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TMI Blog2023 (11) TMI 390X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to Rs. 4,29,06,250/- for payments made to Brain Point consultants UAE ignoring the fact that India UAE DTAA has no clause on Fee for Technical Services. 3. On the facts and circumstances of the case whether the Ld. CIT(A) has erred on facts and in law to delete the disallowances made u/s 40(i)(a) of the Act amounting to Rs. 2,65,03,316/- for payments made to OIT Managed Services Mauritius on grounds that in absence of any specific clause for FTS in the India Mauritius Treaty, the taxability will be determined as per the provisions of Income Tax Act, 1961 and payment made is of the nature of Royalty for transfer of copyright in the 'Work Product' and the associated services and are chargeable to tax as fee for technical services." 3. Briefly stated the facts of the case are that the assessee is engaged in the business of computer software. The assessee filed its return of income on 07.10.2017 declaring income of Rs. 6,99,57,250/-. The case of the assessee was selected for scrutiny through CASS. Statutory notices along with questionnaire under section 143(2) and 142(1) of the Income Tax Act, 1961 (the "Act") were issued to the assessee on various dates online through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance under section 40(a)(i) of the Act in respect of payment made to Dubai Leading Technologies UAE 5. The Ld. DR strongly supported the order of the Ld. AO who by recording his observations and findings in para 6.1.2, 6.1.3, 6.1.4, 6.1.6 of his order of assessment held that the payment made to Dubai Leading Technologies, UAE is in the nature of FTS for the following reasons:- i) The payments have been made to Dubai Leading Technologies for development of an android app with features such as integration with calendar, event management and notifications, appointment management with teacher and principal, able to connect to schools other sub systems like attendance marking, assignment submission, geo tagging, school news and help button for calling for help at designated number in case of emergency. The above specifications makes it amply clear that the software has been custom made for the assessee with specific on demand features and requires integration with the other sub-systems of the school. ii) By referring to certain clauses of the agreement between Dubai Leading Technologies and the assessee (at pages 11 to 13 of the assessment order), the Ld. AO arrived at a conclus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following documents / submissions:: (I) Tax Residency Certificate, issued by respective countries; II) Form 15CA and Form 15CB, evidencing that the payments needed to be remitted without payment of TDS. III) That the appellant did not have a Permanent Enterprise (PE); * The activity was utilized for the purpose of making or earning income from a source outside India. * The appellant has relied on Section 90(2) of the Act. It is argued that the provisions which are more beneficial - i.e. Treaty provisions or Income-tax Act, i.e. either of the two should be applied; * Further, the appellant has also drawn attention to the fact that the decision of Hon'ble ITAT Chennai in the case of DCIT vs. TVS Electronics (Supra) has been overruled by Hon'ble High Court of Madras in Bangkok Glass Industry Ltd. Vs. ACIT [34 taxmann.com 77, 2013] and by the Banagalore ITAT in Kingfisher vs. DDIT (179 ITD 364). 6. In the context of the above submissions of the appellant needs to be evaluated in the context of findings given by the AO. The deductibility of TDS will depend on the provisions of DTAA and other relevant factors. 7. Analysis of payment made to Dubai Leading Technolo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a (PE) of the non-resident in India, the same cannot be taxed. We have already made a reference to the decision of the ITAT Bangalore in the case of ABB FZ-LLC which was a case rendered in the context of DTAA between India and UAE. The decision of the CIT(A) is in line with the decision referred to above and is a correct interpretation of the treaty. We find no grounds to interfere with the decision of the CIT(A) on this issue. 7.3 In view of the ratio of decision as enumerated Kingfisher Airlines Ltd. v. DDIT (supra), there is no denying that the said remittance cannot be brought within the ambit of FTS'. Whether the same can be treated as payment towards 'royalty' is a matter which needs to be looked into. The payment for development of mobile application is akin to payment for development / purchase of computer software- it would be relevant to look at the basis for treatment of payment for development of computer Software'. In order to treat the payment for development of mobile application which is akin to payment for development / purchase of computer software as "royalty", the said payment must refer to payments of any kind received as a consideration for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be accepted as a business income covered under Article-7 of DTAA. In the absence of a PE, the same is not chargeable to tax in India. Hence, the action of the AO is disallowing the amount u/s 40(a)(i) of the Act is erroneous." 