2025 (5) TMI 865 - AT - Income Tax

Royalty receipts - receipts towards access cost allocation towards SUN software and SAP / GSAP software application - HELD THAT - As relying on assessee s own case for AY 2012-13 2025 (3) TMI 705 - ITAT MUMBAI we hold that the amount received towards access cost allocation towards SUN software and SAP / GSAP software application cannot be treated as royalty and the addition made in this regard is not sustainable. Treatment of cost allocations in respect of SUN / GSAP maintenance charges do not qualify as FTS - We have while considering the issue of SUN / GSAP application charges being treated as Royalty have already held that the said receipts are not in the nature of Royalty by following the decision of the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd.(supra). Accordingly the receipts towards maintenance of the SUN / GSAP application in our considered view will not fall within the purview of clause (4) of Article 13. Therefore the revenue s contention that the receipt towards maintenance is FTS in nature is not tenable. Further from the perusal of DRP order we notice that the DRP has observed that the nature of receipts are similar to BSS receipts which we have already held does not fall within FTS since the same does not make available technical knowledge experience skill know-how or processes. Therefore on that count also we are of the view that the revenue s contention is not sustainable. Accordingly we direct the AO to delete the addition made towards SUN / GSAP maintenance charges treating the same as FTS. Treatment of cost allocations in respect of GST scoping charges as FTS - GST scoping / customisation receipts are incurred towards modifying the existing systems especially the billing module to comply with GST regulations and the said services are carried out by third party service providers. The assessee has made payments towards the same which is allocated to the Indian AE who paid the same to the assessee. In our view the impugned receipts are not towards any services rendered by the assessee which makes available any technical knowledge or skill and cannot be treated as FTS. We have while considering the issue of receipts towards SUN/GSAP application have held the same as not in the nature of Royalty. The GST scoping / customisation receipts are incurred as an enhancement to the existing systems the same do not fall with Clause (4) of Article 13 since the receipts towards the application is held to be not royalty. Thus we hold that the treatment of GST scoping / customisation receipts as FTS is not correct and the addition made in this regard is liable to be deleted. Treatment cost allocations in respect of IT service and local project costs as FTS - From the perusal of the orders of the lower authorities we notice that the revenue has held the impugned services to be similar to BSS and accordingly held the same to FTS. We have already held that the receipt towards BSS services are not in the nature of FTS. Further our findings with respect to GST scoping / customisation charges with regard to actual services being rendered by third party and that by rendering of IT services the assessee does not make available any technical knowledge or skill is also to relevant. Accordingly we hold that the treatment of IT services is not in the nature of FTS and cannot be taxed in India.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal across the assessment years 2016-17 to 2020-21 include:

• Whether the receipts from General Business Support Services (BSS) rendered by the assessee constitute taxable income under the Income Tax Act, 1961, and whether such receipts qualify as Fees for Technical Services (FTS) under the India-UK Double Taxation Avoidance Agreement (DTAA).
• Whether receipts towards access and cost allocation for SUN and GSAP software licenses constitute income and whether such receipts qualify as Royalty under the DTAA.
• Whether receipts towards maintenance charges for SUN/GSAP software constitute income and whether they qualify as FTS or Royalty.
• Whether receipts towards cost allocations related to Global Terminal Automated System (GTAS) product costs and GST scoping/customisation charges constitute income and qualify as FTS or Royalty.
• Whether receipts towards cost allocations for IT services and local project costs constitute income and qualify as FTS.
• Whether the final assessment orders passed by the Assessing Officer (AO) are valid and legally sustainable.
• Issues related to short granting of Tax Deducted at Source (TDS) credit, levy of interest under sections 234A, 234B, and 234D, incorrect refund amounts, and penalty under sections 271(1)(c) and 270A.

2. ISSUE-WISE DETAILED ANALYSIS

Treatment of General Business Support Services (BSS) receipts as Fees for Technical Services (FTS)

Relevant Legal Framework and Precedents: The key provisions considered include Article 13 of the India-UK DTAA which defines 'Fees for Technical Services' and the binding effect of Authority for Advance Ruling (AAR) decisions under section 245S of the Income Tax Act. The Tribunal also relied on the Hon'ble Madras High Court decision which quashed the AAR ruling in a related matter, holding that managerial services do not constitute technical services as per Article 13(4)(c) of the DTAA.

