TMI Blog2024 (1) TMI 309X X X X Extracts X X X X X X X X Extracts X X X X ..... exception, wherein it provides that FTS payable by an Indian resident shall not be chargeable to tax in India in the hands of the overseas recipient if i) fee is payable in respect of services utilized in a business or profession carried on by such resident outside India , or ii) fee is payable for the purposes of making or earning any income from any source outside India. In the instant case before us, both the aforesaid conditions provided in exception to section 9(1)(vii)(b) of the Act stand fulfilled. Hence it cannot be taxable as FTS under section 9(1)(vii) of the Act. Source of income refers to something from where the income flows. In the present case, the fact that the services rendered by the assessee were utilized in respect of customers of HCLT located outside India ; the ultimate delivery of the software was outside India, i.e., at the customers' location; the contract was effectively concluded outside India; that no part of the services rendered by the assessee are transferred to India; that the source of income of the payer in respect of which payment was made to the assessee was outside India and hence, the said payment in the hands of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s merely academic in nature in these appeals. Hence no opinion is rendered by us on the same and they are left open. Accordingly, the Ground Nos. 5 9 raised by the assessee are allowed. Taxability of payments received by the assessee for certain categories of Infrastructure Services - We find that the assessee had not rendered any services to HCLT under the Infrastructure Services, which is evident from the submissions of the assessee and discussions made by us hereinabove on the earlier grounds raised by the assessee. We have already held that both the assessee as well as HCLT work independently and render services directly to the end customers and that no service is provided by assessee to HCLT. In any case, from the aforesaid facts explaining the activities carried out by the assessee, it is clear that no technical knowledge, experience, skill, knowhow or process is made available and accordingly the payments received does not qualify as FIS within the ambit of the applicable treaty. It is not in dispute that the assessee does not have any PE in India. At best, the payments received could only be construed as Business Profits in terms of Article 7 of the DTAA and in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. The assessee has raised the following grounds of appeal before us:- 1. That on the facts and circumstances of the case and in law, assessment order passed under section 144C(13)/147/ 143(3) of the Income-tax Act, 1961 ( the Act ) for assessment year 2012-13 assessing the total income of the Appellant at Rs. 26,17,66,998 is without jurisdiction, illegal, void ab initio and therefore, liable to be quashed. 2. Reassessment proceedings initiated under section 147 of the Act are without jurisdiction 2.1 That on the facts and circumstances of the case and in law, the reassessment proceedings undertaken by the assessing officer culminating in final assessment order are without jurisdiction, void ab initio and bad in law.. 2.2 That on the facts and circumstances of the case and in law, the assessing officer erred in passing final assessment order without appreciating that there exist no reasons to believe that income of the Appellant for the relevant assessment year has escaped assessment warranting initiation of reassessment proceedings. 2.3 That on the facts and circumstances of the case and in law, the assessing officer erred in initiating the proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnologies Ltd and its AEs for the purpose of serving overseas customers directly, as one entity providing services to the other entity: 4. Payments not chargeable to tax under section 9(1)(vii) of the Act 4.1 That on the facts and circumstances of the case and in law, the DRP/ assessing officer erred on facts and in law in holding that payments received by the Appellant during the relevant previous year from HCL Technologies Ltd, an Indian resident, were chargeable to tax in India. That on the facts and circumstances of the case and in law, the assessing officer erred in not appreciating that the amount received by the Appellant were in respect of services performed by the Appellant outside India and delivered directly to the overseas customers for utilization in their business carried on outside India and therefore, did not accrue or arise in India so as to be chargeable to tax in India in terms of section 9(1)(vii) of the Act. 4.3 That on the facts and circumstances of the case and in law, the assessing officer erred in arbitrarily alleging in the assessment order that services were rendered by the Appellant to HCL Technologies Ltd. and not to the oversea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax in India, in terms of the applicable DTAA as such services did not make available any technical knowledge, skill or experience or consist of the transfer of any technical plan or design to the HCL Technologies Ltd. 5.2 Without prejudice and in the alternate, that the DRP/ assessing officer erred on facts and in law in not appreciating that the amount received for some of the onsite services rendered by the Appellant were in respect of those categories of Application Engineering Services', viz., Application Support and Maintenance Services, Application Support and Enhancement Services and Others/ Residuary Application Services, which did not involve coding/ designing/ development and were not liable to tax in India in terms of the applicable DTAA as such services did not make available any technical knowledge, skill or experience or consist of the transfer of any technical plan or design. 5.3 Further without prejudice, that on the facts and circumstances of the case and in law, the DRP/ assessing officer erred in holding that 'make available' clause does not apply in respect of development and transfer of technical plan or design. 6. Infrastructure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndent business but was only dependent upon HCL Technologies Ltd. for generation of revenue; c. all risk, reward and liability in respect of the services performed by the Appellant in respect of the contracts entered into with foreign clients was borne by HCL Technologies Ltd.; d. source of income of the Appellant is in India; e. the entire responsibility of execution vis- -vis foreign client remains with HCL Technologies Ltd.; f. project heads of all the projects are located in India and therefore, any work carried out by the employees of the Appellant are being supervised by the project heads of HCL Technologies Ltd.; g. not only the source code is made available by the Appellant but even the knowledge with adequate documentation has been transferred and is available to the employees of HCL Technologies Ltd.: h. employees of HCL Technologies Ltd have been enabled to apply the technology by the employees of the Appellant and HCL Technologies Ltd. after being so enabled has rendered the services to foreign client and raised invoices on them. 9. Without prejudice, that on the facts and circumstances of the case and in law, the assessing offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dispute Resolution Panel (DRP) and the same were disposed of by the DRP vide its directions dated 8.3.2021 giving partial relief to the assessee. Pursuant to the directions of the ld. DRP, the