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TMI Blog2017 (2) TMI 633X X X X Extracts X X X X X X X X Extracts X X X X ..... es involved and its implications thereof, we are taking up the appeal for Assessment Year 2006-07 being ITA No. 237/Mum/2016, which has been passed in pursuance of order of Tribunal setting-aside the matter to the file of Assessing Officer to re-adjudicate the following issues :- "(a) Whether payments made to Standard Chartered Bank (SCB), India to the assessee are payments for "Royalty" or "Fees for Technical Services (FTS)"? (b) Whether the benefits of Sec. 115A of the Act will be available to the assessee in case it is held that the payments from SCB, India are held to be taxable as Royalty or/and FTS?" 3. In the grounds of appeal, assessee has raised the following grounds:- "1.1 On the facts and in the circumstances of the case and in law, the learned Deputy Commissioner of Income-tax (International Taxation) 1(1)(2), Mumbai ('the learned AO') and the Dispute Resolution Panel ('the DRP') erred in holding the sum of Rs. 11,78,20,808 as 'Royalty' and 'Fees for Technical Services' under Section 9(1)(vi) and 9(1)(vii) of the Incometax Act, 1961 ('the Act'). In doing so, the learned AO and the DRP disregarded the Contract for Provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 271 (1)(c) of the Act. The Appellant humbly prays that the Learned AO be directed to not to initiate the penalty proceedings." 4. Before us, the ld. Counsel, Shri Kanchan Kaushal explaining the background and facts of the case submitted that assessee, Atos Information Technology HK Ltd. is a non-resident company, engaged in the business of providing services/facilities for data processing through computer hardware and software from Hong Kong. It had entered into a contract for provision of computing services,for the provision of data process support to 'Standard Chartered Bank India' (SCB India), which is engaged in banking business in India. Under the said contract, assessee processes the data for SCB in Hong Kong. The said services are being provided by assessee to SCB since August, 2005. He pointed out that the contract for computing services was governed by a "Cocteau agreement" dated 12.2.2004 which the assessee had entered with SCB worldwide for the provision of data processing support to SCB in 68 countries during the years under consideration. Considering the involvement of 68 countries, the 'Cocteau agreement' which is typical of any other outsourcing contract contai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware or software in the premises of SCB India's branches to provide the data processing services. * The transaction / data are processed by the assessee's data centre computer equipment located in Hong Kong. No staff of the assessee is required to be in India to provide the data processing services and no staff of the assessee provides data processing services to SCB India in India. However, the staff of the assessee are only required to oversee the data processing services to SCB India so as to ensure uninterrupted services. SCB India owns all the hardware, application software and network in its India branches. * After the raw data is transmitted into the hardware facility of the assessee in Hong Kong, the assessee, processes the raw data as per the requirement of SCB India on application software owned by SCB India, using the hardware infrastructural facility, of the assessee in Hong Kong. * The processed data i.e. the output data is transmitted electronically to SCB India in India using the software provided by SCB India, which has not been designed by the assessee. A copy of the data is backed-up and stored in the Hong Kong data centre for recovery purposes. * The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med on the above said platform utilising the above process. Thus, it could be seen that the assessee has made available to SCB the use of its equipment, model, design, invention and process and has also rendered services in connection with the same, and hence the nature of the transaction clearly fall within the purview of "royalty", as defined in Explanation 2 to Section 9(1)(vi) of the Act. * The fixed charges and variable charges are made for the provision of facilities, infrastructure, network, system, software and environment for the mainframe and midrange servers categorised as mainframe services and midrange services and are in the nature of payment for royalties as u/s. 9(1)(vi) of the Act. FTS: * Further, the Assessing Officer after extensively relying on the 'Cocteau agreement' also held that the assessee has provided technical, managerial and consultancy services to SCB and such services clearly fall within the purview of technical services defined Explanation 2 to Section 9(1)(vii) of the Act. In doing so, the Assessing Officer mainly relied on the Schedule 24 to the 'Cocteau agreement' at pages 1036 to 1065 of the Cocteau agreement and held that the assessee is re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uman involvement. Thus, at the threshold, the findings of Assessing Officer in characterising the impugned payment, both as royalty as well as FTS is not in accordance with the provisions of the Act and hence, on this ground alone the entire addition made by Assessing Officer cannot be upheld. 9. On merits, as regards the payment not being in the nature of royalty in terms of Sec. 9(1)(vi) of the Act, ld. Counsel submitted that the main objection of Assessing Officer is that "assessee has not provided mere data processing services to SCB, but has also provided technology in the form of datacentre, infrastructure, connectivity and application technology for its banking operations.". He pointed out that under the 'Cocteau agreement', the assessee was to provide data centre and related computing services to the banking operations of SCB and only such services were provided.The objectives as set out in para 1.1 of Schedule 1 of the 'Cocteau agreement' are as under: (a) To provide the SCB Group with a global reaching, flexible, scalable and technologically innovative approach to delivering data centre and related computing services; (b) To achieve substantially improving data centre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was only for processing of data. Regarding Assessing Officer's objection that assessee has provided technology in the form of data centre, infrastructure, connectivity