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TMI Blog2024 (8) TMI 356X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and circumstances of the case and in law, the Ld. AO as well as Ld. Dispute Resolution Panel ("DRP") have erred in not allowing to the Appellant, the benefit of India-USA Double Taxation Avoidance Agreement ("DTAA") by holding that the Appellant does not qualify as a tax resident thereof under Article 4 of the India-USA DTAA. TAXABILITY OF INCOME FROM DOMAIN NAME REGISTRATION. WEB HOSTING. WEB DESIGNING. SSL CERTIFICATION SERVICES ETC. 3. On the facts and circumstances of the case and in law, the Ld. AO as well as the Ld. DRP have erred in holding that the Appellant's receipts from domain name registration, web hosting, web designing, SSL certification services etc. amounting to INR 7,49,03,087/- should be brought to tax as fee for technical services/ fees for included services and in doing so, failed to appreciate: (i) that the receipts are not taxable under section 9(i)(vii) read with section 115A of the Act. (ii) that the receipts are not taxable under Article 12(4) of the India-USA DTAA (iii) that the services provided by the Appellant are standard services that are provided without involving any human intervention and which do not 'make available' any techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y if an otherwise disregarded entity chooses to get taxed in USA will it file its tax returns there. In order to understand the material relevance. of this fact, it is critical to gain a perspective of the prevailing laws in force in USA. The assessee is a limited liability company or an LLC as per the laws of USA. What this means is that income is not liable to be taxed in its hands in USA. Instead, it is taxed in the hands of the shareholders. Therefore, the assessee is a fiscally transparent entity in its country of resident as it allows all income to pass through it. In other words, it does not enjoy the benefits of the income it earns but passes it on for the enjoyment of its partners. Accordingly, the assessee lacks beneficial ownership of income earned by it from India and in turn is not eligible to be considered as a "resident" for the purposes of the India-USA DTAA. This issue was dealt with extensively in the "The Application of the OECD Model Tax Convention to Partnerships" Report of the OECD's Committee on Fiscal Affairs. According to the committee, the clear rule of Article 1 of any DTAA is that only persons who are residents of the Contracting States are entitled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 4, and so cannot be resident for purposes of the Convention. The Committee agreed that for the purposes of determining whether a partnership liable to tax, the real question is whether the amount of tax payable on the partnership income is determined in relation to the personal characteristics of tt partners (whether the partners are taxable or not, what other income they have, what are the personal allowances to which they are entitled and what is the tax rate applicable to them). If the answer to that question is yes, then the partnership should not itself be considered to be liable to tax. The fact that the income is computed the level of the partnership before being allocated to the partners, that the tax is technically paid by the partnership or that it is assessed on the partnership as described in the preceding paragraph will not change that result. Here, the main principle to be borne in mind is that if the income, though allocated to the taxpayer under the laws of the source State, is not similarly allocated for purposes of determining the liability to tax on that item of income in the State of residence of the taxpayer claiming the benefits of the Convention, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be considered as a resident for the purposes of India USA Tax Treaty disregarding the Tax Residency Certificate (TRC) filed by the assessee and also ignoring the decision of the Hon'ble Supreme Court in the case of Azadi Bachao Andolan (263 ITR 706), wherein it has been held that liable to tax does not equate to actual payment of tax. However, the DRP rejected the contentions of the assessee observing as under: "DRP Directions: 3.1 The assessee is a non-resident incorporated in the USA. It has provided online database access pertaining to health to customers based in India. The assessee has stated that it has provided access to database which is in the nature of subscription made to a journal / magazine and that not part of the copyright was transferred. 3.2 The assessee has stated that it was converted into a Limited Liability Company during the year under consideration. Earlier it was a Limited Liability Partnership (LLP). The assessee has provided Tax Residency Certificate (TRC) only for the period that it was LLP. No tax reference tax return have been filed by the assessee. The AO has pointed out that the LLP is a fiscally transparent entity as it is the partners who are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee has not provided copies of any returns filed by it in USA. It may be pertinent to mention here that only if an otherwise disregarded entity chooses to get taxed in USA will it file its tax returns there........ "........The assessee is a limited liability company or an LLC as per the laws of USA. What this means is that income is not liable to be taxed in its hands in USA. Instead, it is taxed in the hands of the shareholders. Therefore, the assessee is a fiscally transparent entity in its country of resident as it allows all income to pass through it. In other words, it does not enjoy the benefits of the income it earns but passes it on for the enjoyment of its partners. Accordingly, the assessee lacks beneficial ownership of income earned by itfrom India and in turn is not eligible to be considered as a "resident" for the purposes of the India-USA DTAA.......... ...........Therefore, the assessee, being a Limited Liability Company in USA, is not entitled to the benefits under the India-USA DTAA. Accordingly, the receipts of the assessee are to be taxed only in accordance with the Indian Income-tax Act. " 6. It is respectfully submitted that the interpretation proposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y ensuring the applicability of India-Mauritius tax treaties having a valid TRC issued in Mauritius. 12. Furthermore, it is respectfully submitted that the Government of India issued a Press release dated March 1, 2013, re-iterating that Circular 789 (supra) continues to be in force and it has clarified that a Certificate of Residence issued by Tax Authorities of the other country will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAA. 13. In addition to the above, reliance is also placed on the recent decision of Sarva Capital LLC vs. ACIT [2023] 153 taxmann.eom 618 (Delhi - Trib.) (refer Page 97 to 115 of the case law paper book) wherein, following the decision of the Apex Court in Azadi Bachao (supra) and the decision of the Hon'ble jurisdictional high court in the case of Blackstone Capital Partners (Singapore) VI FDI Three Pte Ltd. [2023] 452 ITR 111, the coordinate bench of this Hon'ble Tribunal held that held that the tax authorities cannot go behind TRC as the TRC issued by the competent authority of another country is sufficient evidence to claim treaty eligibility, residential status and legal ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and legal ownership but also Treaty eligibility. In case of MIH India (Mauritius) Ltd. vs. ACIT (supra), identical view has been expressed by the coordinate Bench. Thus, in our view, the Assessing Officer has committed a fundamental error in denying Treaty benefits to the assessee in spite of the fact that the assessee is having a valid TRC. " (Emphasis supplied by us) 14. Thus, it is most humbly submitted that the TRC filed by the Appellant will serves as a valid proof of tax residency and eligibility of the Appellant to claim DTAA benefit and therefore, the findings of the Ld. AO and Ld. DRP in denying the benefit under India- USA tax treaty are invalid and against the settled jurisprudence. 15. In view of the above contentions and judicial precedents, it is respectfully submitted that the Appellant should be accorded the benefits under the India-USA tax treaty." 8. Ld. Counsel for the assessee further placing reliance on the decision of the Mumbai Bench of the Tribunal in the case of Linklaters LLP Vs. ITO (Int. Taxation) 40 SOT 51 submits that in the context of eligibility of LLP to avail the benefit of India UK Tax Treaty the Hon'ble Tribunal has held that the India UK ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee Limited Liability Company (LLC) is a branch, division or business unit of US partnership. It was also certified that the partnership has filed an information return in Form 1065, US partnership return of income and each of the partners listed in the TRC i.e. GD Subsidiary Inc. and GoDaddy Inc. are residents of the United States of America for purposes of US taxation. Therefore, in our view these TRCs issued by Department of Treasury Internal Revenue Service, Philadelphia USA clearly recognizes the assessee Limited Liability Company having two partners are residents of United States of America filing US partnership return of income. Therefore, the observation of the AO that the assessee has furnished a copy of TRC for only part of the year for which it was not an LLC appears to be not correct. 