TaxTMI 
TaxTMI 
2024 (1) TMI 309
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....e us:- "1. That on the facts and circumstances of the case and in law, assessment order passed under section 144C(13)/147/ 143(3) of the Income-tax Act, 1961 ("the Act") for assessment year 2012-13 assessing the total income of the Appellant at Rs. 26,17,66,998 is without jurisdiction, illegal, void ab initio and therefore, liable to be quashed. 2. Reassessment proceedings initiated under section 147 of the Act are without jurisdiction 2.1 That on the facts and circumstances of the case and in law, the reassessment proceedings undertaken by the assessing officer culminating in final assessment order are without jurisdiction, void ab initio and bad in law.. 2.2 That on the facts and circumstances of the case and in law, the assessing officer erred in passing final assessment order without appreciating that there exist no reasons to believe that income of the Appellant for the relevant assessment year has escaped assessment warranting initiation of reassessment proceedings. 2.3 That on the facts and circumstances of the case and in law, the assessing officer erred in initiating the proceedings under section 147 of the Act on the basis of r....
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....e purpose of serving overseas customers directly, as one entity providing services to the other entity: 4. Payments not chargeable to tax under section 9(1)(vii) of the Act 4.1 That on the facts and circumstances of the case and in law, the DRP/ assessing officer erred on facts and in law in holding that payments received by the Appellant during the relevant previous year from HCL Technologies Ltd, an Indian resident, were chargeable to tax in India. That on the facts and circumstances of the case and in law, the assessing officer erred in not appreciating that the amount received by the Appellant were in respect of services performed by the Appellant outside India and delivered directly to the overseas customers for utilization in their business carried on outside India and therefore, did not accrue or arise in India so as to be chargeable to tax in India in terms of section 9(1)(vii) of the Act. 4.3 That on the facts and circumstances of the case and in law, the assessing officer erred in arbitrarily alleging in the assessment order that services were rendered by the Appellant to HCL Technologies Ltd. and not to the overseas customers, which is....
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....ax in India, in terms of the applicable DTAA as such services did not make available any technical knowledge, skill or experience or consist of the transfer of any technical plan or design to the HCL Technologies Ltd. 5.2 Without prejudice and in the alternate, that the DRP/ assessing officer erred on facts and in law in not appreciating that the amount received for some of the onsite services rendered by the Appellant were in respect of those categories of Application & Engineering Services', viz., Application Support and Maintenance Services, Application Support and Enhancement Services and Others/ Residuary Application Services, which did not involve coding/ designing/ development and were not liable to tax in India in terms of the applicable DTAA as such services did not make available any technical knowledge, skill or experience or consist of the transfer of any technical plan or design. 5.3 Further without prejudice, that on the facts and circumstances of the case and in law, the DRP/ assessing officer erred in holding that 'make available' clause does not apply in respect of development and transfer of technical plan or design. 6. Infra....
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....e Appellant was not doing any independent business but was only dependent upon HCL Technologies Ltd. for generation of revenue; c. all risk, reward and liability in respect of the services performed by the Appellant in respect of the contracts entered into with foreign clients was borne by HCL Technologies Ltd.; d. source of income of the Appellant is in India; e. the entire responsibility of execution vis-à-vis foreign client remains with HCL Technologies Ltd.; f. project heads of all the projects are located in India and therefore, any work carried out by the employees of the Appellant are being supervised by the project heads of HCL Technologies Ltd.; g. not only the source code is made available by the Appellant but even the knowledge with adequate documentation has been transferred and is available to the employees of HCL Technologies Ltd.: h. employees of HCL Technologies Ltd have been enabled to apply the technology by the employees of the Appellant and HCL Technologies Ltd. after being so enabled has rendered the services to foreign client and raised invoices on them. 9. Without prejudice, that on the fac....
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....dance Agreement (DTAA). The assessee filed objections before the Dispute Resolution Panel (DRP) and the same were disposed of by the DRP vide its directions dated 8.3.2021 giving partial relief to the assessee. Pursuant to the directions of the ld. DRP, the ld. AO passed the final assessment order on 23.4.2021 determining the income of the assessee at Rs. 26,17,66,998/- for the Asst Year 2012-13. Aggrieved, the assessee is in appeal before us. 4. We have heard the rival submissions and perused the materials available on record. The assessee and HCLT are part of the HCL group with the assessee being a subsidiary and Associated Enterprise (AE) of HCLT. HCL America (HCLA) provides services to clients of HCLT outside India as per agreement entered into with HCLT. The assessee company provides the marketing and sales support as well as onsite services. HCL group is engaged in the business of development and export of software and rendering ITES which is categorized into the following lines of business:- a) Software Services (including Engineering Services) b) Infrastructure Services c) Business Process Outsourcing (BPO) 4.1. Software, Engineering and Inf....
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....vices rendered by the assessee are transferred to India. As per the business model, the onsite services are entirely performed by the assessee from outside India and delivered for ultimate consumption or utilization by foreign clients in their business outside India and both entities perform work directly on the server of the foreign customers. It is not in dispute that the assessee furnished before the ld. AO the income tax return filed with the foreign tax authorities and the copy of tax residency certificate (TRC) issued by the competent authority for the relevant year. 5. It would be relevant to understand the various contracts / agreements signed between the parties. A Master Service Agreement dated 1.7.2010 had been entered into between HCL Singapore Pte Ltd (assessee herein) and HCL Technologies Ltd, India (HCLT ) . Certain relevant clauses of the said agreement are reproduced below:- "a) HCL Singapore and HCLT are in the business of providing software and IT services (Services) to their customers. b) HCLT is desirous of utilizing expertise of HCL Singapore and to engage HCL Singapore to perform the 'Services' for its customers on its behalf. c)....
