SPi Global US Inc. vs. ACIT: A Critical Examination of the Taxability of Sub-Contracting Charges Under the India-USA DTAA

In a landmark case involving SPi Global US Inc., a taxpayer based in Puducherry, and the Assistant Commissioner of Income Tax, Circle-3(1)(2), International Taxation, New Delhi, the Income Tax Appellate Tribunal delved into the intricate details of the taxability of sub-contracting charges under the India-USA Double Taxation Avoidance Agreement (DTAA). The case, bearing number ITA 1662/DEL/2022 for the assessment year 2019-20, saw the tribunal navigating through the complexities of international tax law, highlighting the nuanced interpretation of DTAA provisions.

The genesis of the dispute lies in the assessing officer’s (AO) decision, dated 24.05.2022, under section 143(3) r.w.s 144C(13) of the Income Tax Act, 1961, which addressed the taxability of sub-contracting charges received by SPi Global US Inc. from its Indian counterpart, SPi Technologies India Private Limited. The AO’s order, rooted in the provisions of the India-USA DTAA, specifically revolved around the interpretation of ‘Fees for Included Services’ (FIS) as per Article 12(4)(b) of the Treaty.

The primary bone of contention was whether the sub-contracting services provided by SPi Global US Inc., which were in the nature of e-publishing services including editorial services, page composition, and language polishing, among others, met the ‘make available’ clause enshrined in the DTAA. The ‘make available’ clause underscores that for services to be taxed as FIS, the technology, skill, know-how, or process must not only be used but also transferred in such a manner that the recipient is enabled to apply the same independently in the future.

In the proceedings, SPi Global US Inc. argued that the sub-contracting charges were not taxable under the India-USA DTAA as the services did not make any technology or process available to SPi Technologies India Pvt. Ltd. that could be used by the latter independently in the future. The company further contended that the assessing officer and the DRP (Dispute Resolution Panel) had erred in their interpretation by not considering the essence of the ‘make available’ clause.

The tribunal’s decisive judgment, delivered by the members, highlighted the necessity to interpret the provisions of the DTAA in light of the principles of natural justice and the actual conduct of the parties involved. It meticulously examined the submissions, evidences, and legal precedents presented by both parties concerning the ‘make available’ clause.

After a thorough review, the tribunal sided with SPi Global US Inc., stating that the services provided did not satisfy the conditions required for taxability under the FIS of the India-USA DTAA. It underscored that for a service to qualify as FIS, it must not only involve the use of technology but also result in the transfer of technology that allows the recipient to perform the service independently in the future.

The tribunal’s detailed analysis encompassed various legal precedents, the memorandum of understanding accompanying the DTAA, and the factual matrix of the services provided. It concluded that the sub-contracting charges received by SPi Global US Inc. from SPi Technologies India Pvt. Ltd. were not taxable in India under the provisions of the India-USA DTAA, thereby setting a significant precedent for the interpretation of ‘make available’ clause in transnational tax disputes.

The SPi Global US Inc. vs. ACIT case is a quintessential representation of the complexities inherent in international tax law and the importance of a nuanced and informed approach toward the application of DTAA provisions. This ruling not only provides substantial clarity on the ‘make available’ clause but also emphasizes the tribunal’s role in ensuring that tax assessments are conducted in accordance with the principles of justice, equity, and interpretative diligence.

SPi Global US Inc. vs. ACIT: A Critical Examination of the Taxability of Sub-Contracting Charges Under the India-USA DTAA