TaxTMI 
TaxTMI 
2017 (2) TMI 633
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....by way of this consolidated order. 2. To understand the facts and issues involved and its implications thereof, we are taking up the appeal for Assessment Year 2006-07 being ITA No. 237/Mum/2016, which has been passed in pursuance of order of Tribunal setting-aside the matter to the file of Assessing Officer to re-adjudicate the following issues :- "(a) Whether payments made to Standard Chartered Bank (SCB), India to the assessee are payments for "Royalty" or "Fees for Technical Services (FTS)"? (b) Whether the benefits of Sec. 115A of the Act will be available to the assessee in case it is held that the payments from SCB, India are held to be taxable as Royalty or/and FTS?" 3. In the grounds of appeal, assessee has raised the following grounds:- "1.1 On the facts and in the circumstances of the case and in law, the learned Deputy Commissioner of Income-tax (International Taxation) 1(1)(2), Mumbai ('the learned AO') and the Dispute Resolution Panel ('the DRP') erred in holding the sum of Rs. 11,78,20,808 as 'Royalty' and 'Fees for Technical Services' under Section 9(1)(vi) and 9(1)(vii) of the Incometax Act, 1961 ('the Act'). ....
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....of the case and in law, the Learned AO erred in initiating penalty proceedings under section 271 (1)(c) of the Act. The Appellant humbly prays that the Learned AO be directed to not to initiate the penalty proceedings." 4. Before us, the ld. Counsel, Shri Kanchan Kaushal explaining the background and facts of the case submitted that assessee, Atos Information Technology HK Ltd. is a non-resident company, engaged in the business of providing services/facilities for data processing through computer hardware and software from Hong Kong. It had entered into a contract for provision of computing services,for the provision of data process support to 'Standard Chartered Bank India' (SCB India), which is engaged in banking business in India. Under the said contract, assessee processes the data for SCB in Hong Kong. The said services are being provided by assessee to SCB since August, 2005. He pointed out that the contract for computing services was governed by a "Cocteau agreement" dated 12.2.2004 which the assessee had entered with SCB worldwide for the provision of data processing support to SCB in 68 countries during the years under consideration. Considering the involvement of 68....
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....orkstation, hardware, network and software are owned by SCB India. The assessee does not supply or install any hardware or software in the premises of SCB India's branches to provide the data processing services. * The transaction / data are processed by the assessee's data centre computer equipment located in Hong Kong. No staff of the assessee is required to be in India to provide the data processing services and no staff of the assessee provides data processing services to SCB India in India. However, the staff of the assessee are only required to oversee the data processing services to SCB India so as to ensure uninterrupted services. SCB India owns all the hardware, application software and network in its India branches. * After the raw data is transmitted into the hardware facility of the assessee in Hong Kong, the assessee, processes the raw data as per the requirement of SCB India on application software owned by SCB India, using the hardware infrastructural facility, of the assessee in Hong Kong. * The processed data i.e. the output data is transmitted electronically to SCB India in India using the software provided by SCB India, which has not been designed by th....
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....flow for the various geographic locations, for various business application, which would constitute "process". The data computing services are performed on the above said platform utilising the above process. Thus, it could be seen that the assessee has made available to SCB the use of its equipment, model, design, invention and process and has also rendered services in connection with the same, and hence the nature of the transaction clearly fall within the purview of "royalty", as defined in Explanation 2 to Section 9(1)(vi) of the Act. • The fixed charges and variable charges are made for the provision of facilities, infrastructure, network, system, software and environment for the mainframe and midrange servers categorised as mainframe services and midrange services and are in the nature of payment for royalties as u/s. 9(1)(vi) of the Act. FTS: • Further, the Assessing Officer after extensively relying on the 'Cocteau agreement' also held that the assessee has provided technical, managerial and consultancy services to SCB and such services clearly fall within the purview of technical services defined Explanation 2 to Section 9(1)(vii) of the Act. I....
