer/use rights or confidentiality provisions) and the mere application of experience/skill to perform services for the payer. The Tribunal found no element of transfer of rights, parting with proprietary information, or contractual confidentiality/know-how transfer that would bring the payments within Explanation 2. Ratio vs. Obiter: Ratio - payments for pure commercial support services that do not involve imparting information concerning industrial, commercial or scientific experience (in the sense of transferring know-how or granting use rights) are not 'royalty' under Explanation 2 to section 9(1)(vi). Obiter - references to the administrative history of earlier assessments as persuasive supporting material. Conclusion: The support service fees under GFNA do not qualify as 'royalty' under section 9(1)(vi) Explanation 2. Issue 2 - Characterisation as FTS or royalty under Article 12 of the DTAA (clauses 2 and 3(a); Article 12(4)) Legal framework: Article 12(3)/(2) addresses payments for information concerning industrial, commercial or scientific experience (royalty); Article 12(4) defines FTS as payments for services of managerial, technical or consultancy nature and includes sub-clauses (a) ancillary to application/enjoyment, (b) that 'make available' technical knowledge/experience/skill/know-how, and (c) development and transfer of technical plan/design; excludes services that do not enable the recipient to apply the technology. Precedent Treatment: The Tribunal considered OECD Commentary (2017) delineating the distinction between supply of know-how (royalty) and provision of services, and judicial authority distinguishing imparting versus mere application of skill (e.g., analysis of 'impart' in prior High Court jurisprudence). The Tribunal noted administrative acceptance in prior assessment years that the services were commercial and not managerial/technical consultancy within Article 12. Interpretation and reasoning: Applying Article 12(4) controls, the Tribunal observed that the GFNA services were not technical, managerial or consultancy in the sense of enabling the Indian recipient to apply transferred technology or know-how independently. The services involved ongoing performance of functions from outside India (support, coordination, account management, marketing, procurement), not the delivery of intangible proprietary information or transfer of the ability to exploit technology. The 'make available' limb was not satisfied because the India entity continued to depend on the foreign provider for ongoing support and did not obtain the capacity to replicate the services independently. The OECD criteria (existing know-how, confidentiality, limited further action required by supplier) were applied to show the absence of a know-how transfer; conversely, the services implicated significant active performance and resources of the supplier (indicative of service payments under Article 7 contextually, but here provided from outside India). Ratio vs. Obiter: Ratio - services that merely apply the supplier's expertise without transferring the capacity/know-how or enabling autonomous use do not constitute FTS nor royalty under Article 12; specifically, absence of 'make available' precludes FTS characterization. Obiter - discussion of OECD Commentary application to the facts. Conclusion: The GFNA receipts are neither royalty nor FTS under Article 12 of the India-Netherlands DTAA. Issue 3 - Taxability as business profits under Article 7 by reason of Permanent Establishment Legal framework: Article 7 taxes business profits of an enterprise of a Contracting State only if the enterprise carries on business in the other State through a permanent establishment situated therein. Interpretation and reasoning: The Tribunal examined factual matrix: services were rendered from outside India; the taxpayer had no office, employees, bank account or other indicia of physical presence in India; activities were performed from outside India and did not constitute a PE. Given the absence of PE, business profits under Article 7 are not taxable in India. Ratio vs. Obiter: Ratio - absent a PE in India, business profits of a non-resident from services performed from abroad are not taxable in India under Article 7. Conclusion: Receipts are not taxable as business profits under Article 7 because no PE exists in India. Issue 4 - Reliance on prior assessments and broader interpretative materials (OECD Commentary, judicial interpretation) Legal framework & practice: Administrative acceptance in prior assessment years and consistent factual matrix are relevant in revenue adjudications; OECD Commentary and judicial interpretations are legitimate aids to treaty interpretation. Interpretation and reasoning: The Tribunal accorded weight to prior assessment conclusions (AYs 2011-12 to 2013-14) where Revenue had accepted the commercial character of similar receipts under the same GFNA and assessed them as non-taxable. The Tribunal treated those consistent prior conclusions and the unchanged factual pattern as persuasive. The Tribunal also relied on OECD Commentary and judicial exposition of 'impart' to draw the commercial/know-how distinction. Objections to reliance on an earlier Tribunal decision pending in higher courts were noted in Revenue grounds but did not displace the Tribunal's analysis grounded on facts, statutory/treaty text, OECD Commentary and prior administrative acceptance. Ratio vs. Obiter: Ratio - consistent prior administrative treatment and established interpretative aids (OECD Commentary, judicial meaning of 'impart') may legitimately support characterisation of payments as non-taxable where facts and contractual terms remain unchanged. Obiter - remarks on pendency of other litigation do not alter application of law to the present facts. Conclusion: Reliance on prior assessment treatment and interpretative materials was appropriate; they reinforce the conclusion that the receipts are not taxable in India. Overall Conclusion The Tribunal concluded that the amounts received under the GFNA are commercial support/service fees that do not constitute 'royalty' under section 9(1)(vi) Explanation 2, nor 'fees for technical services' or royalty under Article 12 of the India-Netherlands DTAA, and are not taxable as business profits under Article 7 in the absence of a permanent establishment in India; accordingly, the appeals by Revenue were dismissed.