TMI Blog2022 (2) TMI 1292X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax Act. - Decided in favour of assessee. Payment received on account of Information Communication Technology (ICT) service charges from Perfetti Van Melle India Pvt. Ltd. taxed as Fees for Technical Services under Article 12 of the India-Netherlands DTAA - HELD THAT:- As decided in case of SCA Hygiene Products AB [ 2021 (1) TMI 323 - ITAT MUMBAI] the person receiving the money as royalty, such as the actual seller of the software in this case, and the person providing service ancillary or subsidiary to the enjoyment of that right, must be the same. That's not the case here. In the present case, the payment received by the assessee has been held to be in the nature of reimbursement, which is outside the ambit of taxation. The person selling the SAP software is Be One Solution, Switzerland, whereas the person providing the services in question is the assessee. Article 12(4)(a) will not, therefore, come into play at all. In our considered view, therefore, the taxation under article 12 in the present case can come into play only when the make available clause is satisfied, but then the Assessing Officer's justification for the satisfaction of 'make avail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the absence of any such right being granted, the payment cannot partake the character of royalty. 7. Without prejudice, the AO/DRP failed to appreciate that in the cases of license of software, the license is given in the Copyrighted Article and not in the copyright per se and hence the reimbursement received by the Appellant cannot be characterized as royalty. 8. Without prejudice, the AO/DRP also failed to appreciate that the provisions of Explanation 4 to section 9(1)(vi) as inserted in the Act (domestic law), cannot be applied to the DTAA in the absence of any specific reference to it. 9. That the AO/DRP also erred in not applying their mind and in relying on the issues relating to infringement of the copyright while failing to appreciate that the infringement can only be qua the owner of the copyright. 10. That the AO/DRP also failed to appreciate that the Appellant was only a facilitator for procurement of SAP and Microsoft licenses and there was no reproduction right given by the Appellant qua the said licenses. 11. That the AO/DRP also failed to appreciate that SAP is an accounting ERP software and based on the number of users, licenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e right to use copyright and therefore, were covered within the ambit of Article 12(5)(a) of the IndiaNetherlands DTAA. 20. That the Ld. AO / Hon ble DRP erred in alleging that the services rendered by the Appellant to its Indian affiliate were in the nature of management consultancy services . 21. The Ld. AO/Hon ble DRP has erred in not following the High Court rulings relied upon by the Appellant, wherein on the basis of similar facts, it was held that payment received in lieu of ICT Services and Regional Support services were not taxable as Fees for Technical Services. 22. That the Ld. AO has grossly erred in charging interest under section 234B of the Act. 23. That the Ld. AO grossly erred in initiating penalty proceedings under section 270A of the Act. 3. The assessee filed its return of income on 28.11.2017 declaring Nil and claimed a refund of Rs.37,03,599/-. PVM ICT BV is a company incorporated in Netherlands on 25.10.2014 having its registered office at ZoeteInval 20, 4815 HK Breda. The company is actively engaged in the business of rendering services in confectionery industry. 4. The assessee has earned income amounting to Rs.5,54,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. The ld. DRP confirmed the addition holding as under: 3.4 The submissions have been perused along with the relevant materials on record. This issue of copyright vs copyrighted article as regards software has been considered in various cases. In this regard, the Hon'ble Karnataka High Court has decided the issue of software royalty, both before and after the insertion of Explanations 4, 5 and 6 in Section 9(1)(vi) of the I.T. Act by the Finance Act 2012 in various decisions namely, CIT vs. Synopsis International Old Ltd. [2012] 28 Taxmann.com 162 (Kar), Samsung Electronics Co. Ltd. (supra), CIT (IT) v. Wipro Ltd. [2013] 355 ITR 0284 (Kar) and CIT v. CGI information Systems Management consultants (P.) Ltd. [2014] 226 Taxmann 319 (Kar). The basic conclusions in all these decisions are as follows: (i) that the consideration paid is for the rights in respect of copyright and the user of the confidential information embedded in the software/computer programme amounts to royalty both under the Act and under the DTAA. (para 45 of Synopsis, supra) (ii) that what is transferred is right to use the software, an exclusive right, which the owner of the copyright i.e., the res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... falling within the ambit of the Royalty Article in the India-Netherlands DTAA. 3.6 Besides, SAP / Microsoft software are ERR software requiring customization, installation and integration with the existing system and processes in the user s machines so that the programs embedded therein can be used. These licensed software being highly specialized software enable the user to carry out different calculations, analysis, data capture, information presentation etc. Therefore, these software also made available a process to the customers who used the embedded process while carrying out their business. Hence, in addition to software involving a copyright, these specialized software also represent a 'process which could be used in a particular industry specific core activity. The Panel therefore does not find any infirmity in the conclusions arrived at by the AO. As regards the cases relied upon by the assessee containing the abovementioned issues are before the Hon ble Supreme Court, DRP being a part of the assessment process, the Panel sustains the addition made in the assessment order and rejects the objections of the assessee in Grounds 2 and 3. 