TaxTMI 
TaxTMI 
2023 (11) TMI 390
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....elete the disallowances made u/s 40(i)(a) of the Act amounting to Rs. 4,29,06,250/- for payments made to Brain Point consultants UAE ignoring the fact that India UAE DTAA has no clause on Fee for Technical Services. 3. On the facts and circumstances of the case whether the Ld. CIT(A) has erred on facts and in law to delete the disallowances made u/s 40(i)(a) of the Act amounting to Rs. 2,65,03,316/- for payments made to OIT Managed Services Mauritius on grounds that in absence of any specific clause for FTS in the India Mauritius Treaty, the taxability will be determined as per the provisions of Income Tax Act, 1961 and payment made is of the nature of Royalty for transfer of copyright in the 'Work Product' and the associated services and are chargeable to tax as fee for technical services." 3. Briefly stated the facts of the case are that the assessee is engaged in the business of computer software. The assessee filed its return of income on 07.10.2017 declaring income of Rs. 6,99,57,250/-. The case of the assessee was selected for scrutiny through CASS. Statutory notices along with questionnaire under section 143(2) and 142(1) of the Income Tax Act, 1961 (the ....
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....he Tribunal and all the three grounds of appeal raised by the Revenue relate thereto. Ground No. 1 Disallowance under section 40(a)(i) of the Act in respect of payment made to Dubai Leading Technologies UAE 5. The Ld. DR strongly supported the order of the Ld. AO who by recording his observations and findings in para 6.1.2, 6.1.3, 6.1.4, 6.1.6 of his order of assessment held that the payment made to Dubai Leading Technologies, UAE is in the nature of FTS for the following reasons:- i) The payments have been made to Dubai Leading Technologies for development of an android app with features such as integration with calendar, event management and notifications, appointment management with teacher and principal, able to connect to schools other sub systems like attendance marking, assignment submission, geo tagging, school news and help button for calling for help at designated number in case of emergency. The above specifications makes it amply clear that the software has been custom made for the assessee with specific on demand features and requires integration with the other sub-systems of the school. ii) By referring to certain clauses of the agreement betwe....
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....d hence, there was no obligation to deduct u/s 195 of the Act; * The appellant during the course of the assessment proceedings has drawn attention to the following documents / submissions:: (I) Tax Residency Certificate, issued by respective countries; II) Form 15CA and Form 15CB, evidencing that the payments needed to be remitted without payment of TDS. III) That the appellant did not have a Permanent Enterprise (PE); * The activity was utilized for the purpose of making or earning income from a source outside India. * The appellant has relied on Section 90(2) of the Act. It is argued that the provisions which are more beneficial - i.e. Treaty provisions or Income-tax Act, i.e. either of the two should be applied; * Further, the appellant has also drawn attention to the fact that the decision of Hon'ble ITAT Chennai in the case of DCIT vs. TVS Electronics (Supra) has been overruled by Hon'ble High Court of Madras in Bangkok Glass Industry Ltd. Vs. ACIT [34 taxmann.com 77, 2013] and by the Banagalore ITAT in Kingfisher vs. DDIT (179 ITD 364). 6. In the context of the above submissions of the appellant n....
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....ce of a clause relating to FTS in the DTAA regarding FTS and the settled position of law that in the absence of a clause in a treaty not dealing with a particular item of income, the same should not be regarded as residuary income but income from business and in the absence of Permanent Establishment in India (PE) of the non-resident in India, the same cannot be taxed. We have already made a reference to the decision of the ITAT Bangalore in the case of ABB FZ-LLC which was a case rendered in the context of DTAA between India and UAE. The decision of the CIT(A) is in line with the decision referred to above and is a correct interpretation of the treaty. We find no grounds to interfere with the decision of the CIT(A) on this issue. 7.3 In view of the ratio of decision as enumerated Kingfisher Airlines Ltd. v. DDIT (supra), there is no denying that the said remittance cannot be brought within the ambit of FTS'. Whether the same can be treated as payment towards 'royalty' is a matter which needs to be looked into. The payment for development of mobile application is akin to payment for development / purchase of computer software- it would be relevant to look at th....
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....le to be deducted. From the discussion hereinabove, it is concluded that the payment cannot be brought within the ambit of FTS, in the absence of an enabling Article in the DTAA with UAE. The payment cannot be classified as 'Royalty', in view of judicial pronouncements enumerated, in the context of facts of the case. This has to be accepted as a business income covered under Article-7 of DTAA. In the absence of a PE, the same is not chargeable to tax in India. Hence, the action of the AO is disallowing the amount u/s 40(a)(i) of the Act is erroneous." 8. It is an undisputed fact that the payee/ remittee do not have a PE in India. We observe that the Ld. CIT(A) has analysed the impugned issue in great detail in para 7.1 to para 7.4 of his appellate order qua the nature of service agreement dated 3.10.2016 entered into between the assessee and Dubai Leading Technologies for development of mobile app on Android and various judicial precedents (extracted above) inter-alia including therein the decision in the case of Kingfisher Airlines Ltd. (supra). In Kingfisher Airlines Ltd.'s case (supra) the Bangalore Tribunal held that the remittance cannot be brought within the ambit ....
