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2022 (2) TMI 1292
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....rticle 13 of the India- Netherlands DTAA. 3. That the Ld. AO/Hon'ble DRP has erred on the facts and circumstances of the case and in law by concluding that software license fees, i.e., fees paid in lieu of SAP Software License and Microsoft License, received by the Appellant during the subject year is taxable as Royalty under clause (iii) to Explanation 2 to section 9(1 )(vi) of the Act as well as under Article 12 of the India-Netherlands Double Taxation Avoidance Agreement ("India - Netherlands DTAA"). 4. That the order of the AO/DRP is patently perverse because they failed to appreciate that only the owner of a Copyright can grant a license to use the same. 5. That the AO/DRP failed to appreciate that in the absence of any right of ownership in the software, the Appellant was not competent to grant any license. 6. That the AO/DRP also erred in not appreciating that in order to partake the character of royalty the payment necessarily has to be for the "use" or "right to use" of a Copyright and in the absence of any such right being granted, the payment cannot partake the character of royalty. 7. Without prejudice, the AO/DRP faile....
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....falls within the definition of "Fees for Technical Services" as defined under section 9(1)(vii) of the Act, as well as under Article 12 of the India-Netherlands DTAA. 17. That the Ld. AO/Hon'ble DRP erred on the fact and circumstances of the case and in law in not appreciating the fact that the Appellant did not make available any technical knowledge, know-how or skill and therefore, payment received in lieu of these services does not fall within the ambit of Article 12 of India-Netherlands DTAA. 18. That the Ld. AO/Hon'ble DRP has erred on the fact and circumstances of the case and in law in holding that the benefit of restrictive definition of "Fees for Technical Services" as provided under Article 12(4)(b) of India-Portugal DTAA could not be availed by the Appellant despite of "Most Favored Nation" clause in the India- Netherlands DTAA. 19. That the Ld. AO/DRP has erred on the fact and circumstances of the case and in law, by holding that the services rendered by the Appellant were ancillary and subsidiary to the application or enjoyment of the right to use copyright and therefore, were covered within the ambit of Article 12(5)(a) of the IndiaNetherlan....
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....cal Services (FTS). 7. During the year the assessee has submitted that it had received an amount of Rs.91,80,403/- and Rs. 92,11,973/-, i.e. total of Rs.1,83,92,376/- on account of software. The assessee submitted that, a) the said amount is cross-charged at actual cost, without any markup. b) The assessee has got a limited use of software licenses. c) These amounts do not qualify as Royalty under the India Netherlands DTAA. 8. The AO invoking the judgment of ITAT Delhi in the case of Microsoft held that the payment falls under the term "Royalty" within the meaning of clause (iii) of explanation to Section 9(1) of the Income Tax Act, 1961 within the meaning of royalty as defined under Article 13 between India-Netherland treaty and taxed the receipt of Rs.1.83 crores @ 10%. 9. The ld. DRP confirmed the addition holding as under: "3.4 The submissions have been perused along with the relevant materials on record. This issue of copyright vs copyrighted article as regards software has been considered in various cases. In this regard, the Hon'ble Karnataka High Court has decided the issue of software royalty, both before and after the inse....
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....ave the meaning which it has under the domestic law of that State which in this case is the IT Act, 1961 containing section 9(1)(vi) and Explanations 3 and 4 thereto and the Copyright Act, 1957. The assessee has stated that the right to use the computer software cannot be treated as right to use for copyright u/s 14 of the Copyright Act, 1957. Section 14 of the Copyright Act defines copyright to mean the exclusive right to do or authorize the doing certain specified acts in respect of a work or any substantial part thereof, which includes a computer programme. In the present case, the user gets the exclusive right in lieu for consideration in the form of royalty to install and use the programme in its systems. To the extent that such consideration is paid, the right to use becomes exclusive within the meaning of section 14 of the Copyright Art, thus falling within the ambit of the Royalty Article in the India-Netherlands DTAA. 3.6 Besides, SAP / Microsoft software are ERR software requiring customization, installation and integration with the existing system and processes in the user's machines so that the programs embedded therein can be used. These licensed software bein....
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....ious modifications at each module level can also be done by the users (like generation of various reports etc.) and instant cases help of IT teams is required as well. Users have to explain to the IT teams, what all structural modification etc. are being sought before any change is processed. Each changes documented as a separate version as well. This is nothing but a consideration for usage of a process as SAP is an enterprise resource planning process (SAP ERP). 2. The decision of the Hon'ble Court was with regard to those cases of software which do not create any interest of right in end users which would amount to use of or right to use any copy right. The facts in the relevant case are different. 3. The provisions of section 14 of the Copyright Act 1957 shows that transfer or use of a copyright in a computer program manifests itself in (i) allowing it to be stored in medium by electronic means, (ii) issuing copies to public not already in circulation, (iii) to communicate it to public or (iv) to sell or give on commercial rental or offer for sale any copy of the computer program. In the present case the appellant has given the access and user rights in th....
