Admissibility of service tax credit--On input services used for maintenance of staff colony and plantation

When the paper manufacturing unit is under an obligation to maintain a colony, all the services received in maintaining such a colony would also be covered as input services; if a service or activity is relating to business, then it should be treated as an ‘input service’ in the light of the definition of ‘input service’.

CESTAT, SOUTH ZONAL BENCH, BANGALORE
ITC Ltd.
v.
CCE
STA No. 414 & 415/2008

RELEVANT EXTRACTS:

We have gone through the records of the case carefully. In broad terms, the appellants availed service pertaining to the maintenance of staff colony and plantation. The service tax paid on input services were taken as credit in terms of the Cenvat Credit Rules, 2004. The actual taxable services are - (i) renovation; (ii) repair and maintenance; (iii) security; (jv) labour supply; (v) advertising services; (vi) plantation works; (vii) rent a cab services; (viii) Business Auxiliary Services; and (ix) manpower recruitment The definition of 'input service' is reproduced herein below :-

"Rule 2 (1) of the Cenvat Credit Rules 2004 defines "input service" as follows:

‘Input service’ means any service,-

(i) used by a provider of taxable service for providing an ' output service; or

(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the] manufacture of final products and clearance of final products from the place of removal,
and includes services used in relation to setting up modernization, renovation or repairs of a factory, remises of provider of output service or an 6ffice relating to such , factory or premises, advertisement \ or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation on inputs or capital' goods and outward transportation upto the place of removal;"

The Commissioner (Appeals) has not accepted the contention of the appellants that maintenance of colony for the 'employees is an input service. According to him, the said view is far-fetched. He has stated that the maintenance of a residential colony is only obligatory activity in a situation exigent a service is in no way concern either directly or indirectly related to the manufacture of final products and hence held that such input services do not fall within the ambit of definition of 'input service* in terms of Rule 2 of the Cenvat Credit Rules, 2004.

The appellants had stated that the area in Which the factory is situated in a Scheduled Area, governed by Article 244 of the Indian Constitution and also Andhra Pradesh Scheduled Areas Land Transfer Regulation, 1959. There is a prohibition for sale and purchase of land. In this background, it is obligatory on the part of the appellants to provide residential accommodation in the vicinity of the factory. Such an accommodation is not provided, it would not be feasible for the appellants to carry on the manufacturing activity. We do not agree with the finding of the Commissioner (Appeals) that providing colony for the employees is not directly or indirectly connected with the manufacturing activity of-the appellants. The factual situation is to be appreciated. We -also take note of the expression. activities relating to business' used in the definition of Input service'. The scope of the; definition of input service is very wide. It encompasses a variety of services which relate to not only manufacture of final products but also several activities relating to business. Some of the activities are also enumerated. We note the following expressions :

“activities relating to business, such as accounting, auditing, financing, recruitment and, quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal”.

The use of the expression "as such" indicates that list of activities given therein are only illustrative' and not exhaustive. When the appellant is under an obligation to; maintain a colony, all the services received in maintaining such a colony would also be covered as input services. In the light of the definition of input service, we do not agree with the Commissioner (Appeals) that the services undertaken like lawn mowing, garbage cleaning, maintenance of swimming pool, collection of household garbage-, harvest cutting, weeding, etc. cannot be considered as input services. When a colony has to be maintained, all the above services are to be considered as input services.

As regards plantar activities, a is seen that the appellant is a paper manufacturing unit. The major raw materials are different kind to soft wood trees. They have also explained the circumstances under which they had to invest during improvement research. It cannot be said that this activity does not have any nexus with the manufacturing activity. The whole things should be viewed in a broader perspective in the light of the definition of the 'input service'. According to the department, there is nothing on record to suggest that the cloned saplings sold to the farmers are sold back to the appellants after, growing into trees. If the department was not satisfied with the submissions of the appellants they could have gone into some verification., Simply discussing their averment is not acceptable. The appellant's contention that no one to one correlation is required to be shown under the Cenvat Credit Scheme to claim the credit is correct. It is not necessary that the farmers should sell their entire products to the appellants in order to-claim the input 'service credit by the assessee. In our view, all input Services enumerated are activities relating to business. The ratio of the Tribunal's decision. in Manikgarh Cement/case (supra) is also squarely applicable to the present case. If a service or activity is relating to business, then it should be treated as an 'input service' in the light of the definition of 'input service', in view of our above observations, we hold that that the appellants are entitled for the input service credit. Hence we allow the appeals with consequential relief if any.

Discount allowed on transactions resulting in outright purchases cannot be treated as brokerage or commission as contained in Sec-194H

ITAT, HYDERABAD BENCHES, HYDERABAD BENCH `B'

ACIT

v.

Idea Cellular Ltd.

