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 assessee,Bain & Company was a non-resident corporate entity and a tax resident of the USA. As stated by the Assessing Officer, the assessee was engaged in the business of providing consultancy services to global clients based in the USA or having USA operations. The assessee also provided support services to other group entities for which it was remunerated at arm’s length basis.
During the course of assessment proceedings, the Assessing Officer observed that as per the return of income, assessee had offered to tax royalty income received from Bain and Company India Pvt. Ltd. (Bain India) and interest on income-tax refund. However, he observed that an amount received from its Indian affiliate towards provisions of consultancy services was not offered to tax on the plea that they were not in the nature of FIS.
After examining the nature and scope of services, the Assessing Officer observed that as per Article 12(4) of India-US Tax Treaty, the amount received for providing managerial, technical or consultancy services, could be regarded as FIS. Thus, he held that since the fee received by the assessee was from consultancy services, it had to be treated as FIS under Article 12(4) of the Tax Treaty.
While coming to such conclusion, he further held that the assessee had made available technical knowhow, knowledge, skill etc. relating to such services to the service recipient. On the basis of aforesaid reasoning, the Assessing Officer treated the amount as the income of the assessee and added back to the income declared.
Himanshu Sinha, on behalf of the assessee submitted that the assessee had entered into a Consulting Services Agreement with the affiliate on Ist April, 2010. He submitted, under the terms of the agreement, the assessee had provided professional management consulting services, clients engagement including market research, strategic research etc. He submitted that, as per the terms of the agreement, either the assessee could itself provide such services or could also outsource some of the work to freelance consultants and agents.
He further submitted that in the first place, the services provided by the assessee were basic business advisory services, hence, not technical in nature and nontechnical consultancy services were not covered under Article 12(4)(b) of the Tax Treaty, therefore, the conditions of Article 12(4)(b) of the Tax Treaty were not satisfied
Vizay B. Vasanta, on behalf of the revenue submitted that as per the terms of the agreement, the nature of services provided by the assessee were technical or consultancy services, hence, covered under the definition of FIS under Article 12(4)(b) of the Tax Treaty. He further submitted, while rendering such services, assessee had also made available the technical knowledge, skill etc. to its affiliate. Thus, he submitted that , the receipts squarely fell within the ambit of Article 12(4)(b) of the Tax Treaty.
The two-member Bench of G.S. Pannu, (President) and Saktijit Dey, (Vice-President) noted that the departmental authorities had not brought any material on record to demonstrate that while rendering services, the assessee had made available technical knowledge, expertise, skill, knowhow etc. to Bain India to apply such technology, knowhow etc. independently without the aid and assistance of the assessee and the Memorandum of Understanding to India-USA DTAA, a receipt could not be treated as FTS merely because the service provider while providing consultancy services had used substantial technical skill and expertise.
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.
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