2025 (2) TMI 160 - AT - Income Tax

Payments received as Service Fees - nature of FIS under Article 12(4)(b) of the India USA DTAA - HELD THAT - AO has not brought about any distinguishing facts about the nature of receipt being Service Fees received during the year as against the sum received as Consultancy and Training Fees received in AY 2020-21. As stated above DRP has given identical finding for both the Assessment Years. Therefore it is held that the amount is not taxable as the same is not in the nature of FIS under Article 12(4)(b) of the India-USA DTAA and therefore the same is deleted. Hence the ground nos. 4 to 11 are allowed. Levy of interest u/s 234A and 234B is consequential and the AO will levy interest as per law. Short granting of credit of tax deducted at source - AO is directed to verify the claim of the assessee and to allow TDS credit as per law. Incorrect adjustment on account of recovery of refund already issued to the Appellant in the computation sheet - AO is directed to verify the claim of the assessee and to modify the tax computation as per law.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

• Whether the assessment order passed by the Assessing Officer (AO) is valid and lawful.
• The validity of the directions issued by the Dispute Resolution Panel (DRP) without a Document Identification Number (DIN).
• Whether the payments received as "Service Fees" by the assessee should be taxed as "Fees for Included Services" (FIS) under Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA) and section 9(1)(vii) of the Income Tax Act, 1961.
• The applicability of interest under sections 234A and 234B of the Income Tax Act.
• Short-granting of credit for Tax Deducted at Source (TDS).
• Incorrect adjustment on account of recovery of refund already issued to the appellant.
• Initiation of penalty proceedings under section 274 read with section 270A of the Income Tax Act.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of the Assessment Order

The assessee challenged the assessment order on grounds of being bad in law and perverse due to non-consideration of material evidence. The Tribunal dismissed these grounds as general in nature.

2. Directions Issued by DRP without DIN

The assessee argued that the DRP's directions were void due to the absence of a valid DIN, as mandated by CBDT Circular No. 19/2019. However, this ground was not pressed by the assessee and was dismissed.

3. Taxation of Service Fees as FIS

• Legal Framework and Precedents: The relevant legal framework includes Article 12 of the India-USA DTAA and section 9(1)(vii) of the Income Tax Act. The "make available" clause under Article 12(4)(b) is crucial in determining whether services qualify as FIS.
• Court's Interpretation and Reasoning: The Tribunal relied on its previous decision for AY 2020-21, where it was held that the services provided did not satisfy the "make available" criteria. The Tribunal emphasized that mere provision of technical services does not automatically result in the transfer of technical knowledge or skills to the recipient.
• Key Evidence and Findings: The assessee provided consultancy services in organizational strategy, talent acquisition, leadership development, etc., which were claimed not to impart technical knowledge enabling independent application by clients.
• Application of Law to Facts: The Tribunal found no distinction in the nature of services provided in the current year compared to AY 2020-21. It concluded that the services did not "make available" technical knowledge, thus not qualifying as FIS.
• Treatment of Competing Arguments: The Tribunal considered the DRP's findings but concluded that the "make available" requirement was not met, aligning with the assessee's argument.
• Conclusion: The Tribunal held that the service fees were not taxable as FIS under Article 12(4)(b) of the India-USA DTAA, allowing the related grounds of appeal.

4. Levy of Interest under Sections 234A and 234B

The Tribunal noted that the charging of interest is consequential and directed the AO to levy interest as per law.

5. Short-Granting of TDS Credit

The assessee claimed short-granting of TDS credit amounting to INR 82,722. The Tribunal directed the AO to verify and allow TDS credit as per law.

6. Incorrect Adjustment of Refund Recovery

The Tribunal directed the AO to verify the assessee's claim regarding the incorrect adjustment of refund recovery amounting to INR 1,00,79,539 and modify the tax computation accordingly.

7. Initiation of Penalty Proceedings

The Tribunal dismissed the ground related to the initiation of penalty proceedings as premature.

SIGNIFICANT HOLDINGS

• The Tribunal reaffirmed the principle that for services to qualify as FIS under the India-USA DTAA, they must "make available" technical knowledge, experience, skill, or processes to the recipient.
• The Tribunal concluded that the consultancy services provided did not satisfy the "make available" requirement, thus not taxable as FIS.
• The Tribunal's interpretation emphasized that the mere provision of technical services does not imply the transfer of technical knowledge or skills enabling independent application by the recipient.
• The Tribunal's decision was consistent with its previous ruling for AY 2020-21, highlighting the importance of consistency in judicial decisions.