Case Digest: Fee for Technical Service (FTS) and Double Taxation Avoidance Agreement (DTAAs)

Section 9(1)(vii) of the Income Tax Act, 1961 defines fees for technical services(FTS) as any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". For avoidance of double taxation, India has signed tax treaties with a number of countries, and Double Taxation Avoidance Agreement (DTAA's) with certain countries have the 'Make Available' clause that imposes a restrictive and narrow interpretation of what constitutes Fees for technical services. The definition of FTS in various DTAAS (Australia, Canada, Cyprus, Malta, Netherlands, Singapore, US and UK) which have this make available clause could create a situation favourable to the assessee. Thee receipt of income by the non-resident for these services would not fall within the meaning of fees for technical services, and thus the income of the non-resident would not be exigible to tax in India under the DTAA. Several judicial decisions have clearly outlined the ambit of the "make available" clause and this has become a very useful shelter for non-taxability of FTS payments to foreign entities by Indian assessee's. ITAT upholds 10% Tax on Fee for Technical Services under Article 12(4) India-Singapore DTAA as Service Provider Transfers all Documents to Service Receiver Gensler Singapore Private Limited vs JCITCITATION: 2023 TAXSCAN (ITAT) 2306 The Delhi bench of the Income Tax Appellate Tribunal (ITAT) held that the lower authorities have rightly treated the amounts received by the assessee from RCITP as fees for technical services under Article 12 (4) of Indo – Singapore DTAA and was rightly brought to tax at 10%. The two member bench consisting of N.K Billaiya (Accountant member) and C.N Prasad (judicial member) held that the payments received by the assessee from RCITP are fees for technical services falls under sub clause (4) of Article 12 of Indo – Singapore DTAA. Thus, the lower authorities have rightly treated the amounts received by the assessee from RCITP as fees for technical services under Article 12 (4) of Indo – Singapore DTAA and was rightly brought to tax at 10%. Amount Received by Rendering Service in Mining of Natural Resources is not Taxable as FTS under India-Portugal DTAA: ITAT Aluminium Pechiney vs DCIT CITATION: 2023 TAXSCAN (ITAT) 2304 The Delhi Bench of Income Tax Appellate Tribunal (ITAT) held that the receipts of amounts received by rendering services fall within the exceptions provided under Article 12(5)(f) and 12(5)(g) of India – Portugal DTAA, hence, would not qualify as FTS. Thus, we hold that the receipts in dispute are not taxable as FTS at the hands of the assessee. Therefore it was held that the amounts received would fall within the exceptions provided under Article 12(5)(f) and 12(5)(g) of India – Portugal DTAA, hence, not taxable at the hands of the assessee. Hence the appeal of the assessee was allowed. Receipts of Subscription, Professional and Training Services of Software from Indian customers can not be taxed as Royalty/FTS under India-Netherlands DTAA: ITAT M/s Service Now Nederland BV vs Asst. CIT CITATION: 2023 TAXSCAN (ITAT) 2253 The Income Tax Appellate Tribunal (ITAT) Delhi bench held that Receipts of subscription, professional and training services of software from Indian Customers could not be taxed as Royalty/Fee for Technical Service (FTS) under India-Netherlands Double Taxation Avoidance Agreement (DTAA). After considering the facts submitted by both parties, the two member bench of M. Balaganesh(Accountant Member) and Kul Bharat (Judicial Member) held that subscription, professional and training services rendered by the assessee does not fall within the definition of FTS both under the Income Tax Act as well as under the DTAA and accordingly the same cannot be taxed in India. Consultancy Services cannot be Treated as FIS Merely because Service Provider has used Substantial Technical Skill as per India-USA DTAA: ITAT Bain & Company, Inc. vs Deputy/ACIT, International Tax CITATION: 2023 TAXSCAN (ITAT) 2261 The Delhi Bench of Income Tax AppellateTribunal (ITAT) has held that the consultancy services could not be treated as Fee for Included Services (FIS) merely because the service provider has used substantial technical skill as per India-USA Double Taxation Avoidance Agreement (DTAA). The Bench Allowed the appeal filed by the assessee holding that while providing such services, the American Company was not making available to the Indian Company, any technical expertise, knowledge or skill etc. but was merely transferring commercial information to the Indian Company by utilising technical skill. Taxability of Data Processing Fees paid by assessee to its overseas branch cannot treated as FTS as per India-France DTAA: ITAT BNP PARIBAS vs Assistant Commissioner of Income tax CITATION: 2023 TAXSCAN (ITAT) 2169 The Income Tax Appellate Tribunal (ITAT) Mumbai bench held that taxability of date processing fees paid by assessee to its overseas branch could not be treated as Fees for Technical Services (FTS) as per India France Double Taxation Avoidance Agreement(DTAA). After considering the facts submitted by both parties, the two member bench of Padmavathy S (Accountant Member) and Vikas Awasthy, (Judicial Member) held that payment made by the assessee to Singapore branch cannot be treated as FTS. Therefore, the above ground raised by the assessee was allowed the tribunal. Receipt of IUC Charges by Telefonica from Indian customers /end users cannot be taxed as Royalty / FTS under Section 9(1)(vi)/(vii) of Income Tax Act and India-Spain DTAA: ITAT M/s. Telefonica Depreciation Espana SA vs The ACIT(IT) CITATION: 2023 TAXSCAN (ITAT) 2080 The Bangalore Bench