TMI Blog2018 (6) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... icated technology which operates on an automatic and continuous basis. That does not mean that the Applicant, which operates on such facilities, is rendering any technical services as contemplated in the definition of the term FTS. - thus Solutions provided by the Applicant without human intervention cannot be treated as provision of technical services. In view of the above, the payments received by the Applicant from Akamai India for content delivery solutions are held to be outside the scope of ‘fees for technical services’ within the meaning Explanation 2 to clause (vii) of section 9(1) of the Act. Taxability under the India-USA DTAA - Held that:- Solutions provided by the Applicant to the customers only enable faster content delivery of the customer’s website, etc. to the end users - thus consideration received by the Applicant from Akamai India cannot be considered to be in the nature of fees for technical services as referred to in Article 12 of the India-US DTAA. Whether the payments made are royalty in nature? - Held that:- Since the equipment is used by the Applicant itself or to provide Solutions to Akamai India which are re-sold to the India customers, and Akama ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er maintained by the customer. 2.2 In order to sell its Solutions in India, the Applicant has entered into an Akamai Services Reseller Agreement, dated 07.01.2010 (w.e.f 01.04.2009) with Akamai Technologies Solutions India Private Limited (Akamai India or Reseller), a company incorporated in India. Under this Reseller Agreement, the Applicant has appointed Akamai India as a non - exclusive reseller who is authorized to resell the Applicant's Solutions directly to customers in India. The key terms of the Reseller Agreement are as follows: i. Akamai India would resell the Applicant's Solutions by directly entering into contracts with customers in India. ii. Akamai India would invoice the Indian customers for the Solutions. iii. Akamai India is required to dedicate adequate resources, financial and otherwise and maintain facilities and staff to re-sell the Solutions. iv. Akamai India would not have any rights, title and interest in any intellectual property and software of the Applicant, including Akamai EdgePlatform and v. Akamai India is required to pay a fee to the Applicant for the Solutions purchased from the Applicant. 3. On the above fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offered remain the same for all customers who avail the Applicant s facility irrespective of their business/website content. Hence these Solutions cannot be termed as technical services for the purposes of Explanation 2 to section 9(1)(vii) of the Act. It also relied on the Hon ble Madras High Court s decision in Skycell Communications Ltd v. DCIT (251 ITR 53) (Mad.), as also on Atos Information Technology HK Ltd. [2017] (79 taxmann.com 26) (Mum.), Wipro Limited v. ITO (80 TTJ 191), Software Technology Parks of India v. ITO (2005 2 SOT 529), DCIT v. Estel Communications (P) Ltd. (ITA no. 3375/De1/2007), Pacific Internet India (P) Limited v. ITO (318 ITR 179), ACIT vs. Merchant Shipping Services (P) Ltd (ITA No 192/ Mum/2010), Jaipur Vidyut Vitran Nigam Ltd. v. DCIT (123 TTJ 888) and Millennium Infocom Technologies Ltd. vs. ACIT (309 ITR 18). 4.2 Secondly, the Applicant submits that a human element is a pre-requisite for characterizing a service as a technical service. In this case the Applicant itself is using its own software and hardware to provide the Solutions to the customers/end users. The customers/end users are not provided with any access to the Applicant s infrastru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e technology contained therein. The Applicant submitted that the arrangement with Akamai India does not make available any technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein. It was reiterated that the Solutions are provided by the Applicant using the Akamai EdgePlatform which is a standard facility. In the provision of this facility, the Applicant s platform of distributed network and intelligent software, incorporated with complex algorithms, work on an automatic and continuous basis without making available any sort of technical knowledge, experience, skill, know-how processes to the customer/end users, which can enable them to apply the technology contained therein. For interpreting the term make available used in Article 12(4)(b), the Applicant placed reliance on the MOU between India and the US concerning FIS in Article 12 of the India US Treaty. It further relied on the Hon ble Karnataka High Court s decision in De Beers India Minerals Pvt. Ltd. (TS-312-HC-2012 (Kar)] wherein it was held that to fit into the terminology making available , the technical knowledge, skill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical expertise and a setup to perform the services which are made available to Indian customers either through Indian company or sometimes even directly; hence the Applicant s submission cannot be accepted that it was not in the receipt of fee for technical services, as services rendered by it to the reseller are very much technical in nature which is described in detail in the agreement and the 3CEB report also. 7. In response to the above objections taken by the Revenue, the Applicant submits in its rejoinder that merely because Applicant s Solutions result in acceleration of content and better performance of websites does not make the nature of services technical in nature. The Revenue s reliance on 3CEB report of kamai Technologies India Private Limited is misplaced as that entity is a sister concern of the Reseller, Akamai Technologies Solutions (India) Private Limited. Hence, the Revenue has mistaken the sister concern to be the Reseller and proceeded to draw conclusions that the Applicant provides technical services . The Applicant further states that paragraph 5.2 of the Reseller Agreement relied upon by the Revenue refers to providing Customer Support to customers p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... former is special and exclusive to the seeker of the service, the latter, even if termed as a service, is available to all and would therefore stand out in distinction to the former. The service provided by the stock exchange