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TMI Blog2022 (10) TMI 654X X X X Extracts X X X X X X X X Extracts X X X X ..... software through EULAs/distribution agreements, is not the pay of royalty for the use of copyright in the computer software, and that same does not give rise to any income taxable in India, as a result of the persons referred to in section 195 of the Income-tax Act were not liable to deduct any TDS under section 195 of the Income-tax Act. - Hence, we hold that the appeal of the assessee on the ground of Royalty is allowed. Provisions of FTS - make available clause - We find the similar matter has been adjudicated by the Co-ordinate Bench of ITAT Mumbai in the case of SCA Hygiene Products AB Vs. DCIT [ 2021 (1) TMI 323 - ITAT MUMBAI ] held that the payment received by the assessee has been held to be in the nature of reimbursement, which is outside the ambit of taxation. The person selling the SAP software is Be One Solution, Switzerland, whereas the person providing the services in question is the assessee. Article 12(4)(a) will not, therefore, come into play at all. In our considered view, therefore, the taxation under article 12 in the present case can come into play only when the make available clause is satisfied, but then the Assessing Officer s justification for the satisfact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd in law, the Hon'ble CIT(A) has erred in holding that the following amounts remitted by the Appellant to MEAP are in the nature of Fee for Technical Services ('FTS'), being ancillary and subsidiary to the payment of royalty and hence taxable under Article 12(4)(a) of India-Singapore DTAA: • Professional services relating to SAP system amounting to Rs. 71,19,645; • Email access services on handheld devices amounting to Rs. 12,61,780; • Providing regional network access and email access services amounting to Rs. 53,63,703; • Firewall and Check point protection services amounting to Rs. 74,66,576. 5. That the Hon'ble CIT(A) has failed to appreciate that out of the total amount of Rs. 3,55,49,941 remitted to MEAP by the Appellant, an amount of Rs. 2,19,57,042 is in the nature of reimbursements and therefore not chargeable to tax and hence should not be subject to withholding tax." 4. The assessee (MEIPL) was incorporated in 2010 under the Companies Act, 1956 as a private limited company. The Company offers products for the Indian market such as air-conditioners, visual information systems, power devices, photovoltaic solutions, powe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y more than 10 years ago, the meaning of the term "software" was basically a set of instructions which included some interaction between the computer and the human being. A set of instructions were laid down in the form of a programme. The programme could be a designated formula to compute or give an output of a certain format. For the purpose of such format, the input was required to be made on the machine. This pre-coded information specifically was written on a CD or a floppy disk and sold "off the shelf' by a number of companies. There was also a provision of slightly modifying or customizing the software dependent on the language or business of the user. In addition, some updates or debugging was also provided by certain entities who provide of such software programmes. The user could enter into a contract and pay a consideration for which the software or a set of instructions was delivered to him. In the past decade however, the definition of the term 'software' has expanded enormously. In fact, it is rather difficult to seek the definition of software on this day. The terminologies being used by software development companies clearly indicate the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information. Referring to the words of any patent, trade mark, design or model, plan, secret formula or process, the ld. CIT(A) held that the discussion on the copy right act, copy righted article did not focus on plan and process. The ld. CIT(A) held that the SAP solution software as it is seen in the present context can be classified as a process and therefore applicability of the judgment is not direct is this case. It was further held that the implementation relates to execution of processes for improving efficiencies of business. The consideration for these unique structures and set ups created for a business, is certainly of the nature of "Royalty". 14. It was held that the SAP solution softwares are basically classifiable as a "process" or plan and the consideration of the same is certainly consideration for a process as included in the definition of Royalty in the DTAA. The term "process" used here is not in the context of the manner of writing a computer program. It was held that the Co-ordinate Bench of Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a); (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals making the payment; (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 14; (I) for services rendered in connection with an installation or structure used for the exploration or exploitation of natural resources referred to in paragraph 2(g) of Article 5; (g) for services referred to in paragraphs 4 and 5 of Article 5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le the skill. Therefore by implication 12(4)(b) would be applicable only where services rendered result in making available technical skill or knowledge