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.... the course of performing Services shall be referred to as "Existing Intellectual Property Rights". HCL Singapore may use Existing Intellectual Property Rights in the development of software pursuant to the performance of Services under this Agreement. HCL Singapore shall remain the exclusive owner of such rights, including any modifications or enhancements thereto that may be developed in the course of providing the Services under this Agreement. Clause 9 - REMUNERATION 9.1. In consideration for the Services rendered by HCL Singapore hereunder, HCL Singapore shall charge the fee from HCLT which shall be determined based on total cost incurred in the provision of services plus an agreed mark up. The mark up shall be agreed between the parties by mutual consent from time to time. 9.2. It is agreed that HCLT shall withhold taxes as applicable at the time of making payment to HCL Singapore for the Services rendered by HCL Singapore under this Agreement. Clause 10 - TAXATION Both parties, hereby, agree that all direct tax (WHT) levies shall be on account of payee (service provider) and all indirect tax (service tax, VAT, GST or similar indir....
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....re and software products for use in computer and communication networks. B. Designer is in the business of designing network software applications. C. Cisco and Designer desire that Designer design the Product (as defined herein) on the terms and conditions set forth herein. 1.0. DEFINITIONS 1.1. Affiliate in the case of Cisco shall mean any entity, whether incorporated or not, which is controlled by , under common control with, or controls Cisco, where 'control' means the ability, whether directly or indirectly, to direct the affairs of another by means of ownership, contract or otherwise. Affiliate in the case of Designer , shall mean an entity directly or indirectly controlling, controlled by or under common control of Designer where control means the ownership or control, directly or indirectly of at least 50.1% of the voting power, but only for so long as ownership remains at 50.1% or above. (emphasis supplied by us) ................ 1.3. Cisco shall mean Cisco Systems, Inc., and its Affiliates. 1.4. Cisco Property shall mean such items provided by Cisco or its Affiliate, Including but not limited....
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....is Agreement as consecutively numbered Exhibit G's, i.e. G-1, G-2, G-3, et. seq. 1.16. Property shall mean the information and technology provided by the parties in connection with this Agreement and all Intellectual Property Rights with respect thereto. 1.17. Source Code shall mean a fully documented human-readable source code form of the Product, including programmer's notes and materials and Documentation, sufficient to allow a reasonable skilled programmer to understand the design, logic, structure, functionality, operation and features and to use, operate, maintain, modify, support and diagnose errors. 1.18. Specifications shall mean the acceptance criteria and technical and other specifications for the Product, as may be set forth in, and/or which are the result of, the Product Project Specifics. 2.0 DESIGN EFFORT 2.1 DESIGN EFFORT Designer shall design and deliver the Deliverables in accordance with the Specifications set forth in, or agreed upon as a result of, the Product Project Specifics, provided, however, that the due date for any Deliverable, performance of which was delayed on account of failure of Cisco t....
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....shall remain the sole owner of all right, title, and interest in the Deliverables, Product, Cisco Property, and all Intellectual Property Rights therein, except the Designer Property. Designer further acknowledges and agrees that upon creation of any Deliverables, Product or Cisco Property, Cisco shall be the sole owner of all rights, title and interests in and to such Deliverables, Product (except the Designer Property), and Cisco Property and all Intellectual Property Rights therein. Designer hereby irrevocably transfers, conveys, and assigns, and agrees to transfer, convey, and assign, to Cisco all of its right, title, and interest in the Deliverables, Product (except the Designer Property), and Cisco Property free and clear of all liens, encumbrances, claims and rights of third parties whatsoever. Further, Designer agrees that such assignment is and shall be perpetual and the assignment shall not lapse under any circumstances including non-exercise of such assignment by the assignee for any period of time. Cisco shall have the exclusive right to apply for or register any patents, mask work rights, copyrights, and such other proprietary protections with respect thereto. Designer....
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....tion 3.2, the Designer shall not adopt any trademark, service mark, trade name, or logo which is substantially similar to any trademark, service mark, trade name, corporate name or logo of Cisco. In the event that Designer requires use of Cisco trademarks, Designer shall register with Cisco's Logo Program at: http://www.cisco.com/logo/index.html. 3.3. OWNERSHIP OF RELATED TECHNOLOGY Subject to the ownership rights specified in Sections 3.1 and 3.2, any technology (i) which is not incorporated in the Product and does not constitute Cisco Property, Designer Property, or Foreground Property, and (ii) which is jointly created, conceived and reduced to practice, designed, or prepared by the parties pursuant to this Agreement or conceived, designed, or prepared by Designer as a direct result of Designer's efforts hereunder shall be owned by Cisco. Cisco hereby grants Designer and/or its Affiliates a royalty-free, perpetual and irrevocable, worldwide, non-exclusive license to use, reproduce and distribute (in both Object Code and Source Code format) products developed by Designer incorporating or using said technology. 3.7. PROTECTION OF INTELLECTUAL PRO....
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....purposes of this Agreement, Designer's Affiliates shall not be considered as third parties. Designer hereby guarantees the performance and obligations of its Affiliates and agrees that a breach by an Affiliate may be deemed by Cisco to be a breach by Designer. (emphasis supplied by us) 10.0. INDEMNITY BY DESIGNER AND CISCO 10.1. GENERAL INDEMNIFICATION BY DESIGNER Designer will indemnify, defend, and hold harmless each of Cisco and its Affiliates and each of their officers, directors, employees, successors and assigns (collectively the "Indemnified Parties") from and against all third party claims, suits, demands and actions brought against the Indemnified Parties or tendered to the Indemnified Parties for defense and/or indemnification (collectively "General Claims"), and for all damages, losses, costs, and liabilities (including reasonable attorney and professional fees) that result or arise from General Claims (collectively "General Losses"), which in whole or in part, directly or indirectly, allege that one or more Products, or any part thereof, have caused bodily injury (including death).. 10.2. INTELLECTUAL PROPERTY INDEMNIFICA....