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....tier architectures. In three tier structure, the presentation tier provides the interface to the user, the application tier processes the business logic and the data base tier stores the business data. There can be situations where three tiers can be reduced to one or two. The possibility of these situations depends on available processing power and number of business users. For example it is to install all three SAP tiers on a single computer. On the other hand large SAP productive installations require multiple powerful servers for each of the tiers in order to ensure good performance of the SAP system. Thus the aforementioned software can easily be classified as a "process" or plan and the consideration for the same is certainly consideration for a process as included in the definition of the Royalty in the DTAA. The term process used in the DTAA is not in the context of the manner of writing a computer program. SAP implementation in an entity is a business solution and lays down a specific manner of execution of activities. The consideration for such implementation is not a consideration for software programs. These processes also result in sharing of an information concerning ....
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....alty, not being more beneficial to the assessees, have no application in the facts of these cases. 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 226 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. 170. The appeals from the impugned judgments of the High Court of Karnataka are allowed, and the aforesaid judgments are set aside. The ruling of the AAR in Citrix Systems (AAR) (supra) is set aside. The appeals from the impugned judgments of the High Court of Delhi are dismissed." 16. Hence, the appeal of the assessee on this ground is allowed. &nb....
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....ultancy services (including through the provision of services of technical or other personnel) 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 4 o f this Article is received; or (b) make available technical knowledge, experience , skill, know-how or processes, or consist of the development and transfer o f a technical plan or technical design. The definition of FTS contained in paragraph 4 of Article 12 of the India-Portugal DTAA reads as under: 4. For the purposes of this Article, "fees for included services" means payments of any kind, other than those mentioned in Articles 14 and 15 of this Convention, to any person in consideration of the rendering of any technical or consultancy services (including through the provisions of services of technical or other personnel) 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 o....
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.... Services User Authorization * Definition of user profiles and access rights of a SAP user. System Maintenance/ Basis Administration * Covers management of dayto- day SAP operational activities (e.g. systems monitoring, backup activities), transporting of objects from SAP development to production, data recovery activities and the like. * It also covers projects like SAP upgrades, coordination of audit activities with SAP Singapore (e.g. Early Watch Sessions), SAP patches installation, Basis training and the like. Technical/ Basis Audit * Refers to the audit of the existing SAP technical setup of the OC which includes both the HW, SLV and maintenance activities. SAP Improvement Projects Post-Implementation Reviews * Audit review of SAP implementation Business re-engineering * Simplify, streamline and improve the business process of the organization thru the use of IT tools and cost-effective manual controls SAP Training * Training can either be on a SAP functional or technical or technical (Basis) level.  ....
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....ertise to provide research, analysis or advice to another entity related to the latter entity's specific requirements I circumstances, the payments received in lieu of such services would be FTS, In the present case, it is seen from the description of services that they clearly involve making available of knowledge, skill and experience by the assessee to the Indian entity, The said payments for the rendering of any technical / management /consultancy services are also ancillary and subsidiary to the application or enjoyment of the right in respect of copyright as discussed in paragraphs 3.4 to 3.6 above, thus attracting sub-paragraph (a) of paragraph 5 of Article 12 of the India-Netherlands DTAA. In view of the above, the consideration in respect of the said services squarely falls within the scope of FTS in Article 12 of the India-Netherlands DTAA. The objections of the assessee under Ground 4 therefore stand dismissed." 18. We find the similar matter has been adjudicated by the Co-ordinate Bench of ITAT Mumbai in the case of SCA Hygiene Products AB Vs. DCIT in ITA No. 7315/Mum/2018 vide order dated 08.01.2021. For the sake of ready reference, the relevant part of the orde....
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....ata (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 assessment proceedings, the Assessing Officer, noticed the above payments and required the assessee to show cause as to why these receipts not be taxed in the hands of the assessee under article 12 of the Indo Swedish tax treaty, as also under the Income Tax Act. One of the arguments that was adopted by the assessee was that under the restricted meanings of the 'fees for technical services' under article 12 of the Indo Swedish tax treaty, as read with "most favoured nation (MFN) clause" in protocol thereto and read with India Portugal Double Taxation Avoidance Agreement [(2016) 244 ITR (Stat) 57; Indo Portuguese tax treaty, ....
