TaxTMI 
TaxTMI 
2024 (1) TMI 309
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....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 reasons recorded which are not only arbitrary and erroneous but contrary to facts on record as evident from statemen....
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....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 in directly in contravention of the findings recorded by the DRP in paras 3.3.6 and 3.3.7 that "Under the software services category, both the onsite and offsite services are deliv....
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....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. Infrastructure Services 6.1 That on the facts and circumstances of the case and in law, the DRP/assessing officer erred in arbitrarily observing that it was submitted by the Appellant that Infrastructure Services was akin to software services ....
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....CL 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 facts and circumstances of the case and in law, the assessing officer erred in levying surcharge and education cess on the income-tax determined under the provisions of the DTAA on the total income of the non- resident Appellant., 10. That on the facts and circumstances of the case and in law, the assessing officer erred in levying int....
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....ssee 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 Infrastructure Services are provided to the customers located outside India under a Global Delivery Model wherein services are provided partly from India (offshore services) and partly from the office of the assessee or at the client's location (onsite services). The onsite services are also provided through the nearshore development centers. The onsite services, requirin....
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....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) HCL Singapore has agreed to such engagement subject to the terms of this Agreement. Clause 4 - OBLIGATIONS OF HCL SINGAPORE AND HCLT 4.1. In the event that any change to the nature or scope of the services is identified as being desirable by either HCLT or HCL Singapore , a request may be submitted to the other party to effect such change. Any such request shall be sufficiently detailed t....
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....ON 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 indirect tax) levies shall be on account of payer (service recipient). Clause 11 - LIMITATION OF LIABILITY In no event, shall HCLT be liable for any indirect, incidental, consequential or special damages (including lost profits), whether in contract or tort (including negligence and strict liability) and whether or not such damages are foreseen. The liability, if any, arising on account of non payment by any customer shall vest with HCLT. However, the liability shall vest with HCL Singapore if it is ....
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....e. 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 to those items described in Exhibit A to each Product Project Specifics, any and all pre-existing technology of Cisco and its Affiliates, Foreground Property and all Intellectual Property Rights related thereto. Cisco Property may also include third party software or tools if specifically identified by Cisco. Cisco Property shall include any derivatives, improvements or modifications thereto or thereof and any Intellectual Property Rights related thereto. Cisco Property will also include any hardware or equipment provided by Cisco to Designer for the performance of Designer's obligations hereunder. 1.5. Deliverables shall mean any tangible or int....
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....d 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 to complete any of its prerequisite obligations in a timely fashion, may be extended up to one day for each day of Cisco's lateness. Each Deliverable shall be delivered in such format and on such media as may be reasonably requested by Cisco. Designer Property shall not be included, incorporated or embedded in a Product unless the parties have expressly agreed upon and identified the specific Designer Property to be included: incorporated or embedded in a Product and set forth in a Product Project Specifics. If Designer fails to deliver a Deliverable to Cisco within twenty (20) business days of the scheduled delivery date set forth in, or agreed upon as a result of, the Product Project Specifics and such delay is for reasons....
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....arties 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 shall execute such documents, render such assistance, and take such other actions as Cisco may reasonably request, at Cisco's expense, to apply for, register, perfect, confirm, and protect Cisco's rights in the Deliverables, Product and Cisco Property. Without limiting the foregoing, Cisco shall have the exclusive right to commercialize, prepare and sell products based upon, sublicense, prepare derivative works from, or otherwise use or exploit the Product. If Designer has any rights to the Deliverables, Product or Cisco Property (including without limitation, all rights of paternity, integrity, disclosure and withdrawal and any other rights that may be known as or referred to as "moral rights") that cannot be: (a) assigned to Cisco, Designer unconditionally and irrevocably ....
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....irect 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 PROPERTY RIGHTS Designer shall immediately notify Cisco of any and all events that threaten the integrity of any and all of Cisco's Intellectual Property Rights including, but not limited to, any Intellectual Property Rights in any Products or Cisco Property, which come to the attention of the Designer during the term of this Agreement. Cisco shall be responsible for taking any action, in the courts, administrative agencies, or otherwise, to prevent the threat to the integrity of Cisco's Intellectual Property Rights, and the Designer shall provide Cisco with such assistance, at Cisco's cost, as Cisco shall reasonably request in connection with any such action. All costs and expenses incurred in connection with any such action shall be borne by Cisco: provided, however, that the Designer sh....
