PR COMMISIONER OF INCOME TAX vs. M/S. IBM UNITED KINGDOM

The present appeal is confined to the impugned order in so far as it relates to IT(IT)A.No.498/Bang/2024 in respect of the Assessment Year [AY] 2017-18. The Assessee – a company which is a tax resident in U.K – had filed its return of income u/s 139 (1) of the Act on 28.11.2017 for AY 2017-18 declaring income of `16,94,91,750 /- and in its return filed u/s 148, the Assessee declared additional income of `9,55,81,040 /- as taxable income.

The Assessee's case was selected for scrutiny and during the course of the assessment, it was found that the Assessee had received a sum of `6,93,32,890/- from M/s. IBM India Limited [IBM India], a company incorporated in India, towards IT support services, including recovery of salary expenses of the employees that were seconded to IBM India. The dispute essentially relates to whether the said receipts are chargeable to tax as 'fee for technical services' [FTS] under Section 9 (1)(vii) of the Act or under Article 12 of the India - UK Double Taxation Avoidance Agreement [the DTAA].

It is the Assessee's case that the said payments do not fall within the meaning of the definition of ‘fees for technical services’, as defined under Article 13 of the DTAA. The Assessee contended that the reimbursement of salary expenses and payment towards IT support services do not come under the FTS. Admittedly, the contentions advanced by the Assessee are not insubstantial. The definition of FTS in terms of paragraph 4 of Article 13 of India UK - DTAA, is considerably narrower than the definition of the said FTS under Explanation 2 to Section 9(1)(vii) of the Act. It is also well settled that the expressions defined in the DTAA,

The question whether such receipts would fall within the scope of FTS, has been the subject matter of various decisions. Largely, the weight of judicial precedents is that such proceeds would not fall within the scope of FTS. The learned Tribunal has set out a tabular statement as referred to by the Assessee, which indicates the various decisions where such issues have been considered and the outcome of the said decisions. The said tabular statement is reproduced below. "3.12 They drew our attention to the table capturing various Courts/ Tribunal decisions on said issue in a chronological order, which is as follows:

Marks & Spencer Reliance India Private Limited [2013] 38 taxmann.com 190 (Mumbai - Trib) (refer page 202-213 of PB)

Toyota Boshoku vs DCIT [2022] 138 taxmann.com 166 (Bangalore - Trib)

Google LLC vs JCIT(OSDYDCIT (I) [(IT)Appeal Nos 167/Bang/2021 & 688/Bang/2022]

Whilst various courts and tribunals had accepted the contentions as are advanced by the Assessee, the Delhi High Court in the case of M/s. Centrica India Offshore Private Limited v. CIT : [2014] 44 taxmann.com 300, had taken a view that in the given facts secondment of the employees would result in absorption of knowledge by the entity to whom such employees had been seconded.

Given the possible view, the Assessee had to avoid further litigation, opted for the Vivad Se Vishwas Scheme and had settled the issue regarding the levy of tax.

The present appeal relates to the imposition of penalty by the Assessing Officer. The Tribunal and the learned ITAT had examined the nature of the disputes and had further noted that the decision of this Court in Flipkart Internet (P). Limited v. DCIT International Taxation : [2022] 139 taxmann.com 595], had favoured the Assessee. Further, in proceedings relating to withholding of tax at source in case of IBM India, the stand that the payments were not chargeable to tax had been accepted.

In the aforesaid circumstances, the learned ITAT had held that given the nature of the disputes, clearly, two views are possible. Thus, the penalty under Section 270-A of the Act could not be levied, as the question involved was a vexed one. The Assessee had laboured under the legitimate bona fide belief that the payments received were not taxable under the Act. We find no infirmity in the said order and no substantial question of law exists for consideration by this court.

The appeal is, accordingly, dismissed.