8. It is an undisputed fact that the payee/ remittee do not have a PE in India. We observe that the Ld. CIT(A) has analysed the impugned issue in great detail in para 7.1 to para 7.4 of his appellate order qua the nature of service agreement dated 3.10.2016 entered into between the assessee and Dubai Leading Technologies for development of mobile app on Android and various judicial precedents (extracted above) inter-alia including therein the decision in the case of Kingfisher Airlines Ltd. (supra). In Kingfisher Airlines Ltd.'s case (supra) the Bangalore Tribunal held that the remittance cannot be brought within the ambit of FTS in view of the absence of a specific clause relating to FTS in the DTAA and the settled position of law that in the absence of a clause in DTAA not dealing with a particular item of income, the payment should not be regarded as residuary income but as business income which is not chargeable to tax in India in the absence of a PE o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es otherwise rightly the Tribunal came to the conclusion that a sum of 4,79,640 USD alone would fall for consideration under art 12 as royalty income and the other to be assessed as by way of technical services. As already pointed out even herein, with the finding of the assessing authority on the remand order that the assessee had no PE, the said amount cannot be brought under art.7. In the light of the above, we have no hesitation in confirming the order of the Tribunal. 20. As far as the order in art. 22 is concerned, we do not find any justifiable ground to uphold this portion of the order after the discussion on the extent of income falling for consideration under royalty as defined under art. 12 and the amount paid as towards technical services falling for consideration under art. 7. Since the said income does not fall as miscellaneous income, the same cannot be brought under art. 22. 21. Even though learned standing counsel made a submission that the fee paid towards technical services cannot be brought towards business income, yet in the absence of any material to show that the same is not related to the business of the assessee. We have no hesitation in rejecting the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confirmed." 9. We also observe that the Ld. CIT(A) has also considered whether the impugned payments can be characterised as 'royalty' in the hands of the payee. The Ld. CIT(A) arrived at the conclusion that the payments made by the assessee for development of mobile application software is akin to payments for development/purchase of computer software and hence cannot be taxed as royalty payments placing reliance on number of judicial pronouncement on this subject which are mentioned in para 7.4 of his appellate order. Since the Revenue has not disputed the aforesaid finding of the Ld. CIT(A), we have not considered the submissions of the assessee on this aspect of the matter. 10. In the light of the above factual matrix of the case and the legal position set-out above, we do not find any infirmity in the order of the Ld. CIT(A) and uphold his finding that the payments made to Dubai Leading Technologies cannot be brought to tax under Article 22 in the absence of a specific clause for FTS in the India-UAE DTAA. The impugned payments are in the nature of business income which are not chargeable to tax in India in the absence of a PE of the payee/remittee in India. We further upho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f any specific clause for FTS in the India-UAE treaty, the taxability will not be determined as per the residuary clause 22 of the treaty, but by the Income Tax Act, 1961. 12. The Ld. DR supported the above findings of the Ld. AO. On the contrary, the Ld. AR supported the finding of the Ld. CIT(A) and reiterated the submissions made before the Ld. CIT(A) as stated above in para 6 of this order. 