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....nd attributable to Designer 10.4. DESIGNER'S EFFORTS In addition to Designer's obligations under Section 10.2, if the manufacture, use or distribution of the Product is enjoined or becomes the subject of a Claim of infringement, Designer shall, at its sole expense, obtain such licenses, or make such replacements or modifications, as are necessary to the continue the manufacture, use, import, service, support, or distribution of the Product without infringement and in compliance with the Product Project Specifics and Specifications within thirty (30) days (or such longer period as determined by Cisco in good faith) after the holding of infringement or the entry of the injunction, as applicable in the event that it is not commercially practicable for Designer to obtain such licenses or make such replacements or modifications. Designer shall provide Cisco with prompt written notice thereof, and shall refund to Cisco the full amount of all amounts paid by Cisco with respect to such Product within thirty (30) days after the date of such written notice. Designer hereby acknowledges and agrees that, in the event that Cisco is subject to any General Losses that ar....
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....gner by Cisco for the design of a Product infringes any United States, European Union, India, or Japanese Intellectual Property Right of a person, firm, or entity who is not a party to this Agreement. As a condition to such defense, Designer will provide Cisco with prompt written notice of the claim and permit Cisco to control the defense, settlement, adjustment or compromise of any such claim provided, however, that Designer shall provide Cisco with assistance, at Cisco's expense, as Cisco shall request, in connection with the defense, settlement or discharge of the claim. Designer may employ counsel at its own expense to assist it with respect to any such claim. Designer shall have no authority to settle any claim on behalf of Cisco. The foregoing slates Designer's sole and exclusive remedy and Cisco's entire liability to Designer arising from or relating to the use of the Cisco Property by Designer hereunder 11.0. LIMITATION OF LIABILITY EXCEPT IN CONNECTION WITH INDEMNITY OBLIGATIONS UNDER SECTION 10 (INDEMNITY), AND DESIGNER'S OBLIGATIONS UNDER SECTION 2.10 (USAGE OF OPEN SOURCE) AND SECTION 7 (CONFIDENTIALITY), IN NO EVENT WILL EITHER PARTY B....
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.... performed and which maintain an AM Best rating of A-VII or higher, where applicable, and will comply with all those requirements as stated herein. In no way do these minimum requirements limit the liability assumed elsewhere in this Agreement, including but not limited to Designer's defense and indemnity obligations. 15.1. Workers' Compensation, Social Scheme and Employer's Liability Insurance Workers' Compensation and Employer's Liability insurance shall be provided as required by any applicable law or regulation and, in accordance with the provisions of the laws of the nation, state, territory or province having jurisdiction over Designer's employees. If any such applicable jurisdiction has a mandatory social scheme to provide insurance or benefits to injured workers, Designer must be in full compliance with all laws thereof, including by way of example, Workers' Accident Compensation insurance and Employer's Liability Insurance. 15.2. Commercial General Insurance Designer shall carry Public Liability or General insurance covering all operations by or on behalf of Designer arising out of or connected with this Agreement including....
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....or the termination/expiration of this Agreement, whichever is earlier. Designer shall furnish Certificates of Insurance (or other authenticated evidence of coverage) annually to Cisco at the beginning of each of these subsequent years at Cisco's request, as evidence of this required insurance. 15.5. Additional Requirements. (a) Additional Insured. Cisco, its subsidiaries, and their respective officers, directors, employees and agents shall be named as Additional Insureds for the Public Liability (or Commercial General Liability) policies required to be maintained by Designer under this Agreement. The policies shall be endorsed to stipulate that Designer's insurance shall be primary to and noncontributory with any and all other insurance maintained or otherwise afforded to any of them. (b) Certificates of insurance. Certificates of Insurance or other formalized evidence of the coverages required above, shall be furnished by Designer to Cisco when this Agreement is signed, or within a reasonable time thereafter, and within a reasonable time after such coverage is renewed or replaced. If reasonably requested by Cisco, a certified copy of the actual p....
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....vice Description. 8.1. INTRODUCTION: (A) Deutsche Bank AG (acting through its London Branch) and Supplier entered into an Outsourcing Master Services Agreement dated 14 December 2009 (the "Agreement"). (B) The Parties to the Agreement also entered into an Interim Services Letter dated 22 December 2010 (the "Letter"). The Letter extended the term for the provision of certain services under a number of Statements of Work, Framework Service Descriptions and Project Descriptions (each entered into and defined under either the Agreement or an earlier Outsourcing Master Services Agreement between the Parties dated 5 February 2008 ("MSA 1.0.")) (the "Current Services") until 31 December 2011 (or until the date of execution of this Framework Services Description, if earlier). The Letter also provided for the commencement of the provision of service desk services (under MSA 1.0.) by Supplier to DB from 1 January 2011. The service desk services will be included in the definition of Current Services. (C) DB is in the process of consolidating the number of Suppliers providing Applications support services to its Capital Markets Production Management unit. DB Produ....
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....s responsible for formulation of the overall group strategy; that it assists its Associated Enterprises (AEs) in their business operations; that the activities relating to market research are undertaken by HCLT India's employees and these include research relating to the current industry trends, customer requirements etc; that these activities provide the basis information on the industries to focus on and the nature of services that can be offered by HCLT Group; that HCLT India being the entrepreneurial entity of the group takes the strategic decision of the industry/verticals to focus on and service offerings ; that the AEs track the requirements of the market and communicate group's service offerings and value propositions to the prospective clients; that given the proximity to the clients, it is the responsibility of the AEs to provide feedback on market conditions to HCLT India so that it can be considered while devising the strategy; that HCLT India primarily performs strategic and corporate functions such as legal and regulatory affairs, designing group policy, human resource management. Statutory and management accounting, treasury management, routine administration, and ma....
