2019 (10) TMI 877 - AT - Income Tax

Income accrued in India - taxability of IPLC as fees for technical services/ fees for included services (FTS/ FIS) and Royalty under the Income tax Act and India US tax treaty - HELD THAT - Payment made by the assessee is only in respect of standard services provided by AT T and Spinet, which cannot be held to be Royalty . Only those payment, when it made for scientific work, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, which is absolutely missing in the present case. The payment in the present case is not for a payment for a scientific work nor there any patent, trademark, design, plan or secret formula or process for which the payment made. The service is connectivity to the telecom operators in the call end jurisdiction. The facility is a standard facility which is used by other telecom companies as well. Therefore, the action of the assessing officer, which was upheld by ld. DRP, in treating the receipt as fee for FIS/ FTS or for the Royalty is not justified. In the result the ground No. 2 of the appeal is allowed. Taxability of income from sale of shrink- wrapped software as Royalty - HELD THAT - The receipt on account of sale of copyrighted/Shrink Wrapped Software is not taxable as per Article 12(14) of India-US Tax Treaty. Further, the receipt is also not taxable under the provisions of Income-tax Act as the assessee is eligible for beneficial provision of India-US Tax Treaty in term of section 90(2) of Income-tax Act. Moreover, after the amendment introduced in Explanation (4) in definition of Royalty under section 9(1)(6) by Finance Act, 2012, there is no corresponding change made in definition in term of Royalty under India-US Tax Treaty. Therefore, in view of the aforesaid discussion, the ground no.3 of the appeal is allowed in favour of assessee. Taxability of support and maintenance services as FIS - HELD THAT - We have noted that the assessee provided support and maintenance services linked with the software supplied. Accordingly, the taxability of such services is dependent on the taxability of software supplied. As we have held that the receipt earned on sale of software is not taxable under Article 12 of India-US Tax Treaty, therefore, the services the receipt from support and maintenance services are also not taxable under 12(4)(b) of India US Tax Treaty. In the result, this ground of appeal is allowed. Taxability of service fee as FTS - HELD THAT - Fees for included services is defined in Article 12(4) of India-US Tax Treaty, wherein Fees for included services means payment of any kind to any person in consideration for rendering of any technical or consultancy services (including through the provision of services of technical or other personnel if services are ancillary and subsidiary to the application or enjoyment or right, property or information for which payment is received or make available technical knowledge, experience, skill no-how or process or consist of development and transfer of a technical plan or technical design. We have noted that the assessee has claimed that services rendered are ancillary and subsidiary and inextricably essentially linked with the software supplied. In our view, unless the services satisfy the make available test, the same cannot be taxed as FIS. Further, mere fact that provision of service may require technical input by the person providing services does not per se mean the technical knowledge. In our view, the receipt on account of support and maintenance services are not taxable under Article 12 as the services do not make available technical knowledge, experience, skill, know-how or process or consist of any development and transfer of any design. In the result, ground no.5 of the appeal is allowed. Levy of interest under section 234B - HELD THAT - Assessee is a foreign company and tax resident of USA and as per section 195 of the act taxes deductible at source on all its received and accordingly the assessee was not liable to pay advance tax. Therefore we direct the assessing officer to recompute the tax by following the decision of the jurisdictional High Court in case of NGC network Asia LLC 2009 (1) TMI 174 - BOMBAY HIGH COURT .

Summary

Issues Involved:
1. Taxability of IPLC/Link Charges as Fees for Technical Services (FTS)/Fees for Included Services (FIS) and Royalty.
2. Taxability of income received from the sale of shrink-wrapped software as Royalty.
3. Taxability of support and maintenance fees as FIS.
4. Taxability of service fees as FTS.
5. Levy of interest under section 234B of the Income Tax Act.
6. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Taxability of IPLC/Link Charges as Fees for Technical Services (FTS)/Fees for Included Services (FIS) and Royalty:
The assessee argued that the IPLC charges were not taxable in India as they did not constitute "Royalty" or FTS/FIS under the India-US tax treaty. The Assessing Officer (AO) and Dispute Resolution Panel (DRP) treated the IPLC charges as Royalty and FTS/FIS under the Income Tax Act and the India-US tax treaty. The Tribunal noted that the IPLC services provided by third-party service providers like AT&T and Sprint were standard services and did not involve any transfer of the right to use the underlying infrastructure. The Tribunal relied on various judicial precedents, including the Delhi Tribunal's decision in the case of Convergys Customer Management Group Inc., to conclude that IPLC charges do not qualify as Royalty or FTS/FIS under the India-US tax treaty. The Tribunal allowed the assessee's appeal on this ground.

2. Taxability of income received from the sale of shrink-wrapped software as Royalty:
The assessee claimed that the income from the sale of shrink-wrapped software was not taxable in India as it did not qualify as Royalty under the India-US tax treaty. The AO and DRP treated the income as Royalty under the Income Tax Act and the India-US tax treaty. The Tribunal noted that the software was sold with a non-exclusive, non-transferable license, and the title and ownership of the software remained with the assessee. The Tribunal relied on various judicial precedents, including the Delhi High Court's decision in DIT vs. Infrasoft Ltd., to conclude that the income from the sale of shrink-wrapped software does not constitute Royalty under the India-US tax treaty. The Tribunal allowed the assessee's appeal on this ground.

3. Taxability of support and maintenance fees as FIS:
The assessee claimed that the support and maintenance fees received from TCS and TCL were not taxable in India under the India-US tax treaty. The AO and DRP treated the fees as FIS under the India-US tax treaty. The Tribunal noted that the support and maintenance services were ancillary and subsidiary to the software supplied and were not taxable under Article 12(4)(b) of the India-US tax treaty. The Tribunal relied on various judicial precedents, including the Karnataka High Court's decision in CIT vs. De Beers India Minerals Ltd., to conclude that the support and maintenance fees do not qualify as FIS under the India-US tax treaty. The Tribunal allowed the assessee's appeal on this ground.

4. Taxability of service fees as FTS:
The assessee claimed that the service fees received for Geneva health check and other professional and consultancy services were not taxable in India under the India-US tax treaty. The AO and DRP treated the fees as FIS under the India-US tax treaty. The Tribunal noted that the services rendered did not make available technical knowledge, experience, skill, know-how, or process to the recipient and, therefore, did not qualify as FIS under Article 12(4)(b) of the India-US tax treaty. The Tribunal allowed the assessee's appeal on this ground.

5. Levy of interest under section 234B of the Income Tax Act:
The assessee argued that being a foreign company, it was not liable to pay advance tax under section 208 of the Act, and therefore, interest under section 234B should not be levied. The Tribunal relied on the Bombay High Court's decision in DIT vs. NGC Network Asia LLC to direct the AO to recompute the interest as per law. The Tribunal allowed the assessee's appeal on this ground.

6. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act:
The Tribunal did not specifically adjudicate this issue in the detailed analysis provided. However, given the favorable decisions on the primary grounds of appeal, the initiation of penalty proceedings under section 271(1)(c) would likely be impacted accordingly.

Conclusion:
The Tribunal allowed the appeals for all the assessment years involved, holding that the IPLC charges, income from the sale of shrink-wrapped software, support and maintenance fees, and service fees were not taxable in India under the India-US tax treaty. The Tribunal also directed the AO to recompute the interest under section 234B as per the law and in line with the Bombay High Court's decision.