TMI Blog2023 (1) TMI 212X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of Section 9(1)(vi) and Section 115A - HELD THAT:- We have gone through the entire arguments given by the assessee and the judgments quoted by the assessee which have been duly incorporated in the order of the ld. CIT(A). We have also been made aware that the receipts of the assessee for the subsequent A.Ys. 2015-16, 2016,-17, 2017-18 have also been taxed @ 10% which has been the ratio followed by the ld. CIT(A) for the A.Y. 2013-14. In view of the settled position, we hereby affirm the decision of the ld. CIT(A). Appeal of revenue dismissed. - ITA No. 7354/Del/2017 And CO. No. 54/Del/2021 (In ITA No. 7354/Del/2017) And ITA No. 5782/Del/2017 - - - Dated:- 3-1-2023 - Sh. Saktijit Dey, Judicial Member And Dr. B. R. R. Kumar, Accountant Member For the Assessee : Sh. Tarandeep Singh, Adv. For the Revenue : Sh. Gangadhar Panda, CIT-DR ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: The present appeals and cross objection filed by the assessee and revenue against the order of the ld CIT(A)43, New Delhi dated 21.09.2017. 2. The revenue has raised the following grounds of appeal in ITA No. 7354/Del/2017 for Assessment Year 2013-14:- 1. Whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant in its return of income. 7. That on facts and in law the AO erred in levying interest u/s 234A, 234B, and 234C of the Income Tax Act. 8. That on facts and in law the order passed by Assessing Officer {hereinabove referred to as the AO } and Dispute Resolution Panel {hereinabove referred to as the DRP } are bad in law and void abinitio. 4. The revenue has raised the following grounds in Cross Objection No. 54/Del/2019 for Assessment Year 2013-14:- 1. That on facts and in law, the Commissioner of Incometax (Appeals)-43 New Delhi [ Ld. CIT(A)] erred in assessing the total income of the respondent at INR 88,33,78,910/- as against a returned total income of INR 1,28,28,565/-. 2. That on facts and in law, Ld. CIT(A) erred in holding that receipts amounting to INR 88,33,78,910/- earned by the respondent from its Indian customers constitute Royalty under Section 9(1)(vi) of the Income-tax Act, 1961, ( the Act ) and is eligible to be taxed as such. 2.1 That on facts and in law, Ld. CIT(A) erred in holding that receipts of the respondent fall under the definition of Royalty for alleged use of a process or the imparting of any information concerni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear under consideration on the assumption (without admitting) that it constitutes a business connection in India within the meaning of Section 9 of the I.T. Act, 1961. 12. It was stated that the assessee does not hold a valid Tax Residency Certificate ('TRC') issued by tax authorities in United States of America ('USA') and hence the benefit of the India-USA Double Taxation Avoidance Agreement ('DTAA') has not been claimed by the assessee and the income has been offered under the provisions of the I.T. Act, 1961. 13. The assessee has offered 15% of net profits from revenues derived from its customers in India to the business connection in India. The net profits are stated to have been calculated by applying global profitability ratio as prescribed by Rule 10(ii) of the Income-tax Rules ('the Rules') and in support the assessee has also filed audited profit and loss account. It claimed that global expenses have been apportioned to India business in the same ratio which the Indian revenues bear to the Global revenues. The said expenses have been claimed as a deduction by the assessee in its return of income for the subject AY. 14. After going ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee with its clients. There is no agent who is a dependant agent and therefore, DA PE is also not present. Therefore, the case for existence of a PE in India is not made out. The assessee also does not have any other presence in India. However, the term business connection being a far broader concept even though not admitted by the assessee, is clearly established in his case. The clients of the assessee are located in India, which are the Airlines. These clients / are the entities to which certain specific services are being rendered by the assessee. The mode of delivery of such advice and services is through a login portal available to the client in India. This is the basic touch point in the Indian jurisdiction which is the point of delivery of the services. Further, the nature of those services determines revenue chargeable by the assessee from the clients. Revenue is also charged by the assessee for providing the point of delivery of the services in India, that is, the login portal. Thus, the business of delivery of specialized services related to decision making in the Airline industry of this foreign company i.e. the assessee conclusively has a business connection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this connection, AO has given a finding in beginning of para 10 of final assessment order that assessee itself claimed to have a PE in India and has offered the receipts to tax as business income. However, appellant countered this finding during the appeal proceedings stating that its assumption of forming a business connection in India was merely to buy peace and to avoid litigation, and should not be equated with appellant having a PE in India under the Act. In this regard, reference was drawn to the various judgments by appellant and submitted that even where a business connection in India existed under Section 9(1) of the Act, the same could not be equaled with the appellant constituting a PE in India so as to apply Section 44DA of the Act. The assessee has strongly contested this issue and has stated that it has never admitted to have a PE in India since it had no office nor any place of business or any server installed in India by the assessee. 