2023 (4) TMI 844 - AT - Income Tax

ITAT rules IT services payments not taxable under India-USA DTAA

The ITAT allowed the appeal, ruling that payments for Microsoft licenses and service desk services were not 'royalty' or 'fees for technical services' ... Income accrued in India - Assessee has received an amount from the services rendered to Atos India Cost recharge of Microsoft license fees - royalty and / or Fee for Technical Service (FTS) - India-USA DTAA - Assessee acquired global license and allowed the group entities to use the above Licenses on the basis of requirements and billed them according to their usage - reliance placed by the assessee on the IRS guidance rejected - HELD THAT:- Taxability and character of an item has to be determined in accordance with the contents of the Indian Income Tax Act and the provisions of the Treaty between India and USA Assessee has provided two services to its subsidiary in India for the execution of sub-contract with Tower Watson India. It is important to note that the services provided by Atos India to Tower Watson India are independently charged to tax as business receipt. For execution of services to Tower Watson by Atos India is based on the Global contract executed by the Assessee and Tower Watson Pennsylvania Inc. We observe that the License for usage of the copy righted products are with Microsoft only and the assessee has acquired global right and transferred the above said Licenses to its group entities based on the requirements. Whether this transaction falls under the category of Royalty or FTS is the issue. Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd [2021 (3) TMI 138 - SUPREME COURT] held that Microsoft Software products are sold to end users by Microsoft Corporation and whatever the license which are routed through the middle man, the Microsoft does not grant any right or interest, least of all, a right or interest to reproduce the computer software. Further such reproduction is expressly interdicted and expressly stated that no vestige of copyright is at all transferred either to the distributor or to the end user. Therefore, it does not fall in the category of Royalty or copyright. Assessee has acquired the global license and allowed the group entities to use the above Licenses on the basis of requirements, the assessee has billed them according to their usage by properly documenting the usage and charged to them. As held in the decision of Hon’ble Supreme Court and Hon’ble Delhi High Court, the Microsoft Licenses are not falling under the category of Royalty or Copy Rights under the definition of respective categories. Hence the claim of the assessee is proper and we direct the Assessing Officer to delete the proposed addition in this regard. Service desk provided by the assessee to the employees of Tower Watson to monitor the IT related glitch - As per the terms of agreement, the engagement clause clearly indicate that the assessee engages the services of Atos India to perform the services in accordance with the scope, delivery schedule, services levels and other essential factors as detailed in the services schedule (schedule no 2) of the sub contract agreement. The services provided by the assessee to the group entity are separate and nothing to do with the separate sub contract awarded to the Atos India, which is independent contract. The service desk services are provided to all the group entities to enable the common services provided to the Watson Group employees and there is nothing on record to indicate any independent service provided to Atos India or IT enabled services which gives knowledge made available to Atos India - services provided by the assessee is separate and it only collected the related cost to maintain the service desk. Therefore, it is a receipt which will fall under the Article 7 of the treaty. Hence, the addition proposed and sustained by the Ld.DRP are beyond the scope and accordingly Assessing Officer is directed to delete the same. Decided in favour of assessee. Issues Involved:1. Taxability of payments as 'Royalty' under Section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-USA DTAA.2. Taxability of payments as 'Fees for Technical Services' (FTS) under Section 9(1)(vii) of the Income-tax Act, 1961 and Article 12 of the India-USA DTAA.3. Classification of payments as 'Business Profits' under Article 7 of the India-USA DTAA and the requirement of a Permanent Establishment (PE) in India.4. Levy of surcharge and education cess on the rate prescribed under Article 12 of the DTAA.5. Proposal to initiate penalty proceedings under section 271(1)(c) of the Income-tax Act, 1961.Detailed Analysis:1. Taxability as 'Royalty':The assessee, a US-based company, provided support services to its group company in India, Atos India, and received payments for cost recharge of Microsoft license fees and coordination services. The Assessing Officer (AO) treated these payments as 'royalty' under Section 9(1)(vi) of the Income-tax Act and Article 12 of the India-USA DTAA. The assessee argued that the payments were for the use of copyrighted articles, not for the use of copyright itself, and thus should not be classified as royalty.The Dispute Resolution Panel (DRP) upheld the AO's decision, stating that the payments for Microsoft licenses were for access to software managed by the assessee, not an outright sale. The DRP concluded that these payments fell within the definition of 'royalty' under Article 12(3) of the India-USA DTAA.However, the ITAT referred to the Supreme Court judgment in 'Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT' and the Delhi High Court judgment in 'EY Global Services Ltd. v. ACIT,' which held that payments for the use of software do not constitute royalty if no copyright is transferred. The ITAT concluded that the payments for Microsoft licenses did not fall under the category of royalty or copyright and directed the AO to delete the proposed addition.2. Taxability as 'Fees for Technical Services' (FTS):The AO also treated the payments for coordination services related to the Tower Watson project as FTS. The assessee argued that these services did not involve the transfer of technical knowledge or skill, which is a requirement under Article 12(4) of the India-USA DTAA for a payment to be classified as FTS.The DRP rejected the assessee's argument, stating that the services provided involved the use of intellectual property and technical knowledge, which were made available to Atos India. The DRP concluded that these payments fell within the definition of FTS under Article 12(4) of the India-USA DTAA.The ITAT, however, observed that the service desk services provided by the assessee to Tower Watson employees were separate from the subcontract agreement with Atos India. The ITAT concluded that these services did not involve the transfer of technical knowledge or skill to Atos India and thus did not qualify as FTS. The ITAT directed the AO to delete the addition related to these services.3. Classification as 'Business Profits':The assessee contended that the payments received were in the nature of 'Business Profits' under Article 7 of the India-USA DTAA and were not taxable in India as the assessee did not have a Permanent Establishment (PE) in India.The ITAT agreed with the assessee's argument, stating that the payments for Microsoft licenses and service desk services were business receipts and not taxable in India in the absence of a PE. The ITAT directed the AO to delete the additions made on this ground.4. Levy of Surcharge and Education Cess:The assessee argued that the AO erred in levying surcharge and education cess on the rate prescribed under Article 12 of the DTAA. The ITAT did not specifically address this issue in the judgment, as the primary issues were resolved in favor of the assessee.5. Penalty Proceedings:The AO proposed to initiate penalty proceedings under section 271(1)(c) of the Income-tax Act. The ITAT did not specifically address this issue, as the primary issues were resolved in favor of the assessee.Conclusion:The ITAT allowed the appeal filed by the assessee, concluding that the payments received for Microsoft licenses and service desk services did not constitute 'royalty' or 'fees for technical services' under the India-USA DTAA. The payments were classified as 'business profits' and were not taxable in India in the absence of a PE. The ITAT directed the AO to delete the proposed additions and resolved the primary issues in favor of the assessee.