TMI Blog2023 (7) TMI 178X X X X Extracts X X X X X X X X Extracts X X X X ..... ade by CPI to the Assessee could not have been brought to tax under the Act as equipment royalty. Further, in our view, for the aforesaid reasons, the submissions made by Mr. Suresh Kumar in the context of equipment royalty are totally devoid of merit. Payment made by CPI to the Assessee was not process royalty under Clause (iii) to Explanation 2 to Section 9(1)(vi) - Explanation 6 to Section 9(1)(vi) clarifies that the expression process includes and shall be deemed to have always included transmission by satellite, cable, optic fibre or by any other similar technology, whether or not such process is secret. As rightly submitted by Mr. Pardiwalla, and as rightly held by the ITAT, Explanation 6 includes within the definition of process live transmission of programmes such as channel feed and not access of the SAP system of the Assessee as done by CPI, which is a standard facility provided by the Assessee to CPI, and is used for input of data and generation of reports. In these circumstances, in our view, Explanation 6 also does not take the case of the Revenue any further. We are of the view that the ITAT is correct in holding, on facts, that the payment made by CPI to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TAA, the payment received by it from CPI, which would be business profit, is not taxable in India. No substantial question of law - Revenue appeal dismissed. - K.R. SHRIRAM FIRDOSH P. POONIWALLA, JJ. For the Appellant : Mr. Suresh Kumar,. For the Respondent : Mr. Percy Pardiwalla, Sr. Advocate with Mr. Madhur Agrawal, Mr. Jay Zaveri, Ms. Rhea Prakash and Ms. Tavleen Saini i/b. Crawford Bayley Co.,. JUDGEMENT (PER FIRDOSH P. POONIWALLA J.) :- The present Appeal is filed by the Revenue challenging the Order dated 25th January 2017 passed by the Income Tax Appellate Tribunal (ITAT). Respondent is the Assessee under the provisions of the Income Tax Act, 1961 (the Act) and the relevant Assessment Year is 1999- 2000. 2. The Assessee, i.e. Colgate Palmolive Marketing SDN BHD, is an entity incorporated in Malaysia and is engaged in the business of marketing, distribution and sale of household products, fabrics and personal care. Colgate Palmolive (India) Limited (CPI) entered into an Agreement dated 14th May, 1998 with the Assessee for use of the Assessee s SAP system (the said Agreement). As per the said Agreement, the Assessee was to charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the services is subject to tax as fees for technical services under the Act, at the rate of 20 percent on a gross basis. Ground 3 The Learned CIT(A) erred in denying the option granted to the Appellant under Section 90 of the Act, to be taxed under provisions of the Act or the Double Tax Avoidance Agreement, as the case may be, to the extent whichever is more beneficial to the Appellant. Ground 4 The Learned CIT(A) has erred in holding that the payments received by the Appellant for the use of the system and for the rendering of services are not in the nature of reimbursement of expenses. 6. By an Order dated 25th January 2017, the ITAT allowed the Appeal of the Assessee. The said Order dated 25th January 2017 of the ITAT has been impugned by the Department in the present Appeal. The following questions of law were proposed in the Memo of Appeal:- (a) Whether on the facts and in the circumstances of the case and in law, the Hon ble ITAT erred in deleting the order of Ld. CIT(A) and holding that payment made to the assessee by the Indian Company CPI for the use of software owned by the assessee is not Royalty by making an illusory distin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that, though, in view of the provisions of Section 90(2) of the Act, the Assessee had an option to opt for taxation either under the Act, or the DTAA, whichever is beneficial to him, however it was imperative to look into the meaning of royalty given in the Act and in the DTAA. Relying upon the provisions of Sections 5 and 9 of the Act, and the amendments made in Section 9 from time to time, he submitted that, as far as taxation of income arising out of royalty is concerned, the source rule would apply. In other words, the country where the actual economic nexus of the income lies has the right to tax income irrespective of the place of residence of the entity deriving the income. He further submitted the definition of royalty provided in the explanations to Section 9(1)(vi) is wide enough to cover industrial royalty as well as copyright royalty. He submitted that the DTAAs entered into by the Government with foreign countries, which are worded in similar manner as Explanation 2 to Section 9(1)(vi), encompass both industrial royalty and copyright royalty. He further submitted that Finance Act 2000 substituted the old Explanation 3 with a new one and Finance Act 2001 inserted C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case may be, for granting relief of tax or avoidance of double taxation, then, in relation to the assessee to whom such an agreement applies, the provisions of the Act would apply to the extent that they are more beneficial to that assessee. Relying upon Section 90(2), the ITAT held that, since under the Act, for Assessment Year 1999-2000, equipment royalty was not provided for, the Assessee could take advantage of this provision which was more beneficial to it, instead of the terms of the Indo Malaysian Double Taxation Avoidance Agreement (DTAA), and therefore the question, of the payment made by CPI to the Assessee being equipment royalty, did not arise at all. 13. In our view, the provisions of Section 90(2) of the Act are very clear. By virtue of the provisions of Section 90(2), if between the provisions of the DTAA and the Act, the provisions of the Act are more beneficial to the Assessee, then the Assessee can opt for taxation under the Act, instead of the DTAA. In the present case, since, for the Assessment Year 1999-2000, the definition of royalty given in Explanation 2 to Section 9(1)(vi) did not include equipment royalty as Clause (iv a) was inserted into the said Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ized as royalty under the Act. 17. Further, Mr. Pardiwalla submitted that Explanation 6 to Section 9(1)(vi), inserted by the Finance Act 2012, with retrospective effect from 1st June 1976, provides that the expression process includes transmission by satellite (including uplinking, amplification, conversion for downlinking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. He submitted that this Explanation had no bearing on the Assessee s case since payment made by CPI to the Assessee was not for transmission by satellite, but for access to the SAP system. He submitted that merely because communication channels were used for input of data and generation of report would not mean that there is transmission by satellite. He submitted that what the explanation seems to bring in is live transmission of programmes such as channel feed and not SAP system, which is a standard facility provided by the Assessee. 