ld. AO passed the final assessment order on 23.4.2021 determining the income of the assessee at Rs. 26,17,66,998/- for the Asst Year 2012-13. Aggrieved, the assessee is in appeal before us. 4. We have heard the rival submissions and perused the materials available on record. The assessee and HCLT are part of the HCL group with the assessee being a subsidiary and Associated Enterprise (AE) of HCLT. HCL America (HCLA) provides services to clients of HCLT outside India as per agreement entered into with HCLT. The assessee company provides the marketing and sales support as well as onsite services. HCL group is engaged in the business of development and export of software and rendering ITES which is categorized into the following lines of business:- a) Software Services (including Engineering Services) b) Infrastructure Services c) Business Process Outsourcing (BPO) 4.1. Software, Engineering and Infrastructure Services are provided to the customers located outside India under a Gl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the onsite services are entirely performed by the assessee from outside India and delivered for ultimate consumption or utilization by foreign clients in their business outside India and both entities perform work directly on the server of the foreign customers. It is not in dispute that the assessee furnished before the ld. AO the income tax return filed with the foreign tax authorities and the copy of tax residency certificate (TRC) issued by the competent authority for the relevant year. 5. It would be relevant to understand the various contracts / agreements signed between the parties. A Master Service Agreement dated 1.7.2010 had been entered into between HCL Singapore Pte Ltd (assessee herein) and HCL Technologies Ltd, India (HCLT ) . Certain relevant clauses of the said agreement are reproduced below:- a) HCL Singapore and HCLT are in the business of providing software and IT services (Services) to their customers. b) HCLT is desirous of utilizing expertise of HCL Singapore and to engage HCL Singapore to perform the Services for its customers on its behalf. c) HCL Singapore has agreed to such engagement subject to the terms of this Agreement. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Existing Intellectual Property Rights in the development of software pursuant to the performance of Services under this Agreement. HCL Singapore shall remain the exclusive owner of such rights, including any modifications or enhancements thereto that may be developed in the course of providing the Services under this Agreement. Clause 9 REMUNERATION 9.1. In consideration for the Services rendered by HCL Singapore hereunder, HCL Singapore shall charge the fee from HCLT which shall be determined based on total cost incurred in the provision of services plus an agreed mark up. The mark up shall be agreed between the parties by mutual consent from time to time. 9.2. It is agreed that HCLT shall withhold taxes as applicable at the time of making payment to HCL Singapore for the Services rendered by HCL Singapore under this Agreement. Clause 10 TAXATION Both parties, hereby, agree that all direct tax (WHT) levies shall be on account of payee (service provider) and all indirect tax (service tax, VAT, GST or similar indirect tax) levies shall be on account of payer (service recipient). Clause 11 LIMITATION OF LIABILITY In no even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C. Cisco and Designer desire that Designer design the Product (as defined herein) on the terms and conditions set forth herein. 1.0. DEFINITIONS 1.1. Affiliate in the case of Cisco shall mean any entity, whether incorporated or not, which is controlled by , under common control with, or controls Cisco, where control means the ability, whether directly or indirectly, to direct the affairs of another by means of ownership, contract or otherwise. Affiliate in the case of Designer , shall mean an entity directly or indirectly controlling, controlled by or under common control of Designer where control means the ownership or control, directly or indirectly of at least 50.1% of the voting power, but only for so long as ownership remains at 50.1% or above. (emphasis supplied by us) . 1.3. Cisco shall mean Cisco Systems, Inc., and its Affiliates. 1.4. Cisco Property shall mean such items provided by Cisco or its Affiliate, Including but not limited to those items described in Exhibit A to each Product Project Specifics, any and all pre-existing technology of Cisco and its Affiliates, Foreground Property and all Intellectual Property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Property Rights with respect thereto. 1.17. Source Code shall mean a fully documented human-readable source code form of the Product, including programmer's notes and materials and Documentation, sufficient to allow a reasonable skilled programmer to understand the design, logic, structure, functionality, operation and features and to use, operate, maintain, modify, support and diagnose errors. 1.18. Specifications shall mean the acceptance criteria and technical and other specifications for the Product, as may be set forth in, and/or which are the result of, the Product Project Specifics. 2.0 DESIGN EFFORT 2.1 DESIGN EFFORT Designer shall design and deliver the Deliverables in accordance with the Specifications set forth in, or agreed upon as a result of, the Product Project Specifics, provided, however, that the due date for any Deliverable, performance of which was delayed on account of failure of Cisco to complete any of its prerequisite obligations in a timely fashion, may be extended up to one day for each day of Cisco's lateness. Each Deliverable shall be delivered in such format and on such media as may be reasonably requested ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rables, Product or Cisco Property, Cisco shall be the sole owner of all rights, title and interests in and to such Deliverables, Product (except the Designer Property), and Cisco Property and all Intellectual Property Rights therein. Designer hereby irrevocably transfers, conveys, and assigns, and agrees to transfer, convey, and assign, to Cisco all of its right, title, and interest in the Deliverables, Product (except the Designer Property), and Cisco Property free and clear of all liens, encumbrances, claims and rights of third parties whatsoever. Further, Designer agrees that such assignment is and shall be perpetual and the assignment shall not lapse under any circumstances including non-exercise of such assignment by the assignee for any period of time. Cisco shall have the exclusive right to apply for or register any patents, mask work rights, copyrights, and such other proprietary protections with respect thereto. Designer shall execute such documents, render such assistance, and take such other actions as Cisco may reasonably request, at Cisco's expense, to apply for, register, perfect, confirm, and protect Cisco's rights in the Deliverables, Product and Cisco Prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Designer shall register with Cisco's Logo Program at: http://www.cisco.com/logo/index.html. 3.3. OWNERSHIP OF RELATED TECHNOLOGY Subject to the ownership rights specified in Sections 3.1 and 3.2, any technology (i) which is not incorporated in the Product and does not constitute Cisco Property, Designer Property, or Foreground Property, and (ii) which is jointly created, conceived and reduced to practice, designed, or prepared by the parties pursuant to this Agreement or conceived, designed, or prepared by Designer as a direct result of Designer's efforts hereunder shall be owned by Cisco. Cisco hereby grants Designer and/or its Affiliates a royalty-free, perpetual and irrevocable, worldwide, non-exclusive license to use, reproduce and distribute (in both Object Code and Source Code format) products developed by Designer incorporating or using said technology. 