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2022 (10) TMI 654
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....ase and in law, the Hon'ble CIT(A) has erred in holding that the following amounts remitted by the Appellant are in the nature of Royalty under Article 12 of India- Singapore Double Taxation Avoidance Agreement ('DTAA' Treaty): * Amount on account of implementation of SAP of Rs. 64,73,250 * SAP data center operation cost and SAP license maintenance cost amounting to Rs. 78,64,983 3 (i) That on the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) has erred in holding that amount remitted by the Appellant to MEAP under Ground no. 2 are in the nature of 'process' as envisaged under Article 12 of India-Singapore DTAA and therefore taxable as royalty. (ii) That on the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) has erred in holding the amounts referred to in Ground no. 2 are in the nature of 'information concerning industrial, commercial or scientific experience' and therefore taxable as royalty under Article 12 of India-Singapore DTAA. 4. That on the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) has erred in holding that....
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....d deducted and deposited taxes at source under Section 195 of the Act amounting to Rs. 54,85,396/-. Thereafter, the Appellant duly deposited taxes of Rs. 54,85,396/- with the Central Government. Royalty: 9. For the A.Y. 2016-17, the payments made by the assessee are as under: 1. Implementation of SAP for transportation system at Pune amounting to Rs.64,73,250/- 2. SAP data center operation cost and SAP license maintenance cost amounting to Rs.78,64,983/- 10. The assessee states that the payments neither fall under the purview of Royalty or FTS, under domestic law or as per the India-Singapore Treaty. 11. With regard to the implementation of SAP for transportation system at Pune and SAP data centre operation cost and maintenance cost. The assessee primarily argued before the revenue that there was no transfer of "copy right" by way of services provided and therefore the resultant receipt can in no terms be stated to be covered under the definition of Royalty. 12. The ld. CIT(A) held that, "the term 'software' as it is being used presently has come a long way from its original intention. In the years gone by, say more than 10 years ag....
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.... softwares are provided with an online chat mechanism. In such mechanisms direct human interfaces in the form of a text chat is provided by the entity who sells the software. Sum and substance of the above discussion is that the software as it is used nowadays is very different from the earlier definition of a set of programs. Presently any services can be packaged in the form of software and delivered to a client, business, consultancy, secret process, formulae and any other services can be delivered by simply signing up or subscribing to a limited license so as to speak." 13. The Ld. CIT(A) held that in this case it is seen that a whole set of activities and services is related to the implementation of SAP. The Ld. CIT(A) held the term 'royalty' defined in the DTAA relates to the consideration for a number of things. Referring to the definition of Royalty in India - Singapore DTAA, 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 e....
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....s" as used in the treaty means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right ,proper ty or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill , know-how or processes, which enables the person acquiring the services to apply the technology contained therein ; or (c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein. For the purposes of (b) and (c) above, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person. It was held that, notwithstanding paragraph 4, "fees for technical services" does not include payments: (a) For services that are ancillary and subsidiary, as well as inextricably and essentially linked, t....
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.... 8. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of royalties or fees for technical services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement. 16. Based on the above, the ld. CIT(A) held as under: "Paragraph 4 of Article 12 has 3 parts to it- 4(a) and 4(b) and 4(c). There is a critical difference between the two limbs 4(a) and 4(b). The appellant has argued that the services do not fulfill the conditions required under 4(b). However the two limbs are examined. Whereas 4(b) requires the service rendered to be of such nature that the technology or skill is made available to the recipient and therefore has a make available clause embedded in it, the clause 4(a) does not have it. In order to qualify as FTS under 12(4)(b) the service is required to be one which makes available the sk....
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....a) ( Ancillary and subsidiary to consideration for Royalty) 4 Firewall and Check point protection services amounting to Rs. 74 , 66 , 576 FTS under Article 12 ( 4 ) ( a) ( Ancillary and subsidiary to consideration for Royalty); As these are actually resulting from the agreement for implementation of SAP and are also ancillary or subsidiary to the implementation of SAP in the appellants business. Another argument taken by the appellant was that a part of these services are obtained from third party vendors and the payment made by the appellant is only in the nature of reimbursements. The only issue is that this would not have a component of profit so these should not be liable to TDS. It is however seen that the nature of services has been clearly seen to be ancillary and subsidiary to the implementation of SAP. The taxability is determined by the nature of service only. In the absence of a PE the provision is there for taxation on a gross basis. There can't be a possibility to actually judge that what is the expense going into the delivery of the services while judging its taxability for TDS purposes at the payment end. The provider had utilized th....
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.... 169. Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to nonresident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment... " 3. From the above, it is clearly seen that the decision of the Hon'ble Supreme Court was with regard to royalty relating to software only by the virtue of being under the term- payment of consideration for the use or the right to use any copyright of a literary, artistic or scientific work, which is the first limb of definition of Royalty as per the India-Singapore DTAA in Paragraph 3(a) of Article 12. The decision of the Hon'ble Apex Court examined what constitut....
