Case Law Details
CPP Assistance Services Pvt Ltd Vs C.I.T (ITAT Delhi)
ITAT Delhi held that as there is no gain of technical knowledge, experience or skill, the IT support service do not fall under the definition of FTS under Article 13 of the DTAA and hence TDS not deductible on the same.
Facts- During the course of scrutiny assessment proceedings, AO noticed that the assessee has paid an amount of Rs. 5,47,90,000/- to its holding company CPP Limited, UK but has not deducted tax at source claiming that Information Support System Services availed by the assessee company do not fall under the definition of FTS under Article 13 of the DTAA.
Accordingly, a show cause notice was issued asking the assessee to show cause as to why provisions of section 40(a)(i) should not be attracted and the amount of Rs. 5,47,90,000/- be added back to the total income.
AO concluded by holding that the assessee company was liable to withhold tax while making the payment of Rs. 5,46,31 ,534/- and failing to do so attracted the provisions of section 40(a)(i) of the Act and added back the expenditure of Rs. 5,46,31 ,534/-. The assessee carried the matter before the ld. CIT(A) but without any success. Being aggrieved, the present appeal is filed.
Conclusion- Held that that the assessee does not gain any technical knowledge, experience or skill as it is not involved in the process that service provider is following while rendering the services. The IT support services are rendered by CPP UK from UK itself and these services are rendered for the entire group and not just for CPP India.
The agreement between CPP group services and the assessee is perpetual and such services are provided by CPP group on recurring basis to the assessee and if the technical knowledge, skill etc. is being made available to the assessee, then there would be no need for the assessee to take recourse to the CPP UK for these services.
In our considered opinion, IT support services do not satisfy the make available test as no technical know-how, skill etc were transferred to the assessee. Considering the facts of the case in totality, in light of judicial decisions discussed hereinabove, we direct the Assessing Officer to delete the disallowance of Rs. 5,46,31,534/-.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal by the assessee is preferred against the order of the National Faceless Appeal Centre, Delhi dated 26.11.2021 pertaining to Assessment Year 201 7-18.
2. Though the assessee has raised as many as 9 grounds in Form No. 36, but the sum and substance of the grievance of the assessee is that the CIT(A) erred in considering the payment of Rs. 5,46,31,534/- made by the assessee to its non-resident group company as Fees for Technical Services [FTS] by concluding that services “make available”, technology, knowledge, skill, know-how or processes to the assessee as per Article 13 of India-UK DTAA [DTAA].
3. Briefly stated, the facts of the case are that return of income was filed on 28.11.2017 declaring income of Rs. 1,14,58,940/- which was revised on 23.08.2018 at the same income. Return was selected for complete scrutiny under CASS and, accordingly, statutory notices were issued and served upon the assessee.
4. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has paid an amount of Rs. 5,47,90,000/- to its holding company CPP Limited, UK but has not deducted tax at source claiming that Information Support System Services availed by the assessee company do not fall under the definition of FTS under Article 13 of the DTAA.
5. Accordingly, a show cause notice was issued asking the assessee to show cause as to why provisions of section 40(a)(i) should not be attracted and the amount of Rs. 5,47,90,000/- be added back to the total income.
6. In its reply, the assessee gave break-up of payment of Rs. 5,47,90,000/- stating that an amount of Rs. 5,46,31 ,543/- was paid to CPP Limited, UK for availing IT support system services and Rs. 1,58,278/- was paid as reimbursement of telephone server AMC
7. The assessee further contended that IT Support System Support Services do not fall under the definition of FTS under Article 13 of the DTAA since the nature of the services do not fulfill the “make available clause of Article 1 3(4)(c) of the DTAA.
8. Strong reliance was placed on the decision of the Hon’ble Jurisdictional High Court in the case of DIT Vs. Guy Carpenter & Co. Ltd 254 CTR 243.
9. Referring to the definition of FTS, as mentioned in Article 13(4) of the DTAA read with Explanation 2 of Section 9(1 )(vii) of the Act, the Assessing Officer was of the opinion that the nature of services availed by the assessee company are mentioned in detail in the agreement between CPP Limited UK and the assessee company and in light of the nature of services, the Assessing Officer dismissed the contention of the assessee that the nature of these services does not fulfill the “make available” criteria.
