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TMI Blog2023 (11) TMI 390X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance u/s 40(a)(i) - payment made to Brain Point Consultants, UAE - contention of the Revenue is that the impugned payments made by the assessee for rendering marketing and sales support services are in the nature of FTS and in the absence of a specific clause on FTS under the India-UAE DTAA, the impugned payments should be taxed under the provisions of Article 22 on other income which is residuary clause under the India-UAE DTAA - HELD THAT:- As abundantly clear that the Ld. CIT(A) after considering the impugned issue in detail has given his finding that invocation of the provisions of section 40(a)(i) of the Act by the Ld. AO is erroneous for the reason that the income of a non-resident agent from provision of marketing and sales support services rendered for overseas client cannot be included under section 5(1) of the Act as the same does not deem to accrue or arise in India based on the decision of Eon Technology P. Ltd. [ 2011 (11) TMI 20 - DELHI HIGH COURT] and further holding that in the absence of a specific clause on FTS under the India-UAE DTAA, provisions of Article 22 on residuary/ other income cannot be invoked based on the decision in the case of Kingfisher Airline ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged Services Mauritius on grounds that in absence of any specific clause for FTS in the India Mauritius Treaty, the taxability will be determined as per the provisions of Income Tax Act, 1961 and payment made is of the nature of Royalty for transfer of copyright in the 'Work Product' and the associated services and are chargeable to tax as fee for technical services. 3. Briefly stated the facts of the case are that the assessee is engaged in the business of computer software. The assessee filed its return of income on 07.10.2017 declaring income of Rs. 6,99,57,250/-. The case of the assessee was selected for scrutiny through CASS. Statutory notices along with questionnaire under section 143(2) and 142(1) of the Income Tax Act, 1961 (the Act ) were issued to the assessee on various dates online through ITBA asking the assessee to submit the required information which were duly submitted by the assessee online through ITBA which were placed on record. 3.1 During the assessment proceedings, the Ld. Assessing Officer ( AO ) observed that the assessee has made various foreign remittances to multiple entities and no TDS was deducted on such payments which are as under:- S. No. Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been made to Dubai Leading Technologies for development of an android app with features such as integration with calendar, event management and notifications, appointment management with teacher and principal, able to connect to schools other sub systems like attendance marking, assignment submission, geo tagging, school news and help button for calling for help at designated number in case of emergency. The above specifications makes it amply clear that the software has been custom made for the assessee with specific on demand features and requires integration with the other sub-systems of the school. ii) By referring to certain clauses of the agreement between Dubai Leading Technologies and the assessee (at pages 11 to 13 of the assessment order), the Ld. AO arrived at a conclusion that services of technical nature are being provided for the development of an android app which when becomes the property of the assessee which in turn sells the solution to its clients. iii) The payment schedule is linked milestones in development of the software, which once develop using the technical services of Dubai Leading Technologies, is owned by the assessee as the agreement does not men ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is argued that the provisions which are more beneficial - i.e. Treaty provisions or Income-tax Act, i.e. either of the two should be applied; Further, the appellant has also drawn attention to the fact that the decision of Hon'ble ITAT Chennai in the case of DCIT vs. TVS Electronics (Supra) has been overruled by Hon'ble High Court of Madras in Bangkok Glass Industry Ltd. Vs. ACIT [34 taxmann.com 77, 2013] and by the Banagalore ITAT in Kingfisher vs. DDIT (179 ITD 364). 6. In the context of the above submissions of the appellant needs to be evaluated in the context of findings given by the AO. The deductibility of TDS will depend on the provisions of DTAA and other relevant factors. 7. Analysis of payment made to Dubai Leading Technologies (UAE):- The nature of transaction is with respect to payment made towards an 'application software'. The nature of the agreement is described as under:- 7.1. Nature of agreement :- PROVIDER shall perform the services within the scope listed below. Following services shall be comprised within the scope of work (the Services ) Development of mobile app for school process automaton focused on school and other academic provide mob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enumerated Kingfisher Airlines Ltd. v. DDIT (supra), there is no denying that the said remittance cannot be brought within the ambit of FTS'. Whether the same can be treated as payment towards 'royalty' is a matter which needs to be looked into. The payment for development of mobile application is akin to payment for development / purchase of computer software- it would be relevant to look at the basis for treatment of payment for development of computer Software'. In order to treat the payment for development of mobile application which is akin to payment for development / purchase of computer software as royalty , the said payment must refer to 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, or films or tapes used for 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 but do not include royalties or other payments in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered into between the assessee and Dubai Leading Technologies for development of