TMI Blog2022 (2) TMI 313X X X X Extracts X X X X X X X X Extracts X X X X ..... ty will not be taxable as equipment royalty or process royalty. The plea of the Assessee in this regard is accepted and the relevant grounds of appeal in all the 7 appeals are allowed, as admitted by both the parties, the facts and circumstances of the case are identical. Taxable income in India - purchase of software - Indo-UK DTAA - HELD THAT:- Case of present Assessee falls within the third category analyzed by Hon'ble Supreme Court. Respectfully following the above view by Hon'ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. [ 2021 (3) TMI 138 - SUPREME COURT] We hold that purchase of software in the present facts does not amount to give rise to any taxable income in India as the provisions of sec.9(1)(vi) along with Explanation- 2 or the relevant provisions of the Indo-UK DTAA are not applicable to present Assessee's. Accordingly, we allow the relevant ground of appeal. - IT(IT)A No.11/Bang/2014 And IT(TP)A No.382/Bang/2015 And IT(TP)A No.2135/Bang/2016 And IT(TP)A No. 1493/Bang/2015 And IT(IT)A No.1365/Bang/2019 And IT(IT)A No.1366/Bang/2019 And IT(IT)A No. 1367/Bang/2019 - - - Dated:- 29-11-2021 - Shri N.V. Vasudevan, Vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oup concerns. 4. Under an Agreement dated 1.1.2008, titled Management Services Agreement , the Assessee agreed to provide certain services to Madura Coasts Pvt.Ltd. (MCPL) a company incorporated under the Companies Act, 1956. The list of services so agreed to be provided by the Assessee to MCPL is set out Schedule-I to the said agreement. The services agreed to provided included (i) management and other services, (ii) Global Information Technology, (iii) Legal, risk and management, (iv) Finance and Tax, (v)Treasury, (vi) Human rsources and (vii) Operational services. Under the head global Information Technology, the Assessee agreed to provide the following services to MCPL. 1. Specifying and guiding roll out of global IT applications 2. Identifying the best practices for implementation, support and operation of IT systems 3. Establishing standards for hardware, software and networking in IT operations and ensuing compliance 4. Establishing standards for SAP operations to ensure best practices across global operations 5. Global vendor selection and management of relationship and contracts 6. Site visits for briefing, reviews and consultations for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Service Provider shall recharge the User the fee charged by BT based o the User network nodes in the global WAN. 6.7 The Service Provider shall provide the following documentation for the fees charged for Application Support, Services and Wide Area Network' Support Services: Details of services rendered and Documents explaining the basis of charge and supporting the cos calculations, 8. The Assessee in order to render Wide Area Network Support Service (WAN services) to MCPL and other group entities across the globe had entered into agreement with BT dated 11.04.2006 called the Master Global Framework Agreement (hereinafter referred to as MGFA) whereby BT agreed to provide services to the Assessee. Schedule 18 to the Agreement gives a list of sites at which BT will provide services. The list includes India and includes sites used by MCPL in India. 9. The MGFA defines services and sites as follows: Services means the services to be provided by BT to Coats at any given time during the Term and as described under Schedule 1 (Services) and any other services agreed by the Parties to be provided by BT to Coats Group under this Agreement; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is Agreement. 4. Service Commencement - Transition As agreed in the Transition Plan, BT will deliver a Global WAN netwcrk as more fully described in Schedule 15 (Transition). 5. Services This Section contains a detailed description of the Services BT will provide to the Sites. 5.1 Network Connectivity BT will provide network connectivity to the Sites based on a BT MPLS (Multi-protocol Label Switching) Class of Service 6 (CoS) model. With the exception of the data centres all site connectivity will be via a single access link and a router with ISDN capability (ISDN to be supplied by Coats) for the purpose of resilient backup. The data centres at Ipiranga (Brazil), Guangzhou (China), Charlotte (USA) and Vienna (Austria) are to be provided with dual access links, in all cases routed diversely (subject to Coats Site infrastructure providing for such diverse routing) and dual MPLS Ports each supporting Class of Service 2. A number of Sites will be connected via a private WAN connection to an existing Coats Site for onward connectivity to the BT MPLS network. These are detailed as follows: Site Connected to MPLS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase of shade cards 6,74,847 Not liable to tax in India for the following reasons: a) Purchase transaction 13) In the nature of business income and in the absence of a PE not taxable 2 Madura Coats Private Limited Royalty for use of technology 37,75,02,201,4 Yes 3 Madura Coats Private Limited Management services fee 7,78,98,476 Yes 4 Madura Coats Private Limited SAP- Charges 7,12,27,118 Yes 5 Madura Coats Private Limited BT-rental