9911796707
TMI Blog1999 (4) TMI 612X X X X Extracts X X X X X X X X Extracts X X X X ..... ed company on June 28, 1994, having its main object as the operation of a high technology centre for data management, information analysis and control of the ABC group and other companies in Asia, Europe or elsewhere. It became a deemed public company with effect from April 1, 1997, by virtue of provisions of sub-section (1A) of section 43A of the Companies Act, 1956, on the basis of turnover criteria. It has set up a 100 per cent. EOU and has commenced commercial operations and export from June, 1995, to various countries around the world. The activities/operations of its business in its EOU involve data management, information analysis and control. Its customers currently consist of various ABC companies located in different countries. It needs to be mentioned here that XT is a wholly owned subsidiary of Z of USA. Y , the applicant-company has, inter alia, a World Wide Information Processing Telecommunication Centre (hereinafter referred to as WIPT Centre ) at USA. It owns and maintains at the said WIPT Centre a huge high-tech computer complex having 15 to 20 mainframe IBM computers and other related hardware and software facilities involving substantial investment and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Asia and the Pacific, in a similar manner. The information is then passed on to the Hong Kong computer centre of the applicant. For carrying out this operation, XT has obtained leased lines from VSNL. The applicant-company, Y , charges XT, the Indian company, for the use of its computer set up in Hong Kong and that in the USA at the rates specified above. The questions posed in the application are as under : (i) Whether payment due to the applicant under the transaction mentioned in annexure-B is liable to tax in India ? (ii) If the answer to question No. 1 is in the affirmative, whether the payment due to the applicant under the transaction mentioned in annexure-B is covered under article 12(3)(a) or article 12(3)(b) of the Double Taxation Avoidance Agreement between India and the USA ? To put the question raised by the applicant in proper perspective, it would be in order to reproduce part of the said annexure-B referred to above : Annexure-B Relevant facts : The application pertains to the liability to tax in India of the charges receivable by the applicant from an Indian company for the use of the applicant s Central Processing Unit (CPU) at USA and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... side India and XT pays charges by way of remittance in foreign exchange which are received by the applicant-company outside India. Accordingly, XT is operating as a separate business entity in India having set up and invested substantially in its EOU, undertaking significant exports and earning substantial foreign exchange for India, employing well trained and expert local employees in large numbers and having its own full fledged business set up in India being run with its own highly sophisticated and advanced technological infrastructure and equipment installed in India. It is claimed that XT is an Indian company and it is not connected with the applicant. The applicant-company receives charges for use of the CPU and CDN by XT . Since the processing of the data is done in the computers located in Hong Kong and the USA and not in India, no business activity of the applicant arises in India and hence the charges paid by XT to the applicant are not taxable in India. XT is registered as an Indian company as a 100 per cent. export oriented unit. It provides customer services, mainly, by way of data processing to 13 companies of the ABC group located all over the world ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is in the affirmative, an advance ruling has been sought as to whether such payment due to it from XT would be in the nature of royalty within the meaning of that term as in paragraph 3 of article 12 of the agreement between the Governments of India and of the USA for avoidance of double taxation of income (for short, DTAA ), and if so, whether they would fall within the ambit of clause (a) or clause (b) of the said paragraph 3 of article 12 of the DTAA. Regarding the first question, it was submitted on behalf of the applicant company that its liability to tax in India on the payments due to it from XT as business income (other than income by way of royalty ) has to be viewed in the light of the provisions of article 7 of the DTAA (relating to taxation of business income, other than income in the nature of royalty referred to in article 12), read with article 5 of the DTAA which contains an exhaustive definition of the term permanent establishment of the enterprise of one of the Contracting States in the other Contracting State. It was submitted that under the provisions of paragraph 1 of article 7 of the DTAA, the business profits of an enterprise of one of the Contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch payments may be taxed in India only according to the laws of India, and as the payments in question were not in the nature of income by way of royalty as per the definition of that term in Explanation 2 to section 9(1)(vi) of the Income-tax Act, 1961, they were not taxable in the hands of Y in India as its income by way of royalty . With regard to the definition of the term included services in paragraph 4(b) of article 12 of the DTAA, i.e., making available technical knowledge, experience, skill, know-how, or processes , or development and transfer of a technical plan or technical design , it was submitted that the payments due to Y from XT for the use of the CPU of Y in USA did not involve the rendering of any such services by Y to XT . In this connection, reference was invited to the clarifications regarding the applicability of the provisions of paragraph 4(b) of article 12 of the DTAA contained in the memorandum of understanding concerning royalties and fees for included services, appended to the DTAA. It was also submitted that the payments in question were not taxable in the hands of Y in India as income by way of fees for technical services as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income shall be deemed to accrue or arise in India if the payments are made in consideration of the provision of facilities and services of the nature defined therein. However, article 12 of the DTAA between India and the USA defines royalties and fees for included services and since the provisions of the DTAA supersede those of the Income-tax Act, the definition of royalties and fees for technical services therein are to be taken into consideration to see whether the payments due to the applicant are taxable