Court's Interpretation and Reasoning: The Tribunal analyzed the nature of services under the Cost Contribution Agreement (CCA) and found that the General BSS provided by the assessee primarily comprised managerial and administrative support services such as management support, marketing support, legal, taxation, HR, and financial advice. These services do not involve the transfer or making available of technical knowledge, skill, or know-how as required under the DTAA definition of FTS.

The Tribunal relied on the Madras High Court ruling which emphasized that the term 'consultancy' within the DTAA context refers to consultancy that makes available technical knowledge and not managerial advice. The Court applied the 'make available' test, which requires that the technical knowledge or skill be imparted to the recipient enabling them to operate independently of the service provider after the contract ends. Since the CCA was ongoing and the services were managerial, not technical, the 'make available' criterion was not met.

Key Evidence and Findings: The list of services under General BSS was examined, and the Tribunal noted that these services were managerial in nature. The AAR ruling, which treated these as FTS, was quashed by the Madras High Court. The Tribunal also noted that the revenue did not bring any contrary evidence for the years under consideration.

Application of Law to Facts: The Tribunal applied the legal principle that only services making available technical knowledge qualify as FTS under the DTAA. The managerial nature of BSS services excluded them from FTS classification, leading to the conclusion that receipts from BSS are not taxable as FTS in India.

Treatment of Competing Arguments: The revenue relied on the AAR ruling to classify BSS receipts as FTS, but the Tribunal gave precedence to the High Court's quashing of that ruling and the legal principle of 'make available'. The revenue did not dispute the applicability of the High Court decision or present contradictory facts.

Conclusion: The Tribunal held that the receipts from General BSS do not constitute FTS and are not taxable as such in India. The addition made by the AO was deleted.

Treatment of Access and Cost Allocation for SUN and GSAP Software Licenses as Royalty

Relevant Legal Framework and Precedents: Article 13(3) of the India-UK DTAA defines 'Royalty' as payments for the use or right to use copyrights or industrial, commercial, or scientific equipment. The Supreme Court decision in Engineering Analysis Centre of Excellence Pvt. Ltd. was pivotal, which held that payments for use of software licenses do not constitute royalty if they do not create a right to use the copyright.

Court's Interpretation and Reasoning: The Tribunal found that the payments made towards SUN and GSAP software licenses were cost allocations without any income element and did not confer any right to use the copyright. The Tribunal followed the Supreme Court ruling which clarified that payments for software licenses under End User License Agreements (EULAs) do not amount to royalty for copyright use under the DTAA.

Key Evidence and Findings: The Tribunal noted that the payments were on a cost-to-cost basis and that the software licenses were for use rights, not copyright ownership or transfer. The Tribunal also relied on the coordinate bench's earlier decisions for AY 2012-13 and the jurisdictional High Court's decisions.

Application of Law to Facts: Applying the Supreme Court's interpretation, the Tribunal concluded that the receipts from SUN and GSAP software licenses do not fall within the definition of royalty under the DTAA and are not taxable as such.

Treatment of Competing Arguments: The revenue argued that these receipts were royalty, but the Tribunal rejected this based on authoritative Supreme Court precedent and the nature of the payments.

Conclusion: The Tribunal held that the receipts towards SUN and GSAP software licenses are not royalty and deleted the additions made by the AO.

Treatment of Maintenance Charges for SUN/GSAP Software as FTS or Royalty

Relevant Legal Framework and Precedents: Article 13(4) of the DTAA defines FTS as payments for rendering technical or consultancy services ancillary and subsidiary to the application or enjoyment of rights described under Article 13(3). The Supreme Court decision in Engineering Analysis Centre of Excellence Pvt. Ltd. and the coordinate bench's decisions were considered.

Court's Interpretation and Reasoning: The Tribunal held that since the receipts for software licenses were not royalty, the maintenance charges, which are ancillary and subsidiary to these licenses, cannot be treated as FTS under Article 13(4)(a). Further, the maintenance services were similar to BSS, which were held not to make available technical knowledge or skill, and thus do not qualify as FTS under Article 13(4)(c).

Key Evidence and Findings: The Tribunal noted that maintenance charges were cost allocations without markup, and the services did not transfer technical knowledge or skill. The DRP's observation that these receipts were akin to BSS was accepted, reinforcing the conclusion that they are not FTS.

