The Delhi bench of Income Tax Appellate Tribual ( ITAT ) recently in a case held that routine support services are not to be classified under “Fee for Technical Services” ( FTS ) under the India-UK Double Taxation Avoidance Agreement ( DTAA ), and thus are not liable to taxation in India.
Nord Anglia Education Ltd, the assessee/appellant is an international school organization incorporated and tax-resident in the United Kingdom, operating over 80 premium schools in 31 countries.
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In India, the assessee provides various management and support services to five schools managed by four different societies: Oakridge Educational Society, Orange Educational Society (Karnataka and Punjab), and Vikas Education Society.
During the assessment year, the assessee had a service agreement with its Indian group entity, PBIL, to provide centralized administrative services such as marketing, human resources, finance, IT support, and facilities management.
For these services, the assessee received a payment of ₹ 28,64,22,509 from PBIL.
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However, the receipts for routine services provided to PBIL were not offered to tax in India, relying on Section 90(2) of the tax statute and Article 13(4)(c) of the India-UK DTAA, as these services did not make available any technical knowledge or skills to PBIL.
Hence, the income from cross charges was claimed as exempt.
During the assessment proceedings, the Assessing Officer (AO) took the view that the payments received by the assessee from PBIL for routine support services should be classified as FTS under the India-UK DTAA, making them taxable in India under Section 9 of the Income Tax Act and Article 13 of the India-UK DTAA.
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The AO’s argument rested on the premise that the services rendered by the assessee, such as marketing and human resources, involved the transfer of technical knowledge or skills, thus satisfying the ‘make available’ test under the DTAA.
The AO issued a draft assessment order, proposing an addition of ₹ 28,64,22,509 to the assessee’s income.
The assessee objected to this draft order, contending that the services provided were routine, non-technical in nature, and did not result in any technology or skill being made available to PBIL, thus failing the ‘make available’ test under the DTAA.
The assessee’s objections were presented before the Dispute Resolution Panel (DRP), which reviewed the evidence produced by the assessee.
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Despite the assessee’s submission that the services did not constitute technical services under the DTAA, the DRP upheld the AO’s position, drawing the inference that the services indeed did enhance the knowledge and skill base of PBIL’s employees.
On June 27, 2023, the AO issued the final assessment order, incorporating the DRP’s directions and treating the payments received by the assessee from PBIL as FTS, taxable in India.
Additionally, penalty proceedings under Section 270A of ITA were initiated against the assessee for under-reporting its income.
Aggrieved by the final assessment order, the assessee appealed to the ITAT.
Before the tribunal, the assessee reiterated its position that the services provided to PBIL were routine administrative support services that did not involve the transfer of technical knowledge or skills and, therefore, should not be taxed as FTS under the DTAA.
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The assessee cited the case of Global Schools Holdings Pte. Ltd. vs. ACIT, where similar services were not considered FTS.
After examining the case details and the submissions made by the assessee, the bench of Mr Saktijit Dey and Dr. B. R. R. Kumar determined that the AO and DRP had misclassified the nature of the services rendered by the assessee.
The Tribunal observed that there was no conclusive evidence to demonstrate that the services provided resulted in any enduring benefit to PBIL or that they met the ‘make available’ test under the DTAA.
The Tribunal noted that routine support services, such as those provided by the assessee, do not typically qualify as technical services under the DTAA unless they involve the transfer of technical knowledge or skills that enable the recipient to perform the services independently in the future.
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Based on its observations, the Tribunal concluded that the payments received by the assessee from PBIL should not be classified as FTS under the India-UK DTAA and, therefore, are not taxable in India.
The Tribunal allowed the appeal in favor of the assessee, setting aside the AO’s final assessment order and nullifying the penalty proceedings initiated under Section 270A of ITA.
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