The Income Tax Appellate Tribunal (ITAT), Delhi Bench ‘D’, adjudicated on the appeal filed by Netafim Ltd., a non-resident corporate entity incorporated in Israel, against the order passed by the Deputy Commissioner of Income Tax (DCIT), Circle-2(2)(2), International Taxation, New Delhi. The appeal, registered as ITA No. 366/DEL/2021, pertains to the assessment year 2015-16.
Netafim Ltd., located in Vadodara, Gujarat, filed its return of income for the assessment year 2015-16. The case was filed on 31/03/2021, and the final order was pronounced on 31/05/2023. The central issue in this appeal was 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 appellant, Netafim Ltd., is a tax resident of Israel and opted to be governed by the India-Israel DTAA. During the assessment year in question, the appellant offered its royalty income received from its Indian subsidiary for tax. However, it did not offer the fees/charges received under an IT and SAP service agreement for tax, arguing that these should not be treated as FTS.
Netafim Ltd. contended that the services rendered under the IT and SAP service agreement did not make available any technical knowledge, skill, or know-how to its Indian subsidiary, a condition necessary for FTS under the India-Portugal DTAA. Therefore, these receipts should not be taxable in India as FTS.
The Assessing Officer rejected the appellant’s argument, holding that the MFN clause in the Protocol to the India-Israel DTAA would not apply without a specific notification from the Government of India. Consequently, the receipts were brought to tax as FTS under Article 13 of the India-Israel DTAA.
The Commissioner of Income Tax (Appeals) disagreed with the Assessing Officer, holding that the MFN clause applied and the more restricted definition of FTS under the India-Portugal DTAA should be used. However, the Commissioner (Appeals) concluded that the receipts under the IT and SAP Service Agreement were ancillary and subsidiary to the royalty income and thus taxable as FTS under Article 12(4)(a) of the India-Portugal DTAA.
The Tribunal examined the nature of services rendered under the IT and SAP Service Agreement and the Technical Collaboration Agreement. It was found that these agreements were distinct and unrelated. The IT and SAP Service Agreement provided day-to-day IT support for maintaining IT infrastructure, while the Technical Collaboration Agreement was for drip irrigation products.
The Tribunal observed that the IT and SAP Service Agreement existed from 1st April 2009, whereas the Technical Collaboration Agreement commenced from 1st April 2011. The Tribunal concluded that the services under the IT and SAP Service Agreement were not ancillary and subsidiary to the services under the Technical Collaboration Agreement. Therefore, the receipts in question could not be taxed as FTS under Article 12(4)(a) of the India-Portugal DTAA.
The Tribunal held that the receipts under the IT and SAP Service Agreement were not taxable as FTS under the India-Portugal DTAA and deleted the disputed additions for the assessment years 2014-15 and 2015-16.
The appeals were allowed, and the receipts under the IT and SAP Service Agreement were not treated as FTS.
Order pronounced in the open court on 31st May, 2023.
Signed by:
(G.S. PANNU) – President
(Saktijit Dey) – Judicial Member
Date: 31st May, 2023
RK/-
Copy forwarded to:
Assistant Registrar, ITAT, Delhi Benches, Delhi
ITA No. 366/DEL/2021 – Netafim Ltd. vs DCIT Circle-2(2)(2) – Taxability of IT and SAP Services
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