18. The ITAT held that, if the language employed in Clause (iii) of Explanation 2 to Section 9 (1) (vi) is properly analyzed, it can be seen that there must a right to use of some of the categories of items as mentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocurement, production, sales order processing and payroll processing. On the basis of the data fed into the system, stake holders at the divisions level can have visibility to the stock position across the countries in the division. With global manufacturing facilities supplying to many countries, online data available in SAP is very crucial in placing orders for procurement. Financial records are consolidated using the reporting modules and are made available within few days of the close of the period. The group companies in different countries can only process transactions and have no access to modify any of the configurations. 22. Based on the aforesaid, the ITAT came to the conclusion that the payment made by CPI is for the purpose of accessing the SAP system hosted by the Assessee at its facilities for exchange of information / data. 23. Further, in the context of process royalty, the ITAT further held that Explanation 6 to Section 9(1)(vi) would have no bearing on the issue at hand as what is meant by the said Explanation is live transmission of programmes such as channel feed and not SAP, which is used for input of data and generation of outputs. Accordingly, the ITAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnel feed and not access of the SAP system of the Assessee as done by CPI, which is a standard facility provided by the Assessee to CPI, and is used for input of data and generation of reports. In these circumstances, in our view, Explanation 6 also does not take the case of the Revenue any further. 28. For the aforesaid reasons, we are of the view that the ITAT is correct in holding, on facts, that the payment made by CPI to the Assessee for accessing the SAP system does not amount to process royalty under Section 9(1)(vi) of the Act. On Explanation 5 to Section 9(1)(vi) 29. The ITAT has also held that the payment made by CPI to the Assessee would also not be covered by Explanation 5 to Section 9(1)(vi). 30. Mr. Suresh Kumar has challenged the said finding of the ITAT and has submitted that the payment made by CPI to the Assessee amounts to consideration in respect of any right, property or information. 31. Mr. Pardiwalla submitted that, as the SAP system was resident in Malaysia and USA, CPI merely accessed the system, and did not have any control or possession thereof. Hence, payment made by CPI cannot be regarded as payment for use of the system. He further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14 of the Indian Copyright Act says that the meaning of copyright given therein is only for the purpose of that Act. He submitted that, where the meaning of a particular word is to be taken from another Act, the legislature expressly indicates the same. He submitted that the claim of the Assessee has to be tested in the light of the definitions of royalty in the Act and DTAA without referring to the definition under the Copyright Act, 1957. He further submitted that the test to find out whether payment made for use of software is royalty is whether the person making the payment is able to commercially exploit the software just like the owner of the software and earn profit by using the software. He submitted that CPI, by making use of data and information obtained from SAP, had used it in its business to make profit, hence, the payment was in the nature of royalty under clause (v) of Explanation 2. 38. On the other hand, Mr. Pardiwalla referred to the judgment of the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited Vs. Commissioner of Income Tax and Anr. reported in (2022) 3 Supreme Court Cases 321. He submitted that the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xploit such rights. 41. Clause (v) to Explanation 2 reads as under : (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting. 42. This clause has been interpreted by the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited (supra). Paragraphs 75, 83 and 84 of the said judgment read as under:- 75. However, even where such transfer is in respect of copyright, the transfer of all or any rights in relation to copyright is a sine qua non under Explanation 2 to Section 9(1)(vi) of the Income Tax Act. In short, there must be transfer by way of licence or otherwise, of all or any of the rights mentioned in Section 14(b) read with Section 14(a) of the Copyright Act. 83. However, when it comes to the expression use 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red. For Explanation 4 to apply again there has to be transfer of right to use a computer software. In the present case, the Assessee has not transferred to CPI the right to use any computer software. It has only allowed CPI to access the SAP system. For this reason, on facts, even Explanation 4 is not applicable. 45. For the aforesaid reasons, we are of the view that, on facts, the ITAT has correctly come to conclusion that clause (v) to Explanation 2 is not applicable in the present case. On Article 7 of the DTAA 46. The last question that the ITAT considered is whether the consideration received by the Assessee could at all be taxed in India. The ITAT concluded that, since the consideration received by the Assessee from CPI towards the use of SAP system is not royalty in terms of DTAA, it would a business profit under Article 7 of DTAA. 47. Mr. Suresh Kumar submitted that the payment received by the Assessee from CPI towards use of the SAP system was royalty and not a business profit and therefore taxable in India. We have already concluded, for the reasons given herein above, that the same is not royalty. 48. Mr. Pardiwalla supported the finding of the ITAT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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