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2023 (7) TMI 1573 - AT - Income TaxIncome chargeable to tax in India - Taxability of amount received for Consulting and Engineering services as Fees for technical services (FTS) - HELD THAT - We observed that similar issues were considered and adjudicated by the Coordinate Bench in assessee s own case for the A.Y. 2012-13 2019 (4) TMI 605 - ITAT MUMBAI and decided the issue in favour of the assessee as held the amount received towards consulting engineering services to be not in the nature of fees for technical services as discussed above we hold that the amount received towards cost recharge cannot be brought to tax in India in the absence of PE. Decided in favour of assessee.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered in the appeal are: (i) Whether the amount received by the assessee for consulting and engineering services qualifies as Fees for Technical Services (FTS) under Article 13 of the India-UK Double Taxation Avoidance Agreement (DTAA), or whether it should be treated as business income not taxable in India in the absence of a Permanent Establishment (PE). (ii) Whether the amount received as management fees and common cost recharge constitutes Royalty or Fees for Technical Services under Article 13 of the India-UK DTAA, or whether it is business income not taxable in India due to lack of PE. (iii) Whether the tax rate of 15% applied under the India-UK DTAA is erroneous, and if a beneficial rate of approximately 10.6% under the Income-tax Act, 1961 should apply. (iv) Whether the consequential interest levied under Section 234B of the Income-tax Act is justified. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Taxability of Consulting and Engineering Services as Fees for Technical Services (FTS) Legal Framework and Precedents: The interpretation hinges on Article 13 of the India-UK DTAA, particularly Article 13(4)(c), which defines Fees for Technical Services as payments for rendering technical or consultancy services that either:
Section 90(2) of the Income-tax Act mandates application of treaty provisions if more beneficial. Precedents include the Coordinate Bench's decision for AY 2012-13 in the assessee's own case, which held that mere supply of project-specific technical designs/drawings/plans does not amount to making available technical knowledge or knowhow, and thus does not constitute FTS. The Pune Bench's decision in Gera Developments Pvt. Ltd. v/s DCIT was also cited, holding that unless technical expertise or knowledge is transferred enabling independent use, payments cannot be treated as FTS. Court's Interpretation and Reasoning: The Court examined whether the development and transfer of technical plans or designs simpliciter, without making available technical knowledge or processes, fall within FTS. The Court rejected the Assessing Officer's interpretation that the second limb of Article 13(4)(c) operates independently. Applying the ejusdem generis rule, the Court held that the phrase "development and transfer of a technical plan or technical design" must be read in conjunction with "make available technical knowledge, experience, skill, knowhow or processes." The Court further analyzed whether the assessee made available such technical knowledge or knowhow. It noted that the technical designs/drawings/plans supplied were project-specific and could not be used independently by the Indian entity for other projects. Therefore, the technical knowledge or skill did not remain with the recipient post-service, which is a settled test for "making available" technology. Key Evidence and Findings: The agreements showed that the assessee provided consulting engineering services including technical designs/drawings/plans for specific projects. The technical information was not transferable for independent use beyond the immediate project. The Department did not provide evidence to establish that technical knowledge or processes were made available. Application of Law to Facts: Given the absence of transfer of usable technical knowledge or knowhow, the payments for consulting engineering services were held to be business profits under Article 7 of the DTAA, not FTS under Article 13. In the absence of a PE in India, such business profits are not taxable in India. Treatment of Competing Arguments: The Department argued that the second limb of Article 13(4)(c) does not require "making available" and that the payments fall within FTS. The Court rejected this, emphasizing the ejusdem generis principle and the necessity of "making available" technical knowledge. The Department's failure to prove the transfer of technical knowledge was decisive. Conclusion: The amount received for consulting and engineering services is not FTS but business income not taxable in India due to absence of PE. Issue (ii): Taxability of Management Fees and Common Cost Recharge as Royalty and Fees for Technical Services (FTS) Legal Framework and Precedents: Article 13 of the India-UK DTAA covers Royalty and Fees for Technical Services. The definition of FTS applies to payments for technical or consultancy services that make available technical knowledge, skill, or processes. Management fees and cost recharges, typically relating to administrative, IT, HR, finance, legal, and project management support, are generally considered business income unless they involve transfer of technical knowledge or right to use intellectual property. Court's Interpretation and Reasoning: Following the reasoning on consulting services, the Court held that since the cost recharges were ancillary and incidental to consulting engineering services, and given that consulting services were not FTS, the cost recharges could not be treated as FTS or Royalty. The Court examined the nature of services performed (IT management, business development, finance, HR, legal, operations, project management) and concluded these are managerial or business functions, not technical services making available technical knowledge or processes. Key Evidence and Findings: The assessee incurred common expenses for group-wide services and recharged these to Indian entities with a markup. The services did not involve transfer of technical knowledge or intellectual property rights. The Department contended that the recharge related to use of the trademark or brand name 'Buro Happold' and thus constituted Royalty, but the Court found this unsubstantiated and contrary to the nature of services described. Application of Law to Facts: Since the management fees and cost recharges did not make available technical knowledge or processes, they do not fall within Article 13(4)(c) FTS or Royalty under Article 13. They qualify as business income under Article 7, not taxable in India absent PE. Treatment of Competing Arguments: The Department's contention that cost recharges failed tests such as need and benefit was rejected as inconsistent with their own classification of these amounts as FTS. The Court emphasized that the Department must prove transfer of technical knowledge to characterize such payments as FTS or Royalty. Conclusion: Management fees and common cost recharges are business income not taxable in India due to absence of PE and lack of transfer of technical knowledge or rights. Issue (iii): Application of Erroneous Tax Rate Legal Framework: The India-UK DTAA prescribes a tax rate of 15% for FTS, whereas the Income-tax Act provides for a beneficial rate of approximately 10.6% (10.608%). Court's Reasoning: Since the Court held that the receipts do not constitute FTS and are not taxable in India, the question of applicable tax rate does not arise. The issue is therefore rendered infructuous. Conclusion: Ground relating to erroneous tax rate is dismissed as infructuous. Issue (iv): Levy of Consequential Interest under Section 234B Legal Framework: Section 234B imposes interest for default in payment of advance tax. Court's Reasoning: The interest levy is consequential to the tax demand. Since the tax demand is set aside on merits, the interest issue does not require separate adjudication. Conclusion: The ground challenging interest levy is dismissed as consequential and not requiring specific adjudication. 3. SIGNIFICANT HOLDINGS "The words 'or consists of the development and transfer of a technical plan or technical design' appearing in the second limb of Article 13(4)(c) of the India-UK tax treaty have to be read in conjunction with 'make available technical knowledge, experience, skill, knowhow or processes'. The second limb cannot be read independently." "Technology is considered to have been made available when the recipient is competent and authorized to apply the technology independently as an owner without depending upon the service provider. The technical knowledge, experience, skill, knowhow or processes must remain with the service recipient even after rendering of the services has ended." "The technical designs/drawings/plans supplied by the assessee are project specific and cannot be used by the Indian entity in any other project in future. Therefore, the assessee has not made available any technical knowledge, experience, skill, knowhow or processes." "In the absence of evidence from the Department establishing that technical knowledge or processes have been made available, the amount received by the assessee has to be treated as business profits and in the absence of a Permanent Establishment in India, cannot be brought to tax in India." "Management fees and common cost recharge being ancillary and incidental to consulting engineering services and not involving transfer of technical knowledge or rights, cannot be treated as Royalty or Fees for Technical Services." "Since the receipts are held not taxable in India, the issue of tax rate and consequential interest become infructuous." Final determinations:
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