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...., 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 INDEMNIFICATION BY DESIGNER Designer will indemnify, defend, and hold harmless the Indemnified Parties from and against all third party claims, suits, demands and action brought against the Indemnified Parties or tendered to the Indemnified Parties for defense and/or indemnification (collectively "IP Claims"), and for all damages, losses, costs, and liabilities (including reasonable attorney and professional fees) that result or arise from IP Claims (collectively "IP Losses"), which in whole or in part, directly or indirectly allege that one or more Products, or any part thereof, infringe, misappropriate, or violate any Intellectual Property Rights of any third party, except as provided in Section 10.5 (Exceptions to Designer's Indemnity). 10.3. TERMS OF DEFENSE AND INDEMNIFICATION Cisco will promptly notify Designer, in writing, of any Claim for....
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.... 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 are within the scope of Designer's indemnity in Section 10.1. Designer's obligations under this Section 10.4 are in addition to, and not in lieu of, Designer's obligations under that Section 10.1. Furthermore, nothing in this Section 10.4 shall limit any other remedy of Cisco 10.5. EXCEPTIONS TO DESIGNER'S INDEMNITY; AND OBLIGATIONS UNDER SECTION 10.4 Designer shall have no obligation under Section 10 2 and/or Section 10.4 of this Agreement to the extent any claim of infringement is caused by (1) use or sale of the Product in combination with any other products not provided or combinations that may not be reasonably anticipated in the Product Project Specifics or by Designer if the infringement would not have occurred but for such combination; (ii) any material alteration or modification of the Product not intended, authorized by Designer, or subsequently in....
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.... 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 BE LIABLE TO THE OTHER IN CONNECTION WITH A PRODUCT OR ITS PRODUCT PROJECT SPECIFICS FOR ANY AMOUNTS IN EXCESS OF THE GREATER OF: (A) THE AGGREGATE OF THE FEES PAID BY CISCO TO DESIGNER FOR SUCH PRODUCT OR UNDER ITS PRODUCT PROJECT SPECIFICS DURING THE TWELVE (12) MONTH PERIOD PRIOR TO THE DATE THE CAUSE OF ACTION AROSE, OR (B) TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000 US). THIS SECTION DOES NOT LIMIT EITHER PARTY'S LIABILITY FOR BODILY INJURY OF A PERSON, DEATH, OR PHYSICAL DAMAGE TO PROPERTY OR DAMAGES RESULTING FROM INTENTIONAL MISCONDUCT. EXCEPT IN CONNECTION WITH INDEMNITY OBLIGATIONS UNDER SECTION 10 (INDEMNITY), AND DESIGNER'S OBLIGATIONS UNDER SECTION 2.10 (USAGE OF OPEN SOURCE) AND SECTION 7 (CONFIDENTIALITY), UNDER NO CIRCUMSTANCES WILL EITHER PARTY BE LIABLE TO THE OTHER UNDER ANY CONTRACT, STRICT LIABILITY, NEGLIGENCE OR OTHER LEGAL OR EQUITABLE THEORY, FOR ANY INCIDENTAL OR CONSEQUENTIAL....
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....iability Insurance. 15.2. Commercial General Insurance Designer shall carry Public Liability or General insurance covering all operations by or on behalf of Designer arising out of or connected with this Agreement including coverage for bodily injury. property damage, personal and advertising injury, products liability, completed operations liability and contractual liability with limits of not less than the local currency equivalent of US$ 1,000,000 each occurrence. If "claims made" policies are provided. Designer shall maintain such policies for at least one year after the termination or expiration of this Agreement 15.3. Automobile Liability Insurance. If Designer is required to utilize any motor vehicles in the performance of the Services then Designer shall carry Comprehensive Automobile Liability insurance, including bodily injury and property damage for vehicles with limits not less than those required by law, regulation or statute where services are to be provided hereunder. If injury to third-party passengers of such vehicles is not covered by such Automobile Liability insurance, then Designer shall also maintain separate insurance to cover injury to such passengers.....
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....ement 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 policy(s) with appropriate endorsement(s) shall be provided to Cisco. 7. Yet another agreement examined by the ld. AO was the Outsourcing Master Services Agreement signed on 14.12.2009 with Deutsche Bank AG (acting through its London Branch) with a) HCL Technologies Limited b) HCL Great Britain Limited c) HCL America Inc. d) HCL Comnet Systems & Services Limited e) HCL Singapore Pte Limited f) HCL GmbH Here, the parties mentioned in items (b) to (f) were collectively and individually categorized as "Supplier" for the purposes of this Agreement. 7.1. INTRODUCTION: (A) Under this Agreement, Deutsche Bank (DB) intends to establish a framework within which it may invite Supplier to submit proposals to provide IT, business process and / or other services to support the DB Group's projects from time to time and which governs the relationship between the Parties in respect of those projects. (B) The Parties wish to establish a flexible contractual framework that will ....
