TMI Blog2021 (12) TMI 585X X X X Extracts X X X X X X X X Extracts X X X X ..... ma Heavy Industries Ltd. [ 2007 (1) TMI 91 - SUPREME COURT] which was applicable at the relevant time, could not be controverted by the ld. DR. We find, the Hon ble Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. (supra) has held that for a nonresident to be taxed in India, two events need to be fulfilled i.e., not only should the services be utilized in India, but, the same should also be rendered in India. We find, the above proposition was amended retrospectively by the Finance Act, 2010 with retrospective effect from 1st June, 1976. Therefore, we find merit in the argument of the ld. Counsel that it was under a bona fide belief that the payments were not taxable in India. We find, the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. [ 2021 (3) TMI 138 - SUPREME COURT] has thoroughly discussed the issue regarding royalty under the Income-tax Act and has held that a person mentioned in section 195 of the Income-tax Act cannot be expected to do the impossible, namely to apply the expanded definition of royalty inserted by Explanation 4 to section 9(1)(vi) of the Income-tax Act for the assessment years in questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to engage another party to perform management consulting services in India for certain clients of Bain USA. (ii) Bain India will provide services to Bain USA in relation to clients of Bain USA but may also develop clients of its own. (iii) Bain India will assist Bain USA in the performance of consulting services by providing independent consulting services. (iv) Bain USA will assist Bain India in the performance of consulting services by providing independent consulting services. (v) Bain USA is assisting Bain India in its daily operations by rendering professional support and administrative services not otherwise available to Bain India which are necessary to enable Bain India to function as an entity rendering consulting services of the highest quality. (vi) It has been and continues to be the intent of Bain India and Bain USA that the fees and charges referred to in the Service Agreement reflect an arm's length compensation for any particular service provided by one of the parties from which the other derives a benefit. Both the parties to the agreement acknowledge that the term arm's length compensation' is intended to mean an amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or personnel of Bain USA and their related expenditure. He examined the remittances made by Bain India to Bain USA and noted that these are in lieu of or in relation to various services rendered by Bain USA to Bain India under the Agreement under consideration. He, therefore, asked the assessee to show cause as to why the remittances made to non- resident Bain USA in respect of services rendered by it be not taxed as FTS/ royalty. 5. The assessee submitted that the standard support services expenses amounting to ₹ 5,47,89,345/- which Bain USA incurs on behalf of all Bain worldwide subsidiaries represent reimbursement of cost incurred by Bain US for providing support services to Bain India such as cost incurred in performing financial and recruiting administration, computer support assistance, communication and information services, maintenance of bank relationships, sponsorship of global and regional meetings, etc. The costs incurred by Bain US for rendering these services are allocated to all group entities availing these services, including Bain India, using rational and appropriate basis of allocation such as revenue, headcount etc. The standard support services are ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TAA. So far as the client related expenses are concerned, the AO took an ad hoc percentage being 80% of client related expenses and held that the assessee was under obligation to deduct tax on 80% of the client related expenses i.e., all expenses amounting to ₹ 2,04,85,020/- u/s 195 of the IT Act. In connection with certain expenses like Gerson, Lehrmai charges of ₹ 20,48,182 and market research charges, etc., the AO held that the same are in the nature of consultancy payments and, hence, taxes are required to be withheld on the same. In connection with other expenses under the head Client related expenses , travel expenses, hotel cost, etc., the AO held that since these expenses are closely linked with the obligation of the assessee to provide consultancy services such expenses cannot be taken out of consultancy fees for withholding tax. So far as the payment on account of computer maintenance expenses are concerned, the AO made disallowance by holding that the use of software licences by the assessee amounts to royalty/FTS. 10. In appeal, the ld.CIT(A), after complete factual analysis of the services received by the assessee under the head Professional support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd in law in not appreciating that the services were not technical services so as to fall within the ambit of FIS under the India- USA DTAA. 5. That the appellant reserves its right to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal. 14. The ld. counsel for the assessee submitted that the services were not required to be rendered in India and, hence, could not be subjected to taxation in India. Referring to the