TMI Blog2006 (10) TMI 260X X X X Extracts X X X X X X X X Extracts X X X X ..... and in the light of detailed reasons set out earlier in the order, are at variance with the conclusions arrived at in the said ruling. We have carefully perused the esteemed views of the Hon ble Authority for Advance Ruling, and, with respect but without hesitation, we are not persuaded. Hence, in our considered view, the impugned payment cannot be held to be covered by the scope of expression royalty under article 12(3) of the India Australia DTAA. Since the Australian company admittedly does not have any permanent establishment (PE) in India, this payment cannot also be taxed as a business profit of the Australian company in India. It is so in view of the fact that article 7(1) of the applicable tax treaty specifically provides that, The profits of the enterprises of one of the Contracting States shall only be taxable in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein . This leads us to the conclusion that the right of Indian tax jurisdiction does not extend to taxing the impugned payment of A$ 3,25,000 to the Australian company, i.e., FCAL, for specialized data processing of informatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t system updates are provided as released by Ford Credit as well as permitting the company to have access to Ford Motor Company and/or its affiliates overseas based mainframe computer system and its software applications, for the running and operating of the business operations of the company. It will be a requirement that the system solutions being provided, will always be targeted to leverage on Ford Credit s worldwide automotive financing business at, at the leading edge of the technology, and have specific applicability and competitiveness in operating for the company. B.In addition, there will be a monthly invoice charge for the costs associated with running the business operations of the company on the Ford Motor overseas based mainframe computer. Such costs will be based upon actual incurred costs for the link to the overseas based mainframe computer, and for the machine run time to process the company s transaction. 3. As for the break up of the remittance of A $ 3,25,000, between the two segments set out above, the same was as under : System Annual Maintenance and Licensing Charges US $ 60,000 converted to A$ @ 0.64, equals A$ 93,750 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satisfied for a payment to be classified as royalty payment. These tests according to the Assessing Officer, are as follows : (1)It is a payment made in return for a right to exercise a beneficial privilege or right. (2)The payment is made to a person who owns the right. (3)The consideration payable is determined on the basis of amount of usage. 5. All the three tests, according to the Assessing Officer, "squarely cover" the annual maintenance, licensing charges and data processing charges. It was also observed that the payment can also be viewed as payment for the use of scientific equipment i.e., the mainframe computer. The location of the computer is immaterial because the computer could be used from any corner of the world, if it is available on line through any communica-tion system. The Assessing Officer thus concluded that the payments made by the Indian company to the Australian company were covered by the scope of expression royalty appearing in section 9(1), Indian Income-tax Act, 1961, as also in article 12(3)( a ) of the applicable tax treaty. Reliance was also placed on the ruling given by the Authority of Advance Ruling in Petition No. 30 of 1999, repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e manner in which the corresponding tax credit that such a person will get in the domicile country in respect of the taxes so paid in a country other than domicile country. It cannot be viewed as an exemption regime, as learned Departmental Representative suggests. Therefore, the question of whether or not a particular payment is taxable in a Contracting State, in the hands of a person who is, not domiciled in that Contracting State, is irrelevant unless it is, first established that the Contracting State, as a tax jurisdiction, has a right to tax that payment. We reject the contention of the learned Departmental Representative and proceed to adjudicate upon taxability of impugned payments, in India, in the hands of the Australian company in the light of the provisions of the applicable tax treaty. We have to adjudicate on the taxability of the Australian company in India first. After all, a tax withholding liability is a vicarious or substitutionary liability and it presupposes the existence of a primary and basic tax liability of the person from whose income-tax is to be withheld. Therefore, unless such a tax liability exists, there cannot be any question of any tax withholding l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ta processing, as it is independent of data processing charges. There cannot be two payments for one task of data processing, according to the learned Departmental Representative. We are, however, not im-pressed by this plea either. This type of pricing of a service, by segregating the fixed and variable price, is not unusual and is fully justified when a business does not seek to make profit, does not seek to maximize the profits or does not seek profits to vary in proportion to scale of operations. That is a typical situation when one of the group concerns has to service the other group concerns, without profit maximization as a primary driving force. Take