TaxTMI 
TaxTMI 
2018 (6) TMI 37
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.... its Akamai EdgePlatform(r) comprising of 73,000 secure servers equipped with proprietary software and deployed in 70 countries. The Akamai EdgePlatform(r) pulls content from the customer's web server by replicating the data therefrom, and continually monitors the Internet - traffic, trouble spots and overall conditions. This information is used intelligently to optimize routes and replicate content for faster, more reliable delivery. The end-users access the customer's website through the Akamai EdgePlatform(r), thereby avoiding the (slower) web server maintained by the customer. 2.2 In order to sell its Solutions in India, the Applicant has entered into an Akamai Services Reseller Agreement, dated 07.01.2010 (w.e.f 01.04.2009) with Akamai Technologies Solutions India Private Limited (Akamai India or Reseller), a company incorporated in India. Under this Reseller Agreement, the Applicant has appointed Akamai India as a non - exclusive reseller who is authorized to resell the Applicant's Solutions directly to customers in India. The key terms of the Reseller Agreement are as follows: i. Akamai India would resell the Applicant's Solutions by directly entering into....
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....and on a continuous basis for any customer who is willing to pay for availing such a facility. The fact that technology (such as the Akamai EdgePlatform(r)) is used by the Applicant to deliver the standard facility does not affect the nature of the transaction. To support its contention, the Applicant placed reliance on the ratio held in M/s CIT v/s Kotak Securities Ltd [2016] (383 ITR 1) (SC). The Solutions provided are neither specialized nor exclusive and do not cater to individual requirements of the customer. The Solutions offered remain the same for all customers who avail the Applicant's facility irrespective of their business/website content. Hence these Solutions cannot be termed as 'technical services' for the purposes of Explanation 2 to section 9(1)(vii) of the Act. It also relied on the Hon'ble Madras High Court's decision in Skycell Communications Ltd v. DCIT (251 ITR 53) (Mad.), as also on Atos Information Technology HK Ltd. [2017] (79 taxmann.com 26) (Mum.), Wipro Limited v. ITO (80 TTJ 191), Software Technology Parks of India v. ITO (2005 2 SOT 529), DCIT v. Estel Communications (P) Ltd. (ITA no. 3375/De1/2007), Pacific Internet India (P) Limited v. ITO (318 ITR 17....
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.... when conditions in either (a) or (b) of Article 12 (4) are satisfied. As regards Article 12 (4)(a), the Applicant submitted that the arrangement with Akamai India does not envisage use of any right, property, or information for which royalty under Article 12(3)(a) is paid. The detailed submissions in this regard are made while dealing with question no. 3 below. 5.1 Article 12(4)(b) of the India-US Treaty excludes from the definition of FIS any service that does not enable the person acquiring the service to apply the technology contained therein. The Applicant submitted that the arrangement with Akamai India does not "make available" any technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein. It was reiterated that the Solutions are provided by the Applicant using the Akamai EdgePlatform(r) which is a standard facility. In the provision of this facility, the Applicant's platform of distributed network and intelligent software, incorporated with complex algorithms, work on an automatic and continuous basis without making available any sort of technical knowledge, experience, skill, kn....
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....o deliver the job. 6.2 Further, the Revenue states that in the era of technology and online/wire communication, physical presence of humans to render the services is not required. This is the very feature of Telecom or internet revolution that the data or services may travel through wires which saves the time and effort of the physical movement of human beings. Also, the development of the software and solutions cannot happen without human involvement. 6.3 It is also stated that the Applicant needs the technical expertise and a setup to perform the services which are 'made available' to Indian customers either through Indian company or sometimes even directly; hence the Applicant's submission cannot be accepted that it was not in the receipt of fee for technical services, as services rendered by it to the reseller are very much technical in nature which is described in detail in the agreement and the 3CEB report also. 7. In response to the above objections taken by the Revenue, the Applicant submits in its rejoinder that merely because Applicant's Solutions result in acceleration of content and better performance of websites does not make the nature of services technical in natu....
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....of the stock exchange in respect of every transaction that is entered into. There is nothing special, exclusive or customised service that is rendered by the Stock Exchange. "Technical services" like "Managerial and Consultancy service" would denote seeking of services to cater to the special needs of the consumer- user as may be felt necessary and the making of the same available by the service provider. It is the above feature that would distinguish/identify a service provided from a facility offered. While the former is special and exclusive to the seeker of the service, the latter, even if termed as a service, is available to all and would therefore stand out in distinction to the 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 or 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 featu....