decision of the Hon ble Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd., reported in 288 ITR 408, wherein it has been held that for a non-resident to be taxed in India, two conditions have to be fulfilled, i.e., not only should the services be utilized in India, the same should also be rendered in India. He submitted that in assessee s set of facts, there is no dispute that the services were rendered outside India and, therefore, the payments for the services could not qualify as Fee for Technical Services. He submitted that the above proposition was amended retrospectively by the Finance Act, 2010 w.e.f. 1st June, 1976. Referring to various decisions, he submitted that it is the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erform the work without any recourse to the service provider. For the above proposition, he relied on the following decisions:- i) CIT v. De Beers India Minerals (P.) Ltd. [ (2012) 21 taxmann.com 214 (Kar.)]; ii) ICICI Bank Ltd. v. DCIT [2008] 20 SOT 453 (MUM.); iii) Raymond Ltd. [2003] 86 ITD 791 (Mum.); iv) Bovis Lend Lease (India) (P.) Ltd. v. ITO [2010] 36 SOT 166 (Bang.); v) Intertek Testing Services India (P) Ltd., In re [2008] 175 Taxman 375 (AAR - New Delhi); vi) Akamai Technologies Inc., In re [2018 93 taxmann.com 471 (AARDelhi)]; vii) Jet Lite (India) Ltd. v. CIT [2015 63 taxmann.com 62 (Del)]; viii) US Technology Resources (P.) Ltd. v. CIT [2018 97 taxmann.com 642 (Ker)]; ix) DIT (Int. Taxation) v. Sun Microsystems India (P.) Ltd. [2014 48 taxmann.com 93 (Kar)]; x) Biotech Visioncare 93 Taxmann.com 20 (ITAT Ahd); xi) Koninklijke Philips Electronics N.V. [2018] 99 taxmann.com 23 (Kolkata - Trib.); xii) Sun Pharmaceutical Laboratories Ltd. (2018) (96 taxmann.com 105) - Ahmedabad Tribunal; xiii) ABB Inc. (2015) (59 taxmann.com 159) - Bangalore Tribunal. 17. He submitted that in the instant case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt of ₹ 15,13,53,724/- to Bain USA for various expenses and towards reimbursement of cost incurred by Bain USA on behalf of the assessee. We find, out of the aforementioned amount, the AO held that the assessee should have deducted taxes on payments to the tune of ₹ 7,89,70,432/- on account of various payments such as: (i) Professional support cost - ₹ 5,47,89,345/-; (ii) Client related expenses - ₹ 2,04,85,020/-; (iii) Computer maintenance expenses - ₹ 36,96,067/-. 21. We find, the ld.CIT(A) held that the payment for professional support cost for the services received by the assessee from its AE are neither technical in nature nor do they satisfy the criteria of make available clause under the Treaty between India and USA so as to qualify as Fee for Technical/Included Service, therefore, there was no requirement of withholding tax on such payments. Similarly, on account of computer maintenance expenses, the CIT(A) held that the payment has been made for using one common global portal shared by all globally affiliated companies proportionately and, thus, does not make available any technology. He accordingly deleted the additi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Engineering Analysis Centre of Excellence (P) Ltd. (supra) has thoroughly discussed the issue regarding royalty under the Income-tax Act and has held that a person mentioned in section 195 of the Income-tax Act cannot be expected to do the impossible, namely to apply the expanded definition of royalty inserted by Explanation 4 to section 9(1)(vi) of the Income-tax Act for the assessment years in question at a time when Explanation was not actually and factually in the statute. The relevant observations of the Hon ble Supreme Court from para 67 to 85 read as under:- ROYALTY UNDER THE INCOME TAX ACT 67. The insertion of sub-sections (v), (vi) and (vii) in section 9(1) of the Income Tax Act, by way of an amendment through the Finance Act 1976, [Act 66 of 1976, (w.e.f 1-6-1976)] was to introduce source-based taxation for income in the hands of a non-resident by way of interest, royalty and fees for technical services. In Carborandum Co. v. CIT, (1977) 2 SCC 862, this Court, applying residence-based rules of taxation, held that the technical service fees received by the non-resident assessee (relatable to the assessment year 1957-1958) could only be deemed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on by the nonresident in India or for the purposes of making or earning any income from any source in India. 69. Consequently, section 9(1)(vi) of the Income Tax Act was brought into force. The definition of royalty contained in explanation 2(v) of section 9(1)(vi) of the Income Tax Act includes the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work . 