Background:
M/s. Apollo Consulting Services Corporation (hereinafter referred to as ACSC) is a non-resident company incorporated in USA. ACSC and IBM (based in USA) had entered into a Global Agreement which is also known as ‘Base Agreement’ on 11.01.2002. By virtue of this agreement, ACSC agreed to provide IBM, USA and its global subsidiaries certain services. In the background of the Base Agreement, IBM India made deal with ACSC through IIC Systems Private Limited, India (hereinafter referred to as ISPL) for the services to be performed in the USA.
During the previous year, as per the agreement between IBM India and ISPL, ACSC provided technical manpower to IBM in USA according to its requirements. Thus, the link between the three entities was that, purchase orders are issued by IBM to ISPL who in turn passed that to ACSC. The entire arrangement was for providing skilled manpower in USA.
During the course of assessment proceedings the assessee – ACSC was required by the AO to give reasons for claiming the income earned on providing technical manpower were not taxable in India. In response to this, the assessee gave detailed submission regarding the nature of services and that the payment received is neither Fees for Technical Services (FTS) within the meaning of section 9(i)(vii) nor under Fees for Included Services (FIS) as per Article 12(4)(b) of Indo Us DTAA. The AO accepted the contention of the assessee that and passed the order u/s 143(3).
Learned DIT called for the assessment records and observed that that the technical services agreement between IBM and ISPL, the scope of services also included the software development activities. DIT held that the AO has failed to appreciate the nature of services to be provided under the contract between ISPL and ACSC for AY 2005-2006 and held u/s 263 that the assessee has made available its technical knowledge and expert skill in rendering these services and accordingly payments for the same prima-facie constitute “Fees for Included Services” within the meaning of Article 12 of the India-US DTAA.
Assessee’s contentions:
- The personnel provided by ACSC performed their services wholly in the US and no part of the activity was carried out in India.
- As the activities were carried out outside India, no part of income accrues or arises in India.
- Assessee’s activity was purely recruiting and supplying of skilled personnel to IBM India through ISPL. These technical personnel were neither the employee nor were they working under the supervision of the assessee i.e. ACSC.
- Thus, payment made was by the IBM to the assessee was for time value or the remuneration of the supplied personnel employed by the IBM’s clients project outside India and it has no relationship or nexus with the work or services or software developed by the said personnel for the IBM’s client.
- The assessee has purely provided recruitment services which do not fall within the meaning of FIS or FTS.
HELD:
- While accepting a contention of the assessee, it is not necessary that the AO must passed a lengthy order for justifying the acceptance of the contention
- In such a situation, when CIT / DIT is holding the order as erroneous and prejudicial to the interest of revenue must give reasons for his conclusion that assessment order which has been passed even though in a cryptic manner was erroneous in law and on facts and is also prejudicial to the interest of revenue.
- One or two terms in an agreement will not per se lead to any conclusion of providing any technical services, unless something is found in terms of actual work order, bills and payment received for services rendered. The entire substance of the agreement is to be seen.
- From the perusal of the ITAT order in the case of ISPL, it is seen that in the case of ISPL, this aspect of the matter and the transactions among the ACSC, ISPL and IBM has been taken duly note of and examined by the Tribunal. The relevant finding of the Hon’ble Tribunal for the sake of ready reference is reproduced hereunder:
“So far as DTAA between India and USA is concerned, consultancy services which are not technical in nature, cannot be treated as ‘fee for included services’. We also notice that the fact that in the instant case the agreement of the assessee with ACSC is only for manpower supply or supply of technical personnel.
Neither the agreement nor the invoice refer to any technical services rendered or any product or software developed for IBM. All the agreements, invoices and related documents produced before us lead to the fact that the payments have been made only for supply of manpower for certain amount of hours and nothing more. Since there is no technology, skill, experience, technical plan, design, etc. had been made available either by the assessee or the ACSC, invoking the provisions of Article 12(4)(b) of the DTAA for treating the payments as chargeable to tax in India, is not justified.“ - Thus, the view taken by the ITAT is in fact directly contrary to the view taken by the Ld DIT and, therefore, we can safely presume that finding and view taken by the AO in accepting the assessee’s explanation is a better possible view.