9911796707
TMI Blog2022 (2) TMI 1292X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. - Decided in favour of assessee. Payment received on account of Information Communication Technology (ICT) service charges from Perfetti Van Melle India Pvt. Ltd. taxed as Fees for Technical Services under Article 12 of the India-Netherlands DTAA - HELD THAT:- As decided in case of SCA Hygiene Products AB [ 2021 (1) TMI 323 - ITAT MUMBAI] the person receiving the money as royalty, such as the actual seller of the software in this case, and the person providing service ancillary or subsidiary to the enjoyment of that right, must be the same. That s not the case here. In the present case, 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht being granted, the payment cannot partake the character of royalty. 7. Without prejudice, the AO/DRP failed to appreciate that in the cases of license of software, the license is given in the "Copyrighted Article" and not in the "copyright" per se and hence the reimbursement received by the Appellant cannot be characterized as royalty. 8. Without prejudice, the AO/DRP also failed to appreciate that the provisions of Explanation 4 to section 9(1)(vi) as inserted in the Act (domestic law), cannot be applied to the DTAA in the absence of any specific reference to it. 9. That the AO/DRP also erred in not applying their mind and in relying on the issues relating to infringement of the copyright while failing to appreciate that the infringement can only be qua the owner of the copyright. 10. That the AO/DRP also failed to appreciate that the Appellant was only a facilitator for procurement of SAP and Microsoft licenses and there was no reproduction right given by the Appellant qua the said licenses. 11. That the AO/DRP also failed to appreciate that SAP is an accounting ERP software and based on the number of users, licenses have to be procured to enable use of the ERP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 12(5)(a) of the IndiaNetherlands DTAA. 20. That the Ld. AO / Hon'ble DRP erred in alleging that the services rendered by the Appellant to its Indian affiliate were in the nature of "management consultancy services". 21. The Ld. AO/Hon'ble DRP has erred in not following the High Court rulings relied upon by the Appellant, wherein on the basis of similar facts, it was held that payment received in lieu of ICT Services and Regional Support services were not taxable as Fees for Technical Services. 22. That the Ld. AO has grossly erred in charging interest under section 234B of the Act. 23. That the Ld. AO grossly erred in initiating penalty proceedings under section 270A of the Act." 3. The assessee filed its return of income on 28.11.2017 declaring Nil and claimed a refund of Rs.37,03,599/-. PVM ICT BV is a company incorporated in Netherlands on 25.10.2014 having its registered office at ZoeteInval 20, 4815 HK Breda. The company is actively engaged in the business of rendering services in confectionery industry. 4. The assessee has earned income amounting to Rs.5,54,27,472/- from Perfetti Van Mele India Pvt. Ltd. ("PVM, India") in relation to the agreement entered w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opsis International Old Ltd. [2012] 28 Taxmann.com 162 (Kar), Samsung Electronics Co. Ltd. (supra), CIT (IT) v. Wipro Ltd. [2013] 355 ITR 0284 (Kar) and CIT v. CGI information Systems & Management consultants (P.) Ltd. [2014] 226 Taxmann 319 (Kar). The basic conclusions in all these decisions are as follows: (i) that the consideration paid is for the rights in respect of copyright and the user of the confidential information embedded in the software/computer programme amounts to royalty both under the Act and under the DTAA. (para 45 of Synopsis, supra) (ii) that what is transferred is right to use the software, an exclusive right, which the owner of the copyright i.e., the respondent-supplier owns and what is transferred is only right to use copy of the software for the internal business as per the terms and conditions of the agreement (Para 24 of Samsung, supra) (iii) that right to make a copy of the software and use it for internal business by making copy of the same and storing the same in the hard disk of the designated computer and taking back up copy would itself amount to copyright work under s. 14(1) of the Act and licence is granted to use the software by making cop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a "process" to the customers who used the embedded process while carrying out their business. Hence, in addition to software involving a copyright, these specialized software also represent a 'process' which could be used in a particular industry specific core activity. The Panel therefore does not find any infirmity in the conclusions arrived at by the AO. As regards the cases relied upon by the assessee containing the abovementioned issues are before the Hon'ble Supreme Court, DRP being a part of the assessment process, the Panel sustains the addition made in the assessment order and rejects the objections of the assessee in Grounds 2 and 3." 10. Aggrieved the assessee filed appeal before us. 11. The ld. AR relied on the judgment of Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. (CA No. 8733-8734 of 2018). 