3.7. PROTECTION OF INTELLECTUAL PROPERTY RIGHTS Designer shall immediately notify Cisco of any and all events that threaten the integrity of any and all of Cisco's Intellectual Property Rights including, but not limited to, any Intellectual Property Rights in any Products or Cisco Prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (emphasis supplied by us) 10.0. INDEMNITY BY DESIGNER AND CISCO 10.1. GENERAL INDEMNIFICATION BY DESIGNER Designer will indemnify, defend, and hold harmless each of Cisco and its Affiliates and each of their officers, directors, employees, successors and assigns (collectively the Indemnified Parties ) from and against all third party claims, suits, demands and actions brought against the Indemnified Parties or tendered to the Indemnified Parties for defense and/or indemnification (collectively General Claims ), and for all damages, losses, costs, and liabilities (including reasonable attorney and professional fees) that result or arise from General Claims (collectively General Losses ), which in whole or in part, directly or indirectly, allege that one or more Products, or any part thereof, have caused bodily injury (including death).. 10.2. INTELLECTUAL PROPERTY INDEMNIFICATION BY DESIGNER Designer will indemnify, defend, and hold harmless the Indemnified Parties from and against all third party claims, suits, demands and action brought against the Indemnified Parties or tendered to the Indemnified Parties for defense and/or indemnifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pense, obtain such licenses, or make such replacements or modifications, as are necessary to the continue the manufacture, use, import, service, support, or distribution of the Product without infringement and in compliance with the Product Project Specifics and Specifications within thirty (30) days (or such longer period as determined by Cisco in good faith) after the holding of infringement or the entry of the injunction, as applicable in the event that it is not commercially practicable for Designer to obtain such licenses or make such replacements or modifications. Designer shall provide Cisco with prompt written notice thereof, and shall refund to Cisco the full amount of all amounts paid by Cisco with respect to such Product within thirty (30) days after the date of such written notice. Designer hereby acknowledges and agrees that, in the event that Cisco is subject to any General Losses that are within the scope of Designer's indemnity in Section 10.1. Designer's obligations under this Section 10.4 are in addition to, and not in lieu of, Designer's obligations under that Section 10.1. Furthermore, nothing in this Section 10.4 shall limit any other remedy of Cisc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e claim and permit Cisco to control the defense, settlement, adjustment or compromise of any such claim provided, however, that Designer shall provide Cisco with assistance, at Cisco's expense, as Cisco shall request, in connection with the defense, settlement or discharge of the claim. Designer may employ counsel at its own expense to assist it with respect to any such claim. Designer shall have no authority to settle any claim on behalf of Cisco. The foregoing slates Designer's sole and exclusive remedy and Cisco's entire liability to Designer arising from or relating to the use of the Cisco Property by Designer hereunder 11.0. LIMITATION OF LIABILITY EXCEPT IN CONNECTION WITH INDEMNITY OBLIGATIONS UNDER SECTION 10 (INDEMNITY), AND DESIGNER'S OBLIGATIONS UNDER SECTION 2.10 (USAGE OF OPEN SOURCE) AND SECTION 7 (CONFIDENTIALITY), IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER IN CONNECTION WITH A PRODUCT OR ITS PRODUCT PROJECT SPECIFICS FOR ANY AMOUNTS IN EXCESS OF THE GREATER OF: (A) THE AGGREGATE OF THE FEES PAID BY CISCO TO DESIGNER FOR SUCH PRODUCT OR UNDER ITS PRODUCT PROJECT SPECIFICS DURING THE TWELVE (12) MONTH PERIOD PRIOR TO THE DATE TH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity obligations. 15.1. Workers' Compensation, Social Scheme and Employer's Liability Insurance Workers' Compensation and Employer's Liability insurance shall be provided as required by any applicable law or regulation and, in accordance with the provisions of the laws of the nation, state, territory or province having jurisdiction over Designer's employees. If any such applicable jurisdiction has a mandatory social scheme to provide insurance or benefits to injured workers, Designer must be in full compliance with all laws thereof, including by way of example, Workers' Accident Compensation insurance and Employer's Liability Insurance. 15.2. Commercial General Insurance Designer shall carry Public Liability or General insurance covering all operations by or on behalf of Designer arising out of or connected with this Agreement including coverage for bodily injury. property damage, personal and advertising injury, products liability, completed operations liability and contractual liability with limits of not less than the local currency equivalent of US$ 1,000,000 each occurrence. If claims made policies are provided. Designer shall maintain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Requirements. (a) Additional Insured. Cisco, its subsidiaries, and their respective officers, directors, employees and agents shall be named as Additional Insureds for the Public Liability (or Commercial General Liability) policies required to be maintained by Designer under this Agreement. The policies shall be endorsed to stipulate that Designer's insurance shall be primary to and noncontributory with any and all other insurance maintained or otherwise afforded to any of them. (b) Certificates of insurance. Certificates of Insurance or other formalized evidence of the coverages required above, shall be furnished by Designer to Cisco when this Agreement is signed, or within a reasonable time thereafter, and within a reasonable time after such coverage is renewed or replaced. If reasonably requested by Cisco, a certified copy of the actual policy(s) with appropriate endorsement(s) shall be provided to Cisco. 