2.3. Ld. CIT(A) in his order observed that the clients of the assessee i.e. various airlines /travel agents are located in India to whom specific services were rendered by the assessee. The mode of delivery of such specialized ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Thus, even though the server may not be inside India, but the Interface System hooked to the Agents computers would amount to an existence of PE for the applicant in respect of the utilization of resources which are in the nature of royalty. 2.4. Thus, in view of the applicant having a PE in India would give rise to business income , and as per Art 12 of DTAA , the income has to be assessed under ART 7 or Sec 44DA of the IT Act, as discussed by AO at para-10.1 of the final assessment order . 2.5. Revenue relies on the following judicial rulings in regard to existence of PE in the case of the applicant i.e. the ruling of the Hon ble AAR in the case of Mastercard Asia Pacific Pte Ltd (MasterCard) and the decisions of Hon ble ITAT, Delhi Bench in the cases of Amadeus Global Travel Distribution SA vs DCIT [2008] 113 TTJ (ITAT Delhi) 767 GaIileo International Inc. [2008] 19 SOT 257 (Delhi). The legal positions discussed in aforesaid cases are as under- (A) The Hon ble ITAT Delhi Bench in these two cases held that CRS systems installed in the premises of Indian agents constituted a PE in India, and 15% of income from Indian operations was chargeable to tax in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Customers of Banks/FIs etc.) in India. The application software (Master Connect and Master Card file, owned by the Applicant) is installed at the computers of Banks/FIs. The connectivity to MIP and Banks computers is provided by various service providers through cables as well as internet. Similar was the position in the cases of Amadeus and Galileo as well. (D) Further, the Hon ble AAR held that functions of MIP and Mastercard network in India were significantly more than what were performed in India in the cases of Amadeus and Galileo. (E) Para 17.5.5.3 of the order further elaborately discusses applicability of decisions of Amadeus and Galileo to the facts of case of MAPL wherein the Hon ble AAR held that CRS system installed in the premises of Indian agents was capable of booking of tickets and therefore generation of revenue for the assessee even though the main processing was done outside India. It was held that computers and CRS system installed in India constituted PE in India and therefore, income was attributable to the same. (F) Further, drawing similarity with the above cases, the Hon ble AAR held that what CRS was doing in Galileo case was the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o creates fixed place PE of the Applicant in India. (G) Further, it is to state that the above two decisions still hold good and issue of PE and attribution of 15% of income to such PE has been upheld by higher courts in case of Galileo and Amadeus. Therefore, the ratio of the above cases is applicable to case of MAPL and similarly placed cases; however, attribution of income is a fact-based exercise wherein functions performed, assets deployed and risk assumed determine the quantum of income attribution. 2.5. Conclusion: In view of above, the assessee company s protected software or portal offers facility to the clients to login, to furnish some data and then access reports generated after the data is analyzed. Further, the assessee which allows its travel agents /clients to have access to the main Booking Interface System /Processor owned/ at the disposal of the Sabre group entity , in order to execute / process the requests of the Sabre Clients ( already having a Ticket through its networks ) which is placed at customers' locations in India for processing of Seat Booking, Food booking transactions using Sabre global network and infrastructure. Thus the part of fees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company is offering specific solutions on a day to day basis to the airlines. The mechanism for offering these solutions is through functionality which has been mentioned clearly in the Work Order with one of the clients i.e. M/s Jet Airways. The extract of the functionality is as under: 1. Description of Functionality and Service a. Functionality. Sabre will provide Customer with access and use of the functionality described in the attached Appendix A (the 'Functionality ). Once implemented, the Functionality shall be considered to be a part of the System covered under Work Order Number 1 to the Agreement entered into by the parties with a Work Order Effective Date of 31st March, 2008 (the CSS Work Order ). b. Implementation of Functionality. Sabre will implement the Functionality for Customer as soon as reasonably practicable following the Work Order Effective Date set forth above, in practice this means the first available implementation slot for this functionality at the time of signing of this Work Order. c. Customer Responsibilities. In connection with the implementation of the Functionality to be provided by Sabre hereunder. Customer shall h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olutions provided are based on principally protected software and the experience and data analyzed by experts, which has been developed by the assessee company. This protected software or portal offers facility to the clients to login, furnish some data and then access reports generated after the data is analyzed. The entire revenues of the assessee i.e. Rs.883378906 have been held by the AO to be in the nature of Royalties. 