Loading judgment…
Facts
The assessee is challenging the assessment order and directions issued by the DRP, which treated receipts from product analytics solutions as taxable Fees for Included Services (FIS) under the India-USA DTAA for AY 2022-23. The assessee contends that the services provided do not make technical knowledge available to the customer, as required by the treaty.
Held
The Tribunal held that the services provided by the assessee, which involved granting access to its product analytics software, generated commercial information and did not make technical knowledge, skill, or know-how available to the end-user in a manner that would allow them to use it independently in the future. Therefore, the receipts do not qualify as Fees for Included Services.
Key Issues
Whether the fees received by the assessee for providing access to its product analytics software constitute 'Fees for Included Services' (FIS) under Article 12(4)(b) of the India-USA DTAA, specifically on the interpretation of the 'make available' clause.
Sections Cited
143(3), 144C, 144C(13), 274, 270A, 234A, 234B, 234C, 234D, 153(1), 9(1)(vi)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCHES: D : NEW DELHI
Before: SHRI ANUBHAV SHARMA & SHRI MANISH AGARWAL
Assessment Year: 2022-23 Mixpanel Inc., Vs ACIT, Pier 1, Bay 2, Circle-2(2)(1), The Embarcadero, International Tax., San Francisco CA 94111. New Delhi. PAN: AAJCM2431M (Appellant) (Respondent) Assessee by : Shri Nishank Vashistha, Advocate & Shri Puru Medhira, Advocate. Revenue by : Shri Abhishek Sharma, CIT-DR Date of Hearing : 07.05.2025 Date of Pronouncement : 21.05.2025 ORDER
PER ANUBHAV SHARMA, JM:
This appeal is preferred by the Assessee against the final assessment order dated 27.01.2025 passed by the Asstt. Commissioner of Income-tax, International Tax Circle 2(2)(1), New Delhi (hereinafter referred to as the Ld. AO) u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for AY 2022-23.
The assessee has taken the following grounds of appeal:-
“On the facts and in the circumstances of the case and in law, the learned Assistant Commissioner of Income Tax, Circle 2(2)(1) (International tax), New Delhi (Ld. AO') has erred in passing the final assessment order dated January 27th 2025 under section 143(3) read with section 144C of the income-tax Act, 1961 (the Act') and the Ld. Dispute Resolution Panel-II, New Delhi ('Ld.. DRP) has erred in issuing the directions as per section 144C of the Act, on the following grounds .
1. On the facts and circumstances of the case and in law, the Ld. AO has grossly erred in passing the final assessment order without considering the material available on record and is bad in law since it has been passed without giving sufficient opportunity to the appellant.
2. On the facts and in the circumstances of the case and in law, Ld. AO has erred in alleging that receipts from provision of product analytics solutions amounting to Rs 42,59,36,336/, is taxable as Fee for included Services as per the Act and also as per the provisions of India-USA Double Taxation Avoidance Agreement ('DTAA'). i. The said finding of the Impugned Order is, on the face of it, illegal and fallacious in view of the decisions of this Hon'ble Tribunal in Appellant's own case, for AYs 2018-19 and AY 2021-22, wherein on basis the identical facts as involved in present case and no further appeal has been filed against the same, this Tribunal held that the payments received by the Appellant for granting access to its product analytics software and for providing support services in relation to the said software, does not amounts to FIS under Article 12(4)(b) of the India-USA DTAA. ii. That the Impugned Order suffers from well settled law that "the principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities." iii. That the Ld. AO has not considered the settled law as per Delhi High Court as well as this Hon'ble Income Tax Appellate Tribunal ('ITAT') that for the 'make available' clause to satisfy the recipient of service must be able to utilize the technical knowledge on its own in future even after the rendering of the services has come to an end. iv. That even the addition on account of professional services, which are incidental to the primary software licensing services, is against the settled law that when primary services are not taxable, the support services cannot be taxed.
3. On the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 274 read with section 270A of the Act.
On the facts and circumstances of the case and in law, the Learned AO has erred in charging interest u/s 234A, 234B, 234C & 234D, as applicable.
5. On the facts and circumstances of the case and in law, the Ld. AO has erred in computing the total tax liability without considering the directions of the DRP to provide for credit of taxes paid by way of EQL. The above grounds and/or sub-grounds are without prejudice to each other.