10. Aggrieved the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g it to be stored in medium by electronic means, (ii) issuing copies to public not already in circulation, (iii) to communicate it to public or (iv) to sell or give on commercial rental or offer for sale any copy of the computer program. In the present case the appellant has given the access and user rights in the software purchased from third parties. Such grant of access in the software to its group entities is possible only when assessee has transferred the rights to its group entities to commercially exploit. It is akin to licensing by appellant to its group entities for access to the software. Every time the assessee allows its group entity to access and use of the software, the appellant is in a way issuing copies to public not already being in circulation as such software is not available not any public without allowing access by appellant for a fee. The appellant does not pass the ownership right and only gives limited access to use as the software always remains the property of assessee. Thus the grant of access to group entity for use is akin to allowing commercial rental of the copy of the software program, which is also one of the copyright privileges u/s 14 of the Copy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e manner of writing a computer program. SAP implementation in an entity is a business solution and lays down a specific manner of execution of activities. The consideration for such implementation is not a consideration for software programs. These processes also result in sharing of an information concerning industrial, commercial or scientific experience which is a part of definition of Royalty under the Act. Moreover Explanation 6 to section 9(l)(vi) has made the meaning of word 'process' in domestic law at par with that of DTAA. Hence the consideration for SAP licenses is a process Royalty as well. 5. In the relevant case the appellant has not given exact details of licenses purchase from Microsoft. However, it is understood that since the assessee has deployed SAP ERP, the same must have been Microsoft platform. For example SAP might have been run on Microsoft Azure. Thus purchases of licenses from SAP and Microsoft are related and interlinked for deployment in the premises of AES of the assessee. Thus customization and configuration of SAP and Microsoft are related. In the relevant case, PVM ICT BV, has got the license configured/customized for meeting spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ling of the AAR in Citrix Systems (AAR) (supra) is set aside. The appeals from the impugned judgments of the High Court of Delhi are dismissed. 16. Hence, the appeal of the assessee on this ground is allowed. Payment of INR 3,70,35,976/- received on account of Information Communication Technology (ICT) service charges from Perfetti Van Melle India Pvt. Ltd. taxed as Fees for Technical Services under Article 12 of the India-Netherlands DTAA 17. The issue as dealt by the ld. DRP is as under: Ground 4 - That the Ld, AO has erred on the facts and circumstances of the case and in law by concluding that ICT sen/ice charges received by the assessee as Fees for Technical Services ( FTS ) as per the treaty. Ground 4.1 - That the Learned AO has erred on the fact and circumstances of the case and in law in not appreciating the fact that the assessee does not make available any technical knowledge, know-how or skill and do not fail within the ambit of Article 12 of India- Netherlands OTA A read with India Portugal DTAA. Ground 4.2 - That the Learned AO has erred on the facts and circumstances of the case and in law, by holding that the assessee cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ersonnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received, or (b) make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design which enables the person acquiring the services to apply the technology contained therein. (Emphasis supplied) In this regard, it is noted that the absence of a comma after the word design in the India-Portugal DTAA implies that the phrase to apply the technology contained therein applies only to the second limb of the provision, namely development and transfer of a technical plan or technical design. The phrase technology contained thereon would have meaning only in respect of the technical plan / design containing the same. Attributing the phrase to the first limb of the provision which includes diverse aspects such as experience/ skill would lead to an absurd interpretation. There cannot be an interpretation that technolog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Sessions), SAP patches installation, Basis training and the like. Technical/ Basis Audit Refers to the audit of the existing SAP technical setup of the OC which includes both the HW, SLV and maintenance activities. SAP Improvement Projects Post-Implementation Reviews Audit review of SAP implementation Business re-engineering Simplify, streamline and improve the business process of the organization thru the use of IT tools and cost-effective manual controls SAP Training Training can either be on a SAP functional or technical or technical (Basis) level. Development of User Standard Procedures Documentation of user procedures Review/Audit or User Procedures Review/audit of the documentation of end-user business process including it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y fall within the scope of FTS. The Commentary specifically states that where an entity uses its knowledge, skill and expertise to provide research, analysis or advice to another entity related to the latter entity's specific requirements I circumstances, the payments received in lieu of such services would be FTS, In the present case, it is seen from the description of services that they clearly involve making available of knowledge, skill and experience by the assessee to the Indian entity, The said payments for the rendering of any technical / management /consultancy services are also ancillary and subsidiary to the application or enjoyment of the right in respect of copyright as discussed in paragraphs 3.4 to 3.6 above, thus attracting sub-paragraph (a) of paragraph 5 of Article 12 of the India-Netherlands DTAA. In view of the above, the consideration in respect of the said services squarely falls within the scope of FTS in Article 12 of the India-Netherlands DTAA. The objections of the assessee under Ground 4 therefore stand dismissed. 