2023 (8) TMI 30 - AT - Income Tax

Income deemed to accrue or arise in India - royalty income - taxability of receipts from provision of disaster recovery up-linking services, disaster recovery play-out services, down-linking and distribution services, space segment capacity services and digital satellite news gathering services - addition u/s 9(1)(vi) as well as under Article 12(3) of India- Singapore Double Taxation Avoidance Agreement (DTAA) - DRP have treated the disputed receipts as FTS - HELD THAT - As relying on assessee s appeal for assessment year 2017-18, we hold that the receipts in dispute are not in the nature of FTS, hence, not taxable in India. Accordingly, the Assessing Officer is directed to delete the addition. Grounds are allowed. Addition being business profits of the assessee attributable to the alleged permanent establishment (PE) in India - Assessee through sub-contractors had carried out installation and commissioning of such equipments - AO has referred to India-Italy, India-Australia and India- USA DTAAs, where, treaty provisions explicitly provide that for determination of existence of PE, all projects in one contracting State have to be construed as single project, and in absence of such express provision like India-Netherlands DTAA in India-Singapore DTAA, all project sites have to be treated as one - HELD THAT - In our considered opinion, provisions contained in Article 5(3) and 5(4) of India- Singapore DTAA cannot at all be compared with similar provisions contained in India-Australia, India-Italy and India-USA DTAAs. Thus, strictly going by the language used in Article 5(3) and 5(4) of India- Singapore DTAA, each project site has to be construed as a separate project for constituting an installation or supervisory PE in terms of Article 5(3) and 5(4) of the treaty. Viewed in the aforesaid perspective, undisputedly, each project site did not exceed threshold limit of 183 days. In that view of the matter, the project sites of Accenture Solutions Pvt. Ltd. at Bangaluru and Gurugram cannot be considered to be either installation or supervisory PE of the assessee in India. That being the factual position emerging on record, in our view, the assessee in the year under consideration did not have any PE in India. Therefore, no profits out of sale of equipments as well as installation and commissioning services can be taxed in India. The addition made is, therefore, directed to be deleted. Taxability of receipts from internet bandwidth charges as royalty income - HELD THAT - In absence of any such amendment widening the scope of expression royalty under the treaty provisions, the amendment made to section 9(1)(vi) of the Act cannot be automatically brought or imported to Article 12(3) of India-Singapore DTAA, as the treaty provisions have to be construed strictly in accordance with the language used in the provision. While coming to such view, we have found support from the ratio laid down in the decisions cited by learned Sr. Counsel for the assessee. Thus, we hold that the receipts from internet bandwidth charges cannot be treated as royalty income under Article 12(3) of India-Singapore DTAA. Accordingly, we direct the Assessing Officer to delete the addition. Taxability of receipts from reimbursement of licence fee as royalty income - HELD THAT - From the assessment order, it is discernible that the receipts are in the nature of cost to cost reimbursement of payments made to Singapore government. Hence, the receipts did not have any profit element embedded therein. In fact, the Assessing Officer has not disputed the aforesaid factual position. In case of DIT vs. A.P. Moller Maersk AS ( 2017 (2) TMI 993 - SUPREME COURT ) Hon ble Supreme Court has observed that once the character of the payment is found to be in the nature of reimbursement of expenses without having any profit element embedded therein, it cannot be held to be chargeable to tax.Thus we hold that reimbursement of expenses cannot be treated as royalty income. The Assessing Officer is directed to delete the addition.

Summary

Issues Involved:
1. Taxability of receipts as royalty income under section 9(1)(vi) of the Income-tax Act and Article 12(3) of India-Singapore DTAA.
2. Taxability of receipts as Fee for Technical Services (FTS) under section 9(1)(vii) of the Act and Article 12(4) of India-Singapore DTAA.
3. Attribution of business profits to Permanent Establishment (PE) in India under Article 5 of India-Singapore DTAA.
4. Taxability of receipts from internet bandwidth charges as royalty income.
5. Taxability of receipts from reimbursement of license fee as royalty income.
6. Levy of interest under sections 234B and 234D of the Act.
7. Imposition of penalty proceedings under section 270A of the Act.

Summary:

1. Taxability of Receipts as Royalty Income:
The assessee challenged the taxability of receipts from various services as royalty income under section 9(1)(vi) of the Act and Article 12(3) of India-Singapore DTAA. The Tribunal, following its decision in the assessee's own case for assessment year 2017-18, held that the receipts from such services do not constitute royalty income. It was observed that the customers were neither in possession of any equipment nor had any control over the equipment used by the assessee. The Tribunal emphasized that the term 'process' in the context of royalty envisages that the payer must use the 'process' on its own and bear the risk of its exploitation. Since the assessee was the sole bearer of the risks in relation to the equipment, the income could not be characterized as royalty.

2. Taxability of Receipts as FTS:
The assessee also challenged the taxability of receipts from disaster recovery services as FTS under section 9(1)(vii) of the Act and Article 12(4) of India-Singapore DTAA. The Tribunal, referring to its earlier decision, held that the disaster recovery services do not make available any technical knowledge, experience, skill, know-how, or process to the customers. The services provided were standard services and did not involve any element of controlling, directing, or administering the business of customers. Therefore, the receipts were not in the nature of FTS and were not taxable in India.

3. Attribution of Business Profits to PE:
The assessee contested the addition of business profits attributable to the alleged PE in India. The Tribunal examined whether the conditions of Article 5(3) and 5(4) of the DTAA were satisfied. It was observed that the installation and commissioning services were sub-contracted to OEM, and the duration of such activities did not exceed the threshold limit of 183 days. The Tribunal held that each project site should be construed as a separate project, and since the threshold limit was not breached, the assessee did not have a PE in India. Consequently, no profits from the sale of equipment or installation services could be taxed in India.

4. Taxability of Receipts from Internet Bandwidth Charges:
The assessee challenged the taxability of receipts from internet bandwidth charges as royalty income. The Tribunal noted that no corresponding amendment to the treaty provisions was made to align with the amendment to section 9(1)(vi) of the Act. Therefore, the receipts could not be treated as royalty income under Article 12(3) of India-Singapore DTAA, and the addition was deleted.

5. Taxability of Receipts from Reimbursement of License Fee:
The assessee argued that the receipts from reimbursement of license fee paid to the Singapore Government were cost-to-cost reimbursements without any profit element. The Tribunal, following the Supreme Court's decision in DIT vs. A.P. Moller Maersk AS, held that reimbursement of expenses without profit element could not be chargeable to tax. Therefore, the addition was deleted.

6. Levy of Interest under Sections 234B and 234D:
The issues related to the levy of interest under sections 234B and 234D were deemed consequential and did not require specific adjudication.

7. Imposition of Penalty Proceedings under Section 270A:
The issue of imposition of penalty proceedings under section 270A was considered premature and did not require adjudication at this stage.

Conclusion:
The appeals were partly allowed, with the Tribunal directing the deletion of various additions made by the Assessing Officer and upholding the assessee's contentions on several grounds.