2025 (4) TMI 914 - AT - Income Tax

Addition made towards Passenger System Solutions treating same as taxable in the hands of the assessee as Fees For Technical Services (FTS) u/s 9(1)(vii) of the Income Tax Act as well as under Article 12 of the DTAA between India and USA - assessee is a company incorporated in the USA and is a tax resident of USA - main contention of the AR before us is that these services are standard services rendered using the software technology and that they are not the technical services - HELD THAT - A particular service will be considered as fees for included services only when the person acquiring the service is enabled to apply the technology. It is also clear that even if the provision of the service requires technical input by the person providing the service it may not fall within the ambit of Article 12(4)(b) unless the technical knowledge skills etc. are made available to the person purchasing the service. In assessee s case from the perusal of the nature of Passenger Services it is clear that no technology per se is made available to NACIL and that the services are rendered using the software supported by the data centre of the assessee in USA. Accordingly there is merit in the contention of the ld AR that these services are rendered using the technology and are not in the nature of technical services. Further we notice that there are plethora of judicial pronouncements where it has been held that unless the technical knowledge skills etc. are made available by the service provider the same cannot be held as FTS to be taxed in India under the DTAA which specifically provides so. We see no infirmity in the order of the CIT(A) in holding that the impugned receipts are not taxable in the hands of the assessee in India. Since we have dismissed the ground of the revenue for the reason that the receipts towards Passenger Services are not taxable under Article 12 of the DTAA between India and USA the contention of the revenue that the same is taxable under section 9(1)(vii) of the Act has become academic and not adjudicated separately.

ISSUES PRESENTED and CONSIDERED

The core legal issue considered in this judgment is whether the income earned by the assessee, a USA-based company, from providing Passenger System Solutions (PSS) to Indian airlines, primarily National Aviation Company of India Limited (Air India), is taxable in India as Fees for Technical Services (FTS) under section 9(1)(vii) of the Income Tax Act and Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and the USA.

ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents:

The relevant legal provisions include section 9(1)(vii) of the Income Tax Act, which defines "fees for technical services," and Article 12 of the India-USA DTAA, which addresses "Royalties and Fees for Included Services." Article 12 specifies that fees for included services encompass payments for rendering technical or consultancy services that either make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or design.

Court's interpretation and reasoning:

The Tribunal examined whether the services provided by the assessee involved making available technical knowledge or skills to the recipient, as required under Article 12 of the DTAA. The Tribunal noted that the services rendered by the assessee were standard services using software technology, without any human intervention in the processing of data. The assessee's software was not made available to NACIL or other customers, as it was operated from the assessee's data center in Atlanta, USA.

Key evidence and findings:

The Tribunal relied on the nature of the services provided, which included reservations, fares and pricing, departure control, message switching, flight information, baggage reconciliation, internet booking, and frequent flyer services. The services were provided remotely via the assessee's data center, and no technology or technical knowledge was transferred to the Indian airlines.

Application of law to facts:

The Tribunal applied the provisions of Article 12 of the DTAA, emphasizing that for services to be considered as fees for included services, they must make technology available to the recipient. Since the assessee's services did not involve transferring any technical knowledge or skills to NACIL, they did not qualify as fees for included services under the DTAA.

Treatment of competing arguments:

The revenue argued that the services should be considered technical services under section 9(1)(vii) of the Income Tax Act and Article 12 of the DTAA. The Tribunal, however, found merit in the assessee's argument that the services were standard and did not involve making technology available to the recipient. The Tribunal also noted that similar rulings by the Authority for Advance Rulings (AAR) and the Cochin Bench of the Tribunal had been reversed by higher courts.

Conclusions:

The Tribunal concluded that the services provided by the assessee did not qualify as fees for included services under Article 12 of the DTAA, as they did not make any technology available to the recipient. Consequently, the income from these services was not taxable in India as FTS.

SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

The Tribunal cited the CIT(A)'s observations, emphasizing that for a payment to qualify as fees for included services under the tax treaty, it is necessary that the services make available technical knowledge, experience, skill, know-how, or processes. The Tribunal referred to several judicial precedents supporting this interpretation, including decisions from the Bombay High Court and various ITAT benches.

Core principles established:

The Tribunal reaffirmed the principle that for services to be taxable as fees for included services under the DTAA, they must involve making technology available to the recipient. The provision of standard services using technology without transferring technical knowledge does not meet this criterion.

Final determinations on each issue:

The Tribunal upheld the CIT(A)'s decision to delete the additions made by the Assessing Officer, concluding that the income from Passenger System Solutions was not taxable in India as FTS under either section 9(1)(vii) of the Income Tax Act or Article 12 of the India-USA DTAA. Consequently, the appeals by the revenue for the assessment years 2014-15 to 2021-22 were dismissed.

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