12. The ld. DR submitted written arguments which are as under: "The assessee submitted before the Hon'ble Bench in proceedings on 18.11.2021 that with reference to reimbursements received by the assessee on account of SAP software and Microsoft licenses cannot be taxed as Royalty u/s 9(1) (vi) of the Act as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ploit. It is akin to licensing by appellant to its group entities for access to the software. Every time the assessee allows its group entity to access and use of the software, the appellant is in a way issuing copies to public not already being in circulation as such software is not available not any public without allowing access by appellant for a fee. The appellant does not pass the ownership right and only gives limited access to use as the software always remains the property of assessee. Thus the grant of access to group entity for use is akin to allowing commercial rental of the copy of the software program, which is also one of the copyright privileges u/s 14 of the Copyright Art. Once the appellant allows this commercial use, it is a manifestation of transfer of some rights in copyright too. So even while retaining the ownership and copyright in case of a software, the copyright can be commercially exploited by owner by delivering the software to end user in multiple ways such as allowing the use of software given on a media, copied to hard disc, downloaded from internet, access to cloud servers where the software is located etc. Since no other title or interest in the so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in domestic law at par with that of DTAA. Hence the consideration for SAP licenses is a process Royalty as well. 5. In the relevant case the appellant has not given exact details of licenses purchase from Microsoft. However, it is understood that since the assessee has deployed SAP ERP, the same must have been Microsoft platform. For example SAP might have been run on Microsoft Azure. Thus purchases of licenses from SAP and Microsoft are related and interlinked for deployment in the premises of AES of the assessee. Thus customization and configuration of SAP and Microsoft are related. In the relevant case, PVM ICT BV, has got the license configured/customized for meeting specific needs of PVM group which includes customization of SAP ERP software run on Microsoft software. Thus what is transferred in this case is copyright as covered u/s 14(a) & 14 (b) of the Copyright Act 1957 and hence payments received against transfer of copyright is Royalty as defined under the Act and the tax treaty." Sd/- Anupama Anand CIT DR 13. Heard the arguments of both the parties and perused the material available on record. 14. We find that this issue stands covered by the order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the facts and circumstances of the case and in law by concluding that ICT sen/ice charges received by the assessee as Fees for Technical Services ("FTS') as per the treaty. Ground 4.1 - That the Learned AO has erred on the fact and circumstances of the case and in law in not appreciating the fact that the assessee does not make available any technical knowledge, know-how or skill and do not fail within the ambit of Article 12 of India- Netherlands OTA A read with India Portugal DTAA. Ground 4.2 - That the Learned AO has erred on the facts and circumstances of the case and in law, by holding that the assessee cannot apply the provisions of India and Portugal Double Taxation Avoidance Agreement which is an OECD country inspite of 'Most Favored Nation' clause in IndiaNetherland DTAA. Under this Ground, the assessee has objected to the treatment by the AO of id service charges as FTS under section 9(1)(vii) of the Act and Article 12 of the India- Netherlands DTAA. The assessee submitted that as per the DTAA, the amount earned as ICT charges does not relate to transfer of any technical knowledge, experience skill, know-how or processes or transfer of any technical pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the second limb of the provision, namely development and transfer of a technical plan or technical design. The phrase 'technology contained thereon' would have meaning only in respect of the technical plan / design containing the same. Attributing the phrase to the first limb of the provision which includes diverse aspects such as experience/ skill would lead to an absurd interpretation. There cannot be an interpretation that technology is contained in a technical experience or skill. Considering the same, the assessee's contention that India Portugal DTAA be applied under the Most Favoured Nation clause in place of the India-Netherlands DTAA on account of a narrower scope becomes infructuous. Coming to the nature of services provided, the AO refuted the claim of the assessee that the services provided by it were routine administrative functions and held that they were of the nature of specialized management consultancy and hence taxable as FTS under the DTAA, On perusal of the relevant Agreement between the assessee and Perfetti Van Melle India Private ltd. dated 28.04.2015, it is seen that through various inter-connected services, the assessee made available technical knowle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion (OA) and Network Infrastructure Office Automation • This includes the mail server administration, file/print services and PC support (both SW and