2017 (11) TMI 1870 - AT - Income Tax

Royalty receipt - Payments received from key application services ( KAS ) for network access etc or providing network access to use copyright software - DTAA of India-Netherlands - HELD THAT - Tribunal in assessee s own case has taken the view that the payments received by the assessee from WIPRO, IBM and Logica in pursuance to the MSA cannot be treated as royalty under Article 12(4) of the Indian-Netherlands DTAA. Exactly on identical facts, this was confronted to the learned CIT DR, he fairly agreed that the issue is covered by the Tribunal s decision. After hearing both the sides and gone through the facts of the case, we find that exactly on identical facts the issue is covered by Tribunal s decision for AY 2006-0 7 2017 (4) TMI 763 - ITAT MUMBAI Taxability of payment received by assessee from IT support services which constitutes Fees for Technical Services ( FTS ) - royalty under the India-Netherlands Treaty DTAA - HELD THAT - Concept of make available of technical services that such receipts would not amount to fee for technical services so as to the concept of make available clause contained in Article 13(4)(c) of the treaty has not been satisfied. See GUY CARPENTER CO. LTD. 2012 (5) TMI 31 - DELHI HIGH COURT Accordingly, we delete the addition and allow this issue of assessee s appeal.

Issues Involved:
1. Whether payments received for providing network access to use copyrighted software constitute 'royalty' under the India-Netherlands Double Taxation Avoidance Agreement (DTAA).
2. Whether payments received for IT support services constitute 'Fees for Technical Services' (FTS) and 'royalty' under the India-Netherlands DTAA.

Issue 1: Payments for Network Access to Use Copyrighted Software as 'Royalty'

The first issue pertains to payments received by the assessee from key application services (KAS) providers such as IBM, WIPRO, and Logica for providing network access to use copyrighted software. The Dispute Resolution Panel (DRP) construed these payments as 'royalty' under the India-Netherlands DTAA.

The assessee argued that these payments were for the use of copyrighted software, not for any copyright itself, and thus should not be classified as 'royalty'. The Tribunal had previously considered this issue in the assessee's own case for AY 2006-07, where it was determined that the payments did not constitute 'royalty'. The Tribunal noted that the Master Service Agreement (MSA) with IT service providers like WIPRO and IBM granted limited rights to access and use the software strictly for business purposes, without transferring any copyright or allowing modifications.

The Tribunal emphasized that the payments were for the use of a copyrighted article, not for the use of the copyright itself. The software's ownership remained with the assessee, and no rights to the software's source code were transferred to the service providers. Consequently, the payments did not fall under the definition of 'royalty' as per Article 12(4) of the India-Netherlands DTAA.

The Tribunal also referred to several judicial precedents, including the Delhi High Court's decision in DIT vs. Infrasoft Ltd., which distinguished between the acquisition of a copyrighted article and the acquisition of copyright rights. The Tribunal upheld that the payments received by the assessee for providing network access to software did not amount to 'royalty' under the DTAA.

Issue 2: Payments for IT Support Services as 'Fees for Technical Services' (FTS) and 'Royalty'

The second issue concerns the taxability of payments received by the assessee for IT support services. The DRP held that these payments constituted 'Fees for Technical Services' (FTS) and 'royalty' under the India-Netherlands DTAA.

The assessee argued that the IT support services did not 'make available' any technical knowledge, skill, or experience to the service recipients, as required under Article 12 of the DTAA. The services provided included helpdesk support, network infrastructure services, and facilitating teleconferencing and video conferencing services, which did not involve transferring any technical knowledge or skills to the recipients.

The Tribunal examined the nature of the services and the relevant agreements. It concluded that the services provided by the assessee were merely technical support and did not 'make available' any technical knowledge or skills to the recipients. The Tribunal referred to the Delhi High Court's decision in DIT vs. Guy Carpenter & Co. Ltd., which held that payments for intermediary services that do not transfer technical knowledge or skills do not qualify as FTS under the DTAA.

Additionally, the Tribunal noted that the DRP's reliance on the AAR ruling in Areva T&D India Limited was misplaced, as the Delhi High Court had subsequently reversed this ruling. The Tribunal concluded that the payments received by the assessee for IT support services did not constitute FTS or 'royalty' under the India-Netherlands DTAA.

Conclusion:

The Tribunal allowed the assessee's appeals, holding that:
1. Payments received for providing network access to use copyrighted software do not constitute 'royalty' under the India-Netherlands DTAA.
2. Payments received for IT support services do not constitute 'Fees for Technical Services' (FTS) or 'royalty' under the India-Netherlands DTAA.

The Tribunal's decision was based on a detailed analysis of the agreements, the nature of the services provided, and relevant judicial precedents, ensuring that the payments in question were not taxable in India as 'royalty' or FTS under the DTAA.

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