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....ces rendered by the assessee is carried out in India. ii) The statements recorded during survey proceedings reveal that entire responsibility of execution vis-à-vis foreign client remains with Indian team i.e. HCLT. iii) The Project Heads of all the projects are located in India and therefore, any work carried out by the assessee's employees are being supervised by the Project Heads of HCLT, which shows that remittances are not for earning any income from a source outside India. iv) The employees of HCLT have been enabled to apply the technology by the employees of the assessee and HCLT, after being so enabled, has rendered the services to client and raised invoices on them. v) The statements recorded during the survey proceeding make it clear that Indian Project Heads have recruited the employees of the assessee and entire responsibility for execution remains with HCLT. vi) Services have been made available in India. vii) The remittances were in the nature of Fees for Technical Services/ Fees for Included Services, which has been made available by the employees of the assessee. viii) Make available clause in....
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....;s employees are being supervised by the Project Heads of HCLT, which shows that remittances are not for earning any income from a source outside India. Reply: As has been in the statements of the employees of HCLT recorded by the ld. AO and which allegedly is the basis for reopening the assessment, depending upon the situations, either the project manager sits in India or abroad. The offshore project lead or project manager of HCLT manages his offshore team in India, whereas the assessee's project lead manages his team independently, which executes work from the overseas locations directly on the customer's server. Both the project managers/ leads only coordinate with each other on need basis. 4. The employees of HCLT have been enabled to apply the technology by the employees of the assessee and HCLT, after being so enabled, has rendered the services to client and raised invoices on them. Reply: Incorrect, as the assessee did not render any services to HCLT but rendered services directly to overseas customers outside India. The services were delivered directly on customers' servers and the assessee itself did not make it available to HCLT. ....
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....of the assessee; that in case of default on the part of the assessee in performance of services, clause 11 of the Master Services Agreement unequivocally provides that the liability shall vest with the assessee itself; that in case any damages, claims, demands, liabilities, costs and expenses arise due to errors or performance problems of the assessee's employees, clause 12 of Master Service Agreement again fixes the liability on the assessee to indemnify HCLT, unconditionally and irrevocably; that clause 13 of the Master Service Agreement further establishes that both parties, i.e., the assessee and HCLT are independent contractors and no party has supervisory power over the other. We find that this agreement is the foundation defining the scope of services to be performed by the assessee and HCLT duly defining their respective obligations to the overseas customers. We find that this agreement has not been treated by the revenue as sham or an agreement entered into for the purpose of evasion of tax. Rather the revenue has taken cognizance of this agreement and had only interpreted the contents thereon in a different manner so as to bring the activities carried out by the asses....
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....LT. This view of ours is further fortified by the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs NIIT Ltd reported in 318 ITR 289 (Del). It would be relevant to address the primary facts and dispute that arose in the case of NIIT Ltd to understand as to how the said decision applies to the facts of the present case before us. In the case of NIIT Ltd, it was engaged in business of providing computer education and training and had entered into agreements with franchisees for running education centers at various metro cities. Under the said agreements, franchisees were providing NIIT courses under license from the assessee and the franchisees were to pool their independent resources for purpose of providing computer education to students and were further required to provide infrastructure facilities like classroom facility, equipment, furniture, fixture, administrative set-up, etc. Fees collected from students were deposited in the account of NIIT and then the same was shared with the franchisees in accordance with the terms of the franchisee agreement. NIIT for the purpose of its convenience had categorized the said fees shared as marketing claim and infrastr....
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....r the purposes of making or earning any income from any source in India." 16.1. In the instant case, HCLT is an Indian entity and had paid monies to the assessee (overseas entity). So it falls under the 'Source Rule' in clause (b) of section 9(1)(vii) of the Act supra. But the said provision contain an exception, wherein it provides that FTS payable by an Indian resident shall not be chargeable to tax in India in the hands of the overseas recipient if - i) fee is payable in respect of services utilized in a business or profession carried on by such resident outside India , or ii) fee is payable for the purposes of making or earning any income from any source outside India. 16.2. In the instant case before us, both the aforesaid conditions provided in exception to section 9(1)(vii)(b) of the Act stand fulfilled. Hence it cannot be taxable as FTS under section 9(1)(vii) of the Act. 17. We find that the ld. AR before us made an alternative argument on without prejudice basis, HCLT provides both onsite and offshore services to the customers outside India. Onsite services are carried out through a separate business segment. Such business carried on by the HCLT....
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.... of the passage quoted by Mr. Justice de Villiers from Mr. Ingram's work on income-tax : "Source means not a legal concept but something which a practical man would regard as a real source of income; the ascertaining of the actual source is a practical hard matter of fact". This quotation was referred to by a Full Bench of our court in Rani Amrit Kunwar v. Commissioner of Income-tax [1946] 14 ITR 561 (All.) [FB]. In that case the learned Judges considered that an agreement or an order of the court requiring the payment of a periodical sum could be regarded as a source of income. In the case of income from business, which is a separate head under section 6, each business has been treated as a distinct source of income. The decision of the Madras High Court in Commissioner of Income-tax v. E.K. R. Savumiamurthy [1946] 14 ITR 185 (Mad.) proceeds on that basis. In Commissioner of Income-tax v. Lady Kanchanbai [1962] 44 ITR 242 (MP), the Madhya Pradesh High Court observed that each branch of a business could be described as a distinct source of income. A source of income, therefore, may be described as the spring or fount from which a clearly defined channel of inc....
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....voice on the customer and HCLT raises invoice on the respective HCL affiliate for offshore services; - Both, HCLT and HCL affiliate raise separate invoice to the customer for the respective services rendered - such cases may be few and far between. In the first scenario as described above, where HCLT raises a consolidated invoice to the customer, HCLT receives the entire consideration for both, offshore services performed by itself as also for on-site services rendered by HCL affiliates. HCLT, accordingly, pays to HCL affiliates for the on-site services rendered by HCL affiliates directly to the customers, which is billed as part of the consolidated invoice raised by HCLT on the customers. In the case of the assessee, no part of assessee's work is sent to India for utilization of services in India; the entire onsite services or software program developed by the assessee directly gets integrated into the client's server abroad, hence, the question of utilization of services within India does not arise at all." 19. It is not in dispute that both the onsite and offsite team of HCL group duly possess their own technical skills of their qualified Engineers a....