mobile app on Android and various judicial precedents (extracted above) inter-alia including therein the decision in the case of Kingfisher Airlines Ltd. (supra). In Kingfisher Airlines Ltd. s case (supra) the Bangalore Tribunal held that the remittance cannot be brought within the ambit of FTS in view of the absence of a specific clause relating to FTS in the DTAA and the settled position of law that in the absence of a clause in DTAA not dealing with a particular item of income, the payment should not be regarded as residuary income but as business income which is not chargeable to tax in India in the absence of a PE of the non-resident in India. The Ld. CIT(A) relying on this decision in para 7.3 (extracted above) of his appellate order held that the impugned remittances/ payments by the assessee to Dubai Leading Technologies cannot be brought within the ambit of FTS. 8.1 The Ld. AO relied on the decision of Chennai Tribunal in TVS Electronics Ltd. (supra) wherein the Tribunal has observed that in the absence of any specific clause for FTS in the India-UAE Treaty, the taxability will not be dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order in art. 22 is concerned, we do not find any justifiable ground to uphold this portion of the order after the discussion on the extent of income falling for consideration under royalty as defined under art. 12 and the amount paid as towards technical services falling for consideration under art. 7. Since the said income does not fall as miscellaneous income, the same cannot be brought under art. 22. 21. Even though learned standing counsel made a submission that the fee paid towards technical services cannot be brought towards business income, yet in the absence of any material to show that the same is not related to the business of the assessee. We have no hesitation in rejecting the said contention. Even assuming for a moment that the assessee is an Indian company given the nature of business of the assessee, if the income earned would qualify for consideration on the normal computation as business income, we do not find that the said character would undergo a change merely on the score that the assessee is not an Indian company. 22. In the light of the above, we allow the assessee's appeals viz, Tax Case (Appeal) Nos. 1187, 1307 and 1342 of 2005, 34 of 2006 and 743 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is appellate order. Since the Revenue has not disputed the aforesaid finding of the Ld. CIT(A), we have not considered the submissions of the assessee on this aspect of the matter. 10. In the light of the above factual matrix of the case and the legal position set-out above, we do not find any infirmity in the order of the Ld. CIT(A) and uphold his finding that the payments made to Dubai Leading Technologies cannot be brought to tax under Article 22 in the absence of a specific clause for FTS in the India-UAE DTAA. The impugned payments are in the nature of business income which are not chargeable to tax in India in the absence of a PE of the payee/remittee in India. We further uphold the finding of the Ld. CIT(A) that there is no obligation to deduct tax at source under section 195 of the Act as the impugned payments are not chargeable to tax in India as held by the Hon ble Apex Court in GE India Technology Centre (P) Ltd. (supra) and hence the disallowance made by the Ld. AO under section 40(a)(i) of the Act is erroneous. Accordingly, ground No. 1 of the Revenue is dismissed. Ground No. 2 Disallowance under section 40(a)(i) of the Act in respect of payment made to Brain Point Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the impugned payments made by the assessee for rendering marketing and sales support services are in the nature of FTS and in the absence of a specific clause on FTS under the India-UAE DTAA, the impugned payments should be taxed under the provisions of Article 22 on other income which is residuary clause under the India-UAE DTAA. The facts with regard to this issue remain undisputed and the recipient i.e. Brain Point Consultants does not have a PE in India. The Ld. CIT(A) has dealt with this issue in para 8 to 8.7 of his appellate order. His observations and findings on the impugned issue are extracted below: 8. Ananlysis of payments made to Brain Point Consultants : The payment has been essentially made for market-survey outside India. The nature of agreement is enumerated hereunder :- 8.1 Nature of Agreement: Provider shall perform the services within the scope listed below. Following services shall be comprised within the scope of work (the Services ):- Market Survey and analysis for Middle East Asia (MEA Region) at a minimum covering following information in relation to the products and services listed in Exibit B (Products and Services) New Market Sizing: The company is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd., In reported [2010] 323 ITR 184 2 (AAR New Delhi), wherein support services were provided by an affiliate in U.K. to EYPL under a global agreement in the Appeal No. 10738/19-201 field of market strategy, knowledge management and sharing, priority accounts strategy, internal communications, public relations, providing global data centre services etc. This Authority observed that 'support services were aimed at providing information and guidelines so as to ensure uniformity and seamless quality in the business dealings of the group entities and by furnishing such services it cannot be held that the technical knowledge and experience possessed by EYK UK. has been made available to the applicant and the other entities. Similar observation of Authority of Advance Ruling in the case of Bharati AXA General Insurance Co. Ltd. reported in 326 ITR 477, wherein it has been held as under: 10. Providing comments and suggestions after reviewing the strategies and plans developed by the applicant, giving suggestions to the applicant to improve the product developed by it so as to bring it in line with the common practices followed by other AXA entities across the