2022 (12) TMI 1563 - AT - Income Tax

Infrastructure Data Centre charges, referral fees, and member login fees not taxable as royalty under India-Singapore DTAA

Edenred Pte. Ltd. C/o Walker Chandiok & Co. LLP Versus Dy. Commissioner of Income Tax International Taxation Circle-2 (2) (1), Mumbai

ITAT Mumbai allowed the appeal, ruling that Infrastructure Data Centre charges, referral fees, and member login fees received by the Singapore-based ... Taxability of income in India or not - receipts on account of Infrastructure Data Centre (‘IDC”) charges, referral fees, and member login fees - Royalty receipt under the India - Singapore Double Taxation Avoidance Agreement ('DTAA') Taxability of IDC charges as royalty under the India Singapore DTAA - HELD THAT:- We find that the coordinate bench of the Tribunal in assessee’s own case in Edenred Pte Ltd [2021 (10) TMI 14 - ITAT MUMBAI] for the assessment year 2016–17 to hold that IDC charges received by the assessee is not in the nature of royalty, thus, decided similar issue in favour of assessee. Taxability of other service charges (referral fees) as royalty under the India Singapore DTAA - We find that the coordinate bench of the Tribunal in assessee’s own case in Edenred Pte Ltd [2021 (10) TMI 14 - ITAT MUMBAI] for the assessment year 2016–17 to hold that referral fee received by the assessee is not in the nature of royalty decided similar issue in favour of the assessee by following the judicial precedents rendered in assessee’s own case. Taxability of member login fees as royalty under the India Singapore DTAA - We find that the coordinate bench of the Tribunal in assessee’s own case in Edenred Pte Ltd [2021 (10) TMI 14 - ITAT MUMBAI] for the assessment year 2016–17 decided similar issue in favour of the assessee by following the judicial precedent rendered in assessee’s own case. Appeal by the assessee is allowed. The core legal questions considered by the Tribunal in this appeal relate to the taxability under the Income Tax Act, 1961 and the India-Singapore Double Taxation Avoidance Agreement (DTAA) of various receipts earned by the assessee, a Singapore tax resident, from its Indian group companies. Specifically, the issues are:1. Whether the Infrastructure Data Centre (IDC) charges received by the assessee constitute royalty income taxable in India under section 9(1)(vi) of the Act and Article 12 of the India-Singapore DTAA.2. Whether Other Service Charges, specifically referral fees, received by the assessee are taxable as royalty under the Act and DTAA.3. Whether Member Login Fees received by the assessee are taxable as royalty under the Act and DTAA.4. The general ground of the correctness of the total income assessed by the AO as against the Nil income declared by the assessee.Issue-wise Detailed Analysis1. Taxability of Infrastructure Data Centre (IDC) Charges as RoyaltyLegal Framework and Precedents: The relevant provisions are section 9(1)(vi) of the Income Tax Act, 1961, which defines royalty, and Article 12 of the India-Singapore DTAA. The key legal test under the DTAA is whether the payments constitute royalties, which generally involve transfer or right to use intellectual property, or make available technical knowledge, experience, skill, or know-how enabling the recipient to apply technology.Precedents relied upon include decisions in the assessee's own case for earlier assessment years, notably ITA No. 6267/Mum/2019 for AY 2016-17, where the Tribunal examined the nature of IDC services and held that such receipts do not constitute royalty. Other significant precedents include Bharati Axa General Insurance Co. Ltd., Standard Chartered Bank, ExxonMobil Company India (P.) Ltd., and Reliance Jio Infocomm Ltd., which clarified that mere provision of IT infrastructure or hosting services without transfer of technical knowledge or rights does not amount to royalty.Court's Interpretation and Reasoning: The Tribunal noted that the assessee provides IDC services comprising IT infrastructure management, mailbox, and website hosting services to its Indian group companies. These services are performed entirely in Singapore using the assessee's hardware, security devices, and personnel. The Indian companies do not have access to or use of the assessee's CPU or software, nor is there any transfer of copyright or right to use equipment or software.The Tribunal distinguished the facts from cases where software licenses or specialized software access were involved, such as the IMT Labs case. It emphasized that the IDC services are standard hosting and infrastructure services, not involving any embedded or secret software or transfer of technical know-how.The Tribunal also considered the decision in Cargo Community Network (P.) Ltd., which held that payments for access to a portal could be royalty, but distinguished it on facts since the assessee's IDC services do not involve granting access to specialized software or proprietary technology.Key Evidence and Findings: The Tribunal relied on documentary evidence showing that the IDC is an ISO 27001 certified data centre located in Singapore, owned by the assessee; services are rendered by personnel in Singapore; Indian companies remit payments to Singapore; and the services ensure uptime and security but do not involve transfer of technology or software rights.Application of Law to Facts: Applying the legal test from the DTAA and judicial precedents, the Tribunal concluded that IDC charges do not constitute royalty as there is no transfer or right to use intellectual property or technical knowledge. The payments are for services rendered, not for use of technology or software.Treatment of Competing Arguments: The Revenue relied on the AO and DRP orders which treated IDC charges as royalty. However, the Tribunal found no new facts or legal changes warranting deviation from earlier decisions in the assessee's own case and other precedents. The Tribunal