TMI Blog2011 (5) TMI 580X X X X Extracts X X X X X X X X Extracts X X X X ..... data. This part of the consideration cannot be said to be a consideration paid for use or right to use process as the processing of the data is done by SPL using the system software owned by the appellant. Therefore it cannot be said that the payment by the appellant to SPL is Royalty within the meaning of Article 12(3)(a) of the treaty. As appellants have no right to access the computer hardware except for transmitting raw data for further processing. The appellants took advantage of a facility of use of sophisticated equipment installed and provided by another, it could not be said that the recipient/customer "used" the equipment as such. The appellant merely made use of the facility, though they did not them-self use the equipment. Therefore it cannot be said that the payment is royalty within the meaning of Article 12(3)(b) of the treaty - thus the receipts by the Assessee is in the nature of business income and assessee does not have PE in India, the same is not taxable in India in accordance with Article 7 of the DTAA - Decided in favor of assessee - ITA NO.3824, ITA NO.3825, ITA NO.3826, ITA NO.3827, ITA NO.3828/Mum/2006, & ITA NO.1932, ITA NO.1933, ITA NO.1934, ITA N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sident Company engaged in the business of banking in India through branches established in the different states of India. The appellant entered into a Hubbing agreement dated 26th Sept.1996(hereinafter referred to as the Agreement) , with M/s. Sema Group Outsourcing (Singapore) Pte Ltd.(now known as Atos Origin IT Services Singapore Pte Ltd.) (earlier also known as Schlumberger Sema Pte Ltd.) (hereinafter referred to as 'SPL'), a company incorporated in Singapore. According to the Assessee, the agreement is for the provision of data processing support to the appellant for its business in India and that the data processing is done outside India. The main terms of the agreement in so far as it relates to a decision in the present appeals is as follows: (SPL is referred to as "Sema" and the appellant is referred to as "SCB") "1. Sema will make available SCB the following capacity in the Singapore Data Centre for SCB's exclusive use:- From November 6th 1996 to 5th December 2001 inclusive 32 MIPS and 100 Gigabytes. From March 6th 1997 to 5th December, 2001 inclusive an additional 20 MIPS and 100 Gigabytes making a total of 52 MIPS and 200 Gigabytes in this period. Sema ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capacity at no extra cost on the same terms in connection with any other similar requirement it may have for data processing to be performed in Singapore. Further, the permission granted by Reserve Bank of India to the appellant vide letter dated 6/11/1996, shows that SPL was carrying out data processing for the appellant at Singapore. As per the agreement appellant was required to pay SPL fixed monthly installments with effect from January 1, 1998 over a period of 60 months. The Reserve Bank 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. 5. As per the agreement the appellant had to make payment to SPL for services rendered. The appellants filed applications u/s.195(2) of the Income Tax Act, 1961 (hereinafter referred to as "Act") before the AO for issue of the No Objection Certificate for making payments to SPL without deduction of tax at source at the time of making payment. According to the appellant, the nature of the fees paid by it to SPL does not fall within t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f SPL in Singapore, SPL staff based in Singapore process the raw data on an application software owned by appellant using the mainframe computer of SPL. 4. The raw data is processed by SPL staff as per the requirements of appellant using the application software owned by the appellant. 5. The processed data, i.e., the output data is transmitted electronically to the appellant in India using the software provided by the appellant, which is not designed by SPL. 8. SPL further confirmed by their letter dated 4/4/2005 filed before the AO (in the form of confirmation by Atos Origin), the nature of services performed by it for the appellant. The same refers to the following as the nature of services performed by SPL pursuant to the Agreement. a) The appellant would send raw input bank transaction data through telecommunication lines to SPL at Singapore for processing. b) The processing is done by SPL at Singapore as per appellant's requirement using system hardware and software (through human intervention), whenever required. c) The operating software of SPL's mainframe computer was developed by the manufacturer of the computer and third party vendors and is not d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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; (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, distribution or exhibition of cinematographic films; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (v); (iva) the use or right to use, any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; Explanation: For the removal of doubts, it is hereby declared that income of the nature referred to in this clause payable for service rendered in India shall be regarded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Singapore. This was to handle and process the specified volume of data and transactions of the appellant. b) The input data i.e. the raw data relating to branch transactions is fed by the appellant via application software owned by it and then transmitted to SPL mainframe computer in Singapore for processing. The application software owned and used by the appellant in this regard has not been designed by SPL nor acquired from SPL. c) After the raw data is transmitted into the hardware facility of SPL in Singapore SPL staff, based in Singapore apply their mind and brain to process the raw data on application software owned by the appellant using the mainframe computer of SPL. The processing work performed by SPL staff in Singapore on the main frame computer