2025 (11) TMI 162 - AT - Income Tax

US resident IT services provider not taxable for Fees for Included Services under Article 12 of India US DTAA

ITAT, Delhi held for a US-resident taxpayer supplying IT/application and support services to associated enterprises that reimbursements on a cost-to-cost ... Income deemed to accrue or arise in India - Addition in respect of reimbursement of cost for providing IT/Support Services treated as Fee for Including Services (FIS) under Article 12 of India-USA Double Tax Avoidance Agreement (DTAA) - assessee is tax resident of USA and is engaged in providing Information Technology Application Services, IT Infrastructure Services and IT Security to its Associated Enterprises (AE’s) in India and other Invesco Group Companies located Worldwide - Counsel submits that the cost incurred by the assessee for providing IT Support Services is allocated to its AE’s on the basis of allocation rationale provided in Annexure II to the Master Inter Company Services Agreement HELD THAT:- AE’s have reimbursed the cost for providing IT/Support Services to the assessee on the basis of Master Inter Company Services Agreement dated 20.05.2019. The reimbursements have been made on cost to cost basis, i.e. without any markup. The said agreement is placed on record at page no. 128 to 146 of the paper book. We find that identical issue was considered by the Co-ordinate Bench of the Tribunal in assessee’s own case [2024 (8) TMI 1424 - ITAT DELHI] for AY 2020-21 held that condition of make available was not satisfied for services when provided by assessee did not enabled the AEs to apply the technology independently, on conclusion of the yearly contract. We find that in regard to IT administration services the assessee was providing services where the IT training and facilities training, were of desktop application tools such as Microsoft Word, excel and power point etc to staff of the group. Apart from that there is nothing to show in the assessment order that the AO had made any enquiry on his own or relied any provisions of the Master Inter-Company Services Agreement (in short “MSA”) to show that the training as imparted was of such nature that it “made available”, the technology to the associate enterprises so that on conclusion of the training the employees of AE’s will be unable to use technology on their own. Rather we observed that very common softwares used in offices are mentioned for which the training was provided. Then Assessing Officer in para5 of the assessment order has merely relied the assessee’s own submissions to conclude that as the assessee is training personnel of the group. The provisions of make available would become applicable. Thus we are inclined to sustain the contention of the Ld. Counsel. AO has not made any enquiry to rebut the claim of the assessee that the cost incurred by the assessee company for providing IT support services is allocated to its AE’s without any element of profit. Addition deleted. Decided in favour of assessee. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether reimbursement of cost for providing IT/Support Services, made on a cost-to-cost basis without markup under a Master Intercompany Services Agreement, constitutes Fee for Included Services (FIS)/technical or consultancy services taxable in India under Article 12 of the India-US DTAA (i.e., whether the 'make available' condition is satisfied). 2. Whether the character of receipts as pure reimbursement (cost-to-cost allocation) deprives such receipts of character as taxable income in India. 3. Whether earlier coordinate Tribunal decisions on identical facts create a binding precedent for the present assessment year such that the addition should be deleted on parity. 4. Whether challenge to initiation of penalty proceedings under section 274 read with section 270A is maintainable at the appeal stage (i.e., whether adjudication of penalty is premature in the present appeal). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Whether reimbursements for IT/support services amount to FIS under Article 12 (make available test) Legal framework: Article 12 of the India-US DTAA treats technical/managerial/consultancy services as chargeable where such services 'make available' technical knowledge, experience, skill, know-how or processes. The Protocol/Memorandum of Understanding to the DTAA explains 'make available' as enabling the recipient to apply the technology independently; mere technical input or incidental advantage does not satisfy the test. Precedent treatment: The Tribunal applied the 'make available' test and relied on coordinate decisions where continuing, recurring service arrangements over years were held inconsistent with a transfer that leaves the recipient able to operate independently. Decisions cited confirm that training or incidental assistance does not automatically amount to making available specialized technical knowledge; the test requires enduring transfer enabling independent application post-contract. Interpretation and reasoning: The Tribunal examined the contractual terms and factual matrix: (a) services were routine IT management, recurring annually since 2018; (b) recipients continued to require the service each year, indicating inability to apply the technology independently; (c) training was limited to common desktop applications and administrative support; (d) AO made no specific inquiry to demonstrate transfer of specialized technology or knowledge satisfying 'make available.' The Tribunal reasoned that recurring dependence, absence of specialized transferable know-how, and lack of evidentiary basis to show independent capability post-service defeat the make-available contention. Ratio vs. Obiter: Ratio - on the given facts, recurring routine IT/support services and training in common applications do not satisfy the DTAA 'make available' condition; therefore such receipts are not FIS under Article 12. Obiter - observations distinguishing managerial/marketing training from technical services and reliance on broader high court commentary about training not amounting to technical service reinforce but are not essential to the decision. Conclusion: The Court concluded that the 'make available' condition under Article 12 is not satisfied; therefore the reimbursements do not constitute taxable FIS under the DTAA on these facts. Issue 2 - Whether cost-to-cost reimbursements without markup are taxable income Legal framework: Taxability depends on character of receipts. Reimbursements that are pure pass-through of expenses with no profit element do not constitute income chargeable to tax. Precedent treatment: Authority was invoked holding that receipts which are mere reimbursements of expenses without embedded profit cannot be taxed as income; if the factual record establishes cost-to-cost allocation, taxation as income is impermissible. Interpretation and reasoning: The Tribunal examined the Master Intercompany Services Agreement and Annex II allocation mechanics: services allocated by logical keys (FTE, number of users, desktops, actual costs, etc.), and fees determined to achieve arm's length pricing with allocation keys expressly reflecting cost allocation. Debit notes reflected recharges based on these allocation methodologies. The AO did not make enquiries to rebut the assertion of no markup. On this basis, the Tribunal concluded the receipts were cost-to-cost reimbursements lacking profit element. Ratio vs. Obiter: Ratio - where contractual allocation and supporting debit notes establish cost-to-cost reimbursement without profit and tax authorities do not rebut this with contrary material, such receipts are not taxable as income. Obiter - broader references to arm's length methodology and transfer pricing principles are supportive but not essential. Conclusion: The addition treating the cost reimbursements as taxable income is not sustainable; the receipts are cost-to-cost reimbursements and must be excluded from income for the impugned year. Issue 3 - Precedential effect of coordinate Tribunal decisions and application of parity Legal framework: Consistency and parity require that identical issues and facts considered by coordinate benches in earlier assessment years in the same factual matrix be followed unless contrary material is placed. Precedent treatment: Coordinate Tribunal had decided identical issues for earlier assessment years, analyzing the same MSA, Article 12, and comparable authorities, and deleted like additions. Those decisions were expressly noted by the Dispute Resolution Panel. Interpretation and reasoning: No contrary material was produced by Revenue to distinguish or overturn the earlier findings. The Tribunal therefore applied parity, following its coordinate bench conclusions that the make-available test was not satisfied and that receipts were reimbursements. Ratio vs. Obiter: Ratio - absent contrary material, coordinate Tribunal decisions on identical facts are followed and compel deletion of like additions for parity. Obiter - references to potential Departmental appeals do not justify departure from parity. Conclusion: The addition of Rs.54,85,23,539/- is deleted on parity with earlier coordinate Tribunal decisions. Issue 4 - Maintainability of challenge to initiation of penalty proceedings at appeal stage Legal framework: Challenge to initiation of penalty proceedings is distinct from assessment and may be premature if penalty proceedings have merely been initiated and not adjudicated. Precedent treatment: The Tribunal declined to adjudicate premature penalty challenges while allowing substantive appeal relief. Interpretation and reasoning: The appeal raised ground against initiation of penalty under sections 274 read with 270A, but actual penalty adjudication had not been completed; therefore the Tribunal held the challenge premature for the present appeal. Ratio vs. Obiter: Ratio - challenge to initiation of penalty proceedings is premature where penalty adjudication has not concluded, and such ground may be dismissed at the assessment appeal stage. Obiter - none. Conclusion: Ground attacking initiation of penalty proceedings is dismissed as premature; substantive appeal allowed in part as above.