HW) • Coverage of support can range from planning to design to implementation and support. LAN/WAN services • This refers to the management of the data communication lines (including internet access and internet security). Improvement Projects • Refers to any OA/Network project that the OC would like RSO to do for them (e.g. IT Audit, Exchange 2000 implementation etc.) It is seen from the services provided above that they relate to a wide spectrum of technical services (setup, configurations, customizations, trouble shooting etc.) management services (Business process re-engineering and streamlining) and consultancy services (planning, design, support etc). In this regard, the following extract from the Commentary to the UN Model Double Tax Convention on FTS is instructive - 66. The ordinary meaning of "consultancy'' involves the provision of advice or services of a specialized nature... 67. The terms "management", "technical" and "consultancy" do not have precise meanings and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding data processing of above systems - Providing operations, support and consulting services for the above - Providing support for implementation of ERP system [SAP 81) for project Vindaloo which includes support for • Pre implementation work i.e. applying per-sets for Template (all changes not impacting the productive Database), Cleansing current Database, finalizing target processes and preparing Infrastructure, • Assisting in Testing Phase i.e. testing upgrade, testing new integration scenarios, training users to new processes, testing business process on upgraded Database with users, • Post implementation work which includes upgrading Database, applying new integration scenarios and applying other part of templates. • Other tasks including creation and testing Fixed Assets module, additional reporting modules, retraining new users to ERP and onsite support post GO live 2. Details of the object of the Services Scope, type and purpose of the intended collections, processing, or use of data Data managed is related to the operations of the SCA business and to the management of its workforce, and will only be used to that purpose. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tomatically to a third state". Without prejudice to this stand, on merits of applicability of "make available" clause, learned Dispute Resolution Panel observed as follows: 4.17 The relevant clause of the Article 12(4) relied on by the assessee is reproduced below: - -make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of technical plan or technical design. 4.18. There are two clear components in this clause - One which requires making available of technical knowledge, experience, skill, know how or process and the second which consists of the development and transfer of technical plan or technical design. The DRP finds that the case of the assessee is to be examined with reference to both these requirements. 4.19 It needs clarification that when third party consultants are operating on behalf of the assessee and the amount received by it include payments for these excerpts, the character of their service needs to be elaborated for purpose of deciding the character of fee received by the assessee. It is also noted that the assessee is operating in project monitoring and project scheduling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is of the view that these services constitute. FTS under the Act as well as under India Sweden DTAA and are required to be taxed in India under Article 12 of the India Sweden DTAA. 13. Accordingly, the Assessing Officer proceeded to make the additions of Rs 1,97,94,209 as consultancy services taxable under article 12 and Rs 57,47,684 as information technology support services taxable under article 12. The assessee is aggrieved and is in appeal before us. 14. We have heard the rival contentions, perused the material on record, and duly considered facts of the case in the light of the applicable legal position. 15. Let us first take a look at the provisions with respect to taxability of fees for technical services under the Indo Swedish tax treaty, the related protocol clause of the Indo Swedish tax treaty, and the provision for fees for technical services under the Indo Portuguese tax treaty. These provisions are set out below: ARTICLE 12 OF INDO-SWEDISH TAX TREATY ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 6. 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 or fees for technical 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-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention. PROTOCOL TO INDO SWEDISH TAX TREATY At the signing of the Convention between the Government of the Republic of India and the Government of the Kingdom of Sweden for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital, the undersigned have agreed that the following shall form an integral part of the Convention: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nformation 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 in articles 14 and 15 of this Convention, to any person in consideration of the rendering of any technical or consultancy services (including through the provisions of services of technical or other personnel) if such services: (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 (b) make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design which enables the person acquiring the services to apply the technology contained therein. 