ITA No. 289/Hyd/2005

February 26, 2009

RELEVANT EXTRACTS:


12. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute. Under section 194H of the Act any person not being an individual or a Hindu undivided family who is responsible for paying on or after the first day of June 2001 to a resident any income by way of commission or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the specified rate. The term 'commission or brokerage' has been defined in the Explanation (i) and includes any payment received or receivable directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or a thing not being securities. Definition of expression ^commission or brokerage' as contained in clause (i) of Explanation to sec.l94H, is not so wide that it would include any payment receivable, directly or indirectly for services in the course of buying or selling of goods. To fall within the said Explanation, the payment received or receivable, directly or1 indirectly, by a person acting on behalf of another person (i) for services rendered ( not being professional) , or (ii) for any services in the course of buying or selling goods (iii) in relation to any transaction relating to any asset, valuable article or thing, the element of agency is to be there in case of all services or transactions contemplated by Explanation (i) to sec.l94H of the Act.

13. Before proceeding further, it is apt to consider decisions relied on by the parties which are as under;

i) In Gordon Woodroffe & Co. v. Sheikh M.A.Majid & Co. (AIR 1967 SC 181) it has been observed that it is well established that even an agent can become a purchaser when an agent pays the price to the principal on his own responsibility and it has been held (head note)

"Contract- difference between sale and agency to sell- what is account stated-when can be reopened-essence of 'sale' is the transfer of title to the goods for price paid or to be paid whereas essence of the agency to sell is the delivery of goods to a person who is to sell them, not as his own property but as the property of the principal who continues to be the owner of the goods and the agent is liable to account for the proceeds - the accounts were settled between the parties and the respondent could not be allowed to reopen the settled account as there was no proof of fraud, mistake or any other sufficient ground - accounts are "settled or stated" if they are submitted and accepted as correct by the other side to whom they have been rendered."

ii) In Idea Cellular Ltd. V. DCIT and vice versa in ITA Nos. 3031/Dei/05 and 1875/Del/06 and ITA No.2867/Del/ 05 dt. 28-3-2008 for assessment years 2003-04, 2004-05 and 2002-03, reported in (2009) 27 SOT (i)I (Breaking News) it has been held vide para 14 of the order as under:

" 14. In order to ascertain whether the PMAs were acting as agents of the assessee or were outright purchasers of goods supplied by the assessee, it is necessary to discuss the distinction between the contract of sale or contract of agency. The essence of contract to sale is the transfer of title to"the goods for price paid or to be paid. The transferee in such case becomes liable to the transferor of goods as a debtor for the price to be paid and not an agent for the proceeds of the sale. On the other hand, the essence of agency to sell is the delivery of goods to a person, who is to sell them, not as his own property but as the property of the principal who continues to be the owner of goods and who is therefore liable to account for the proceeds. The true legal relationship between the assessee and the PMAs has to be inferred from the nature of contract, its terms and conditions and the nature of respective obligations undertaken by the parties. Clause 3 of the agreement specifically provides that the relationship created by the agreement is that of independent contracting parties and is not, and shall not deem to be any relationship inter alia employer/employee principal and agent. Clause 6(b) provides that full legal equitable title and interest in all and any of the prepaid simcard/recharge coupons delivered to PMAs shall remain in ICI and shall not pass to PMA. However, in case the prepaid SIM cards/recharge coupons with PMAs become unusable, substandard or are destroyed due to natural calamities or occurrences or circumstances beyond the reasonable control of either party or due to negligence of PMA in storage, the assessee shall replace the prepa[d simcards/recharge coupons subject to payment of processing fees for such replaced cards. On cursory look on this condition of agreement it appears that ownership on prepaid simcard/recharge coupons remains with he assessee. However, as per the conditions prescribed the PMA shall pay the processing fees for such replaced cards. If the relationship between the assessee and PMA was that of principal and agent, there was no need for recovery of processing fee for replacement of cards, destroyed or become unusable in case of contract of agency the agents acts on behalf of the principle and no question arises for seeking the compensation from the agent in case of loss of property due to natural calamity or occurrence or circumstances beyond the reasonable control of the agent. The agent is required to protect the interest of his principal as a man of ordinary prudence. Another contention of revenue that Clause 8 of the agreement debars the PMA to enter into agreement with other parties for similar telephony services and therefore he is not to act independently. In our view the restrictions prescribed in clause 8 deals with the competitors of he assessee. Such terms and conditions are generally found in commercial agreements. Clause 9 provides for appointment of retailer by PMA. Further clause 10 deals with the price at which PMA shall acquire the prepaid SIM cards/recharge vouchers. The retailers can sell the recharge vouchers to end user at any price not exceeding the maximum retail price. The assessee will receive the fixed amount including service charges. In case of an agent the price collected by him is remitted to the principal after deduction of his commission and expenses relating to sale of the goods. The assessee is not making any reimbursement of the expenditure incurred by the PMA and his retailers. This also suggests that the agreement between the assessee and PMA is that of seller and purchaser. Agreement also provides certain conditions relating to protection of intellectual property rights of the assessee. The other conditions stipulated in the agreement including termination clause do not throw any light so as to suggest that the agreement between the assessee and PMA is that of principal and agent. In the case of Gordon Hoodroffe & Co Madras Ltd. vs. Shaik MA Mazid and Co. AIR 1967 (SC) 181 held that even an agent can become a purchaser when agent pays the price to principal on his own responsibility. In the case before the goods are sold to the PMA who in turn transfer goods to retailer to be sold to the end users. The retailers are appointed by the PMA though with the approval of the assessee but they are working under the instructions of PMAs. Termination of the retailers is co-terminus with the termination of the agreement with PMA. in our considered view the legal relationship between the assessee and PMA is that of seller and purchaser. We do not find any condition in the agreement from which it can be inferred that PMA stands in a fiduciary position in relation to the assessee. It is admitted by the revenue that the agreement in substance is the agreements entered into between the assessee and the PMA is in the nature of contract to sale and not contract of the agency. Therefore, the discount allowed by the assessee to PMA will not fall in the definition of commission of brokerage."