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....er it can be royalty or FTS, but cannot be both. The income by way of 'royalty' connotes more 'passive' in nature, whereas FTS relates to rendering of managerial, technical or consultancy services through constant human involvement. Thus, at the threshold, the findings of Assessing Officer in characterising the impugned payment, both as royalty as well as FTS is not in accordance with the provisions of the Act and hence, on this ground alone the entire addition made by Assessing Officer cannot be upheld. 9. On merits, as regards the payment not being in the nature of royalty in terms of Sec. 9(1)(vi) of the Act, ld. Counsel submitted that the main objection of Assessing Officer is that "assessee has not provided mere data processing services to SCB, but has also provided technology in the form of datacentre, infrastructure, connectivity and application technology for its banking operations.". He pointed out that under the 'Cocteau agreement', the assessee was to provide data centre and related computing services to the banking operations of SCB and only such services were provided.The objectives as set out in para 1.1 of Schedule 1 of the 'Cocteau agreement' are as under: (a)....
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....essed output should be received in India on a day to day basis. (iii) The bank will remain responsible for maintaining the secrecy and confidentiality of the data processed / to be processed." Thus, the approval granted by RBI to SCB was only for processing of data. Regarding Assessing Officer's objection that assessee has provided technology in the form of data centre, infrastructure, connectivity and application technology to SCB, the ld. Counsel submitted that under the Cocteau agreement, the assessee provides data processing services to SCB Group which has presence in approximately 68 countries for the years under consideration. With the exorbitant size of the assignment, work that is required to be transacted between SCB and the assessee, it is but natural for SCB to be sure about the capacity (i.e. the infrastructure, human resources, facilities, technology, internal processes etc.) of the assessee in handling the assignment.By way of an example, he submitted that if any MNE wants to get its data work done, then it may negotiate with audit firm and seek information like number of auditors working in the firm, about human resources, about level of understanding, the proc....
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....ives" of the SCB for which it has entered into the Cocteau agreement. The said objectives contemplates provision of technologically innovative approach to render data centre and related computing services, improving data centre service capability, minimizing operational risks, justifying the provision of services against the cost incurred by SCB, employing best practices to render such services. 10. Further, all the infrastructural facilities and software, located in Hong Kong, have been used by the assessee, to provide data computing services to the SCB. The assessee is using its infrastructure and software facilities to provide the data computing and related services to the SCB. The Cocteau agreement nowhere suggests that any of the hardware or software facilities of the assessee, have been lent to SCB Group. The SCB Group do not have any access to the methodology and process used by the assessee in provision of data computing and related services. 11. Thus, it was submitted that it has not provided the SCB Group with the technology in the form of datacentre, infrastructure, connectivity and application technology, rather it has used such technology and infrastructure on its o....
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.... use a process. Third Stage: The processed data, i.e., the output data is transmitted electronically to SCB in India using the software provided by SCB, which is not designed by Atos Singapore. Even at this stage there is no use or right to use any process. From the above three stages, it can be very well seen that the Hon'ble Tribunal has categorically given a finding that (i) there was 'no use' or 'right to use' of any process by SCB and (ii) there was no consideration for use of process. Further, there cannot be any presumption of indirect use by SCB as the Process is ONLY used by Atos Singapore in earlier years and by the assessee during the year under consideration. Hence, in the absence of direct as well as indirect use by SCB, Explanation 5 will have no application. b. Non-applicability of Explanation 6: Explanation 6 is being retrospectively inserted, w.e.f 1st June, 1976 and same reads as under: "Explanation 6: For the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, c....