and application technology to SCB, the ld. Counsel submitted that under the Cocteau agreement, the assessee provides data processing services to SCB Group which has presence in approximately 68 countries for the years under consideration. With the exorbitant size of the assignment, work that is required to be transacted between SCB and the assessee, it is but natural for SCB to be sure about the capacity (i.e. the infrastructure, human resources, facilities, technology, internal processes etc.) of the assessee in handling the assignment.By way of an example, he submitted that if any MNE wants to get its data work done, then it may negotiate with audit firm and seek information like number of auditors working in the firm, about human resources, about level of understanding, the process that they might adopt to conduct their work, internal process which would be adopted while conducting the assignment or the technology which they will use. The client and their consultant may also mutually discuss the role, responsibili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operational risks, justifying the provision of services against the cost incurred by SCB, employing best practices to render such services. 10. Further, all the infrastructural facilities and software, located in Hong Kong, have been used by the assessee, to provide data computing services to the SCB. The assessee is using its infrastructure and software facilities to provide the data computing and related services to the SCB. The Cocteau agreement nowhere suggests that any of the hardware or software facilities of the assessee, have been lent to SCB Group. The SCB Group do not have any access to the methodology and process used by the assessee in provision of data computing and related services. 11. Thus, it was submitted that it has not provided the SCB Group with the technology in the form of datacentre, infrastructure, connectivity and application technology, rather it has used such technology and infrastructure on its own, to render services to the SCB Group and the Assessing Officer/ DRP erred in considering that the assessee has made available to SCB the use of its equipment, model, design, invention and process. 12. Lastly, with regard to Assessing Officer's objection th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stages, it can be very well seen that the Hon'ble Tribunal has categorically given a finding that (i) there was 'no use' or 'right to use' of any process by SCB and (ii) there was no consideration for use of process. Further, there cannot be any presumption of indirect use by SCB as the Process is ONLY used by Atos Singapore in earlier years and by the assessee during the year under consideration. Hence, in the absence of direct as well as indirect use by SCB, Explanation 5 will have no application. b. Non-applicability of Explanation 6: Explanation 6 is being retrospectively inserted, w.e.f 1st June, 1976 and same reads as under: "Explanation 6: For the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;'." As can be seen, the Explanation has been inserted to extend the meaning of 'Royalty' by providing the explanation of the term 'process' to also include t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o withholding tax on such payments as the taxpayer takes shelter under the definition of the term "royalty" as provided in the Income-tax Act since the same is more beneficial to him. It is therefore, proposed to amend section 9 so as to widen the scope of the term "royalty" as provided in Explanation 2 of clause (vi) of sub-section (1) of section 9 so as to include in its ambit consideration for the use of, or the right to use, industrial, commercial or scientific equipment." Thus, it is clear that the insertion of Clause (iva) was to bring the leasing of industrial, commercial or scientific equipment under the scope of Royalty. Since, in this case there is no leasing of equipment, the question of invoking clause (iva) does not arise. The said view is also adopted by the decision of Yahoo India P, Ltd. Vs DCIT (140 TTJ 195)(Mum) which has observed as under: "5. .......... A perusal of the relevant portion of the Board circular shows that the legislative intention behind insertion of the said clause is to overcome the situation where no tax at source was being deducted from the payment of lease rent of industrial, commercial and scientific equipment by taking shelter under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y processing, model, invention, design or equipment, albeit it is payment for provision of data computing services and hence cannot be reckoned as royalty. 14. Regarding the impugned payment not being in the nature of FTS, he submitted that Assessing Officer has mainly emphasised on Schedule - 24 of the Cocteau agreement, wherein assessee is required to submit reports for various activities and services performed and, therefore, the services provided fall in the nature of managerial and technical services. The relevant clauses and the submissions made by the ld. Counsel to rebut the observations of Assessing Officer are reproduced hereunder:- "(a) Managed Platforms and Managed Infrastructure Scope: This section provides an overview of the Managed Platforms and Managed Infrastructure in Datacentres in respect of which the Appellant shall provide the services. "Managed Platform" means a unit of hardware or firmware (together with any embedded software) providing a specific functionality, which is located within a Datacentre for the time being. "Managed Infrastructure" means, (i) the managed network; (ii) Managed components that provide interconnectivity between managed platforms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , such health check are required to be fully automated. (e) Availability Management: "This section describes the Services to be provided by the Supplier for the purpose of maintaining appropriate levels of Availability for Production Environments. The Supplier shall proactively monitor Managed Systems resources and individual/clustered Managed Systems components, in order to detect bottlenecks and potential Problems, and to automatically (where possible) recover from critical situations and / or notify support personnel." Under this, the assessee is required to monitor all of its hardware and softwares and detect any bottlenecks and repair them automatically. (f) Database Administration: "This section describes the Services