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....apital Markets Production Management unit. DB Production Management intends to transition the support of certain Applications provided by certain third party vendors to the Supplier and to one other supplier in order to reduce the overall cost of these services without any degradation or services provided. (D) As such, this Framework Service Description governs the arrangement whereby Supplier will continue to provide the Current Services and will also provide SERvices that are transitioned to Supplier from third party service providers (the "Transitioned Services", together with the Current Services, the "Services"). (E) Those Services are to be provided in relation to a suite of Applications that will be supported under this Framework Service Description by Supplier which are listed in the In-Scope Applications Matrix at Exhibilt L (the "Supported Applications") . The Supported Applications will change from time to time as Applications are added to and / or removed from the scope of this Framework Service Description in accordance with paragraph 9. ........ (8) AGREED SERVICE LOCATIONS (10) INVOICING 10.1. The Supplier will invoice the relevant branch of DB (as i....
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....of information systems for the AEs; that HCLT India is responsible for the overall supervision of the activities performed by offshore personnel to ensure that the services are performed as per the prescribed delivery schedules ; that the AEs are responsible for the overall supervision of the activities performed by onsite personnel apart from being responsible for day to day delivery of those services that cannot be provided remotely; that the onsite personnel typically update the offshore project manager to ensure that there is a seamless delivery to the client. This style of functioning of HCLT India and the AEs (including the assessee herein) are not disputed by the revenue. 12. We find that HCLT India performs the entire billing and collection functions for itself as well as on behalf of the AEs (including assessee) by using its collection team which contacts the end customers of HCLT India as well as end customers of AEs directly for service fees collection. However, the entire billing and collections are made / received in the name of entity which has entered into contract with the end customer. Further Service liability lies with the entity signing the contract . Thus, for....
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....technical plan or technical design. 14. The ld. AR before us met each of the aforesaid observations of the ld. AO by submitting as under:- 1. Remittances have been made by HCLT to the assessee for providing technical services by the assessee for the contracts entered into by HCLT for which invoices were raised on the foreign clients and therefore, the business and profession of HCLT with respect to the remittances for the services rendered by the assessee is carried out in India. Reply: Services were performed by the assessee independently outside India and were also delivered directly to the overseas customers outside India, and no part of services were rendered in India. Such remittances were in connection with services utilized in a business or profession carried on by the customer outside India and services were neither delivered to HCLT nor were utilised in any business in India. Invoices were raised by HCLT for services performed in the course of the business carried on by the assessee outside India and utilized in the business or profession carried on by the foreign customer outside India. 2. The statements recorded during survey proceedings reveal that entire resp....
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....ire responsibility for execution remains with HCLT. Reply: Factually incorrect. Indian company did not recruit employees for the assessee. Each team of HCLT and the assessee develops the particular modules as assigned to them, therefore, the delivery heads of respective teams of the assessee company and HCLT issues directions to their respective teams and the assessee was responsible for performance and execution of services delivered from its end. 6. Services have been made available in India. Reply: Factually incorrect. Services have been rendered entirely outside India and delivered directly to the overseas customer. 7. The remittances were in the nature of fee for technical services / fee for included services, which has been made available to HCLT by the employees of the assessee. Reply: The assessee did not render any services to HCLT but rendered services directly to overseas customers outside India. 8. Make available clause in the DTAA is not required to be satisfied in the case of transfer of technical plan or technical design. Reply: Incorrect and arbitrary belief entertained by the ld. AO which is contrary to the correct legal position in this regard. ....
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....d services are not rendered by one entity to another. While the assessee performs services outside India in connection with contracts entered into by HCLT with foreign customers, no service or deliverable is provided by the assessee to HCLT and work is directly performed onsite at the foreign customer's location or nearshore delivery centers. In other words, the assessee does not provide any services to HCLT and the services are rendered by the assessee directly to the customers located outside India, i.e., no part of the services rendered by the assessee are transferred to India. Thus, as per the business model, the on-site 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. Accordingly, we appreciate the arguments of the ld. AR that the overall responsibility with HCLT is only to facilitate common linkage between HCLT, HCL group entities and customers and that the fact that HCLT is the facilitator or single contact point for the end customer does not lead to the conclusion that services are being provided by the assessee to HCLT; that such arrangement is en....
