2025 (4) TMI 1304 - AT - Income Tax

Taxability of income in India or not - Royalty receipts taxable in India u/s 9(1)(vi) and Article 12 of the DTAA - Infrastructure Data Centre (IDC) Services Consumer CRM Development Charges - HELD THAT - As relying in assessee s own case for AY 2019-20 2022 (12) TMI 1563 - ITAT MUMBAI IDC and CRM Development Charges are not taxable in India and accordingly direct the AO to delete the addition made in this regard. Grounds 2 3 raised by the assessee are allowed. Other Services Charges taxed as Royalty - We notice that the impugned issue is recurring in nature and that the Co-ordinate Bench while considering the same for AY 2019-20 2022 (12) TMI 1563 - ITAT MUMBAI as held this issue is recurring in nature and has been decided in favour of the assessee by the decision of the coordinate bench of the Tribunal for the preceding assessment years. The learned DR could not show us any reason to deviate from the aforesaid decision and no change in facts and law was alleged in the relevant assessment year. Thus respectfully following the order passed by the coordinate bench of the Tribunal in assessee s own case cited we uphold the plea of the assessee and direct the AO to delete the addition on account of other service charges (referral fees). Management Service Fee taxed as Royalty - We notice that an identical has been considered by the Co-ordinate Bench in assessee s own case for AY 2010-11 to AY 2013-14 has considered similar issue and held the same in favour of the assessee. For the year under consideration the revenue did not bring any new material on record and therefore direct the AO to delete the addition made in this regard. Member Login Fees - An identical issue has been considered by the Co-ordinate Bench in assessee s own case for AY 2019-20 2022 (12) TMI 1563 - ITAT MUMBAI uphold the plea of the assessee and direct the AO to delete the addition on account of member login fees. Assessee appeal allowed.

Summary

The core legal questions considered by the Tribunal in this appeal pertain to the taxability of various receipts received by a Singapore-resident company from its Indian group companies under the Income Tax Act, 1961 (the Act) and the India-Singapore Double Taxation Avoidance Agreement (DTAA). The issues are:

1. Whether Infrastructure Data Centre (IDC) charges received by the assessee are taxable as royalty under section 9(1)(vi) of the Act and Article 12 of the India-Singapore DTAA.

2. Whether Trade & Consumer CRM System Development charges are taxable as royalty under the Act and DTAA.

3. Whether Other Service Charges (Referral Fees) received by the assessee are taxable as royalty or fees for technical services (FTS) under the Act and DTAA.

4. Whether Management Service Fees received by the assessee constitute royalty or FTS under the Act and DTAA, especially in light of prior years' treatment.

5. Whether Member Login Fees received by the assessee are taxable as royalty under the Act and DTAA.

6. Whether the Assessing Officer (AO) and Dispute Resolution Panel (DRP) erred in their interpretation and application of tax provisions and precedents in treating these receipts as royalty.

Issue-wise Detailed Analysis:

1. Taxability of Infrastructure Data Centre (IDC) Charges and Trade & Consumer CRM System Development Charges as Royalty

Legal Framework and Precedents: Section 9(1)(vi) of the Act defines royalty income, and Article 12 of the India-Singapore DTAA governs the taxation of royalty and fees for technical services. The key test is whether the payments constitute consideration for the use or right to use any industrial, commercial or scientific equipment or for imparting technical knowledge, experience or skill.

Relevant precedents include decisions in the assessee's own case for earlier years (AY 2010-11 to AY 2019-20), where the Tribunal repeatedly held that IDC charges do not amount to royalty. The Tribunal relied on judicial precedents such as Bharati Axa General Insurance Co. Ltd., Standard Chartered Bank, ExxonMobil Company India (P.) Ltd., and Reliance Jio Infocomm Ltd., which emphasize the necessity of "making available" technical knowledge or rights to use technology for a payment to qualify as royalty or FTS under the treaty.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee merely provides IT infrastructure management, mailbox hosting, and website hosting services from its data centre in Singapore. The Indian companies do not get access to or use the CPU, software, or any proprietary technology owned by the assessee. The services are standard IDC services involving administration and supervision of infrastructure, with no transfer or license of software or technical know-how.

The Tribunal distinguished the instant facts from cases where software licensing or specialized technical services were involved, such as IMT Labs (India) (P.) Ltd. and ThoughtBuzz (P.) Ltd., where payments were held taxable as royalty due to the nature of services involving access to software or technical know-how.

Key Evidence and Findings: The IDC is an ISO 27001 certified data centre located in Singapore. Payments are made directly to the assessee's bank account in Singapore. There is no evidence of transfer of copyright, software license, or any right to use proprietary technology. The services are performed by the assessee's personnel using its own hardware and security devices.

