TaxTMI 
TaxTMI 
2011 (5) TMI 580
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.... "1. That on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) XXXI,Mumbai (hereinafter referred to as 'the CIT(A)') erred in confirming the decision of the Assessing Officer that the amount of US $ 14,08,292.74 payable by the appellant as data processing charges to M/s. Sema Group Outsourcing (Singapore) Pte Ltd. (now known as Schlumberger Sema Pte Ltd.) ['SPL'], is liable to tax in India and subject to withholding tax at 15% under Article 12(3)(a) of the double Taxation Avoidance Agreement [hereinafter referred to as "Treaty"] between India and Singapore. 2. That on the facts and in the circumstances of the case, the sum of US $ 14,08,292.74 payable by the appellant in favour of SPL, as referred to in ground no.1 above, neither being in the nature of "Royalties" or "Fees for Technical Services" within the meaning of Article 12 of the Treaty, but being in the nature of "Business Profits" which were not attributable to any "Permanent Establishment" of SPL in India, within the meaning of Article 5 of the Treaty, the same were not taxable in India as per Article 7 of the Treaty and in the said premises, the appellant had no obli....
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....rs. The scope of the price for all four metros will include the following elements: Maintenance CPU Disc space 36 track tape subsystem Staff Site Preparation Upgrade to communications front end processor System software Disaster recovery (In line with Contractual levels.) The Service charges also takes into account lower maintenance and running costs compared with those of the current configuration in Singapore at 1st September 1996. .................. 8. Should any of the capacity set out in 1 above not be required in connection with India 'Hubbing' requirements at any time during the five years to November 5th 2001, SCB will have the right to utilize any residual capacity at no extra cost and on the same terms in connection with any other similar requirements it may have for data processing to be performed in the Singapore........................ 4. As can be seen from clause-1 of the agreement SPL has a Data Centre at Singapore and it has to make available for exclusive use by the appellant the from November 6th 1996 to 5th December 2001 32 MIPS and 100 Gigabytes to start with. It is not in d....
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....ar about the nature of services to be rendered by SPL. Based on Clause-8 of the Agreement and approval of the RBI referred to earlier, the appellant claimed that under the agreement SPL was processing data for the appellant in Singapore for appellant's exclusive use. The appellant submitted before the AO that the consideration payable to SPL for the data processing services has been computed having regard to the following:- 1. Computer hardware and system software for operations of the appellant's computer applications. 2. Computer hardware to support data communications for using the services as stated above. 3. Manpower to handle daily and periodic computer based processing. 4. Suitable environment for housing the computer systems. 5. Disaster recovery capability for the services provided and testing of the same twice a year. 7. The nature of services rendered by SPL to the appellant was explained by the appellant in their letter dated 7.11.2003 in one of the application filed u/s.195(2) of the Act, dated 9/10/2003, for no objection to remit payments to SPL without deduction of tax at source, as follows: 1. The input data i.....
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....the meaning of Article 12(3) of the Treaty read with Sec.9(1)(vi) of the Act? 10. The definition of Royalty under the DTAA between India and Singapore is contained in Article 12(3), which is as under: "The term "Royalty" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use; a) Any copyright of a literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information. b) Any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in paragraph 4(b) of Article 8" 11. Explnation-2 to Sec. 9(1)(vi) of the Act defines "Royalty" as follows: Sec.9 Income deemed to accrue or arise in India.-(1) The following incomes shall be deemed to accrue or arise in India:- (vi) income by way of royalty.......... Explanation 2....
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....rce. In coming to the above conclusion, the AO held as follows: 1. The payment to SPL is for the purpose of availing CPU and disk capacity and supporting tape sub system capacity. Hence the payment made by the appellant for the above activities is royalty as per Article 12 of the DTAA between India and Singapore. 2. The service provider is not just providing the routine communications services but the service provider is providing the modern technical designs and models involving the customized communication and computation with the application of sophisticated information technology requiring constant upkeep and updating so as to meet the challenges of the advanced technology in this area. 3. The use of embedded secret software provided by the service provider for purpose of processing of raw data of the appellant clearly falls within the ambit of Article 12(3) of the DTAA and 9(1)(vi) of the Act. 4. The AO also held that the case of the appellant was similar to the ruling given by the Authority for Advance Ruling reported as P No.30 of 1999 (238 ITR 296) and has relied on the said ruling in coming to the above conclusion. 5. The AO also obs....