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....ourt, affirming the decision of the Tribunal, held that having regard to the intent of the parties in coming together and the dominant purpose, the arrangement between the parties was a franchisee agreement and not a lease agreement; accordingly, it could not be said that rent was being paid by NIIT to the franchisees. 16. We find that extensive arguments were advanced by both the parties before us regarding the taxability under the domestic law in respect of the amounts received by the assessee from HCLT. We deem it fit to address the same with regard to specific provisions of the domestic law as under:- a) As per the provisions of section 5 of the Act, the total income of a non-resident will include all income which are: - received or deemed to be received in India; or - accrues or arises or is deemed to accrue or arise in India In the instant case, there is no dispute that the amounts were received outside India by the assessee. Hence the provisions of section 5(2)(a) of the Act are not applicable. Since there is no dispute that the services were rendered outside India to the customers outside India, no part of the income accrues or arises or deemed to accrue or arise in ....
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....by the HCLT to the assessee cannot be construed as FTS in the hands of the assessee. In any event, since onsite services are carried out through a separate business segment and it is an independent identifiable source of earning income outside India, the income earned from such onsite services is from service rendered outside India and hence automatically the source is also outside India. Hence as per the 'Source Rule' itself, the same would be falling under the exception provided in section 9(1)(vii)(b) of the Act. In this regard, we find that the reliance placed by the ld. AR on the decision of Hon'ble Allahabad High Court in the case of Seth Shiv Prasad vs CIT reported in 84 ITR 15 (All) would be relevant wherein the expression 'source of income' was defined and discussed as under:- "Section 6, Indian Income-tax Act, 1922, enumerates the heads of income chargeable to income-tax. One of the heads is "income from other sources". Sub-section (1) of section 12 provides : "(1) The tax shall be payable by an assessee under the head 'income from other sources' in respect of income, profits and gains of every kind which may be included in his total income (if not included u....
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....hat income from dividends has been treated as one kind of income. What is the source of dividend income? It is the shareholding held by the assessee; and there can be as many sources of income as there are shareholdings. Shareholding in different companies constitute different sources of income. The shares of one company may be treated by the assessee as a single shareholding. The assessee may also, for good reason, treat the shares of the same company as constituting a number of separate and distinct shareholdings. The shares may be divided into groups denned by reference to the circumstances in which they were acquired, or to the purpose for which they were purchased, that is, some as an investment holding and others as a share-dealer's stock-in-trade, or to the category or class to which they belong, for example, whether they are preference or equity. There may be other criteria reasonably defining them into separate and distinct shareholdings, and, therefore, as distinct and separate sources of income. (emphasis supplied by us) 18. We find that the ld. AR explained the modus operandi of raising of bills by HCLT and its affiliates by submitting as under:- "Generally in....
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...., basis which the billing is done. The mere fact that HCLT has raised a composite invoice for administrative convenience of its customers for the aforesaid joint efforts of both the teams, should not necessarily do away the independence of the onsite services. As stated earlier, it is an independent identifiable segment capable of earning source of income outside India for services rendered outside India. The payments received by the assessee from HCLT are for services that are rendered to the customers located outside India and that contract for providing such services has been effectively concluded outside India. Further, the onsite services are rendered by the assessee to the foreign customers directly. These services inevitably require the physical presence of Engineers at the site due to customer preferences or security reasons or time zone requirements, as the case may be. The place of rendering 'onsite software services' will always be outside India. In that view of the matter, the onsite software services are entirely performed and delivered outside India for ultimate consumption or utilization by non-resident customers for their business outside India. (emphasis su....
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.... the source of income is in India. Rebuttal: In this regard, it is submitted that the factors considered by the ld. AO for arriving at a conclusion that the source of income is in India are irrelevant and in the teeth of settled judicial position. Further, the aforesaid findings of the ld. AO are based on the statements recorded of the employees of the said company during the course of survey in the case of that company, which, it is submitted, cannot be the basis for determining income chargeable to tax in India in the hands of the assessee. In any event, the statements recorded from employees actually support the contentions of the assessee. (iv) Observation: In the assessment order, following adverse observations have been made by relying exclusively on the agreement with CISCO: "From the above discussion, it emerges that it is HCLT which is responsible to the client for the development and delivery of the final product to the client as per the specifications and requirements provided by the client. The regular periodic monitoring of the progress of the work by HCLT shall be done by the client by way of meetings conferences and presentations etc. The penal damages/ indem....