iii) In Foster's India P. Ltd. v. ITO (2008) 117 TTJ (Pune) 346, the Tribunal after relying on the decision in Ahmedabad Stamp Vendors Association v. Union of India (2002) 176 CTR (Guj) 193, Bhopal Sugar Industries Ltd. V. STO AIR 1977 SC 1275 and distinguishing the decisions in ACIT v. Bharti Cellular Ltd. (supra) and Hindustan Coca Cola Beverages (P) Ltd. (supra), has held that distributors incentive, early payment discount and bond expenses do not constitute commission so as to attract TDS u/s 194H as there is no principal-agent relationship between assessee and its distributors.

iv) In Singapore Airlines Ltd. V. ACIT (2005) TIOL-93-ITAT- DEL, it has been held that the amount realized by the travel agent in excess of net fare cannot be considered as commission liable to TDS by Airlines. v) In A.C.I.T., Vs. Bharti Cellular Ltd., [2007] 294 ITR (AT) 283 (Kolkata), it has been held that the agreement between the assessee and its distributors showed that the rights with the prepaid cards at all times vested in the assessee before they were finally sold to the customers. Thus, the assessee was liable to deduct tax at source u/s 194H on the commission payment to its franchisees and the assessing officer was justified in treating the assessee as a defaulter and then computing the deduction of tax at source and interest u/s 201(1) and 201(1A).

vi) In Hindustan Coca Cola Beverages P.Ltd. v. ITO (2005) 98 TTJ 1 (JP), it has been held that when the assessee having sold goods to its distributors to operate in a specified territories only and the sale of goods at fixed margins is under the supervision and control of the assessee, the transaction between the assessee and the distributors on principal and agent basis and not on principal-to- principal basis, and , therefore, the assessee is liable to deduct tax at source u/s 194H in respect of payment to the distributors.

14. Applying the ratio of the above decisions in the light of provisions of sec.l94H, and keeping in view that the decisions relied on by the Id.DR in A.C.I.T., Vs. Bharti Cellular Ltd., [2007] 294 ITR (AT) 283 (Kolkata) and in the case of Hindustan Coca Cola Beverages P.Ltd. v. ITO (2005) 98 TTJ 1 (JP), have been distinguished by the tribunal in Foster's India P.Ltd., supra, on the ground that the normative effect of the judgments of Honourable Supreme Court is far greater than that of the judgments of the coordinate benches, we are of the view that for application of the provisions of sec.l94H of the Act there should be in existence the relationship of principal and agent in order to bring the discount in the ambit of commission or brokerage. Under the definition of expression 'commission or brokerage' as contained in clause (i) of Explanation to sec.l94H, it is not so wide that it would include any payment receivable, directly or indirectly for services in the course of buying or selling of goods, hence discount allowed on transactions resulting in outright purchases cannot be treated as brokerage or commission. In our view, the transactions between the assessee and the distributors are on principal to principal basis and not on principal and agent basis and hence, it cannot be said that the assessee was defaulter attracting the provisions of sec.201 (1) and sec.201(lA) of the Act and accordingly the order passed by the Id. CIT(A) does not call for any interference. The grounds taken by the revenue are therefore rejected.

Guidelines regarding “Transfer of In-principle or Formal approval issued to a SEZ Developer to its subsidiary or SPV”

No. C.8/3/2009-SEZ

Government of India
Ministry of Commerce and Industry
Department of Commerce
Udyog Bhawan, New Delhi

Dated the 16th July , 2009

INSTRUCTION NO. 21

Subject: Guidelines regarding “Transfer of In-principle or Formal approval issued to a SEZ Developer to its subsidiary or SPV” – Reg.

The undersigned is directed to enclose herewith guidelines regarding Transfer of In-principle or Formal approval issued to a SEZ Developer to its subsidiary or SPV as per the decision taken in the 31st meeting of the Board of
Approvals held on 15.01.2009 for information and necessary action of all concerned.

2. These guidelines will be valid henceforth with respect to change of name/ transfer of approval cases.

3. Cases not covered in these guidelines would be decided by Board of Approvals.

(T. Srinidhi)
Director

(Annexure to Instruction No. 21)

Guidelines on Transfer of In-principle or Formal approval issued to a SEZ
Developer/approved Co-developer to its subsidiary or SPV

The Board, in its meeting held on 15-01-2009, approved following guidelines for changeof name/transfer of approvals in the following categories:-

(i) Category I – Where there is mere change in name and no change in share holding pattern of the original developer.