Charges 3,85,69,353 No 6 Madura Coats Private Limited Reimbursement expenses 60,311 No 7 Madura Coats Private Limited Others 72,94,828 Yes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration which would be the income of the recipient chargeable under the head Capital gains ) for- (i) the transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to secret process is not attracted while providing telecom bandwidth facility. Reliance was placed on the following judicial precedents in support of Assessee s contention that provision of telecom bandwidth facility would not be characterised as royalty under the Act and the DTAA- A In this regard, the Hon'ble High Court of Delhi in the case of CIT Vs. Expeditors International (India) Private Limited ITA No.1088 of 2011 Judgment dated 16.12.2011 it has been held that amount paid to its parent company on account of ....., communication uplink charges and other reimbursement of expenses incurred by parent company will not be chargeable to tax and no TDS obligation arises for the same. Similar view was upheld by the Delhi Tribunal in a recent case of Convergys Customer Management Group Inc v ADIT - [2013] 58 SOT 69 (Delhi ITAT). DIT (IT) v WNS Global Services (UK) Ltd [2013] 32 taxmann.com 54 (Bombay High Court) WNS North America Inc. v. ADIT [2012] 152 TTJ 145 (Mumbai Trib.) ITO v M/s. Madura Coats (P) Ltd. - ITA No. 1711 1712 / Bang / 2005 (Bang Trib.) Wipro Limited v ITO - 133 Taxman 149 (Bang. Trib.) Bharat Sanchar Niga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnical services' to mean: For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term fees for technical services means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which: (c) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received ; or (d) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received ; or (e) make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design. It was submitted that in terms of paragraph 4(e) of Article 13 of DTAA, payments of any kind in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) would be regarded as fees for technical services' if it 'makes availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ists of the development and transfer of a technical plant or technical design to such person. The MOU explains that the category of services included in para 4(b) of article 12 is narrower because it excludes any service that does not make technology available to the person acquiring the service. The MOU further states that the technology will be considered made available when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc. are made available to the person purchasing the service within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make technology available. Reliance was placed on the following judicial precedents wherein it was held that the fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc. are made available to the person purchasing the service. Airports Authority of India 273 ITR 437 (AAR) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yalty as given in Article 13(3)clause (b) of DTAA which also has a similar clause payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment . According to the AO, the consideration received by the Assessee from MCPL was a consideration received for use or right to use two way dedicated bandwidth and the equipment associated with the network and therefore the payment was in the nature of Royalty. We have already seen that the Assessee has placed reliance on decisions of AAR in the case of Dell International Services (supra), Cable Wireless Networks (I) Pvt.Ltd., (supra) and ISRO Satellite Centre (supra) wherein it was held that providing telecom bandwidth facility by means of dedicated circuits and other network installed and maintained by the service provider does not amount to a lease of equipment. The AO distinguished those decisions by pointing out observations of the AAR in the case of Dell International Services(supra) wherein the AAR observed May be, a fraction of the equipment in visible form may find its place at the applicant s premises for the purpose of establishing connectivity or other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicant except in a very loose sense such as using a road bridge or a telephone connection. The user of BT s equipment as such would not have figured in the minds of parties. As stated earlier, the expression use occurring in the relevant provision does not simply mean taking advantage of something or utilizing a facility provided by another through its own network. What is contemplated by the word use in cl. (iva) is that the customer comes face to face with the equipment, operates it or controls its functioning in some manner, but, if it does nothing to or with the equipment (in this case, it is circuit, according to the Revenue) and does not exercise any possessory rights in relation thereto, it only makes use of the facility created by the service provider who is the owner of entire network and related equipment. There is no scope to invoke cl. (iva) in such a case because the element of service predominates. 