On the facts and circumstances of the case and in law, the final assessment order is barred by limitation in as much as 3rd proviso to section 153 (1) of the income tax Act stipulates that no order of assessment shall be made under section 143 or section 144 of the Act at any time after the expiry of nine months from the end of the assessment year in which the income was first assessable: which limitation in the present case stood expired on 31.12.2023 whereas the impugned Assessment Order dated 27.01.2025 was passed after the elapse of 13 months from the expiry of limitation period. The above grounds and/ or sub-grounds are without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. The Appellant prays that appropriate relief be granted based on the above grounds of appeal and the facts and circumstances of the case.”
3. Heard both the sides. The ld. AR has submitted that the issue involved is covered in favour of the assessee in the assessee’s own case by the decision of the Tribunal in AY 2021-22. In this context, we find that the DRP in internal page 12 of its order at para No.6(iii) has observed as follows:- “6. …… …………… (iii) As can be seen from the above the DRP in its directions for AY 2021- 22 has analyzed in detail the work done by the assessee company for its customers and has affirmed the draft order passed by the AO. It has been submitted by the assessee that the Hon'ble ITAT has recently decided the appeal in favour of the assessee for AY 2021-22. The panel members consider it appropriate to direct the AO to verify if the factual matrix and the issues involved are identical and if the said decision has been accepted by the Revenue. If the decision has been accepted and no further appeal has been filed, the AO should follow the same. However, if further appeal has been filed, and the issue has not yet attained finality, in order to keep the issue alive, the proposed variation made by the AO deserves to be upheld. In view of the above, Ground of objection number 1, 2 & 3 stands rejected.”
4. Then, in the final order, the ld. AO has observed as follows:- “In this regard it is submitted that the decision of Hon'ble ITAT in the case of the assessee for AY 2021-22 is not acceptable on the merits and as on date of passing this order, the Department is in the process of filing further appeal before Hon'ble High Court. In this regard, as evident from the directions of Hon'ble DRP, proposed variation made by the AO is upheld.”
The ld. DR was unable to cite before us any decision contrary to what has been concluded in favour of the assessee and, further, if at all any appeal filed has given rise to consequential order in favour of revenue or of stay in favour of the Revenue. In the coordinate Bench of Delhi on which one of us i.e., the JM, was on the Bench has considered the issues involved with regard to the disputed receipts falling in the category of Fee for Technical Service (FTS) or Fee for Included Services (FIS) and has observed as follows:- “8. As we examine the Business model, which is also considered by the AO, on the basis of portal of assessee company it comes up that the assessee is a business analytics service company. It tracks user interactions with web and mobile applications and provides tools for targeted-communication with them. Data collected is used to build custom reports and measure user engagement arid retention. It lets customers track thousands of intricate events and properties. This allows customers to run sophisticated queries and unearth powerful product insights in seconds. Mixpanel is a tool that allows customers to analyze how users interact with their Internet- 4 connected product. It is designed to make teams more efficient by allowing everyone to analyze user data in real time to identity trends, understand user behavior, and make decisions about your product.
The primary basis of DRP classifying the income as FIS is as follows: i. That "nature of services being highly technical, these falls clearly under the definition of FTS/FIS" ii. That knowledge imparted through application "become knowledge base for future use "
Now the relevant Article 12(4)(b) of the India-USA DTAA reads as follows: "4. For purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know- how, or processes, or consist of the development and transfer of a technical plan or technical design."
As per plain terms of Article 12(4)(b) of the India-US Tax Treaty, following twin conditions are required to be cumulatively satisfied in order to qualify as FIS: i. such services are technical or consultancy services if they make available knowledge, experience, skill, know-how, or processes or alternatively consist of development and transfer of a plan or design ii. and such knowledge, experience, plan, design etc. is technical.
Relying the DRP direction the AO held in the impugned Assessment Order that report/solutions as generated from the Application and 'made available' to end users the knowledge available in these reports and which may also be put to future use, therefore, the income qualifies as FIS. In addition, the Assessment Order classifies the said services as FIS on the reasoning that the nature of services is highly technical.
Thus it becomes necessary to examine that if DRP was right to conclude that the report or information generated by access to the software of assessee, can be called 'Technical' as with regard to the nature of services generating FIS. Admittedly what the customer of assessee can generate by access to the software of assessee is data analysis of information provided by the users of the product of the assessee. The reports so generated are merely commercial information which helps the customers of assessee in product analysis in real time to identity trends, understand user behavior, and make decisions about your product.