4.4.2 The submissions of the assessee against the consideration being in the nature of Royalty are as under: Revenues earned by SDT are not in the nature of Royalty We submit that for the reasons given below, revenues earned by SDT cannot be construed to be royalties under Section 9(1) (id) of the Act. Transfer or use of patent, invention, model, design, secret formula or process or trademark or similar property or imparting of any information concerning their working At the outset, it is submitted that in the present case there is no transfer of any of patent, invention, model, design, secret formula or process or trademark or similar property (collectively referred to as intellectual property rights) as the appellant has only mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity/ end product in the form of data. 4.4.3 In this regard, the assessee submitted the following judgments which are stated to be in his favor on the issue of what constitutes royalty. Each of the judgments is distinguished from the assessee s case, on the basis of the nature of business of the assessee and how it operates. In Asia Satellite Telecommunication (332 ITR 340), the Delhi High Court laid down the principle that payment was not for the use of any process or equipment, since control over the process or equipment was with Asia Satellite Telecommunications and not with the Customers/Argument was addressed on the meaning which is assigned to the term royalty occurring in sub-clause (vi) of Explanation 2. The learned counsel for the appellant had argued that the doctrine of noscitur a sociis would apply and the process should be treated as item of intellectual property. On this it was argued that the process employed in the transponder of a satellite, i.e., changing of frequency and amplifying the signal, is not at all an item of intellectual property. Though there appears to be some force in this argument, it is not necessary to answer it conclusively. The fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the customers cannot be termed as Royalty for the use of a process or equipment under the respective double taxation avoidance agreement. In Bharti Airtel Limited (ITA 3593 to 3596 Del/2012), the Hon'ble Delhi ITAT held that payment of Inter-connect Usage Charges by Bharti Airtel to Foreign Telecom Operators ('FTO')in connection with its telecom service business does not constitute FTS or royalty (including process royalty under Section 9(l)(vi)/(vii) of the Act. In ADDIT v. Taj TV Ltd. the Hon'ble Mumbai ITAT held that transponder charges and uplinking charges paid to a USA company for providing transponder facility (for telecasting its channel in various countries including India) is not taxable as royalty under India-US Double Taxation Avoidance Agreement ('tax treaty'). In the case of Atos Information Technology HK Ltd. (ITA Nos. 237- 240/MUM/2016),the Hon'ble ITAT held that the payments received by the assessee on account of rendering data processing services, using servers located outside India does not qualify either as 'Royalty' or 'FTS'. 4.4.4 All the above decisions are not even remotely linked to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... izes the services being offered as well as reduces manual updates. Supporting these new filing structures helps airlines authorize the sale of optional products and services using a standardized distribution process. o Merchandising Manager - an online GUI based application that allows the Customer to define Ancillary fees and other optional sermces items. Ancillaries filed through Merchandising Manager can be displayed directly alongside Ancillaries filed through ATPCO, and sold/fill filled through the same EMD process in the airline's direct channel The Ancillary Services solution currently supports the following flight related ancillary offerings; o Ancillary Seats (i.e. the capability to charge for pre-reserving a specific seat). This requires Pre-reserved Seats (PRS). o Lounge Access o In-flight Entertainment o Meals/Beverages. o Pet Transportation (e.g. Pet in cabin, Pet in Hold, etc.) o Unaccompanied Travel o Medical Services (e.g. Medical assistance, oxygen, stretcher, wheelchair, etc.) o Ground Transportation o Pay for baggage (e.g. Pre-sale of baggage, pay for excess baggage, pay for oversized baggage) From the above i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... divert attention from the actual issue at hand. The consideration and fees received by the assessee is not for transmission of signals or transmission of information. The consideration is for the value of the advice which is transmitted in the form of information to the client. This advice, it is repeated, is based on intellectual property owned by the assessee. The reference to explanation 6 is therefore, uncalled for. Notwithstanding this, it is mentioned in para 4.4.2 above, that if the process uses intellectual property, then the consideration for the same may qualify as Royalty. The AO has no where held that the SDT i.e. the assessee is providing a data link or lease line to its customers for the consideration paid to SDT. The arguments of the assessee to consider the payments as payments for use of equipment are therefore, incorrect. 