ITAT Mumbai Rules That Functional Service Receipts Are Not Taxable as Fees for Technical Services or Royalty
The present appeal (ITA No.2071/Mum/2025) has been filed by Solvay S. A. (Appellant) in the Income Tax Appellate Tribunal (ITAI) “I” Bench, Mumbai, before Shri Saktijit Dey, Vice President and Shri Narendra Kumar Billaiya, Accountant Member, against the Deputy Commissioner of Income-Tax, International Tax Circle-4(2)(2) (respondent). The case is related to the assessment year 2022-23 and was heard by the tribunal on September 30, 2025, and the final order was issued on October 27, 2025.
The appeal has been filed to challenge an assessment order dated January 15, 2021, issued under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961, in pursuance to the directions of the learnt Dispute Resolution Panel (‘ld. DRP’ for short), belonging to the assessment year (A.Y.) 2022-23.
The main issue in this appeal is whether a large payment received by Solvay S.A. from its Indian group companies should be taxed in India as “Fees for Technical Services (FTS)” or “Royalty”. The company’s lawyer told the Tribunal that only one main issue (mentioned in grounds 4, 5, and 6) should be decided now.
That issue is about whether the amount of Rs. 109,727,5428 (about Rs. 109.7 crore) received by Solvay S.A. from its two Indian group entities should be treated as Fees for Technical Services (FTS) under Article 12(3)(b) of the India–Belgium Double Taxation Avoidance Agreement (DTAA) and/or FTS under Section 9(1)(vii) of the Income Tax Act.
For the assessment year 2022-23, the company filed its income tax return (ITR) on November 29, 2022, declaring its total income as Rs. 3.24 crore. The Assessing Officer (AO) chose this return for the purpose of inspection.
During the investigation, AO found that Solvay S.A. had received Rs. 109.72 crore from two Indian companies within the same group, i.e., Solvay Specialities India Pvt. Ltd. (SSIPL) and Sunshine Chemical. This amount was received under a Functional Service Agreement for providing support services. However, the company is not displaying this amount of Rs. 109.72 crore as taxable income in its return.
The company argued that the services it provided did not “make available” any technical knowledge, know-how, or skills to the Indian entities. Therefore, under the “Most Favoured Nation (MFN)” clause in the India–Belgium DTAA, these services should not be treated as “Fees for Technical Services (FTS)” and hence should not be taxed in India.
When the appellant approached the Income Tax Appellate Tribunal (ITAI) “I” Bench, Mumbai, the tribunal analysed the arguments of both appellant and respondent and took reference from some earlier judgements titled Springer Verlag GmbH vs. DCIT vs. DCIT (supra) and M/s. UPS SCS (Asia) Limited vs. The Asstt. Director of Income Tax (International Taxation) (supra), based on the same issue. The tribunal analysed the services provided by the assessee and concluded that those services cannot be considered managerial, technical, or consultancy services.
Even when we apply the same tests that the Dispute Resolution Panel (DRP) referred to, the result is the same: the services do not fall under any of those categories.
The court believes this because of the following reasons:
- The assessing officer did not properly assess the matter under Article 13(3) of the tax treaty.
- The DRP did not properly and carefully analyse the actual nature of the services while calling the receipts Fees for Technical Services (FTS).
- Most of the services described earlier do not meet the conditions of being managerial, technical, or consultancy in nature. While a few might appear to have some technical or consultancy elements, it was the Department’s responsibility to prove that with proper evidence, and they failed to do so.
- Another important point is that the Functional Services Agreement between the assessee and the Indian group companies was signed in early 2013. The assessee argued that in all the previous years, the Department never treated these receipts as either FTS or royalty, and the Department did not deny this. This supports the assessee’s case further.
- We also note that the DRP directed the A.O. to treat the receipts as FTS, but at the same time also said they were like royalty. This shows confusion in the Department’s decision-making, because receipts cannot be both FTS and royalty at once.
Therefore, we hold that the receipts cannot be treated as FTS under Article 12(3)(b) of the Treaty. However, this conclusion is based only on the specific facts of this case.
In the final decision, the key legal issue (ground no. 1) is kept open. Ground no. 7 is now irrelevant and needs no decision. Grounds 8 and 9 are only consequential, so they also don’t need a separate ruling. Meaning, the appeal is partly allowed.
Citation: Solvay S. A. Vs Deputy Commissioner of Income-Tax, International Tax Circle-4(2)(2) (ITAT Mumbai); ITA No.2071/Mum/2025; 27/10/2025; 2022-23