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....s operation. It was also highlighted that under the Agreement, the appellant does not itself undertake the processing of the data. Hence the making available by SPL of software and secret process for use by the appellant does not arise. 14. On the question whether the nature of the fees indicated above falls within the ambit of the definition of royalty given in Section 9(1)(vi) of the Act or Article 12(3) of the Treaty, the appellant pointed out the definition of Royalty in Section 9(1)(vi) of the Act and Article 12(3)(a) of the Treaty has been defined as payment of any kind received as consideration for the use or the right to use inter-alia any copy right of a literary, artistic or scientific work including any patent, trade mark, design, plan, secret formula or process. The appellant pointed out that under the Agreement consideration payable to SPL is not a payment for the use of or the right to use any copyright owned by SPL. SPL has not allowed the appellant the use of or the right to use any literary, artistic or scientific work for which the consideration is payable under the Agreement. It was argued that under the Agreement, SPL has not made available to the appell....
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....the appellant to be processed. 16. The CIT(A) did not agree with the submissions of the appellant and he held as follows: "3.1 The appellant had entered into an agreement with SPL for processing of the appellant's data at Singapore. This agreement is for a period of 5 years starting from 26.09.1996 and it appears, later on this agreement was renewed further. The services being provided by SPL have been examined and have been quoted in the order in brief. The appellant collects the data about its customers in India and thereafter transmits its electronically in Singapore. SPL has set up a vast computer system by utilizing various computer hardware and software. It has got massive capacity for processing of data provided by the appellant. After the date is processed and reports as required by the appellant are prepared, the data is transferred back to the appellant in India. SPL also maintains back up of the processed data in case of any loss. From these facts it can be very well understood that the SPL is providing service of 'processing of data' which can be termed as a process. Sec.9(1) Explanation (2) of the I.T. Act........... 3.2 Article 12(3) of the DTA....
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....ctronics Company Ltd. vs. ITO [ (94 ITD 91 (Bang)] was also rendered on different facts. Both these decisions relates to acquisition of software and whether payment made for such purchase amounts to royalty. The appellant company has not acquired any software and therefore facts in the case are totally different from these two cases." 18. While dealing with another appeal arising out of application under section 195 of the Act (which is subject matter of ITA No.1936/M/08) the CIT(A) added another reason as to why the payment in question should be held to be royalty. "2.17 On perusal of the above quoted portion of the agreement, it is clear that the payment being made by SCB India, pursuant to the aforesaid agreement is for the purpose of availing CPU and disc capacity and supporting tape subsystem capacity i.e. the capacity which has been created for the exclusive use of SCB India. This fact was not present in the Kotak case, as discussed above, and its agreement (the relevant portion of which has been quoted from the order of the Hon'ble Tribunal) also did not speak about a captive exclusive disc capacity being granted to the appellant in the Kotak case. This fact ....
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....arned counsel for the Appellant submitted before us that the conclusion of the revenue authorities that the payment by the Appellant to SPL is taxable in India is not correct. He reiterated the stand of the Assessee on the nature of service that SPL was to provide to the appellant. These have already been narrated in the earlier part of this order and are not being repeated here. He brought to our notice the definition of Royalty under the DTAA between India and Singapore. The learned counsel for the appellant after referring to the agreement and the manner in which data is sent by the Appellant to SPL and how the same is processed and received back from SPL, submitted that the payments in question were charges paid for data processing. In this regard the learned counsel for the Appellant submitted that the definition of royalty provides for use of, or the right to use any copyright of a literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. It was submitted ....