4.4.7 The assessee further submits the interpretation of the term Use or right to use any industrial, commercial or scientific equipment. The submission of the assessee quotes the case of AAR in Dell International Services India (P) Ltd. In Re (2008) [305 ITR 37(AAR)]. The relevant paragraphs of that judgment are reproduced below - 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n delivery of expert advice and solutions to the client. The usage of the portal though and the payment thereof is not for simply using any equipment. It is for receiving consultancy in decision making in the Airline Sector. There is no comparison to the activity of web hosting which is basically a different service altogether. In web hosting only a specific server space is allocated to the client for which rentals are paid. There is no concept of rendering any advice. Moreover the above cases have been decided on the basis of interpretations of the Indo-US Tax Treaty not the domestic law. The treaty benefit is not available to the assessee. 4.4.10 Further, the assessee quoted the case of Qualcomm India Private Limited v. ADIT (ITA No. 1664 to 16677 2011/Hyd), where the Hon'ble Hyderabad ITAT ruled that payment made by an Indian company to Verizon USA for providing internet and bandwidth services and also for providing customer premises equipment ('CPE'), does not amount to royalty. ....The Hon'ble ITAT also observed that CPE is not personalized/sophisticated equipment for specific and exclusive use of the assessee. The aforesaid citation of Qualcomm is in fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Income Tax Act. These will also fall under the head Fee for technical services which is discussed here under. 4.4.12 The assessee has further given detailed arguments that the consideration for sale of software or computer program does not fall in the definition of Royalty under the section 9(l)(vi) of the Act. A number of judgments have also been given in support of the arguments of the assessee. The AO has given detailed reasons for his decision in the assessment order. The same are not reproduced as the business of the assessee is not to sell software. The business of the assessee is providing advice on decisions to be taken in the airline industry. An electronic platform has been made to enable the interaction of the assessee and his clients. The platform also enables passage of advice to the client. It would be childish to assume that the consideration being paid is for the provision of computer software. The consideration is nothing other than Royalty and this has been further elaborated later in this order. 4.5.1 The assessee also submitted that the consideration for services rendered does not fall in the ambit of fee for technical services as provided in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gy and that too, sophisticated technology but that does not mean that MTNL/other companies which provide such facilities are rendering any technical services as contemplated in the Explanation 2 to Section 9(l)(vii). This is so because the expression 'technical services' takes colour from the expression 'managerial services and consultancy services' which necessarily involves a human element or, what is now a days fashionably called, human 'interface'. In the instant case, the sendees rendered qua interconnection/port access did not involve any human interface and, therefore, the same could not be regarded as technical services as contemplated under said Section. In the case of M/s. Kotak Securities Ltd. (Civil Appeal No. 3141 of 2016), the Hon'ble Supreme Court reversed the decision of the Hon'ble High Court and held that services which do not satisfy test of catering to specialized, exclusive and individual requirement of the user would be merely in the nature of a facility offered and consequently, would not fall within Explanation 2 to Section 9(l)(vii)of the Act. The aforesaid citations are also against the assessee as the Hon ble S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Going further from the above discussion on Ground No. 3, it is required to be seen as to what is the nature of income of the assessee for the purpose of taxation. It has been held in a number of judgments that where income is of a specific nature, it would be assessed under the specific provisions and it would not be chargeable to tax under the general provisions. In the present case, the assessee has offered business income to tax arising through a business connection in India. The AO in his order has made out the case for charging the income to tax as royalty. The AO is principally relied on the case of Cargo Communication Network Pvt. Ltd. decided by the Authority for Advanced Ruling in Application No.688/2006. In the said case, however the liaison office was setup for the purpose of acting as a connection channel