10. The Assessing Officer was of the opinion that the phrase “make available” would not be expressly mentioned in the description of the services availed, and, therefore, the agreement between the assessee and CPP Limited, UK do not use the phrase ‘make available’ explicitly. The Assessing Officer observed that the assessee is engaged in the business of providing emergency card services. Whenever a customer loses her financial card and asks her bank to block it for security purposes, the assessee company gets notified by the bank. The assessee company then contacts the customer and offers a range of services to help the customer in difficult time.
11. Making available technical knowledge would mean helping with data management inflow and transmission of data. A technical plan or process for such a business would be Standard Operating Procedures to be followed once a customer contacts the company. According to the Assessing Officer, any SOP given out by the UK company to the Indian company would make available the technical processes involved in handling customers.
12. Once these SOPs are given, they remain with the Indian company for use in the future as well without taking recourse to the UK company every time when a new customer contacts them. Therefore, it is a definite case of making available technical processes and plans.
13. Referring to the decision of the co-ordinate bench in the case of H.J. Heinz Company USA ITA No. 6252/DEL/2012, the Assessing Officer concluded by holding that the assessee company was liable to withhold tax while making the payment of Rs. 5,46,31 ,534/- and failing to do so attracted the provisions of section 40(a)(i) of the Act and added back the expenditure of Rs. 5,46,31 ,534/-.
14. The assessee carried the matter before the ld. CIT(A) but without any success.
15. Before us, the ld. counsel for the assessee vehemently stated that the Assessing Officer has grossly erred in not appreciating the facts in true perspective and further erred in drawing support from the decision of the co-ordinate bench. It is the say of the ld. counsel for the assessee that relevant clauses of the agreement make it clear that the assessee has no right over the Intellectual Property Right and is simply using the services of CPP UK which cannot be termed as “make available’ any technical knowledge or experience as each time the assessee has to approach the system provided by CPP UK to redress the grievance of its customers.
16. The Hon’ble Jurisdictional High Court in the case of Guy Carpenter [supra] and also the co-ordinate bench in the case of Mitsubishi Electric India Ltd ITA No. 3336/DEL/2018. The ld. counsel for the assessee also drew support from the decision of the Hon’ble Karnataka High Court in the case of De Beers India Minerals {p} Ltd 346 ITR 467.
17. It is the say of the ld. counsel for the assessee that during the course of rendering of services, the assessee does not gain any technical knowledge, experience, skill etc. It is stated that the IT support services are rendered by CPP UK from UK itself and these services are rendered for entire group and not just for CPP India and cost is recharged based on time cost of UK team.
18. The ld. counsel for the assessee vehemently stated that the Assessing Officer grossly erred in alleging that the assessee is provided with an SOP as part of the IT support services. It is the say of the ld. counsel for the assessee that no such SOP is envisaged in the agreement for such services and this contention of the Assessing Officer is purely based on his conjectures.
19. Per contra, the ld. DR strongly supported the findings of the Assessing Officer/ld. CIT(A) and read the operative part of the assessment order and the order of the first appellate authority.
20. We have given thoughtful consideration to the orders of the authorities below. The agreement between CPP Group UK [supplier] and CPP –assessee [customer] is dated 11.07.2017 in which the most relevant clauses read as under:
SUPPLY OF SERVICES
3.1 The Supplier shall provide such of the Services to the Customer as the Customer may require from time to time in accordance with this agreement.
3.2 In supplying the Services, the Supplier shall:
(a) perform the Services with reasonable care and skill, using appropriately trained personnel;
(b) perform the Services in accordance with the services descriptions set out in Schedule 1;
(c) ensure that the Deliverables, and all goods, materials, standards and techniques used in providing the Services are of satisfactory quality and are fit for purpose;
(d) comply with:
(i) all laws, statutes and regulations from time to time in force that are applicable to the provision of the Services; and
(ii) the Mandatory Policies,
provided that the Supplier shall not be liable under this agreement if, as a result of such compliance, it is in breach of any of its obligations under this agreement;
(e) take reasonable care of all Customer Materials in its possession and make them available for collection by tire Customer on reasonable notice and request.