of Income Tax Appellate Tribunal) ITAT) has held that the receipt of interconnectivity utility charges (IUC) from Indian customers or end users could not be taxed as royalty or Fee for Technical Services (FTS) under Section 9(1)(vi)/(vii) of Income Tax Act, 1961 and also as per India-Spain Double Taxation Avoidance Agreement. The two-member Bench of Chandra Poojari, (Accountant Member) and Beena Pillai, (Judicial Member) allowed the appeal filed by the assessee referring to the decision in case of “Vodafone Idea Ltd and Vodafone South Ltd” and held that payments received by assessee towards interconnectivity utility charges from Indian customers / end users could not be considered as Royalty / FTS to be brought to tax in India under Section 9(1)(vi)/(vii) of the Income Tax Act and also as per DTAA. Income received from India by way of Royalties shall be taxed in India only on receipt basis under Indo-Switzerland DTAA: ITAT grants relief to ABB Switzerland ABB Switzerland Ltd vs The Deputy Commissioner of Income Tax CITATION: 2023 TAXSCAN (ITAT) 2070 The Income Tax Appellate Tribunal (ITAT) Bangalore bench while granting relief to ABB Switzerland held that income received from India by way of Royalties should be taxed in India only on receipts basis under the India-Switzerland Double Taxation Avoidance Agreement (DTAA). The bench also observed that which was not taxed on accrual basis. After considering the facts and circumstances of the case and also explanation of the assessee two member bench of George George K (Vice President) and Laxmi Prasad Sahu (Accountant Member) held that income received from India by way of Royalties should be taxed in India only on receipts basis under the India-Switzerland Double Taxation Avoidance Agreement (DTAA). Chavali Narayan appeared for the assessee and Veera Raghavan appeared for the revenue. Cloud Computing Services Rendered by Amazon Web Services to customers in India do not fall within “FIS” under Article 12(4)(b) of the India-USA DTAA: ITAT Amazon Web Services vs ACIT CITATION: 2023 TAXSCAN (ITAT) 2007 The Delhi bench of the Income Tax Appellate Tribunal (ITAT) held that the cloud computing services rendered by Amazon web services to customers in India do not fall within the Fee for Technical Services (FTS) under Article 12(4)(b) of the India-USA DTAA. The Two-member bench comprising of G.S. Pannu (President) and Astha Chandra (Judicial member) held that the payments received by the assessee from Indian Customer(s) from rendering AWS Services do not qualify as royalty under Article 12(3) of the India-USA DTAA and hence are not taxable in India. Thus, the appeal of the assessee was allowed. Failure of AO to Consider Documents with Respect to Tax Deduction on FTS under India UK DTAA: ITAT directs Readjudication Spark44 Demand Creation Partners Private Limited vs Assistant Commissioner of Income Tax CITATION: 2023 TAXSCAN (ITAT) 1923 The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) directed readjudication on the issue that the Assessing Officer failed to consider the documents with respect to a tax deduction on FTS under India UK DTAA.The case was restored to the file of the Assessing Officer for deciding afresh after verification of the relevant supporting document and submission made by the assessee. Therefore, the appeal of the assessee was allowed for statistical purposes. Diamond Testing & Certification Services by GIA USA Covered Under India-USA DTAA: Gujarat HC Dismisses Appeal by Income Tax Department COMMISSIONER OF INCOME TAX vs STAR RAYS CITATION: 2023 TAXSCAN (HC) 1288 The High Court of Gujarat has held that diamond testing & certification services provided by the Gemological Institute of America (GIA) USA is covered Under India-USA Double Taxation Avoidance Agreement (DTAA). The court dismissed the appeal filed by the Revenue, Commissioner of Income Tax (International Taxation and Transfer Pricing), finding no substantial question of law warranting further consideration The court highlighted that the services provided by GIA USA were not “make available” services and that the payments were routed through GIA USA’s accounts, entitling the respondent assessee to the benefits of the India-USA DTAA. In result, the Gujarat High Court ruled in favour of the respondent assessee, maintaining that the payments for diamond certification services provided by GIA USA were eligible for DTAA benefits between India and the United States. The Court upheld the factual findings and dismissed the Revenue’s appeal. Service Fees for Providing Supporting Services Taxable as FTS u/s 9(1)(vii) of Income Tax Act and Article 12(4) of India-USA DTAA: ITAT Kraft Heinz Foods Company vs Dy. Commissioner of Income Tax CITATION: 2023 TAXSCAN (ITAT) 1918 The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) held that the cost reimbursement of received by the assessee towards providing support services is taxable as fees for technical services both under Section 9(1) (vii) of the Income Tax Act,1961 as well as Article 12(4) of the Double Taxation Avoidance Agreement (DTAA) between India and USA. The bench comprising of Prashant Maharishi, Accountant Member and Rahul Chaudhary, Judicial Member perused the orders of the co-ordinate bench in assessee’s own case for A.Y. 2009-10 and 2011-12. Accordingly, the action of the Assessing Officer holding that the cost reimbursement of Rs.10,03,78,345/- received by the assessee towards providing support services was taxable as fees for technical services both under Section 9(1) (vii) of the Income Tax Act as well as Article 12(4) of the Double Taxation Avoidance Agreement (DTAA) was confirmed. Hence the grounds of appeal by assessee were dismissed. Fee for providing