for which transaction charges are paid fails to satisfy the aforesaid test of specialized, exclusive and individual requirement of the user or consumer who may approach the service provider for such assistance/service. It is only service of the above kind that, according to us, should come within the ambit of the expression technical services appearing in Explanation 2 of Section 9(1)(vii) of the Act. In the absence of the above distinguishing feature, service, though rendered, would be merely in the nature of a facility offered or available which would not be covered by the aforesaid provision of the Act. 9. In other words, there is no exclusivity to the services rendered by the stock exchange and each and every member has to necessarily avail of such services in the normal course of trading in securities in the stock exchange. Such services, therefore, would undoubtedly be appropriate to be termed as facilities provided by the stock exchange on paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 The principle upheld in other cases relied upon by the Applicant also lead us to conclude that since the Applicant is providing its Solutions through the Akamai EdgePlatform to all customers alike, for accelerating the delivery of their content, irrespective of the nature of business/website content, they cannot be termed as specialised, exclusive and individual requirement of the customer so as to qualify as technical services . 8.4 On the issue of human intervention in providing technical services, we agree with the principle held in Bharti Cellular Limited (supra), as also upheld by the Apex Court, that a human element is a pre-requisite for characterizing a service as a technical service and consequently treating payments for the same as fees for technical services. The Solutions provided by the Applicant without human intervention cannot be treated as provision of technical services. The human involvement in the Applicant s case is only in relation to the development of the Akamai EdgePlatform and for marketing and after sale services. The Revenue s contention that there is human intervention while providing customer support and training is irrelevant to the question u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mers through the Indian company and/or directly by the Applicant without elaborating as to how the provision of Solutions by the Applicant falls under the meaning of make available . 9.3 As we understand from the decisions on this issue, the term Make available connotes that it should result in transmitting the technical knowledge such that the recipient could derive an enduring benefit and utilize the same in future on his own without the aid and assistance of the provider. In other words, the technical knowledge, skill, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver and he is enabled to apply the technology. The fact that the provision of the service may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). 9.3.1 In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tself has exploited the right to use, operate or control its technology / intangibles, without granting the right to use the same to Akamai India / the Indian customers. The customers / end users are not provided with any access to the Applicant s infrastructure (neither software nor hardware) nor is such access even required for availing the standard facility provided by the Applicant. Thus, at no point of time, the customers/end user (who avails of the standard facility offered by the Applicant) has any access to any software of hardware of the Applicant. It is only the Applicant who has access to the network built by it which operates to pull the content from the customer s server and accelerate it to deliver to the end users in a speedy, efficient and reliable manner. Thus, the payments received by the Applicant are not for the use of or right to use any equipment of the Applicant and thus cannot constitute royalty . 10.3 For understanding the term use or right to use , the Applicant has placed reliance on the decision of the Mumbai ITAT in the case of Vodafone Essar Limited vs. DIT (135 TTJ 385). Further reliance was placed on the AAR ruling in Dell International Servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vi) of the Act. 11.3 Thirdly, the Revenue contends that the transactions amount to grant of distribution rights, involving transfer of rights in process, and hence the payment received is in the nature of Royalty. The Revenue has cited the following decisions in support: CIT vs Synopsis International Pvt. Ltd.(2013) 212 taxman 454; CGI Information Systems Management Consultants (P) Ltd.(2014) 226 taxman 319); CIT Another Vs Samsung Electronics Co. Ltd., Others(2011) 245 CTR (Kar) 481; Citrix Systems Asia Pacific Pvt. Ltd.(2012) 248 CTR 141, Gracemac Corporation Vs Assistant Director Of Income Tax (International Taxation) (2010) 08 ITR 522) ; Cargo Community Network Pvt. Ltd.(2007) 208 CTR 814); In Re Skillsoft Ireland Ltd.(2015) AAR No. 985/2010, Vodafone South Ltd. vs DDIT (International Taxation(2015) 53 taxmann.com 441, Verizon Communications Singapore Pvt. Ltd. Vs. ITO (International Taxation) (2013) 263 CTR 497 (Madras);and ABB FZ-LLC Vs DCIT (International Taxation)(2017) 83 taxmann.com 86. 11.4 In particular, the Revenue has referred to the decisions in the case of Samsung Electronics (Supra) in which the meaning of copyright was discussed in detail with reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreement entered into by the Applicant should be interpreted holistically in the light of the facts and circumstances and the intent with which the agreement was entered in to by the Applicant and the Reseller. 13. We have considered the submissions of the Applicant, the objections raised by the Revenue, and the details and agreements submitted with the application. 13.1 We may first look at the relevant provisions regarding taxability of royalty income under the Act and the DTAA. The definitions of royalty under Explanation 2 to section 9(1)(vi) of the Act and Article 12(3) of the India-US Treaty are as follows: Explanation 2 to section 9(1)(vi) For the purposes of this clause, royalty means consideration (including any lump sum consideration but excluding any consideration 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 trademark or similar property; ii. the imparting of any information concerning the working of, or the use of, a patent, invention, model ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommercial or scientific experience; or - Industrial, commercial or scientific equipment. 