The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has granted relief to Netafim holding that the income from Systems Applications and Products in Data Processing(SAP) and Information Technology support services were not in the nature of Fees for Technical Services (FTS) as per treaties.
The assessee Netafim Ltd., was a non-resident corporate entity incorporated in Israel and a tax resident of Israel. In the previous year relevant to assessment years under dispute, the assessee had entered into various international transactions with its Indian subsidiary, Netafim Irrigation India Pvt. Ltd. (NIIPL), such as, sale of raw materials, sale of stores, consumables and packing materials, sale of traded goods, sale of equipment and provision of IT and SAP services.
However, in the present appeals, it was concerned only with the taxability of the amounts received towards provision of IT and SAP services. In the course of assessment proceeding, the assessee submitted that as per Article 13 of India – Israel DTAA, FTS means payments of any kind received as a consideration for services of a managerial, technical or consultancy nature, including the provision of services by technical or other personnel.
However, he submitted, as per the protocol to India – Israel Treaty, if India had entered into a DTAA with any other country after 01.01.1995 and in the said treaty the scope of FTS was more restricted, then the restricted terms of that treaty would apply to India – Israel DTAA.
In this regard, the assessee submitted that as per India – Portugal and India – Canada DTAAs the definition of FTS was more restricted as it imposes ‘make available’ condition. He submitted, only when technical knowledge, skill, knowhow, etc. was made available to the recipient of service, the payments received will fall within the definition of FTS.
The Assessing Officer, treated the amounts received towards provision of IT and SAP support services as FTS under Article 13 of the India – Israel DTAA and added back the amounts.
Salil Kapoor, on behalf of the appellant submitted that the assessee had not transferred any technical knowledge, skill etc. and services were provided outside India. Therefore, the receipts cannot be treated as FTS. He submitted that the payments received were in the nature of reimbursements on cost-to-cost basis without any profit element embedded therein.
Abhishek Kumar, on behalf of the revenue submitted that the Most Favoured Nation (MFN) clause as per the Protocol to India – Israel DTAA for applying a more restrictive meaning to FTS as per a treaty between India and a third country could not be made applicable unless a specific notification regarding applicability of MFN clause was issued by the Government. Applying the restricted meaning of FTS as per India – Portugal and India – Canada DTAAs, the Division Bench of Saktijit Dey, (Judicial Member) and B.R.R. Kumar, (Accountant Member) held that the amounts received by the assessee from providing SAP and IT support services were not in the nature of FTS, hence, not taxable in India in absence of a Permanent Establishment.
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