7. Yet another agreement examined by the ld. AO was the Outsourcing Master Services Agreement signed on 14.12.2009 with Deutsche Bank AG (acting through its London Branch) with a) HCL Technologies Limited b) HCL Great Britain Limited c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of certain services under a number of Statements of Work, Framework Service Descriptions and Project Descriptions (each entered into and defined under either the Agreement or an earlier Outsourcing Master Services Agreement between the Parties dated 5 February 2008 ( MSA 1.0. )) (the Current Services ) until 31 December 2011 (or until the date of execution of this Framework Services Description, if earlier). The Letter also provided for the commencement of the provision of service desk services (under MSA 1.0.) by Supplier to DB from 1 January 2011. The service desk services will be included in the definition of Current Services. (C) DB is in the process of consolidating the number of Suppliers providing Applications support services to its Capital Markets Production Management unit. DB Production Management intends to transition the support of certain Applications provided by certain third party vendors to the Supplier and to one other supplier in order to reduce the overall cost of these services without any degradation or services provided. (D) As such, this Framework Service Description governs the arrangement whereby Supplier will continue to provide the Current S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndustries to focus on and the nature of services that can be offered by HCLT Group; that HCLT India being the entrepreneurial entity of the group takes the strategic decision of the industry/verticals to focus on and service offerings ; that the AEs track the requirements of the market and communicate group s service offerings and value propositions to the prospective clients; that given the proximity to the clients, it is the responsibility of the AEs to provide feedback on market conditions to HCLT India so that it can be considered while devising the strategy; that HCLT India primarily performs strategic and corporate functions such as legal and regulatory affairs, designing group policy, human resource management. Statutory and management accounting, treasury management, routine administration, and management of information systems for the AEs; that HCLT India is responsible for the overall supervision of the activities performed by offshore personnel to ensure that the services are performed as per the prescribed delivery schedules ; that the AEs are responsible for the overall supervision of the activities performed by onsite personnel apart from being responsible for day to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Heads of HCLT, which shows that remittances are not for earning any income from a source outside India. iv) The employees of HCLT have been enabled to apply the technology by the employees of the assessee and HCLT, after being so enabled, has rendered the services to client and raised invoices on them. v) The statements recorded during the survey proceeding make it clear that Indian Project Heads have recruited the employees of the assessee and entire responsibility for execution remains with HCLT. vi) Services have been made available in India. vii) The remittances were in the nature of Fees for Technical Services/ Fees for Included Services, which has been made available by the employees of the assessee. viii) Make available clause in the DTAA is not required to be satisfied in the case of transfer of technical plan or technical design. 14. The ld. AR before us met each of the aforesaid observations of the ld. AO by submitting as under:- 1. Remittances have been made by HCLT to the assessee for providing technical services by the assessee for the contracts entered into by HCLT for which invoices were raised on the foreign clients and therefore, the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee s project lead manages his team independently, which executes work from the overseas locations directly on the customer's server. Both the project managers/ leads only coordinate with each other on need basis. 4. The employees of HCLT have been enabled to apply the technology by the employees of the assessee and HCLT, after being so enabled, has rendered the services to client and raised invoices on them. Reply: Incorrect, as the assessee did not render any services to HCLT but rendered services directly to overseas customers outside India. The services were delivered directly on customers' servers and the assessee itself did not make it available to HCLT. 5. The statements recorded during the survey proceeding make it clear that Indian Project Heads have recruited the employees of the assessee and entire responsibility for execution remains with HCLT. Reply: Factually incorrect. Indian company did not recruit employees for the assessee. Each team of HCLT and the assessee develops the particular modules as assigned to them, therefore, the delivery heads of respective teams of the assessee company and HCLT issues directions to their respective t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice Agreement further establishes that both parties, i.e., the assessee and HCLT are independent contractors and no party has supervisory power over the other. We find that this agreement is the foundation defining the scope of services to be performed by the assessee and HCLT duly defining their respective obligations to the overseas customers. We find that this agreement has not been treated by the revenue as sham or an agreement entered into for the purpose of evasion of tax. Rather the revenue has taken cognizance of this agreement and had only interpreted the contents thereon in a different manner so as to bring the activities carried out by the assessee within the ambit of domestic taxation as well as taxability under the Treaty. In our considered opinion, under the Global Delivery model, HCL group entities operate as independent contractors and services are not rendered by one entity to another. While the assessee performs services outside India in connection with contracts entered into by HCLT with foreign customers, no service or deliverable is provided by the assessee to HCLT and work is directly performed onsite at the foreign customer's location or nearshore deliver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous metro cities. Under the said agreements, franchisees were providing NIIT courses under license from the assessee and the franchisees were to pool their independent resources for purpose of providing computer education to students and were further required to provide infrastructure facilities like classroom facility, equipment, furniture, fixture, administrative set-up, etc. Fees collected from students were deposited in the account of NIIT and then the same was shared with the franchisees in accordance with the terms of the franchisee agreement. NIIT for the purpose of its convenience had categorized the said fees shared as marketing claim and infrastructure claim. The assessing officer treated infrastructure claim paid to franchisees as rent paid and held that NIIT was liable to deduct tax therefrom u/s 194-1 of the Act. The Hon ble Delhi High Court, affirming the decision of the Tribunal, held that having regard to the intent of the parties in coming together and the dominant purpose, the arrangement between the parties was a franchisee agreement and not a lease agreement; accordingly, it could not be said that rent was being paid by NIIT to the franchisees. 16. We find th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resident outside India , or ii) fee is payable for the purposes of making or earning any income from any source outside India. 