13.3 The Applicant has entered into a non-exclusive Reseller Services Agreement with the Reseller to provide a global, secure and outsourced infrastructure facility using the Akamai network and technology, to the customers. The Reseller Services Agreement does not contemplate providing any kind of a software product to any of its customers or to the Reseller. The business model of the Applicant is very different from that of a normal software reseller or a distributor. The Applicant is in the business of content acceleration which is usually a function of efficient use of hardware (platform) and software. The Applicant has entered into an arrangement with the Reseller in order to sell Akamai Solutions to customers in India. 13.4 The Revenue has made out a case that the Applicant s case is similar to that of a software distributor. A regular software distributor distributes software to end users who would use it in their internal business which is actively used by the customer. However, in the case of the Applicant, the Reseller Agreement does not entail providing any software (either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the network and within such network, at all times. The software is neither downloaded by the customers nor copied or otherwise customized and the customers cannot and need not use the software on a stand-alone basis for receiving the Applicant s services. (e) That the Applicant does not distribute, license or otherwise sell any software (shrink wrapped or customized) in India and that we use our proprietary software in India only for our own CDN business. (f) That the Applicant does not provide any kind of hardware to its customers in India. (g) That the Applicant is not in the business of building websites not hosting them for its customers nor does it provide internet connectivity to its customers though leased lines . 13.7 Considering the above factual position, we hold that since the equipment is used by the Applicant itself or to provide Solutions to Akamai India which are re-sold to the India customers, and Akamai India / Indian customers are not granted any right to use any equipment, the transaction is not covered under the definition of royalty. Akamai India/ Indian customers are neither aware of the tangible property which is used for providing the ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, the entire provisions of the Copyright Act do not apply to the Applicant s transaction since by the said transaction the Applicant does not act or provide rights to act in any work which involves any computer or any copy of the computer software. The fact that it is for similar reasons as described above that the Copyright Act itself provides an exception to the general rule of Copyright in a computer programme copy, namely that Section 14(b)(ii) would not apply in the cases of a computer programme where the programme itself is not the essential object of the rental. This also merits consideration in favour of the Applicant. The essence of the Reseller Agreement entered into between the Applicant and the Reseller in India is not for a computer programme. It is rather for a facility that is provided by the Applicant to the customers, using the Applicant s own private network. 13.9 We are unable to agree with the Revenue s contention that grant of distribution rights by the Applicant involves grant to use Trademark, which appears based on the view that certain other IPR such as branding are licensed to the Reseller in India. A plain reading of Explanation 2 to Section 9(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Verizon Communications Singapore Pvt. Ltd., Vs ITO (supra) is also misplaced, as these decisions have been rendered in the context of interconnectivity charges paid by a customer to telecom operators wherein the customer himself uses the telecom operator s facility/hardware/software. Thus, the facts are different from the Applicant s case where Applicant itself uses its network of servers and software to provide a standard facility as mentioned above and the customer/end user does not have any access at any point of time to the Applicant s hardware or software. 13.13 The Revenue had also placed reliance on ABB FZ-LLC Vs DCIT (supra). This ruling was rendered in the context of use/sharing of specialized knowledge, skill, expertise, etc. by the assessee through its employee with its associated enterprise. The Applicant s facts are clearly distinguishable from the facts of this Ruling in the absence of any use/sharing of knowledge, information, etc. by the Applicant with the Reseller or the end user. 13.14 We are therefore of the view that the amount received by the applicant towards the Solutions would not be in the nature of Royalty . 14. With regard to question no. 4, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or assume any obligation of or on account of the other party. Akamai India concludes contracts on its own name; doesnot maintain any stock of goods of the Applicant; purchases the Akamai Solutions from the Applicant for onward sale to Indian customers; secures orders and enters into contract with customers in India on its own account and not on behalf of the Applicant. Their relationship is on a principal-to-principal basis. Hence none of the conditions enumerated in Article 5(4) are satisfied. 14.5 In view of the above, the Applicant contends that there is no creation of a Permanent establishment for the Applicant in India under the provisions of Article 5 of India-US Treaty. 14.6 We have considered the submissions of the Applicant. In their written submissions and during the course of the hearing in this case, Revenue has argued that the Applicant s income was taxable as FTS/FIS or Royalty in India. No submissions or arguments have been made to the effect that the Applicant has a PE in India. In any case, once we have ruled above that income does not accrue or arise in the hands of the Applicant as Royalty or FTS/FIS, under the Act or under the India US DTAA, the question ..... X X X X Extracts X X X X X X X X Extracts X X X X
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