TMI Blog2011 (9) TMI 208X X X X Extracts X X X X X X X X Extracts X X X X ..... nfirming the decision of the Assessing Officer that the amount of US $ 19,11,754.37 payable by the appellant as data processing charges to M/s. Sema Group Outsourcing (Singapore) Pte. Ltd. (now known as Schlumberger Sema Pte. Ltd.) ['SPL'], is liable to tax in India and subject to withholding tax at 15% under Article 12(3)(a) of the double Taxation Avoidance Agreement [hereinafter referred to as "Treaty"] between India and Singapore. 2. That on the facts and in the circumstances of the case, the sum of US $ 19,11,754.37 payable by the appellant in favour of SPL, as referred to in ground no. 1 above, neither being in the nature of "Royalties" or "Fees for Technical Services" within the meaning of Article 12 of the Treaty, but being in the nature of "Business Profits" which were not attributable to any "Permanent Establishment" of SPL in India, within the meaning of Article 5 of the Treaty, the same were not taxable in India as per Article 7 of the Treaty and in the said premises, the appellant had no obligation to withhold tax thereon under section 195 of the Income-tax Act,1961. 3. The Appellant is a Non-resident Company engaged in the business of banking in India through branc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso takes into account lower maintenance and running costs compared with those of the current configuration in Singapore at 1st September 1996. ** ** ** 8. Should any of the capacity set out in 1 above not be required in connection with India 'Hubbing' requirements at any time during the five years to November 5th 2001, SCB will have the right to utilize any residual capacity at no extra cost and on the same terms in connection with any other similar requirements it may have for data processing to be performed in the Singapore. .." 4. As can be seen from clause-1 of the agreement SPL has a Data Centre at Singapore and it has to make available for exclusive use by the appellant from November 6th 1996 to 5th December 2001 32 MIPS and 100 Gigabytes to start with. It is not in dispute that the tenure of this agreement was further extended to cover the period in dispute in these appeals. The Agreement does not make any reference to any data processing to be carried out by SPL for the appellant at Singapore. However, clause-8 of the Agreement mentions that the appellant will have the right to utilize any residual capacity at no extra cost on the same t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed having regard to the following 1. Computer hardware and system software for operations of the appellant's computer applications. 2. Computer hardware to support data communications for using the services as stated above. 3. Manpower to handle daily and periodic computer based processing. 4. Suitable environment for housing the computer systems. 5. Disaster recovery capability for the services provided and testing of the same twice a year. 7. The nature of services rendered by SPL to the appellant was explained by the appellant in their letter dated 7.11.2003 in one of the application filed u/s.195(2) of the Act, dated 9/10/2003, for no objection to remit payments to SPL without deduction of tax at source, as follows: 1. The input data i.e., the raw data relating to branch transactions is by appellant via application software owned by it and then transmitted to SPL mainframe computer in Singapore for processing. 2. The application software owned and used by the appellant in this regard is not designed by SPL nor acquired from SPL. 3. After the raw data is transmitted into the hardware facility of SPL in Singapore, SPL staff based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which the Tribunal has considered the issue and held that the amount paid to M/s. Sema Group Outsourcing (Singapore) Pte. Ltd. cannot be considered as royalty and similar decision was also given in the hands of the recipient Atos Origin IT Services Singapore Pte. Ltd. v. Asstt. DIT (International Taxation) [2011] 11 taxmann.com 435/46 SOT 52 (Mum.)(URO) and ITA/1457/Mum./2008 dt 11-05-11. 11. The learned D.R. without conceding the issue fairly admitted that the facts are similar to the earlier order decided in assessee's case and the issue was covered by the said decision of the Tribunal. 12. We have perused the record and considered the matter carefully. The dispute is regarding taxability of the amounts paid by assessee to M/s. Sema Group Outsourcing (Singapore) Pte. Ltd. (now name changed to Atos Origin IT Services Singapore Pte. Ltd.) (supra) for the use of disc space in the hardware of the said company at its data centre in Singapore. The ITAT in assessee's own case on similar payments in ITA No. 3824 to 3828/Mum/2006 ITA NO. 1932 to 1938/Mum/2008 vide order dated 11th May 2011 has considered the issue and held as under: - "29. We have very carefully considered the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk of India (RBI) had granted permission to renew the agreement between the appellant and SPL for data processing at SPL's Data Centre at Singapore vide letter of RBI dated December 19, 2001 subject to conditions stipulated in their letter dated November 6, 1996. The appellant submitted before the AO that the consideration payable to SPL for the data processing services has been computed having regard to the following - 1. Computer hardware and system software for operations of the appellant's computer applications. 2. Computer hardware to support data communications for using the services as stated above. 3. Manpower to handle daily and periodic computer based processing. 4. Suitable environment for housing the computer systems. 5. Disaster recovery capability for the services provided and testing of the same twice a year. 31. The nature of services rendered by SPL to the appellant was explained by the appellant in their letter dated 7.11.2003 in one of the application filed u/s.195(2) of the Act, dated 9/10/2003, for no objection to remit payments to SPL without deduction of tax at source, as follows: (the same was also confirmed by SPL in their co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to use, any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB and Article 12(3)(b) of the Treaty which provides that payment of any kind received as a consideration for the use of, or the right to use any industrial, commercial or scientific equipment. 