Supervisory Service for manufacturing of linear polyethylene under Composite Contract are FTS under UK and India DTAA: ITAT upholds Revision Order Ineos Commercial Services UK Limited vs Commissioner of Income Tax CITATION: 2023 TAXSCAN (ITAT) 1882 The Income Tax Appellate Tribunal (ITAT) Kolkata bench held that Fee for providing supervisory services for manufacturing of linear polyethylene under composite contract are Fee For Technical Service (FTS) under UK and India Double Taxation Avoidance Agreement. Thus the bench upheld the revision order Asseesee entered into a composite contract, which could not be segregated in parts and, therefore, rightly found the assessment order as erroneous. The tribunal after reviewing the facts and submissions of the both parties, the two member bench of Rajesh Kumar ,(Accountant Member ) and Rajpal Yadav, (Vice-President) observed that Fee for providing supervisory services for manufacturing of linear polyethylene under composite contract are Fee For Technical Service (FTS) under Uk and India Double Taxation Avoidance Agreement. Rahul Shah,counsel appeared for assessee and Abhijit Kundui, counsel appeared for the revenue. Mere Passing of Architectural Drawings to AOP Not ‘FIS’, doesn’t satisfy ‘make believe’ under Article 12(4)(b) of India-USA DTAA: ITAT Michael Graves Design Group Inc vs DCIT CITATION: 2023 TAXSCAN (ITAT) 1843 The Delhi bench of the Income Tax Appellate Tribunal (ITAT) held that mere passing of project of specific architectural drawings and design with measurement did not amount to ‘make believe’ technical knowledge under 12(4)(b) of India-USA Double Taxation Avoidance Agreement (DTAA). While allowing the appeal, two-member bench consisting of G.S Pannu (President) and Astha Chandra (Judicial member) held that the consideration received by the assessee for services rendered to the AOP does not fall within the purview of FIS under Article 12(4)(b) of the India-USA DTAA as the same does not satisfy the ‘make believe’ clause envisaged therein. Accordingly, we allow the ground of appeal raised by the assessee in both the AYs. Sub-contracting Charges Not Taxable in India if No Technical Knowledge Transferred: ITAT Spi Global US vs ACIT CITATION: 2023 TAXSCAN (ITAT) 1823 The Delhi bench of the Income Tax Appellate Tribunal (ITAT) has ruled that sub-contracting charges are not taxable in India if no technical knowledge is transferred to the Indian entity and held that the assessee in this case, a United States based company, did not make available any technical knowledge to its Indian subsidiary, and therefore the sub-contracting charges were not taxable in India. The Two-member bench comprising G.S. Pannu (President) and Astha Chandra (Judicial Member) ruled that sub-contracting charges received by the assessee from SPi India are not taxable in India under the India-USA DTAA. The assessee did not provide any technical knowledge, experience, skill, know-how, or processes to SPi India, resulting in the sub-contracting charges not being considered “fees for included services” under Article 12(4) of the DTAA. Receipts from Provision of Disaster Recovery Up-Linking Services and Disaster Recovery Play-Out Services are not FTS under India-Singapore DTAA: ITAT deletes Addition Planetcast International Pte. Ltd. vs ACIT CITATION: 2023 TAXSCAN (ITAT) 1818 The Income Tax Appellate Tribunal (ITAT) Delhi Bench held that receipts from provision of Disaster Recovery Up-Linking Services and disaster recovery play-out services are not Fee for Technical Service (FTS) under India-Singapore Double Taxation Avoidance Agreement (DTAA). After reviewing the facts and submissions of both parties, the two-member bench of B.R.R. Kumar(account member) and Saktijit Dey (Vice-President) held that payments received by the assessee as consideration for providing disaster recovery playout services are not taxable as FTS. Receipts for AWS services /Cloud computing services rendered by Amazon to Indian Customers Not Taxable as FTS under Indo-US Treaty: ITAT Amazon Web Services vs ACIT CITATION: 2023 TAXSCAN (ITAT) 1796 The Income Tax Appellate Tribunal (ITAT) Delhi Bench held that the receipts for Amazon Web Services cloud computing services rendered by amazon to Indian customers are not taxable as Fee for Technical Service (FTS) under India -US treaty. Further, AWS Services provided by the assessee are standardised automated services that did not provide technical services to its customers nor does it satisfy the ‘make available’ clause as the customer would not be able to make use of the technical knowledge, skill, process etc. used by the assessee in providing cloud computing services, by itself in its business or for its own benefit, without recourse to the assessee in future. Hence, rendering cloud computing service cannot be held to be liable to tax in India as FTS/FIS. After reviewing the facts and submissions of the both parties, the two member bench of G.S.Pannu, (President) and Astha Chandra, (Judicial Member) held that receipts for Amazon Web Services cloud computing services rendered by amazon to Indian customers are not taxable as Fee for Technical Service(FTS) under India -US treaty. Receipts for Advisory Services Not Taxable Unless they Result in Transfer of Technical Knowledge u/a 13(4) of India-UK DTAA: ITAT N.M. Rothchild & Sons Ltd vs DCIT CITATION: 2023 TAXSCAN (ITAT) 1773 The Delhi bench of the Income Tax Appellate Tribunal (ITAT) has held that receipts for advisory services are not taxable as Fees for Technical Services (FTS) unless they result in the transfer of technical knowledge and clarifies the scope of FTS under the India-UK Double Taxation Avoidance Agreement (DTAA), and it is likely to have