TaxTMI 
TaxTMI 
TaxTMI 
2019 (10) TMI 877
X X X X Extracts X X X X
X X X X Extracts X X X X
.... year 2009-10, the assessee has raised following grounds of appeal: 1. That in the facts and circumstances of the case & in law, the Ld. AO/DRP erred in assessing the income of Appellant at Rs. 8,55,40,120 against the returned income of Rs. 47,94,030. 2. That in the facts and circumstances of the case & in law, the Ld. DRP/AO erred in making an addition of Rs. 1,36,31,094 received on account of International Private Leased Circuit (IPLC) charges by stating that link charges constitute as Fee for Technical/Included Services ('FTS') as well as Royalty under section 9 the provisions of the Act read with the provisions of Article 12 of the India USA Double Taxation Avoidance Agreement ('DTAA'). 3. That in the facts and circumstances of the case & in law, the Ld. DRP/AO erred in characterising the income received from sale of shrink wrapped software as Royalty under the provisions of the Act read with the provisions of Article 12 of the DTAA amounting to Rs. 4,05,24,300/-. 4. That the Ld. DRP/AO grossly erred on facts and in law in making an addition to the returned income in respect of support and maintenance fees, amounting to Rs. 2,29,63,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....said receipts as 'Royalty'/ fees for technical services (FTS)/ fee for included services (FIS) under the income tax Act as well as under the India US tax treaty and taxed the said receipts in the hand of assessee as taxable in India. The assessing officer also taxed the receipt of sale of shrink- wrapped software as Royalty and payments for support and maintenance services as fee for included services (FIS). The assessee exercised its option to file objections before the dispute resolution panel (DRP). The DRP upheld the action of assessing officer in its direction dated 9th December 2013. On receipt of direction of DRP, the assessing officer pass the final assessment order under section 143(3) read with section 144C(13) dated 21st January 2014. Aggrieved by additions in final order of assessment, the assessee has filed present appeal before this Tribunal. 4. We have heard the submission of the learned authorised representative (ld.AR) of the assessee and the learned departmental representative (ld. DR) for the revenue and perused the material available on record. Ground No. 1 of the appeal is general in nature and needs no specific adjudication, hence dis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d is a non-resident company for the purpose of Indian tax laws. The assessee is tax resident of USA as per Article 4 of India US tax treaty and therefore, basis the provision of section 90(2) of the Act and is entitled to invoke the provisions of India USA tax treaty, to the extent they are more beneficial to them. This view has been confirmed by Hon'ble Apex Court of India in case of Union of India Versus Azadi Bachao Andolan (263 ITR 706 SC) and by Hon'ble Delhi High Court in case of DIT Versus Rio Tinto Technical Services (340 ITR 507 Delhi). 7. For the treatment of receipt as 'Royalty' as per Article 12(3) of the India US tax treaty as the same is for right to use a 'process'. The learned AR of the assessee would submit that the term "Royalty" has been defined in Article 12(3) of the India US tax treaty. The learned AR invited our attention to the definition of "Royalty" as prescribed under Article 12(3) of the India USA tax treaty and would submit that a plain reading of the definition of Royalty, it is evident that payment can be held to be the Royalty only when there is "use" or 'right to use' of a process. The assessee company and the Indian entity-CIM do not have any ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nce skilled, know-how or process or consist of the development and transfer of technical plan or technical and design. 9. Whether the IPLC connectivity services are technical in nature, the learned AR of the assessee submits that clause (b) of Article 12(4) of India US tax treaty shall apply only in respect of services that are technical in nature. Although, the total 'technical services' has neither been defined in the act nor under the tax treaty, a mere provision of a standard services would not qualify as a 'technical services'. Mere use of technology/sophisticated equipment in rendering service does not lead the services to be classified as 'technical services'. The provision of IPLC connectivity does not involve technology. Such services in a standard facility which is provided by thirdparty telecom/Internet services provided to various customers. The facilities neither sophisticated nor exclusive and does not cater to the individual requirement of the customer and they remained the same as for all customers who avails the facility. The learned AR for the assessee explained by giving an example that mere use of telephone lines by making payments of telephone bills by a cust....