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....e 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 under Project Administration. This also includes project and financing controls including necessary charts and controls for implementation of project. The assessee is not executing the project but is rendering consultancy service to the AE. When project implementation tools are provide to the employees of the AE, they are enable to employ these tools in implementing their own project. 5.14. The nature of service rendered by the assessee as detailed by it has been reproduced above. Admittedly, these vacancies are effectively connected with the SAP system implemented by the Group as a whole and have been made towards effective utilisation....
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....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 consideration for the rendering of any managerial, technical or consultancy services including the provisions of services by technical or other personnel but does not include payments for services mentioned in Articles 14 and 15 of this Convention. 4. The provisions of paragraphs (1) and (2) shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal servic....
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....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 Delhi, this 24th day of June, 1997, in the Swedish, Hindi and English languages, all three texts being equally authentic. In case of divergence between the texts the English text shall be the operative one. ARTICLE 12 OF INDO PORTUGESE TAX TREATY ROYALTIES AND FEES FOR INCLUDED SERVICES 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State, ....
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....ndividuals (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 Contracting State in which the royalties and fees for included services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties and fees for included services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 14, as the case may be, shall apply. 7. Royalties and fees for included services shall be deemed to arise in a Contracting State where the payer is that State itself, a political or admini....
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....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 ways in which such an MFN clause can be implemented. There can be situations like in India Switzerland Double Taxation Avoidance Agreement [(1995) 214 ITR Stat 223 @ 246; Indo Swiss tax treaty, in short] which only requires fresh negotiations to provide for giving effect to most favoured nation status in effect, as evident from the observations in the protocol to the effect that "If after the date of signing this Amending Protocol, India under any Convention, Agreement or Protocol with a third State which is a member of the OECD, restricts the scope in respect of royalties or fees for technical services than the scope for these items of income provided....
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....visions 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 extended to the treaty partner jurisdiction as well. There can be several modes for implementation of the MFN clause, but its not really necessary to explore that aspect any further. Suffice to note that there are different methods in which MFN clause can be implemented, and there cannot, therefore, be a 'one size fits all' approach. As far as the situation that we are dealing with, i,e. MFN clause in Indo Swedish tax treaty, is concerned, it is a situation in which the action of limiting the source taxation, for dividends, interest, royalties or fees for technical services, to any other OECD member jurisdiction, by itself, is enough to trigge....
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....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, notification No.9602 [F.No.501/16/80-FTD], dated 6.9.1994 as amended by Notification No. SO 650(E), dated 10.7.2000. was issued by Govt. of India. The said Notification does not include anything about the 'make available' provision. Had the intention of the Protocol or the Government is to include 'make available' clause in the Tax Treaty between India and France, it should have been done so in the said Notification. We have taken note of the Notification issued in the case of India Netherland Tax Treaty whereby the Protocol was given effect to. The changes in the Treaty on the basis of the Protocol were given effect by Notification ....
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....ical 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 specifically approved by Hon'ble Delhi High Court in the case of Steria India Ltd (supra), we hold that the provisions of article 12 (4)(b) of the Indo Portuguese tax treaty, being more restricted in scope vis-à-vis article 12(3)(b) of Indo Swedish tax treaty, apply in the Indo Swedish tax treaty as well. 23. As for the connotations of 'make available' clause in the treaty, this issue is no longer res integra. There are at least two non-jurisdictional High Court decisions, namely Hon'ble ITA No. 7315/Mum/2018 Assessment year: 2015-16 Page 17 of 19 Delhi High Court in the case of DIT v. Guy Carpenter & Co Ltd. [(2012) 346 ITR 504 (Del)....
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....nly 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 services, in the future, without recourse to the assessee. The consultancy services are in the nature of leading the setting up of factory, including planning and steering execution of work, being responsible for managing project within budget constraints, leading the project team from different locations, coordination and follow up with the contractors, securing communication and good flow of information between those directly or indirectly involved with the project, preparing project progress report and updating all concerned with the project progress. Just because the assessee renders these services does not mean, and by no stretch can imply, that the recipient can ne....
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....eby a clear enduring benefit is provided". It is also mentioned that "specific support in the form of implementation of SAP project amd Project Vinadalloin the form of preimplementation, 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 "make available" clause. As we have seen in our analysis earlier, what is important is transfer of technology and not the incidental benefit. Unless the recipient of a service is not enabled to perform that service on his own, without recourse to the service provider, the requirements of the make available clause are not satisfied. The concept of enduring benefit, increase in efficiency, improvement in income generating capacity and incidental skill development is wholly irrelevant for this purpose. The authorities below have been thus swayed by considerations not germane in this context. So far as these services being incidental to SAP system being the reason for taxatio....