Application of Law to Facts: The Tribunal applied the 'make available' test and the requirement that FTS must be ancillary and subsidiary to royalty payments, which were absent. Therefore, maintenance charges could not be taxed as FTS or royalty.

Treatment of Competing Arguments: The revenue's contention that maintenance charges were taxable as FTS or royalty was rejected based on the absence of a right to use copyright and the managerial nature of services.

Conclusion: The Tribunal deleted the additions relating to SUN/GSAP maintenance charges treated as FTS or royalty.

Treatment of Cost Allocations for GTAS Product Costs and GST Scoping/Customisation Charges as FTS

Relevant Legal Framework and Precedents: The same provisions of Article 13 of the DTAA and the 'make available' test were applied. The coordinate bench's earlier decisions on similar charges were considered.

Court's Interpretation and Reasoning: The Tribunal noted that GST scoping/customisation charges were incurred to modify existing systems to comply with Indian GST regulations and were reimbursed by the Indian Associated Enterprise (AE). These services were rendered by third parties, and the assessee only recharged the costs.

The Tribunal held that such receipts are not for services making available technical knowledge or skill and are similar to BSS, which are not taxable as FTS. The GTAS product cost receipts were reversed in the subsequent year, and thus the issue was not pressed.

Key Evidence and Findings: The Tribunal found the services were managerial or administrative and did not transfer technical knowledge. The cost allocations were on a reimbursement basis without markup.

Application of Law to Facts: Applying the 'make available' test and the principle that FTS must be linked to technical services, the Tribunal held these receipts are not taxable as FTS.

Treatment of Competing Arguments: The revenue's reliance on DRP directions was considered but rejected in light of the Tribunal's findings on BSS and maintenance charges.

Conclusion: The Tribunal held that GST scoping/customisation charges and GTAS product cost allocations are not taxable as FTS and deleted the additions.

Treatment of Cost Allocations for IT Service and Local Project Costs as FTS

Relevant Legal Framework and Precedents: Article 13 of the DTAA and the 'make available' test were applied.

Court's Interpretation and Reasoning: The Tribunal observed that the IT services and local project costs related to warehouse relocations and IT infrastructure setup were similar to BSS and did not involve making available technical knowledge or skill. These services were also rendered by third parties and recharged by the assessee.

Key Evidence and Findings: The Tribunal found no technical transfer or enduring benefit to the recipient and noted the cost-to-cost recharge nature of the receipts.

Application of Law to Facts: The receipts were held not to qualify as FTS as they failed the 'make available' test and were managerial or administrative in nature.

Treatment of Competing Arguments: The revenue's contention that these receipts were taxable as FTS was rejected based on the consistent findings regarding BSS and related services.

Conclusion: The Tribunal deleted the additions treating IT service and local project cost allocations as FTS.

Validity of Final Assessment Orders and Other Ancillary Issues

The additional ground raised by the assessee regarding limitation on the final assessment order was not pressed and hence not admitted. Issues related to short granting of TDS credit, interest under sections 234A, 234B, and 234D, incorrect refund amounts, and penalties under sections 271(1)(c) and 270A were either consequential or not separately adjudicated.

3. SIGNIFICANT HOLDINGS

"The services availed by Petitioner cannot be said to be technical services and Article 13 is wholly inapplicable in the facts and circumstances of the present case."

"The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider."

"The payments received without markup are in the nature of reimbursement and not in the character of income which is chargeable to tax in India."

"The amount received towards cost allocation of SUN Maintenance Software and GSAP maintenance charges cannot be treated as royalty."

"The receipts towards maintenance of the SUN / GSAP application will not fall within the purview of clause (4) of Article 13."

"The GST scoping / customisation receipts are not towards any services rendered by the assessee which makes available any technical knowledge or skill and cannot be treated as FTS."

"The receipts towards IT services and local project costs do not qualify as FTS as they do not make available any technical knowledge or skill."

Core principles established include the strict interpretation of 'Fees for Technical Services' under Article 13(4) of the DTAA requiring the service to make available technical knowledge, skill or know-how, the application of the 'make available' test to determine taxability, and the recognition that managerial or administrative services do not qualify as technical services for tax purposes.

Final determinations on each issue resulted in the deletion of additions made by the AO treating various receipts as FTS or royalty, thereby partly allowing the appeals for all assessment years under consideration.