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....in India. The Tribunal held that the portion of fees for technical services was not taxable under Article 7 but under Article 22, as per section 9(1)(vii). On further appeal, the Hon'ble Madras High Court held as under: "19. Even though the Revenue canvassed this issue before the Tribunal, in the absence of any material to read the clauses otherwise rightly the Tribunal came to the conclusion that a sum of 4,79,640 USD alone would fall for consideration under art 12 as royalty income and the other to be assessed as by way of technical services. As already pointed out even herein, with the finding of the assessing authority on the remand order that the assessee had no PE, the said amount cannot be brought under art.7. In the light of the above, we have no hesitation in confirming the order of the Tribunal. 20. As far as the order in art. 22 is concerned, we do not find any justifiable ground to uphold this portion of the order after the discussion on the extent of income falling for consideration under royalty as defined under art. 12 and the amount paid as towards technical services falling for consideration under art. 7. Since the said income does not fall as mis....
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....d that the said payment of reimbursement of expenses is in the nature of fee for technical services. As noted by the Id. CIT (A), there is no FTS clause in the India UAE DTAA regarding fee of technical services and, therefore, there cannot be any question of withholding of tax. Accordingly, disallowance u/s 40(a)(i) cannot be made. The aforesaid finding of ld. CIT (A) is accordingly confirmed." 9. We also observe that the Ld. CIT(A) has also considered whether the impugned payments can be characterised as 'royalty' in the hands of the payee. The Ld. CIT(A) arrived at the conclusion that the payments made by the assessee for development of mobile application software is akin to payments for development/purchase of computer software and hence cannot be taxed as royalty payments placing reliance on number of judicial pronouncement on this subject which are mentioned in para 7.4 of his appellate order. Since the Revenue has not disputed the aforesaid finding of the Ld. CIT(A), we have not considered the submissions of the assessee on this aspect of the matter. 10. In the light of the above factual matrix of the case and the legal position set-out above, we do not find any infirmi....
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....al and consultancy services and the payments made by the assessee to Brain Point Consultants, UAE are in the nature of FTS. vi) The Ld. A.O also has noted that the India-UAE DTAA does not have a clause on fees for technical services (FTS). The Ld. A.O has also made a reference to the decision of the Chennai Tribunal in DCIT vs. TVS Electronics Ltd. [TS 421 ITAT 2012], wherein the Tribunal has observed that in the absence of any specific clause for FTS in the India-UAE treaty, the taxability will not be determined as per the residuary clause 22 of the treaty, but by the Income Tax Act, 1961. 12. The Ld. DR supported the above findings of the Ld. AO. On the contrary, the Ld. AR supported the finding of the Ld. CIT(A) and reiterated the submissions made before the Ld. CIT(A) as stated above in para 6 of this order. 13. We have heard the Ld. Representatives of the parties and pursued the material on record. The contention of the Revenue is that the impugned payments made by the assessee for rendering marketing and sales support services are in the nature of FTS and in the absence of a specific clause on FTS under the India-UAE DTAA, the impugned payments should be taxed ....
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....oreign entity, will attract the provisions of 195 of the Act. The AO has sought to invoke the residuary clause of Article 22 of DTAA in bringing the payment under the ambit 40(i)(a) disallowance. 8.3 Payment has been made to Brain Point Consultants for the Market Survey and analysis for Middle East Asia (MEA Region) involving services such as Market Size Estimation, Estimation of current and projected annual spends on automation, digitization etc. by the target institutions, competitive benchmarking for determining the strategy. GAP analysis and price benchmarking etc in view of above mentioned detailed discussion none of the services provided by Brain Point Consultants to fit into the terminology "make available", The services offered may be the product of intense technological effort and lot of technical knowledge and experience of the service provider would have gone into it. But, that is not enough to fall within the description of services which make available the technical knowledge, etc. The view is also supported by the order of Authority of Advance Ruling in the case of Ernst & Young (P.) Ltd., In reported [2010] 323 ITR 184 2 (AAR New Delhi), wherein support serv....