rejected the Revenue's contention and upheld the assessee's plea.Conclusion: The Tribunal deleted the addition of Rs. 2,85,01,345 treated as royalty and held IDC charges are not taxable as royalty under the Act or the DTAA.2. Taxability of Other Service Charges (Referral Fees) as RoyaltyLegal Framework and Precedents: Section 9(1)(vi) of the Act and Article 12 of the India-Singapore DTAA are again relevant. The key question is whether referral fees constitute royalty or fees for technical services (FTS) by making available technical knowledge or skill.Precedents include the assessee's own case for earlier years and rulings such as Cushman & Wakefield (S) Pte. Ltd. and Real Resourcing Ltd., where referral fees for introducing clients were held not to be royalty or FTS as they do not transfer technical knowledge or rights.Court's Interpretation and Reasoning: The assessee received referral fees for referring potential customers to Accentiv (India) Private Ltd., which provided services from India. The referral services did not involve transfer of technical knowledge or skill, nor did they enable the recipient to apply technology.The Tribunal noted that the referral fees support the business of the Indian company but do not amount to making available technical knowledge or processes as required under the DTAA definition of royalty or FTS.Key Evidence and Findings: The agreement showed that the assessee's role was limited to referring clients, with no responsibility for negotiation or fee collection. The services were rendered outside India, and no permanent establishment existed in India for the assessee.Application of Law to Facts: Based on the precedents and the factual matrix, the Tribunal held that referral fees are not taxable as royalty or FTS in India under the DTAA or the Act.Treatment of Competing Arguments: The Revenue relied on AO and DRP orders treating referral fees as royalty. The Tribunal found no basis to depart from earlier consistent decisions and rejected the Revenue's submissions.Conclusion: The Tribunal deleted the addition of Rs. 14,20,719 on account of referral fees and held it not taxable as royalty or FTS in India.3. Taxability of Member Login Fees as RoyaltyLegal Framework and Precedents: The legal provisions remain section 9(1)(vi) of the Act and Article 12 of the India-Singapore DTAA. The question is whether member login fees constitute royalty by conferring rights to use intellectual property or technology.Precedents include the assessee's own case for earlier years where member login fees were held akin to IDC services and not royalty.Court's Interpretation and Reasoning: The Tribunal observed that member login fees relate to providing a standard facility to Indian entities without granting exclusive rights to use any copyright, process, or technology. The DRP itself had observed the similarity of member login services to IDC services.Accordingly, the Tribunal held that these fees do not constitute royalty under the DTAA or the Act.Key Evidence and Findings: The material showed that member login services are standard access services without transfer of proprietary rights or technical know-how.Application of Law to Facts: Applying the legal principles and consistent precedents, the Tribunal concluded that member login fees are not taxable as royalty.Treatment of Competing Arguments: The Revenue relied on AO and DRP orders treating member login fees as royalty. The Tribunal found no justification to deviate from earlier decisions and rejected the Revenue's arguments.Conclusion: The Tribunal deleted the addition of Rs. 70,16,013 on account of member login fees and held the same not taxable as royalty.4. General Ground on Total Income AssessedThis ground was general and did not require separate adjudication as the substantive grounds relating to classification of receipts were determinative of the total income assessed.Significant HoldingsOn the issue of IDC charges, the Tribunal held:'From the enunciation of law in Bharati Axa General Insurance Co. Ltd; ExxonMobil Company India (P.) Ltd; Standard Chartered Bank v. DOIT; DCIT v. M/s Reliance Jio Infocomm Ltd narrated at para 6.1 hereinbefore, it is quite luculent that revenues under the IDC agreement ought not to be taxed in the hands of the appellant as royalty under the Act and/or India-Singapore DTAA. Therefore, we delete the addition of Rs. 95,62,479/- made by the AO towards IDC charges and allow the 2nd ground of appeal.'On referral fees, the Tribunal observed:'In the context of the above factual scenario and position of law, the revenues under the referral agreement is not taxable in the hands of the appellant as royalty under the Act and/or India-Singapore DTAA or FTS under the India-Singapore DTAA, Therefore, we delete the addition of Rs. 39,94,209/- made by the AO towards referral fee and allow the 4th & 5th ground of appeal.'On member login fees, the Tribunal stated:'It is further relevant to observe, learned DRP, while deciding the issue has clearly and categorically observed that member login services are similarly to IDC services. If that is the factual position, the member login fee cannot be treated as royalty since, while deciding assessee's appeal challenging the taxability of fees received towards IDC services, the Tribunal has consistently expressed the view that the services cannot be treated as royalty under the India-Singapore Tax treaty. In aforesaid view of the matter, we hold that member login fee is not in the nature of royalty under the treaty provision. Accordingly, addition is deleted.'The Tribunal's final determinations on each issue were to delete the additions made by the AO treating IDC charges, referral fees, and member login fees as royalty income taxable in India. The Tribunal consistently followed its earlier decisions in the assessee's own case and relevant judicial precedents, finding no change in facts or law to warrant deviation.