70. The comma after the word copyright does not fit as copyright is obviously spoken of as existing in a literary, artistic or scientific work. As a matter of fact, this drafting error was rectified in the Draft Taxes Code 2010, (This Code has, however, remained in draft form and was never enacted) under Chapter XIX in Part H thereof, which set out the definition of royalty as follows: PART H - CHAPTER XIX INTERPRETATIONS AND CONSTRUCTIONS xxx xxx xxx (314)(220) royalty means consideration (including any lumpsum consideration but excluding any consideration which would be the income of the recipient chargeable under the head Capital gains ) for- xxx xxx xxx (g) the transfer of all or any righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of, or the right to use , the same position would obtain under explanation 2(v) of section 9(1)(vi) of the Income Tax Act, inasmuch as, there must, under the licence granted or sale made, be a transfer of any of the rights contained in sections 14(a) or 14(b) of the Copyright Act, for explanation 2(v) to apply. To this extent, there will be no difference in the position between the definition of royalties in the DTAAs and the definition of royalty in explanation 2(v) of section 9(1)(vi) of the Income Tax Act. 73. Even if we were to consider the ambit of royalty only under the Income Tax Act on the footing that none of the DTAAs apply to the facts of these cases, the definition of royalty that is contained in explanation 2 to section 9(1)(vi) of the Income Tax Act would make it clear that there has to be a transfer of all or any rights'' which includes the grant of a licence in respect of any copyright in a literary work. The expression including the granting of a licence in clause (v) of explanation 2 to section 9(1)(vi) of the Income Tax Act, would necessarily mean a licence in which transfer is made of an interest in rights in respect of copyright, name ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (c) The location of such right, property or information is in India (iii) To amend section 9(1)(vi) to clarify that the term 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. These amendments will take effect retrospectively from 1st June, 1976 and will accordingly apply in relation to the assessment year 1977-78 and subsequent assessment years. 76. Shri Pardiwala argued that explanation 4, that was inserted with retrospective effect, uses the language that is contained in section 9(1)(vi)(b) of the Income Tax Act, namely, that the expression any right, property or information occurring in section 9(1)(vi)(b) alone is the subject matter of explanation 4, explanation 4 not expanding the scope of the definition of royalty contained in explanation 2, which does not contain the aforesaid expression. A reference to the Memorandum explaining the provisions in the Finance Bill 2012 set out hereinabove, would make it clear that the expression as menti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clude what is stated therein, vide the Finance Act 2012. 79. The learned Additional Solicitor General then relied upon the Finance Minister s statement made before the Lok Sabha on 07.09.1990, which allowed lump sum payments to be made without the deduction of tax at source under section 195(1) of the Income Tax Act and did away with the dual levy, both by way of customs duty and income tax, on royalty payments for the licensing of software. This statement, again, in no manner furthers the case of the Revenue that explanation 4 is merely clarificatory of the legal position as it always stood. Likewise, Notification No. 21/2012 dated 13.06.2012, which deals with section 194J of the Income Tax Act, does no more than providing that a transferee is exempt from deducting TDS under section 194J when TDS has already been deducted under section 195 on the payment made in the previous transfer of the same software which the transferee acquires without any modification. In any case, this notification being issued on 13.06.2012, i.e., after explanation 4 was inserted vide the Finance Act 2012, it would not assist the Revenue in asserting that explanation 4 clarifies the legal position a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Once such application is made to the court, and the court then orders or directs that the requisite certificate be produced by a person to whom it sends a summons to produce such certificate, the party asking for the certificate has done all that he can possibly do to obtain the requisite certificate. Two Latin maxims become important at this stage. The first is lex non cogit ad impossibilia i.e. the law does not demand the impossible, and impotentia excusat legem i.e. when there is a disability that makes it impossible to obey the law, the alleged disobedience of the law is excused. This was well put by this Court in Presidential Poll, In re [Presidential Poll, In re, (1974) 2 SCC 33] as follows : (SCC pp. 49-50, paras 14-15) 14. If the completion of election before the expiration of the term is not possible because of the death of the prospective candidate it is apparent that the election has commenced before the expiration of the term but completion before the expiration of the term is rendered impossible by an act beyond the control of human agency. The necessity for completing the election before the expiration of the term is enjoined by the Constitution in public and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in State Power Light Corpn. Ltd. v. State of Kerala [Cochin State Power Light Corpn. Ltd. v. State of Kerala, (1965) 3 SCR 187 : AIR 1965 SC 1688] , a question arose as to the exercise of an option of purchasing an undertaking by the State Electricity Board under Section 6(4) of the Electricity Act, 1910. The provision required a notice of at least 18 months before the expiry of the relevant period to be given by such State Electricity Board to the State Government. Since this mandatory provision was impossible of compliance, it was held that the