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....t will bind and inure to the benefit of the parties' respective successors and permitted assigns." 21. In view of the above, we are unable to comprehend ourselves to accept to the argument of the ld. DR before us that since payer of income (i.e HCLT) to the assessee is in India and accordingly the source of income is to be construed as arising from India. In our considered opinion, the place of location of the payer (i.e HCLT) is an irrelevant consideration. Undoubtedly, the contract is concluded with the customer in the country of the customer which is outside India; customer is located outside India; source of income is outside India and services are rendered outside India to Cisco and Deutsche Bank (i.e two agreements examined by the ld. AO). Both HCLT and the assessee work on the server of the customer located outside India and there is no transmission of data or server from the customer location to India. Both HCLT and the assessee jointly render the services to the customer located outside India and they do not render any services to each other. 22. In our considered opinion, the broad perusal of the agreements entered into between the parties clearly postulate a situa....
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....d on outside India, in as much as such onsite services are performed outside India and is also delivered directly to the customers outside India. HCLT as a corollary would be considered as having availed the services of the assessee outside India in respect of and for the purpose of business of providing such onsite services to the customer outside India. Therefore, the amount paid by HCLT to the assessee is for the services utilized for business of onsite services carried on by HCLT outside India. Thus, such receipts in the hands of the assessee would not be taxable in India in view of first limb of the exception carved out in clause (b) of section 9(1)(vii) of the Act and cannot be deemed to accrue or arise in India. 25. Even if it has to be assumed that the payment made by HCLT for onsite services rendered by the assessee is to be construed as FTS, in any event, we find that Section 9(1)(vii)(b) of the Act carves out a second exception to the taxability of FTS paid by a resident, wherein the fee for technical services payable in respect of services utilized for the purpose of making or earning any income from any source outside India is not an income within the ambit of section....
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....the payments are not taxable as FTS. 22. In any case of the matter, the departmental authorities have disallowed a part of the expenditure for the only reason that assessee failed to furnish the TRC of the payees. The departmental authorities have not at all examined the taxability of payments under the applicable DTAAs. 23. Be that as it may, on overall analysis of facts and applicable statutory provisions as well as keeping in view the ratio laid down in the decisions cited before us, we hold that the payments made to foreign attorneys are not chargeable to tax under the provisions of the Act, in terms of section 195 of the Act. Therefore, the assessee was not required to withhold tax on the payments made. Accordingly, we delete the disallowance made under section 40(a)(i) of the Act." 25.1. We find that similar view was also taken by the Hon'ble Gujarat High Court in the case of PCIT vs Motif India Infotech (P) Ltd reported in 409 ITR 178 (Guj). In that case, that assessee was engaged in the business of software development and was providing software related services to its overseas clients. It hired services of a Philippines company for rendering human resource and infr....
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....n or access. The mere fact that the assessee is engaged in understanding the requirements of the customers and passes on the requirement plan to respective development teams for designing and coding the software module does not, per se, constitute an inter- dependent function of the HCL group. Rather, it has to be understood in a holistic manner that these are well-coordinated activities, meant to support the entire group in delivering quality products and services to the ultimate customers. All the software development work is generally divided between onsite and offsite team based on discussion with customers. The respective onsite and offsite engineers work directly with the customer's engineers and managers. The entire development environment is customer owned. On the basis of the discussions with the customer's project manager, the software work is broken into different modules and each team of HCL group of companies is allocated the development of their own module based on which entire software product is developed. It is reiterated that no team is dependent on any other team's technical capabilities or work. At best, the teams are dependent upon each other for bu....
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....the same by Finance Act, 2010 w.r.e.f. 01.06.1976, the rendition of services outside India by the assessee on the server of foreign client is irrelevant and, therefore, services provided by the assessee to HCLT is taxable in India under section 9 of the Act. In other words, the ld. DR argued that the place of rendition of services is not relevant for the purpose of exclusion clause under section 9(1)(vii) of the Act. In this regard, we find that the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd vs DIT reported in 288 ITR 408 (SC) had held that fees for technical service would be liable to tax in India only when the services are rendered in India and utilized by the recipient in India. This decision was admittedly rendered prior to the amendment brought in section 9(1)(vii) of the Act by the Finance Act 2007 and Finance Act 2010. In this regard, it would be relevant to reproduce the Explanation inserted in section 9(2) with retrospective effect from 01.06.1976 as under:- Explanation- For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under claus....
