Inveso Holding Company (US) Inc. Vs ACIT (ITAT Delhi)
ITAT Delhi Ruling on Treatment of Cost Reimbursement for IT/Support Services as Fee for Included Services (FIS) under India–USA DTAA
Brief facts:
The case concerns the taxability under the India-USA Double Tax Avoidance Agreement (DTAA) of a large sum (Rs. 54.85 crore) claimed as reimbursement of cost for IT and support services by a US-based parent company (Invesco Holding Company) from its Indian Associated Enterprises (AEs). The Assessing Officer (AO) treated the reimbursement as Fee for Included Services (FIS) under Article 12 of the India-USA DTAA, attracting tax in India.
Key Issues
- Whether the reimbursement amount constitutes taxable income as FIS or Fees for Technical Services (FTS) under Article 12 of the India-USA DTAA.
- Whether the services “make available” technical knowledge, skill, or know-how to the Indian AE, thereby warranting tax.
- Whether cost allocation on a cost-to-cost basis without any markup implies receipts are not taxable income.
Tribunal’s Analysis and Findings
Make Available Condition Under Article 12(4)(b) of India-USA DTAA:
- Taxability under FIS arises only if the service “makes available” technical knowledge or skill that enables the recipient to use such technology independently without provider assistance.
- The Assessing Officer failed to prove that technical know-how was transferred to Indian AEs; instead, services were recurring and routine (IT infrastructure, application support, security), indicating no transfer of independent capability.
- The Tribunal relied heavily on precedents such as Bio Rad Laboratories Inc. and the Delhi High Court’s affirming decisions, which held that recurring service contracts without independent transfer of technology do not satisfy the “make available” criteria.
Nature of Services Rendered:
- The services included support and administration, including basic software training (Microsoft Word, Excel, PowerPoint), which are routine in nature and not technical services under the treaty.
- The Tribunal distinguished managerial, consultancy, or routine support services from genuine technical services delivering specialized knowledge.
Cost-to-Cost Reimbursement:
- The Master Intercompany Services Agreement clearly stipulated that charges were on cost-to-cost basis without profit, allocated on rational allocation keys tied to usage and benefit.
- Tribunal reiterated the Supreme Court precedent in DIT v. A.P. Moller Maersk AS that reimbursements without any element of profit are not chargeable as income.
- AO did not independently verify or disprove the cost allocation mechanism; hence, treating the receipt as fee income was erroneous.
Legal Precedents Cited
- Bio Rad Laboratories Inc. v. ACIT (2023, Delhi ITAT)
- CIT (International Taxation)-1 v. Bio Rad Labs (Singapore) Pte. Ltd. (2023, Delhi HC)
- SFDC Ireland Ltd. v. CIT (2024, Delhi HC)
- Shell India Markets Pvt. Ltd. v. Union of India (2024, Bombay HC)
- Planetcast International Pte. Ltd. v. ACIT (2023, Delhi ITAT)
ITAT Decision
- The Tribunal deleted the addition of Rs. 54,85,23,539/- treating it neither as Fees for Included Services nor taxable income.
- The “make available” condition was not satisfied since no independent capability was transferred to Indian AEs from the IT support.
- The receipts were merely cost reimbursements on an arm’s length basis and hence exempt from tax under Article 12 of DTAA.
- Penalty proceedings invoked by the AO were held premature and dismissed at this stage.
FULL TEXT OF THE ORDER OF ITAT DELHI