for example, a situation in which a data processing unit XY has to serve units A, B, C, D and E. Let us assume that this XY unit has fixed costs of $ 5,00,000, incremental or variable cost of $ 1 per unit of data processing, and XY unit expects to process 50,00,000 units of data each year evenly supplied by all the five units it has to serve. Let us further assume that XY unit seeks to make a profit of $ 5,00,000 per year to meet its capital costs. In these circumstances, broadly the pricing options will be as follows : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this payment can be said to be for the use of specialized software on which data is processed or for the use of mainframe computer because the Indian company does not have any independent right to use the computer or even physical access to the mainframe computer, so as to use the mainframe computer or the specialized software. All that the right is for processing of data, and the use of mainframe computer is permitted only for that purpose. The Indian company can feed the raw data in the mainframe computer in Australia, with the help of the telecommunication link, and the output data, after due processing, is transmitted back to the Indian company. There is no privilege or right, granted to the Indian company by the Australian company. The control of the Indian company is only on the input transmission and the right is to get the output processed data back. The actual processing of data is in the exclusive control of the Australian company, and it is for this work that the Australian company gets paid. In our considered view, therefore, in essence the impugned payment is made to the Australian company in consideration of its processing of data belonging to the Indian company. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcraft in international traffic; ( j )for teaching in or by an educational institution; ( k )for services for the personal use of the individual or individuals making the payments or credits; or ( l ) to an employee of the person making the payments or credits or to any individual or firm of individuals (other than a company) for professional services as defined in article 14. 14. As far as the scope of article 12(3)( a ) is concerned, we find that it covers only a payment for the use of, or the right to use of, any copyright, patent, design or model, plan, secret formula or process, trade mark, or other like property or right. The case of the revenue is that the payment is made for the use of specialized software with the help of which data is processed. We are not persuaded. As we have concluded earlier in this order, on the facts of this case, the payment made by the Indian company, is not for the use of, or right to use of, software, the payment is for data processing. Be that as it may, even if stand of the revenue is to be upheld and it is to be concluded that the payment is made for software per se , that does not lead to taxability of receipt in the hands of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Indian company does not have any control over, or physical access to the mainframe computer in Australia. There cannot, therefore, be any question of payment for use of the mainframe computer. It is indeed true that the use of mainframe computer is integral to the data processing but what is important to bear in mind is the fact that the payment is not for the use of mainframe computer per se , that the Indian company does not have any control over the mainframe computer or physical access to the mainframe computer, and that the payment is for act of specialized data processing by the Australian company. Use of mainframe computer in the course of processing of data is one of the important aspects of the whole activity but that is not the purpose of, and consideration for, the impugned payment being made to Australian company. The payment, as we have observed earlier, is for the activity of specialized data processing. It is neither practicable, nor permissible, to assign monetary value to each of the segment of this economic activity and consider that amount in isolation, for the purpose of deciding character of that amount. Therefore, neither the impugned payment can be said t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tc. in terms of provisions of article 12(3)( g ). It is also not covered by any other clause of the article 12 either. As regards learned Departmental Representative s reliance on the ruling given, by the Hon ble Authority for Advance Ruling in the case of ABC ( supra ), in the light of the detailed reasons set out above, we see no need to deal with the same separately. The Assessing Officer had adopted the reasoning approved by the Hon ble Authority for Advance Ruling and we have dealt with the same in the course of our consideration to the matter. The prescription of section 245S is unambiguous. Section 245S of the Act provides that the Advance Ruling pronounced by the Authority under section 245R will be binding only on the applicant who had sought it, in respect to the transaction in relation to which the ruling had been sought, on the Commissioner, and the income-tax authorities subordinate to him, in respect to the applicant and the said transaction. It is, therefore, obvious that, apart from whatever its persuasive value, it would be of no help to us. We are not inclined to disturb our conclusions merely because the conclusions arrived at above, and in the light of detail ..... X X X X Extracts X X X X X X X X Extracts X X X X
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