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in the definition of 'Royalty' under the Income -tax Act, by Finance Act, 2012, as there is no corresponding change introducing the definition of 'Royalty' under India-US Tax Treaty, and the assessee, being a tax resident of USA, is as eligible for the beneficial provision of the tax treaty which contain a more restrictive definition of Royalty as compared to the Income tax Act. Accordingly subject receipt cannot be make taxable as Royalty unless it is covered by the definition of Royalty in the India-US Tax Treaty, even if it is covered in the definition of 'Royalty' under the Act, the ld AR for assessee relied upon the decision in New Sky Satellite BV (ITA No. 473/Mumbai/2012, AP Moller Maersk (374 ITR 497 Bombay) and B 4 U International holding (ITA No. 3326/Mumbai/2006). On the issue of deputation of personnel, the ld. AR submits that Assessing Officer has alleged that assessee has deputed personnel and provided equipment for efficient use of IPLC services. The DRP upheld the finding of Assessing Officer holding that assessee has not provided positive evidence to rebut the finding of Assessing Officer. The ld. AR further submits that no personnel were deputed by assessee in co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Order. In reply the assessee specifically stated that CIM has used certain communication links which are comely known as IPLC. IPLC provided point to point private line used for organization for communication for internet access, business data exchange, video conferencing and other form of telecommunication. These IPLCs were procured by the assessee from third party provider. The cost of such link charges incurred by assessee in connection with business of CIM was allocated to CIM. The assessee also stated that the link charges do not qualify for FTS or Royalty. The contention of assessee was not accepted by Assessing Officer. The Assessing Officer treated the same receipt for 'right to use a process' and hence same is Royalty in term of Article -12(3) of India-US Tax Treaty. The Assessing Officer also held that consideration were technical in nature, therefore, receipt construed FTS/FIS in term of Explanation 2 to section 9(i)(vii) of the Act as well as Article-12(4) of India-US Tax Treaty. The DRP confirmed the action of Assessing Officer. The DRP while confirming the action of assessing officer in holding that IPLC connectivity services qualifies the 'make available' test has re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....#39;Equipment Royalty' in terms of Article 12(2) read with Article 12(3)(b) of the DTAA. This issue is common to both assessment year 2006-07 and 2008-09. In this regard, the ld. AR of the assessee submitted that the link charges pertain to leased lines (under sea cables) that allow a dedicated capacity for a private, secure communication link from India to the US which enables CIS to communicate with the customers. The assessee makes payment for such link charges to telecom service providers in the USA and cross charges the portion of the cost incurred by it in connection with the India half link to CIS, which is accordingly reimbursed by CIS to CMG. Ld. counsel also referred to the invoice of raised by the assessee on CIS on Page 349 of paper book volume I and the basis of cross charged at page 828 of paper book volume III and placed reliance on the decision of the Hon'ble Delhi High Court in the case of Expeditors International India (P.) Ltd. (supra) on reimbursement of common expenses incurred by the parent company. 13.1 AO made an addition on account of link charges by stating that they were taxable as 'Equipment Royalty' in terms of Article 12(2) read with....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ost". This observation supports the case of assessee. 13.5 In view of the foregoing observations we hold that there is no transfer of the right to use, either to the assessee or to CIS. The assessee has merely procured a service and provided the same to CIS, no part of equipment was leased out to CIS. Even otherwise, the payment is in the nature of reimbursement of expenses and accordingly not taxable in the hands of the assessee. Therefore, it is held that the said payments do not constitute Royalty under the provisions of Article 12 of the tax treaty and the ground is allowed in favour of assessee." 18. The DRP while confirming the action of Assessing Officer that IPLC connectivity services qualify the "make available text" relied upon the decision of authority of advance ruling (AAR) in Perfetti Van Melle Holding BV (supra). The aforesaid decision has been reversed by Hon'ble Delhi High Court in Perfetti Van Melle Holding BV vs. AAR reported in 228 Taxman 201 (Del.). 19. We have further noted that DRP has also relied upon the decision of Raymond Ltd. (supra) held that section 9(1)(vii) stops with the "rendering" of technical services, the DTA goes further and qualif....