Receipts from training programs and providing access to computer systems are not FTS

The Mumbai Income Tax Appellate Tribunal (ITAT) ruled on 8 June 2018 that consideration received by a Dutch tax resident company for conducting training programs in India and providing Indian entities with access to computer systems does not qualify as “fees for technical services” (FTS) under article 12(5) of the India-Netherlands tax treaty.

Facts of the case

The taxpayer is part of a global hotel group and conducts training programs and provides access to computer systems (i.e. centralized reservation system, property management systems, etc.) to hotels operating under the brand name worldwide. The taxpayer had entered into Training and Computer Systems Agreements (TCSA) with two Indian hotels to provide such services.

The taxpayer maintained that income received under the TCSA was not subject to tax in India on the basis that the consideration: 

  • Was in the nature of a reimbursement of expenditure and contained no profit element;
  • Should not be treated as FTS under article 12(5) of the India-Netherlands tax treaty as the payments were not “in consideration for the rendering of any technical or consultancy services”; and
  • Was in the nature of business income and not liable to tax in India in the absence of a permanent establishment of the taxpayer in India, in accordance with the provisions of articles 5 (permanent establishment) and 7 (business profits) of the treaty.

The assessing officer disagreed and assessed the consideration received for conducting training programs as FTS under both Indian domestic legislation and article 12 of the treaty, and the consideration received for providing access to computer systems as royalty under domestic legislation and FTS in accordance with the provisions of article 12(4) and (5)(a) of the treaty.

The taxpayer appealed the assessments to the Commissioner of Income-tax (Appeals) (CIT(A)). The CIT(A) issued an order confirming that the full amount of the income represented FTS in the hands of the taxpayer in accordance with article 12(5)(a) of the treaty. The CIT(A) also observed that:

  • The TCSA are an integral part of the license agreements executed between the taxpayer and the Indian hotels and that these agreements are mutually complementary; and
  • The services rendered by the taxpayer under the TCSA were ancillary and subsidiary to the license agreement.
  • The taxpayer subsequently appealed the CIT(A)’s decision to the ITAT. The ITAT was asked to rule on whether the consideration received by the taxpayer for conducting training programs and providing access to the computer systems qualified as FTS both under domestic legislation as well as under the treaty.

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