Payments made to American company for supply of personnel are not ‘fees for included services’ under Article 12(4)(b) of India-USA DTAA.

The appellant is an Indian company. It is
subsidiary of an American company. The appellant entered into a contract with
another Indian company (which was an affiliate of IBM) in Bangalore for
providing software personnel by the appellant for global (including the USA)
projects of IBM. The appellant, in turn, entered into contract with another US
company by name ACSC. In terms of the contract between the appellant and ACSC,
ACSC was to supply software personnel in the USA for projects of IBM (which were
awarded to the appellant) in the USA. Thus, whenever IBM Bangalore required
personnel for a project in the USA, it instructed the appellant. The appellant,
in turn, would instruct ACSC and procure the personnel from ACSC and would
deploy them for IBM projects in the USA. ACSC raised invoice on the appellant on
monthly basis and the appellant, in turn, raised its invoice on IBM. The
appellant remitted the payments to ACSC in US $, but had not deducted tax at
source on the same.

The AO was of the view that (i) the payments made
by the appellant to ACSC were for supply of software professionals for executing
on site work in the USA in connection with the appellant’s contract with IBM
Bangalore; (ii) they were ‘fees for technical services’ and chargeable in terms
of S. 9(1)(vii)(b) of the Income-tax Act; and (iii) as the appellant had not
deducted the tax on such payments, the appellant should be treated as an
‘assessee in default’. While admitting that the recipient (namely, ACSC) is
entitled to be taxed either under the Income-tax Act or the India-USA DTAA,
whichever is beneficial, the AO did not accept the appellant’s contention that
the payment made by it was not covered under Article 12(4)(a) or (b) of the
India-USA DTAA. Finally, the AO concluded that the payments made by the
appellant to ACSC were covered u/s.9(1)(vii)(b) of the Income-tax Act as well as
under Article 12(4)(b) of the India-USA DTAA and accordingly, the appellant was
required to deduct u/s.195 of the Income-tax Act. As the appellant had not so
deducted the tax, he was an assessee in default u/s.201 and u/s.201(1A) of the
Income-tax Act. The AO, thus, raised demand of tax on the appellant.

In appeal, the CIT(A) annulled the order of the AO
and deleted the demand.

The Tribunal observed that the questions were:
firstly, whether the payments were towards ‘fees for technical services’ or
merely for supply of personnel; secondly, whether the payments could be
considered ‘fees for included services’; and thirdly, whether the payments would
be ‘business profits’ in the hands of ACSC. Also, under the India-USA DTAA,
non-technical consultancy services cannot be treated as ‘fees for included
services’.

The Tribunal noted that what was ordered was
certain amount of manpower at a specified unit price per hour and no detail as
to the work to be done was stipulated by the appellant, which showed that the
payments were made only for supply of manpower. It observed that the India-USA
DTAA also clarified that provision of technical input by the person providing
the services does not per se mean that technical knowledge or skill is ‘made
available’. Similarly, use of the product embodying the technology also does not
per se mean that the technology is ‘made available’. Even if there is a transfer
of developed work, software, etc. it is not ACSC, but the appellant who
transfers the same. Also, neither the appellant nor ACSC appear to be engaged in
computer programming and the developed work never belonged to the appellant or
ACSC.

Since no technology, skill, experience, technical
plan, design, etc. was made available either by the appellant or by ACSC,
provisions of Article 12(4)(b) could not be invoked.

Even if payments were to constitute ‘fees for
technical services’ u/s.9(1)(vii), in view of S. 90(2) the appellant has option
to be governed by the provisions of the DTAA.