5. Notwithstanding paragraph 4, "fees for included services" does not include payments: (a) For services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property; (b) For services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention. [Emphasis, by underlining, supplied by us] 16. The question that we first need to deal with is as to what is the impact of the MFN clause in the Indo Swedish tax treaty, read with the Indo Portuguese tax treaty which was subsequently entered into between India and Portugal, an OCED member country. 17. Let us first understand as to what a most favoured nation clause, in the tax treaties, is. All it implies is that in case the tax jurisdictions entering into the tax treaty, or any of the treaty partner, extends a more generous tax treatment to any other tax jurisdiction, or any other tax jurisdiction of a particular nature- e.g. OECD member jurisdiction, the same tax treatment will be due to the treaty partner in question. For example, if X jurisdiction provides for sour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plomatic 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 Contracting States (Emphasis, by underlining, supplied by us)". In the case of Indo Swedish tax treaty, however, the wordings are different inasmuch as it provides that "if under any Convention. Agreement or Protocol between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, or fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items of income shall also apply under this Convention (Emphasis, by underlining, supplied by us)". There are thus three different modes, in the illustrations that we discussed, in which the MFN clause can be implemented- first, as in Indo Swiss tax treaty, where all that the MFN clause ensures is that the negotiations take place, without any delay, to ensure that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 respective Governments, unlike the situation envisaged in, for example, para 4 of protocol to Indo-Philippines DTAA or para 3 of protocol to Indo-Swiss…. 20. It is interesting to note that the coordinate bench did take note of the notification issued by the Government of India, giving effect to, what it perceived as, the impact of the protocol clause as a result of a subsequent tax treaty being entered into by India. The controversy about the Government notification was on account of the fact that it did implement the protocol clause, but it extended lesser effect to it than as visualized by a plain reading of the protocol clause- i.e., about the rate of taxation in the subsequent treaty provision only and not about the restricted scope of the related treaty provision. However, the coordinate bench was of the view that nothing turned on this notification and ignored the same. The plea that issuance of notification was at best done as a measure of abun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 separately executed between the India and France which formed part of the DTAA between the two countries was interpreted. It was held by the ITAT, and in the view of this Court correctly, that the benefit of the lower rate or restricted scope of fee for technical services under the IndoFrench DTAA was not dependent on any further action by the respective governments. It was held that the more restricted scope of fee for technical services as provided for in a DTAA entered into by India with another OECD member country shall also apply under the Indo-French DTAA with effect from the date on which the Indo-French DTAA or such other DTAA enters into force. 22. The views so expressed by Hon'ble Delhi High Court, in the absence of anything contrary thereto by Hon'ble jurisdictional High Court, or, for that purpose, even any other Hon'ble High Court, bind us. The A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 does not mean that the Indian entity is transferred the technology of being a project leader of this type and next time Indian entity can perform similar services without recourse to the same- which is the core test for the fulfilment of 'make available' clause. We are unable to approve the stand of the authorities below on this point. In our considered view, in the light of the discussions above, the make available clause is not satisfied, in the course of rendition of services by the assessee, and, as such, the consultancy fees of Rs 1,97,94,209 cannot be brought to tax, in the hands of the assessee, under article 12 of Indo Swedish tax treaty. 25. That leaves us with the taxability of Rs 57,47,684 on account of Information Technology Services. The main reason for its taxability by the DRP is stated to be that "the services is found to be intrinsically lin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 receiving the money as royalty, such as the actual seller of the software in this case, and the person providing service ancillary or subsidiary to the enjoyment of that right, must be the same. That's not the case here. In the present case, 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 satisfaction of 'make available' clause, for the detailed reasons set out earli ..... X X X X Extracts X X X X X X X X Extracts X X X X
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