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.... arm's length basis, and do not supervise the activities of one another. Further, the two parties provide services to the foreign clients directly by performing services on the servers of such clients located abroad. The same is supported by the relevant clauses of the Master Services Agreement reproduced above as well as the business model explained above. (ii) Observation: The allegation in the assessment order that the Project Heads of HCLT who sit in India, supervise the work done by the assessee, is baseless and unsubstantiated. Rebuttal: It is submitted that the Project Heads are merely to ensure that the services as have been contracted with the end-customers are delivered in the manner it has been agreed. The Project Heads merely ensure proper co-ordination of services between HCLT and the assessee which is to be delivered to the end-customers. It is reiterated that the employees of the assessee do not provide any services to employees of HCLT. Both the teams undertake their work independently and there is no case that the employees of the assessee render services to employees of HCLT only pursuant to which employees of HCLT are enabled to render the s....
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.... India." Rebuttal: Firstly, by any stretch of imagination, the assessee cannot be deemed to be sub-contractor in the view of the fact that as explained hereinabove, both the assessee and HCLT perform the respective onsite and offshore work independently and the respective portion of the work so performed is delivered directly to the customer. Further, we would like to reproduce below Clause number 1.6. of CISCO agreement which clearly implies the intention of CISCO to treat both the assessee and HCLT as "Joint/ Co- Executors" rather than "Sub-contractors": "Designer Property shall mean such items provided by Designer or its Affiliates as listed and described in Exhibit B to each Product Project Specifics, any and all Background Property, and all Intellectual Property Rights related thereto." Clause 14.9 of the agreement with CISCO, as reproduced in the assessment order by the ld. AO, clearly states that the designer may delegate the rights to develop and deliver the product with the prior permission of the customer. The said clause is reproduced hereunder:- "14.9 ASSIGNMENT Designer may not assign its rights or delegate its obligation he....
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....ement. Further the agreement with Cisco and Deutsche Bank (which had been considered by the ld. AO) specifically prohibits sub-contracting activity by the HCLT. However, the said agreement permit HCLT to use the services of its affiliates situated across the globe for rendition of services in a seamless and smooth manner. 23. We find that the ld. DRP vide para 3.3.7. of its directions u/s 144C(5) of the Act had stated as under:- "3.3.7. In brief, both HCLT and the assessee (HCL Singapore Pte Ltd.) work on the server of the client. Major part of the development of modules and writing of the software application codes is carried out by HCLT and some part of it is being done by the assessee (HCL Singapore Pte Ltd.). Both the HCLT and the assessee (HCL Singapore Pte Ltd.) are working together on the server of the client to develop a final product which is to be delivered to the client." 23.1. In view of the above, we find the allegation leveled by the ld. AO in his order that services were rendered by assessee to HCLT is in direct contravention to the findings recorded by the ld. DRP. Needless to mention that the observations of the ld. DRP are binding on the ld. AO as p....
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.... not taxable in India. In this regard, we find that the ld. AR rightly placed reliance on the decision of co-ordinate bench of Delhi Tribunal in the case of Chander Mohan Lall vs ACIT reported in 134 taxmann.com 292 (Delhi Trib) wherein the issue of making payment by resident Indian lawyer to the foreign attorneys for certain services rendered by them (i.e foreign attorneys) outside India were sought to be treated as FTS was subject matter of consideration. The Tribunal held as under:- "21. At this stage, we must observe, learned Departmental Representative has submitted before us that the payments made by the assessee being in the nature of FTS are taxable by applying the source rule. In our view, even assuming that payments made by the assessee come within the ambit of section 9(1)(vii) of the Act, nonetheless, the exception provided under clause (b) to Section 9(1)(vii) would apply. We have already examined the nature of services provided by the foreign attorneys. It is a fact that Indian/overseas clients engage the assessee for availing certain services. In turn, assessee engages the foreign attorneys to perform certain services which are required to be performed in fo....
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.... outside India ; the ultimate delivery of the software was outside India, i.e., at the customers' location; the contract was effectively concluded outside India; that no part of the services rendered by the assessee are transferred to India; that the source of income of the payer in respect of which payment was made to the assessee was outside India and hence, the said payment in the hands of the assessee did not accrue or arise in India in terms of section 9(1)(vii)(b) of the Act. 26. The ld. AR submitted that the onsite software services are essentially and invariably performed onshore at the customer's location or nearshore delivery centers, directly by the employees of the assessee. These services inevitably require the physical presence of engineers at the site to customer preferences or security reasons or time zone requirements, or for any other reasons, as the case may be. The services of the onsite of the assessee, inter alia, include the following: - Liaising with the overseas customers for gathering their requirements; - Software module development and coding; - Application operation, application maintenance, application development ....
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....income from a source outside India by HCLT. We have already held supra that onsite services are an independent identifiable source of income. Similar is the case of with offshore services also. Hence we find lot of force in the argument of the ld. AR that HCLT maintains a clear demarcation between these activities as the team size allocated at respective onsite and offsite location is always pre-determined and agreed by the customers. Hence, the entire development process is customer driven and all projects are undertaken under the oversight of the customer's project manager. Further, such division is based on the roles and responsibilities of each team. Under the terms of SoW, both teams work independently on the client's server and the customers are billed according to the time and efforts of each team. 28. Hence it could be safely concluded that the income of the assessee from providing onsite services constitutes a separate source of income and independently identifiable source of income. Accordingly the amount paid by HCLT to the assessee, even if construed as fee payable in respect of the services utilized in a business carried on by HCLT outside India and for the ....
