The Income Tax Appellate Tribunal (ITAT) Mumbai Bench, has recently, in an appeal filed before it, held that Atos IT Solutions and Services Inc, is not liable to tax, for support services provided to Atom India.
The aforesaid observation was made by the Mumbai ITAT when an appeal was filed before it by the assessee, as against order of the Disputes Resolution Panel – 1, Mumbai [DRP], dated 22.08.2017, for the A.Y.2014-15, passed u/s. 144 C (5) of the Income-tax Act, 1961.
The brief facts of the case were that the assessee was a company incorporated in USA, providing support services to its group companies in India namely, Atos India Private Limited (Atos India). And, during the year under consideration, the assessee had received an amount of ₹.7,55,89,549 from the services rendered to Atos India as cost recharge of Microsoft license fees and co-ordination services relating to Tower Watson project. The above services were provided by the assessee in pursuance of the agreements entered with Atos India.
It so happened that even though the return of income was filed by the assessee and however, it had not reported the above receipts and offered the same to tax, based on which the Assessing Officer observed that the taxes were deducted at source at the time of payments.
The Assessing Officer observed that as per the 26AS statement, the taxes were deducted on a total receipt of ₹.5,55,75,255 /- at 10.55% on an average and the TDS of ₹.58,67,358 was claimed in the return of income as refund, and also that since no income was offered to tax, during the assessment proceedings, the assessee was asked to explain why the same should not be taxed as royalty and / or Fee for Technical Service (FTS).
In reply to the same, it was submitted by the assessee that it had received payments from Atos India towards recharge of costs pertaining to Microsoft licence fees, and that in this regard, it was informed that Atos group had entered into a central agreement with Microsoft to obtain licenses for the use of Microsoft products. It was further submitted by the assessee that, as per this agreement the assessee is being a USA based entity, with regard to various invoices of Atos entities, for their use of the Microsoft products.
The assessee submitted that accordingly, the assessee had recovered payments from Atos India for the Microsoft products used by them, and further that the assessee had remunerated for its services (of purchasing delivery and administrative support for the benefit of Atos India) with handling fees based on the cost of the Microsoft licenses. It was also added by the assessee that with regard to the co-ordination services relating to Tower Watson project, it was informed that Atos India had entered into a contract with Tower Watson India, to provide Information Technology services to Tower Watson India, and that for this purpose, Atos India has engaged the assessee to provide certain support services such as ‘service desk’, for authorized users of Atos India, which deals with all incidents, problems and service requests (including requests for data, system or application access) in the course of provision of services by Atos India to Tower Watson India.
It was further submitted by the assessee that it had received payment from Atos India for the above transactions, and that the same did not constitute either “Royalties” or “Fees for Technical Services (‘FTS’) or Fees for Included Services (FIS). The assessee added that the above services being in the nature of “Business Profits”, was thus, taxable in terms of the provisions of Article 7 of the Double Taxation Avoidance Agreement between India and USA (‘India-USA DTAA’), and that as per Article 7 of the India-USA DTAA, “Business Profits” are taxable in India only if the non-resident has a Permanent Establishment (PE) in India.
And thus, adding to its submissions, the assessee contented that since the assessee did not have a PE in India, the amount received from Atos India was not taxable in India, thereby relying upon various explanations and judicial precedents thus, defending its arguments.
However, the Assessing Officer rejected the submissions made by the assessee and observed that the assessee has merely attempted a vague explanation of the services it has provided to Atos India, without going into the context and the basis on which these services are rendered. He added that the same requires an analysis of the agreements on the basis of which these services are rendered, thereby analyzing the services offered by the assessee in terms of the Article 12 of the ‘India-USA DTAA‘ for royalty, FTS and FIS. And, subsequently, proposed the addition of ₹.7,55,89,549/- as fees received from Atos India being royalty as well as FTS.
Aggrieved by the same, the assessee filed its objections before the DRP, thereby filing its detailed submissions, but, the DRP rejected the reliance placed by the assessee on the IRS guidance notes, thus deciding the issue against the assessee with its observations being recorded. And it is being agitated by the same, that the assessee has preferred the instant appeal before the Mumbai ITAT.
The primary issue involved in the assessee’s appeal being as to whether on the facts and in the circumstances of the case and in law, the AO and the DRP erred in not considering that the sum of Rs. 7.55,89.550 to be in nature of “Business Profits” under Article 7 of the DTAA, and hence, not taxable in India as the Appellant did not have a Permanent Establishment in India under Article 5 of the DTAA, it was the submission of Shri Dhanesh Bafna, Ms. Chandani Shah Kinjal Patel & Yogesh Malpani ,the AR for the assessee, that the provisions regarding taxability of royalty and fees for technical/included services under section 9 the Income-tax Act, 1961 are wider in scope as compared to the respective provisions under Article 12 of the India USA Double Taxation Avoidance Agreement (India-USA DTAA), and therefore that since the provisions of the India-USA DTAA are more beneficial to the Appellant as compared to the provisions of the Act, the taxability or otherwise of the income of the Appellant from Atos India, shall be governed by the provisions of the India USA DTAA, in view of section 90(2) of the Income Tax Act.
However, on the other hand, Shri Richa Gulati, the DR opposed the submissions of the AR of the assessee, thus bringing to the Tribunal’s notice, page No. 160 and 162 of the paper Book which was a copy of the agreements for services rendered by the assessee, with special reference to clause 5.2 of the service agreement, thereby submitting that it is a service and that the assessee has not reported these services in 3CB.
Further, he brought to the notice of the Tribunal, the agreement relating to service desk services and specifically the Clause 8.4 of the above services, thus submitting that these are all support services rendered by the assessee to Atos India and that these services rendered by the assessee will thus, fall under royalty as well as FTS, relying upon the orders passed by the DRP/AO.
Hearing the opposing contentions of either sides and perusing the materials available on record, the ITAT Panel comprising of Amit Shukla, the Judicial Member, along with S Rifaur Rahman, the Accountant Member, noted:
“We observe that the assessee has given sub contract to Atos India of the services to be provided to Tower Watson India, the same is placed in record at Page No.160 of the Paper Book. The revenue has heavily relied on this sub-contract agreement to bring to tax the payment made by Atos India to the assessee relating to the Service Desk facility provided to the Tower Watson group. According to us, this activity is completely different to the sub-contracting agreement. As per the terms of agreement, the engagement clause clearly indicate that the assessee engages the services of Atos India to perform the services in accordance with the scope, delivery schedule, services levels and other essential factors as detailed in the services schedule (schedule no 2) of the sub contract agreement.”
“The services provided by the assessee to the group entity are separate and nothing to do with the separate sub contract awarded to the Atos India, which is independent contract. The service desk services are provided to all the group entities to enable the common services provided to the Watson Group employees and there is nothing on record to indicate any independent service provided to Atos India or IT enabled services which gives knowledge made available to Atos India. Therefore, in our considered view, the services provided by the assessee is separate and it only collected the related cost to maintain the service desk.”, the ITAT Bench added.
Thus, allowing the assessee’s appeal, the Mumbai ITAT held:
“It is a receipt which will fall under the Article 7 of the treaty. Hence, the addition proposed and sustained by the Ld.DRP are beyond the scope and accordingly Assessing Officer is directed to delete the same. Accordingly, the ground raised by the assessee is allowed. In the result, the appeal filed by the assessee is allowed”.
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