Services availed by a resident from non-resident subcontractor for rendering services to non-resident outside India could not be deemed to accrue or arise in India

Facts of the Case:

• Infosys Limited (Infosys) an Indian resident company entered into an agreement to render software support services to McDonalds Corporation (a USA based entity). In order to render such services, Infosys entered into a subcontracting agreement with the Assessee (SunGard Availability Services LP), a limited partnership which is a tax resident in USA.
• The Assessee provided the services to Infosys under the sub-contracting agreement in nature of Cloud InfrastructureManaged private cloud, Colocation and network services, Mainframe services, Disaster/Data recovery services. The Assessing Officer (AO) while finalizing the assessment proceedings of the Assessee concluded that consideration received by the Assessee company shall be taxable in India as Fees for technical services under Section 9(1)(vii) of the Income Tax Act, 1961 (“the Act”).
• The Assessee filed appeal before CIT(A), wherein the CIT(A) reversed the decision of AO and passed order in favor of the Assessee. Thereafter, the department preferred an appeal before the Hon’ble Income Tax Appellate Tribunal (ITAT).

Issue before the Hon’ble ITAT:

• Whether the consideration received by the Assessee is taxable in India under section 9(1)(vii) of the Act?
• Where the consideration received is taxable under Section 9(1)(vii) of the Act, whether benefit under Article 12(4) of the India-US DTAA is available to the Assessee or not?

Decision of the Hon’ble ITAT:

• • The Hon’ble ITAT held that since Infosys has availed the services from the Assessee for rendering services to its customer outside India, hence the source of income lies outside India and not deemed to accrue or arise in India under Section 9(1)(vii) of the Act, therefore, not chargeable to tax.
• ITAT further held that, even if it is assumed that the consideration is deemed to accrue or arise in India, the Assessee can claim the benefit of India-USA DTAA wherein Article 12(4) clearly stipulates taxability of the income arising from India only if the services concerned “make available” technical knowledge to the recipient/payer. The “make available” condition in the DTAA stipulates that after receiving the services from the service provider, the recipient of the services is able to make use of the technical know-how and is then able to perform such similar services independently without the help of the service provider.
• However, in current case no material was found which could satisfy the “make available” condition. Therefore, the Hon’ble ITAT affirmed the findings of CIT(A) and reversed the AO’s action of holding the amount of consideration to be taxable in India under Section 9(1)(vii) of the Act.

SW Point of View:

Through this order, the Hon’ble ITAT has established that any service availed by a resident from a non-resident subcontractor for rendering services to a non-resident outside India is not deemed to accrue or arise in India under Section 9(1)(vii) of the Act since such services are utilized in a business carried on by such person outside India.

Virendra Vikram, Tax Associate, SW India