SNC LAVALIN INC.,DELHI vs. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE INT. TAX 3(1)(2), DELHI

The assessee company is incorporated in Canada and is a tax resident therein. It is engaged in the business of rendering consultancy, design, and engineering services to various clients. The assessee filed its return of income u/s 139(1)/139(9) of the Income Tax Act, 1961 for A.Y. 2021-22 declaring total income of Rs. 41,36,27,860/- out of which Rs.34,05,55,800/- was declared to be taxed at the rate of 15% and receipts of Rs.7,41,83,452/- being amount cross charged from group companies in India for use of third-party standard software were claimed as non-taxable under India-Canada DTAA.

In A.Y. 2021-22, the assessee cross charged Rs. 7,41,83,452/- from group companies for actual use of various third-party standard software like Auto CAD software, Civil 3D, 3ds Max, etc. which is called GIT Infrastructure (‘GIT’) charges in the books of accounts. The assessee as a measure of commercial expedience, acquires software licenses from third- party owners for use in its business of providing engineering services to its clients, and also use of such software licenses by the group companies from which it cross charges the cost of software license plus mark-up based on actual use by the group companies.

The Assistant Commissioner of Income Tax, Circle International Tax-3(1)(1), Delhi issued draft assessment order u/s 144C(1) of the Act dated December 27, 2022 wherein the AO proposed an addition of Rs. 7,41,83,452 in relation to above amount cross charged from group companies for use of third- party software (GIT charges) alleging it to be taxable as FIS under the provisions of the Act and India-Canada DTAA.

Aggrieved by the draft assessment order, the assessee filed objections before the ld. DRP on January 23, 2023. The ld. DRP passed its directions on September 13, 2023, affirming the action of the Assessing Officer.

Pursuant to directions of the ld. DRP, The AO passed the final assessment order dated October 18, 2023, u/s 143(3)

Aggrieved, the assessee filed appeal before the Tribunal.

The ld. AR submitted that the assessee raised monthly invoices/ debit notes for amount cross charged for use of third- party owned software licenses i.e., Auto CAD software, Civil 3D, 3ds Max, etc. (GIT charges) from its group companies. The Appellant has enclosed the sample copies of debited notes and sample copy of agreement with group company. It was submitted that the licensor of the said software is third-party vendor and the SNC group companies merely use these software on need basis.

At the outset, it was argued that the debate whether the use of third-party software is Royalty under DTAA stands settled by the judgement of Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited v The Commissioner of Income Tax & ANR (Civil Appeal Nos. 8733- 8734 of 2018) wherein the Hon’ble Supreme Court held that grant of non-exclusive software license is not use or right to use the copyright and hence, not in the nature of Royalty under DTAA. It was argued that the Assessing Officer in the assessment order held the amount cross charged from group companies for use of third-party software as FIS under India-

On the other hand, the ld. DR supported the order of the ld. DRP.

Heard the arguments of both the parties and perused the material available on record.

Article 12(4) of the India Canada DTAA defines Fee for Technical Services as: “For the purposes of this Article, 'fees for Technical 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

The meaning of the term make available has been explained as per the Memorandum of Understanding of the India-USA DTAA concerning FIS in Article 12 (‘MOU’). “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.” The concept of ‘make available’ has been interpreted as transmitting the technical knowledge so that the recipient of service can derive an enduring benefit and utilize the technical knowledge or skill in future on his own without the aid of the service provider. In other words, to fit into the terminology "make available", the technical knowledge, skills etc. must remain with the person receiving the services even after the particular contract comes to an end.

Further, various judicial precedents have also dealt with the issue as to what constitutes make available, especially in light of the provisions of the India-USA DTAA and the MOU to the India-USA DTAA. As per the judicial precedents, services are said to be made available when as a result of provision of such services, the recipient of the services is enabled to perform such services in the future on its own without recourse to the service provider. Mere provision of technical services shall not suffice for consideration for services to qualify as FIS.

In this regard, the reliance is being placed on the judgment of the Hon’ble Jurisdictional Delhi High Court in the case of DIT vs. Guy Carpenter & Co. Ltd. (2012) 346 ITR 504 (Delhi) where it has been held as under:

Basis the above, it can be held that the assessee do not “make available” any technical knowledge, experience, skill, know-how or processes to group companies which may enable

We have considered as to whether the receipts can be considered as royalty as per Article 12 India-Canada DTAA has also been examined.

We find that the facts of the assessee are covered by the decision of Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Private Limited vs. CIT (CA Nos. 8733-8734 of 2018), the Hon’ble Supreme Court, after determining various clauses of EULA/ Distribution agreement held that payments made by the Appellant to non-resident vendors shall not be taxable as Royalty under the relevant DTAA, the relevant extract of decision is as under:

In the light of above, we hold that payment made by Indian group entities to the Appellant is in consideration for use of software provided by third party vendor and is towards the ‘copyrighted article’, without any copyrights being granted for its commercial exploitation, hence, the same shall not qualify as ‘Royalty’ as per Article 12(3) of the India-Canada DTAA.

In the result, the Appeal of the assessee is allowed, the Stay Application of the assessee is dismissed as infructuous. Order Pronounced in the Open Court on 25/06/2024.