3.3 Any processing by the Supplier of Personal Data on behalf of the Customer in connection with the provision of the Services shall be carried out in accordance with a separate data processing agreement in place between the Supplier and the Customer.”
INTELLECTUAL PROPERTY
5.1 The Supplier and its licensors shall retain ownership of all Supplier IPRs. The Customer and its licensors shall retain ownership of all Intellectual Property Rights in the Customer Materials,
5.2 The Supplier grants the Customer, or, subject to Clause 5.3, shall procure the direct grant to the Customer of, a fully paid-up, worldwide, non-exclusive, royalty-free, licence to copy and modify the Supplier IPRs for the purpose of receiving and using the Services and the Deliverables in the Customer’s business.
5.3 Where the Supplier IPRs include a third party’s Intellectual Property Rights and the Supplier cannot procure the direct grant to the Customer of a fully paid-up, worldwide, non-exclusive, royalty-free, licence to copy and modify the relevant third party’s Intellectual Property Rights in accordance with Clause 5.2, the Supplier shall procure for the Customer the right to use the relevant third party Intellectual Property Rights for the purpose of receiving and using the Services and the Deliverables in the Customer’s business,
5.4 Tire Customer grants the Supplier a fully paid-up, worldwide, nonexclusive, royalty- free, non-transferable licence to copy and modify the Customer Materials for the term of this agreement for the purpose of providing the Services to the Customer in accordance with this agreement.”
21. In Schedule 1, Part 14 is “IT Services” which reads as under:
“The Supplier will establish a technical vision contributing to the Customer’s commercial strategy to harness technology for innovative product development. This will include the provision of a technology roadmap using the most appropriate technology to deliver the commercial strategy, developing architectural support for the growing and changing needs of the business and the development of technology platforms for the Customer’s product portfolio both existing and new.
IT Service Desk – IT support and analysis
The Supplier will provide the first point of contact for all the Customer’s technology issues and provide management of all- IT related incidents and requests from incident generation to closure providing incident information to the Customer and resolution groups as required.
The Supplier will provide management information relating to service levels and root cause analysis and will provide work closely with other SMC teams in the integration of new support responsibilities and processes into the ‘Service Desk’ arena.
Infrastructure
The Supplier will ensure that the network infrastructure and its associated technologies operate efficiently, perform within agreed targets and deliver a secure platform for Customer to cany out its business. This will include ensuring the IT Infrastructure meets and retains compliance with all relevant standards and frameworks.
The Supplier will work closely with third party providers and the service desk function to ensure third tier support is effective and fit for purpose and to source new development opportunities in the IT Infrgshucture. The Supplier will also review third party contracts to ensure value for money is being obtained.
The supplier will support the strategic delivery of IT infrastructure services and liaison Customer to understand requirements and facilitate communication between all relevant parties accordingly.
Telephony
The Supplier will provide technical support for any technical infrastructure incidents alongside third paity providers.
The Supplier will design, cost and implement infrastructure solutions for new technologies and systems in support of infrastructure refresh/improvement work, business projects or Customer user requests,
Database administration
The Supplier will administer maintenance to the Supplier’s Oracle databases and troubleshoot production and other database environments to ensure a reliable and robust service provision for the Customer,
Licences/hosting/maintenance
Where appropriate, Supplier will contract with third parties to provide licences for the use of software and hardware, hosting services to meet the Customer’s data requirements and maintenance services in respect of the Customer’s systems.
Business Intelligence
The Supplier will generate MI reports on operational activity, financial reporting and productivity for the Customer, The Supplier will also maintain data warehouse and work to insure high data integrity and standardised reporting,”
22. Article 13(4) of the India-UK DTAA reads as under:
“Article 13 – ‘Royalties and Fees for Technical Services’ of India – UK Double Taxation Avoidance Agreement (DTAA)
1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed:
a) in the case of royalties within paragraph 3(a) of this Articles, and fees for technical services within paragraphs 4(a) and (c) of this Article,-
during the first five years for which this Convention has effect;
(aa)15 per cent of the gross amount of such royalties or fees for technical services when the payer of the royalties or fees for technical services is the Government of the first-mentioned Contracting State or a political sub-division of that State, and
(bb)20 per cent of the gross amount of such royalties or fees for technical services in all other cases; and
during subsequent years, 15 per cent of the gross amount of such royalties or fees for technical services; and
c. ;n the case of royalties within paragraph 3(b) of this Article
and fees for technical services defined in paragraph 4(b) of this Article, 10 per cent of the gross amount of such royalties and fees for technical services.