implications for other taxpayers who are engaged in the provision of advisory services to their associated enterprises. The tribunal held that the services provided by the assessee to the Indian AE are merely for enabling and assisting the Indian AE in making the correct decisions on certain aspects as specifically provided under the group service agreement. Such rendition of services does not result in the transfer of technical knowledge, know-how, skill, etc. to the Indian AE. Therefore, the ‘make available’ condition provided under Article 13(4)(c) remains non-compliant. That being the position, the receipts would not fall within the definition of FTS as provided under Article 13(4) of India – UK DTAA. Payment for architectural design could not be classified as royalty under Article 12(3) of India Singapore DTAA: ITAT DCIT vs Aedas Pte. Ltd CITATION: 2023 TAXSCAN (ITAT) 1763 The Delhi bench of the Income Tax Appellate Tribunal held that Payments made in consideration of architectural design could not be classified as royalty under Article 12(3) of India Singapore Double Tax Avoidance Agreement (DTAA). The two-member bench consisting of G.S. Pannu (president) and Astha Chandra (Judicial member) after considering the facts of the assessee’s case in the light of the decisions in the case of Gera Developments P. Ltd. and Devi Ashmore India Ltd. held that payments made to the assessee in consideration of architectural design services could not be classified as royalty under Article 12(3) of IndiaSingapore DTAA. Hence, the tribunal did not find any reason to interfere with the findings of the CIT(A) and the appeal was dismissed. DTAA Benefits allowable to Assessee acts as Intermediary between Indian Subscribers and Alibaba.com Hongkong: Bombay HC The Commissioner of Income International vs Alibaba.Com Singapore E-Commerce CITATION: 2023 TAXSCAN (HC) 1050 In a recent judgment, the panel composed of Justice K.R. Shriram and Justice Firdosh P. Pooniwalla provided relief to the assessee, Alibaba.com, Singapore E-Commerce Private Limited. The panel emphasized that the assessee, acting as an intermediary between Indian subscribers and Alibaba.com Hong Kong Company, is eligible for the benefit of Double Taxation Avoidance Agreement (DTAA). The High Court has observed that “AO has completely denied the existence of the assessee as an independent entity as if the assessee was only a front or a shadow entity of Alibaba Hong Kong. If the AO was so convinced that the entire activity in India to various subscribers was actually carried out by Alibaba Hong Kong and not by assessee, then we would have expected him to do something to Alibaba Hong Kong and not the assessee.” Therefore, the Bombay High Court rejected the appeals filed by the revenue, as it concluded that no significant legal issue was raised in the case. Receipts from Centralised Service Income by Radisson Hotels International are not Taxable as FTS/FIS under Article 12(4)(a) of India-USA DTAA: ITAT M/s. Radisson Hotels International Incorporated vs ACIT CITATION: 2023 TAXSCAN (ITAT) 1414 The Delhi Bench of Income Tax Act has held that the receipts from centralised service income by Radisson Hotels international would not be taxable as fees for technical services (FTS) or fees for included services (FIS) under Article Double Taxation Avoidance Agreement (DTAA). The Bench further observed that, “Rather than centralised service income being ancillary and incidental to royalty income, in reality, it is a reverse situation. In such a scenario, it cannot be said that centralised service income, being ancillary and incidental to royalty income, would fall under Article 12(4)(a) of the Tax Treaty.” Salary Reimbursement for Seconded Employee Not Taxable as FTS under India-US DTAA: ITAT M/s. Juniper Networks Inc vs ITO CITATION: 2023 TAXSCAN (ITAT) 1028 The Bangalore Bench of Income Tax Appellate Tribunal (ITAT) has held that salary reimbursement for seconded employees would not be taxable as Fees for Technical Service (FTS) under the India-US tax Double Taxation Avoidance Agreement, also known as Indo-US DTAA. The two member Bench of Chandra Poojari, (Accountant Member) and BeenaPillai, (Judicial Member) referring to the Goldman Sachs Services Pvt. Ltd allowed the appeal filed by the assessee and held that salary reimbursements for seconded employees would not be taxable as Fee for Technical Services (FTS). Distribution Fee to AE of Google India cannot be Treated as “Royalty/FTS”: ITAT deletes Orders against Google India M/s. Google India Private Ltd vs Additional Commissioner of Income Tax CITATION: 2023 TAXSCAN (ITAT) 798 The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) has held that the distribution fee paid by the tech-giant Google India to its Associate Enterprises cannot be treated as royalty/FTS. Holding that the assessee is not a DAPE of GIL, “the stand of the revenue for making the addition is not tenable since each assessee has to be assessed in respect of income that accrues or is received by it, unless by a statutory enactment, the income of another is permitted to be assessed in the hands of a person. Therefore, the Assessee can only be assessed in respect of the amount it retains pursuant to the contract, which it has entered into with GIL and therefore the addition made by applying the notional rate of profit in the distribution fees is not sustainable. Atos Not Liable to Tax for Support Services Provided to Atom India: ITAT Atos IT Solutions and Services Inc Vs DCIT (IT)-1(1)(2) CITATION: 2023 TAXSCAN (ITAT) 666 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. 