to the recipient. The appellant has given a number of judgments in his favor where he has argued that make available is not satisfied in the present case. In fact, the entire set of payments fail on the make available clause and therefore cannot be classified as FTS. 5.6.5 It is however seen that article 12(4) of the Treaty has 3 parts. The first part(a) does not have any make available attached to it. In the present case, the consideration for SAP implementation has been held to be liable to deduction of tax under section 195. Therefore the payment is in the nature of Royalty. All the other payments are subsidiary and ancillary to the implementation of SAP in the appellant's premises. Article 12 (4) (a) refers to payments which are a consideration for services which a. are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or This clearly states and includes consideration for services which are ancillary to the enjoyment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es not render the payments being made immune from the purpose of deduction of tax and neither does it change the nature of services which is FTS in the present case. On this argument also the appellant does not succeed." 17. To conclude, the ld. CIT(A) held that the services mentioned above fall under the category of Article 12(4)(a) as they are ancillary and subsidiary to consideration for Royalty. The ld. CIT(A) also held that the taxability is determined by nature of service only and since there was no PE they have to be taxed on gross basis. 18. Before us, the assessee reiterated the arguments taken before the revenue authorities whereas the ld. DR argued based on the submissions which are reproduced as under: "In the last date of hearing before the Hon'ble ITAT, 'D' Bench, New Delhi, the counsel of the appellant had submitted that the case under consideration is covered by the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited vs. The Commissioner of Income Tax & Anr. in civil appeal nos. 8733-8734 of 2018 dated 02.03.2021 and also by the decision of the Hon'ble ITAT, New Delhi in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition of royalty as contained in Paragraph 3 of Article 12 of the DTAA apart from the royalty arising out of (transfer of copyright was not discussed/considered. 4. Similarly, in the case of Perfetti Van Melle ICT 86 BV, the ITAT, New Delhi decided the case simply by relying on the aforesaid decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited wherein the decision pertained only with respect to the first limb of the definition of Royalty relating to the transfer of copyright as mentioned in the previous paragraph. 5. In the present case, the facts are that M/s. Mitsubishi Electric India Pvt. Ltd. has made payment to M/s. Mitsubishi Electric Asia Pte Ltd. for the implementation of SAP for transportation system and also payment for SAP data centre operation cost and SAP license maintenance. It is pertinent to note that SAP is not a standard pre-coded software which is available off-the-shelf but it is an enterprise resource planning process comprising several processes for large number of corporate functions which are customized after properly evaluating the business requirements before its implementation. Implementati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses only when the sum payable to a non-resident, including a foreign company, is chargeable to tax under the provisions of the Act. However, the above payments does not result into any income of "MEAP" in India as per the provisions of the Act read with relevant Double taxation avoidance agreement ('DTAA'), as the amounts are not chargeable to tax in India. Hence, the Appellant has incorrectly borne and paid taxes of Rs. 54,85,396/- by grossing up payments of Rs. 4,93,68,563/- made to MEAP. 20. Accordingly, against the above payment of taxes at source the Appellant is in appeal before ITAT under Section 248 of the Act for a declaration that no taxes are deductible at source and consequently the sum of Rs. 54,85,396/- representing taxes incorrectly deducted and deposited at source by the Appellant deserve to be refunded to the Appellant, along with applicable interest. 21. It was submitted that the assessee in the grounds of appeal and statement of facts had inadvertently mentioned amount of payments to MEAP as Rs. 5,11,46,485/- and TDS thereon as Rs. 56,82,945/-. However, as mentioned above the correct amount of payment to MEAP is Rs. 4,93,68,563/- and TDS there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee cannot be brought to tax as per India - USA DTAA. 24. Hence, we hold that the appeal of the assessee on the ground of "Royalty" is allowed. 