Though back-up services and IT support services for solving IT related problems to its Indian subsidiary are in the nature of technical services, but is not covered in para (3)(g) to Article 12 of the India Australia Treaty

Sandvik Australia Pty. Ltd vs DDIT

 

The assessee is a non-resident company incorporated in Australia. During scrutiny AO observed that assessee received the payment from Sandwich Asia Ltd., from Walter Tools India Pvt. Ltd. The A.O. has noted that the assessee gives the IT support in Asia pacific region which was introduced in order to achieve the consolidated and standardised IT environment in Sandvik Group. The services provided by the assessee are in the nature of Help Desk, administrative and maintenance IT support and therefore, concluded that as per the agreement the assessee is not only providing the basic IT services such as help desk support, by supporting Sandvik IT personnel but much more than that which is IT infrastructure to those facilities. The A.O. has also observed that the assessee is also charging payments from its affiliates for providing the infrastructure which is evident from the copy of the invoices submitted by the assessee. AO also referred to section 5(2) r.w.s. 9(1)(vi) and section  9(1)(vii) and concluded that the services rendered by the assessee company to its group companies in India i.e. Notes Domino Administration, SBS, Windows operations, network infrastructure, global server, and AS400 data processing are services in the nature of technical services and payments made for those services get covered under the fees for the technical services.

 

Assessee claimed that said payment is not received to make available technical knowledge, skill, knowhow or process and the same do not fall within the ambit of royalty under Article 12 of the Treaty (DTAA) between India and Australia. Assessee also contended that as assessee is not having any Permanent Establishment (PE) in India, the said income is not taxable. Assessee also contended that the services rendered by it are in the nature of IT support services. The assessee opposed the conclusion of the A.O. that the services rendered to Indian affiliates are in the nature of technical services by taking the stand that the payment for the services rendered by the assessee is not in the form of the royalty income and nor it is FTS. Assessee further contended that assessee has not made available any technical knowledge, experience, skill and know-how. The assessee also relied on the decision in the case reportd in (2006) TaxCorp (INTL) 2220 (ITAT-MUMBAI) and  (2001) TaxCorp (INTL) 2002 (HC-MADRAS).

 

The A.O. did not accept the contention of the assessee that the services rendered by the assessee are not the technical services and hence the payment received by it from its Indian affiliates cannot be treated as FTS. The A.O. also held that so far as the taxability of the payment received by the assessee from its Indian affiliates is concerned, the same is taxable u/s.9(1)(vii) of the Act as assessee cannot get the benefit even under the Treaty.

 

The Dispute Resolution Panel (DRP) confirmed by the AO that the amount received by the assessee from its Indian affiliates are taxable in the normal provisions of the Act u/s.5(2) r.w.s. 9(1)(vi) and 9(1)(vii) of the Income Tax Act, 1961 as well as same is taxable in view of the Article 12 of the DTAA between India and Australia.

 

Whether payments for IT support services are taxable as FTS in India under Article 12 of the tax treaty?

 

On appeal before ITAT, submitted that the assessee acts as a global information technology support centre for the Asia-pacific region and is responsible for providing necessary IT support services for Sandvik Asia Ltd. in Asia-pacific region. He submits that assessee company has installed servers in various locations in Asia-pacific region i.e., Singapore, Malaysia, China, Japan, Korea, India, etc., and the regional servers installed at various locations are part of global infrastructure maintained by the assessee. He submits that there are two servers located in India, one is at Mehsana(Gujarat) and another is in Gurgaon. He submits that the services rendered by the assessee company do not make available any technical knowledge, skill, know-how or process to the recipients and they do not fall within the ambit of the royalties under Article 12 of the Treaty. He submits that even it is not the case of the A.O. also that the payments received by the assessee company is in the nature of the royalty though he has mentioned royalty/FTS in the draft order as well as in the final order. He submits that so far as taxability of the payments received by the assessee from the Indian affiliates, the same is taxable under the normal provisions of the Act more particularly under sec.9(1)(vi)/9(1)(vii) but in view of the DTAA between India and Australia, unless and until the technical knowhow is made available the same cannot be taxed in India. He submits that the nature of the services has been elaborated in the agreement between these two parties, the assessee and Sandvik Asia Ltd.

 

Futhe, thrust of the argument is that assessee is only rendering IT support services but is not imparting any technical knowhow or knowledge to its Indian affiliates and unless and until the technical know-how is imparted, the same cannot be taxable in India in view of the DTAA more particularly Article 12. Ld. Counsel took us to Article 12 of the India Australia Treaty more particularly sub-para 3(g) and submits that it is clear from the language used in the Treaty that unless the services are made available to the person acquiring the services, the same cannot be taxed in the contracting State. He placed his reliance on the decision of the Hon'ble High Court of Karnataka in the case reported in (2012) TaxCorp (INTL) 0214 (KARNATAKA). Finally he concluded that there is a difference between rendering the services and to make available the services.

 

Where as on behalf of revenue it was contended that  taxpayer was not only rendering the back-up IT support services but also transferring knowledge of the said services to the recipient party. Referring to Article 12 of the tax treaty it was contended that consideration received by the taxpayer from the Sandvik Asia Ltd was nothing but royalty.

 

ITAT observed that Clause (g) in Article 12(3) goes to the roots of the issue. Main thrust of the argument of the Ld. Counsel is that it is not only sufficient to render the services but the same should be made available to the recipient and this particular important aspect is missed by the DRP/TPO. We find that the expression “making available” is very much important to decide in which contracting state the amount received for rendering the services relating to the technical know-how is to be taxed. The expression “make available” is used in the context of supplying or transferring technical knowledge or technology to another. It is different than the mere obligation of the person rendering the services of that persons own technical knowledge or technology in performance of the services. The technology will be considered as made available when the person receiving the services is able to apply the technology by himself.

 

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 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 available 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 or 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.”

 

Held, the assessee has only provided the back-up services and IT support services for solving IT related problems to its Indian subsidiary. Hence, unless and until the services are not made available, same cannot be taxable in India. We therefore hold that the services rendered by assessee company to its Indian group companies, though are in the nature of technical services, but is not covered in para (3)(g) to Article 12 of the India Australia Treaty and hence, the same is not taxable in India. We also hold that the amount received by the assessee cannot be treated as a Royalty even under the normal provisions of I.T. Act. But under the normal provision of the I.T. Act the same constitute consideration for rendering the technical services covered u/s.9(1)(vii) of the I.T.Act.