16.2. In the instant case before us, both the aforesaid conditions provided in exception to section 9(1)(vii)(b) of the Act stand fulfilled. Hence it cannot be taxable as FTS under section 9(1)(vii) of the Act. 17. We find that the ld. AR before us made an alternative argument on without prejudice basis, HCLT provides both onsite and offshore services to the customers outside India. Onsite services are carried out through a separate business segment. Such business carried on by the HCLT outside India utilizes the services of the assessee to provide onsite services outside India, therefore the payments are made by the HCLT to the assessee for services utilized business of HCLT carried by HCLT outside India. On this count also, such payments made by the HCLT to the assessee cannot be construed as FTS in the hands of the assessee. In any event, since onsite services are carried out through a separate business segment and it is an independent identifiable source of earning income outside India, the income earned from such onsite services is from serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source of income. In the case of income from business, which is a separate head under section 6, each business has been treated as a distinct source of income. The decision of the Madras High Court in Commissioner of Income-tax v. E.K. R. Savumiamurthy [1946] 14 ITR 185 (Mad.) proceeds on that basis. In Commissioner of Income-tax v. Lady Kanchanbai [1962] 44 ITR 242 (MP), the Madhya Pradesh High Court observed that each branch of a business could be described as a distinct source of income. A source of income, therefore, may be described as the spring or fount from which a clearly defined channel of income flows. It is that which by its nature and incidents constitutes a distinct and separate origin of income, capable of consideration as such in isolation from other sources of income, and which by the manner of dealing adopted by the assessee can be treated so. Reverting to section 12, we find that income from dividends has been treated as one kind of income. What is the source of dividend income? It is the shareholding held by the assessee; and there can be as many sources of income as there are shareholdings. Shareholding in different companies constitute different sources ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectly to the customers, which is billed as part of the consolidated invoice raised by HCLT on the customers. In the case of the assessee, no part of assessee's work is sent to India for utilization of services in India; the entire onsite services or software program developed by the assessee directly gets integrated into the client's server abroad, hence, the question of utilization of services within India does not arise at all. 19. It is not in dispute that both the onsite and offsite team of HCL group duly possess their own technical skills of their qualified Engineers and are independently capable of rendering respective services. From the above modus operandi, it is clear that both onsite and offsite team comprises of their own technically qualified engineers who have independent know how and capabilities. Onsite services are separately identifiable and independently reviewed as well as approved by the client, basis which the billing is done. The mere fact that HCLT has raised a composite invoice for administrative convenience of its customers for the aforesaid joint efforts of both the teams, should not necessarily do away the independence of the onsite service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to ensure that the services as have been contracted with the end-customers are delivered in the manner it has been agreed. The Project Heads merely ensure proper co-ordination of services between HCLT and the assessee which is to be delivered to the end-customers. It is reiterated that the employees of the assessee do not provide any services to employees of HCLT. Both the teams undertake their work independently and there is no case that the employees of the assessee render services to employees of HCLT only pursuant to which employees of HCLT are enabled to render the services to the end- customers. Therefore, it is submitted, that HCLT in no way whatsoever exercises supervisory jurisdiction over the assessee. (iii) Observation: It is further alleged in the assessment order that majority of the work, major part of the workforce, and major value creation in respect of services performed for foreign clients is in India and that therefore the source of income is in India. Rebuttal: In this regard, it is submitted that the factors considered by the ld. AO for arriving at a conclusion that the source of income is in India are irrelevant and in the teeth of settled judicial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its Affiliates as listed and described in Exhibit B to each Product Project Specifics, any and all Background Property, and all Intellectual Property Rights related thereto. Clause 14.9 of the agreement with CISCO, as reproduced in the assessment order by the ld. AO, clearly states that the designer may delegate the rights to develop and deliver the product with the prior permission of the customer. The said clause is reproduced hereunder:- 14.9 ASSIGNMENT Designer may not assign its rights or delegate its obligation hereunder, either in whole or in part, whether by operation of law or otherwise, without the prior written consent of Cisco. Any attempted assignment or delegation without Cisco's prior written consent will be void. Cisco may, in Cisco's sole discretion, assign this Agreement or any rights granted herein, in whole or in part, to any Cisco subsidiary or Affiliate. The rights and liabilities of the parties under this Agreement will bind and inure to the benefit of the parties' respective successors and permitted assigns. 21. In view of the above, we are unable to comprehend ourselves to accept to the argument of the ld. DR before us t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and some part of it is being done by the assessee (HCL Singapore Pte Ltd.). Both the HCLT and the assessee (HCL Singapore Pte Ltd.) are working together on the server of the client to develop a final product which is to be delivered to the client. 23.1. In view of the above, we find the allegation leveled by the ld. AO in his order that services were rendered by assessee to HCLT is in direct contravention to the findings recorded by the ld. DRP. Needless to mention that the observations of the ld. DRP are binding on the ld. AO as per section 144C(10) of the Act. 24. We further find that if the contention of the ld. AO i.e., the amount paid to the assessee by HCLT is to be considered towards the onsite software services provided by HCLT in the course of carrying on its business of onsite services were to be accepted, such business of providing onsite services would be considered as outsourced by HCLT to the assessee. Such business of providing onsite services is carried on outside India, in as much as such onsite services are performed outside India and is also delivered directly to the customers outside India. HCLT as a corollary would be considered as having availed the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are taxable by applying the source rule. In our view, even assuming that payments made by the assessee come within the ambit of section 9(1)(vii) of the Act, nonetheless, the exception provided under clause (b) to Section 9(1)(vii) would apply. We have already examined the nature of services provided by the foreign attorneys. It is a fact that Indian/overseas clients engage the assessee for availing certain services. In turn, assessee engages the foreign attorneys to perform certain services which are required to be performed in foreign jurisdictions. There is no privity of contract between the assessee's clients and foreign attorneys. In fact, the clients are no way concerned, whether the assessee does the work himself or engages others. Thus, the source of income of the assessee through services rendered by non-resident attorneys in foreign jurisdictions is located outside India. That being the case, exception provided in clause (b) of section 9(1)(vii) would apply. Hence, the payments are not taxable as FTS. 22. In any case of the matter, the departmental authorities have disallowed a part of the expenditure for the only reason that assessee failed to furnish the TRC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directly by the employees of the assessee. These services inevitably require the physical presence of engineers at the site to customer preferences or security reasons or time zone requirements, or for any other reasons, as the case may be. The services of the onsite of the assessee, inter alia, include the following: - Liaising with the overseas customers for gathering their requirements; - Software module development and coding; - Application operation, application maintenance, application development and testing, etc; - Support services during specific country's business hours. 