Application of Law to Facts: Since the Indian companies only receive output services without any right to use or access proprietary technology or software, the receipts do not fall within the definition of royalty or FTS under the Act or DTAA.

Treatment of Competing Arguments: The Revenue relied on the AO and DRP's earlier orders and argued for taxing these receipts as royalty. However, the Tribunal found no new material or change in law or facts to justify deviation from earlier decisions in the assessee's favor.

Conclusion: The Tribunal deleted the addition made by the AO treating IDC and CRM development charges as royalty, holding these receipts are not taxable as such under the Act or DTAA.

2. Taxability of Other Service Charges (Referral Fees) as Royalty or FTS

Legal Framework and Precedents: The issue was analyzed under the same provisions of the Act and DTAA. The key question was whether referral fees constitute royalty or FTS by virtue of "making available" technical knowledge or skills.

Precedents such as Cushman & Wakefield (S) Pte. Ltd., Real Resourcing Ltd., and Knight Front (India) (P.) Ltd. were relied upon. These decisions held that referral fees paid for introducing clients or providing referral services do not amount to royalty or FTS as they do not involve transfer or making available of technical knowledge or rights.

Court's Interpretation and Reasoning: The Tribunal observed that referral services merely support the Indian entity's business without transmitting any technical knowledge, skill, or know-how. The payment is for business facilitation and not for use of any intellectual property or technical services.

Key Evidence and Findings: Referral fees were paid as a percentage of amounts realized from customers introduced by the assessee. The assessee did not negotiate or collect fees from customers, nor did it provide technical or managerial services that would qualify as FTS or royalty.

Application of Law to Facts: Since referral fees do not confer any right or technical knowledge, they cannot be taxed as royalty or FTS under the Act or DTAA.

Treatment of Competing Arguments: The Revenue's reliance on AO and DRP orders was rejected as no new facts or law were presented to counter the consistent precedent in the assessee's favor.

Conclusion: The Tribunal deleted the addition made towards referral fees, holding that such fees are not taxable as royalty or FTS.

3. Taxability of Management Service Fees as Royalty

Legal Framework and Precedents: Management service fees are examined under section 9(1)(vi) of the Act and Article 12 of the DTAA. The key consideration is whether such fees involve making available technical knowledge or rights.

Earlier decisions of the Tribunal in the assessee's own case for AY 2010-11 to AY 2013-14 consistently held that management service fees do not constitute royalty or FTS.

Court's Interpretation and Reasoning: The Tribunal found no new material or change in law or facts to warrant a different conclusion for the year under consideration. It followed the prior decisions holding that management service fees do not amount to royalty.

Conclusion: The addition made by the AO treating management service fees as royalty was deleted.

4. Taxability of Member Login Fees as Royalty

Legal Framework and Precedents: The issue was considered under the same provisions. The Tribunal relied on earlier decisions in the assessee's own case where member login fees were held not to be royalty, as they are similar to IDC services.

Court's Interpretation and Reasoning: Since member login services provide a standard facility without granting exclusive rights or use of any copyright or process, the fees cannot be treated as royalty.

Conclusion: The Tribunal deleted the addition made towards member login fees.

5. Treatment of AO and DRP Directions and Consistency of Approach

The AO and DRP had treated all the above receipts as royalty and made additions accordingly. The Tribunal noted that the AO and DRP relied on earlier directions for AY 2018-19 and AY 2019-20, despite the assessee not receiving similar services in those years, which was erroneous. The Tribunal emphasized the principle of consistency and the binding nature of coordinate bench decisions in the absence of any change in facts or law. The Revenue failed to bring any new material or demonstrate any change in legal position to justify deviation from prior favorable decisions.

Significant Holdings:

"We find that the revenues under the IDC agreement ought not to be taxed in the hands of the appellant as royalty under the Act and/or India-Singapore DTAA."

"Referral fee received in Singapore by the applicant, a Singaporean company from an Indian company for referring customers to the latter is neither business income u/s 9(1)(i) nor royalty u/s 9(1)(vi) nor fee for technical services u/s 9(1)(vii) r.w. Article 12(4)(b) of the DTAA between India & Singapore and, therefore, it is taxable as business income in Singapore only as the applicant has no PE in India."

"Member login fee is not in the nature of royalty under the treaty provision."

"Management service fees do not amount to royalty or fees for technical services."

The Tribunal's core principles established include the necessity of "making available" technical knowledge, experience, skill, or rights for payments to qualify as royalty or FTS under the India-Singapore DTAA. Mere provision of standard infrastructure services, referral facilitation, or access without transfer of proprietary rights does not constitute royalty or FTS.

Consequently, the Tribunal allowed the appeal of the assessee, deleted the additions made by the AO, and held that the various receipts including IDC charges, CRM development charges, referral fees, management service fees, and member login fees are not taxable as royalty or FTS under the Act or the India-Singapore DTAA for AY 2021-22.