globe, providing HR supp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rue in India or is received in India, Non-residents who are not assessable in respect of income accruing and received abroad are rendered chargeable under Section 5(2)(b) in respect of income deemed by Section 9 to accrue in India. (emphasis supplied) 17. After referring to Eli Lilly (supra) in GE India Technology Centre Private Limited (supra), it has been held: 17. Section 195 appears in Chapter XVII which deals with collection and recovery. As held in CIT v. Eli Lilly Co. (India) (P) Ltd. the provisions for deduction of TAS which is in Chapter XVII dealing with collection of taxes and the charging provisions of the IT Act form one single integral, inseparable code and, therefore, the provisions relating to TDS applies only to those sums which are chargeable to tax under the IT Act. It is true that the judgment in Eli Lilly was confined to Section 192 of the IT Act. However, there is some similarity between the two. If one looks at Section 192 one finds that it imposes statutory obligation on the payer to deduct TAS when he pays any income chargeable under the head 'Salaries . Similarly, Section 195 imposes a statutory obligation on any person responsible for paying to a non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO has sought to invoke the provisions of Article 22 in the absence of a specific clause in FTS in the DTAA between India and UAE. This has been undertaken in view of the decision laid down by ITAT Chennai in DCIT vs. TVS Electronics Limited. However, in view of the decision in Kingfisher Airlines vs. DDIT (supra) the same is not being followed here. 8.7 Accordingly, in view of the discussion hereinabove, the action of AO in invoking the provisions of section 40(i)(a) of the Act is held to be erroneous. 14. From the above, it is abundantly clear that the Ld. CIT(A) after considering the impugned issue in detail has given his finding that invocation of the provisions of section 40(a)(i) of the Act by the Ld. AO is erroneous for the reason that the income of a non-resident agent from provision of marketing and sales support services rendered for overseas client cannot be included under section 5(1) of the Act as the same does not deem to accrue or arise in India based on the decision of the Hon ble Delhi High Court in the case of CIT vs. Eon Technology P. Ltd. (ITA No. 1167/2011) and further holding that in the absence of a specific clause on FTS under the India-UAE DTAA, provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Trib) held that the payment towards web hosting services cannot be held as royalty or FTS. 18. The Ld. AR supported the order of the Ld. CIT(A). He submitted that the impugned issue stands squarely covered by the decisions of Coordinate Bench of the Tribunal in the case of Millenium Infocom Technologies Ltd. vs. ACIT 117 ITD 114 (Delhi Trib.); Rackspace US Inc. (supra) as well as decisions of the Delhi ITAT in the case of MOL Corporation vs. DCIT ITA No. 1554/Del/2016. 19. We have considered the submissions of the parties and perused the records. We observe that the Ld. CIT(A) has duly considered the facts of the present case in the light of the decisions (supra) in Bharti Axa General Insurance Co. Ltd. and Rackspace US Inc. s case and arrived at the conclusion that the impugned payments cannot be classified as royalty or FTS. The observations and findings of the Ld. CIT(A) are reproduced below:- 9.1 Nature of agreement: OIT Managed Services will provide AWS Housing Services Scope of work Hosting Service as per services Request raised by Campus EAI Professional Service includes a Account creation and IAM Setup b VPC Setup and configuration c VM Creation a Monitoring Backup Config ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... un ultimately on a server of Amazon. The services provided by the Mauritius based entity include creation and configuration of virtual machines, sending alerts, monitoring threshold settings, script configuration for rapid restart of devices, assistance in analysis of the generated reports which are technical in nature. The deliverable has been mentioned to achieve availability of 99% and the service level agreement mentions the expected response times which would certainly involve manual intervention as well, the payment is not for a pail vanilla web hosting service. It is not merely installation and operation of sophisticated equipment but a comprehensive IT solution'. The appellant has contested that none of the services provided by 'OIT Managed Services Mauritius' fit into the terminology make available , The services offered may involve manual intervention But, that is not enough to fall within the description of services which make available the technical knowledge, etc. Some of the judicial pronouncements are enumerated hereunder:- (i) Authority of Advance Ruling in the case of Bharati AXA General Insurance Co. Ltd. reported in 326 ITR 477 has held that 11. Comin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of Explanation (2) to section 9(1)(vi) the Hon'ble Mumbai Tribunal has held that income earned from cloud hosting services cannot be treated as Royalty , relevant extracts, as to the reasons as to why the same cannot be treated as 'Royalty' is enunciated hereunder :- 10. We have heard the rival contentions and gone through the facts and circumstances of the case. We noted that as per the provisions of section 9(1)(vi) of the Act royalty is taxable in India inter alia if the payer an Indian resident, except where the royalty is payable in respect of a right, property, information or service used for the payer's business outside India or for earning income outside India Explanation 2 to section 9(1)(v) of the Act dealing with the definition of royalty inter alia includes payment for use or night to use an industrial commercial or scientific equipment Considering the fact that Rackspace USA customers only avail hosting services and do not use, possess or control the equipment used for providing hosting services (which are owned and controlled by Rackspace US), the payment for hosting services made by Indian customers to Rackspace USA does not fall within the ambit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8' (Emphasis supplied). 