26.1. We find that the aforesaid activities are performed by the assessee onshore at the location of the customers or at the customer's server located abroad, which is not disputed before us. The requirement analysis and application design documents prepared by the onsite team are stored in client's environment itself and can be accessed by the HCLT offshore team only upon client granting permission or access. The mere fact that the assessee is engaged in understanding the requirements of the customers and passes on the requirement plan to respective development teams for design ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... W, both teams work independently on the client's server and the customers are billed according to the time and efforts of each team. 28. Hence it could be safely concluded that the income of the assessee from providing onsite services constitutes a separate source of income and independently identifiable source of income. Accordingly the amount paid by HCLT to the assessee, even if construed as fee payable in respect of the services utilized in a business carried on by HCLT outside India and for the purpose of earning any income from any source outside India, stands squarely covered by the exceptions carved out under section 9(1)(vii)(b) of the Act and therefore, does not partake the character of income deemed to accrue or arise in India in the hands of the assessee. 29. The ld. DR before us vehemently submitted that in the light of amendments in section 9 of the Act, first by insertion of Explanation to the said section by Finance Act, 2007 w.r.e.f. 01.06.1976 and subsequently by substitution of the same by Finance Act, 2010 w.r.e.f. 01.06.1976, the rendition of services outside India by the assessee on the server of foreign client is irrelevant and, therefore, services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he services should be utilized in India, even though the requirement of rendition of services in India is no longer relevant. In that case, the assessee Bank decided to raise capital abroad through the issuance of Global Depository Receipts ( GDRs ). The assessee paid Amas Bank (UAE), agency charges on which tax was not deducted at source on the ground that the foreign payee had no tax obligation in India. The stand of the assessee was negated by their Assessing Officer and CIT(A). The Tribunal, however, reversed the decision of the lower authorities and allowed the bank s appeal, essentially observing that services rendered by Amas Bank were purely of commercial nature and bore the character of income arising to it wholly outside India, emanating from commercial services rendered by the Bank in the course of carrying on of its business wholly outside India. Such services were neither rendered in India nor utilized in India and therefore, such services did not partake the character of fees for technical services liable to tax in India. On appeal by the Revenue, the Hon'ble High Court dismissing the appeal observed as under: 6. As is well known, under sub-section (1) of Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of this explanation, whether or not the non-resident has a residence or place of business connection in India, or had rendered services in India, would be inconsequential when one decides whether in terms of Section 9(1) of the Act, the income was to be charged in India or not. He submitted that Section 9 gives rise to deeming fiction which must be allowed to take its full effect. 8. As is well known, Section 9(1) of the Act specifies the incomes which would be deemed to be accrued or arise in India. Clause (vii) thereof reads as under: (vii) income by way of fees for technical services payable by (a) the Government ; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uses (v),(vi) and (vii) of sub-section (1) and would be included in the total income of the non-resident whether or not such non-resident has a residence or place of business or business connection in India, or, the non-resident has rendered services in India. This explanation further seeks to delink the concept of income deemed to have accrued or arisen in India to the non-resident having rendered services in India. In case of CIT v. Gujarat Reclaim Rubber Products Ltd. [2017] 79 taxmann.com 352/[2016] 383 ITR 236 (Bom.), this Court had come to the conclusion that payment of commission to non-resident agent which commission was not an income deemed to accrue or arise in India would not invite the requirement of deducting tax at source. In case of Jindal Thermal Power Co. Ltd. v. Dy. CIT (TDS) [2009] 182 Taxman 252/[2010] 321 ITR 31 (Kar.) in the context of Section 9 of the Act, the Karnataka High Court observed that the twin requirement of rendering of services in India and utilization of services in India would have to be satisfied. The Court was examining the effect of the newly inserted explanation to Section 9 by virtue of Finance Act of 2007. We are conscious that subsequen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngineering delivery organization and am primarily responsible for deliverables and customer satisfaction and employee facing activities. Q.7 What is the Revenue Model of the work performed by your team in HCL of the performance of contract for? Ans. Largely Time and Material contracts and fixed price projects. We are accountable for timely delivery and quality. The projects are SOW based and mostly the work distribution is determined by the customer. Projects invoices are submitted based on customer's billing system. Expenses are majorly on the people cost. Q.8 What is the role performed by the HCL America (HCLA) in performance of the contract with CISCO? Ans. All HCL employees working in US are employees of HCL America. HCL America takes care of all these emplolyee's payrolls and benefits, provide HR and training support, hiring needs, running local development centers administration, IT support, information security support, etc. Q.10 Please explain with examples, how the teams onshore and offshore coordinate with each other in execution of contract? Ans. The nature of work offshore and onshore is similar and rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n autonomous units of work. It would be rare for this to happen but not impossible. Statement of Shri Rajneesh Rathi, Global Technology Director Q.10 Please explain with examples how the teams onshore and offshore coordinate with each other in execution of contract? Ans. The teams are structured as required by individual projects delivery requirements and in accordance with customer preference. The teams are global in nature as each site brings their own competency and skills to contribute towards the projects they are involved in. There is coordination and synchronization between the various sites to deliver the services to Nokia. I share two examples to indicate how the teams are structured and