; For the purposes of this Article, the term “royalties” means:
= payments of any kind received as a consideration for the use of, or the right to use, any copyright of aliterary, artistic or scientific work, including cinematography films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and
payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic.
– For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term “fees for technical services” means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which:
a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received; or
b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or
c) make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design.”
23. Having considered the terms of the agreement [supra], in light of Article 13(4) of the DTAA, we are of the considered view that unless the recipient of the services is enabled to provide same services without recourse to the service provider, the services cannot be said to have made available recipient of services.
24. In our humble opinion, mere incidental advantage to the recipient of services is not enough. The real test is the transfer of technology and on the given facts of the case, there is no transfer of technology and what has been appreciated by the Assessing Officer/ld. CIT(A) is the incidental benefit to the assessee which has been considered to be of enduring advantage.
25. In our understanding, in order to invoke make available clauses, technical knowledge and skill must remain with the person receiving the services even after the particular contract comes to an end and 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.
26. As mentioned elsewhere, intellectual property is with the supplier [UK based company]. Facts of the case in hand clearly show that there is no transfer of skill or technical services. The recipient [assessee] has not been enriched by receiving the services and making it capable to face similar challenges in future on its own and acquiring skills to deal with the issues. Rendition of these services by the UK company does not enable the recipient [assessee] to provide similar services without recourse to the service provider in future. Merely incidental benefit or enrichment is not sufficient.
27. The Hon’ble Delhi High Court in the case of Guy Carpenter 346 ITR 504 [supra] on similar circumstances held as under:
“9. A plain reading of Article 13(4)(c) of the DTAA indicates that ‘fees for technical services’ would mean payments of any kind to any person in consideration for the rendering of any technical or consultancy services which, inter alia, “makes available” technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. According to the Tribunal this “make available” condition has not been satisfied inasmuch as no technical knowledge, experience, skill, know-how, processes, have been made available by the assessee to the insurance companies operating in India. It also does not consist of the development and transfer of any technical plan or technical design.
10. The Tribunal examined the evidence available on record in order to return a finding on the issue as to whether the payments received by the assessee from the insurance companies operating in India would fall within the expression ‘fees for technical services’ as appearing in article 13(4)(c) of the DTAA read with section 9(1)(vii) of the said Act.
XXXXX
11. The Tribunal also noted the process by which the transaction takes place. It has been pointed out that the originating insurer in India would contact J.B. Bodal M.B. Boda for placing identified risks/ class of risks with international J.B. Boda, in turn, would contact one or more international firm(s) of reinsurance broker(s) like the assessee for competitive proposals from the international reinsurer. Then, the international reinsurance brokers like the assessee would contact other primary brokers and various syndicates in the Lloyds market for competitive proposals. Based on the various offers or proposals given by the international reinsurance brokers, like the assessee, to J.B. Boda, the latter would present various options to the originating insurer in India, which would take a final decision in the matter. Based on the decision of the originating insurer in India, the policy terms would then be agreed upon and the risk would be placed with the international reinsurer. It was also pointed out that as per the normal industry practice, the reinsurance premium net of brokerage of 10% as per the policy contract is remitted to the assessee, i.e., reinsurance brokers, for onward transmission to international reinsurers. The intermediation fee which is another word for brokerage is paid separately by the originating insurance in India to J.B. Boda, the international reinsurance brokers like the assessee and other intermediaries, based on a mutually agreed ratio which accounts for their relative contribution in the reinsurance process.
12. Based on this manner of transacting, the Tribunal came to a conclusion that the payment received by the assessee could not be regarded as ‘fees for technical services’. Further, more, the Tribunal also held that such receipts would not amount to fees for technical services as the “make available” clause contained in article 13(4)(c) had not been satisfied in the facts and circumstances of the present case.