13. We have heard the Ld. Representatives of the parties and pursued the material on record. The contention of the Revenue is that the impugned payments made by the assessee for rendering marketing and sales support services are in the nature of FTS and in the absence of a specific clause on FTS under the India-UAE DTAA, the impugned payments should be taxed under the provisions of Article 22 on "other income" which is residuary clause under the India-UAE DTAA. The facts with regard to this issue remain undisputed and the recipient i.e. Brain Point Consultants does not have a PE in India. The Ld. CIT(A) has dealt with this issue in para 8 to 8.7 of his appellate order. His observations and findings on the impugned issue are extracted below: "8. Ananlysis of payments made to Brain Point C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd price benchmarking etc in view of above mentioned detailed discussion none of the services provided by Brain Point Consultants to fit into the terminology "make available", The services offered may be the product of intense technological effort and lot of technical knowledge and experience of the service provider would have gone into it. But, that is not enough to fall within the description of services which make available the technical knowledge, etc. The view is also supported by the order of Authority of Advance Ruling in the case of Ernst & Young (P.) Ltd., In reported [2010] 323 ITR 184 2 (AAR New Delhi), wherein support services were provided by an affiliate in U.K. to EYPL under a global agreement in the Appeal No. 10738/19-201 field of market strategy, knowledge management and sharing, priority accounts strategy, internal communications, public relations, providing global data centre services etc. This Authority observed that 'support services were aimed at providing information and guidelines so as to ensure uniformity and seamless quality in the business dealings of the group entities and by furnishing such services it cannot be held that the technical knowledge a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4(1), total income for the previous year is chargeable to tax. Section 4(2) inter alia provides that in respect of income chargeable under sub-section (1), income tax shall be deducted at source whether it is so deductible Appeal No. 10738/19-20 under any provision of the 1961 Act which inter alla brings in the TDS provisions contained in Chapter XVII-B in fact, if a particular income falls outside Section 4(1) then TDS provisions cannot come in. 16. Under Section 5, all residents and non-residents are chargeable in respect of income which accrues or is deemed to accrue in India or is received in India, Non-residents who are not assessable in respect of income accruing and received abroad are rendered chargeable under Section 5(2)(b) in respect of income deemed by Section 9 to accrue in India. "(emphasis supplied) 17. After referring to Eli Lilly (supra) in GE India Technology Centre Private Limited (supra), it has been held: "17. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in CIT v. Eli Lilly & Co. (India) (P) Ltd. the provisions for deduction of TAS which is in Chapter XVII dealing with collection of taxes and the charging provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be held that there is no error in the findings Appeal No. 10738/19-20 recorded by the Commissioner of Income Tax (Appeals) which have been upheld in the impugned order by the ITAT 8.5 In the above case, it was held by the Hon'ble Court that the income of a non-resident agent from providing marketing and sales support, rendered for overseas client cannot be included u/s 5(1) of the Act and, hence, not liable to TDS. In view of the above ratio of decision as stated hereinabove, it can be held that no TDS was required to be deducted by the appellant in the present case. 8.6 Further, the AO has sought to invoke the provisions of Article 22 in the absence of a specific clause in FTS in the DTAA between India and UAE. This has been undertaken in view of the decision laid down by ITAT Chennai in DCIT vs. TVS Electronics Limited. However, in view of the decision in Kingfisher Airlines vs. DDIT (supra) the same is not being followed here. 8.7 Accordingly, in view of the discussion hereinabove, the action of AO in invoking the provisions of section 40(i)(a) of the Act is held to be erroneous." 14. From the above, it is abundantly clear that the Ld. CIT(A) after considering the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer of copyright in the 'Work Product' and the associated services are chargeable to tax as fee for technical services. iii) The Chennai Tribunal in DCIT v. TVS Electronics Ltd. [TS-421-ITAT- 2012] has ruled that in absence of any specific clause for FTS in the India Mauritius treaty the taxability will not be determined as per the residuary clause 22 of the treaty but rather by the Income Tax Act, 1961. 17. On appeal, the Ld. CIT(A) relying on the decisions in the case of Bharti Axa General Insurance Co. Ltd. 326 ITR 477 (AAR) and Rackspace US Inc. vs. DCIT (2020) 113 taxman.com 382 (Mumbai Trib) held that the payment towards web hosting services cannot be held as royalty or FTS. 18. The Ld. AR supported the order of the Ld. CIT(A). He submitted that the impugned issue stands squarely covered by the decisions of Coordinate Bench of the Tribunal in the case of Millenium Infocom Technologies Ltd. vs. ACIT 117 ITD 114 (Delhi Trib.); Rackspace US Inc. (supra) as well as decisions of the Delhi ITAT in the case of MOL Corporation vs. DCIT ITA No. 1554/Del/2016. 