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....essing of data. This central processing unit was accessed and used by various group entities located worldwide through a consolidated data network maintained in Hong Kong. The transactions done by a traveller in a particular country were reported to a centralised computer in that country. In India, this is done by XT, located at Delhi. The said Indian company XT received information on computer through telephonic and microwave links about the use of credit cards and travellers' cheques by travellers all over the country. XT also serviced thirteen group companies in Asia and the Pacific, in a similar manner. The information was then passed on to the Hong Kong computer centre of the applicant. For carrying out this operation, XT obtained leased lines from VSNL. The applicant-company, Y charged XT, the Indian company, for the use of its computer set up in Hong Kong and that in the USA. XT, the Indian company, is a sub-subsidiary of the applicant. On these facts, the applicant sought an advance ruling on the questions whether payment due to the applicant under the transactions with XT was liable to tax in India and, if so, whether the payment due to the applicant under the transactions....
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....n this area. It is the use of embedded secret software (an encryption product) developed by the applicant for the purpose of processing raw data transmitted by XT which would clearly fall within the ambit of article 12(3)(a) of the Double Taxation Avoidance Agreement between India and the U.S.A. 21. It was submitted by the learned counsel for the Appellant that in the present case, the appellant did not have any right to access the mainframe of the computer at Singapore. The Appellant can only send data to the mainframe and receive back processed data in a particular form. The right to access is thus a very crucial distinction and in the light of the definition of royalty both under the Act as well as DTAA, the payment in question is a business receipt in the hand of SPL and not royalty. It was submitted by him that the decision of the AAR relied upon by the Revenue authorities have been rendered based on a set of facts which are totally different from the facts of the Appellant's case. 22. The learned counsel for the appellant submitted that the learned CIT(A) had placed reliance on the decision of the Delhi ITAT in the case of Asia Satellite Telecommunication Co. ....
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.... in its view, Asia Sat's customers do not make a payment for the use of a process. The transponder is an inseverable part of the satellite and cannot function without the continuous support of various systems and components of the satellite. Consequently it is incorrect to assume that a transponder is a self-contained unit, the control and constructive possession of which can be handed over by the satellite operator to the customer. Asia Sat was the operator of the satellites and continued to be in control of the satellites and had not leased the satellite to its customers. 23. The learned counsel for the Appellant pointing out to the above decision of the Hon'ble Delhi High Court submitted that in the case of appellant, the appellant had no right to use the mainframe. He highlighted the fact that the ultimate control of the mainframe computer lies with SPL at Singapore and the fact that the substance of the agreement was the use of capacity of mainframe computer of SPL. Thus there was no right to use a process. 24. Further reliance was placed by the learned counsel for the Assessee on the decision of the AAR in the case of Dell International Services (India) P.Ltd.....
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....ant except in a very loose sense, such as using a road, bridge or a telephone connection. What was contemplated by the word "use" in clause (iva) of Explanation 2 to section 9(1)(vi) was that the customer came face to face with the equipment, operated it or controlled its functions in some manner. But if it did nothing to or with the equipment and did not exercise any possessory rights in relation thereto, it only made use of the facility created by the service provider who was the owner of the entire network and related equipment. There was no scope to invoke clause (iva) in such a case because the element of service predominated. The predominant features and underlying object of the agreement unerringly emphasized the concept of service. That even where an earmarked circuit was provided for offering the facility, unless there was material to establish that the circuit/equipment could be accessed and put to use by the customer by means of positive acts, it did not fall within the category of "royalty" in clause (iva) of Explanation 2 to section 9(1)(vi) of the Act. That the payment by the applicant to BT was also not in the nature of "royalty" within the meaning of clause (iii) of....
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....icant so that it could utilize for the specific purpose of making available the augmented data sent by the applicant through its ground station to the users extensively. The expression "use of space segment capacity" of the transponder had no reference to any operations performed by means of the transponder. The operation and regulation of the transponder remained always with Inmarsat Global of the U. K. The payment made by the applicant could not, therefore, be regarded as payment made for the use of the equipment of Inmarsat Global of the U.K. 26. Further reliance was placed on the decision of the ITAT Mumbai in the case of Kotak Mahindra Primus Ltd. vs. DCIT 105 TTJ (Mumbai) 578. The question before the Tribunal was as to whether the appellant before the Tribunal which was in the business of providing finance for purchase of cars, was required to deduct tax at source on payments made to M/s.Ford Credit Australia Ltd., Australia, a non-resident, the payment being an annual Maintenance fee charge for right to have system updates released by Ford Credit and access to Ford Motor Company and/or its affiliates overseas based mainframe computer system and its software applicati....