to be provided by the Supplier in relation to the management of tall databases forming part of the Managed Systems from time to time. The primary objective of the database administration is to ensure continuous, uninterrupted and efficient database operation." This section describes the Appellant's responsibilities to ensure continuous uninterrupted and efficient database operation. The Appellant is required to prepare and maintain an efficient datab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction describes the assessee's responsibilities to evaluate whether each managed system can deliver the level of performance required by SCB for handling data computing / processing services and then tuning it until it does. (k) Business Impact Analysis: "The Business Impact Analysis process is an internal SCB process managed and implemented by SCB, in order to identify key business functions and recovery time frames, when viewed in the context of monetary, workflow and intangible effects of inoperability of the Managed Systems (or anyone of them)." This section describes the assessee's responsibilities in analyzing the impact in the event of failure of any hardware or software. (l) Disaster Recovery Planning and Testing: This section describes the assessee's responsibilities for planning and testing in advance, the disaster recovery. (m) Problem Analysis and Resolution: This section describes the assessee's responsibilities in technically diagnosing the problem which is affecting the managed systems, identification of such problems and implantation of resolutions. (n) Change implementation: "Change implementation describes the implementation of Change into the Managed En ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es which is of "rendering data computing services." 15. Ld. counsel thus submitted that, Assessing Officer has mainly cherry-picked some of the clauses from the agreement to conclude that provision of services constitutes managerial and technical services without actually understanding and examining the terms of such clauses in the light of entire agreement. He further submitted that the agreement has to be understood in its overall context and also to be understood in the light of objective of the parties entering into such an agreement. The main object of the Cocteau agreement was provision of data computing services by the assessee to SCB. It was only looking to the amount of work and the number of countries involved that the Cocteau agreement was made in such detail so that both parties have defined obligations, roles and responsibilities so that their respective interests are protected. He again referred to the approval letter of RBI, wherein RBI has clearly required SCB India to observe the following terms and conditions:- "(i) All original records, source documents and all books of accounts will be maintained in India. Hard copies of books of accounts and processed output ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. No verification or further analysis is carried out on such data for the purpose of generating reports. The processing and generation of report is done automatically in the mainframe computers of the assessee. The employees of the assessee are only required to oversee as to whether the computer systems are functioning properly and performing well, and there any breakdown or fault in running of such systems. The assessee reiterates that there is no human intervention during the process of generation of reports which is the main objective of Cocteau agreement. This is done automatically. The Human intervention, as stated above, is required only for maintaining, repairing and monitoring the hardware and softwares which are processing the raw data of SCB. It was also pointed by drawing the Hon'ble Tribunal's attention to page no 66 para 2.3.1 of the Agreement that even the faults were to be corrected automatically. During the course of the hearing, the assessee had submitted the photographs of its data centre which clearly showed that the no human finds place in such centres. The human intervention is required only for maintenance of such data centres and managing such da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lvement is definitely there, therefore, it cannot be held that there is no human intervention. In our opinion, this cannot be the criteria for understanding the term "technical services" as contemplated in Explanation 2 to section 9 (1)(vii). If any person delivers any technical skills or services or make available any such services through aid of any machine, equipment or any kind of technology, then such a rendering of services can be inferred as "technical services". In such a situation there is a constant human endeavour and the involvement of the human interface. On the contrary, if any technology or machine developed by human and put to operation automatically, wherein it operates without any much of human interface or intervention, then usage of such technology cannot per se be held as rendering of "technical services" by human skills. It is obvious that in such a situation some human involvement could be there but it is not a constant endeavour of the human in the process. Merely because certificates have been provided by the humans after a test is carried out in a Laboratory automatically by the machines, it cannot be held that services have been provided through the human ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be mere in the nature of a facility offered or available which would not be covered by the aforesaid provision of the Act." In reply to the DR's argument and his reliance on the Apex Court judgement, it was submitted that the same para as relied upon by the Ld. DR supports the case of the assessee. It was submitted that with the help of the same infrastructure the assessee also provides services to others. In this connection, the Hon'ble Tribunal's attention was drawn to the use of client services by the assessee and stated in Point 4.3.14. Further, the fact that the assessee is already engaged in rendering data processing services, is further substantiated by the "introductory paragraph" of Cocteau agreement wherein it has been stated that "the supplier companies have represented that they are specialists in the provision of computing services to the banking industry". In light of the fact that similar services are being rendered to the other entities as well as the