(ii) Category II – Where approval is transferred to a 100% SPV or a wholly owned subsidiary (WOS) of the developer company,

(iii) Category III- De-merger in terms of a Court decision in respect of M/s. Bajaj Holdings Pvt. Ltd.

(iv) Category IV- Where partly the equity is held by State Government or one of its organisations by virtue of the State Government’s requirement BOA further indicated that these guidelines will be valid henceforth with respect to
change of name/ transfer of approval cases.

It was further decided that in regard to the rest of the cases the Department of Commerce would separately examine the matter in consultation with the Department of Revenue and come up with separate policy guidelines.

SEZ - AUTHORIZED ACTIVITIES WHICH CAN BE UNDERTAKEN BY THE DEVELOPER /APPROVED CO-DEVELOER BY DEFAULT

Instruction no. 20 has been issued to clarify the activities that CAN BE UNDERTAKEN BY THE DEVELOPER APPROVED CO-DEVELOER BY DEFAULT FROM THE DATE OF NOTIFICATION August 2, 2009

Since a time gap exists between the date of notification and actual approval of the authorized operations by the Board of Approval, to avoid delays in the project implementation, the authorized activities were approved by the Board of Approval as default operations which may be carried out by the Developer or Co-Developer, as the case may be, after the SEZ is notified.

The list of default activities has been given to annexure to the instruction.

The list of authorized operations are as under:

(A) Information Technology/Information Technology Enabled Services, Biotechnology
and Gems and Jewellery Special Economic Zone:

1. Roads with Street lighting, Signals and Signage

2. Water treatment plant, water supply lines (dedicated lines up to source), sewage lines, storm water drains and water channels of appropriate capacity.

3. Sewage and garbage disposal plant, pipelines and other necessary infrastructure for sewage and garbage disposal, Sewage treatment plants

4. Electrical, Gas and Petroleum Natural Gas Distribution Network including necessary sub-stations of appropriate capacity, pipeline network etc.

5. Telecom and other communications facilities including internet connectivity

6. Rain water harvesting plant

7. Air conditioning of processing area

8. Fire protection system with sprinklers, fire and smoke detectors

9. Landscaping and water bodies

10. Boundary wall

11. Built up processing area not less than minimum prescribed 1 lakh sq. m.

12. Office space for Customs and Security staff not exceeding 500 sq.m.

(B) Sector Specific Special Economic Zones

1. Roads with Street lighting, Signals and Signage

2. Water treatment plant, water supply lines (dedicated lines up to source), sewage lines, storm water drains and water channels of appropriate capacity.

3. Sewage and garbage disposal plant, pipelines and other necessary infrastructure for sewage and garbage disposal, Sewage treatment plants

4. Electrical, Gas and Petroleum Natural Gas Distribution Network including necessary substations of appropriate capacity, pipeline network etc.

5. Effluent treatment plant and pipelines and other infrastructure for Effluent treatment.

6. Telecom and other communications facilities including internet connectivity

7. Rain water harvesting plant

8. Landscaping and water bodies

9. Wi Fi and / or Wi max Services

10. Drip and Micro irrigation systems.

11. Boundary wall

12. Factory sheds in processing area

13. Office space for Customs and Security staff not exceeding 500 sq.m.

(C) Multi Product Special Economic Zones

1. Roads with Street lighting, Signals and Signage

2. Water treatment plant, water supply lines (dedicated lines up to source), sewage lines, storm water drains and water channels of appropriate capacity.

3. Sewage and garbage disposal plant, pipelines and other necessary infrastructure for sewage and garbage disposal, Sewage treatment plants

4. Electrical, Gas and Petroleum Natural Gas Distribution Network including necessary substations of appropriate capacity, pipeline network etc.

5. Effluent treatment plant and pipelines and other infrastructure for Effluent treatment.

6. Play ground

7. Landscaping and water bodies

8. Wi Fi and / or Wi max Services

9. Drip and Micro irrigation systems.

10. Boundary wall

11. Factory sheds

12. Office space for Customs and Security staff not exceeding 500 sq.m.

No tax on foreign telcos for carrying calls abroad: AAR

FOREIGN telecom firms operating without a permanent establishment in India are no more required to pay any tax on income from carrying international calls and data services in pacts with domestic operators.




A.A.R. NO. 786 OF 2008
Name and Address of Applicant
Cable & Wireless Networks India Private Limited
Unit 2(B) Creator Building, International Tech Park, Whitefiled Road, Bangalore
Commissioner concerned
Director of Income Tax (International Taxation), Bangalore





