2022 (10) TMI 654 - AT - Income Tax

Income deemed to accrue or arise in India - Royalty receipt - Implementation of SAP for transportation system at Pune India- Singapore DTAA - Fee for Technical Services - TDS u/s 195 - CIT(A) held that the services mentioned above fall under the category of Article 12(4)(a) as they are ancillary and subsidiary to consideration for Royalty. The ld. CIT(A) also held that the taxability is determined by nature of service only and since there was no PE they have to be taxed on gross basis - HELD THAT - The quarrel/is squarely covered in favour of the assessee and against the Revenue by the decision of the Hon'ble Supreme Court in a land mark judgment in the case of Engineering Analysis Center of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT amounts paid by resident Indian end-users/distributors to nonresident computer s. manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the pay of royalty for the use of copyright in the computer software, and that same does not give rise to any income taxable in India, as a result of the persons referred to in section 195 of the Income-tax Act were not liable to deduct any TDS under section 195 of the Income-tax Act. - Hence, we hold that the appeal of the assessee on the ground of Royalty is allowed. Provisions of FTS - make available clause - We find the similar matter has been adjudicated by the Co-ordinate Bench of ITAT Mumbai in the case of SCA Hygiene Products AB Vs. DCIT 2021 (1) TMI 323 - ITAT MUMBAI held that the payment received by the assessee has been held to be in the nature of reimbursement, which is outside the ambit of taxation. The person selling the SAP software is Be One Solution, Switzerland, whereas the person providing the services in question is the assessee. Article 12(4)(a) will not, therefore, come into play at all. In our considered view, therefore, the taxation under article 12 in the present case can come into play only when the make available clause is satisfied, but then the Assessing Officer's justification for the satisfaction of 'make available' clause, for the detailed reasons set out earlier in this paragraph, does not meet our judicial approval. In view of these discussions, as also bearing in mind the entirety of the case, we uphold the plea of the assessee on this point as well. Accordingly, we hold that the income on account of Information Technology Services is also not taxable under article 12 - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of CIT(A)'s order dismissing the appeal under Section 248 of the Income Tax Act.
2. Classification of payments as "Royalty" under Article 12 of the India-Singapore DTAA.
3. Classification of payments as "Fee for Technical Services" (FTS) under Article 12(4)(a) of the India-Singapore DTAA.
4. Nature of reimbursements and their taxability.

Detailed Analysis:

1. Validity of CIT(A)'s Order:
The assessee challenged the CIT(A)'s dismissal of the appeal filed under Section 248 of the Income Tax Act, arguing that the order was "wrong and bad in law" and should be quashed.

2. Classification of Payments as "Royalty":
The assessee argued that payments for the implementation of SAP and SAP data center operation and maintenance costs do not constitute "Royalty" under domestic law or the India-Singapore DTAA. The CIT(A) held that the payments are classified as Royalty under the DTAA, as they relate to the use of a "process" and "information concerning industrial, commercial or scientific experience." The CIT(A) emphasized that modern software solutions, such as SAP, involve complex processes and structures that improve business efficiencies, thus falling under the definition of Royalty in the DTAA.

3. Classification of Payments as "Fee for Technical Services" (FTS):
The CIT(A) classified payments for professional services related to the SAP system, email access services, regional network access, and firewall protection as FTS under Article 12(4)(a) of the DTAA. The CIT(A) noted that these services are ancillary and subsidiary to the implementation of SAP, which was already classified as Royalty. The CIT(A) rejected the argument that these payments were mere reimbursements, stating that the nature of the services determines their taxability.

4. Nature of Reimbursements and Their Taxability:
The assessee contended that a portion of the payments to MEAP were reimbursements and should not be subject to withholding tax. The CIT(A) disagreed, asserting that the taxability is determined by the nature of the service, not the reimbursement status.

ITAT's Judgment:

Royalty:
The ITAT referred to the Supreme Court's decision in the case of Engineering Analysis Center of Excellence Pvt. Ltd., which clarified that payments for software do not constitute Royalty if there is no transfer of copyright. The ITAT concluded that the payments for SAP implementation and related services do not involve the transfer of any copyright and thus cannot be classified as Royalty under the India-Singapore DTAA.

Fee for Technical Services (FTS):
The ITAT referred to the Co-ordinate Bench's decision in the case of SCA Hygiene Products AB, which emphasized the "make available" clause in the definition of FTS under the DTAA. The ITAT concluded that the services provided by MEAP did not "make available" technical knowledge or skills to the assessee, and therefore, the payments cannot be classified as FTS under Article 12(4)(a) of the DTAA.

Reimbursements:
The ITAT agreed with the assessee that the payments classified as reimbursements should not be subject to withholding tax, as they do not constitute income.

Conclusion:
The ITAT allowed the assessee's appeals, holding that the payments do not qualify as Royalty or FTS under the India-Singapore DTAA and that the reimbursements are not subject to withholding tax. The ITAT ordered the refund of taxes incorrectly deducted and deposited by the assessee.