25. Further, with regard to the provisions of FTS, we find the similar matter has been adjudicated by the Co-ordinate Bench of ITAT Mumbai in the case of SCA Hygiene Products AB Vs. DCIT in ITA No. 7315/Mum/2018 vide order dated 08.01.2021. For the sake of ready reference, the relevant part of the order is reproduced as under: "11. Yet another receipt by the assessee, under the said agreement, was for Information Technology Services. These payments aggregated to Rs. 57,47,684 during the relevant financial period. The nature of these services, as set out in Annexure B to the said agreement, is as follows: 1. Object and Term of the Services - SCA Sweden shall perform the following Services for SCA India; - Providing hard and software for various ERP systems, CRM systems and other business systems - Providing hard and software for various internet services - Providing data communication services - Providing management of workplace environment - Providing data processing of above systems - Provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was that under the restricted meanings of the 'fees for technical services' under article 12 of the Indo Swedish tax treaty, as read with "most favoured nation (MFN) clause" in protocol thereto and read with India Portugal Double Taxation Avoidance Agreement [(2016) 244 ITR (Stat) 57; Indo Portuguese tax treaty, in short], unless a technical service "makes available" technical knowledge, experience, skill, knowhow or process, it cannot be brought to tax as fees for technical service. The Assessing Officer, however, did not accept this contention. When the matter travelled to the Dispute Resolution Panel, on objections being raised by the assessee, learned Dispute Resolution Panel did reject the invocation of MFN clause and observed that "with regard to automatic application of the MFN clause available in the India Sweden Treaty, the DRP has its own reservations and feels that both the states are required to invoke the MFN clause through issuance of notifications" and that "in the absence of such notifications, benefits of other treaties cannot be extended automatically to a third state". Without prejudice to this stand, on m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AE, they are enable to employ these tools in implementing their own project. 5.14. The nature of service rendered by the assessee as detailed by it has been reproduced above. Admittedly, these vacancies are effectively connected with the SAP system implemented by the Group as a whole and have been made towards effective utilisation and efficient working of the SAP system. The assessee admits that these services are required on an annual basis and are meant for maintenance and upkeep of the system. The procurement of licences for SAP system has been held to be in the nature of royalty. 5.15. The assessee is not correct in claiming that the services so rendered are covered by Article 12(4)(b) of the India Portugal Treaty, even if the claim of automatic application of MFN clause is allowed to the assessee. The services is found to be intrinsically linked with enjoyment of the SAP system and hence, would fall within the ambit of Article 12(4)(a) of the Article where there is no requirement of making available of any knowledge, skill or experience. 5.16. In light of the above discussion, the DRP is of the view that these services constitute. FTS under the Act as well as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply. 5. Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the royalties and fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 3. The term "royalties" as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes or any other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial, or scientific experience. 4. For the purposes of this article, "fees for included services" means payments of any kind, other than those mentioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med to arise in a Contracting State where the payer is that State itself, a political or administrative subdivision thereof, a local authority or a resident of that State. Where, however, the person paying the royalties and fees for included services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or fixed base in connection with which the obligation to pay the royalties and fees for included services was incurred, and such royalties and fees for included services are borne by that permanent establishment or fixed base, then such royalties and fees for included services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 8. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties and fees for included services, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this article shall apply only to the last-m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or technical services than the scope for these items of income provided for in Article 12 of this Agreement, then Switzerland and India shall enter into negotiations without undue delay in order to provide the same treatment to Switzerland as that provided to the third State" (Emphasis, by underlining, supplied by us). Similarly, in the case protocol to the India Philippines Double Taxation Avoidance Agreement [(1996) 219 ITR Statutes 60 @ 83; Indo Philippines tax treaty, in short], all that provided is in the MFN clause is that the treaty partners inform the other party so that the matter is appropriately revied as is evident from the protocol observation to the effect that "With reference to Articles 8 and 9 if at any time after the date of signature of the Convention the Philippines agrees to a lower or nil rate of tax with a third State the Government of the Republic of the Philippines shall without undue delay inform the Government of India through diplomatic channels and the two Governments will undertake to review these Articles with a view to providing such lower or nil rate to profits of the same kind derived under similar circumstances by enterprises of both Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es or fees for technical services, to any other OECD member jurisdiction, by itself, is enough to trigger that the same provisions "shall also apply" under Indo