2018 (6) TMI 37 - AAR - Income Tax

Payments for Content Delivery Not Taxable as FTS or Royalty under India-US Treaty

The payments received by the Applicant for content delivery solutions were held not taxable as 'Fees for Technical Services' (FTS) as the services ... TDS liability u/s 195 - Income accrued in India - fees for technical services - whether payments made on account of resell agreement are fees for technical services or royalty under India-US Treaty - DTAA - human intervention in providing technical services - withholding of tax - Held that:- On the issue of human intervention in providing technical services, we agree with the principle held in Bharti Cellular Limited [2008 (10) TMI 321 - DELHI HIGH COURT] as also upheld by the Apex Court [2010 (8) TMI 332 - SUPREME COURT OF INDIA] that a human element is a pre-requisite for characterizing a service as a technical service and consequently treating payments for the same as fees for technical services. The Solutions provided by the Applicant without human intervention cannot be treated as provision of technical services. What is important to consider is whether there is any human intervention while rendering of ‘Solutions’ and not in providing customer support or training. The Solutions are independently provided by the use of technology and that too, sophisticated technology which operates on an automatic and continuous basis. That does not mean that the Applicant, which operates on such facilities, is rendering any technical services as contemplated in the definition of the term FTS. - thus Solutions provided by the Applicant without human intervention cannot be treated as provision of technical services. In view of the above, the payments received by the Applicant from Akamai India for content delivery solutions are held to be outside the scope of ‘fees for technical services’ within the meaning Explanation 2 to clause (vii) of section 9(1) of the Act. Taxability under the India-USA DTAA - Held that:- Solutions provided by the Applicant to the customers only enable faster content delivery of the customer’s website, etc. to the end users - thus consideration received by the Applicant from Akamai India cannot be considered to be in the nature of fees for technical services as referred to in Article 12 of the India-US DTAA. Whether the payments made are royalty in nature? - Held that:- Since the equipment is used by the Applicant itself or to provide Solutions to Akamai India which are re-sold to the India customers, and Akamai India / Indian customers are not granted any right to use any equipment, the transaction is not covered under the definition of royalty - thus when payments under Reseller Agreement are not towards any IPR/Trademarks, it cannot be covered within the definition of royalty for the purpose of taxability. Whether the applicant have PE in India - Held that:- Reseller Agreement does not create a principal-agent relationship between the Applicant and the Reseller - their relationship is on a principal-to-principal basis. Hence none of the conditions enumerated in Article 5(4) are satisfied - applicant does not create a Permanent Establishment in India. Since no income arises in the hands of the Applicant in India, there is no requirement to withhold tax u/s 195 of the Act - Decided in favor of assessee. Issues Involved:1. Taxability of payments received by the Applicant as 'Fees for Technical Services' (FTS).2. Taxability of payments under the India-US Double Taxation Avoidance Agreement (DTAA) as 'Fees for Included Services' (FIS).3. Taxability of payments as 'Royalty'.4. Creation of a Permanent Establishment (PE) in India.5. Requirement of withholding tax under section 195 of the Income Tax Act, 1961.Issue-wise Analysis:1. Taxability as 'Fees for Technical Services' (FTS):The Applicant contended that the payments received from Akamai India for content delivery solutions are not taxable as FTS since the solutions are not managerial, consultancy, or technical in nature. The solutions provided are standard facilities delivered through the Akamai EdgePlatform® without human intervention, and thus do not qualify as 'technical services'. The Applicant cited various judicial precedents, including the Supreme Court's decision in Kotak Securities Ltd., to argue that services provided without human intervention and customization do not constitute FTS. The Revenue argued that the services are technical in nature due to the involvement of sophisticated technology. The Authority concluded that the solutions provided by the Applicant are standard facilities and not specialized or exclusive services, and thus, payments received do not qualify as FTS under Explanation 2 to section 9(1)(vii) of the Act.2. Taxability under India-US DTAA as 'Fees for Included Services' (FIS):The Applicant argued that even if the services are technical, they do not qualify as FIS under Article 12(4) of the India-US Treaty because they do not 'make available' technical knowledge, experience, skill, or processes to the recipient. The Revenue did not provide specific arguments on how the services 'make available' technical knowledge. The Authority agreed with the Applicant, stating that the solutions enable faster content delivery but do not impart any technical knowledge or skills to the customers that they can use independently in the future. Thus, the payments do not qualify as FIS under Article 12(4) of the India-US Treaty.3. Taxability as 'Royalty':The Applicant contended that the payments do not involve the transfer of any rights in intellectual property or equipment and thus do not constitute 'royalty'. The Revenue argued that the transaction involves the transfer of rights in copyright, trademarks, and distribution rights, and thus the payments are in the nature of royalty. The Authority found that the Applicant does not grant any rights to use its software or hardware to Akamai India or the Indian customers. The solutions provided are standard facilities, and the customers do not have access to the Applicant's infrastructure. Therefore, the payments do not constitute 'royalty' under Explanation 2 to section 9(1)(vi) of the Act and Article 12(3) of the India-US Treaty.4. Creation of a Permanent Establishment (PE):The Applicant argued that it does not have a fixed place of business or dependent agent in India, and thus does not create a PE under Article 5 of the India-US Treaty. The Revenue did not provide specific arguments regarding the existence of a PE. The Authority agreed with the Applicant, stating that there is no PE in India based on the facts presented. However, it noted that if the facts change in the future, the Revenue is free to re-examine the issue.5. Requirement of Withholding Tax:Since the Authority concluded that the payments received by the Applicant are not taxable as FTS, FIS, or royalty, and there is no PE in India, there is no income arising in India. Consequently, there is no requirement for withholding tax under section 195 of the Income Tax Act, 1961.Conclusion:1. Payments received by the Applicant from Akamai India for content delivery solutions are not taxable as 'Fees for Technical Services'.2. Payments are not taxable as 'Fees for Included Services' under the India-US Treaty.3. Payments do not constitute 'royalty' under the Income Tax Act, 1961, and the India-US Treaty.4. The Applicant does not create a Permanent Establishment in India.5. No requirement for withholding tax under section 195 of the Income Tax Act, 1961.