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.... solutions which are provided for improving business efficiency are based on innumerous case studies of similar entities. Therefore, the possible outputs/efficiency improvements suggested in such solutions are a result of industrial scientific or commercial experience. Paragraph 3 (a) of Article 12 of India-Singapore DTAA provides for consideration for information concerning industrial, commercial or scientific experience to be included under "Royalty". Therefore, the payments for the implementation of SAP and for SAP data centre operation cost and SAP license maintenance fall under this limb of royalty as well. 7. Further, the payments made for professional services relating to SAP system, email access services on handheld devices, regional network access and email access services and firewall and check point protection services provided by M/s. Mitsubishi Electric Asia Pte Ltd. are all ancillary and subsidiary to the transfer of the customized processes through the implementation of SAP. Accordingly, the payment for these services is covered under Paragraph 4(a) of Article 12 of the DTAA and is taxable as Fee for Technical Services." Sd/- (....
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....ons 2 and 4 thereof), which deal with royalty, not being beneficial to the assessees, have no application in the facts of these cases. "Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to nonresident computer s. manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the pay of royalty for the use of copyright in the computer software, and that same does not give rise to any income taxable in India, as a result of the persons referred to in section 195 of the Income-tax Act were not liable to deduct any TDS under section 195 of the Income-tax Act. The answer to this question will apply to all four categories of cases enumerated by paragraph 4 of this judgment. "The appeals from the impugned judgments of the High Court of Karnataka are allowed, and the aforesaid judgments are set aside. The rule the AAR in Citrix Systems (AAR) (supra) is set aside. The appeals from impugned judgments of the High Court of Delhi are dismissed." 14. The factual matrix involved in the case in hand, read with the ratio laid down by the Hon....
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....ections, processing, or use of data Data managed is related to the operations of the SCA business and to the management of its workforce, and will only be used to that purpose. The processing and use of the date is restricted to the territory of a member state of the European Union or another state party to the Agreement of the European Economic Area. Relocation to other countries is subject to SCA India's prior approval. Type of Data The collection, processing and/or use of personal data refers to the following types/categories of data:- * Personal data * Communication data (e.g. Telephone/e-mail) * Contractual accounting and payment data * Financial and non-financial planning and control data * Information obtains from third parties, e.g. credit inquiry agencies or public directories * Statistical data The group of data subjects affected by the use of their personal data hereunder comprises: * Employees * Customers and Vendors * Interested parties * Consumers * Other contract persons 12. During the course of the scrutiny asse....
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.... the character of their service needs to be elaborated for purpose of deciding the character of fee received by the assessee. It is also noted that the assessee is operating in project monitoring and project scheduling and budgeting which require development of elaborate plans which are subsequently transferred to the Indian party for execution. 4.20. It is not the case of the assessee that these services are provided in isolation of the employees of SCA India who are involved in project execution, whether it is pre-development stage or subsequent stage. We are not convinced that the project execution service could be executed by the assessee without active involvement of project related employees of SCA India. It is not merely engineering or architectural designs which are contemplated under Article 12(4)(b) of the Treaty but also development and transfer of any technical plan or technical design, Technical does not mean technological. It only means specialized- the area may be finance, legal, commerce, arts, science or project implementation as in the case. This will include scheduling charts, time lines, bar charts which are contemplated in the case of the assessee unde....
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.... out below: ARTICLE 12 OF INDO-SWEDISH TAX TREATY ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. Notwithstanding the provisions of paragraph (1), such royalties and fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services. 3. (a) The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. (b) The term 'fees for technical services' means payment of any kind in cons....
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.... of the Convention between the Government of the Republic of India and the Government of the Kingdom of Sweden for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital, the undersigned have agreed that the following shall form an integral part of the Convention: ................................. With reference to Articles 10, 11 and 12 : In respect of Articles 10 (Dividends), 11 (Interest) and 12 (Royalties and fees for technical services) if under any Convention. Agreement or Protocol between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, or fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items of income shall also apply under this Convention. ............................ IN WITNESS whereof the undersigned being duly authorised thereto have signed this Protocol. DONE in duplicate at New Delh....
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....r included services" does not include payments: (a) For services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property; (b) For services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international craft; (c) For teaching in or by educational institutions; (d) For services for the personal use of the individual or individuals making the payment; (e) To an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in article 14; (f) For services rendered in connection with an installation or structure used for the exploration or exploitation of natural resources referred to in paragraph 2, f), of article 5; (g) For services referred to in paragraph 3 of article 5. 6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties and fees for included services, being a resident of a Contracting State, carries on business in the other....
