ITAT Holds Business Support Service Receipts Are Not Taxable in India as Royalty 

The Income Tax Appellate Tribunal (ITAT) Delhi held that since the India–Philippines and India–Thailand DTA As they do not contain a specific Fees for Technical Services (FTS) article, the receipts would fall under the head “Business Profits”. In the absence of a Permanent Establishment (PE) of the assessees in India, income from routine support services rendered by foreign entities was not taxable in India.

Alstom (Shared Services) Philippines Inc. and Alstom Transport Systems (Thailand) Ltd. provided various back-office and administrative support services to their Indian group entity, Bombardier Transportation India Ltd. (BTIN). During reassessment proceedings, the AO treated the consideration received by the assessees from the Indian entity as royalty, alleging that the assessees had furnished drawings, documents, methods and other proprietary information to the Indian entity. Accordingly, the receipts were brought to tax in India.

The assessees contended that they merely provided routine support services and had not transferred any drawings, technical know-how, manuals, processes or intellectual property. They further argued that the applicable DTAAs did not contain any FTS article and therefore the receipts could only be assessed as business profits, which were not taxable in India in the absence of a PE.

After examining the service agreements, the Tribunal observed that the services provided were routine support and administrative services and that the AO had failed to identify any material to prove that drawings, documents or technical information had actually been supplied to the Indian entity. The findings of the AO were not supported by the record and were contrary to the terms of the agreements.

Accordingly, the Tribunal held that the payments received by the assessees for providing support services were not in the nature of royalty. The Tribunal decided in favour of the assessees and held that the receipts could not be characterised as royalty.

The Tribunal further held that the India-Philippines and India-Thailand DTAAs do not contain a particular article dealing with Fees for Technical Services. Therefore, service receipts could not be taxed as FTS under the treaties and would fall under Article 7 dealing with Business Profits.