working in tandem. The WCDMA project team has Tier 2 and Tier 3 support done from USA, China and India and Tier 4 support (bug fix) from India. Nokia subject matter experts wroks closely with HCL team in US, China and India for problem resolution. Based on type of issue and Nokia s customer from where an issue is raised, appropriate teams are involved. In example given below the HCL India and US teams are involved with Nokia Subject Matter Expert to resolve an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s from HCL Technologies for the Deutsche Bank Account. The team delivers Application Operations, Application development and Maintenance, Testing services. The nature of work involves understanding customer requirements, defining service solutions and operating models, post award of work working with talent acquisition teams to build up teams and managing service delivery in line with the contractual commitments. Q.7 What is the Revenue Model for the work performed by your team in HCL of the performance of contract for? Ans. As part of the portfolio the revenue model is based on T M and Fixed price revenue models. The revenue model is based on discussions with customers on the commercial terms and structure. Q.8 What is the role performed by the HCL America (HCLA) in performance of the contract with Deutsche Bank? Ans: From a delivery perspective HCL team members located in America deliver services for application operations, application maintenance, application development and testing for Deutsche bank. Q.9 How many people are associated with the execution of contract for your client from HCLT and HCLA or any other subsidiary. Ans. The DB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Q.21 Please explain in detail the reporting structure of your project with Deutsche Bank? Ans. The Delivery team is structured around Delivery units associated with DB s respective IT Programs/Portfolios. The HCL Deutsche Bank Account comprises of Senior DUHs (Delivery Unit Heads) for Application operations, Applications Development, Testing , appSMART. In application operations we have DUHs (Delivery Unit Heads) for Global Markets, Asset Management, Enterprise Risk Technology, Global Transaction Banking, Chage management, Test and environment Services, Deployment management. In Application Development, we have DUHs for Global Markets, Global Transaction Banking, Enterprise Risk Technology, Deutsche Wealth Services, Deutsche Retail. In Application Testing we have a DUH for the complete testing services line. The appSMART Portfolio is managed by a DUH. The Senior Delivery Heads and DUHs work along with the respective DB IT Heads for delivering projects in the functional Portfolio/service line. Within each HCL DB Delivery unit we have project teams engaged on delivery services based on the defined scope of the SoW. The project status ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irements gathering from customer the offshore teams make technological changes. Also, there are cases where based on the requirements gathering from customer the onsite and offshore teams make technological changes. The onsite and offshore teams also work independently example on tickets, service requests, enhancements, etc. directly assigned to them. Statement of Shri Salil Kumar Bhattacharjee, Vice President Media Entertainment and Publishing Vertical Q.8 Please explain how the work is done in above services mentioned in question above. Ans. Based on customers s requirement, I provide the software solutions through the following models 1. Application Support and Maintenance 2. Application Enhancements 3. Application Testing and Implementation My customer IGT is an US incorporated organization and is in the business of providing Technology Services to Lotteries, Casinos and Interactive Lotteries to global customers. We provide IT services to IGT customers through- 1. Offshore teams from India (Chennai, Hyderabad Madurai) 2. Onsite teams from US, Canada, Mexico, Germany, UK, etc. Based on the SOW, team location ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ou have explained that the work that you are heading is of continuous development/enhancement nature, please elaborate on how the learning at various locations i.e. onsite and offsite is integrated and used in future. Ans. As I have explained earlier, the IP of the applications and all related artefacts belong to the customer and they are stored in the customer's environment. HCL team including the onsite and offshore teams have both access to the same code base and repository, so all can have access of the same from anywhere as long as they have the access privileges of the same. These repositories are kept up- to-date through each project work, so that anyone new joining in HCL or Client side (both onsite and offshore) can be trained through these. This way it can be said that if a new knowledge/learning is available to any team at onsite through this repository as well as to the offshore team. Q.12 Please tell whether there are instances where onsite team provides certain inputs for delivery of work/services from off shore to the client? Please substantiate with some evidence. Ans. In projects / assignments, where the work is done from offshore, in very ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ans. Resource Management and Knowledge Transition is already explained in prior question. About Knowledge transition, sessions are attended by both onsite and offshore teams. After the knowledge transition session, HCL team take over the control for the scope of services as mentioned in the SOW. Mostly the scope of services are software development, maintenance and support. Most of the software development is done by India team, with some percentage for any critical work being done by onsite team. There are frequent communication between the teams to clarify / understand requirements and work accordingly. As an example I am showing the printouts of the mail communication (Annexure 1 Page 1-2) that have occurred between one of the onsite coordinators of our US client and Indian team. Please note that certain confidential information has been masked by me using pen and I have countersigned against the information masked. As can be seen from page 1, onsite coordinator located in US at customer site has sent a mail to India project team members where he has made available the information which was brought to his knowledge by customer and directed the team members. After same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... modules and then these modules are divided between different teams - both offshore and onshore. The division of work is based on various factors, viz. data security, competence / skill set, schedule pressure etc. In some cases, client may demand that due to data security constraints some modules need to be developed onsite only. In some case, where delivery of software is within very short period of time, some critical components of software may be developed onsite and rest in India. In some cases, where the skill set required is not available in India, that module (part of software) may be developed onsite. In such cases, because, we work in client environment which is accessible over. Web, both teams can work on their respective modules/ assigned tasks simultaneously. After finishing the module assigned same is submitted to centralized depository for integration and build. Same module, if its passes the system, gets automatically integrated; otherwise same is reverted back. In such environment, the modules