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....o tax in India. On appeal by the Revenue, the Hon'ble High Court dismissing the appeal observed as under: "6. As is well known, under sub-section (1) of Section 195 of the Act, any person responsible for paying to a non-resident any other sum chargeable under the provisions of the Act (not being income chargeable under the head "salaries"), would at the time of credit of such income to the account of the payee or at the time of payment in cash or by issuance of cheque or draft or by any other mode, whichever is earlier deduct income tax thereon at the rates in force. It is, thus, indisputable that the requirement of deducting tax while making such payment would arise only if payee has the liability to pay tax on such payment. In case of GE India Technology Centre (P.) Ltd. v. CIT [2010] 7 taxmann.com 18/193 Taxman 234/327 ITR 456 (SC), this aspect was elaborately discussed by the Supreme Court. It was held that the expression "chargeable under the provisions of the Act" in Section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. It was observed that if the tax is not so assesseable, there is no question....
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....dent, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India." 9. An explanation was inserted at the end of Section 9 by Finance Act of 2007, w.r.e.f. 1.6.1976 which reads as under:- "Explanation - For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India." As per this explanation, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1), such income would be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India. This explanation starts with expression "For the removal of doubts, it is hereby declared......". Through this explanation, thus, the legislature desired to delink the question of ....
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....of Finance Act of 2007. We are conscious that subsequent explanation which replaced the previous one by the Finance Act of 2010 has somewhat widened the scope of applicability of Section 9. However, the question of non-resident having rendered services in India is quite different from such services having been consumed by the assessee in India. 10. In the result, we do not find any error in the view of the Tribunal. The appeals are dismissed." 31. Hence the contentions raised by the ld. DR are not accepted herein. In view of the aforesaid observations and respectfully following the various judicial precedents relied upon hereinabove, we hold that the payment made by the HCLT to the assessee cannot be construed as income that accrues or arises in India or deemed to accrue or arise in India and hence cannot be brought to tax as FTS u/s 9(1)(vii)(b) of the Act as it falls under the exceptions thereon. 32. In our considered opinion, the ld. AO was carried away by the statements recorded from the employees during the course of survey conducted on HCLT by the TDS officer. However, we find that the ld. AO had merely cherrypicked part of the statements recorded without considering th....
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....ated to sustaining Cisco solutions and testing them. The teams work independently with the customer. All the desktop computing, n/w systems, tab equipment is provided by the customers. The offshore team work within dedicated offshore Development Center ODCs and on the customer internet. Onsite teams work from within customer premises. The teams work directly with Cisco where the projects are jointly executed. In certain cases where a unit of work like a module is fully sustained by offshore team that team is directed by a Cisco Project Manager (CPM) or a Cisco Director. There might be an offshore HCL project lead or manager managing this offshore team. Q.11 Had HCLT ever developed any solutions for Cisco from scratch? Ans. Yes, once probably early 2000, but mostly we are sustaining existing Cisco developed solutions and products. Q.12 I am showing you an email dated 28 Jan 2019 showing a Ratly snapshot on project status. Please explain the contents of the same. Ans. This is a snapshot showing details of work for a scrum (Agile team) which has a combination of HCL onsite and offshore engineer (one each) and Cisco engineers. The solution being worked on is a software s....
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....ucts are used. Q.16 Are onsite people also responsible for writing the code, if yes, how is it shared with the offshore team and integrated into a final deliverable? Ans. Yes, Onsite teams also write code as per the work distribution and competency required to deliver the work. The releases are normally delivered as coordinated effort when work is contributed across sites as per competency. Release Delivery The HCL team delivers large releases to Nokia based on cost and time tradeoff decision taken by Nokia after due diligence process. The target feature content in release is selected by Nokia and HCL proposed multiple opinions considering effort speak across sites, time required to deliver the features and tradeoff of not doing some work in case Nokia has budget constraints. The slides in e-mail dated 20th Nov 2017 lists options to achieve target feature contents required Nokia and suggests various budget scenarios with detailed scheduled embedded including low level milestones. The budget is distributed across India, China and US for this case. Nokia management selected option chat suited to them as per cost and release date. The CDMA SU4 release was targeted for Oct ....