19. We have considered the submissions of the parties and perused the records. We observe that the Ld. CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... systems vis an authenticated web-based portal (k) Assisting in the analysis and interpretation of reports 9.2 So far as payments to OIT Managed Services Mauritius is concerned, the AO concluded on construction of DTAA between India and Mauritius that the payment is in the nature of royalty and therefore, the appellant was obliged to deduct TDS under section 195 of the Act. Hence, the AO made a disallowance under section 40(a)(i) of the Act. In this regard AO in the assessment order has noted that 'the services being provided are not standalone hosting services provided by OIT managed services, these are Amazon Web Services (AWS) based services which run ultimately on a server of Amazon. The services provided by the Mauritius based entity include creation and configuration of virtual machines, sending alerts, monitoring threshold settings, script configuration for rapid restart of devices, assistance in analysis of the generated reports which are technical in nature. The deliverable has been mentioned to achieve availability of 99% and the service level agreement mentions the expected response times which would certainly involve manual intervention as well, the payment is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing full effect to the definition contained in the Treaty. This Authority is therefore, of the view that the fee paid to the AXA ARC by the applicant does not amount to fee for technical services within the meaning of India-Singapore Tax Treaty. (ii) Mumbai Tribunal in the case of Rackspace, US Inc vs DCIT reported in [2020] 113 taxmann.com 382 (Mumbai - Trib.) wherein the issues before the tribunal was that the Assessee, a US based company, earned income from providing cloud services including cloud hosting and other supporting and ancillary services to its Indian customers therefore whether impugned income earned by assessee could be said to be royalty within meaning of Explanation (2) to section 9(1)(vi) the Hon'ble Mumbai Tribunal has held that income earned from cloud hosting services cannot be treated as "Royalty", relevant extracts, as to the reasons as to why the same cannot be treated as 'Royalty' is enunciated hereunder :- "10. We have heard the rival contentions and gone through the facts and circumstances of the case. We noted that as per the provisions of section 9(1)(vi) of the Act royalty is taxable in India inter alia if the payer an Indian resident, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration for the list of or the right to Use, any copyright of literary, artistic or scientific work including cinematograph or work on ten, tape or other means of reproduction for use in connection it radio or television broadcasting, any patent, trade mark, design or model, plan secret formula or process, or for information (concerning industrial, commercial or scientific experience including gains derived from the alienation of any such right or property which are Contingent on the productivity, use, or disposition thereof, and (b) Payments of any kind received as consideration for the use, or right to use, any industrial, commercial or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8' (Emphasis supplied). 13. As may be observed, the definition of royalty under Article 12(3) of the India-USA Tax Treaty in respect of payment for use or right to use equipment is in pari-materia with the pre-amendment definition of royalties in the Act. The said definition of "royalties" is exhaustive and not inclusive and therefore, it has t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e hosting services simpliciter and is not for the purpose of giving the underlying equipment on hire or lease. The customer was not knowing any location of the server in data centre, web mail, websites etc. Accordingly, it cannot be said as royalty within the meaning of Explanation (2) to Section 9(1)(vi) of the Act as well as Article 12(3)(b) of the Indo-USA Data by the AO and DRP Moreover, there is no PE of the assessee in India and hence, no income can be taxed in India in term of Indo-US DTAA. The facts are not distinguishable in this order also. Therefore, the finding above is quite applicable to the facts of the present case. Accordingly, we find that the issue is squarely covered by the decision of Hon'ble ITAT in the assessee's own case(supra), hence, we decide these issues in favour of the assessee against the revenue. 9.3 Therefore, in view of the judicial pronouncements in the context of facts of the case, the payment cannot be held to be Royalty. Accordingly, the disallowance made by AO is erroneous u/s 40(i)(a) of the Act. Therefore, the grounds are allowed." 