12. Further it is the observation of the AO that income of the assessee is not liable to be taxed in the hands of the USA instead of it is taxed in the hands of the shareholders, therefore, the assessee is a fiscally transparent entity in its country of resident as it allows all income to pass through it. In other words it is the observation of the AO that assessee do not enjo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ently, the benefits thereunder are not available to persons who are not liable to taxation and the words 'liable to taxation' are intended to act as words of limitation ".......... ............."85. In our view, the contention of the respondents proceeds on the fallacious premise that liability to taxation is the same as payment of tax. Liability to taxation is a legal situation; payment of tax is a fiscal fact. For the purpose of application of article 4 of the DTAC, what is relevant is the legal situation, namely, liability to taxation, and not the fiscal fact of actual payment of tax. If this were not so, the DTAC would not have used the words, "liable to taxation ", but would have used some appropriate words like "pays tax"................. .................87. In a Manual on the OECD Model Tax Convention on Income and on Capital, at paragraph 4B. 05, while commenting on Article 4 of the OECD Double Tax Convention, Philip Baker points out that the phrase 'liable to tax' used in the first sentence of Article 4.1 of the Model Convention has raised a number of issues, and observes: ..............."It seems clear that a person does not have to be actually payi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer that since, the assessee is not liable to tax under Article 4 of the India-Mauritius Treaty, it cannot claim benefit of Treaty provisions, is liable to be rejected. " (Emphasis Supplied by us)" 15. We further observed that with respect to taxability of tax transparent entities such as single member LLCs being eligible to avail treaty benefits, the Mumbai Bench of the Tribunal in the case of Linklaters LLP Vs. ITO (supra) in the context of eligibility of LLP to avail the benefit of India UK Tax Treaty, the Tribunal has held that the India UK Tax Treaty would apply to a UK Limited Liability Partnership even though it was a pass through entity for UK tax purposes. While holding so the Tribunal observed as under: "56. Modalities or mechanism of taxation may vary from jurisdiction to jurisdiction, as domestic law is a sovereign function and a bilateral tax treaty, or even the need of uniformity in entity classification approach - no matter how desirable someone may consider it to be, does not dictate such modalities of taxation being legislated. The fact of taxation, however, can be decided in an objective and uniform manner. Take, for example, a situation, in w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scertain fiscal domicile of a person, and the heading of article 4, as we have reproduced earlier in this order, is "Fiscal domicile". In our humble understanding, as long as de facto entire income of the enterprise or the person is subjected to tax in that tax jurisdiction, whether directly or indirectly, the taxability test must be held to have been satisfied. Of course, the other possible approach to such a situation is that as long as the tax jurisdiction has the right to tax the entire income of the person resident there, whether or not such a right is exercised, the test of fiscal domicile should be satisfied. Viewed thus, all that matters is whether that tax jurisdiction has a right to tax or not; the actual levy of tax by the tax jurisdiction cannot govern whether a person has fiscal domicile in that jurisdiction or not.......... 79. In view of the above discussions, as also bearing in mind the entirety of the case, we hold that the Assessee was indeed eligible to the benefits of India-UK tax treaty, as long as entire profits of the partnership firm are taxed in UK - whether in the hands of the partnership firm though the taxable income is determined in relation to the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch services are included services as per the MOU. However, the taxability of such services would require crossing the "make available" clause threshold. The term 'make available' means that the person acquiring the service is enabled to independently apply the technology. The word 'enable' is used in the sense that the technical services should be such that they make the recipient able or wiser in the subject matter. Thus, where the recipient of technical services does not get equipped with the knowledge or expertise and the recipient would not be able to apply it in future independently without support from the service provider, it will not be a case of technical service having been 'made available'. In the instant case, the CRM software solution was made available to the Indian customer-users so that they can, use this for data analytics independently without the support of the assessee company. Assessee also imparts training to employees of Indian customer-users so as to enable them to act independently. The customer- users are held responsible for any damage to the software. These are attributes of independent performance. Moreover, as per the examples provided in the MOU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charge of and maintain a database of all the domain names. Each registry is certified by and subject to the direct supervision of ICANN. * Furthermore, ICANN has accredited over 2400 companies to act as 'registrars' (like the Appellant) whose function is to register the domain names of the customers/ registrants and facilitate the entire domain name registration process. * In a typical domain name registration process, a 'registrant' (i.e. the customer), desirous of registering a domain name would approach a