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....e limited company engaged in business of development and export of software. During the relevant assessment year 2007-08, the assessee had paid commission of Rs. 33,36,068/- to its parent/holding company EON Technologies, U.K., (ETUK, for short) on the sales and amounts realized on export contracts procured by ETUK for the respondent assessee. Commission was paid thereon and no TDS was deducted. The Hon'ble Court held that:- "To answer the contention herein we need to examine briefly the scheme of the 1961 Act. Section 4 is the charging section. Under Section 4(1), total income for the previous year is chargeable to tax. Section 4(2) inter alia provides that in respect of income chargeable under sub-section (1), income tax shall be deducted at source whether it is so deductible Appeal No. 10738/19-20 under any provision of the 1961 Act which inter alla brings in the TDS provisions contained in Chapter XVII-B in fact, if a particular income falls outside Section 4(1) then TDS provisions cannot come in. 16. Under Section 5, all residents and non-residents are chargeable in respect of income which accrues or is deemed to accrue in India or is received in India, N....
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...., therefore, not only requires the words "chargeable under the provisions of the Act" to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Governmen would nonetheless collect tax. In our view, Section 195(2) provides a remedy by which person may seek a determination of the "appropriate proportion of such sum so chargeab where a proportion of the sum so chargeable is liable to tax." 18. In view of the aforesaid discussions, it has to be held that there is no error in the findings Appeal No. 10738/19-20 recorded by the Commissioner of Income Tax (Appeals) which have been upheld in the impugned order by the ITAT 8.5 In the above case, it was held by the Hon'ble Court that the income of a non-resident agent from providing marketing and sales support, rendered for overseas client cannot be included u/s 5(1) of the Act and, hence, not liable to TDS. In view of the above ratio of decision as stated hereinabove, it can be held that no TDS was required to be deducted by the appellant in the present c....
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.... Web Services (AWS) based services which run ultimately on a server of Amazon. The services include creation and configuration of virtual machines, sending alerts, monitoring threshold settings, script configuration for rapid restart of devices, assistance in analysis of the generated reports which are technical in nature and manual intervention is involved. The payment is not for a pail vanilla web hosting service. It is not merely installation and operation of sophisticated equipment but a comprehensive IT solution along with transfer of certain copyright ii) The payment is of the nature of royalty as consideration has been paid for the transfer of copyright in the 'Work Product' and the associated services are chargeable to tax as fee for technical services. iii) The Chennai Tribunal in DCIT v. TVS Electronics Ltd. [TS-421-ITAT- 2012] has ruled that in absence of any specific clause for FTS in the India Mauritius treaty the taxability will not be determined as per the residuary clause 22 of the treaty but rather by the Income Tax Act, 1961. 17. On appeal, the Ld. CIT(A) relying on the decisions in the case of Bharti Axa General Insurance Co. Ltd. 326....
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....h system and monitoring the collection devices through the length of the contract working with campus EAI to determine optimum settings Monitored devices include IP addressable devices. Database processes, application processes, and/or other routines running on servers. Which can be monitored. Monitoring may also cover specified IP addresses of designated network routers, switches and/or other networked IP devices (h) Alert Campus EAI by email and/ or text-enabled cell phones when alert threshold have been exceeded or when monitored systems fail to respond (i) Configuring scripts to provided rapid restarts of devices and processes being monitored, when applicable under the direction of Campus EAI (j) Providing designated Campus EAI staff with read only access to reporting systems vis an authenticated web-based portal (k) Assisting in the analysis and interpretation of reports 9.2 So far as payments to OIT Managed Services Mauritius is concerned, the AO concluded on construction of DTAA between India and Mauritius that the payment is in the nature of royalty and therefore, the appellant was obliged to deduct TDS under section 195 of the A....
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....ystem hosted in Singapore is for availing of the facility provided by AXA ARC and it cannot be said that the applicant has been conferred any right of usage of the equipment located abroad, more so when the server is not dedicated to the applicant. 12. The learned departmental representative has contended that AXA ARC provides consultancy services and as a result of the suggestions and sharing of informations with service provider, the applicant utilizes the technology transmitted to the applicant, who can thereby act independently to develop its business is not a convincing argument. This contention cannot be accepted as it amounts to stretching the point to bring the services within the net of FTS as defined in the Treaty. One has to look into the substance and the core of the services availed of by the applicant while giving full effect to the definition contained in the Treaty. This Authority is therefore, of the view that the fee paid to the AXA ARC by the applicant does not amount to fee for technical services within the meaning of India-Singapore Tax Treaty. (ii) Mumbai Tribunal in the case of Rackspace, US Inc vs DCIT reported in [2020] 113 taxmann.com 382....