In the present case, only commercial information is transferred to the end user and not technical knowledge as required under Article 12(4)(b) to constitute FIS. In this regard, reference was drawn by Ld. Counsel to Example No. 7 given in the MoU dated 12.09.1989 on the similar subject i.e., product market analysis. We consider the same to be quite relevant and reproduce the same below, as this example 7 reads as follows: Facts: The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol free oil and wishes to market this product worldwide. It hires an American marketing consultancy firm to do computer simulation of the world market for such oil and to advise it on marketing strategies. Are the fees paid to the US company for included services? Analysis: The fees would not be for included services. The American company is providing a consultancy which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc., nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information.The fact that technical skills were required by the performer of the service in order to perform the commercial information does not make the service a technical service within meanings of para (4)(b).
Clearly, commercial information/output from a technical application does not constitute FIS as there is no technical design, process or plan which has been transferred to the client providing enduring benefit.
Ld. Sr. Counsel has also relied on the MOU dated 12 September, 1989 to India USA DTAA and we are of considered view that same also sheds light on the scope of Article 12(4)(b) in the following words: Paragraph 4(h) Paragraph 4(b) of Article 12 refers to technical or consultancy services that make available to the person acquiring the services, technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plant or technical design to such person. (For this purpose, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person). This category is narrower than the category described in paragraph 4(a) because it excludes any service that does not make technology available to the person acquiring the service. Generally speaking, technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. Typical categories of services that generally involve either the development and transfer of technical plants or technical designs, or making technology available as described in paragraph 4(b), include: 17. Taking aforesaid into consideration we find that that there is nothing in the order of DRP, as to how assessee was providing any services to any of the clients who acquired the service in a manner that it enabled said client to apply the said technology. In fact said client may not be even aware of the technological aspects in place in the software that is used to generate the reports.
Further Clause 2 of agreement clearly mentions all rights and test of Application remains with assessee and end users have not been given source code of the application which constitute technical knowledge an per 12(4)(b). In this context, we find force in the contention of Ld. Counsel, that when no source code was shared with the end users, said end user cannot be said to have been enabled for any enduring benefit. In present case, this test is not satisfied by any stretch as the contract is limited only to grant of access to the software during the subscription period and on the expiry of the subscription period, the access to the software gets terminated and the customer content also stands deleted.
The concept of 'make available' as applicable to FTS, is now quite crystilised and we rely upon the findings of Hon'ble Karnataka High Court in the case of De Beers India Minerals (p.) Ltd. ITA 549 to 551 of 2007, where in the facts were quite similar as in that case the assessees entered into an agreement with M/s Fugro Elbocon B. V. Netherlands (hereinafter referred to as 'Fugro'). Fugro had a team of experts who are specialized in performing air borne geophysical services for clients, process the data acquired during the survey and provide necessary reports. The services are engaged to conduct the air borne survey for providing high quality, high resolution, geophysical data suitable for selecting probable kimberlite targets.For the technical services rendered by them the assessees had paid consideration. The Assessing Officer treated the consideration paid to Fugro under the agreement as falling within the definition of fees for technical services under Article 12 of the Indo-Netherlands Double Tax Avoidance Agreement (DTAA) read with Section 90 of the Income-tax Act, 1961. 19.1 In aforesaid set of fact the Hon'ble Karnataka High Court, explained the phrase 'make available' as appears in the Article 12(4) of India-USA DTAA, as follows; "22. What is the meaning of "make available". The technical or consultancy service rendered should be of such a nature that it "makes available" to the recipient technical knowledge, know- how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology "making "available", the technical knowledge, skill?, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as "fee for technical/included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied.
Thus, in terms of the contract entered into with Fugro, they have given the data, photographs and maps. But they have not made available technical expertise, skill or knowledge in respect of such collection or processing of data to the assessees, which the assessee can apply independently and without assistance and undertake such survey independently excluding Fugro in future.