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”. Huawei Liable to Pay Tax on Income from Provision of Technical Services to Huawei Indian as ‘FTS’: ITAT Huawei Technologies Co.Ltd vs ACIT CITATION: 2023 TAXSCAN (ITAT) 647 The Delhi bench of the Income Tax Appellate Tribunal (ITAT)has ruled that Huawei is liable to pay tax on income from the provision of Technical Services to Huawei Indian as ‘FTS’. It was observed that there are decisions of the Coordinate Bench in the assessee’s case on an identical set of facts and circumstances upholding the decision of the Revenue Authorities aboutthe existence of PE and attribution of profit, as a Bench of equal strength. Respectfully following the consistent view of the Tribunal in the assessee’s case in past assessment years, the Coram comprising of Shri G S Pannu, President and Shri Saktijit Dey, Judicial Member upheld the decision of the Departmental authorities on these issues. Relief to Linklaters LLP: Remuneration received by Law Firm for Providing Legal Services Not Taxable as “FTS” as per Indo-UK Treaty, rules ITAT Linklaters LLP vs Asst. CIT CITATION: 2023 TAXSCAN (ITAT) 567 The Mumbai Income Tax Appellate Tribunal ( ITAT ) while providing relief to Linklaters LLP ruled that remuneration received by a law firm for providing legal services is not taxable as Fee for Technical Service (FTS) as per the Indo-UK treaty. After considering the contentions of both the parties the division bench of the ITAT comprising B. R. Baskaran, (Accountant Member) and Kavitha Rajagopal, (Judicial Member) allowed the appeal filed by the assessee and observed that revenue has failed to prove that the same would fall under the category of ‘fee for technical services’ as envisaged in Article 13 of the India-UK DTAA and thereby holding that the same cannot be brought to tax as ‘FTS’ as per section 90(2) of the Income Tax Act,1961. Levy of Surcharge and Cess cannot Exceed Tax Rate of 10% As Per India – Japan DTAA: ITAT FCC Co. Ltd. vs ACIT CITATION: 2023 TAXSCAN (ITAT) 311 The Income Tax Appellate Tribunal (ITAT), Delhi Bench, has recently, in an appeal filed before it, held that the levy of surcharge and cess cannot exceed the tax rate of 10%, as per India – Japan DTAA. Having considered the rival submissions, in principle, we accept the assessee’s contention that levy of surcharge and cess cannot exceed the tax rate of 10% as per India – Japan DTAA. Article 12 of India – Japan tax treaty provides that the tax to be charged on royalty and FTS shall not exceed 10% of the gross amount of royalty or FTS. Article 2 of the tax treaty defines tax in India as income tax including any surcharge thereon. Therefore, Article 12 read with Article 2 of the tax treaty makes it clear that the rate of tax at 10% would encompass surcharge and education cess as it is also in the nature of surcharge.”, the ITAT Bench further added. Thus, allowing the assessee’s appeal, the Delhi ITAT ruled : “Therefore, we hold that levy of surcharge and cess over and above the taxable rate of 10% on royalty and FTS is not permissible as per the treaty provisions.” Payments made by ONGC towards Air Injection Equipment to Non-Residents Not FTS as per India-Canada DTAA: ITAT ONGC Representative Assessee of Linklaters vs ADIT CITATION: 2023 TAXSCAN (ITAT) 294 The Delhi Bench of Income Tax Appellate Tribunal(ITAT) has held that the payment made by ONGC towards air injection equipment to non-residents could not be considered as FTS as per India- Canada DTAA. The return of income was filed as Nil by ONGC Ltd in its capacity as the representative assessee of University of Calgary , Alberta , Canada . During the relevant previous year, ONGC had made payments to University of Calgary, Alberta, Canada (“non-resident”) for long term collaboration, participation , training , maintenance and service of air injection equipment. The Bench of Kul Bharat, (Judicial Member) and B. R. R. Kumar (Accountant Member) held that the ONGC personnel and ONGC institute could not independently conduct the test in the absence of the research team from University of Calgary, Alberta, Canada and the invocation of make available clause was wrong on facts on record and in the absence of technical expertise , being made available by the non-resident assessee to ONGC in India , the payments could not be treated as FTS. The bench allowed the appeal observing that the ” fees for included services’ ‘ as defined in the said Article 12 had fulfilled the conditions. Business support services is not ‘Technical service’ as ‘make available’ clause not satisfied under DTAA: ITAT deletes addition Michael Page International Pte Limited vs Deputy Commissioner of Income-tax CITATION: 2023 TAXSCAN (ITAT) 179 The Mumbai bench of Income Tax Appellate Tribunal ( ITAT ) deleted the addition made by the Assessing Officer (AO) stating addition made on account of fee for technical services is unsustainable. The “make available” clause of the Indo-Singapore tax treaty cannot be invoked under the facts of the current case, according to the bench of Gagan Goyal (accountant member) and Vikas Awasthy (judicial member), which recognized in the case of Shell Global International Solution BV vs. ITO. The revenue has not even established that providing these services to the Indian entity resulted in any transfer of technology or skill. Consideration for Advisory Services does not amount to FTS under Indo-US Treaty, Not Taxable: Calcutta HC COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION & TRANSFER PRICING) vs M/S. THE TIMKEN COMPANY CITATION: 2023 TAXSCAN (HC) 162 The Calcutta High Court (HC) held that consideration for advisory services does not amount to FTS and cannot be treated as Fees for Included Services under Article 12(4)(b) of the India-US Double Taxation Avoidance Agreement (DTAA). The Court