This application has been filed under section 245Q(1) of the Income-tax Act, 1961 (the Act) by Cable & Wireless Networks India Private Limited. The applicant is a company incorporated in India and is a part of the Cable and Wireless Groups of Companies. It is engaged in the business of providing international long distance and domestic long distance telecommunication services in India. The applicant proposes to enter into an agreement with another group company, namely M/s Cable and Wireless UK (C &W UK) with a view to providing end to end international long distance telecommunication services to its Indian customers. C&W UK is stated to be a leading international telecom company which has a well established international network. The applicant submits that the Indian customers of the applicant would want to transmit their voice/data to places outside India. Under the proposed agreement the applicant would provide the Indian leg of the service by using its own network and equipments and network of other domestic operators, and the international leg of the service would be provided by C&W, UK, using its international infrastructure and equipments. In other words, whereas the applicant will carry the calls and data within the country, C&W UK will further carry those calls and data to the recipients outside India. The network and equipments of C&W UK will not be used in India and the applicant’s network and equipments will not be used outside India. Thus in telecom parlance, domestic half circuit will be provided by the applicant and international half circuit will be provided by C&W UK. In respect of the aforesaid services rendered by C&W UK, the applicant will pay fees to the former.
2. It is in this factual background that the applicant seeks ruling of this Authority on the following questions:
(1) Whether the amounts payable by the Applicant to Cable & Wireless UK (“C&W UK”) under the terms of the proposed agreement/arrangement (the “Agreement”) would be in the nature of “fees for technical services” (“FTS”) within the meaning of the term in Explanation 2 to clause (vii) of section 9(1) of the Act, or not?
(2) Whether the amounts payable by the Applicant to C&W UK under the terms of the Agreement would be in the nature of “royalty” within the meaning of the term in Explanation 2 to clause (vi) of section 9(1) of the Act, or not?
(3) Whether the amounts payable by the Applicant under the Agreement between the Applicant and C&W UK would be in the nature of FTS within the meaning of the term in Article 13 of the Agreement for Avoidance of Double taxation entered into, between the Government of the United Kingdom and the Government of the Republic of India (“Treaty”), or not?
(4) Whether the amounts payable by the Applicant to C&W UK under the terms of the Agreement would be in the nature of “royalty” within the meaning of the term in Article 13 of the Treaty, or not?
(5) Based on the facts of this case, whether C&W UK has a Permanent Establishment (“PE”) in India under Article 5 of the Treaty?
(6) Based on the answers to questions (1) to (5) above, and in view of the facts as stated in Annexure I, whether the income received by C&W UK will be chargeable to tax in India, or not? If the answer is in the negative, would such payments by the Applicant suffer withholding tax under section 195 of the Income Tax Act, 1961, or not, and if yes, at what rate?
3. The applicant has filed a copy of the agreement which it proposes to enter into with C&W UK. This agreement is called ‘Service and Revenue Share Agreement’. It is stated in the recitals that the parties wish to provide to each other on reciprocal basis national and global telecommunications services. Article 1 of the agreement states that the parties shall provide services to each other through bandwidth connectivity and other similar facilities. The bandwidth service will comprise international leased circuit, managed private leased services, managed private lines, etc. Article 3 requires the parties to interconnect their respective networks at Network Access Points. The expression ‘Network Access Points’ has been defined to mean physical points at which the networks of the parties are to be connected. As per article 5, the party availing the service shall pay fees to the party providing the service. The payment shall be on mutually agreed revenue share basis, which shall be calculated with reference to the revenue billed by the party to the customers at the originating point. The revenue share shall be settled on monthly basis. Each party shall bill the other in sterling pounds.

4. The applicant submits that the service to be provided by C&W UK is a standard facility and is not technical in nature. So the payment made for availing this service would not amount to fee for technical services as stipulated in section 9(1)(vii)of the Act. According to the applicant the payment in question would not either be regarded as ‘ fee for technical services’ under article 13(4) of the Convention between the Government of India and the Government of the United Kingdom for the Avoidance of Double Taxation and Prevention of the Fiscal Evasion with respect to Taxes on Income and Capital Gains (the treaty), as C&W UK does not make any technical knowledge, skill or experience available to the applicant. The applicant further submits that the payment made to C&W UK is not for the use of any intellectual property or equipment. Under the proposed agreement, C&W UK will provide two way communication service to the applicant without allowing any right to use its network or equipment. As such, the payment in question would not come within the purview of royalty, either under section 9(1)(vi) or article 13(3) of the treaty. The applicant relies on the Report of the Technical Advisory Group (TAG) constituted by the Organization for Economic Cooperation and Development which lays down certain principles for drawing distinction between transactions for use of equipment and those for rendering of services. The applicant also cites the cases of Neyveli Lignite Corporation Ltd.1 , BSSL vs. UOI2, WIPRO3 and the decision of AAR in Dell International Services India Pvt. Ltd 4. The applicant states that C&W UK has no permanent establishment in India. It has no liaison office, branch office, project office or sales outlet in this country, nor does C&W UK render any services in India through its employees, personnel or agency.