State Electricity Board was excused from giving such notice, as follows : (1965) 3 SCR 187, at p. 193 : AIR pp. 1691-92, para 8 8. Sub-section (1) of Section 6 expressly vests in the State Electricity Board the option of purchase on the expiry of the relevant period specified in the licence. But the State Government claims that under sub-section (2) of Section 6 it is now vested with the option. Now, under sub-section (2) of Section 6, the State Government would be vested with the option only where a State Electricity Board has not been constituted, or if constituted, does not elect to purchase the undertaking . It is common ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia was applied in the context of the applicability of a mandatory provision of the Registration Act, 1908, as follows : (SCC pp. 402-03, paras 6-7) 6. We have to bear in mind two maxims of equity which are well settled, namely, actus curiae neminem gravabit - An act of the court shall prejudice no man. In Broom's Legal Maxims, 10th Edn., 1939 at p. 73 this maxim is explained that this maxim was founded upon justice and good sense; and afforded a safe and certain guide for the administration of the law. The above maxim should, however, be applied with caution. The other maxim is lex non cogit ad impossibilia (Broom's Legal Maxims, p. 162) - The law does not compel a man to do that which he cannot possibly perform. The law itself and the administration of it, said Sir W. Scott, with reference to an alleged infraction of the revenue laws, must yield to that to which everything must bend, to necessity; the law, in its most positive and peremptory injunctions, is understood to disclaim, as it does in its general aphorisms, all intention of compelling impossibilities, and the administration of laws must adopt that general exception in the consideration of all particular ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the narration of events hereinbefore made that the arbitrators had tried to obtain the custody of the award which the court declined to give to them. (emphasis in original) 50. These maxims have also been applied to tenancy legislation - see B.P. Khemka (P) Ltd. v. Birendra Kumar Bhowmick [B.P. Khemka (P) Ltd. v. Birendra Kumar Bhowmick, (1987) 2 SCC 407] (at para 12), and have also been applied to relieve authorities of fulfilling their obligation to allot plots when such plots have been found to be unallottable, owing to the contravention of the Central statutes - see Hira Tikkoo v. State (UT of Chandigarh) [Hira Tikkoo v. State (UT of Chandigarh), (2004) 6 SCC 765] (at paras 23 and 24). 51. On an application of the aforesaid maxims to the present case, it is clear that though Section 65-B(4) is mandatory, yet, on the facts of this case, the respondents, having done everything possible to obtain the necessary certificate, which was to be given by a third party over whom the respondents had no control, must be relieved of the mandatory obligation contained in the said sub-section. 82. As a matter of fact, even under the Income Tax Act, the High Court of Bomb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce relating to the accommodation given to the employees on the ground that no concession in rent has been given to the employees. This contention of the assessee has been in fact upheld by the Apex Court in the case of Arun Kumar (supra). To overcome the above decision, the law has been amended by Finance Act, 2007 with retrospective effect from 1/4/2002. The retrospective amendment merely takes away the above argument, which was available to the assessee. Once the salary is paid by the employer after deducting tax at source as per the law prevailing on the date of paying the salary, then any subsequent amendment in law brought about retrospectively cannot require the employer to deduct tax at source for the past period, because the salary for that period has already been paid. Consequently, the employer cannot be made liable for the consequences set out in Section 201 of the Act on account of the retrospective amendment to Section 17(2) of the Act. 85. It is thus clear that the person mentioned in section 195 of the Income Tax Act cannot be expected to do the impossible, namely, to apply the expanded definition of royalty inserted by explanation 4 to section 9(1)(vi) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue it to the public, unless such copies are already in circulation, and the other acts mentioned in section 14 of the Copyright Act. iv) A licence from a copyright owner, conferring no proprietary interest on the licensee, does not entail parting with any copyright, and is different from a licence issued under section 30 of the Copyright Act, which is a licence which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the licensed computer software product over which the licensee has no exclusive rights, no copyright is parted with and consequently, no infringement takes place, as is recognized by section 52(1)(aa) of the Copyright Act. It makes no difference whether the end-user is enabled to use computer software that is customised to its specifications or otherwise. v) A non-exclusive, non-transferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights ment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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