decision of the Hon'ble Supreme Court, it can well be said that the data computing services provided to SCB, are not exclusive to it or to cater to special needs of SCB. The assessee has also provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia to assessee has to be seen from the perspective of domestic law, i.e. Income-tax Act and not under any treaty. The assessee-company is mainly engaged in the business of providing services/facilities for data processing through computer hardware and software to banking entities. It had entered into an agreement which has been termed as "Cocteau agreement" with SCB for provision of data processing support, which is for 68 countries with various branches. Under the said 'Cocteau agreement', the role and responsibilities of assessee in respect of providing data processing services has already been discussed in detail in the earlier part of the order including the manner in which the entire processing activity is carried out. The Revenue's case is that first of all, it is in the nature of royalty and for coming to this conclusion, the main contention of Assessing Officer is that, firstly, the assessee is not merely providing data processing services, but also providing technology in the form of data centre, infrastructure, connectivity and application technology for its banking operations; and secondly, it has created and provided facility in the form of dedicated centres for exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onment and also put in place appropriate disaster recovery plan. All these are to be maintained by the assessee to conduct the processing of data through computers. There is no providing or giving any use or right to use of any process to SCB. The technology, infrastructure, data centre, connectivity, etc. is solely used by the assessee for its own purposes and not to make available any such thing to SCB as explained by the ld. Counsel. At the first stage, SCB transmits raw data through operating software owned by it to the hardware facility of assessee in Hong Kong. The assessee in Hong Kong mainly receives the data so transmitted and at this stage there is absolutely no use or right to use of any process of assessee in Hong Kong by SCB. At the second stage, the raw data transmitted by SCB is processed by the assessee in its computer system/hardware as per the requirement of SCB and at times may be using the application software owned by SCB. At this stage also, SCB does not use or have any right to use any process. At the third stage, the processed data is transmitted electronically to SCB in India and at this stage also there is no use or right to use of any process which is giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e applicable in the case of assessee. 20. Further, for any payment to fall within the term of "royalty" it is sine qua non that there should be some kind of a transfer of any right in respect of various items as given in Explanation - 2 or any imparting of any information or use of any patent, invention, model, design, secret formula, process, etc. Here, in this case, there is neither transfer of any of right in respect of any patent, invention, model, design, secret formula or process or trademark or any similar property by the assessee to SCB, nor there is any imparting of any information or use of any of similar nature of things. Here, the entire equipment and technology which are used for processing the data is solely for performing the activity of assessee for itself while rendering data processing services to SCB. There is absolutely no transfer of any technology, information, knowhow or any of the terms used in Explanation 2 or any kind of providing of technology in the form of data centre, infrastructure, connectivity and application technology by the assessee to SCB for SCB's banking operations. Thus, we are of the opinion that the payment made by SCB to assessee-company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under:- "------------------------In our opinion, this cannot be the criteria for understanding the term "technical services" as contemplated in Explanation 2 to section 9 (1)(vii). If any person delivers any technical skills or services or make available any such services through aid of any machine, equipment or any kind of technology, then such a rendering of services can be inferred as "technical services". In such a situation there is a constant human endeavour and the involvement of the human interface. On the contrary, if any technology or machine developed by human and put to operation automatically, wherein it operates without any much of human interface or intervention, then usage of such technology cannot per se be held as rendering of "technical services" by human skills. It is obvious that in such a situation some human involvement could be there but it is not a constant endeavour of the human in the process. Merely because certificates have been provided by the humans after a test is carried out in a Laboratory automatically by the machines, it cannot be held that services have been provided through the human skills. Even in the latest decision of Hon'ble Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly, we hold that the said payment is not taxable in India as 'fees for technical services' in terms of Sec. 9(1)(vii) of the Act. Thus, the issue raised in ground no. 1.1 is decided in favour of the assessee. 22. So far as the issue raised in ground no. 1.2 with regard to rate of tax u/s 115A of the Act, it has been submitted that the Assessing Officer has taken 40% of the gross amount on the ground that SCB India has no role in 'Cocteau agreement'. The ld. Counsel pointed out that the rate applicable should be reckoned from the cut-off date of the agreement, which for the purpose of Sec. 115A of the Act is before 1.6.2005 then it is 20% and if agreement is post 1.6.2005 then it is 10%. Even, though we agree with the ld. Counsel, however this issue will become purely academic because we have already held that the amount of payment received by assessee from SCB is not taxable in India. Likewise, the issue raised in ground no. 1.3 is also being rendered infructuous. 23. Regarding ground no. 2 it has been pointed out that Assessing Officer may be directed to give credit of tax paid amounting to Rs. 2 crores. Accordingly, we direct the Assessing Officer to look into this iss ..... 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