20. The impugned issue is covered in favour of the assesee in umpteen number of cases. In MOL Corpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o not have any access to the process of the service provider i.e. the assessee, and the assessee does not have any access except otherwise provided in the master subscription agreement to the data of the subscriber. 29. In our considered opinion, all the equipments and machines relating to the service provided by the assessee are under its control and are outside India and the subscribers do not have any physical access to the equipment providing system service which means that the subscribers are only using the services provided by the assessee." 8.3 The Mumbai Tribunal in the case of DDIT v Savvis Communication Corporation [2016] 69 taxmann.com 106 (Mumbai - Trib.) has held that payment received for providing web hosting services though involving use of certain scientific equipment cannot be treated as 'consideration for use of, or right to use of, scientific equipment' which is a sine qua non for taxability under section 9(1)(vi), read with Explanation 2 (iva) thereto as also article 12 of Indo-US DTAA. The Chennai Tribunal in the case of ACIT v Vishwak Solutions Pvt. Ltd ITA No. 1935 & 1936/MDS/2010 dated 30.01.2015 has upheld the findings of CIT(A) that "the amount paid to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e royalty income." 21. In the case of Millenium Infocom Technologies Ltd. (supra), the Delhi Tribunal on the question inter-alia, whether provision of space on the servers by the non-residents for the purpose of hosting of the website would amount to provision of technical service, held as under:- "8. We have heard both the parties and perused the material available on record. The facts of the case are not in dispute. The assessee had paid Rs. 3,26,386 to four non-resident companies for launching of different websites on their servers located in USA. No tax was deducted while making the remittance on the ground that the amount was not chargeable to tax in India. The assessee claimed deduction in respect of the said amount as revenue expenditure. The AO disallowed the amount under Section 40(a)(i) on the ground that the assessee did not deduct any tax at source at the time of remittance to non-resident. Under Section 40(a)(i) relevant to asst. yr. 2001-02, in the case of any assessee, any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hows that consideration paid for rendering of any managerial, technical or consultancy services, as also the consideration paid for the provision of services of technical or other personnel, would be regarded as fees paid for "technical services". The definition excludes from its ambit the consideration paid for construction, assembly, or mining or like project undertaken by the recipient, as also consideration which would constitute income of the recipient chargeable under the head "Salaries". 8.2 Hon'ble Madras High Court in the case of Skycell Communication Ltd. and Anr. (supra) had an occasion to examine the scope of term "technical services". It has been held as under: Thus while stating that 'technical service' would include managerial and consultancy service, the legislature has not set out with precision as to what would constitute 'technical' service to render it 'technical service'. The meaning of the word 'technical' as given in the New Oxford Dictionary is adjective 1. of or relating to a particular subject, art, or craft or its techniques; technical terms (especially of a book or article) requiring special knowledge to be underst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal services to the consumer resulting in the consumer having to deduct that at source on the payment made for power consumed and remit the same to the Revenue.... Installation and operation of sophisticated equipments with a view to earn income by allowing customers to avail of the benefits of the user of such equipments do not result in the provision Lo technical service to the customer for a fee. On applying the above stated reasoning to the facts of case before us it can be safely concluded that providing of space on the servers by the non-residents for the purpose of hosting of the website will not result in the provision to technical service to the assessee for a fee. Therefore the payments were not made for fees for technical services liable to be taxed in India." 22. Based on the above facts and legal position set out abvoe, we are of the considered view that the web hosting services availed by the assessee do not constitute royalty or FTS and hence payments made by the assessee to OIT Managed Services Mauritius in consideration of such services are not chargeable to tax in India consequent to which the assessee is not required to withhold any tax on the impugned payme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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