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....non-resident are utilized by the resident in a business carried on outside India and/ or for the purposes of earning income from any source outside India. This view of ours is further fortified by the decision of Hon'ble Bombay High Court in the case of CIT vs IndusInd Bank Ltd reported in 415 ITR 115 (Bom), wherein, in the context of the obligation to deduct tax at source u/s 195 of the Act after the retrospective amendment in section 9 of the Act made vide Finance Act, 2010 in respect of technical services rendered by the non- resident service provider, the Hon'ble High Court observed that the condition precedent for attracting the obligation for deduction of tax at source is that the services should be utilized in India, even though the requirement of rendition of services in India is no longer relevant. In that case, the assessee Bank decided to raise capital abroad through the issuance of Global Depository Receipts ("GDRs"). The assessee paid Amas Bank (UAE), agency charges on which tax was not deducted at source on the ground that the foreign payee had no tax obligation in India. The stand of the assessee was negated by their Assessing Officer and CIT(A). The Tribunal, howeve....
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....ndered in India nor utilized in India and the charterer of income arising out of such transaction was wholly outside India emanating from commercial services rendered by the bank in course of carrying business wholly outside India. The Tribunal was, therefore, correctly of the opinion that such services cannot be included within the expression technical services in terms of Section 9(1)(vii)(b) read with Explanation to Section 9. 7. Learned counsel for the Revenue, however, put stress on two successive amendments. First of inserting the Explanation to Section 9 by Finance Act of 2007 w.r.e.f. 1.6.1976 and subsequently replacing it by by Finance Act of 2010 w.r.e.f. 1.6.1976. By virtue of this explanation, whether or not the non-resident has a residence or place of business connection in India, or had rendered services in India, would be inconsequential when one decides whether in terms of Section 9(1) of the Act, the income was to be charged in India or not. He submitted that Section 9 gives rise to deeming fiction which must be allowed to take its full effect. 8. As is well known, Section 9(1) of the Act specifies the incomes which would be deemed to be accrued o....
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....e of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,- (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India." Like the previous explanation, the present explanation also contains the expression "For the removal of doubts, it is hereby declared that ....". It provides that for the purpose of the said Section, the income of a non-resident would be deemed to accrue or arise in India under clauses (v),(vi) and (vii) of sub-section (1) and would be included in the total income of the non-resident whether or not such non-resident has a residence or place of business or business connection in India, or, the non-resident has rendered services in India. This explanation further seeks to delink the concept of income deemed to have accrued or arisen in India to the non-resident having rendered services in India. In case of CIT v. Gujarat Reclaim & Rubber Products Ltd. [2017] 79 taxmann.com 352/[2016] 383 ITR 236 (Bom.), ....
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....i Sreedhar Chittamuri ; Shri Ajay Tomar, Operations Director, Life Sciences ; Shri Madhumit Singh Dixit, Senior Vice President, Consumer Electronics ; Shri Dalip Sachdeva , Director-Taxation; Shri Anil Singh, Director-Taxation; Shri Ravi Bansal, Operation Director and Shri Kaushik Mazumdar. We deem it fit and address the replies given by the employees in response to specific queries raised by the Survey team as under:- "Statement of Shri Jaishankar Mahadevan, Vice President HCL - Cisco Delivery Q.6 Please explain the nature of work performed by you in HCL? Ans. HCL provides software centric services for Cisco Systems, Inc. USA. I head the engineering delivery organization and am primarily responsible for deliverables and customer satisfaction and employee facing activities. Q.7 What is the Revenue Model of the work performed by your team in HCL of the performance of contract for? Ans. Largely Time and Material contracts and fixed price projects. We are accountable for timely delivery and quality. The projects are SOW based and mostly the work distribution is determined by the customer. Projects invoices are submitted ba....
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....L project managers, the onsite team engineers work directly with customer managers. The entire development environment is customer owned and all desktop computing and servers and labs are customer provided. The code and test scripts are worked on from Cisco servers and persisted directly on Cisco servers. The integration is done through Cisco build machines that integrate the various units or code into a solution. Q.15. Do you mean to say that on the basis of the inputs from the onsite team you make the required technological changes for the customer from India. Ans. In the Cisco case, majority of the team is offshore. Most of the onsite team works directly with the onsite Cisco manager on autonomous units of work. It would be rare for this to happen but not impossible. Statement of Shri Rajneesh Rathi, Global Technology Director Q.10 Please explain with examples how the teams onshore and offshore coordinate with each other in execution of contract? Ans. The teams are structured as required by individual projects delivery requirements and in accordance with customer preference. The teams are global in nature as each site brings their own....
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....l changes for the customer from India. Ans: In case of Nokia each site (e.g. HCL China, HCL US, HCL India) has distinct competency that is not replicated across sites. The troubleshooting is coordinated effort (as Tier 2, Tier 3 and Tier 4 teams are split across sites) to identify where problem may reside. The code level troubleshooting gets done by the team that in charge of the particular software component. The software customization project require code changes that gets done in onside (US, Mexico) as per Nokia requirement. Statement of Shri Pudur Radhakrishnan Sashikumar Q.6 Please explain the nature of work performed by you in HCLT? Ans. I currently manage the delivery of Software services from HCL Technologies for the Deutsche Bank Account. The team delivers Application Operations, Application development and Maintenance, Testing services. The nature of work involves understanding customer requirements, defining service solutions and operating models, post award of work working with talent acquisition teams to build up teams and managing service delivery in line with the contractual commitments. Q.7 What is the Revenue Model for t....
