Introduction
In Western Digital Technologies Inc. v. Deputy Commissioner of Income-tax[i], the Income Tax Appellate Tribunal, Bangalore ('ITAT') addressed two significant issues arising from International Taxation. Firstly, the ITAT examined whether SanDisk India Device Design Centre Pvt. Ltd (‘SanDisk India’) constituted a Dependent Agency Permanent Establishment (‘DAPE’) of Western Digital Technologies Inc (‘Assessee’) under the India-USA Double Taxation Avoidance Agreement (‘DTAA’). Secondly, the ITAT evaluated whether the reimbursements for seconded employees to SanDisk India qualify as Fee for Technical Services (‘FTS’) under a. 12 of India-USA DTAA.
Facts
The Assessee became associated with SanDisk India by acquiring SanDisk USA LLC in 2016. During the relevant assessment year (‘AY’), the Assessee had no declared income in India.
The Assessing Officer (‘AO’), based on the findings of the survey conducted under s. 133A of the Income-tax Act, 1961 (‘IT Act’) at SanDisk India’s premises in 2019 concluded that SanDisk India acted as a DAPE under a. 5 of the India-USA DTAA of the Assessee in India.
The AO asserted that SanDisk India’s involvement in the Assessee’s business was beyond auxiliary functions and that its operations were influential in facilitating sales of the Assessee’s business in India.
The AO also contended that the reimbursement of salary expenses for seconded employees of the Assessee to SanDisk India were taxable as FTS under a. 12 of the India-USA DTAA as the ‘make available’ clause was fulfilled. The AO had asserted that the technical and managerial services provided by these seconded employees were ‘made available’ to SanDisk India so that they could utilize the technical know-how independently.
The Assessee argued that SanDisk India provided services exclusively to SanDisk Ireland and not to the Assessee, as evidenced by the financial statements and transfer pricing documents. It was further asserted that the reimbursements for seconded employees were purely cost-to-cost payments, without any transfer of technical knowledge to satisfy the ‘make available’ clause, and thus did not qualify as FTS.
The Dispute Resolution Panel (‘DRP’) confirmed the AO’s conclusions, upholding the findings that SanDisk India constituted a DAPE and that the reimbursements for the seconded employees were taxable as FTS.
Held
The ITAT observed that SanDisk India’s financial statements and transfer pricing documents confirmed that its services were exclusively rendered to SanDisk Ireland, not the Assessee. It, therefore, concluded that SanDisk India could not be treated as a DAPE of the Assessee, the AO’s reliance on the survey findings and the indirect role of SanDisk India in supporting the Assessee’s business was deemed insufficient to establish the existence of a DAPE.
The ITAT continued to analyse the ‘make available’ clause under a.12 of the India-USA DTAA and observed that the agreement between the Assessee and SanDisk India was of indefinite duration, indicating no definitive transfer of technical expertise.
The ITAT further observed that the reimbursements for the seconded employees were cost-to-cost payments with no profit element or provision of services that would qualify the transfer as FTS under the DTAA. However, due to the absence of a complete agreement, the ITAT remanded the issue to the AO to evaluate whether the ‘make available’ clause was fulfilled.
Our Analysis
The taxability of FTS under the Act has been a significant area of contention, especially in the context of international transactions. As businesses increasingly rely on specialized technical expertise, the payments made for such services often become the subject of scrutiny by tax authorities. Determining whether a payment qualifies as FTS involves assessing if the services rendered fall under managerial, technical or consultancy categories, which is often subjective[ii].
This ruling reinforces fundamental principles of International Taxation, particularly in determining a DAPE and characterising FTS under the India-USA DTAA. It underscores that establishing a DAPE requires concrete and direct evidence linking an Indian entity’s activities to revenue generation for the foreign enterprise. The ruling highlights the critical role of contemporaneous documentation, such as financial records, transfer pricing reports, and contractual agreements, in defending against PE allegations and ensuring tax certainty. By setting aside the DAPE determination due to a lack of substantive evidence, the ITAT reinforces the principle that a PE cannot be presumed in the absence of clear contractual or operational control over business activities in India.
Some treaties include a ‘make available’ clause, stipulating that services are considered technical only if they result in the recipient acquiring technical knowledge, experience, skill, know-how, or processes. A mere rendition of services does not fall within the gamut of the term ‘make available’ unless the recipient of services is enabled and empowered to make use of the technical knowledge by itself in its business or for its own benefit without recourse to the original service provider in the future. Therefore, on the issue of FTS, the ruling has correctly held that the ‘make available’ clause under a. 12 of the DTAA serves as a definitive test for taxability. It is not enough for a service to be technical or managerial in nature. It must result in a demonstrable transfer of technical knowledge that enables the recipient to apply it independently.
End Notes
[i] [2025] 170 taxmann.com 14 (Bangalore - Trib.).
[ii] Prashant Singh, Treaty Provisions for Royalty and Fees for Technical Services (FTS): Common Disputes, Metalegal (Aug. 24, 2024), https://www.metalegal.in/post/treaty-provisions-for-royalty-and-fees-for-technical-services-fts-common-disputes.
Authored by Maarij Ahmad, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.