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....cargo portal outside India which an Indian subscriber paying fees for access and use of portal for booking cargo with airlines, training subscribers and help connected therewith and Fees paid for such use, is income that can be said to arise in India and whether they are in the nature of royalties and fees for technical services. The AAR held that the fee so paid is Royalty and Fees for technical services and therefore Taxable in India. Reference was made to the decision of the Delhi Bench of ITAT in the case of Millennium Infocom Technologies Ltd. vs. ACIT 117 ITD 114 (Delhi) relating to AY 01-02, wherein the question was whether payment for hosting websites on servers in USA i.e., whereby space is provided on the servers by the non-resident for the purpose of hosting website was royalty. The Tribunal ruled that clause (iva) to Expln.2 to Sec.9(1)(iv) was inserted by the finance Act, 2001 w.e.f. 1-4-2002 whereby the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in Sec.44BB was to be treated as royalty. Since the case related to AY 01-02 the tribunal held that the payment was not royalty. According to the learned D.....
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.... as to whether the payment by the appellant to SPL is in the nature of Royalty. The facts are therefore recapitulated. SPL had a Data Centre at Singapore and it agreed to make available for exclusive use by the appellant the From November 6th 1996 to 5th December 2001 inclusive 32 MIPS and 100 Gigabytes and thereafter increased capacity. It is not in dispute that the tenure of this agreement was further extended to cover the period in dispute in these appeals. The Agreement does not make any reference to any data processing to be carried out by SPL for the appellant at Singapore. However, clause-8 of the Agreement mentions that the appellant will have the right to utilize any residual capacity at no extra cost on the same terms in connection with any other similar requirement it may have for data processing to be performed in Singapore. Further, the permission granted by Reserve Bank of India to the appellant vide letter dated 6/11/1996, shows that SPL was carrying out data processing for the appellant at Singapore. As per the agreement appellant was required to pay SPL fixed monthly installments with effect from January 1, 1998 over a period of 60 months. The Reserve Bank of India....
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....a) of DTAA since the payment in question was a consideration for the use of process. According to the revenue SPL has provided a process by providing its computer facility to process the data provided by the appellant. The fact that the software and hardware of the computer system of the SPL has not been designed or manufactured by SPL or the fact that SPL itself did not design, assemble and set up the computer system is no ground to hold that the payment is not for use of any process. SPL without being the owner of the process can obtain various components from the market including copyrighted software or using software and hardware available from the market. It can also design or can get the software and hardware designed for use of its computer system for the efficient processing of data. In clause (iii) of explanation (2) there is no requirement that the process should be a copy right process of which the provider should be the owner. It is sufficient if the provider of a process provides such a process for which payment is made to him. 33. The second reason assigned by the revenue is that the payment falls within the ambit of Expln-2 clause (iva) to sec. 9(1)(vi) of th....
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....d to be a payment for a facility which is available to any person willing to use the facility as laid down by the Hon'ble Madras High Court in the case of Skycell communications Ltd. vs. DCIT 251 ITR 53 (Mad). The system software which is embedded in the computer hardware by which the computer hardware functions is not owned by SPL and SPL only has a licence to use the system software. SPL employs manpower to process the data and also provides disaster recovery. The consideration received by SPL from the appellant is therefore for using the computer hardware which does not involve use or right to use a process. The data is received by application software which is owned by the appellant. The consideration paid by the appellant to SPL is for processing its data. This part of the consideration cannot be said to be a consideration paid for use or right to use process as the processing of the data is done by SPL using the system software owned by the appellant. Therefore it cannot be said that the payment by the appellant to SPL is Royalty within the meaning of Article 12(3)(a) of the treaty. 35. The CIT(A) in coming to the conclusion to the contrary has placed reliance on the ....