can be accessed by either team or client can restrict the access, if he desired. Q.10 Please tell me how the work is divided among different team members and how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the offshore project lead or project manager of HCLT manages his offshore team in India, whereas the assessee s project lead manages his team independently, which executes work from the overseas locations directly on the customer's server. Both the project managers/ leads only coordinate with each other on need basis; that each team of HCLT and the assessee develops the particular modules as assigned to them; that the delivery team of the assessee reports to the delivery manager who sits in the foreign country and the delivery team of HCLT reports to the delivery manager who sits in India; that both onsite and offsite personnel of the assessee and HCLT respectively are responsible for writing the code; that the offshore teams of HCLT work directly with customer managers or through project managers in India and the onsite team engineers belonging to the assessee company work directly with foreign customer's managers; that in majority of the projects, the entire development environment is owned by foreign customer; that the code and test scripts are worked on from foreign customers' servers and provided directly on the said servers; that the integration is normally don ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this line of business: Data Center Services: HCL has 300+ Data Center customers supported across the globe including 40+ Fortune 500/ Global 1000 organizations. Customers leverage our Data Center services encompassing day-to-day Operations of servers, DBs, storage backup systems and Transformations. End User Support Services : HCL has extensive experience in delivering high- performance End User support services globally. We support 33 languages through 32 delivery centres across the globe to provide a Glocalized (Global yet Local) experience for the end users for our customers. Network Security Services: We deliver services across the Network Lifecycle For Security services we are helping the clients to manage their dynamic security posture through our services we are helping the clients to manage their dynamic security posture through our Strategy Architecture, Transformation Integration. HCL has7 of its Cyber Security Fusion Centres which are state of the art facilities for providing these services to our customers. Application Operations: HCL is one of the first few in the industry who came up with the concept of managing Application Opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mer location To provide support using people who were transferred to HCL from customer due to contractual commitments 14. 1.4 Application Packaging HCL delivers Application Packaging Testing as pay-as-you-use service through its offshore Application Packaging Factory (APF) setup. HCL has designed a factory-based model to handle an enterprise's application compatibility, remediation and packaging needs and its entirely done from India. This is part of End user computing services, delivered as pay-as-you use service. 39. The assessee submitted that under the Infrastructure Services category, all services are intended to be run from offshore and the limited support is provided by onshore teams. Such support services are also rendered by the assessee directly to the customers and no service is provided to HCLT. Thus, there is no question of technology being made available by the assessee to HCLT or there being transfer of technical plan or technical design. Accordingly, the amount received by the assessee from HCLT for the aforesaid services would not be in the nature of Fees for Included Services (FIS) so as to fall within the purview of Article 12 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices is in the nature of Fee for Included Services : (i) Providing Application Management Services; (ii) Providing Application Development Services; (iii) Providing Problem Management Services; (iv) Data Centre Management; and (v) Providing Hosting Services. 41.1. The ld. AR submitted that even in the aforesaid categories of Infrastructure Services, no technology/ skill/ know-how, etc., is made available by the associated enterprises to the assessee as explained herein below:- (i) As regards Application Development Services, the assessee seeks to clarify as under:- a) That sometime though the MSA with an end customer may contain the reference of Application Development as a part of Infrastructure Services , it does not mean that any such services would have been mandatorily performed for the Customer. In fact, largely depends on the Customer's requirement only. For example, in case of an Infra Customer named Mecom Group Inc. , the MSA was containing the reference of Application Development Services but no such services were performed. b) That whenever any such services are performed along with Infrastructure Services for any end customer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the onsite team to the customer, it is respectfully submitted, clearly reveals that the onsite support is provided by the onsite team directly to the end customer only and no part of any such support is provided by the onsite team to the Appellant. (iii) As regards Problem Management Services, it is submitted that such services are the set of processes and activities responsible for managing the lifecycle of all problems that could happen in an IT environment. Problem Management Services include activities required to diagnose the root cause of incidents and determine the appropriate resolution steps that should be taken. The onsite presence is required for the limited purpose of the problem identification and for working with the Hardware Vendor to facilitate a successful hardware part replacement. The assessing officer erred in not following/ accepting the binding recorded by the DRP to verify whether 'Problem Management Services' were provided in succeeding years and whether they pass the test of make available' as contained in the DTAA and in instead, arbitrarily and wrongly holding that 'Problem Management Services' was not part of the services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strued as FTS, then the same would be subjected to deduction of tax at source and accordingly it falls under the ambit of tax deductible by HCLT. We are conscious of the fact that proviso to section 209(1) of the Act has been amended w.e.f. 01.04.2012, wherein, payments made during the said financial year i.e. during the Financial Year 01.04.2012 to 31.03.2013 relevant to AY 2013-14 would be covered by the said amendment in the proviso to section 209(1) of the Act. Since, we are concerned with AY 2012-13 before us, the said amendment also would not be applicable to the assessee. We find that the Hon'ble Supreme Court in the case of DIT Vs. Mitsubishi Corporation reported in 438 ITR 174 had categorically held that prior to FY 2012-13, the amount of tax deductible at source can be reduced while calculating advance tax and therefore, interest u/s 234B of the Act cannot be levied. As stated earlier, even if the entire payment made by HCLT to the assessee is to be construed as FTS (which we have already held that it is not so) still, the entire sum of FTS would be subjected to tax deductible and hence, there will be absolutely no obligation on the part of the non-resident assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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