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....is is subject to customer assignments and delivery needs based on customer's needs and the project schedule. These teams are delivery services of Application operations Application Development and maintenance. Testing. Q.10 Please explain with examples how the teams onshore and offshore coordinate with each other in execution of contract? Ans. Application operations - Onsite resources are assigned or pick up a ticket and 3work on resolution of the ticket. Application Maintenance & Development - Onsite resources are assigned JIRA tickets which are part of a release plan and they work on it. - Where Business analysis and functional definition is done by onsite teams, the onsite BA's prepare functional specifications and place them in the document repository. The development is based on the features outlined in the functional document. - Where onsite and offshore teams are working on a collection of features, they build code and check it into a common repository. - The overall build and deployment is handled by the build and deployment team. These teams are either internal to the bank or IT vendors. For some applications HCL provides deployment services. ....
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....ll engagement. Statement of Shri Sanjay Kumar Kapoor, Global Operation Director Q.10 Please explain with examples how the teams onshore and offshore coordinate with each other in execution of contract? Ans. We follow multiple models of operations and co-ordination between onsite and offshore teams: Example 1 - Application Maintenance and Support Project - Largely, here the Onsite team has responsibility to manage the availability during the US Business Hours and Offshore team has the responsibility to manage the availability during non US Business hours. Both teams typically work on incidents/ tickets assigned to them. In addition, the onsite team also performs activities requiring close interaction with the customer such as co-ordination of Priority I incidents. Example 2 - Application Enhancement - Largely, here the onsite teams are responsible for activities requiring close interaction with the customer such as requirements finalization, deployment co-ordination, etc. Q.14 Are onsite people also responsible for writing the code, if yes how is it shared with the offshore team and integrated into a final deliverable? Ans: Largely onsite teams are involved in a....
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....ble at onsite at customer locations, all work that require usage of that equipments is delivered from onsite. 3. Most of the other work that can be delivered from offshore would require some faceoff time with the customer or their customers, so these role (typically Business Analysis for requirement, Architectural teams) may be required to be operating out of onsite. Customers own the IP and so all code and other relevant deliverables. are stored at customer locations and on their infrastructure. HCL team accesses these either from onsite or from offshore through remote connectivity. No code is stored in any HCL machines and all changes, enhancements etc. are carried out directly on customer's servers. Q.9 Please provide the details of how work is divided between onshore and offshore entities and how work/software is delivered? Ans. This is primarily a Time & Material engagement, where based on the work effort estimates, available resources and capability at each location the team is formed. Each individual's tasks are assigned and reported in the client's time sheet system. At the end of the month, the client managers approve these time sheets and that forms t....
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....ffshore team will incorporate. I am submitting mail communication between (Annex 2 Page 1-8 & 2-8). Balasubramani Kumarasankar (HCL India based) and Andrew Claremont (HCL UK) where the test plan covering testing strategy, execution plan etc.'s internal review was done from onsite for the work that was created at offshore. (Annex 2 page 3-8 to 5-8), Dinesh Kumar (HCL India based) and Andrew Claremont (HCL UK) - where the portal update project's test plan covering testing strategy, execution plan etc. internal review was done from onsite for the work (in this case the test plan for this project) that was created at offshore. In this mail thread you will also find that the same has been marked to the customers as well - Jason Schurer and Emson Russell. (Annex 2 page 6-8 to 8-8) Dinesh Kumar (HCL India based) and Andrew Claremont (HCL UK)- where the portal update project's testy plan covering testing strategy, execution plan etc. internal review was done from onsite for the work (in this case the test plan for this project) that was created at offshore. In this mail thread you will also find that the same has been marked to the customers as well - Jason Schurer and....
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.... Ans. All aspects of a particular application is documented like business requirements, architecture, design, test strategy, test plan, user acceptance plan. Both India and US team have access to these documents. Even if any particular module is developed by US team, the knowledge is captured in documents and both teams have access to the source code of the application. In case of any problem or defect in the application, we take the responsibility of fixing it within the warranty period. Within HCL, it is just one team irrespective of the location. Q.14 What type of penalties may be levied on HCL India, if there is any deficiency with the delivery and / or quality of software developed by you and foreign entity? Ans. Provision for penalty is agreed with Merck and part of the SOW. That is the case mostly with the Managed Services (fixed price) contract. Our most of the contracts are Time and Material which don't have any such provision. This applies to HCL. It doesn't distinguish between HCL India and other entities. Statement of Shri Ravi Bansal, Operation Director Q.8 What is the role performed by the U.S. Entity in performance of the contracts for development of so....