thus upheld the ITAT’s order setting aside the additions made to the foreign assessee Company’s income for the compensation received by it for rendering advisory services to its Indian subsidiary.While dismissing the appeal of the Revenue, the bench held that “the finding having been rendered after a thorough examination of the factual position as well as the terms and conditions of the agreement qua Article 12(4)(b) of the Indo-USTreaty, we find no ground to take a different view.” High Court can’t decide on Tax ability of Payments received from Indian Customers on Centralized Services When Appeal pending before Supreme Court: Delhi HC THE COMMISSIONER OF INCOME TAX vs WESTIN HOTEL MANAGEMENT LP CITATION: 2022 TAXSCAN (HC) 990 The Delhi High Court has held that High Court can’t decide on the taxability of payments received from Indian Customers on Centralized Services which was already pending appeal before the supreme court. It was observed that the already decided matter which was challenged before the supreme court and was pending can’t be decided by the same court. While dismissing the petition, the Court held that “though the judgment of this Court has been challenged and is pending adjudication before the Supreme Court, yet there is no stay of the said judgment till date.” Relief to Radisson Hotel Interaction Incorporated: Delhi HC holds Receipts of assessee from various activities of Hotel Management constitute Fee for Technical Services THE COMMISSIONER OF INCOME TAX vs RADISSON HOTEL INTERACTION INCORPORATED CITATION: 2022 TAXSCAN (HC) 900 The Delhi High Court granted relief to Radisson Hotel Interaction Incorporated and reiterated that Receipts of assessee from various activities of hotel management constitute ‘Fee for Technical Services. A Bench consisting of Justice Manmohan and Justice Manmeet Pritam Singh Arora observed that “Accordingly, no substantial question of law arises for consideration in the present appeal and the same is dismissed. However, it is clarified that the orders passed in the present appeal shall abide by the final decision of the Supreme Court in the aforesaid Civil Appeal.” Relief for Air India: No TDS on Rental of Aircraft Engine as per DTAA, says ITAT Air India Limited vs ITO CITATION: 2021 TAXSCAN (ITAT) 464 In a major relief to Air India, the Income Tax Appellate Tribunal (ITAT), Delhi Bench ruled that the Technical Services Fee does to include the amount paid for ancillary and subsidiary service to the rental of ships as per Double Taxation Avoidance Agreement (DTAA) between India and Neitherland. we are of the considered view that ld. CIT (A) has erred in holding that in this case, provisions contained u/s 206AA overrides beneficial provisions of DTAA between India and Neitherland. Consequently, the assessee has rightly deducted the tax @ 10% as per provisions contained under DTAA as section 206AA cannot have an overriding effect on DTAA, hence no demand is payable by the assessee. Hence, the question framed is decided in favour of the assessee,” the ITAT said. Income From Cloud Hosting Services not Taxable under the head ‘Royalty’, rules ITAT Rackspace, US Inc vs DCIT CITATION: 2020 TAXSCAN (ITAT) 109 The Income Tax Appellate Tribunal (ITAT), Mumbai has ruled that, Income From Cloud Hosting Services not Taxable under the head ‘Royalty’. The ITAT bench comprising of Judicial member Amarjit Singh and Accountant member M.Balaganesh while allowing the appeal held that, “the assessee and its customer is for providing hosting and other ancillary services to the customer and not for the use of / leasing of any equipment. The Data Centre and the Infrastructure therein is used to provide these services belong to the assessee. The customers do not have physical control or possession over the servers and right to operate and manage this infrastructure/servers vest solely with the assessee. The agreements entered into the service level agreements. The agreement is to provide hosting services simpliciter and is not for the purpose of giving the underlying equipment on higher or lease. The customer is not even aware of the specific location of the server in the Data Centre where the customer application, webmail, websites etc. In view of these facts, we are of the view that income from cloud hosting services has erroneously held as royalty within the meaning of explanation (2) to section 9(1)(vi) of the Act as well as Article 12(3)(b) of the Indo-USA DTAA by the AO and DRP. Even otherwise, there is no PE of the assessee in India and hence, no income can be taxed in India in terms of Indo-US DTAA. Fee for Legal Services paid to a Foreign Lawyer for Representation in Foreign Court not FTS: ITAT The Delhi bench of the Income Tax Appellate Tribunal (ITAT) has held that the amount paid to a foreign lawyer as the fee for representing before a Foreign Court cannot be treated as Fee for Technical Services. On second appeal, the Tribunal held that “the assessee provided of professional legal services before a foreign court, which cannot be brought to tax as FIS under Article 12 of the India-USA DTAA, because there is no make available of any particular knowledge or skill to ONGC before the courts which can enable ONGC to represent its case in future. Under Section 9(1)(vii) legal services cannot be treated as FTS as it is a professional service which is outside the scope of Section 9(1)(vii) of the Act. In A.Y. 2009-10, the Tribunal held that the said legal services are not taxable as FTS u/s 9(1)(vii) of the Act.” Membership Fee and Contribution Received by IZA Belgium from the Indian members not Taxable in India: AAR The New Delhi Bench of the Authority of Advance Rulings (AAR) in the application filed by International