Facts of the Case

The respondent-assessee, Ciena Communications India Pvt. Ltd., made payments to its associated enterprise, Ciena Communications Inc., USA, during Assessment Years 2012–13, 2013–14 and 2014–15 for remote equipment repair and maintenance support services. The Assessing Officer held that such payments constituted fees for technical services under Section 9(1)(vii) of the Income-tax Act, 1961 and Article 12 of the India–USA DTAA, and since tax was not deducted at source under Section 195, disallowed the expenditure under Section 40(a)(i).

The CIT(A) upheld the disallowance. However, the Income Tax Appellate Tribunal deleted the additions holding that the services did not satisfy the “make available” condition under Article 12(4) of the DTAA. Aggrieved, the Revenue filed appeals before the Delhi High Court.

Issues Involved

Whether payments made for remote technical support and equipment repair services rendered by a US associated enterprise constituted fees for technical services involving “make available” of technical knowledge under Article 12 of the India–USA DTAA, thereby attracting withholding tax under Section 195 and disallowance under Section 40(a)(i).

Petitioner’s Arguments (Revenue)

The Revenue contended that the services rendered were technical in nature and enabled the assessee to benefit from the technical expertise of the US entity. It was argued that the services resulted in enduring benefits and therefore amounted to making available technical knowledge, skill and experience, attracting taxability in India as fees for technical services.

Respondent’s Arguments (Assessee)

The assessee argued that the services were limited to remote troubleshooting, diagnostics, and repair support, and no technical knowledge, skill or know-how was transferred or made available to the assessee. It was submitted that the assessee was not enabled to independently perform such services without the continued involvement of the US entity.

Court Order / Findings

The Delhi High Court examined the service agreement dated 01.04.2010 and noted that the services comprised remote on-call technical support and physical repair of defective equipment shipped to the USA. The Court held that although the services involved use of technical expertise by the service provider, they did not result in making available any technical knowledge or skill to the assessee.

The Court observed that the findings of the ITAT were purely factual and based on a correct appreciation of the agreement and nature of services. The Revenue did not challenge the ITAT’s findings on the ground of perversity. Accordingly, the premise that the assessee was obliged to deduct tax at source was held to be unsustainable.

Important Clarification

The Court clarified that under the India–USA DTAA, mere rendering of technical or consultancy services is insufficient to attract taxability as fees for included services unless the services result in making available technical knowledge or skill enabling the recipient to apply it independently.

Final Outcome

All appeals filed by the Revenue were dismissed. The Delhi High Court held that no substantial question of law arose and upheld the ITAT’s order deleting the disallowance under Section 40(a)(i), ruling that the payments made to the US entity were not taxable as fees for technical services under the India–USA DTAA.

 

Link to download the order - https://www.mytaxexpert.co.in/uploads/1769850985_PR.COMMISSIONEROFINCOMETAX2VsCIENACOMMUNICATIONSINDIAPVT.LTD..pdf

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