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.... of client. After automatic integration of different modules, a build is created. Build can be understood as desired application software. Build process will throw errors if it fails to complete successfully. It will show that which part of software is erroneous and same module/part of software needs to be corrected. Preferably, if the foreign team made that erroneous part of software, they will do the needful and if the Indian team made that erroneous part of software, Indian team will do the needful. But if the need arises due to time constraints or unavailability of members at any location, then team at India can also rectify the mistakes in the software part which is hindering the integration and vice versa. Because, team at India has access to the source code/algorithm/logic of the module developed by foreign team. And accordingly, the software can be rectified in customer environment and delivered to the customer." Q.12 If after the delivery of the software, a problem arises in future. And if that module was developed by foreign entity, how would you resolve the problem? Ans. If a support team is in place, that will fix a future problem. And even if a part of software/m....
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....s of the assessee in India as per the domestic law. Accordingly, the Ground Nos. 3,4,7 & 8 raised by the assessee are disposed off in the aforementioned terms. 35. Since the payments made by HCLT to the assessee is held not be taxable in India as per the domestic law, the other elaborate arguments by the ld. AR and grounds raised by the assessee on the applicability of Double Taxation Avoidance Agreements (DTAA) benefits ; 'make available clause' in DTAA and 'Most Favoured Nation' (MFN) clause in Protocol etc need not be gone into, as adjudication of the same is merely academic in nature in these appeals. Hence no opinion is rendered by us on the same and they are left open. Accordingly, the Ground Nos. 5 & 9 raised by the assessee are allowed. 36. The Ground No.1 raised by the assessee is general in nature and does not require any specific adjudication. 37. The Ground No. 6 raised by the assessee is with regard to taxability of payments received by the assessee for certain categories of 'Infrastructure Services'. 38. We have heard the rival submissions and perused the materials available on record. We find that the assessee before the ld. DRP had made the following submissions....
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....ltiple automation tools at all levels, be it Fault & Performance monitoring, Reporting & Dash-boarding etc 1.3. HCL's Standard Operations Solution HCL's Solution is generally architects in such a manner that it delivers an infrastructure that is always available and operationally agile to help customers derive the benefits of this IT outsourcing initiative. In line with customer requirements, HCL normally proposes Hybrid Model of Operations i.e. mix of Onsite & Offshore resources. All services are intended to be run from Offshore, however for below reasons HCL keeps some people at onsite for majority of services: * Generally, customer prefers having L3s closer to them for discussions, comfort and strategic reasons * Handling Critical & High Priority Incidents * Technology changes/improvements/upgrade project support & handover Customers who likes to have more interactions face to face or some activities in specific 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 ....
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....a, therefore, the income arising to the assessee on account of the aforesaid payments is not taxable in India. Accordingly, it was submitted that the amount received by the assessee is neither taxable in India in terms of the domestic law nor under the relevant provisions of the DTAA and that there is no income which accrues or arises, or is deemed to accrue or arise, or is received or deemed to be received by the assessee in India. 40. The ld. AO accepted the contentions of the assessee that the following infrastructure services were provided directly to the customers outside India and hence, payment in respect of the same made by HCLT could not be said to be towards making available technical knowledge, so as to constitute fee for technical services, and hence were not liable to tax in India:- (i) Providing the Service Desk (ii) Providing Incident 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, howeve....
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....mitted that such services do not involve any coding, designing or development of Software. These services only involve managing Application Operations in an industrialized way. Under these services, Infrastructure Services Team merely takes away the burden from the Developers of the Applications to manage day-to-day operations of the Applications involved. For example, if there is an upgrade/ update of Microsoft Windows, instead of each user I doing it in his own computer, Infrastructure Services Team does it remotely for all the users forming part of the Customer's environment. Further, as regards L3 support provided by Infrastructure Services Team, it is submitted that the onsite presence of the personnel who are engaged in the provision 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....
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....partner. In such cases, the Data Centre or Server is generally owned by the hosting service provider partner and the same is always located outside India only." 42. We find that the assessee had not rendered any services to HCLT under the Infrastructure Services, which is evident from the submissions of the assessee and discussions made by us hereinabove on the earlier grounds raised by the assessee. We have already held that both the assessee as well as HCLT work independently and render services directly to the end customers and that no service is provided by assessee to HCLT. In any case, from the aforesaid facts explaining the activities carried out by the assessee, it is clear that no technical knowledge, experience, 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 Grou....