13. In our view, the Tribunal has arrived at these conclusions purely on assessing the factual matrix of the case at hand. The findings are in the nature of factual findings and, therefore, according to us, no substantial question of law arises for our consideration, particularly, because the learned counsel for the Revenue was unable to point out any perversity in the recording of such findings.”
28. Similarly, the Hon’ble High Court of Karnataka in the case of De Beers India Minerals [P] Limited 346 ITR 467 has, inter alia, held as under;
“Therefore the clause in Singapore agreement which explicitly makes clear the meaning of the word make available, the said clause has to be applied, and to be read into this agreement also. Therefore, it follows that for attracting the liability to pay tax not only the services should be of technical in nature, but t should be made available to the person receiving the technical services. The technology will be considered ‘made available’ when the person who received service is enabled to apply the technology. The service provider in order to render technical services uses technical knowledge, experience, skill, know how or processes. To attract the tax liability, that technical knowledge, experience, skill, know-how or process which is used by service provider to render technical service should also be made available :it is open to the recipient of the services, so that the recipient also acquires technical knowledge, experience, skill, know -how or processes so as to render such technical services. Once all such technology is made a a able it is open to the recipient of the service to make use of the said technology. The tax is not dependent on the use of the technology by the recipient. The recipient after receiving of technology may ~*use may not use the technology. It has no bearing on the taxability aspect is concerned. When the technical service is provided, that technical service is to be made use of by the recipient of the service in further conduct of his business. Merely because his business is dependent on the technical service which he receives from the service provider, it does not follow that he is making use of the technology which the service provider utilizes for rendering technical services. The crux of the matter is after rendering of such technical services by the service provider, whether the recipient is enabled to use the technology which the service provider had used. Therefore, unless the service provider makes available his technical knowledge, experience, skill, know-how or process to the recipient of the technical service, in view of the clauses in the DTAA, the liability to tax is not attracted. [Para 14]
From the aforesaid discussion it is clear that test is whether the recipient of the service is equipped to carry on his business without reference to the service provider. If he is able to carry on his business in future without the technical service of the service provider in respect of services rendered then, it would be said that technical knowledge is made available. [Para 18]
It is in this background one has to look at the facts of this case, in order to find out whether the service provider has made available the technical knowledge to the assessee so as to foist the liability of payment of tax. [Para 21]
What is the meaning of ‘make available’. The technical or consultancy service rendered should be of such a nature that it ‘makes available’ to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology ‘making available’, the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone 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. Technology will be considered ‘made available’ when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical « edge, skills, etc., does not mean that technology is made available to the person purchasing the service within the meaning of paragraph (4)(b ). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, 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.”
29. In light of the aforementioned judicial decisions, we are of the considered view that the assessee is unable to make use of the said technology only by itself in its business or for its own benefit without recourse to the UK company.
30. We find that neither the Assessing Officer nor the ld. CIT(A) has made any attempt to discuss the judicial decisions relied upon by the assessee but has only referred to a single decision of the co-ordinate bench in the case of HJ Heinz [supra] wherein the assessee was availing support services from group company in the area of human resources, strategic planning and marketing, finance and information systems.
31. It was further held that the concept of make available which requires that fruits of services should remain unavailable to the service recipients in some concrete shape such as technical knowledge, experience, skill, etc and service recipient has to make use of such technical knowledge, skill, etc by himself in his business and for his own benefit.
32. Whereas the facts of the case in hand show that the assessee does not gain any technical knowledge, experience or skill as it is not involved in the process that service provider is following while rendering the services. The IT support services are rendered by CPP UK from UK itself and these services are rendered for the entire group and not just for CPP India.
33. The agreement between CPP group services and the assessee is perpetual and such services are provided by CPP group on recurring basis to the assessee and if the technical knowledge, skill etc. is being made available to the assessee, then there would be no need for the assessee to take recourse to the CPP UK for these services.
34. In our considered opinion, IT support services do not satisfy the make available test as no technical know-how, skill etc were transferred to the assessee. Considering the facts of the case in totality, in light of judicial decisions discussed hereinabove, we direct the Assessing Officer to delete the disallowance of Rs. 5,46,31,534/-
35. In the result, the appeal of the assessee in ITA No. 116/DEL/2022 is allowed.
The order is pronounced in the open court on 22.12.2022.
Author Bio