18. We find the similar matter has been adjudicated by the Co-ordinate Bench of ITAT Mumbai in the case of SCA Hygiene Products AB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sonal data refers to the following types/categories of data:- Personal data Communication data (e.g. Telephone/e-mail) Contractual accounting and payment data Financial and non-financial planning and control data Information obtains from third parties, e.g. credit inquiry agencies or public directories Statistical data The group of data subjects affected by the use of their personal data hereunder comprises: Employees Customers and Vendors Interested parties Consumers Other contract persons 12. During the course of the scrutiny assessment proceedings, the Assessing Officer, noticed the above payments and required the assessee to show cause as to why these receipts not be taxed in the hands of the assessee under article 12 of the Indo Swedish tax treaty, as also under the Income Tax Act. One of the arguments that was adopted by the assessee was that under the restricted meanings of the 'fees for technical services' under article 12 of the Indo Swedish tax treaty, as read with most favoured nation (MFN) clause in protocol thereto and read with India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsequent stage. We are not convinced that the project execution service could be executed by the assessee without active involvement of project related employees of SCA India. It is not merely engineering or architectural designs which are contemplated under Article 12(4)(b) of the Treaty but also development and transfer of any technical plan or technical design, Technical does not mean technological. It only means specialized- the area may be finance, legal, commerce, arts, science or project implementation as in the case. This will include scheduling charts, time lines, bar charts which are contemplated in the case of the assessee under Project Administration. This also includes project and financing controls including necessary charts and controls for implementation of project. The assessee is not executing the project but is rendering consultancy service to the AE. When project implementation tools are provide to the employees of the AE, they are enable to employ these tools in implementing their own project. 5.14. The nature of service rendered by the assessee as detailed by it has been reproduced above. Admittedly, these vacancies are effectively connected with the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services. 3. (a) The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. (b) The term 'fees for technical services' means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provisions of services by technical or other personnel but does not include payments for services mentioned in Articles 14 and 15 of this Convention. 4. The provisions of paragraphs (1) and (2) shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, or fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items of income shall also apply under this Convention. . IN WITNESS whereof the undersigned being duly authorised thereto have signed this Protocol. DONE in duplicate at New Delhi, this 24th day of June, 1997, in the Swedish, Hindi and English languages, all three texts being equally authentic. In case of divergence between the texts the English text shall be the operative one. ARTICLE 12 OF INDO PORTUGESE TAX TREATY ROYALTIES AND FEES FOR INCLUDED SERVICES 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they aris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or to any individual or firm of individuals (other than a company) for professional services as defined in article 14; (f) For services rendered in connection with an installation or structure used for the exploration or exploitation of natural resources referred to in paragraph 2, f), of article 5; (g) For services referred to in paragraph 3 of article 5. 6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties and fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties and fees for included services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties and fees for included services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 14, as the case may be, shall apply. 7. Royalties and fees for included services shall be deemed to arise in a Contracting State where the payer is that State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other jurisdiction or any other OECD member tax jurisdiction, the same will be extended to Y jurisdiction as well. In a sense, terming this clause as a 'most favoured nation clause' is a misnomer because what this clause ensures is an equal treatment vis- -vis other jurisdictions, or other jurisdictions of a specific category, rather than a favoured treatment for the treaty partner jurisdiction. 