Consultancy Services Not Taxable as FIS under Article 12 of India-US DTAA: ITAT [Read Order]

The Delhi bench of Income Tax Appellate Tribunal ( ITAT ) reversed the decisions of the Assessing Officer (AO) and Dispute Resolution Panel ( DRP ), ruling that consultancy services are not taxable as Fees for Included Services ( FIS ) under Article 12 of the India-USA Double Taxation Avoidance Agreement ( DTAA ).

Korn Ferry, the appellant-assessee company incorporated under the U.S laws and engaged in consultancy and professional services, received Rs. 5.16 crore as a product license fee, which was taxed as royalty. The company claimed Rs. 5.59 crore in consultancy fees, Rs. 1.68 crore in referral fees, and Rs. 55.29 lakh in general management charges as non-taxable under the DTAA based on the definition of FIS.

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The assessee claimed that they provided consultancy services in areas such as organizational strategy, assessment and cessation, talent acquisition, leadership and professional development, evaluation of rewards and benefits (including ESOPs and compensation), and payment structures.

The AO determined that the amount of Rs. 7.18 crore falls under the definition of FIS according to Article 12 of the DTAA and upon reviewing the submissions and sample invoices provided by the assessee, found that the company offered consulting services in several areas, including developing talent mapping strategies, assisting with organizational structures, assessing and bridging talent gaps, and attracting and retaining leadership and professional development talent.

The AO reviewed the submission by the assessee regarding the taxability of their services in India. The assessee argued that their services do not make available knowledge or expertise to the group company in India, which should exempt them from taxation under the "make available" clause.

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The AO concluded that the consultancy services offered by the assessee assist clients in hiring, rewarding, and motivating their workforce, as well as developing comprehensive strategies, organizational structures, and talent programs. Therefore, the AO determined that these services, which contribute to the comprehensive development of the client's organization, are taxable in India.

The AO concluded that the assessee's services improved clients' performance and business development. The training, provided by qualified experts and customized to client needs, empowered clients to solve their own problems.

The assessee, dissatisfied by the AO’s decision, appealed before the DRP. The DRP agreed with the decision of AO that “ the make available” clause was fulfilled. The assessee being aggrieved by the DRP’s decision appealed before the tribunal.

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The Tribunal contended that for services to qualify as FIS under the India-USA DTAA, the recipient must be able to use the technical knowledge independently without further assistance from the provider. Merely having expertise in consulting does not make technology available to the recipient.

Further stated that in this case, The assessee's consultancy services did not transfer knowledge or skills allowing clients to operate independently. Clients needed to return for continued support, so the "make available" condition was not met.

The tribunal reviewed the services provided to Deloitte and Flipkart, including work orders and project details, and found no technical knowledge was transferred. The ESOP review process is ongoing and does not involve permanent technical inputs.

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The two member bench comprising Anubhav Sharma (Judicial Member) and Dr.B.B.R Kumar (Accountant Member) based on the agreements and conduct, contended that the "make available" requirement was not met. Therefore, the services do not qualify as FIS under Article 12(4)(b) of the India-USA DTAA.

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