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.... of technology, and without the sophisticated equipment installed by the internet service providers and the use of the telephony, fixed or mobile through which the connection is established, the service cannot be provided. However, on that score, every subscriber of the internet service provider cannot be regarded as having entered into a contract for availing internet service, and such subscriber regarded as being obliged to deduct tax at source on the payment made to the internet service provider". 8.3 The principle upheld in other cases relied upon by the Applicant also lead us to conclude that since the Applicant is providing its Solutions through the Akamai EdgePlatform(r) to all customers alike, for accelerating the delivery of their content, irrespective of the nature of business/website content, they cannot be termed as specialised, exclusive and individual requirement of the customer so as to qualify as 'technical services'. 8.4 On the issue of human intervention in providing technical services, we agree with the principle held in Bharti Cellular Limited (supra), as also upheld by the Apex Court, that a human element is a pre-requisite for characterizing a service as a t....
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....does not per se mean that technical knowledge, skills etc. are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available." 9.2 Here, it is nobody's case that the payments should be covered under Article 12(4)(a). As regard Article12(4)(b), the Revenue has contended that services are 'made available' by the Applicant to Indian customers through the Indian company and/or directly by the Applicant without elaborating as to how the provision of Solutions by the Applicant falls under the meaning of 'make available'. 9.3 As we understand from the decisions on this issue, the term "Make available" connotes that it should result in transmitting the technical knowledge such that the recipient could derive an enduring benefit and utilize the same in future on his own without the aid and assistance of the provider. In other words, the technical knowledge, skill, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense ....
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.... mark, design or model, plan, etc.; the arrangement between the Applicant and Akamai India / Indian customers is for the provision of a standard facility and not for the use of a "process" or "formula"; the payments are not for the use of, or right to use, any information concerning industrial, commercial or scientific experience; and lastly the payments are not for right to use industrial, commercial or scientific equipment. 10.2 It is averred that in fact, the Applicant itself has exploited the right to use, operate or control its technology / intangibles, without granting the right to use the same to Akamai India / the Indian customers. The customers / end users are not provided with any access to the Applicant's infrastructure (neither software nor hardware) nor is such access even required for availing the standard facility provided by the Applicant. Thus, at no point of time, the customers/end user (who avails of the standard facility offered by the Applicant) has any access to any software of hardware of the Applicant. It is only the Applicant who has access to the network built by it which operates to pull the content from the customer's server and accelerate it to deliver....
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....tions and the program itself is not sold to Akamai India. 11.2 Secondly, the transaction involves grant of right to use Trademarks and Brand features since there is a specific clause 4 regarding Marketing and Publicity in the Reseller Agreement, which allows Akamai India to use trademarks of the Applicant for the purpose of marketing and reselling of Akamai Solutions. Therefore use of trademarks or other similar property is covered by Explanation 2 to Section 9 (1)(vi) of the Act. 11.3 Thirdly, the Revenue contends that the transactions amount to grant of distribution rights, involving transfer of rights in process, and hence the payment received is in the nature of Royalty. The Revenue has cited the following decisions in support: CIT vs Synopsis International Pvt. Ltd.(2013) 212 taxman 454; CGI Information Systems Management Consultants (P) Ltd.(2014) 226 taxman 319); CIT & Another Vs Samsung Electronics Co. Ltd., & Others(2011) 245 CTR (Kar) 481; Citrix Systems Asia Pacific Pvt. Ltd.(2012) 248 CTR 141, Gracemac Corporation Vs Assistant Director Of Income Tax (International Taxation) (2010) 08 ITR 522) ; Cargo Community Network Pvt. Ltd.(2007) 208 CTR 814); In Re Skillsoft Irel....
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....t access and does not contemplate any use or right to use Trademarks/IP transfer/IP sharing agreement so as to make the payments received taxable as royalty. The Reseller Agreement nowhere grants or transfers any right in the "process" as alleged by the Revenue nor is there any use of such process by the Reseller or end user. Without prejudice, it is submitted that the usage of process involved in providing the Solutions is by the Applicant itself. The Reseller Agreement entered into by the Applicant should be interpreted holistically in the light of the facts and circumstances and the intent with which the agreement was entered in to by the Applicant and the Reseller. 13. We have considered the submissions of the Applicant, the objections raised by the Revenue, and the details and agreements submitted with the application. 13.1 We may first look at the relevant provisions regarding taxability of royalty income under the Act and the DTAA. The definitions of royalty under Explanation 2 to section 9(1)(vi) of the Act and Article 12(3) of the India-US Treaty are as follows: Explanation 2 to section 9(1)(vi) - "For the purposes of this clause, "royalty" means consideration (inclu....
