The Delhi bench of the Income Tax Appellate Tribunal (ITAT) has ruled that sub-contracting charges are not taxable in India if no technical knowledge is transferred to the Indian entity and held that the assessee in this case, a United States based company, did not make available any technical knowledge to its Indian subsidiary, and therefore the sub-contracting charges were not taxable in India.
The assessee, SPI Global Services Inc, a US-based e-publishing company, sub-contracted services to India’s SPi India in 2019. The assessee received sub-contracting charges, which were assessed as “fees for included services” under Article 12(4) of the India-United States of America Double Taxation Avoidance Agreement.
The Assessing Officer found that the assessee provided technical knowledge to SPi India, making the sub-contracting charges taxable in India. The assessee appealed the AO’s decision to the Tribunal.
The assessee argued that sub-contracting charges did not qualify as “fees for included services” under Article 12(4) of the DTAA. They also claimed they did not provide technical knowledge to SPi India and their services were similar to those offered by SPi India and the Tribunal’s decision in LW US was binding on the AO.
The AO argued that sub-contracting charges were “fees for included services” under Article 12(4) of the DTAA. They argued that the assessee provided technical knowledge to SPi India, but the services they could provide were not relevant and the Tribunal’s decision in LW US was not binding on the AO.
The Tribunal observed that the assessee provided editorial services without technical knowledge transfer, but did not provide documentation supporting its claim. The services were similar to SPi India’s, suggesting SPi India did not need to rely on the assessee’s technical knowledge for performance.
In the case of Mahindra and Mahindra Ltd. vs. Dy. CIT (2009) the Mumbai Bench of the Tribunal held that where the payer only obtained the benefit from the services but did not get any technical knowledge experience or skill in its possession for future use, it cannot be said that technical know-how was made available.
The Tribunal noted that the DRP in the case of LW US had held that the sub-contracting charges in that case were not taxable in India as per the provisions of India-USA DTAA. The Tribunal found that the facts of the two cases were similar, and therefore it was bound by the decision of the DRP in the case of LW US.
The Two-member bench comprising G.S. Pannu (President) and Astha Chandra (Judicial Member) ruled that sub-contracting charges received by the assessee from SPi India are not taxable in India under the India-USA DTAA. The assessee did not provide any technical knowledge, experience, skill, know-how, or processes to SPi India, resulting in the sub-contracting charges not being considered “fees for included services” under Article 12(4) of the DTAA.
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