2019 (10) TMI 877 - AT - Income Tax

India-US Tax Treaty: IPLC charges, software income not taxable. AO to recompute interest. Penalty implications likely.

The Tribunal allowed the appeals for all assessment years, holding that IPLC charges, income from sale of shrink-wrapped software, support and maintenance ... Royalty - Fees for technical services (FTS) / Fees for included services (FIS) - 'make available' test - reimbursement versus taxable receipt - tax treaty supremacy and benefit under section 90(2) - shrink wrapped software - copyright versus copyrighted article - advance tax liability and applicability of tax deducted at source - interest under section 234BRoyalty - Fees for technical services (FTS) / Fees for included services (FIS) - 'make available' test - reimbursement versus taxable receipt - Taxability of IPLC/link charges received from the Indian group company as Royalty or FTS/FIS. - HELD THAT: - The Tribunal examined whether link/IPLC charges constituted (a) 'Royalty' under Article 12(3) (use or right to use equipment/process) or (b) FTS/FIS under Article 12(4) (including the treaty's 'make available' requirement). On the facts the IPLC was a standard connectivity service procured from third party telecom providers, with the service provider retaining control and ownership of the network/equipment; no right to use or transfer of any process or equipment was granted to the Indian recipient. The Tribunal applied treaty jurisprudence and co ordinate decisions holding that mere provision of connectivity/service, even though involving technical equipment, does not amount to 'use/right to use' or to making technology available to the recipient. In consequence the receipts were either reimbursements/charges for services and standard facilities and did not satisfy the 'make available' test or the definition of equipment royalty in the India-US DTAA; therefore they were not taxable as Royalty or FTS/FIS in India. [Paras 18, 19, 20, 21, 22]IPLC/link charges are not taxable as Royalty or as FTS/FIS and the addition is deleted.Shrink wrapped software - copyright versus copyrighted article - tax treaty supremacy and benefit under section 90(2) - Taxability of receipts from sale of shrink wrapped software to Indian purchasers as 'Royalty'. - HELD THAT: - The Tribunal analysed the licence/sale terms and Article 12(3) of the India-US DTAA. The agreement granted a personal, non transferable, non exclusive licence and supplied the copyrighted article while title remained with the assessee; there was no transfer of the copyright itself. The DTAA definition of 'Royalty' requires income to arise from use of, or right to use, copyright. The Tribunal held that consideration for delivery of a copyrighted article (shrink wrapped software) which does not transfer copyright or give the right to use the copyright in the sense contemplated by the treaty cannot be taxed as Royalty. Given the absence of a corresponding change in the DTAA definition, the treaty (available under section 90(2)) governs and is more restrictive than domestic amendments; the receipts therefore are not Royalty. [Paras 23, 24, 25, 28, 30]Consideration from sale/licence of shrink wrapped software is not taxable as Royalty under the India-US DTAA and the addition is deleted.Fees for included services (FIS) / ancillary and subsidiary test - 'make available' test - tax treaty supremacy and benefit under section 90(2) - Taxability of support and maintenance fees (ancillary to software supply) as FIS under Article 12(4) of the India-US DTAA. - HELD THAT: - The Tribunal found that support and maintenance services were rendered remotely and were ancillary and subsidiary to the software supplied. Article 12(4)(a) taxes services only if ancillary to enjoyment of a right for which a royalty is paid; Article 12(4)(b) taxes services that 'make available' technical knowledge/know how. Because the sale of the software was held not to be taxable as Royalty, the ancillary clause (a) could not operate to tax these receipts. On the 'make available' limb the services did not transfer technical knowledge or enable the recipient to apply the technology independently. Applying treaty tests and authoritative decisions, the Tribunal held the support and maintenance receipts were not FIS taxable under the DTAA. [Paras 31, 32, 33, 34, 37]Support and maintenance receipts are not taxable as FIS under Article 12 and the addition is deleted.Fees for included services (FIS) / ancillary and subsidiary test - 'make available' test - Taxability of other service fees (professional/consultancy, Geneva health check etc.) as FIS under Article 12(4). - HELD THAT: - The Tribunal applied the treaty definition of FIS and reiterated that taxation under Article 12(4) requires services either to be ancillary and subsidiary to a royalty bearing right or to 'make available' technical knowledge/know how or transfer of technical design. The services in question were subcontracted and did not satisfy the 'make available' test; mere rendering of services involving technical input does not, by itself, make technical knowledge available. Following treaty interpretation and precedents, the Tribunal held these receipts were not taxable as FIS. [Paras 38, 40, 41]Service fees are not taxable as FIS under the India-US DTAA and the addition is deleted.Advance tax liability and applicability of tax deducted at source - interest under section 234B - Levy of interest under section 234B for shortfall in advance tax where the assessee is a non resident US tax resident and receipts were subject to tax deduction at source under section 195. - HELD THAT: - The Tribunal noted that the assessee is a non resident and tax resident of the USA and that taxes on its receipts were liable to be deducted at source under section 195; accordingly, there