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....y that is located in the clients IT environment. The onsite and offshore teams are assigned tasks that they work on and commit into a common client code database located in the clients IT environment. The final build is triggered by build scripts and deployed into production post testing by the deployments team. The deployments can be done by DB staff or vendor staff basis the service alignment of the service. Q.17 Do you mean to say that on the basis of the inputs from the onsite team you make the required technological changes for the customer from India. Ans. Yes, In the case where Business requirements are prepared by onsite team members, the Business requirement specification is provided to offshore teams for Technology development. Q.21 Please explain in detail the reporting structure of your project with Deutsche Bank? Ans. The Delivery team is structured around Delivery units associated with DB's respective IT Programs/Portfolios. The HCL Deutsche Bank Account comprises of Senior DUHs (Delivery Unit Heads) for Application operations, Applications Development, Testing , appSMART. In application operations we have DUHs (De....
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....d, for example critical /high priority tickets, HCL onsite and offshore teams work on AIG existing applications residing on AIG systems / environments and use AIG provided tooling such as Code Configuration tools for code management. The integration of code is done by a Release Manager. The release manager can be from HCL or AIG or another vendor whoever has the responsibility for the entire program. The deployment is done by AIG Technical Services. Q.15 Do you mean to say that on the basis of the imputs from the onsite team you make the required technological changes for the customer from India? Ans. Largely onsite teams are involved in activities requiring more customer interaction and co-ordination activities such as requirements gathering, etc. There are cases where based on the requirements gathering from customer the offshore teams make technological changes. Also, there are cases where based on the requirements gathering from customer the onsite and offshore teams make technological changes. The onsite and offshore teams also work independently example on tickets, service requests, enhancements, etc. directly assigned to them. Statement of Shri Sal....
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....se provide the details about the interaction that you have with onsite team for timely delivery of services / software. Ans. Since this is a T&M (time and material) engagement, each resource's tasks are tracked on a weekly basis. My service delivery managers do a weekly status review call with the client stakeholders for all active assignments. In case of any escalation, client may reach out to the client partner from HCL at onsite. My interaction with my team is only with the offshore service delivery managers. This is an old account and has lot of legacy knowledge that resides within IGT (customer) and within HCL teams. So, to keep these knowledge reusable, all key learnings and project artefacts are stored in customer's repository so that the same can be used to train any new joinee either in IGT or in HCL Q.11 As you have explained that the work that you are heading is of continuous development/enhancement nature, please elaborate on how the learning at various locations i.e. onsite and offsite is integrated and used in future. Ans. As I have explained earlier, the IP of the applications and all related artefacts belong to the custome....
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....n Russel. Statement of Shri Ajay Tomar - Operations Director, Life Sciences Q.10 You are an employee of HCL Technologies and the contract with Merck is signed by HCL America. Are you involved in all the processes right from bid management to software support? Ans. Yes. HCL America and HCL Technologies India is one team only though they may be different legal entity but our team is common. I frequently travel to US for client meetings and bid management. Q.11 What role is played by onsite team in projects? Ans. Onsite team plays the role of client interaction, attending meetings with users, participating in knowledge transition sessions. The employees of the onsite team are on the payroll of the HCL America. Q.12 Please provide the flowchart of how the work is executed after bid is awarded to HCL or its foreign subsidiary? Ans. Resource Management and Knowledge Transition is already explained in prior question. About Knowledge transition, sessions are attended by both onsite and offshore teams. After the knowledge transition session, HCL team take over the control for the scope of services as mentioned in the SOW. Mostly....
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....formed by the U.S. Entity in performance of the contracts for development of software? Ans. As answered already, the US entity members help in various roles as given below and same is illustrated through examples also. 1. One of role played by project team members of US entity is w.r.t. coordination. They interact with client representative on regular basis for clarifications, feedback and project status. And then as required, the same is conveyed to project teams which are mainly located in India. 2. In certain instances, when, we have a joint team, e.g. in the case of a California based healthcare client. We have a team of roughly 60-65 people. Out of these 30-32 are based in US and rest 30-32 are based in India. One of the software to be delivered to the client is related 5to Business Work flow automation. For this, client and HCL Technologies Ltd. have divided the work in modules and then these modules are divided between different teams - both offshore and onshore. The division of work is based on various factors, viz. data security, competence / skill set, schedule pressure etc. In some cases, client may demand that due to data security constraints ....
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....olve the problem? Ans. If a support team is in place, that will fix a future problem. And even if a part of software/module has been developed by foreign team, it is also visible to Indian development team and support team, same can be rectified in future also. People in India team has knowledge/information about the coding done by the foreign team and so, even if the foreign team is not present at a later date, the problem can be solved by team at India as per customer requirements. ― 33. From the perusal of the aforesaid statements of various employees which were recorded during the course of survey by the TDS officers, which were heavily relied upon by the ld. AO by cherry picking some of the questions and answers alone given by them, we find that prima facie all the statements of employees actually support the contentions of the assessee herein. From the aforesaid statements, it emerges that the offshore project lead or project manager of HCLT manages his offshore team in India, whereas the assessee's project lead manages his team independently, which executes work from the overseas locations directly on the customer's server. Both the project managers/ le....
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....submissions and perused the materials available on record. We find that the assessee before the ld. DRP had made the following submissions while filing objections in Form 35A :- Kind attention is invited to the Kind attention of your Honours is further invited to the business model of HCL group relating to Infrastructure Services as submitted during the course of reassessment proceedings. The same is reproduced as under: "Brief on HCL Infrastructure Services and Delivery Model 1.1. Document Objective This document shares brief about HCL Infrastructure Services portfolio, delivery model, standard split of services between onsite & offshore with brief of rationale and standard organisation structure. 1.2. HCL's Infrastructure Services Portfolio Below is HCL Infrastructure Services Mode 1 'Run the Business' pollution which constitutes majority of its business in this line of business: Data Center Services: HCL has 300+ Data Center customers supported across the globe including 40+ Fortune 500/ Global 1000 organizations. Customers leverage our Data Center services encompassing day-to-day Operations of servers, D....