13. As may be observed, the definition of royalty under Article 12(3) of the India-USA Tax Treaty in respect of payment for use or right to use equipment is in pari-materia with the pre-amendment definition of royalties in the Act. The said definition of royalties is exhaustive and not inclusive and therefore, it has to be given the meaning as contained in the Article itself and no other meaning should be looked upon 14. From the above, it is clear that the services provided by Rackspace USA to that Indian customers are not covered by the above definition of royalties provided in the India USA Tax Treaty since Rackspace USA is providing hosting services to the Indian customers and does not give any equipment or control over the equipment. The term use or right to use' for the purpose of the tax treaty entails that the prayer has a possession/ control over the property and/ or the said property is at its disposal. There is no privilege or right granted to the Indian customers over the servers and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Hon'ble ITAT in the assessee's own case(supra), hence, we decide these issues in favour of the assessee against the revenue. 9.3 Therefore, in view of the judicial pronouncements in the context of facts of the case, the payment cannot be held to be Royalty. Accordingly, the disallowance made by AO is erroneous u/s 40(i)(a) of the Act. Therefore, the grounds are allowed. 20. The impugned issue is covered in favour of the assesee in umpteen number of cases. In MOL Corporation s case (supra), the Delhi Tribunal held as under:- 8 It was submitted for the assessee that Ld. Tax Authorities below have failed to appreciate the functional aspects of Cloud base service while holding the subscription to cloud base service as royalty. In this context, the co-ordinate bench judgment, in which one of the members of this bench was also a member, in M/s. Salesforce.com Singapore Pte. Vs. Dy. D.I.T. Circle-2(2) ITA No. 4915/DEL/2016 [A.Y 2010-11] with six other connected was relied to contend that subscription to the cloud computing services do not give rise royalty income. He also relied the Mumbai Bench judgement in the cases of Rackspace , Us Inc., Usa vs Dcit (It) - 4(1)(1) ITA n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sting services though involving use of certain scientific equipment cannot be treated as consideration for use of, or right to use of, scientific equipment which is a sine qua non for taxability under section 9(1)(vi), read with Explanation 2 (iva) thereto as also article 12 of Indo-US DTAA. The Chennai Tribunal in the case of ACIT v Vishwak Solutions Pvt. Ltd ITA No. 1935 1936/MDS/2010 dated 30.01.2015 has upheld the findings of CIT(A) that the amount paid to the non-resident is towards hiring of storage space. 8.4 In the case of Rackspace , Us Inc., Usa vs Dcit (It) -4(1)(1), Mumbai, I.T. A Nos.6195 4920/Mum/2018 for the Assessment Years 2010-11 2015-16 the Mumbai Bench of the Tribunal has also considered similar issue where the assessee filed the return of income and the notes stating therein that the cloud hosting services was not taxable as 'royalties' under Article 12 of the India-US tax treaty as the customers do not operate the equipment or have physical access to or control over the equipment used by the assessee to provide cloud support services and do not make available technical knowledge, experience, skill, know-how etc., to its Indian Customers and the cloud s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure. The AO disallowed the amount under Section 40(a)(i) on the ground that the assessee did not deduct any tax at source at the time of remittance to non-resident. Under Section 40(a)(i) relevant to asst. yr. 2001-02, in the case of any assessee, any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India on which tax has not been paid or deducted under Chapter XVII-B shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession . Proviso to sub-clause further says that where in respect of such sum tax has been paid or deducted under Chapter XVII-B in any subsequent year, such sum shall be allowed as deduction in computing the income of the previous year in which such tax has been paid or deducted. Sub-clause (ia) which contains identical provisions in respect of payments made to a resident has been inserted by the Finance (No. 2) Act, 2004, w.e.f. 1st April, 2005. In this sub-clause words rent, royalty have been inserted w.e.f. 1st April, 2006. Provisions of Sub-clause (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consultancy service, the legislature has not set out with precision as to what would constitute 'technical' service to render it 'technical service'. The meaning of the word 'technical' as given in the New Oxford Dictionary is adjective 1. of or relating to a particular subject, art, or craft or its techniques; technical terms (especially of a book or article) requiring special knowledge to be understood : a technical report, 2. of involving, or concerned with applied an industrial sciences : an important technical achievement, 3. resulting from mechanical failure : a technical fault, 4. according to a strict application or interpretation of the law or the rules : the arrest was a technical violation of the treaty. Having regard to the fact that the term is required to be understood in the context in which it is used, 'fee for technical services' could only be meant to cover such things technical as are capable of being provided by way of service for a fee. The popular meaning associated with technical' is 'involving or concerning applied and industrial science'. 5. In the modern day world, almost every facet of one's life is linked t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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