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.... or 3 of Article 8." 13.2 Based on the reading of the above legal provisions under the Act and the India-US Treaty, for a payment to be construed as "royalty", the same would need to be in relation to the use or right to use or transfer of all or any rights in relation to: - Copyright, patent, trademark, design or model, plan, etc; or - Any secret formula or process; or - Information concerning industrial, commercial or scientific experience; or - Industrial, commercial or scientific equipment. 13.3 The Applicant has entered into a non-exclusive Reseller Services Agreement with the Reseller to provide a global, secure and outsourced infrastructure facility using the Akamai network and technology, to the customers. The Reseller Services Agreement does not contemplate providing any kind of a software "product" to any of its customers or to the Reseller. The business model of the Applicant is very different from that of a normal software reseller or a distributor. The Applicant is in the business of content acceleration which is usually a function of efficient use of hardware (platform) and software. The Applicant has entered into an arrangement with the Reseller in order to....
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....t human intervention) and continuously. (c) That the proprietary technology broadly enables front end optimization of websites by reducing the size of the data, removing unnecessary information, delaying non-essential tasks and decoupling performance of the website from performance of linked third party websites. (d) That the software is used in the network hardware and remains affixed to the network and within such network, at all times. The software is neither downloaded by the customers nor copied or otherwise customized and the customers cannot and need not use the software on a stand-alone basis for receiving the Applicant's services. (e) That the Applicant does not distribute, license or otherwise sell any software (shrink wrapped or customized) in India and that we use our proprietary software in India only for our own CDN business. (f) That the Applicant does not provide any kind of hardware to its customers in India. (g) That the Applicant is not in the business of building websites not hosting them for its customers nor does it provide internet connectivity to its customers though leased lines". 13.7 Considering the above factual position, we hold that since th....
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.... a computer programme or a copy of the computer programme. By implication, if the acts purported to be done are not in the context of computer software/programme copy, then this section will not be applicable. In a situation where the provisions of the Section 14(b) of the Copyright Act, as against its meaning in the context of the Applicant, do not apply to the Applicant, the entire provisions of the Copyright Act do not apply to the Applicant's transaction since by the said transaction the Applicant does not act or provide rights to act in any "work" which involves any computer or any copy of the computer software. The fact that it is for similar reasons as described above that the Copyright Act itself provides an exception to the general rule of Copyright in a computer programme copy, namely that Section 14(b)(ii) would not apply in the cases of a computer programme where the programme itself is not the essential object of the rental. This also merits consideration in favour of the Applicant. The essence of the Reseller Agreement entered into between the Applicant and the Reseller in India is not for a computer programme. It is rather for a facility that is provided by the Appli....
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....ch software by anyone. The Applicant itself uses its network of servers and software to provide a standard facility to customers for faster and secure content delivery to its users. Hence, the above mentioned cases relied upon by Revenue are not applicable to the facts of the Applicant's case. 13.12 The Revenue's reliance on Vodafone South Ltd. vs DDIT (supra) and Verizon Communications Singapore Pvt. Ltd., Vs ITO (supra) is also misplaced, as these decisions have been rendered in the context of interconnectivity charges paid by a customer to telecom operators wherein the customer himself uses the telecom operator's facility/hardware/software. Thus, the facts are different from the Applicant's case where Applicant itself uses its network of servers and software to provide a standard facility as mentioned above and the customer/end user does not have any access at any point of time to the Applicant's hardware or software. 13.13 The Revenue had also placed reliance on ABB FZ-LLC Vs DCIT (supra). This ruling was rendered in the context of use/sharing of specialized knowledge, skill, expertise, etc. by the assessee through its employee with its associated enterprise. The Applicant's ....
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....elationship is established is that of independent contractors, neither party has power to direct or control the day-to-day activities of the other; and they are deemed to be acting as partners, joint ventures, co-owners or otherwise as participants in a joint undertaking; nor shall the officers, directors, employees, agents or representatives create or assume any obligation of or on account of the other party. Akamai India concludes contracts on its own name; doesnot maintain any stock of goods of the Applicant; purchases the Akamai Solutions from the Applicant for onward sale to Indian customers; secures orders and enters into contract with customers in India on its own account and not on behalf of the Applicant. Their relationship is on a principal-to-principal basis. Hence none of the conditions enumerated in Article 5(4) are satisfied. 14.5 In view of the above, the Applicant contends that there is no creation of a Permanent establishment for the Applicant in India under the provisions of Article 5 of India-US Treaty. 14.6 We have considered the submissions of the Applicant. In their written submissions and during the course of the hearing in this case, Revenue has argued tha....