2024 (12) TMI 1336 - AT - Income Tax

Income deemed to accrue or arise in India - Royalty/Fee for Technical services ( FTS ) under Article 12 of the India-Singapore DTAA - receipts from data center related services and receipts from provision of advertisement space - Assessee does not have a presence in India or Permanent Establishment ( PE ) in India under Article 5 of the DTAA HELD THAT - We find from the perusal of the Schedule 1 of the inter-company Service Agreement enumerating the list and description of services rendered that the assessee has provided Criteo India with only advertising spaces purchased from publishers. We note that the assessee does not have any physical possession or any sort of control over the advertising space. It is the third-party publishers who actually control the advertising space and hence the assessee was not in a position to pass on the control/right to the advertisement space to Criteo India. In the instant case we find that Criteo India has used a standard facility which is provided for displaying advertisement on the website of third-party publishers. The assessee has merely provided the advertisement space bought from third-party publishers which is also provided to other global customers of such publishers in the like manner. Equipment/installations are all owned by third-party publishers and the assessee/Criteo India does not have any role to play in either maintaining/involving into any managerial activities. Criteo India does not even have any economic/ possessory right with regard to the server of the third-party publishers and it is not at the disposal of the Assessee/ Criteo India. We also find that the right to modify/deal with the server in any manner vest with the third-party publishers. The Services Agreement does not provide any right to use of any industrial commercial or scientific equipment or for imparting any information concerning technical industrial commercial or scientific knowledge experience or skill. In view of above it is evident that the receipts for provision of advertisement space from Criteo India are not chargeable to tax in India as royalty under Article 12(3) of the India-Singapore DTAA. We accordingly direct the AO to delete the said addition. Accordingly Ground No. 1.1 is allowed. Receipts on account of Business Support Services being treated as FTS - whether such receipts on Business support services are in the nature of FTS and whether the assessee has made available the technical knowledge experience etc. under the DTAA? - HELD THAT - In the instant case we find that the receipts in question are for rendering the services categorized as Business support services which pertains to routine administrative services and that too on a recurring basis year-on-year and thus cannot have any enduring benefit for Criteo India as held by the AO. We find that the inter37 company agreement was effective since November 10 2016 and the said support services are being provided to Criteo India year-on-year since the inception of the Agreement. We also find that travel related services was merely for supervisory activities and for very short duration. Such services having a recurring nature does not satisfy the make available clause. Mere incidental advantage to the recipient of services is not enough. The technical or consultancy services may be said to be made available only when the service recipient is enabled to apply the technology/ skill/ services in future without recourse to the service provider. A mere incidental advantage to the recipient of service is not enough. The test is the transfer of technology/ skill and not the incidental benefit to the recipient. Training/ recruitment and human resource support neither result in transfer of technology or knowledge or skill or know-how. The receipts on account of travelling by no stretch of imagination can be considered in the nature of managerial technical or consultancy services or for any use or right to use of any technology or software or equipment. Employees of the assessee travelled to India on certain occasions for a very short duration in relation to supervisory activities only. In view of the above the receipts in the hands of the assessee for providing Business support services travelling related services and external consultants services to Criteo India are not in the nature of FTS as defined in Article 12(4) of the India-Singapore DTAA. We direct the AO to delete the said addition.

Summary

Issues Involved:

1. Taxability of receipts from data center services and advertisement space as "Royalty" under the Income Tax Act and India-Singapore DTAA.
2. Taxability of receipts from business support services as "Fee for Technical Services" (FTS) under the Income Tax Act and India-Singapore DTAA.
3. Initiation of penalty proceedings under section 270A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Receipts from Data Center Services and Advertisement Space as "Royalty":

The primary issue was whether the receipts from data center services and advertisement space should be taxed as "Royalty" under section 9(1)(vi) of the Income Tax Act and Article 12(3) of the India-Singapore DTAA. The assessee, a Singapore-based company, provided data center services and advertisement space to its Indian group entity. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) had classified these receipts as "Royalty."

The Tribunal analyzed whether the services provided involved the "use or right to use" any equipment or process, which is a prerequisite for classifying payments as "Royalty." It was found that the assessee merely provided remote access to data stored in its Singapore-based data center, without granting any control or possession over the equipment to the Indian entity. The Tribunal relied on judicial precedents, including the Delhi High Court's ruling in Asia Satellite Telecommunications Co. Ltd., which emphasized that mere access to services using equipment does not constitute "Royalty" unless control or possession is transferred. The Tribunal concluded that the receipts did not qualify as "Royalty" under the DTAA, as the expanded definition of "Royalty" under the Income Tax Act cannot be imported into the DTAA without explicit amendments to the treaty. Consequently, the Tribunal directed the AO to delete the addition related to these receipts.

2. Taxability of Receipts from Business Support Services as "Fee for Technical Services" (FTS):

The second issue concerned the classification of receipts from business support services as "FTS" under section 9(1)(vii) of the Income Tax Act and Article 12(4) of the India-Singapore DTAA. The Tribunal examined whether the services rendered by the assessee made available any technical knowledge, experience, skill, or know-how to the Indian entity, which is necessary for classifying payments as "FTS."

The Tribunal found that the services provided were routine administrative and support services, such as finance, HR, IT, and legal support, which did not result in the transfer of any technical knowledge or skill that would enable the Indian entity to apply such knowledge independently. The Tribunal emphasized the "make available" clause in the DTAA, which requires the service recipient to be able to apply the technology or skills without further assistance from the service provider. Citing judicial precedents, the Tribunal concluded that the services did not satisfy the "make available" test and, therefore, could not be classified as "FTS" under the DTAA. The Tribunal directed the AO to delete the addition related to these receipts.

3. Initiation of Penalty Proceedings under Section 270A:

The Tribunal addressed the issue of the initiation of penalty proceedings under section 270A of the Income Tax Act, which was challenged by the assessee. The Tribunal found this ground to be premature, as the penalty proceedings had not yet been concluded. Therefore, the Tribunal dismissed this ground.

Conclusion:

The Tribunal allowed the appeal in part, directing the deletion of additions related to receipts from data center services, advertisement space, and business support services, as they were not taxable as "Royalty" or "FTS" under the India-Singapore DTAA. The issue of penalty proceedings was dismissed as premature.