18. It is crucial to bear in mind that the implementation of a most favoured nation clause is not always in a homogenous manner. There are different ways in which such an MFN clause can be implemented. There can be situations like in India Switzerland Double Taxation Avoidance Agreement [(1995) 214 ITR Stat 223 @ 246; Indo Swiss tax treaty, in short] which only requires fresh negotiations to provide for giving effect to most favoured nation status in effect, as evident from the observations in the protocol to the effect that If after the date of signing this Amending Protocol, India under any Convention, Agreement or Protocol with a third State which is a member of the OECD, restricts the scope in respect of royalties or fees for technical services than the scope for these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls, so that existing provisions can be brought in par with more generous tax treatment in the source jurisdiction; and, third- in which the treaty does not prescribe anything further that is required to be done, for giving effect to the MFN status, as the same rate or the same scope, as is extended to any other OECD country subsequently, shall also apply under this treaty. There can also be situations in which an MFN clause may require the treaty partner jurisdictions to issue notifications to the effect that the benefit extended to another jurisdiction is extended to the treaty partner jurisdiction as well. There can be several modes for implementation of the MFN clause, but its not really necessary to explore that aspect any further. Suffice to note that there are different methods in which MFN clause can be implemented, and there cannot, therefore, be a 'one size fits all' approach. As far as the situation that we are dealing with, i,e. MFN clause in Indo Swedish tax treaty, is concerned, it is a situation in which the action of limiting the source taxation, for dividends, interest, royalties or fees for technical services, to any other OECD member jurisdiction, by its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xmann.com 1 (AAR)], the approach adopted, on this issue, by the Authority for Advance Ruling was entirely different, as it held notification to be a crucial and legal source of the rights by the implementation of protocol, Hon'ble Authority for Advance Ruling observed as follows: ..What is stated by the Protocol is for India to limit its taxation at source for the detail items mentioned therein. The restrictions are on the rates and 'make available' clause cannot be read in the items. On the basis of the Protocol, notification No.9602 [F.No.501/16/80-FTD], dated 6.9.1994 as amended by Notification No. SO 650(E), dated 10.7.2000. was issued by Govt. of India. The said Notification does not include anything about the 'make available' provision. Had the intention of the Protocol or the Government is to include 'make available' clause in the Tax Treaty between India and France, it should have been done so in the said Notification. We have taken note of the Notification issued in the case of India Netherland Tax Treaty whereby the Protocol was given effect to. The changes in the Treaty on the basis of the Protocol were given effect by Notification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adopts the 'make available' clause which restricts the taxation of fees for technical services only in such cases which make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design which enables the person acquiring the services to apply the technology contained therein. Therefore, respectfully following the coordinate bench decision in the case of ITC Ltd (supra), which has been specifically approved by Hon'ble Delhi High Court in the case of Steria India Ltd (supra), we hold that the provisions of article 12 (4)(b) of the Indo Portuguese tax treaty, being more restricted in scope vis- -vis article 12(3)(b) of Indo Swedish tax treaty, apply in the Indo Swedish tax treaty as well. 23. As for the connotations of 'make available' clause in the treaty, this issue is no longer res integra. There are at least two non-jurisdictional High Court decisions, namely Hon'ble ITA No. 7315/Mum/2018 Assessment year: 2015-16 Page 17 of 19 Delhi High Court in the case of DIT v. Guy Carpenter Co Ltd. [(2012) 346 ITR 504 (Del)] and Hon'ble Karnataka High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmed on the facts of this case, but whether the technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. In this light when we analyze the nature of services, which are set out in detail earlier in this order, we find that in none of the cases, these services enable the recipient of these services to perform the same services, in the future, without recourse to the assessee. The consultancy services are in the nature of leading the setting up of factory, including planning and steering execution of work, being responsible for managing project within budget constraints, leading the project team from different locations, coordination and follow up with the contractors, securing communication and good flow of information between those directly or indirectly involved with the project, preparing project progress report and updating all concerned with the project progress. Just because the assessee renders these services does not mean, and by no stretch can imply, that the recipient can next time do all this work without recourse to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also mentioned that specific support in the form of implementation of SAP project amd Project Vinadalloin the form of preimplementation, testing, post implementation is also provided which is clearly technical in nature and intended to increase the efficiency and improve the functioning of SCA India . It is to be noted that so far as the enduring benefit and increase of efficiency in the recipient entity is concerned, that has nothing to do with the satisfaction of make available clause. As we have seen in our analysis earlier, what is important is transfer of technology and not the incidental benefit. Unless the recipient of a service is not enabled to perform that service on his own, without recourse to the service provider, the requirements of the make available clause are not satisfied. The concept of enduring benefit, increase in efficiency, improvement in income generating capacity and incidental skill development is wholly irrelevant for this purpose. The authorities below have been thus swayed by considerations not germane in this context. So far as these services being incidental to SAP system being the reason for taxation under article 12(4)(a) is concerned, we have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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