2025 (6) TMI 79 - HC - Income Tax

Order passed by AO u/s 197 - petitioner s application for NIL withholding tax was rejected - cross charges considered as FTS or not? - Withhold tax at the rate of 15% (including surcharge and cess) on the payment - AO concluded that the charges paid to the petitioner by its AEs are taxable as FTS and FIS HELD THAT - Petitioner renders wide range of services to AEs. None of the services can be considered as included services within the meaning of paragraph no.4 of Article 12 of the India-US DTAA as the same is not ancillary and subsidiary to the application or enjoyment of the right property or information for which the petitioner receives royalty as covered under Article 12 (3) of the India-US DTAA. The services rendered by the petitioner also do not make available technical knowledge experience skill know-how or processes to AIPL and AIGSPL. The expression make available must be understood to mean transfer of technical knowledge experience skill or know-how or process which enables the recipient to absorb and utilise the same. If the service provided does confer any right in favour of the recipient in respect of the knowledge experience skill or know-how; the condition that the services make available such technical knowledge know-how skill or process so as to fall with the sweep of FIS are not satisfied. Given the fact that AIPL and AIGSPL did not acquire any copyright in the software the cross charges paid by them could not be construed as royalties within the scope of Article 12 (3) of the India-US DTAA. This issue is covered by the decision of the Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited 2021 (3) TMI 138 - SUPREME COURT against which Revenue s review petition is pending before the Supreme Court. The decision of the Supreme Court is binding under Article 141 of the Constitution of India and could not have been disregarded on the ground that a review petition is pending. Thus the impugned order is not sustainable and therefore is set aside. We accordingly direct the AO to issue the necessary certificate or NIL withholding Tax Certificate in respect of the cross-cost charges as received by the petitioner from AIPL and AIGSPL.

Summary

The core legal questions considered by the Court in this matter include:

1. Whether the cost cross charges made by the petitioner, a foreign company, to its Indian associated enterprises (AIPL and AIGSPL) for corporate services constitute "fees for technical services" (FTS) under Section 9(1)(vii) of the Income Tax Act, 1961.

2. Whether such charges qualify as "fees for included services" (FIS) under Article 12(4) of the India-US Double Taxation Avoidance Agreement (DTAA).

3. Whether the cross charges could be characterized as royalties under Article 12(3) of the India-US DTAA.

4. The applicability and interpretation of the "make available" criterion in determining whether the services rendered amount to FIS under the DTAA.

5. The correctness of the Assessing Officer's (AO) rejection of the petitioner's application for a 'nil' withholding tax certificate under Section 197 of the Act.

Issue-wise Detailed Analysis:

1. Characterization of Cost Cross Charges as Fees for Technical Services (FTS) under Section 9(1)(vii) of the Income Tax Act

The AO held that the services rendered by the petitioner were highly technical, managerial, and consultancy in nature, requiring special skills and technical qualifications. The AO concluded that these services made available knowledge, experience, and know-how to the Indian associated enterprises, thus falling within the ambit of FTS and FIS, and accordingly rejected the petitioner's application for a nil withholding tax certificate.

The petitioner disputed this characterization, emphasizing that the cross charges were on a pure cost-to-cost basis and did not constitute income chargeable to tax. It contended that the services rendered did not amount to FTS under the Act.

The Court, however, did not find it necessary to delve into the question of whether the charges constituted FTS under the Act since the charges clearly did not satisfy the definition of FIS under the DTAA, which was determinative for the withholding tax certificate application.

2. Applicability of Fees for Included Services (FIS) under Article 12(4) of the India-US DTAA

Article 12 of the India-US DTAA defines "fees for included services" as payments for technical or consultancy services that either:

• (a) are ancillary and subsidiary to the application or enjoyment of rights, property, or information for which royalties are paid; or
• (b) make available technical knowledge, experience, skill, know-how, or processes, or involve development and transfer of a technical plan or design.

The Court emphasized that the expression "make available" requires that the service provider transfers technical knowledge, experience, skill, or know-how in a manner that enables the recipient to absorb and utilize it independently in the future.

