The Delhi Bench of Income Tax Appellate Tribunal (ITAT) held that the services rendered under IT & SAP service agreement are different from technical collaboration agreement. Thus the receipt of IT & SAP service is not treated as Fees for Technical service (FTS) under India-Israel Double Taxation Avoidance Agreement (DTAA).
The assessee Netafim Ltd is a non-resident corporate entity incorporated in Israel and a tax resident of Israel opted to be governed by India – Israel DTAA. In the course of assessment proceeding, the Assessing Officer (AO) noticed that, in addition to the royalty income, the assessee has also received certain fees/charges towards provision of IT support and SAP services under IT and SAP service agreement entered with the Indian subsidiary.
The assessee explained that IT and SAP service agreement should not be treated as FTS, is that since while rendering services under IT and SAP service agreement, the assessee had not made available any technical knowledge, know-how, skill etc, the receipts cannot be treated as FTS.
The assessee contended that the Most Favoured Nation (MFN) Clause under the Protocol to India – Israel DTAA will not be available to the assessee unless and until the Government of India issues a notification specifically stating that more restricted definition/scope of India – Portugal would be applicable to India – Israel DTAA.
The Assessing Officer (AO) however did not accept the submission of the assessee and held that since, Article 13 of India – Israel DTAA does not contain any ‘make available’ condition and the services for which the amounts were received, fall within the ambit of Article 13(3) of India – Israel DTAA, the receipts are taxable in India.
The assessee filed an appeal before Commissioner of Income Tax (Appeals) [CIT (A)] where it was observed that since the receipts of IT and SAP would fall under Article 12(4)(a) of India – Portugal DTAA, the ‘make available’ condition under Article 12(4)(b) of the said treaty would not apply. Aggrieved by the order appeal was filed before the ITAT.
The Counsel appearing for the assessee submitted that there is no linkage between the IT and SAP Service Agreement and the Technical Collaboration Agreement, further he contended IT and SAP Service Agreement existed prior to the Technical Collaboration Agreement, which clearly demonstrates that two agreements have no connection with each other.
The Departmental Representative submitted that the services rendered under IT and SAP service agreement are ancillary and subsidiary to the Technical Collaboration agreement, to this he added that some of the services may be related to transfer of technical know-how, knowledge etc., which resulted in royalty income.
The ITAT Bench comprising of Shri G.S. Pannu, President and Shri Saktijit Dey, Judicial Member observed that to qualify FTS under Article 12(4)(a) of India – Portugal Tax Treaty therein, two conditions have to be satisfied. Firstly, the services giving rise to the fees must be ancillary and subsidiary, and secondly, it must be connected to the application or enjoyment of right, property, or information which results in payment of royalty.
The Tribunal noted that IT and SAP support service agreement are completely different in nature and have no connection with the services rendered under the Technical Collaboration Agreement. Thus, the bench concluded that the IT and SAP Service receipts cannot be treated as FTS under Article 12(4)(a) of India – Portugal DTAA.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