was no independent liability to pay advance tax under section 208 during the relevant year. Relying on the jurisdictional High Court precedent referenced by the parties, the Tribunal directed recomputation of interest by the assessing officer in accordance with law. [Paras 42, 44]Assessing officer directed to recompute/adjust interest under section 234B in accordance with law; no sustained liability to pay advance tax was found.General ground - summary dismissal - Disposition of the general ground of appeal raised by the assessee. - HELD THAT: - The Tribunal observed the general ground was omnibus and required no specific adjudication. [Paras 4]General ground dismissed as not requiring adjudication.Final Conclusion: All appeals for the assessment years before the Tribunal were allowed: IPLC/link charges, sale of shrink wrapped software, support and maintenance fees and other service receipts were held not taxable as Royalty or FTS/FIS under the India-US DTAA; the assessing officer was directed to recompute interest in accordance with law. Appeals allowed for AYs 2008 09, 2009 10, 2010 11 and 2011 12. Issues Involved:1. Taxability of IPLC/Link Charges as Fees for Technical Services (FTS)/Fees for Included Services (FIS) and Royalty.2. Taxability of income received from the sale of shrink-wrapped software as Royalty.3. Taxability of support and maintenance fees as FIS.4. Taxability of service fees as FTS.5. Levy of interest under section 234B of the Income Tax Act.6. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.Detailed Analysis:1. Taxability of IPLC/Link Charges as Fees for Technical Services (FTS)/Fees for Included Services (FIS) and Royalty:The assessee argued that the IPLC charges were not taxable in India as they did not constitute 'Royalty' or FTS/FIS under the India-US tax treaty. The Assessing Officer (AO) and Dispute Resolution Panel (DRP) treated the IPLC charges as Royalty and FTS/FIS under the Income Tax Act and the India-US tax treaty. The Tribunal noted that the IPLC services provided by third-party service providers like AT&T and Sprint were standard services and did not involve any transfer of the right to use the underlying infrastructure. The Tribunal relied on various judicial precedents, including the Delhi Tribunal's decision in the case of Convergys Customer Management Group Inc., to conclude that IPLC charges do not qualify as Royalty or FTS/FIS under the India-US tax treaty. The Tribunal allowed the assessee's appeal on this ground.2. Taxability of income received from the sale of shrink-wrapped software as Royalty:The assessee claimed that the income from the sale of shrink-wrapped software was not taxable in India as it did not qualify as Royalty under the India-US tax treaty. The AO and DRP treated the income as Royalty under the Income Tax Act and the India-US tax treaty. The Tribunal noted that the software was sold with a non-exclusive, non-transferable license, and the title and ownership of the software remained with the assessee. The Tribunal relied on various judicial precedents, including the Delhi High Court's decision in DIT vs. Infrasoft Ltd., to conclude that the income from the sale of shrink-wrapped software does not constitute Royalty under the India-US tax treaty. The Tribunal allowed the assessee's appeal on this ground.3. Taxability of support and maintenance fees as FIS:The assessee claimed that the support and maintenance fees received from TCS and TCL were not taxable in India under the India-US tax treaty. The AO and DRP treated the fees as FIS under the India-US tax treaty. The Tribunal noted that the support and maintenance services were ancillary and subsidiary to the software supplied and were not taxable under Article 12(4)(b) of the India-US tax treaty. The Tribunal relied on various judicial precedents, including the Karnataka High Court's decision in CIT vs. De Beers India Minerals Ltd., to conclude that the support and maintenance fees do not qualify as FIS under the India-US tax treaty. The Tribunal allowed the assessee's appeal on this ground.4. Taxability of service fees as FTS:The assessee claimed that the service fees received for Geneva health check and other professional and consultancy services were not taxable in India under the India-US tax treaty. The AO and DRP treated the fees as FIS under the India-US tax treaty. The Tribunal noted that the services rendered did not make available technical knowledge, experience, skill, know-how, or process to the recipient and, therefore, did not qualify as FIS under Article 12(4)(b) of the India-US tax treaty. The Tribunal allowed the assessee's appeal on this ground.5. Levy of interest under section 234B of the Income Tax Act:The assessee argued that being a foreign company, it was not liable to pay advance tax under section 208 of the Act, and therefore, interest under section 234B should not be levied. The Tribunal relied on the Bombay High Court's decision in DIT vs. NGC Network Asia LLC to direct the AO to recompute the interest as per law. The Tribunal allowed the assessee's appeal on this ground.6. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act:The Tribunal did not specifically adjudicate this issue in the detailed analysis provided. However, given the favorable decisions on the primary grounds of appeal, the initiation of penalty proceedings under section 271(1)(c) would likely be impacted accordingly.Conclusion:The Tribunal allowed the appeals for all the assessment years involved, holding that the IPLC charges, income from the sale of shrink-wrapped software, support and maintenance fees, and service fees were not taxable in India under the India-US tax treaty. The Tribunal also directed the AO to recompute the interest under section 234B as per the law and in line with the Bombay High Court's decision.