5. The Director of Income-tax (International Taxation), Bangalore, who is the jurisdictional Commissioner in this case, first furnished his comments vide his letter dated 17.11.2008 and later vide letter dated 25.2.2009. He first of all points out that a group company, namely, M/s C&W India Ltd., a company registered in UK, has a branch office in Mumbai, which provides telecommunication networking services, designing and maintaining networks, etc. The Commissioner states that the address of its registered office given by the applicant is the same as that of the branch office of the said UK Company. The Commissioner raises doubt that the applicant may take over the functions of this branch office. On the question of technical services, however, the Commissioner concedes that the services in question cannot be regarded as ‘technical services’ under article 13(4) of the treaty, since no transfer of technology is involved. He further states that the payments made by the applicant to C&W UK would be in the nature of royalty, both under section 9(1)(vi) of the Act as well as article 13 of the treaty. According to the jurisdictional Commissioner the services provided by C&W UK are not in the nature of standard facility as these use secret process. The applicant thus pays for using secret process. The jurisdictional Commissioner relies on Asia Satellite Communication5 case for this proposition. He also submits that as the actual service has not yet started, it cannot be said what equipment will be installed and where and this needs to be verified. The last point raised by the jurisdictional Commissioner relates to PE. He submits that the contract between the applicant and its Indian customers indirectly binds C&W UK. As such, the applicant acts as an agent of C&W UK and so C&W UK has agency PE in India. He also states that it is not clear at this point of time whether C&W UK will be deputing some of its employees for providing connectivity, technical or maintenance support in India. The Commissioner urges that the question of PE may be left open at this stage.

6.

6.1 The Authority, during the course of hearing, on 28.1.2009, directed the applicant to file affidavits clarifying certain technical details relating to the network/system by which connectivity is provided to the customers in India and any other factual information considered relevant by the applicant. The applicant filed two affidavits on 31.3.2009 – a technical affidavit and an affidavit explaining certain relevant factual details.

6.2 In the technical affidavit, the applicant gives the description of a network by which it provides international connectivity between TCS premises located in Mumbai and Equifax located in Alpharetta, USA . The connectivity is provided through a dedicated private leased line. The applicant has installed a router at TCS premises. The voice/data is carried by the applicant in India on its own network and delivered to C&W UK at Marseilles in France from where the latter carries it to Alpharetta, USA. In the Indian leg of the service there is no involvement of the network or equipment of C&W UK. TCS pays one time charge for installation and recurring charges for connectivity services.

6.3 The second affidavit gives clarification about the nature of charges, revenue sharing with reference to the provisions of article 5 of the agreement. It is stated that the applicant charges its customers in India purely for rendition of service. No charges are taken for router which is completely under the control of the applicant. The applicant has by way of illustration stated that if it charges rupees 100 from its customer, it pay Rs. 44 to C&W UK for providing the international leg of the service. This affidavit also gives clarification about the Indian branch of the UK group company

7. We shall first take up the issue whether the applicant pays fees to C&W UK for rendering ‘technical services’ under the Act or under the treaty. Explanation 2 to para (vii) of section 9(1) defines ‘fees for technical services’ to mean any consideration paid for rendering any managerial, technical or consultancy services, including provision of services of technical or other personnel. In the present case, in carrying telecom signals from Marseilles to other countries, C&W UK is not providing any managerial, technical or consultancy services, nor is it providing the services of its technical or other personnel to the applicant. C&W UK performs this part of service itself without the involvement of the applicant. The applicant has thus rightly urged that the fees paid by it to C&W UK is not in the nature of fees for technical services under the Act. So far as article 13(4) of DTAA is concerned, the first part of it defines ‘technical services’ in a manner similar to Explanation 2 to section 9(1)(vii), but it further qualifies this expression in clauses (a), (b) & (c). Clause (c) is relevant for the present consideration. This clause requires that the technical service in question should make available technical knowledge, experience, skill, know-how or process, or consist of the development and transfer of a technical plan or technical design (emphasis supplied). From the description of service presented before us, we do not find that the requirements of clause (c) are fulfilled here. First, no technical service is rendered and secondly, there is no transfer of technology. The Revenue also concedes that this is not a case of payment of fees for technical services.

8.

8.1 The question whether the fees paid by the applicant to C&W UK are in the nature of royalty has been much debated. The revenue vehemently contends that it is royalty income –both under the Act as well as the treaty. Before dealing with the issue, we may extract the provisions of the Act as well as the treaty. The relevant provisions of section 9 read as under:
“Income deemed to accrue or arise in India.

9. (1) The following incomes shall be deemed to accrue or arise in India :—
(i) to (v) xx xx xx xx xx xx xx xx xx
(vi) income by way of royalty payable by—
(a) the Government ; or
(b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or
(c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :
xx xx xx xx xx xx xx xx xx
Explanation 2.—For the purposes of this clause, “royalty” means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains”) for—
(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ;
(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section44BB;]”
xx xx xx xx xx xx xx xx xx
The relevant provisions of Article 13 of the treaty are as under:
“ARTICLE 13 -Royalties and fees for technical services –
1. xx xx xx xx xx xx xx xx xx xx
(2) However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed :
xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx
3. For the purposes of this Article, the term “royalties” means :
(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematography films or work on films, tape or 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 information concerning industrial, commercial or scientific experience; and
(b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic.
xx xx xx xx xx xx xx xx xx xx”
According to the applicant, in the proposed business model, no intellectual property rights are involved; C&W UK has not granted to it any right to use any intellectual property or any equipment. The Commissioner, on the other hand, states that the payment made by the applicant is clearly for using secret process. According to him the technology involved in the process of transmission of voice/data contains proprietary resources. It is not a case of mere rendition of service, but the quality of service and secrecy are also material. It is further stated that the services to be availed by the applicant would amount to the use of a secret process and thus is covered by royalty as stipulated in article 13(3) of the treaty. But, no material has been placed before us to show that C&W UK uses any secret process in the transmission of the international leg of the service, or that the applicant pays towards the use or right to use that secret process. It is well settled that telecom services are standard services. The arrangement between the applicant and C&W UK is for rendition of service and the applicant pays for the same. It is for C&W UK to see how it will provide that service. The applicant is not concerned with the same. This Authority has dealt with this issue in the case of Dell International Services India Pvt. Ltd.(supra). In that case BT America provided two way transmission of voice and data to Dell India between India and USA. For providing this service, BT America had tied up with VSNL in India and other telecom service providers outside India. Dell India had an agreement with BT America for the entire service for which it made payment directly to BT America. One of the issues that arose for consideration was whether the payment made by the applicant to BT America was in the nature of royalty falling either under clause (iii) of Explanation-2 of section 9(1) or article 12(3) of the tax avoidance treaty between India and USA, which is materially similar to the provisions of article 13(3) of the treaty between India and UK. The Authority held –

