2011 (5) TMI 580 - AT - Income Tax

India Singapore DTAA - data processing charges to Singapore company SPL treated as Royalty - liability to pay tax in India and subject to withholding tax at 15% under Article 12(3)(a) of DTAA - assessee contested on no Permanent Establishment of SPL in India - Held that - The appellant transmits raw data through operating software owned by it to the hardware facility of SPL in Singapore. SPL receives the data so transmitted process it according to appellant s requirements and transmits the output data electronically to the appellant in India using the software provided by the appellant which is not designed by SPL. The consideration received by SPL from the appellant is therefore for using the computer hardware which does not involve use or right to use a process. The data is received by application software which is owned by the appellant. The consideration paid by the appellant to SPL is for processing its data. This part of the consideration cannot be said to be a consideration paid for use or right to use process as the processing of the data is done by SPL using the system software owned by the appellant. Therefore it cannot be said that the payment by the appellant to SPL is Royalty within the meaning of Article 12(3)(a) of the treaty. As appellants have no right to access the computer hardware except for transmitting raw data for further processing. The appellants took advantage of a facility of use of sophisticated equipment installed and provided by another it could not be said that the recipient/customer used the equipment as such. The appellant merely made use of the facility though they did not them-self use the equipment. Therefore it cannot be said that the payment is royalty within the meaning of Article 12(3)(b) of the treaty - thus the receipts by the Assessee is in the nature of business income and assessee does not have PE in India the same is not taxable in India in accordance with Article 7 of the DTAA - Decided in favor of assessee

Summary

Issues Involved:
1. Taxability of data processing charges as "Royalty" under Article 12(3)(a) of the Double Taxation Avoidance Agreement (DTAA) between India and Singapore.
2. Nature of payments made for data processing services and whether they constitute "Business Profits" or "Royalties" or "Fees for Technical Services."
3. Obligation to withhold tax under Section 195 of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Taxability of Data Processing Charges as "Royalty"
- The appellant (Standard Chartered Bank) contended that payments made to M/s. Sema Group Outsourcing (Singapore) Pte Ltd. (SPL) for data processing services should not be classified as "Royalty" under Article 12(3)(a) of the DTAA between India and Singapore.
- The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) (CIT(A)) held that the payments constituted "Royalty" as they were for the use of a process, citing Section 9(1)(vi) of the Income Tax Act and Article 12(3) of the DTAA.
- The Tribunal examined the nature of the services rendered by SPL, which involved processing raw data sent by the appellant and returning processed data. The Tribunal concluded that the payments were not for the use of any process owned by SPL but for data processing services, which do not fall under the definition of "Royalty" in Article 12(3)(a) of the DTAA.

Issue 2: Nature of Payments - "Business Profits" vs. "Royalties" or "Fees for Technical Services"
- The appellant argued that the payments were "Business Profits" under Article 7 of the DTAA, as SPL did not have a Permanent Establishment (PE) in India.
- The Tribunal agreed with the appellant, noting that the payments were for data processing services and not for the use of any intellectual property or process owned by SPL. The Tribunal emphasized that SPL's role was limited to processing data using software owned by the appellant.
- The Tribunal distinguished the case from other rulings cited by the revenue authorities, such as the AAR ruling in P No.30 of 1999 and the ITAT Delhi decision in Asia Satellite Telecommunication Co. Ltd., noting significant factual differences.

Issue 3: Obligation to Withhold Tax under Section 195
- The appellant contended that there was no obligation to withhold tax under Section 195 of the Income Tax Act, as the payments were not taxable in India.
- The Tribunal held that since the payments were classified as "Business Profits" and SPL did not have a PE in India, there was no obligation to withhold tax.

Conclusion:
- The Tribunal allowed the appeals, concluding that the payments made by the appellant to SPL for data processing services were not "Royalty" under Article 12(3)(a) of the DTAA but "Business Profits" under Article 7, and thus not taxable in India in the absence of a PE.
- The Tribunal's decision was based on a detailed analysis of the nature of the services provided, the contractual terms, and relevant legal precedents, emphasizing the distinction between payments for services and payments for the use of intellectual property or processes.