owned by SPL using their own intellect does not involve the transfer of any technical model or design to the appellant in India. The raw data is processed by the SPL staff as per the requirements of the appellant using the application software owned by the appellant. The processed data i.e. the output data is transmitted electronically to the appellant in India using the software provided by the appellant which inciden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by SPL nor acquired by the appellant from SPL. It was submitted that though the data is processed on the main frame computer owned by SPL in Singapore, but the system software i.e. the operating software necessary for the operation of the main frame computer was owned by the manufacturer of the main frame computer. Such operating software of the main frame computer is secret software belonging to the manufacturer of the hardware. SPL has the right to use the said operating software to the extent it is required to operate the main frame computer. SPL has neither acquired the operating software from the author nor has the rights of distribution and reproduction with regard to the said operating software. Consequently SPL cannot and has not granted to the appellant the use of or the right to use the said operating software of the main frame computer for a consideration. 15. It was further submitted that the Agreement does not make available to the appellant the use of or the right to use any secret process. It will be appreciated that the appellant is merely transmitting the raw data and getting back the processed data which is the end product. The appellant does not itself use or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or process or trade mark or similar property. The appellant has not obtained any software of its own and therefore there is no question of any copy right or right to use any copy right. However, the SPL has provided a process by providing its computer facility to process the data provided by the appellant. The AR has argued that the software and hardware of the computer system of the SPL is not been designed or manufactured by SPL. It is not necessary that SPL should itself design, assemble and set up the computer system. It can do so by obtain various components from the market including copyrighted software or using software and hardware available from the market. It can also design or can get the software and hardware designed for use of its computer system for the efficient processing of data. In clause (iii) of explanation (2) there is no requirement that the process should be a copy right process of which the provider should be the owner. It is sufficient if the provider of a process provides such a process for which payment is made to him. 17. The CIT(A) thereafter relied on the decision of the Hon'ble Delhi ITAT in the case of Asia Satellite Telecommunication Co. Ltd. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cilities because these facilities can be utilized only by the SCB India as per the terms of agreements. 2.19 It is also seen that SCB India is also having significant economic interest in these facilities because as per para 9.1 of the agreement, any reduction in SPL's overall net profitability during the period of agreement will be funded on a 50/50 basis by SPL and SCB India. Also as per the para 8 of the agreement, the capacity/scientific equipment is at the disposal of SCB India. 2.20. All these facts satisfy most of the "tests" suggested by the Technical Advisory Committee of OECD, and referred to by the appellant itself in its written submissions quoted above, mainly 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. In the present case the disc space is very well part of the equipment which is at the disposal of the appellant. 2.21. On these facts, the arrangement appears to one of renting out disc space in the hardware system of assessee company in favour of the SCB India. The payments made by SCB India to the assessee company can be term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... secret formula or process. SPL owned the mainframe computer which processed the data sent by the appellant from India. The operating system for operating the mainframe was owned by the manufacturer of the mainframe and SPL by virtue of purchase of the mainframe had only a licence to use the operating system to operate the mainframe computer. Since SPL did not have a Permanent Establishment (PE) in India, the receipt in the hands of SPL cannot be taxed as income in India. 20. He brought to our notice that the AO in coming to the conclusion that the payment by the appellant to SPL is "Royalty" within the meaning of Article 12(3) of the DTAA between India and Singapore has primary relied on the decision of the AAR in the case of P.No.30 of 1999(supra). It was his submission that the facts in the said decision were different from the facts as it prevails in the case of the appellant. It was submitted by him that in the aforesaid case, the applicant before the AAR, Y, a company formed and incorporated in the U.S.A. and belonging to a group of companies which operate in the worldwide credit card and travel business. It was engaged in providing international credit cards, travellers' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software that the royalty is paid. In this context, the source rule becomes relevant which requires that the royalty is sourced in the State of payer. The royalty is, therefore, taxable in India. (ii) That according to the agreement between the applicant and the Indian company, the facilities are to be accessed only by XT. The consideration payable is for the specific programme through which XT is able to cater to the needs of the group companies located in Japan, Asia Pacific, Australia and New Zealand. The transaction would relate to a "scientific work" and would partake of the character of intellectual property. The payments received in such transactions are for the use of intellectual property and partake of the character of royalty. The software is customised and secret. From the