34. We shall take up for consideration the first reason assigned by the Revenue authorities viz., that the payment in question is a payment for use or right to use process. In this regard, we notice that the AO has made vague observations while concluding that the payment in question is Royalty. The CIT(A) has held that SPL provided a process by providing its computer facility to process the data provided by the appellant. The CIT(A) has further gone on to hold that the fact that SPL was not manufacturer of the hardware or the software of the computer system will not make any difference. According to CIT(A) there is no requirement in clause (iii) of expln.2 to Sec. 9(1)(vi) of the Act that the process should be owned by the person who allows a right to use the process. This line of reasoning of the CIT(A) in our view is fallacious. We have already seen the manner in which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Telecommunication Co. Ltd. 85 ITD 478 (Del)(SB) for the proposition that process need not be secret process and that the definition in Sec.9(1)(vi) Expln.2 and the treaty are one and the same. The aforesaid decision of the Special Bench has since been reversed by the Hon'ble Delhi High Court in the case of Asia Satellite Telecommunications Co. v. CIT 332 ITR 340 (Del) wherein it was held that where transponder is allowed to be used for transmitting signals, it would not amount to allowing right to use process. The decision of the AAR in the case of P.No.30 of 1999 (supra) is materially different from the facts as it prevails in appellant's case. In the case before AAR, an entity (Non-Resident) maintained a centralised computer in the USA. The centralised computer or the central processing unit (CPU) which was accessed and used by various group entities located worldwide through a consolidated data network maintained in Hong Kong. The transactions done by a traveller in a particular country were reported to a centralised computer in that country. In India, this was done by an Indian company, located at Delhi. The said Indian company received information on computer through telephoni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on-resident. The Tribunal held that though the payment had a fixed and a variable component they had to be taken together and not in isolation. The fixed fee did not give any independent rights to the Indian company as it was only paid as the company could not avail the unit cost of processing unless the fixed fee was paid. The Tribunal held that both these payments taken together were only payments for processing of data. The Tribunal further observed that no part of the payment could be said to be for use of specialized software on which data is processed as no right or privilege were granted to the company to independently use the computer. The company had no control over the actual processing of data which was exclusively controlled by FLCA. It was further observed that the company did not have any physical access or control over the mainframe computer therefore it could not be said that the payment was for the use or right to use of mainframe computer. The Tribunal held that the payment was being made for data processing and not for the use of the computer though the use of the computer was an important aspect of the activity of data processing. The Tribunal did not accept the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the applicant could not, therefore, be regarded as payment made for the use of the equipment of Inmarsat Global of the U. K. This decision was followed by the Hon'ble Delhi High Court in the case of Asia Satellite Telecommunications Ltd. (supra). In the case of Dell International Services (India) P. Ltd. In Re (supra) it was held the word "use" in relation to equipment occurring in clause (iva) was 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" indicated that there must be some positive act of utilization, application or employment of equipment for the desired purpose. If an advantage was taken from sophisticated equipment installed and provided by another, it could not be said that the recipient/customer "used" the equipment as such. The customer merely made use of the facility, though he did not himself use the equipment. What was contemplated by the word "use" in clause (iva) of Explanation 2 to section 9(1)(vi) was that the customer came face to face with the equipment, operated it or controlled its functions in some manner. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ished receipts or substantially increased expenditure if there is non-performance under the contract. (e) The provider does not use the property concurrently to provide significant services to entities unrelated to the service recipient. (f) The total payment does not substantially exceed the rental value of the equipments for the contract period. On a close reading of the said 'tests" suggested by the Technical Advisory Committee of OECD, it appears that in order to constitute user of equipment, the customer should actually have domain or control over the equipment, or in other words, the equipment should be at its disposal. The customer should be in a position to use the equipment in its business activities. However, if a customer is given the mere access to some infrastructural facilities of the service provider, in a situation where the service provider has all the control, disposition and possession of such infrastructure and also the service provider operates such infrastructure on its own, then the customer cannot be said to have been assigned a right to use the equipment in the form of the infrastructure. In that case, the transaction partakes of the character o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment is royalty within the meaning of Article 12(3)(b) of the treaty. 42. The learned D.R. has placed reliance on the decision of the AAR in the case of Cargo Community Network Pte. Ltd. In re (supra). The question that was considered by the AAR was as to whether Providing access to internet based air cargo portal outside India which an Indian subscriber paying fees for access and use of portal for booking cargo with airlines, training subscribers and help connected therewith and Fees paid for such use, is income that can be said to arise in India and whether they are in the nature of royalties and fees for technical services. The AAR held that the fee so paid is Royalty and Fees for technical services and therefore Taxable in India. As rightly contended on behalf of the Appellant, the right to access various airlines for booking cargo is a vital distinction. In such cases, there is a positive right to use the equipment. The decision in the case of Frontline Soft Ltd. (supra) is a case where mere right to use an equipment was held to fall within the ambit of clause (iva) of Expln.-2 of Sec.9(1)(vi) of the Act. The tribunal in coming to the above conclusion followed the ruling ..... 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