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....specialized data processing of raw data using mainframe computers located abroad is not liable to tax as royalty and the company is not liable to withhold tax from such payments in our view is squarely applicable to the facts of the present case. Kotak Mahindra Primus Ltd., the taxpayer, an Indian Company, was engaged in the business of providing finance for purchase of cars. The company was jointly formed by Kotak Mahindra Finance Limited, India and Ford Credit International Inc., USA (FCII). The company which is engaged in the business of providing finance for purchase of cars, had entered into a data processing agreement with Ford Credit Australia Limited (FCAL) to enable it to upload the raw data in the mainframe computer in Australia and the output data, after due processing would be transmitted back to the company. The fee payable had a fixed component for annual maintenance and licensing charges and a variable component based on the amount of data processed. On the above facts, the question that was to be considered by the Tribunal was as to whether the payment by the taxpayer was Royalty and therefore taxable in India and therefore there was an obligation to withhold tax at....
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.... exclusive use of appellants. The further reasoning is that though the appellants do not have any physical possession of the property, it is exercising constructive control over the infrastructure facilities because these facilities can be utilized only by the appellants as per the terms of agreements. According to CIT(A), the arrangement was one of renting out disc space in the hardware system of SPL in favour of the appellants and the payments made by appellants to SPL is for right to use the scientific equipments. 39. The meaning of the expression "use or right to use" as used in Article 12(3)(b) has to be first understood. In the case of ISRO Satellite Centre(ISAC), In Re (Supra), the AAR had to decide whether the consideration paid by ISRO to Inmarsat Global of the U. K. for leasing of the Inmarsat navigation transponder capacity, would be Royalty under the DTAA between India and U.K. The Authority after looking into the nature of the agreement, ruled that by earmarking a space segment capacity of the transponder for use by the applicant, the applicant did not get possession (actual or constructive) of the equipment of Inmarsat Global of the U. K. ; nor did the applica....
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....l tax treaties contained such a provision, however, by virtue of the amendments made to such model in the year 1977, payment made for the user of equipment, was deleted from the scope of "royalties However, in a Report to Working Party No.1 of the OECD Committee on Fiscal Affairs, submitted by the Technical Advisory Group of OECD on Treaty Characterization of Electronic Commerce Payments, dated February 1, 2001, the Technical Advisory Group of OECD specifically considered the scope of payments made for the user of equipment in the context of electronic commerce related issues. Since a number of tax treaties across the world still covered such payments within the scope of "royalties". Commenting upon under what circumstances a computer hardware, namely an equipment, could be said to have been made available for user to a customer, the Technical Advisory group of OECD brought out the following "tests", the fulfillment of all or some of which would render the transaction to be user of equipment a) The customer is in physical possession of the property. b) The customer control the property. c) The customer has a significant economic or possessory interest in the....
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.... 36 track tape subsystem Staff Site Preparation Upgrade to communications front end processor System software Disaster recovery (In line with Contractual levels.) We have already seen the nature of services rendered by SPL to the appellants. The appellants as already seen have no right to access the computer hardware except for transmitting raw data for further processing. The appellants have no control over the computer hardware or physical access to it. There is nothing to show positive act of utilization, application or employment of equipment for the desired purpose. The appellants cannot come face to face with the equipment, operate it or control its functions in some manner. The appellants had no possessory rights in relation to the computer mainframe. The appellants took advantage of a facility of use of sophisticated equipment installed and provided by another, it could not be said that the recipient/customer "used" the equipment as such. The appellant merely made use of the facility, though they did not themself use the equipment. There is nothing on record to establish that the hardware could be accessed and put to us....
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....ssessee being one relating to period after 1-4-2002, the payments should be treated as covered by clause(iva) to Expln.2 to Sec.9(1)(iv) of the Act. In our view the decision rendered as above cannot be said to be strictly a precedent as the issue was neither discussed or argued by the parties. Besides the above, the said decision is contrary to decision of the Hon'ble Delhi High Court in the case of Asia Satellitte (supra). The decisions relied upon by the learned D.R. do not therefore support the case of the revenue. We therefore hold that the payment by the appellants to SPL is not royalty within the meaning of Article 12(3)(b) of the treaty. 43. For the reasons stated above, we allow all the appeals by the Assessee. 44. ITA No. ITA NO.1457/MUM/2008 for AY 04-05: This appeal is by SPL against the order of CIT(A) XXXI, Mumbai dated 27/12/2007 for AY 2004-05. The grounds of appeal raised in this appeal by the Assessee reads as follows: "On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) XXXI [CIT(A)] erred in confirming the following grounds: 1.1 That on the facts and in the circumstances of the case, the ....