Use of Disk Space--Not Taxable as Royalty

Amount received by the assessee, a tax resident of Singapore, from SCB India for use of disk space in the hardware of the assessee at its data centre in Singapore is not taxable as royalty, as held by MumTrib in Atos Origin IT Services Singapore (P) Ltd v ADIT — In favour of: The assessee; ITA No 2428 (Mum) of 2009: (AY 2005–2006).


Atos Origin IT Services Singapore (P) Ltd. v ADIT ITAT, Mumbai
ITA No. 2428 (Mum.) of 2009 Assessment Year: 2005-06
Decided on: 27 May 2011

1. This appeal by the assessee is directed against the order dated 30-1-2009 for the assessment year 2005-06. The only dispute raised by the assessee is regarding taxability of Rs.12,92,68,070 receivable from the assessee from Standard Chartered Bank (SCB) as royalty.


2. Briefly stated facts of the case are that the assessee who was tax resident of Singapore had entered into a hubbing agreement for providing data processing support to Standard Chartered Bank (SCB) a non-resident company engaged in the business of banking in India. The Assessing Officer on perusal of agreement noted that SCB India though it was not in physical possession of infrastructure owned by the assessee for the purpose of data processing, it did have constructive control over the same because it could utilize the same as per terms of agreement. It was also observed by him that these equipments were at the disposal of SCB India and it was a case of renting out of disc space in hardware system and therefore, the payment made by SCB was royalty as per Article 12(3)(a) of
DTAA between India and Singapore. The Assessing Officer further observed that use of embedded secret software provided by the assessee for processing raw data also fell within the ambit of Article 12(3)(a) of DTAA. The Assessing Officer accordingly taxed payment as royalty.


3. The assessee disputed the decision of the Assessing Officer and submitted before CIT(A) that providing services for processing of data of customers was part and parcel of normal business activity of the assessee and, therefore, fee payable by assessee was per se business profit of the assessee. Thus, under the provisions of Article 7(1) of DTAA, the business profit could be taxed in India only if the assessee had permanent establishment (PE) in India. Since assessee did not have a PE in India, income was not taxable. CIT(A) however, did not accept the contentions raised. He agreed with the finding of Assessing Officer that it was a case of renting out of disc space in the hardware system and
embedded software by the assessee in favour of SCB India and therefore, the income earned by the assessee was of the nature of royalty within the meaning of Article 12(3) of DTAA and also within the meaning of clause (iii) of Explanation (2) below section 9(vi) of the Income-tax Act. He therefore confirmed the order of Assessing Officer assessing the amount as royalty. Aggrieved by said decision the assessee is in appeal before Tribunal.


4. Before us ld. AR for the assessee at the very outset pointed out that the same issue had already been decided by the Tribunal in assessee's own case in ITA No. 1457/Mum./2008 for assessment year 2004-05 in which Tribunal allowed the case of the assessee holding that the amount receivable by assessee was not taxable as royalty. The ld. Departmental Representative fairly conceded that the issue was covered by the said decision of the Tribunal.


5. We have perused the records and considered the matter carefully. The dispute is regarding taxability of the amount received by assessee from SCB India for use of disc space in the hardware of the assessee at its data centre in Singapore. The authorities below have held that it was a case of renting out of disc space along with embedded software of the infrastructure of the assessee and therefore, the income was of the nature of royalty under the provisions of Article 12(3) of DTAA between India and Singapore. We find that the same issue has already been considered by the Tribunal in assessee's own case in assessment year 2004-05 in which the Tribunal noted that as per definition in Article 12(3)(b), royalty meant payment of any kind received as a consideration for useor right to use any industrial, commercial or scientific equipment, other than payments received from
activity described in para-4(b) of Article 8. The Tribunal observed that in the context and collocation of 2 expressions 'use' and 'right to use' followed by the word "equipment" indicated that there must besome positive use or employment of equipment for the desired purpose. The customer must come face to face with the equipment, operate it or control it or control its functions in some manner. If an advantage was taken from sophisticated equipment installed and provided by another person it could not be said that the recipient/customer used the equipment as such. Even where an earmarked circuit
was provided for offering the facility, unless there was material to establish that the circuit/equipment could be accessed and put to use by means of some positive acts, it did not fall within the category of royalty. The Tribunal held that in this case, the assessee did not have the right to access the computer hardware except for transmitting raw data for further processing. The assessee had no control over computer hardware or physical access to it. Therefore, there was nothing to show any positive act of utilization, application or employment of equipment for the desired purpose. The Tribunal

accordingly held that payment was not royalty within the meaning of Article 12(3)(b). Facts, in this year are identical. Therefore, respectfully following the decision of the Tribunal in assessment year 2004-05 in assessee's own case (supra), we set aside the order of the CIT(A) and deleted the addition made.


6. In the result, the appeal of the assessee is allowed.