Swedish tax treaty. No further actions on the part of India are envisaged in the Indo Swedish tax treaty to trigger the application of the same provisions in Indo Swedish tax treaty as well. 19. Elaborating upon the scope of this peculiar manner in which MFN clause operates in India France Double Taxation Avoidance Agreement [(1994) 209 ITR Statues 130 @ 159; Indo French tax treaty, in short) the relevant portion of protocol clause in which is identically worded in effect as in the case of Indo Swedish tax treaty, a coordinate bench of this Tribunal, speaking through one of us (i.e. the Vice President), in the judgment reported as DCIT Vs ITC Ltd. [ (2002) 82 ITD 239 (Kol)] made following observations around two decades back, in late 2001, and these observations, as we will see a little later, hold good even today: ......in our considered view, the benefit of lower rate of or restricted scope of 'fees for technical services' under the Indo-French DTAA is not dependent on any further action by the respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anges in the Treaty on the basis of the Protocol were given effect by Notification only. We do not see any reason as to why different treatment will be given in the present case. 21. In other words, it was thus held, as has been held by the learned DRP in the impugned order, that the effect of the protocol clause is to be given by a formal notification, and unless that happens, the protocol is toothless. That legal position has, however, been reversed in the case of Steria India Ltd. Vs CIT [ (2016) 72 taxmann.com 1 (Del)] and Their Lordships have, referred to, with approval, the decision of a coordinate bench in the case of ITC Ltd. (supra) and concluded as follows: ......... The Court is ........ unable to agree with the conclusion of the AAR that the Clause 7 of the Protocol, which forms part of the DTAA between India and France, does not automatically become applicable and that there has to be a separate notification incorporating the beneficial provisions of the DTAA between India and UK as forming part of the India-France DTAA ....................... ........... a reference to the decision of the ITAT in Dy. CIT v. ITC Ltd. [2002] 82 ITD 239 (Kol.), where the Protocol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of DIT v. Guy Carpenter & Co Ltd. [ (2012) 346 ITR 504 (Del)] and Hon'ble Karnataka High Court in the case of CIT v. De Beers India (P.) Ltd. [ (2012) 346 ITR 467 (Kar)] in favour of the assessee, and there is no contrary decision by Hon'ble jurisdictional High Court or by Hon'ble Supreme Court. In De Beers India (P.) Ltd. case (supra), their Lordships posed the question, as to "what is meaning of 'make available'", to themselves, and proceeded to deal with it as follows: '...... The technical or consultancy service rendered should be of such a nature that it "makes available" to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology "making available", the technical knowledge, skill, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t because the assessee renders these services does not mean, and by no stretch can imply, that the recipient can next time do all this work without recourse to the assessee. As regards learned DRP's observations that the project leading work "will include scheduling charts, timelines, bar charts which are contemplated in the case of the assessee under Project Administration....project and financing controls including necessary charts and controls for implementation of the project", that "the assessee is not executing the project but is rendering consultancy service to the AE", and that "when project implementation tools are provided to the employees of the AE, they are enabled to employ these tools in implementing their own project," these observations are factually incorrect inasmuch as the assessee's representative is executing the work and is the key person at the factory site who is doing all the needful and inasmuch as there is no mention anywhere of developing these tools and handing over the same to the recipient of services. In any case, just because the Indian entity is interacting with the project leader and getting inputs from him do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or this purpose. The authorities below have been thus swayed by considerations not germane in this context. So far as these services being incidental to SAP system being the reason for taxation under article 12(4)(a) is concerned, we have noted that providing support services for SAP implementation is a small part of the services and in any case what article 12(4)(a) covers is the services which "are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received" and the information technology services, as set out in Annexure B to the agreement, cannot be described as ancillary and subsidiary to the SAP system. At best, a small part of these services could fall in that category, but that payment is not even separately identified. These things apart, 12(4)(a) would come into play when the assessee receives a payment in the nature of royalties under article 12(3) and the services ancillary and subsidiary to the ITA No. 7315/Mum/2018 Assessment year: 2015-16 Page 19 of 19 application or enjoyment of that right, payment for which is described in article 12(3). In other words, the person r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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