19. After quoting the above highlighted portion of the ruling of AAR, the AO proceeded to hold that the services provided by BT requires use of Routers belonging to BT by MCPL and a positive act is required to be done by MCPL in relation to the router installe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight to use equipment' and, therefore, royalty under section 9(1)(vi) of the Act. It was also held that alternatively, the payments can also be considered for the use of process provided by the taxpayer and therefore, royalty under the Act. The Hon ble Court also held that even if the payment is not treated as one for the use of the equipment,, the use of the process was provided whereby through assured bandwidth the customer is guaranteed the transmission of the date and voice. The fact that the bandwidth is shared with others, however, has to be seen in the light of the technology governing the operation of the process and this by itself does not take the Assessee out of the scope of royalty. Thus the consideration being for the use and the right to use of the process, it is royalty with the meaning of clause (iii) of Expln.2 to Sec.9(1)(vii) of the Act. Clause(iii) of Expln.-2 to Sec.9(1)(vi) provides that consideration received for use of any patent, invention, model, design, secret formula or process or trade mark or similar property, would be royalty. According to the AO even though the statutory provisions use the expression secret process, even ordinary/simple process s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of the AO. The AO passed the final order of assessment in which he brought to tax BT charges as royalty. Aggrieved by the aforesaid addition, the Assessee is in appeal before the Tribunal. 24. The arguments advanced by the parties are almost identical to the arguments advanced before the AO. The Ld.AR for the Assessee brought our notice the terms of the Application support and Wide Area Network support services between the Assessee and MCPL and submitted that the Wide Area Network support services provided were merely connectivity services and are not for use of any equipment or process as understood by the revenue and therefore cannot be characterized as Royalty either under the Act or under the DTAA. It was submitted that the Assessing Officer s reliance on the decision of Hon ble Madras High Court in Verizon Singapore Pte. Ltd. vs ITO (supra) and decision of Special Bench of ITAT, Delhi, in New Skies Satellite (supra) was misplaced. It was submitted that the Hon ble Delhi High Court has reversed the decision of Special bench in New Skies Satellite BV which is reported in 68 taxmann.com 8, and the issue stands covered by Asia Satellite Telecommunications Co. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paying for use of equipment . The subscriber is paying for services and the equipment is required for such a purpose. Reference was made to decision of Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt.Ltd. Vs. CIT Civil Appeal Nos. 8733-8734 of 2018 wherein it was held that the enlarged definition of Royalty as per the Act as amended by the Finance Act, 2012 cannot be applied to India-UK DTAA. 25. The learned DR primarily reiterated the stand of the revenue as contained in the order of assessment. His submission was that reimbursements to the extent it is for rendering services has to be regarded as income. In this regard he relied on the decisions which has been cited by the AO in the order of assessment. He placed reliance on the decision of the Hon ble Madras High Court in the case of Verizon Communications Singapore Pvt.Ltd. (supra) for the proposition that payment of use of bandwidth facility would be in the nature of royalty both under the Act and the DTAA between India and Singapore and that decision will equally apply to India-UK DTAA. 26. We have heard the rival submissions perused the material on record. The issue which arises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian taxes, including withholding taxes, as may be applicable. There was no equipment of BTA at the Dell India s premises and Dell India has no rights over any equipment held by BTA for providing the bandwidth. Dell India sought ruling that the payments made to BTA are not liable to be taxed in India either under the treaty provisions or s. 9(1) of the IT Act, 1961. The Hon'ble Authority for Advance Ruling held that the word 'use' in relation to equipment occurring in Expln-2 (iva) to Sec.9(1)(vi) is not to be understood in the broad sense of availing of the benefit of an equipment. The context and collocation of the two expressions 'use' and 'right to use' followed by the word equipment suggests that there must be some positive act of utilization, application or employment of equipment for the desired purpose. If an advantage is taken from sophisticated equipment installed and provided by another, it is difficult to say that the recipient/customer uses the equipment as such. The customer merely makes use of the facility, though he does not himself use the equipment. The Hon'ble Delhi High Court in the case of DIT v. New Skies Satellite BV [2016 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition, the Court also held that such payments may also be held to be in relation to the use of process since the provision of assured bandwidth and guaranteeing the transmission of data and voice would qualify for the