under the said article. From the nature of the facilities provided by the applicant to the Indian company, it would be quite clear that the payment has been received as consideration for use of, or right to use . . . design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience within the meaning of the term royalty as per article 12(3)(a). Article 3(2) of the Double Taxation Avoidance Agreement with USA deals with general definitions. Article 3(2) states that any term not defined in the convention, shall have the meaning which it has under the laws of that State. However, the term royalty h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rise in India and is taxable in the hands of the non-resident person even if he is not maintaining any permanent establishment in India where any related activities are carried on. During the course of hearing, a copy of the memorandum and articles of association of XT was asked for and furnished. As per the memorandum of association of XT , one of the main objects of the company is as under : (i) To design, develop, maintain, market, buy, import, export, sell, provide, licence, and implement, computer software, hardware, computer systems, programme products and services, to undertake data operations processing systems and to act as information technology consultants and to operate a high technology data processing centre, for providing management, processing, analysis, development and accounting, information and data to ABC companies and other companies in Asia and Europe and other countries. It would be relevant to reproduce paragraphs 2 and 3 of article 12 of the DTAA which read as under (see [1991] 187 ITR (St.) 102, 115) : (2) However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aced before us. As mentioned above, arguments adduced by the Departmental representative find confirmation in the revised commentary on article 12 concerning software payments. Notwithstanding the various arguments advanced denying any relationship between XT and Y and non-applicability of the term royalty to the payments made by or amounts payable by XT to the applicant, it will be difficult to agree with their contentions. In paragraph 3 of their letter dated July 22, 1998, the applicant states that the use of its CPU in USA by XT does not at all involve the transfer of any software to XT . The CPU of Y (applicant) has its own software and is operated by its own personnel in USA. XT is retrieving from the CPU the processed data of its customers and XT is to make payment to Y only for having access to this data and to use the computer system. This clearly establishes that the software used in the CPU is that of the applicant and it has allowed the Indian company to use its software. The same software is also used by various other subsidiaries and group companies of the applicant. The actual use of CPU at USA is not directly accessible to the Indian company. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayable by the Indian company. It is quite clear that the applicant is aware of the taxability under the head Royalty , but has raised the question whether the aforesaid payments fall under article 12(3)(b) or whether they are taxable at 20 per cent. for the first five years and thereafter at 15 per cent. under article 12(3)(a). The answer to the above question has to be determined with reference to the facts and circumstances of this case mentioned above. We are moving increasingly towards a digital age. With increasing globalization, both labour and capital have become more mobile and markets more integrated and business being conducted across borders on a day-to-day basis. It is well known that globally, enterprises are becoming completely networked, more so in the field of software. Y , in the present case, is a service-provider, which, inter alia, allows XT to use its bandwidth as also its networking-infrastructure for the consideration spelt out in the agreement. In the instant case, though workers are less mobile than the capital and technology, the access to which has been made possible through the CPU and CDN. Undoubtedly, there are millions of transactions whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produced below : 12. Consideration for software.-Whether payments received as consideration for computer software may be classified as royalties poses difficult problems but is a matter of considerable importance in view of the rapid development of computer technology in recent years and the extent of transfers of such technology across national borders. Software may be described as a programme, or series of programmes, containing instructions for a computer required either for the operational process of the computer itself (operational software) or for the accomplishment of other tasks (application software). It can be transferred through a variety of media, for example in writing, on a magnetic tape or disc, or on a laser disc. It may be standardised with a wide range of applications or be tailor made for single users. It can be transferred as an integral part of computer hardware or in an independent form available for use on a variety of hardware. The rights in computer software are a form of intellectual property. Research into the practices of OECD member countries has established that all but one protect software rights either explicitly or implicitly under copyright law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxable as royalty under article 12(3)(a). The software being used is specifically developed by the applicant-company under an agreement signed in 1994 and renewed in 1997. The software is customised and secret. This clearly flows from paragraph 3 of the letter of the applicant dated July 22, 1998 (page 307) (that the CPU has its own software belonging to the applicant. From the facilities provided by the applicant to the Indian company, which are in the nature of online analytical data processing, it would be quite clear that the payment has been received as consideration for use of, or the right to use . . . design or model, plan, secret formula or process within the meaning of the term royalties in article 12(3)(a). From the question raised by the applicant, it seems that the applicant is aware of the taxability of the payment received under the head royalty , but it has also raised the question whether the aforesaid payment could be covered under article 12(3)(b), which speaks of payment of any kind received as consideration for the use of or the right to use any industrial, commercial or scientific equipment . If the case of the applicant falls under the aforesaid art ..... X X X X Extracts X X X X X X X X Extracts X X X X
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