Zinc Association held that membership fee and contribution from members received by the applicant from the Indian members would not be liable to Income-tax in India under the provisions of the Income Tax Act, 1961 or the India-Belgium DTAA. The Authority after going through the rival contentions was of the opinion “that for a PE to come into existence, within the meaning of Article 5 of the said DTAA, in the first place there should be a fixed place of business through which the business of an enterprise is wholly or partly carried on. Once we hold that the Applicant works on the principle of mutuality and is not an enterprise set up for the purpose of doing business or earning profit, the question of any PE coming into existence does not arise.” Hence, membership fee and contribution from members received by the applicant from the Indian members would not be liable to Income-tax in India under the provisions of the Income-tax Act, 1961 or the India-Belgium DTAA. Fee Received by MasterCard from Indian Customers Taxable as ‘Royalty’ not FTS as per Indo-Singapore DTAA: AAR In Re: M/s MasterCard Asia Pacific Pte. Ltd. CITATION: 2018 TAXSCAN (AAR) 101 The Authority of Advance Rulings, New Delhi in the application filed by the applicant Mastercard Asia Pacific Pte. Ltd. constituting of Mr. R.S. Shukla as the Chairman and Mr. Ashutosh Chandra as the Member held that fees received by the services of MasterCard from Indian customers are taxable as “Royalty” and not “Fees from Technical Services”.Hence, the Authority ruled against the applicant’s contention that the license was incidental to the major activity of transaction processing. The payment was hence held to be ‘royalty’ and would get taxed with the PE under Article 7 and not under Article 12. As already adjudged, that the fees arising out of PE and hence, will be taxed as business income through the PE. Income from use of ‘Maersk Net’ is not Taxable in India as ‘Fee for Technical Service’ as per Indo-Denmark DTAA: SC The two-judge bench of the Supreme Court in DIT(IT) v. A.P. Moller Maersk A S, categorically held that the income from the use of Global Telecommunication Facility called ‘Maersk Net’ can be classified as income arising out of shipping business and not as fees for technical services. The bench comprising of Justice A.K Sikri and Justice Abhay Manohar Sapre was hearing a bunch of appeals filed by the Revenue against the order of the Bombay High Court. It was also noted that the AO, as per the relevant DTAA, has already allowed exemption to the assessee for the freight income arises from the operation of ships in international waters.“Once that is accepted and it is also found that the Maersk Net System is an integral part of the shipping business and the business cannot be conducted without the same, which was allowed to be used by the agents of the assessee as well in order to enable them to discharge their role more effectively as agents, it is only a facility that was allowed to be shared by the agents. By no stretch of imagination it can be treated as any technical services provided to the agents.In such a situation, ‘profit’ from operation of ships under Article 19 of DTAA would necessarily include expenses for earning that income and cannot be separated, more so, when it is found that the business cannot be run without these expenses.” Mere providing Access to CRS would not constitute Royalty, No TDS: ITAT Renaissance Services BV vs Asst. Commissioner of Income-Tax CITATION: 2022 TAXSCAN (ITAT) 936 The Mumbai bench of Income Tax Appellate Tribunal comprising Shri M Balaganesh, accountant member & Shri Kuldip Singh, judicial member has held that mere providing access to CRS would not constitute Royalty and TDS not sustainable.The Tribunal found that the assessee had been rendering only training services and Computer reservation systems services and the claim of the assessee that the reimbursement of expenses would pertain only to the training and CRS activities, deserves to be accepted. The Coram held that the receipts of the assessee from training services and computer reservation services including reimbursements shall not be chargeable to tax both under the Act as well as under the Treaty. The appeal filed by the assessee was allowed and appeal by the revenue got dismissed. Interest Income earned by enterprises in Other Jurisdictions is Taxable, if attributable to the PE: ITAT Marubeni Corporation, Japan vs Deputy Commissioner of Income Tax CITATION: 2022 TAXSCAN (ITAT) 847 In a ruling, in favour of Marubeni Corporation India Pvt. Ltd, the Mumbai bench of Income Tax Appellant Tribunal has held that Interest income earned by the enterprise in other jurisdictions is taxable if it is attributable to the permanent establishment.Pramod Kumar (Vice President), and Sandeep S Karhail (Judicial Member upheld the order of CIT(A) and dismissed the appeal filed by the revenue. Milind Chavan appeared for the appellant and Ravi Sharma appeared for the respondent. Set Back to Infosys; Payment of Sub-Contracting Charges to Subsidiary is Liable to TDS: ITAT M/s.Infosys Limited vs The Deputy Commissioner of Income-tax CITATION: 2022 TAXSCAN (ITAT) 377 The Bangalore bench of Income Tax Appellate Tribunal ( ITAT ) has held that payment of sub-contracting charges to subsidiary is liable to Tax Deduction at Source. The Coram of Sri George George K and Ms. Padmavathy S by giving reliance to the decisions of Nagarjuna Fertilizers and Chemicals Ltd. v. ACIT, held that “we hold that the applicable TDS on subcontracting charges paid to Infosys China should be considered at 10% as per the India-China DTAA instead of 20% as per section 206AA of the I.T.Act”. ONGC need not deduct TDS for