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....he right to use, industrial, commercial or scientific equipment". Presently, these payments are not included in the definition of royalty in the aforesaid Explanation. The result is that income from the leasing of industrial, commercial or scientific equipment becomes taxable in the source country as business income only. Consequently, there is no withholding tax on such payments as the taxpayer takes shelter under the definition of the term "royalty" as provided in the Income-tax Act since the same is more beneficial to him. It is therefore, proposed to amend section 9 so as to widen the scope of the term "royalty" as provided in Explanation 2 of clause (vi) of sub-section (1) of section 9 so as to include in its ambit consideration for the use of, or the right to use, industrial, commercial or scientific equipment." Thus, it is clear that the insertion of Clause (iva) was to bring the leasing of industrial, commercial or scientific equipment under the scope of Royalty. Since, in this case there is no leasing of equipment, the question of invoking clause (iva) does not arise. The said view is also adopted by the decision of Yahoo India P, Ltd. Vs DCIT (140 TTJ 195)(Mum) w....
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....s clause never existed as on April 1, 1976 and accordingly, the legislation cannot clarify the intention of the clause which never existed on the said date. Thus, it is humbly submitted that Explanation 5 will not apply to Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Act." Thus, he submitted that the impugned payment received by assessee from SCB India is not for any processing, model, invention, design or equipment, albeit it is payment for provision of data computing services and hence cannot be reckoned as royalty. 14. Regarding the impugned payment not being in the nature of FTS, he submitted that Assessing Officer has mainly emphasised on Schedule - 24 of the Cocteau agreement, wherein assessee is required to submit reports for various activities and services performed and, therefore, the services provided fall in the nature of managerial and technical services. The relevant clauses and the submissions made by the ld. Counsel to rebut the observations of Assessing Officer are reproduced hereunder:- "(a) Managed Platforms and Managed Infrastructure Scope: This section provides an overview of the Managed Platforms and Managed Infrastructure in Datac....
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....X7X365 continuous operational health checks, monitoring and timely event and Problem reporting to guarantee the required levels of Availability of the Managed Systems. Where feasible, such health checks and monitoring should be fully automated". Under this, the assessee is required to health check the necessary infrastructures and softwares so that they are available for rendering services. Further, such health check are required to be fully automated. (e) Availability Management: "This section describes the Services to be provided by the Supplier for the purpose of maintaining appropriate levels of Availability for Production Environments. The Supplier shall proactively monitor Managed Systems resources and individual/clustered Managed Systems components, in order to detect bottlenecks and potential Problems, and to automatically (where possible) recover from critical situations and / or notify support personnel." Under this, the assessee is required to monitor all of its hardware and softwares and detect any bottlenecks and repair them automatically. (f) Database Administration: "This section describes the Services to be provided by the Supplier in relation to the man....
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....ss to, performance of and recovery for data resources." Under this, the assessee is required to set-up, configure, manage and maintain storage facilities for managed systems. (j) Performance Management: "Performance management is the continuous process of evaluating each Managed System to determine whether it can deliver the level of performance required by SCB, and then tuning it until it does." This section describes the assessee's responsibilities to evaluate whether each managed system can deliver the level of performance required by SCB for handling data computing / processing services and then tuning it until it does. (k) Business Impact Analysis: "The Business Impact Analysis process is an internal SCB process managed and implemented by SCB, in order to identify key business functions and recovery time frames, when viewed in the context of monetary, workflow and intangible effects of inoperability of the Managed Systems (or anyone of them)." This section describes the assessee's responsibilities in analyzing the impact in the event of failure of any hardware or software. (l) Disaster Recovery Planning and Testing: This section describes the assessee's respo....
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....dates and management processes stipulated by SCB. Under this, the assessee is required to antivirus standards and procedures, prescribed by SCB so that its data is protected. A reading of the foregoing paras suggests that the assessee is required to install and maintain and protect all the infrastructures and softwares which are used for rendering data computing services. All these services are ancillary to the main services which is of "rendering data computing services." 15. Ld. counsel thus submitted that, Assessing Officer has mainly cherry-picked some of the clauses from the agreement to conclude that provision of services constitutes managerial and technical services without actually understanding and examining the terms of such clauses in the light of entire agreement. He further submitted that the agreement has to be understood in its overall context and also to be understood in the light of objective of the parties entering into such an agreement. The main object of the Cocteau agreement was provision of data computing services by the assessee to SCB. It was only looking to the amount of work and the number of countries involved that the Cocteau agreement was made in....