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... nature having exclusive ownership rights. The assessee was not concerned with any of the process involved in transmission or connectivity of call data. The only concern of the assessee was transmission of call data beyond the boundaries of India to the person in USA to whom call was made. ------- 10.15 Further the assessee in support of the proposition that amendment under section 9(1)(vi) of the Act by finance Act 2012 has no bearing on the provisions of DTAA has relied on the decision of the Hon'ble Delhi High Court in the case of New Sky Satellite BV, (supra) in ITA 473/2012. In the instant case also the assessment year involved is 2002-2003, and thus the Explanation-5 and 6 and Memorandum of Explanation cannot be brought into action as there has not been any corresponding change in the definition of the term royalty in the DTAA between India and the USA. Accordingly, we are of the opinion that under the DTAA, the restricted meaning of the royalty shall continue to operate despite the amendment in law. ----------- 10.16 As far as the assessee is concerned, in case of difference betw....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.' 21. Since in the call connectivity and transmission from end of the Indian Territory at Mumbai to the termination of call in USA, no technical knowledge has been made available to the assessee, respectfully following the decision of the Tribunal in the case of Bharti Airtel Ltd. (supra), we hold that payment for the services of call transmission through dedicated bandwidth provided by the non-resident parties to the assessee, cannot be termed as Fee for Technical services under the treaty also, in the hands of the recipients." 21. The Mumbai Tribunal in Interroute Communication Ltd. vs. DDIT (supra) held as under: 9. Essentially, the role played by the interroute facility is connecting the call to the end operator, and, in that sense, it works like a clearing house. Similarly, in the case of incoming calls,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....M), "....in order to be covered by the provisions of Art. 13(4)(c) of the India-UK DTAA, not only the services should be of technical in nature but such as to result in making the technology available to the person receiving the technical services. We also agree that merely because the provision of the service may require technical input by the person providing the service, it cannot be said that technical knowledge, skills, etc. are made available to the person purchasing the service. As to what are the connotations of 'making the technology available to the recipient of technical services', as is appropriately summed up in protocol to Indo-US DTAA, "generally speaking, technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology." In the case before us, no services are made available in the sense that the recipient of service is enabled to apply the technology, and do the same work without recourse to the service provider. There is no transfer of technology here, and in that sense technical services are not made available. Undoubtedly, the services rendered by the assessee requires technical inputs, but th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to use the software to provide services through a service bureau or other arrangements,(vii) TCS was expressly prohibited from adapting, modifying merging, revising, improving, translating, upgrading, enhancing and creating derivative works of the software for any purpose, including error correction or any other type of maintenance. 24. In the return of income the assessee claimed that income arising from the sale of software was not taxable in India as the same was not covered within the definition of 'Royalty'. The assessing officer treated the said consideration for the right to use the copyright of software and accordingly proposed to tax the income from sale of software as 'Royalty', under the Income tax Act and India USA tax treaty. On objections before DRP, the action of the assessing officer was upheld. 25. The learned AR of the assessee submits that the assessing officer treated the sale of software as 'Royalty', by taking view by virtue of retrospective amendment introduced in Explanation 4 in the definition of ' Royalty' under section 9 (1)(vi) of Income tax Act by virtue of Finance Act 2012. The assessing officer failed to apprec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he ld. DR for the revenue further submits that the software supplied by the assessee is not a copyrighted article. On the point of the issue of amendment in section 9(1)(vi) the ld DR submits that the amendment is clarificatory in nature. In support of his submission the learned DR of the revenue relied upon the decision of honourable Karnataka High Court in case of Samsung Electronics Co Ltd (2009) (185 Taxman 313). 