Payment towards third-party certification of Reserves to US Company: ITAT The Income Tax Appellate Tribunal (ITAT), Delhi bench has held that the Oil and Natural Gas Corporation ( ONGC ) is not liable to deduct tax on making payments to a US Company towards third-party certification of Reserves as the same cannot be deemed as Fee for technical services. On the second appeal, the Tribunal relied on the orders of the Tribunal in the case of the assessee itself for the assessment year 2012-13 and assessment year 2011-12 on the issue of deduction of tax at source in the case of the same non-resident. Relying on the above orders, the Tribunal held that no technical knowledge, skill, know-how etc was made available to the assessee and thus the payment in question cannot be termed as a fee for included services under India USA DTAA. Payments received from Indian Hotel Owner for provision of GRS is Business Income: AAR The New Delhi Bench of Authority of Advance Rulings in the application made by FRS Hotel Group (Lux) S.a.r.l. (Now FRHI Hotels & Resorts S.a.r.l.) held that payments received by the applicant from the Indian hotel owner for provision of Global Reservation Services (GRS) would be chargeable to tax in India under section 9(1)(i) read with Articles 5 and 7 of the India-Luxembourg DTAA as business income and is attributable to the Applicant’s permanent establishment (PE) in India. Also, the question whether it can be characterized as “royalty” or “fees for technical services‟ becomes wholly academic. Even if the income is characterized as either of these two, by virtue of para 4 of Article 12, the income would still be taxable as “business profits” under Article 7. Salary Paid under Secondment Agreement Not subject to TDS: Bombay HC In DIT (International Taxation) v. M/s Marks and Spencer Reliance India Pvt Ltd, the division bench of the Bombay High Court held that TDS cannot be charged on payment of salary under a secondment agreement. Assessing Officer, in the instant case, found the respondent-assessee had paid Rs.4.83 crore to Marks & Spencer’s PLC London, which, according to him, constitutes fee for technical services as per the provisions of the Double Taxation Avoidance Agreement (DTAA).Dismissing the departmental appeal, Justices S.C Dharmadhikari and Prakash Naik noted that “this was a clear case of deputing the officials / employees for the promotion of the business of the assessee which is Indian arm of M/s. Marks & Spencer PLC, UK. Since the said payment to the employees is already subjected to tax in India, therefore there is no question of treating the assessee in default for non deduction of tax at source.” Commission Paid to Non-Resident Agents is not Taxable in the absence of PE in India: ITAT Ahmedabad In Deputy Commissioner of Income Tax (International Taxation) Ahmedabad v. Welspun Corporation Limited, the division bench of the Ahmedabad ITAT held that the commission paid to non-resident agents is not taxable in India when there is no Permanent Establishment can be attributed. It was further observed that the payments made by assessee for services rendered by non-resident agents cannot be categorized as fees for payment for technical services, these payments were in nature of commission earned from services rendered outside India which had no tax implications in India. Profits earned by rendering fees for technical services are only a species of business profits just as the profits any other economic activity. However, without the character of such receipts in the nature of business receipts being altered, the fee for technical services is dealt with separately in some treaties for the reason because, under those treaties the related contracting states proceed on the basis that even in the absence of the permanent establishment or fixed base requirements, the receipts of this nature can be taxed, on gross basis, at the agreed tax rate, and, to that extent, such receipts does not fall in line with the scheme of taxation of business profits under art. 7 and professional income under 14. It is interesting to note that the moment the threshold limits for permanent establishment or fixed base, as the case may be, is satisfied, the taxability shifts on net basis as business profits or professional (independent personal services) income. The business receipts or professional receipts thus cannot be seen in isolation with the fees for technical services. Its only the fact of, and mode of, taxation in the absence of PE or fixed base, which gets affected as a result of the fees for technical services. When there is an FTS clause, the FTS gets taxed even in the absence of the PE or the fixed base, but the character of FTS receipt is the same, i.e. business income or professional (independent personal) income, in the hands of the same. When there is no FTS clause, this sub categorization of income becomes irrelevant, because FTS or any other business receipt, the income embedded in such receipts gets taxed only if there is a permanent establishment or fixed base- as the case may be. The scope of business profit and independent personal service completely covers the fees for technical services as well. With FTS article or without FTS article, the income by way of fees of technical services continues to be dealt with the provisions of articles relating to business profits, independent personal services, and additionally, in the event of existence of an FTS article, with the article relating to the fees for technical services. Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates

Case Digest: Fee for Technical Service (FTS) and Double Taxation Avoidance Agreement (DTAAs)

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