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....is that in case the tax jurisdictions entering into the tax treaty, or any of the treaty partner, extends a more generous tax treatment to any other tax jurisdiction, or any other tax jurisdiction of a particular nature- e.g. OECD member jurisdiction, the same tax treatment will be due to the treaty partner in question. For example, if X jurisdiction provides for source taxation @ 15% for interest to Y jurisdiction, it also assures, by incorporating a MFN clause, that in case X jurisdiction enters into an agreement providing for a lower rate of source taxation, or more restricted scope for taxation of interest, with any other jurisdiction or any other OECD member tax jurisdiction, the same will be extended to Y jurisdiction as well. In a sense, terming this clause as a 'most favoured nation clause' is a misnomer because what this clause ensures is an equal treatment vis-à-vis other jurisdictions, or other jurisdictions of a specific category, rather than a favoured treatment for the treaty partner jurisdiction. 18. It is crucial to bear in mind that the implementation of a most favoured nation clause is not always in a homogenous manner. There are different ....
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....also apply under this Convention (Emphasis, by underlining, supplied by us)". There are thus three different modes, in the illustrations that we discussed, in which the MFN clause can be implemented- first, as in Indo Swiss tax treaty, where all that the MFN clause ensures is that the negotiations take place, without any delay, to ensure that the same treatment is provided to the treaty partner; second, as in India Philippines tax treaty, where the information, about a more generous treatment for any another tax jurisdiction, by one of the treaty partners is to be provided to the other treaty partner, through diplomatic channels, so that existing provisions can be brought in par with more generous tax treatment in the source jurisdiction; and, third- in which the treaty does not prescribe anything further that is required to be done, for giving effect to the MFN status, as the same rate or the same scope, as is extended to any other OECD country subsequently, "shall also apply" under this treaty. There can also be situations in which an MFN clause may require the treaty partner jurisdictions to issue notifications to the effect that the benefit extended to another jurisdiction is e....
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....e- i.e., about the rate of taxation in the subsequent treaty provision only and not about the restricted scope of the related treaty provision. However, the coordinate bench was of the view that nothing turned on this notification and ignored the same. The plea that issuance of notification was at best done as a measure of abundant caution by the CBDT, and it did not have any legal effect on the implementation of the protocol clause, was, in effect, accepted. However, when an identical issue, in the case of Indo French tax treaty itself, came up before the Authority for Advance Ruling, in the case of Steria India Ltd. In Re [ (2014) 72 taxmann.com 1 (AAR)], the approach adopted, on this issue, by the Authority for Advance Ruling was entirely different, as it held notification to be a crucial and legal source of the rights by the implementation of protocol, Hon'ble Authority for Advance Ruling observed as follows: ........What is stated by the Protocol is for India to limit its taxation at source for the detail items mentioned therein. The restrictions are on the rates and 'make available' clause cannot be read in the items. On the basis of the Protocol, notific....
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....hich the Indo-French DTAA or such other DTAA enters into force. 22. The views so expressed by Hon'ble Delhi High Court, in the absence of anything contrary thereto by Hon'ble jurisdictional High Court, or, for that purpose, even any other Hon'ble High Court, bind us. The AAR decisions, as is the well-settled legal position, do not constitute binding judicial precedents for us. It is also not in dispute that Portugal is an OECD jurisdiction, that the Indo Portuguese tax treaty was entered into after the Indo Swedish tax treaty was entered into, and that the Indo Portuguese tax treaty provides far more restricted scope of 'fees for technical services' inasmuch as it adopts the 'make available' clause which restricts the taxation of fees for technical services only in such cases which "make available" technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design which enables the person acquiring the services to apply the technology contained therein. Therefore, respectfully following the coordinate bench decision in the case of ITC Ltd. (supra), which has been speci....
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....ailable 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. In other words, payment of consideration would be regarded as "fee for technical/included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied.' 24. In order to decide whether or not the services rendered by the assessee fit the definition of 'fees for technical services', as applicable under the Indo Swedish tax treaty, the question that we must ask ourselves is not only whether the technical services are performed on the facts of this case, but whether "the technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider." In this light when we analyze the nature of services, which are set out in detail earlier in this order, we find that in none of the cases, these services enable the recipient of these services to perform the same servic....
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....25. That leaves us with the taxability of Rs. 57,47,684 on account of Information Technology Services. The main reason for its taxability by the DRP is stated to be that "the services is found to be intrinsically linked with enjoyment of the SAP system and hence, would fall within the ambit of Article 12(4)(a)". In the assessment order, there is also mention about "resulting in overall improvement in business and the income generating capacity of SCA India, which is a clear enduring benefit" and about the stand that the rendition of these services are "also providing a skill level and relevant training which will be readily available to personnel of SCA India and thereby a clear enduring benefit is provided". It is also mentioned that "specific support in the form of implementation of SAP project and Project Vinadalloin the form of pre-implementation, testing, post implementation is also provided which is clearly technical in nature and intended to increase the efficiency and improve the functioning of SCA India". It is to be noted that so far as the enduring benefit and increase of efficiency in the recipient entity is concerned, that has nothing to do with the satisfaction of "ma....