facilities provided by the applicant to the Indian company, which are in the nature of online, analytical data processing, it would be clear that the payment is received as "consideration for use of, or the right to use... design or model, plan, secret formula or process..." within the meaning of the term "royalties" in article 12(3)(a). The use by XT of the central processing unit and the consol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sat used its own assets and infrastructure comprising the satellite and control centre, which are located outside India. The assets and the processes embedded in them are controlled, operated and maintained by Asia Sat. Asia Sat did not exercise any control over the signals uplinked/downlinked by its customers. Asia Sat claimed it was not subject to tax in India. The Revenue held that the fee received by Asia Sat from persons using transponder was Royalty under section 9(1)(vi) of the Act and was taxable as royalties under the Act. On appeal, the ITAT upheld the claim of the Revenue in this regard. On further appeal by the Assessee, the Hon'ble Delhi High Court held that the meaning of the term 'process' being a series of actions or steps taken in order to achieve a particular end, in the present case it is evident that the particular end ie viewership was achieved only through a series of steps taken by receiving the uplinked signals, amplifying them and relaying them after changing the frequency in the footprint area including India. The applicability of the provisions of section 9(1)(vi) of the Act, would depend on nature of services provided by Asia Sat to its customers as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecurring charges could not be brought within the sweep of clause (iva) of Explanation 2 to section 9(1)(vi) of the Income-tax Act, 1961, or article 12(3) of the Agreement for Avoidance of Double Taxation and Fiscal Evasion between India and the U. S. A. 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. That the entire network consisting of under-sea cables, domestic access lines and the BT equipment, whichever was kept in the connecting point was providing a service to facilitate transmission of voice and data across the globe. One of the many circuits forming part of the network was devoted a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e earth's atmosphere. The capacity was utilized through data commands sent from a ground station set up by the applicant to that transponder out of many which was for navigation purposes which dispatched signals in space on two specified frequencies. The corrected or augmented data sent from the satellite and transmitted by the transponder were used for better navigational accuracies. The applicant paid a fixed annual charge regardless of the actual use of transponder capacity. On these facts the applicant sought the ruling of the Authority on the questions (i) whether the payment to Inmarsat Global of the U. K. for leasing of transponder was not royalty within the meaning of article 13 of the Agreement for Avoidance of Double Taxation between India and the U. K. ; and (ii) whether the applicant had to deduct tax at source under section 195 of the Income-tax Act, 1961, in respect of the lease amount. The Authority ruled that the applicant could not operate the transponder in space. It would only be transmitting/uplinking the augmented data to the navigation transponder. In the course of carrying out its objectives and operations the applicant would not be using any equipment of Inm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd out the nature of payment rather than the case laws. In this regard, she took us through the agreement and submitted that the agreement merely provides for the right to use the mainframe of SLP at Singapore to the Assessee. In this regard, she submitted that there is nothing in the agreement to show that there was processing of data by SLP. In this regard it was also submitted by her that a mere confirmation from Atos Origin would not be sufficient to prove the case of the appellant that SLP rendered service of data processing to the appellant. She relied on the decision of the AAR in the case of P.No.30 of 1999 (Supra) which the AO has also referred to in his order. Further reliance was placed on the decision of the ITAT Hyderabad Bench in the case of Frontline Soft Ltd. vs. DCIT 12 DTR (Hyd)(Trib.) 131 wherein it was held that payment made by an Assessee to a Non-resident US company for availing connectivity facility to enable the Assessee to generate and to cater to outbound PSTN calls within USA through co-located equipment comprising of multimodal switches (MUX) belong to the US Company and located in USA with a certain bandwidth alongwith maintenance services is use of MUX ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) in their orders. It was also submitted by him that the appellant filed confirmation from SPL regarding the nature of services rendered by SPL and the AO and the CIT(A) did not express any adverse opinion about the confirmation of SPL. In this regard it was submitted by him that the revenue authorities proceeded under the assumption that the nature of services rendered by SPL was data processing. The learned counsel for the appellant also distinguished the cases cited on behalf of the revenue. 