The petitioner provided detailed explanations of the services rendered, including human resources, IT and digital solutions, management and operations, finance and accounting, legal and compliance, procurement, and risk management. The services primarily involved administrative support, software maintenance, advisory functions, and coordination activities rather than the transfer of technical knowledge or know-how.

The Court found that these services were not ancillary or subsidiary to any royalty-bearing rights, nor did they "make available" any technical knowledge or processes to the Indian associated enterprises. The services were ongoing and did not confer any enduring technical capability or rights to the recipients.

In support, the Court relied on precedent decisions interpreting the "make available" test, including:

• A recent Coordinate Bench ruling which held that mere incidental advantage or ongoing service provision does not satisfy the "make available" criterion.
• A Division Bench decision which clarified that to qualify as "making available," the technical knowledge or skills must remain with the recipient after the contract ends, enabling independent use without the provider's assistance.

The Court concluded that the petitioner's services did not meet this standard and therefore did not fall within the scope of FIS under the DTAA.

3. Characterization of Cross Charges as Royalties under Article 12(3) of the DTAA

The AO also contended that part of the charges could be taxable as royalties, reasoning that the petitioner centrally procured software and tools used by the Indian associated enterprises and cross-charged them.

The Court rejected this view, noting that there was no transfer of copyright or any proprietary rights in the software or tools to the Indian enterprises. The cross charges were reimbursements of actual costs and did not amount to royalties within the meaning of Article 12(3).

This conclusion was supported by the binding Supreme Court precedent which held that mere use or access to software without transfer of rights does not constitute royalty income.

The Court further observed that the AO's reliance on a pending review petition against the Supreme Court decision was misplaced, as the binding nature of Supreme Court judgments under Article 141 of the Constitution of India precluded disregarding the precedent on such grounds.

4. Interpretation and Application of the "Make Available" Test

The Court extensively analyzed the "make available" test, which is pivotal in determining whether payments for services qualify as FIS under the DTAA.

The Court reiterated that the test requires a transfer of technical knowledge or skill that enables the recipient to apply the technology independently in the future. The petitioner's services, which involved ongoing support and administrative functions, did not satisfy this test.

The Court noted that if the services had indeed made available technical knowledge or processes, the Indian associated enterprises would not require such services repeatedly over multiple years, as the knowledge would be absorbed and utilized independently.

The Court's reasoning drew from authoritative rulings which emphasized that mere incidental benefits or access to services do not amount to making available technical knowledge or skill.

5. Rejection of the Assessing Officer's Order and Grant of Nil Withholding Tax Certificate

Given the above analysis, the Court found the AO's order rejecting the petitioner's application for a nil withholding tax certificate unsustainable.

The Court set aside the impugned order and directed the AO to issue the necessary nil withholding tax certificate in respect of the cross-cost charges received by the petitioner from the Indian associated enterprises.

The Court clarified that this order was confined to the issuance of the certificate under Section 197 of the Act and did not preclude the Revenue from examining the taxability of the receipts in the normal course of assessment.

Significant Holdings:

"The expression 'make available' must be understood to mean transfer of technical knowledge, experience, skill, know-how, or process, which enables the recipient to absorb and utilise the same."

"If the service provided does not confer any right in favour of the recipient in respect of the knowledge, experience, skill or know-how; the condition that the services 'make available' such technical knowledge, know-how, skill, or process so as to fall within the sweep of FIS are not satisfied."

"Payment of consideration would be regarded as 'fee for technical/included services' only if the twin test of rendering services and making technical knowledge available at the same time is satisfied."

"Given the fact that AIPL and AIGSPL did not acquire any copyright in the software, the cross charges paid by them could not be construed as royalties within the scope of Article 12(3) of the India-US DTAA."

"As long as the judgment of the Supreme Court is in force, the concerned authority could not have side stepped the judgment, based on the fact that the review petition had been preferred."

"The impugned order is not sustainable and therefore, is set aside. We, accordingly, direct the AO to issue the necessary certificate or 'NIL' withholding Tax Certificate in respect of the cross-cost charges."