Costs cross-charges are not FTS and FIS: Delhi HC Sets aside order rejecting Application for ‘NIL’ withholding tax [Read Order]

The Delhi High Court has set aside the order rejecting application for ‘Nil’ withholding tax holding that costs cross- charge are not technical services [FTS] within the meaning of Section 9(1)(vii) of the Act or ‘fees for included services’ [FIS] under Article 12(4) of the India USA Double Taxation Avoidance Agreement [India-US DTAA].

The petitioner, Aecom Technical Services Inc. has filed the present petition, inter alia, impugning an order dated 26.07.2024 [impugned order] passed by the Assessing Officer [AO] under Section 197 of the Income Tax Act, 1961 [Act], whereby the petitioner’s application for ‘NIL’ withholding tax, was rejected. However, the AO had held that the deductors are authorised to withhold tax at the rate of 15% (including surcharge and cess) on the payment of ₹114,90,00,000/-. 

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The petitioner is a company incorporated in the United States of America and is also a tax resident of that country. The petitioner had entered into an agreement dated 01.04.2021 with its Associate Enterprise [AE] - AECOM India Private Limited [AIPL] and the agreement dated 01.04.2023 with its AE – AECOM India Global Services Private Limited [AIGSPL].

The petitioner states that it is engaged in the business of design and consultancy services, construction management and infrastructure development. In terms of the agreements with the AEs, the petitioner provided management and governance supports functions in the area of legal, tax, treasury, finance, information technology, human resources, enterprise risk management, etc.

The description of the corporate services agreed to be rendered by the petitioner in terms of the aforementioned agreements with AIPL and AIGSPL are set out in the Annexures to the respective agreements. The same indicate that the petitioner had agreed to provide overall management services in the field of finance, accounting and tax; human resources; legal and compliance; real estate; management and operations; marketing and communications; risk and safety management; information technology and digital solutions; quality, and procurement.

The petitioner filed the application dated 08.05.2024 under Section 197 of the Act seeking the ‘nil’ withholding tax certificate. The petitioner states that costs cross charges are reimbursement of costs on cost-to-cost basis and contends the same are not chargeable to tax under the Act. The petitioner also set out in detail its explanation as to why cost cross charged in terms of the aforesaid agreements are not fees for technical services [FTS] within the meaning of Section 9(1)(vii) of the Act or ‘fees for included services’ [FIS] under Article 12(4) of the India USA Double Taxation Avoidance Agreement [India-US DTAA].

The petitioner has annexed sample invoices for the cross charges, which are receivables during the year. According to the petitioner, the projected receipts from AIPL are ₹41,00,00,000/-, and from AIGSPL are ₹73,90,00,000/- [aggregate amount of ₹1,14,90,00,000/-]. 

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The AO rejected the aforesaid application by the impugned order. The AO noted the services rendered by the petitioner as well as the submissions made by the petitioner and observed “services are highly technical, managerial as well as consultancy in nature which require special skills and technical qualifications”. The AO also concluded that “the services rendered by the assessee do make available knowledge, experience, know-how to the recipient and this is clearly visible when one examines the nature of the services rendered and the consequential benefits obtained by the recipient”.

The AO concluded that the charges paid to the petitioner by its AEs are taxable as FTS and FIS. In so far as the IT infrastructure and software development is concerned, the petitioner had explained it maintains the network connectivity and ensures that the business of AIPL and AIGSPL is being maintained and run at optimum effectiveness and maximum security.

The same would include the applications and software, which are used by the professionals of AIPL and AIGSPL. However, the assumption that there is any transfer of right in relation to the said software or applications to AIPL and AIGSPL is not supported by any material on record.

Although the petitioner has also stated that it provided the software development services with respect to the various software applications, which are used by AIPL and AIGSPL in their businesses. However, there is nothing on record to indicate that the AEs acquired any rights in relation to these software and applications developed by the petitioner.

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The AO also observed that part of the charges was taxable as royalties. The said information was premised on the basis that the petitioner centrally procured software / tools for joint use by its AE. The AO reasoned that cross charges would thus, be the reimbursement of the actual cost of such software / tools and, therefore, taxed as royalty.

A division Justice Vibhu Bakhru and Justice Tejas Karia set aside the impugned order and directed the AO to issue the necessary certificate or ‘NIL’ withholding Tax Certificate in respect of the cross-cost charges as received by the petitioner from AIPL and AIGSPL.

To Read the full text of the Order CLICK HERE

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