registrar such as the Appellant. The Appellant would then ask the relevant registry whether the proposed domain name is available. The registry would check its database and inform the registrar accordingly. If the domain name as requested by the registrant is available i.e. it is not registered in the name of anyone else, the customer would pay a fee and get the name registered with the help of the registrar. * For instance, M/s ABC Private Limited (i.e. Registrant) aims to establish its online presence on the internet and intends to register a domain name for its website "ABCPL.com". In order to register such domain name, ABC Private Limited may visit the website of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers to install and configure supporting applications for such websites on its servers. * The Appellant is responsible for keeping the server up and running, implementing hosting security measures, and ensuring that data such as texts, photos, and other files are transferred successfully to the visitors' browsers who access the website. * It is relevant to note that the Appellant neither exercises any control over the customers contents hosted in the data center nor is responsible for the same. Further, the Appellant does not develop the contents. * These services can neither be replicated by the customer nor is any knowledge provided to the customer. Web Designing services: * Web designing is the process of creating a website which focusses on the design factors of the website like layout, user interface and other visual imagery in order to make the website more visually appealing and easy to use. It involves planning, conceptualizing, and implementing the plan for designing a website in a way that is functional and offers a good user experience. * WWD LLC allow its users to develop their own websites/webpages by using the development tools and applications which are av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axable in India, without providing any cogent basis. It has blanketly concluded that the 'make available' provision stands satisfied and the services per se are technical in nature. Relevant extract of the order is reproduced below: "In the instant case the consultancy services are of technical nature, therefore, such services are included services as per the MOU. However, the taxability of such services would require crossing the "make available" clause threshold. The term 'make available' means that the person acquiring the service is enabled to independently apply the technology. The word 'enable' is used in the sense that the technical services should be such that they make the recipient able or wiser in the subject matter. Thus, where the recipient of technical services does not get equipped with the knowledge or expertise and the recipient would not be able to apply it in future independently without support from the service provider, it will not be a case of technical service having been 'made available '. In the instant case, the CRM software solution was made available to the Indian customer- users so that they can use this for data analytics independently without th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plated under the meaning of FIS. 56. The above understanding has been endorsed by various judicial authorities including the Hon'ble Karnataka High Court in the case of CIT vs. De Beers India Minerals (P) Ltd. [2012] 346 ITR 467 where the court held that in order to fit into the terminology "make available", the technical knowledge, skill, etc., must remain with the service recipient 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 has gone into it. The relevant extract of the judgement is reproduced hereunder for Your Honours' kind perusal:- "22. What is the meaning of "make available". 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not get any enduring benefit from the aforesaid survey.«In that view of the matter, though Fugro rendered technical services as defined under Section 9(1) (vii) Explanation 2, it does not satisfy the requirement of technical services as contained in DTAA. Therefore the liability to tax is not attracted. Accordingly the first substantial question of law is answered in favour of the assessees and against the Revenue. (Emphasis Supplied by us) 57. In the instant case, it is relevant to note that the Appellant offers various packages to its customers for registration of different types of domain name (such as .com, .in, .shop etc.), hosting their websites on its servers, procure various tools for designing their web pages and avail other web services. Such services remain active for a fixed time period. Upon expiry of such fixed period, the service package is required to be renewed and the users are not permitted to continue using such services on their own. Furthermore, the users are not equipped to apply or deploy such services on their own independently without resorting back to the Appellant. Accordingly, rendition of such services in no manner makes available any tec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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