“14. Whether the payment made by the applicant to BTA is in the nature of royalty falling under clause (iii) of Explanation 2 and/or Article 12(3) of the Treaty?

14.1. It is one of the contentions of the Revenue that the applicant makes use of or is conferred with the right to use a ‘process’ within the meaning of clause (iii) to Explanation (2) to Section 9(1) of the Act. That clause speaks of “the use of any patent, invention, model, design, secret formula or process or trade mark or similar property”. It is contended, relying on the decision of ITAT in the case of Asia Satellite Telecommunications Company Ltd. vs. Deputy Commissioner of IT (ITA No.166/DEL/2001* dated 1.11.2002) that the word ‘secret’ only qualifies the expression ‘formula’ and cannot be read before the word ‘process’. On such interpretation, it is submitted by the Revenue in its comments that the services provided to the applicant are clearly in the nature of a process and not in the nature of standard facility and the applicant has used and has been conferred with the right to use such process. However, this contention has not been urged before us by the learned Counsel for the Department for the obvious reason that the language used in the relevant clause of the Treaty does not support any such interpretation. The expression in Article 12(3) (referred to at para 7.1 supra) is “for the use of or the right to use any copyright, patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.” It is thus clear that formula/process are part of the same group and the adjective ‘secret’ governs both. The reasoning of ITAT in the aforementioned case, based on the absence of comma after process and the impact of the immediately following word, ‘trade mark’, does not hold good in view of the clear language in Article 12(3) of the Treaty. It has been so pointed out very rightly by another Bench of ITAT in Panamsat International Systems Inc. vs. Dy. Commissioner Income-tax (ITA. No.1796/DEL/2001 dated 11.8.2006) at paragraph 6.18. Going by such interpretation, it cannot be held that there is, in the instant case, the use of or the right to use a secret process. In fact it is nobody’s case that any secret process is involved here and the applicant makes use of it. The use of secret process is alien to the minds of contracting parties. Incidentally, we may mention that it was brought to our notice that similar bandwidth services through private circuits are being provided by many other telecom operators. Hence, the royalty definition under the Treaty relating to secret process is not attracted here. We may mention that the applicant contended that the decision of ITAT in Asia Satellite case (supra) is distinguishable on facts. It is unnecessary to deal with this aspect.”
The Authority also considered in detail the question whether consideration was payable for using or for the right to use any equipment through which connectivity was provided. That question was answered in the negative. We are of the view that on the same reasoning the applicant does not pay for using any secret process in the present case also.

8.2 We may now consider the next submission of the Revenue that, since the services are yet to commence, it is premature to say whether C&W UK will install any equipment at the premises of the applicant in India. We notice from the pleadings and averments of the applicant that C&W UK will be providing telecom services to the applicant outside India. The network of the applicant will inter-connect with the network of C&W UK at Marseilles in France. Thus the telecom signal will move on the network of the applicant from India to Marseilles. It is beyond Marseilles that the network and equipment of C&W UK will be used for transmission of the signal. We also notice from the draft agreement that there is neither any stipulation for provision of any equipment nor payment of any fee for the same. On the basis of the records placed before us, we are of the view that no case is made out to presume that any equipment will be installed by C&W UK at the premises of the applicant in India and the applicant will pay for the same. The averment of the Commissioner is based merely on the doubt entertained by him for which he has not shown any basis. The affidavits filed by the applicant after first hearing clarify the factual position in this regard. In the light of the view taken by us, it is not necessary to examine the TAG report.

8.3 The Revenue has thus failed to show how the payments made by the applicant will be royalty income in the hands of C&W UK.

9.
9.1 We may now take up the last issue which relates to permanent establishment. As already pointed out, the Revenue has mentioned about the existence of another group company in India whose address is alleged to have been used by the applicant as its registered office. The applicant has submitted that the Cable and Wireless India Limited which is a company incorporated in UK, has set up a branch office in India under Reserve Bank of India (RBI) permission, a copy of which has been filed. This branch office performs ancillary telecom services, such as network designing , project implementation services and providing network management and maintenance services. This branch has not been granted any licence by the Department of Telecommunication to carry out NLD/ ILD services. The applicant also states that its registered office does not share the premises with the above branch office. We find that the applicant and the branch office of Cable and Wireless India Ltd. are separate legal entities which perform different types of telecom services. The said branch office is not in the business of providing voice / data transmission service.