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.... the possession or control of the equipment with the payer or use by the payer or the location of the equipment being in India. But under the provisions of section 90(2) of the Act, an assessee can opt be governed by the provisions of the tax treaty to the extent they are more beneficial than the provisions of the Act. We noted the fact that Rackspace USA is tax resident of USA and therefore, is entitled to claim the beneficial provisions of India-USA tax Treaty with respect to the taxability of its income earned from Indian payers The Tax Residency Certificate along with Form 10F has been submitted by the assessee vide letter dated 29.01.2015 and 13.02.2015 for the years 2011 and 2012 12. We have gone through the provisions of Article 12(3) of the India USA Tax Treaty, wherein the term royalties are defined to mean: (a) payments of any kind received as a consideration for the list of or the right to Use, any copyright of literary, artistic or scientific work including cinematograph or work on ten, tape or other means of reproduction for use in connection it radio or television broadcasting, any patent, trade mark, design or model, plan secret formula or process, ....
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....rest or royalties or fee for technical services or other sum chargeable to tax in India. Central Board of Direct Taxes has revised the procedure for deduction of tax at source on remittances made out of the country. The provisions of DTAA are also in favour of the assessee. Accordingly, the assessee was not required to deduct tax at source under section 195 of the Act while making payments outside India. 5. On appraisal of the above mentioned finding, we find that the agreement between the assessee and its customers is for providing hosting and other ancillary services to the customers and not for the use of leasing any equipment. The data centre and the infrastructure therein used to provide these serves belongs to the assessee. The customers are not having physical control or possession over the servers and right to operate and manage this infrastructure/servers vest solely with the assessee. The agreement is to provide hosting services simpliciter and is not for the purpose of giving the underlying equipment on hire or lease. The customer was not knowing any location of the server in data centre, web mail, websites etc. Accordingly, it cannot be said as royalty within t....
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.... Cloud services merely facilitate the flow of user data from the front end users through internet to the provider's system and back. The ld. AO has fallen in error in interpreting it as licensing of the right to use the above Cloud Computing Infrastructure and Software (para 10.5 of the Ld. AO order). Thus the subscription fee is not royalty but merely a consideration for online access of the cloud computing services for process and storage of data or run the applications. 8.2 While dealing with similar question in regard to the case of M/s. Salesforce.com Singapore Pte. (supra) where the said assessee was provider of comprehensive customer relationship management servicing to its customer by using Cloud Computing Services / Web Casting Services, the Bench in its order dated 25.03.2022 held as under : "28. Considering the facts of the case in totality, in light of the Master Subscription Agreement, we are of the considered view that the customers do not have any access to the process of the service provider i.e. the assessee, and the assessee does not have any access except otherwise provided in the master subscription agreement to the data of the subscriber. ....
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....es belongs to the assessee. The customers are not having physical control or possession over the servers and right to operate and manage this infrastructure/servers vest solely with the assessee. The agreement is to provide hosting services simpliciter and is not for the purpose of giving the underlying equipment on hire or lease. The customer was not knowing any location of the server in data centre, web mail, websites etc. Accordingly, it cannot be said as royalty within the meaning of Explanation (2) to Section 9(1)(vi) of the Act as well as Article 12(3)(b) of the Indo-USA Data by the AO and DRP. Moreover, there is no PE of the assessee in India and hence, no income can be taxed in India in term of Indo-US DTAA." 8.5 The aforesaid judgments squarely covers the controversy in regard to the present assessee also. In the light aforesaid, the Bench is of considered view that the ld. Tax Authorities below had fallen in error in considering the subscription received towards Cloud Services to be royalty income." 21. In the case of Millenium Infocom Technologies Ltd. (supra), the Delhi Tribunal on the question inter-alia, whether provision of space on the servers by the non....
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....ts have been made to non-residents on account of rentals for hosting the websites on their servers located in USA. Thus we have to examine nature of the payments made whether they are in nature of interest or royalty or fee for technical services or other sum chargeable to tax in India. Admittedly payments made are not in nature of interest as these are not relatable to any loan/trade advances. 8.1 The expression "Fees for technical services" is defined in Expln. 2 to Section 9(I)(vii) and reads thus: For the purposes of this clause, 'fee for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries'. This definition shows that consideration paid for rendering of any managerial, technical or consultancy services, as also the consideration paid for the provision of servic....
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....bile. It cannot on that ground be said that the taxi driver who controls the vehicle and monitors its movement is rendering a technical service to the person who uses the automobile. Similarly when person travels by a train or in an airplane it cannot be said that the railways or airlines is rendering a technical services to the passenger and, therefore, the passenger is under an obligation to deduct tax at source on payment made to the railways or the airline for having used it for traveling from one destination to another. When a person travels by bus, it cannot be said that the undertaking which owns the bus services is rendering technical service to the passenger and, therefore, the passenger must deduct tax at source on the payment made to the bus service provider, for having used the bus. The electricity to an consumer cannot, on the ground that generators are used to generate electricity, transmission lines to carry the power, transformers to regulates the follow of current, meters to measures that consumption be regarded as amounting to provision of technical services to the consumer resulting in the consumer having to deduct that at source on the payment made for power con....