The Fugro has not made available the aforesaid technology with the aid of which they were able to collect the data, which was passed on to the assessees as a technical service. In other words, Fugro has rendered technical service to the assessees. They have not made available the technical knowledge with which they rendered technical service. There is no transmission of technical knowledge, expertise, skill, etc., from Fugro along with technical services rendered by them. The assessees are completely kept in dark about the process and the technologies which the Fugro adopted in arriving at the information/data which is passed on to the assessees as technical service. The assessee is unable to make use of the said technical knowledge by itself in its business or for its own benefit without recourse to Fugro. In fact, the question whether along with rendering technical services, whether the technical knowledge with which that services was rendered was also made available to the assessees/customers is purely a question of fact which is to be gathered from the terms of the contract, the nature of services undertaken and what is transmitted in the end after rendering technical services. If along with technical services rendered, if the service provider also makes available the technology which they used in rendering services, then it falls with the definition of fee for technical services as contained in DTAA. However if the technology is not made available along with the technical services and what is rendered is only technical services and the technical knowledge is with-held, then, such a technical service would not fall within the definition of technical services in DTAA and not liable to tax." "27. In the background of the aforesaid principles and facts of this case, it is clear that assessees acknowledge the services of Fugro for conducting aerial survey, taking photographs and providing data information and maps. That is the technical services which the Fugro has rendered to the assessees. The technology adopted by Fugro in rendering that technical ITA No.- 1996/Del/2022 Mixpanel Inc. services is not made available to the assessees. The survey report is very clear. Unless that technology is also made available, the assessees are unable to undertake the very same survey independently excluding Fugro in future. Therefore that technical services which is rendered by Fugro is not of enduring in nature. It is a case specific. That information pertains to 8 blocks. The assessees can make use of the data supplied by way of technical services and put its experience in identifying the locations where the diamonds are found and carrying on its business. But the technical services which is provided by Fugro will not enable the assesses to independently undertake any survey either in the very same area Fugro conducted the survey or in any other area. They did not get any enduring benefit from the aforesaid survey. In that view of the matter, though Fugro rendered technical services as defined under Section 9(1)(vi) Explanation 2, it does not satisfy the requirement of technical services as contained in DTAA. Therefore the liability to tax is not attracted. Accordingly the first substantial question of law is answered in favour of the assessees and against the Revenue." "31. Therefore the assessees not being possessed with the technical know how to conduct this prospecting operations and reconnaissance operations, engaged the services of Fugro which is expert in the field. By way of technical services Fugro delivered to the axsexsees the data and information after such operations. The said data is certainly made use of by the assessees. Not only the said data and information was furnished in the digital form, it is also provided to the assessees in the form of maps and photographs. These maps and photographs which were made available to the assessees cannot be construed as Technology made available. Fugro has not devised any technical plan or technical design. Therefore the question of Fugro transferring any technical plan or technical design did not arise in the facts of these cases. The maps which are delivered are not of kind of any developmental activity. As such, earlier the information which is furnished to the assessees by way of technical services in the digital form is also given in the form of maps. Therefore the case on hand do not fail in the second part of the aforesaid clause dealing with development and transfer of plans and designs. Therefore the second substantial question of law is also answered in favour of the assessees and against the Revenue."
Reliance is also placed on decision of Mumbai Bench in the case of ICICI BANK LTD. v/s DCIT-ITA 486/2004 [MUMBAI ITAT]. The relevant paragraphs reads as follows: 3. The Assessee bank had appointed Moody's Investors Service, a credit rating agency for the purpose of ratings its floating rate euro notes issue amounting to US $ 150,00,00, The fees charged by Moody's Investors Service for rendering analytical services in connection with counter party rating of the issue amounted to US $ 45,000 14. Having given a close look to the facts of the case in the light of definition of fees for included services given in DTAA and the Memorumdum of Understanding alongwith example, we find that the assessee has obtained the commercial information of rating from Moody's and the remuneration was paid outside India. Now it is to be seen whether the assessee acquired any technical skill or technology on the basis of which commercial information was prepared. The answers is certainly in the negative because assessee has only got the commercial information and not the technical know- how/technical expertise or the technologies on the basis of which it was prepared. For bringing any payment within the definition of "fee for included services' the non- resident must make available the technical skill, expertise or technical know-how to the assessee, on the basis of which non- resident has prepared or developed the commercial information. Undisputedly in the instant case the technical skill, expertise or technical know-how used in preparing the commercial information was not made available to the assessee and hence the remittance made by the assessee for obtaining such commercial information cannot be called to be the 'fees for the included services to make it chargeable to tax in India.
In light of the above discussed proposition of law and facts the 'make available' clause is not satisfied, as erroneously held by the DRP. We thus sustain the grounds no. 1, 4 and 5. Further, Ground no. 2 and 3, become academic and ground no. 6 is consequential. Resultantly the appeal is allowed.”