29. We have very carefully considered the rival submissions. At the outset we have to reject the argument of the learned D.R. regarding the absence of evidence to show that SPL carried out the work of data processing for the appellant at Singapore. In this regard, we have already noticed that the Agreement is not clear in as much as there is no reference to any data processing to be carried out by SPL at Singapore. We have also referred to the fact that the RBI permissions refer to the payment by the appellant to SPL as towards data processing to be carried out by SPL at Singapore. Before the AO the Appellant has explained the nature of the transaction between the appellant and SPL. SP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aily 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 confirmation filed before the AO) 1. The input data i.e., the raw data relating to branch transactions is fed 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 in Singapore process the raw data on an application software owned by appellant using the mainframe computer of SPL. 4. The raw data is processed by SPL staff as per the requirements of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roviding 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 appellants use the mainframe computer owned by SPL. The appellant transmits raw data through operating software owned by it to the hardware facility of SPL in Singapore. SPL merely receives the data so transmitted. Thus at this stage there is no use or right to use any process of SPL by the appellant. The next stage is that the raw data transmitted is processed by SPL staff as per the requirements of appellant using the application software owned by the appellant. At this stage the appellant does not use or have any right to use any process. Consideration paid for carrying out processing is not a payment for use or right to use a process. The third stag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 telephonic and microwave links about the use of credit cards and travellers' cheques by travellers all over the country. The Indian company also serviced thirteen group companies in Asia and the Pacific, in a similar manner. The Nonresident charged the Indian company, for the use of its computer set up in Hong Kong and that in the USA. As can be seen from the facts of the aforesaid case, the Indian company had a right to access the data by having access to the computer maintained at USA. In the present case before the Tribunal, the appellant did not have any right to access the mainframe of the computer at Singapore. The Appellant can only send data to the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Ruling of the Authority for Advance Rulings (AAR) in the case of P.No.30 of 1999 In re (supra) where it was held that such payments are in the nature of royalty and therefore subject to tax. The Tribunal held that it was not in agreement with the views of the AAR . The Tribunal also observed that the decisions of the AAR could at best only have a persuasive value and the ruling was only binding on the applicant and therefore they were not obliged to follow it. For the reasons given above, we hold that the payment by the appellant to SPL is not "Royalty" within the meaning of Article 12(3)(a) of the treaty. 37. We shall now examine the second r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. But if it did nothing to or with the equipment and did not exercise any possessory rights in relation thereto, it only made use of the facility created by the service provider who was the owner of the entire network and related equipment. There was no scope to invoke clause (iva) in such a case because the element of service predominated. The predominant features and underlying object of the agreement unerringly emphasized the concept of service. That even where an earmarked circuit was provided for offering the facility, unless there was material to establish that the circuit/equipment could be accessed and put to use by the customer by means ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 of provision of services or facilities by the owner of the infrastructure in favour of the customers, as against giving the infrastructure to the customer itself for being used in the manner desired by the customer. Incidentally, the Technical Advisory Committee of OECD has expressly clarified that data warehousing services would not give rise to user of equipment, since the customer does not have possession or control over the equipment and shall utilize the equipment concurrently with other customers. 41. The facts of the present case are that SPL has a Data Centre at Singapore and as per the agreement between the appellants and SPL it has to m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnical 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 of the ITAT Delhi Special Bench in the case of Asia Satellite Telecommunications Co. Ltd. vs. DCIT 78 TTJ (Del) 489, which has been overruled by the Hon'ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. (Supra). We are of the view that the proposition laid down in this decision is contrary to the decision of the Hon'ble Delhi High Court in the case of Asia Satellitte (supra). The decision in the case of Millennium Infocom Technologies Ltd. vs. ACIT(Supra) was a case where the question was whether payment for hosting websites on servers in USA i.e., whereby space is provided on the servers by the non-resident for the purpose of hosting website was royalty. The Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture and the same has been withdrawn by the entity issuing the same. In light of such withdrawal, the total income mentioned in the erroneous TDS certificate should not be charged to tax at all." 45. The assessment has been made by the AO on the basis that the payment received by SPL from the appellants, viz., Standard Chartered Bank was "Royalty" and therefore taxable in India. The payments received by the Assessee were brought to tax accordingly. The order of the AO was confirmed by the CIT(A) giving raise to the present appeal by the Assessee before the Tribunal. 46. It is not in dispute before us that the facts and circumstances giving raise to this appeal is identical to the case of Standard Chartered Bank. The reasons given while deciding the appeals of standard Chartered Bank would equally apply to this appeal. For the reasons stated therein, we hold that the receipts by the Assessee from Standard Chartered Bank are in the nature of business income and since the Assessee does not have PE in India, the same is not taxable in India in accordance with Article 7 of the DTAA. The appeal by the Assessee is accordingly allowed. 47. In the result, all the appeals are all ..... X X X X Extracts X X X X X X X X Extracts X X X X
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