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....n such data are processed automatically and the final result is then retransmitted to the SCB India. Such transmission and processing of data is done automatically/mechanically by computers. In such processing there is no human intervention. The assessee's employee has no role to play in the data transmitted by SCB India for processing to the assessee, neither is there any application of mind on such data by such employed of the assessee. No verification or further analysis is carried out on such data for the purpose of generating reports. The processing and generation of report is done automatically in the mainframe computers of the assessee. The employees of the assessee are only required to oversee as to whether the computer systems are functioning properly and performing well, and there any breakdown or fault in running of such systems. The assessee reiterates that there is no human intervention during the process of generation of reports which is the main objective of Cocteau agreement. This is done automatically. The Human intervention, as stated above, is required only for maintaining, repairing and monitoring the hardware and softwares which are processing the raw dat....
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....ices provided by the assessee to SCB, are provided automatically through the use of mainframe computers. Further, reliance is also placed on the decision of the Hon'ble Income-tax Appellate Tribunal, Mumbai in the case of Siemens Limited vs. CIT (Appeals) - 11, Mumbai (ITA No. 4356/Mum/2010) wherein it has been held that: "14 .....The learned CIT (DR) had argued that for observing the process, preparing the report, issuance of certificate and for monitoring of machines, human involvement is definitely there, therefore, it cannot be held that there is no human intervention. In our opinion, this cannot be the criteria for understanding the term "technical services" as contemplated in Explanation 2 to section 9 (1)(vii). If any person delivers any technical skills or services or make available any such services through aid of any machine, equipment or any kind of technology, then such a rendering of services can be inferred as "technical services". In such a situation there is a constant human endeavour and the involvement of the human interface. On the contrary, if any technology or machine developed by human and put to operation automatically, wherein it operates without a....
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....he former. The service provided by the Stock Exchange for which transaction charges are paid fails to satisfy the aforesaid test of specialized, exclusive and individual requirement of the user of consumer who may approach the service provider for such assistance/service. It is only service of the above kind that according to us, should come within the ambit of the expression "technical services" appearing in Explanation 2 of Section 9(1)(vii) of the Act. In the absence of the above distinguishing feature, service, though rendered, would be mere in the nature of a facility offered or available which would not be covered by the aforesaid provision of the Act." In reply to the DR's argument and his reliance on the Apex Court judgement, it was submitted that the same para as relied upon by the Ld. DR supports the case of the assessee. It was submitted that with the help of the same infrastructure the assessee also provides services to others. In this connection, the Hon'ble Tribunal's attention was drawn to the use of client services by the assessee and stated in Point 4.3.14. Further, the fact that the assessee is already engaged in rendering data processing services, ....
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....idered the entire gamut of facts as discussed above, relevant findings given in the impugned order as well as the rival submissions made before us. The main issue involved, which has been raised vide ground no. 1.1 is, whether the payments made by Standard Chartered Bank India (SCB) to the assessee is in the nature of 'royalty' u/s 9(1)(vi) or 'fees for technical services'. Since the assessee-company is incorporated in Hong Kong and is providing services/facilities for processing data to SCB from Hong Kong, therefore, the payment made by SCB India to assessee has to be seen from the perspective of domestic law, i.e. Income-tax Act and not under any treaty. The assessee-company is mainly engaged in the business of providing services/facilities for data processing through computer hardware and software to banking entities. It had entered into an agreement which has been termed as "Cocteau agreement" with SCB for provision of data processing support, which is for 68 countries with various branches. Under the said 'Cocteau agreement', the role and responsibilities of assessee in respect of providing data processing services has already been discussed in detail in the earlier part of th....
