Case Number: ITA 1092/DEL/2020
Appellant: Netafim Ltd., Gujarat
Respondent: DCIT Circle-2(2)(2), International Taxation, New Delhi
Assessment Year: 2014-15
Result: Final Tribunal Order
Case Filed On: 2020-03-16
Date of Order: 2023-05-31
Pronounced On: 2023-05-31
This case revolves around whether the amounts received by Netafim Ltd. from its Indian subsidiary towards IT and SAP charges can be treated as Fees for Technical Services (FTS) under the India-Israel Double Taxation Avoidance Agreement (DTAA) read with the India-Portugal DTAA. The primary issue in this appeal was the taxability of receipts from the Indian subsidiary under the IT and SAP service agreement, which were not initially offered for taxation by Netafim Ltd.
Netafim Ltd., a non-resident corporate entity incorporated in Israel and a tax resident of Israel, opted to be governed by the India-Israel DTAA. In the assessment years under dispute, the company filed its return of income, offering to tax the royalty income received from its Indian subsidiary towards the transfer of technical know-how, skill, etc. However, it did not offer receipts from the Indian subsidiary under the IT and SAP service agreement to tax.
During the assessment proceeding, the Assessing Officer (AO) observed that Netafim Ltd. had also received certain fees/charges towards IT and SAP services under an agreement with the Indian subsidiary, which were not offered for taxation. The AO contended that these amounts should be treated as FTS in terms of Article 13 of the India-Israel DTAA. Netafim Ltd. argued that as per the India-Portugal DTAA, which has a more restricted definition of FTS, the receipts could not be treated as FTS due to the absence of ‘make available’ condition. The AO, however, did not accept this argument, stating that without a specific notification from the Government of India, the ‘make available’ condition from the India-Portugal DTAA could not be imported to the India-Israel DTAA. Consequently, the AO treated the receipts as taxable FTS under Article 13 of the India-Israel DTAA.
Netafim Ltd. contested this addition before the learned Commissioner of Income Tax (Appeals)-43, New Delhi. The Commissioner agreed with Netafim Ltd. that the MFN clause under the Protocol to the India-Israel DTAA would apply, making the more restricted scope of FTS under Article 12(4) of the India-Portugal DTAA applicable. However, he also held that the receipts under the IT and SAP service agreement were ancillary and subsidiary to the Technical Collaboration Agreement, resulting in royalty income and therefore, the ‘make available’ condition would not apply. This led to a conclusion that the receipts could be taxed as FTS.
Netafim Ltd. appealed to the Income Tax Appellate Tribunal (ITAT). The key points discussed were:
Appellant: Sh. Salil Kapoor, Advocate; Sh. Ananya Kapoor, Advocate; Sh. Vibhu Jain, Advocate
Respondent: Sh. Vizay B. Vasanta, CIT(DR)
The learned counsel for the assessee argued that there was no linkage between the IT and SAP service agreement and the Technical Collaboration Agreement. They highlighted that the IT and SAP service agreement existed prior to the Technical Collaboration Agreement, which clearly indicates that the two agreements are unrelated. Moreover, the counsel cited several judicial precedents supporting the stance that the receipts under the IT and SAP service agreement could not be treated as FTS due to the lack of ‘make available’ condition.
The learned Departmental Representative argued that the services rendered under the IT and SAP service agreement were ancillary and subsidiary to the Technical Collaboration Agreement. They contended that some services under the IT and SAP agreement might relate to the transfer of technical know-how, which would be taxable as FTS.
The Tribunal analyzed the nature of services under both agreements and observed the following:
Therefore, the Tribunal held that the receipts under the IT and SAP service agreement could not be taxed as FTS under Article 12(4)(a) of the India-Portugal DTAA and deleted the disputed additions for both assessment years.
The ITAT concluded that the receipts under the IT and SAP service agreement between Netafim Ltd. and its Indian subsidiary do not qualify as Fees for Technical Services under the India-Portugal DTAA, as they are not ancillary and subsidiary to the Technical Collaboration Agreement. Thus, the Tribunal allowed the appeal in favor of Netafim Ltd.
Order pronounced in the open court on 31st May 2023 by G.S. Pannu, President, and Saktijit Dey, Judicial Member.
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