between the head office and parties located in India. The LO also provided technical support in the nature of training to the clients, personnel and provide day to day support. In this context, after analyzing the activities of the aforesaid entity the AAR held as under: The applicant is engaged in the business of providing access to an Internet based Air Cargo Po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orted by the following decision of the Gujarat High Court in Meteor Satellite Ltd. Vs. Income-tax Officer 121 ITR 311 12. One of the contentions urged by Mr. Desai was on the question of interpretation of s. 9(1), clause (vi) and he contended that even if the proviso to clause (vi) of s. 9(1) applied, the only thing that the provision would help the petitioner in doing would be to take this particular income by way of royalty out of the provisions of clause (vi) but that would still leave the matter open to be brought under clause (i) or clause (mi) of s. 9(1). In our opinion, this contention must fail. Clause (vi) of s. 9(1) deals with a specific type of income, namely, income by way of royalty, whereas clause (i) of s. 9(1) is a more general provision, which deals with all incomes accruing or arising, whether directly or indirectly, through or from, any business connection in India. Income by way of royalty is a species or one of the categories of a larger class mentioned in clause (i) of s. 9(1) and, hence, the specific instance having been provided by clause (vi), once we come across the question of royalty, we have only to look at that clause (vi) and not to the more gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... listed out again that the assessee would provide the login and password to the client, through which the client would be able to interact with the assessee. In such interaction, the client would be able to avail to the specific services which are offered in the functionality. In other words, the client would furnish some data or write up after logging in on his login portal. This data would be utilized and analyzed by the assessee on it s off shore location in the US. The assessee company after application of its Intellectual Property and expert advice would generate some solution for the customer or the client. It has been clearly mentioned in the Master Agreement that the data analyzed and outputs of the data collected at the customer portal have been worked on through exclusive IP. The advice or the solutions provided are based on principally protected software and the experience and data analyzed by experts, which has been developed by the assessee company. This protected software offers facility to the clients to login, furnish some data and then access reports generated on the data. Now it is important to see the definition of Royalty under the Act. Again it is reiterated th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nic platform, followed by input of data by the client and this data is analyzed and an output advice generated. In the present case, the source code of the process developed by the assessee is the basis of supplied information to the clients. It is actually a set of steps or a combination of processes which are followed for the analysis of data. The consideration being paid by the client is mentioned above is both for Execution and implementation of the software on the client s end. Per month charges payable by the client to the parent company, and Payment also made on a passenger based usage fee The payment being made is prima facie for the purpose of specific services being rendered to the client. These services take the shape of royalty since the consideration for these services is for the use of a process. It is also noteworthy that this process [ a dedicated software] is actually Intellectual Property of the client. On both accounts, the use of such process or property is in the nature of royalty. The assessee in his submission has tried explaining that the consideration received is for use of a standardized product. The detailed submission by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablishment as mentioned in section 92F. The definition includes a fixed place PE which the assessee does not have. As a result, the provisions of Section 44D$. are not applicable to the assessee. 6.2 In the absence of availability of Sec.44DA, the royalty cannot be taxed on a net basis. This implies that there cannot be any allowance for any expenses as provided in section 44AD. Therefore the only mechanism available for taxation of the revenue raised from the Indian clients is on a gross basis. The taxability of FTS or Royalty being at a lower rate of 10% is on the gross amount is also the reason that no expenses can be allowed when it is taxed as such. 6.3 Further, since the tax rate has already been reduced, the question of attribution while taxing it on a gross basis does not arise. Or in other words when a tax is charged at the rate of 10% of the gross amount it factors in attribution also since normal rate of tax is 40% to a foreign company. The assessee therefore also does not have any recourse to Rule 10 as the said rule is applicable only to business income referred to in 9( 1)(i) and the income from Indian revenues, is chargeable as royalty in the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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