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....ata required to be processed from all around the Globe. The provisions mainly contains assessee's responsibility to ensure adequate facility, systems and software which are located in Hong Kong and to ensure that all the hardware which is used in Hong Kong is maintained and housed in secured building space and infrastructure, manage proper performance of the hardware and operating systems, ensure adequate technical support of operating systems, to ensure system performance, maintain adequate security measures and effective internal control environment and also put in place appropriate disaster recovery plan. All these are to be maintained by the assessee to conduct the processing of data through computers. There is no providing or giving any use or right to use of any process to SCB. The technology, infrastructure, data centre, connectivity, etc. is solely used by the assessee for its own purposes and not to make available any such thing to SCB as explained by the ld. Counsel. At the first stage, SCB transmits raw data through operating software owned by it to the hardware facility of assessee in Hong Kong. The assessee in Hong Kong mainly receives the data so transmitted and at th....
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....e legislation. Hence, Explanation 5 is to be read with the Section 9(1)(vi) which was there on the statute as on April 1, 1976. Whereas clause (iva) to Explanation 2 was inserted from April 1, 2002. Thus, retrospective effect of clause (iva) cannot be deemed from 1.06.1976 and hence it cannot be held that Explanation 5 also applies to the said clause as this clause never existed as on April 1, 1976 and accordingly, the legislation cannot clarify the intention of the clause which never existed on the said date. Hence Explanation 5 & 6 would not be applicable in the case of assessee. 20. Further, for any payment to fall within the term of "royalty" it is sine qua non that there should be some kind of a transfer of any right in respect of various items as given in Explanation - 2 or any imparting of any information or use of any patent, invention, model, design, secret formula, process, etc. Here, in this case, there is neither transfer of any of right in respect of any patent, invention, model, design, secret formula or process or trademark or any similar property by the assessee to SCB, nor there is any imparting of any information or use of any of similar nature of things. Here,....
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....sel before us by way of an example which has been already incorporated above. Thus, the magnitude of transactions undertaken by assessee itself goes to show that the computer systems installed by the assessee in Hong Kong is standard facility through which data is processed. In this regard, strong reliance was placed on the decision of ITAT, Mumbai Bench in the case of Siemens Limited (supra), wherein the Tribunal has emphasised upon the element of human intervention for rendering of technical services. The relevant observation in this regard reads as under:- "------------------------In our opinion, this cannot be the criteria for understanding the term "technical services" as contemplated in Explanation 2 to section 9 (1)(vii). If any person delivers any technical skills or services or make available any such services through aid of any machine, equipment or any kind of technology, then such a rendering of services can be inferred as "technical services". In such a situation there is a constant human endeavour and the involvement of the human interface. On the contrary, if any technology or machine developed by human and put to operation automatically, wherein it operates witho....
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.... has also pointed out that assessee is also providing similar services to other clients like Hong Kong Government and other big MNEs and there is nothing special or exclusive about the services which are being rendered to SCB. In view of the entire gamut of facts as discussed above, we are of the opinion that the payment made by SCB to assessee-company does not fall within the realm of 'fees for technical services' as contained in Sec. 9(1)(vii), albeit the assessee has only provided a standard facility for data processing without any human intervention. Accordingly, we hold that the said payment is not taxable in India as 'fees for technical services' in terms of Sec. 9(1)(vii) of the Act. Thus, the issue raised in ground no. 1.1 is decided in favour of the assessee. 22. So far as the issue raised in ground no. 1.2 with regard to rate of tax u/s 115A of the Act, it has been submitted that the Assessing Officer has taken 40% of the gross amount on the ground that SCB India has no role in 'Cocteau agreement'. The ld. Counsel pointed out that the rate applicable should be reckoned from the cut-off date of the agreement, which for the purpose of Sec. 115A of the Act is before 1.6.2....