same, irrespective of the fact that the bandwidth is shared with others. After the insertion of Explanation 5, possession, control of such right, property or information usage directly by the payer, location of the right are not matters of concern in deciding the character of payment as 'royalty . The customer has a significant economic interest in the Assessee's equipment to the extent of the bandwidth hired by the customer. The bandwidth capacity made available on a dedicated basis for the entire contract period, even if it does not involve a possessory interest, the amount received by the Assessee in a way is also for the use of process. The definition of 'royalty' under DTAA and the Indian Income-tax Act are in para materia. As rightly pointed out by the revenue, Explanation 6 defines 'process' to mean and include transmission by satellite (cable, optic fibre, or by any other similar technology, whether or not such process is secret. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essees, will not have any application. We find that the Hon ble Delhi High Court in New Skies Satellite (supra) has also taken the same view and has observed in the said decision that Hon ble High Court of Madras in Verizon Communications Singapore Pte. Ltd. (supra) declined to conclusively determine or record a finding as to whether amendment to section 9(i)(vi) of the Act by insertion of Expln.5 to Section 9(1)(vi) of the Act, indeed was clarificatory as the Revenue suggested or prospective and the Court was of the view that the issue of taxability of income of Assessee may be resolved without redress of above question purely because the Assessee did not press the said line of argument and had instead stated that ultimate taxability of income shall rest on the interpretation of terms of DTAA. 30. It was submitted by the learned counsel for the Assessee that internationally, it is accepted that when payments are made for such services, they are not in the nature of royalties . It has been internationally accepted that payments for satellite broadcasting services, transponder services, bandwidth services etc. are not to be considered royalties . It is also accepted that band ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y on the subject, if the words used are ambiguous and reasonable open to two interpretations benefit of interpretation is given to the subject. In State of West Bengal vs. Kesoram Industries Limited, (2004)10 SCC 201 has summed up the following principles applicable to the interpretation of a taxing statute: (i) In interpreting a taxing statute, equitable considerations are entirely out of place. A taxing statute cannot be interpreted on any presumption or assumption. A taxing statute has to be interpreted in the light of what is clearly expressed; it cannot imply anything which is not expressed; it cannot import provisions in the statute so as to supply any deficiency; (ii) Before taxing any person, it must be shown that he falls within the ambit of the charging section byclear words used in the section; and (iii) If the words are ambiguous and open to two interpretations, the benefit of interpretation is given to the subject and there is nothing unjust in a taxpayer escaping if the letter of the law fails to catch him on account of Legislature s failure to express itself clearly . 32. We have already seen the two divergent views one taken by the Hon ble Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing the decision of the Hon ble Karnataka High Court in the case of CIT Vs. Samsung Electronics Co. Ltd. 345 ITR 494 (Karn.). It was the plea of the Assessee before DRP that there was no transfer of right in respect of the copyright by the software vendors to the Assessee. There was no commercial exploitation of the copyright of the software vis- -vis third parties. The Assessee had a right to use the software only within its own business, as end-user software. The Assessee acquired a copyrighted article and not a copyright and that software is goods. The contention was rejected by the DRP. Aggrieved by the addition made by the AO in the final order of assessment, the Assessee is in appeal before the Tribunal. 35. We have heard the rival submissions. Admittedly, the issue has been set at rest by the decision of Hon'ble Supreme Court in a recent case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT (supra). Hon'ble Supreme Court while considering the issue of royalty on sale of software have considered the decision of Hon'ble Karnataka High Court in case of CIT vs Samsung Electronics Co Ltd. (supra) and various other decisions. We note that Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sers, which would amount to the use of or right to use any copyright. The provisions contained in the income Ta Act (section 9(1)(vi, along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases. 169. Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/ suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment. 170.The appeals from the impugned judgments of the High Court of Karnataka are allowed, and the aforesaid judgments are set aside. The ruling of the AAR in Citrix Systems (AJAR) (supra) is set ..... X X X X Extracts X X X X X X X X Extracts X X X X
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