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....pecific which needs regular interaction with customer stakeholders • Physical Presence Situations like Facilities Management or Onsite/Field Support which needs HCL employees to provide hands & feet support • Having adequate presence of technical tracks at customer locations lo handle situations like Disaster Recovery Service Desk, Remote Desktop and DC Monitoring is normally 100% offshore as it is run 24 X 7 X 365 and those tasks don't need any onsite activities: For providing the offshore support, HCL leverages its state-of-the-art Operations Management Centre (OMC) normally dedicated to individual customer, located at India. There are customers where HCL choses Nearshore locations (within the geographical continent normally) because of the below reasons: • To provide local languages support in Service Desk • To provide capabilities available within the region, but nearshore provides cost arbitrage than keeping around customer location • To provide support using people who were transferred to HCL from customer due to contractual commitments 14. 1.4 Application Packaging HCL delivers Appli....
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....ent Management Services (iii) Providing Management Services (iv) Providing Desktop Management Services (v) Providing Email Support Services (vi) Providing Event Monitoring and Management (vii) Providing Network Management and Connectivity Services (viii) Providing Security Management Services 41. The above position, however, would equally apply to the remaining category of infrastructure services, which too are rendered directly to the customers outside India and hence, do not make available technical knowledge so as to constitute Fee for Technical Services liable to tax in India. The ld. AR submitted before us that the ld. AO has broadly accepted the contentions of the assessee that Infrastructure Services, being primarily in the nature of helpdesk/incidence management/remote infrastructure support services, are not in nature of "Fees for Included Services". However, the ld. AO has observed in the remand report that the amount paid to the assessee for the following type of Infrastructure Services is in the nature of "Fee for Included Services": (i) Providing Application Management Services; (ii) Providing A....
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....ision of L3 support services is quite insignificant. In fact, most of the remote infrastructure support which is normally provided as a part of Infrastructure Services is in the nature of L1/L2 Support only normally without involving any technical knowledge, skill or expertise and is more in the nature of helpdesk/trouble shooting kind of activities only. Further, L3 support is normally provided by those personnel who are generally covered under E3 Salary Band. Basis this Chart, it can be inferred that the onshore presence of E3 band personnel is quite insignificant as compared to the respective offshore team and there is no reason to presume that any kind of service is provided by the onsite team to the offshore team. In fact, both the onsite team and the offshore team do execute their own defined scope of work and deliver the services directly to the end customer located outside India. The rationale behind engaging the onsite team for providing L3 Support lies in the customer's preference to have some onsite personnel for discussions, comfort, and strategic reasons. Such proximity of the onsite team to the customer, it is respectfully submitted, clearly reveals that ....
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....rience, skill, knowhow or process is made available and accordingly the payments received does not qualify as FIS within the ambit of the applicable treaty. It is not in dispute that the assessee does not have any PE in India. At best, the payments received could only be construed as 'Business Profits' in terms of Article 7 of the DTAA and in the absence of PE in India, the same cannot be brought to tax even as per the treaty in the hands of the assessee. Hence the Ground No. 6 raised by the assessee is allowed. 43. The Ground No. 10 raised by the assessee is challenging the chargeability of interest u/s 234B of the Income Tax Act, 1961. 44. We have heard the rival submissions and perused the materials available on record. We have already held that the payments made by HCLT to the assessee would not be chargeable to tax in India in the hands of the assessee as per the domestic law. Hence, there is no obligation on the part of the assessee to pay advance tax and consequentially no interest u/s 234B of the Act could be levied. Even if the revenues received from HCLT by the assessee are to be construed as FTS, then the same would be subjected to deduction of tax at source and ac....
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....the same HCL group for the years under consideration before us, in view of the identical facts, except with variance in figures. 49. Before we conclude, we would like to place on record our appreciation to the learned CIT DR and learned Senior Counsel for the assessee for providing able assistance to the Bench in these matters by bringing on record fairly all the factual materials that are relevant for adjudication of the disputes. 50. In the result, all the appeals of various assessees as mentioned in the cause title at the beginning of this order, are allowed for statistical purposes. Order pronounced in the open court on 20^th December, 2023. ============= Document 1 Service Line Offshore Agreed Service Locations DB Onsite Locations Nearshore 1 Access Mgmt HCL Technologies Limited-Special Economic Zone No. 288, 38, 39, 123(P), 124, 125, 126, 128 & 129(P) Bommasandra Jigani Link Road, Jigani Industrial Area, Antibele Taluk Bangalore 561 106, Kamataka, India 2 Capacity Mgmt HCL Technologies Limited-Special Economic Zone 3 Change Maint 4 Configuration Mant S Deployment Mant 6 Event Mgmt 7 Implementat....
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....l Economic Zone No. 288, 38 , 39, 123(P), 124, 125, 126, 128 & 129 Bommasandra Jigani Link Road Jigani Industrial Area, Attibele Taluk, Bangalore 561 106 Kamataka, India Singapore 609921 HCL America, Inc 11000 Pack, Suite 10 Regency Cary North Carolina 27518 HCL Singapore Pe Lad 31 International Business Park 05- 02 Resource Creative 11 Problem Mant HCL Technologies Limited-Special Economic Zone No. 288, 38, 39, 123, 124, 125, 126, 128 & 129P Bommasandra Jigani Link Road, Jigani Industrial Area, Amibele Taluk, Bangalore 561 106, Kamataka, India 12 Singapore 609921 HCL Poland Sp. zo 1st Floor KBP-1000 Kraków Business Pack Krakowska Street 280, 32-080 Zabierzów, Poland HCL America, Inc. 11000 Park, Suite 10 Cary, Regency Carolina 27518 North HCL Singapore Pe Lad 31 International Business Park #05- 02. Resource Creative Singapore 609921 HCL Poland Sp. 208 DR Opsite Locations Document 3 Service Line Offshore Agreed Service Locations Nearshore DB Onsite Locations 12 Process Assurance 13 Pro....