28. We have considered the rival submission of the parties and perused the material available on record. The In the return of income, the assessee has shown a receipt of Rs. 4.05 crore on account of supply of software to TCS. The assessee claimed that said software is the nature of Shrink Wrapped Software and no use or right to use any copyright or intellectual copy right in the software was granted to the TCS. The TCS was provided a copyrighted article; the said arising of said software is not taxable in India as the same is not covered by the definition of Royalty under India-US Tax Treaty. The Assessing Officer treated the said receipt for the use of copyright and proposed to tax in the form of sale of software as Royalty under India-US Tax Treaty. The DRP u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(13) of India-US Tax Treaty. The decision relied by ld. DR in Samsung Electronics (supra) has been distinguished by Hon'ble Delhi High Court in DIT vs. Infrasoft Ltd. (supra). The relevant part of decision of Hon'ble Delhi Court is extracted below: "98. We are not in agreement with the decision of the Karnataka High Court in the case of Samsung Electronics Co. Ltd (supra) that right to make a copy of the software and storing the same in the hard disk of the designated computer and taking backup copy would amount to copyright work under section 14(1) of the Copyright Act and the payment made for the grant of the licence for the said purpose would constitute royalty. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use was only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process was necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product. The right to make a ba....
X X X X Extracts X X X X
X X X X Extracts X X X X
....any software other than the software supplied by the assessee, (c) incorrect or unauthorised use of the software supplied by the assessee or operation is not in accordance with the documentation, (d) any fault in the equipment on which software is installed, (e) any programme used in conjunction with software supplied, (f) use of element of the software supplied in any combination other than those specified in the documentation, (g) use of software supplied with computed hardware, operating stem or other supporting software other than those specified in the documentation. Accordingly the support and maintenance services rendered by assessee work only in connection with the software supplied and ancillary and subsidiary as well as inextricably and essentially linked to software supplied. 32. In the return of income the assessee claimed that said receipt were not taxable in India under India US tax treaty. The assessing officer in the draft assessment held that support and maintenance fees were ancillary and subsidiary to enjoyment of 'right to use' of the software for which royalties being paid and hence proposed to tax the amount as FIS in term of Article 12(4)(....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to the Ground No.3. 37. We have considered the submission of both the parties produce the orders of authorities below. We have also deliberated on various case laws relied by lower authorities and the learned AR of the assessee. We have noted that the assessee provided support and maintenance services linked with the software supplied. Accordingly, the taxability of such services is dependent on the taxability of software supplied. As we have held that the receipt earned on sale of software is not taxable under Article 12 of India-US Tax Treaty, therefore, the services the receipt from support and maintenance services are also not taxable under 12(4)(b) of India US Tax Treaty. In the result, this ground of appeal is allowed. 38. Ground No. 5 relates to taxability of service fee as FTS. During the year under consideration, the assessee rendered certain services to TCS. The services comprised of in Geneva health check for retail instances (Geneva billing system performance tuning) and other professional and consultancy services. These services were claimed to have been subcontracted by assessee to Indian entity CIM on a principal to principal basis. In the return of i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....wledge, experience, skill no-how or process or consist of development and transfer of a technical plan or technical design. We have noted that the assessee has claimed that services rendered are ancillary and subsidiary and inextricably essentially linked with the software supplied. In our view, unless the services satisfy the make available test, the same cannot be taxed as FIS. Further, mere fact that provision of service may require technical input by the person providing services does not per se mean the technical knowledge. In our view, the receipt on account of support and maintenance services are not taxable under Article 12 as the services do not make available technical knowledge, experience, skill, know-how or process or consist of any development and transfer of any design. In the result, ground no.5 of the appeal is allowed. 42. Ground No. 6 relates to levy of interest under section 234B of the Act. The learned AR of the assessee submits that in the assessment order, the assessing officer levied interest under section 234B of the act amounting to Rs. 37,58,522/-on account of shortfall in payment of advance tax and self assessment tax. The learned AR ....