9.2 The Revenue also states that it cannot be said at this point of time whether C&W UK would be deputing its personnel to provide technical and maintenance support to the applicant. The applicant states that there is no such stipulation in its agreement with C&W UK. From the case presented before us, there is no reasonable basis to entertain the doubt that C&W UK will depute its technical personnel for providing maintenance and support to the applicant.

9.3 The next contention of the Revenue is that the applicant will be entering into an agreement with the Indian customers for providing end-to-end international long distance telecom transmission, the Indian leg of which will be provided by the applicant and the foreign leg will be provided by the C&W UK. Thus the contract between the applicant and the Indian customers would indirectly bind C&W UK, so far as the international leg of the transmission is concerned. As such the applicant would be acting as an agency PE for C&W UK. The applicant states that it does not act on behalf of the C&W UK in India, nor does it conclude any contract on behalf of that company. The applicant in its independent capacity negotiates and concludes contracts with its customers on principal-to-principal basis, to which C&W UK is not a party. Similarly, the agreement with C&W UK is also on principal-to-principal basis, the Indian customer not being a party to the same. The breach of one type of contract does not affect the rights and obligation arising under the other type of contract.

10. In the light of the above discussion, we have come to the conclusion that the payments made by the applicant to C&W UK are in the nature of business profits. In the absence of there being any permanent establishment of C&W UK In India, this income is not at all taxable here. Since this income is not chargeable to tax under the Act, there is no question of making any deduction at source under section 195. In the result, we answer all the questions in negative.
Pronounced in the open Court of the Authority on this 30th day of June, 2009.

AAR on taxability of a US company for allowing use of its database located abroad to customers in India against subscription fees--Not Chargeable

The subscription fee received by the American company from the licensee (user of database) does not fall within the scope of clause (v) of Explanation (2) to section 9(1) of the Income-tax Act, 1961 and the same is not taxable in India as royalty; it is liable to be taxed only as business income if at all it is found by the Revenue that an agency PE exists of the American Company.

THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI

FactSet Research Systems Inc., In re

AAR No. 787 of 2008

June 30, 2009

RELEVANT EXTRACTS:

1.1 The following facts are stated in the application and in the written submissions filed: The applicant maintains a ‘database’ which is located outside India and which contains the financial and economic information including fundamental data of a large number of companies world-wise. The customers of the applicant are mostly financial intermediaries and investment banks which have the need for such data. The databases contain the published information collated, stored and displayed in an organized manner by Fact Set, though the information contained in the database is available in public domain. The applicant, however, through its database enables the customer to retrieve this publicly available information within a shorter span of time and in a focused manner. The database maintains historical information and all the databases of FactSet are maintained at its datacenters in USA. For a customer to access and view FactSet data, the customer need to down-load client interface software (similar to internet browser). The customer can subscribe to specific database as per its requirement. The ‘lion-share’ database provides information on the shareholding by global holders of global equities. The ‘Shark repellent’ database provides information on takeover defence strategies adopted by various U.S. Public companies over a period of time. The Mergerstat database tracks formal transfers of ownership. A Call street database includes transcripts of quarterly conference calls (e.g. analysts’s queries) held by public companies. There are some more databases also. A customer can view the data on their computer screens. The software, tools database and other related documentation are hosted on the FactSet’s main frames and data libraries. Through the tools, any commercial data on FactSet’s database can be easily woven into charts, graphs and spread-sheets. FactSet allows the data to be viewed and used only in the internal documents of its customers. The applicant seeks advance ruling on the following questions formulated by it:

1. Whether, on the facts and circumstances of the case, FactSet Research Systems Inc. (‘FactSet’ or ‘the applicant’) will not be taxable in India under the Income-tax Act, 1961, with respect to the subscription fees?

2. Whether, on the facts and circumstances of the case, the applicant will not be taxable under the Double Taxation Avoidance Agreement entered into between the Government of India and the Government of United States of America with respect to the subscription fees?

3. Whether, on the facts and circumstances of the case, if the applicant is not taxable in India for the subscription fees, its customers in India will be required to withhold taxes under section 195 of the Act on subscription fees paid to the applicant?

4. Assuming that the applicant has no other taxable income in India, whether, on the facts and circumstances of the case, the applicant will be absolved from filing a tax return in India, under the provisions of Section 139 of the Act with respect to the subscription fees?

5. Broadly, the contention of the applicant is that no tax liable to be paid on the subscription fees received from the customers in India as it does not constitute ‘royalty’ or ‘fees for technical services’ either under the provisions of the Income-tax Act, 1961 or the DTAA (Treaty) between India and USA. Moreover, as the applicant does not have permanent establishment (PE) in India, the subscription fees cannot be taxed as business income in view of Article 7 of India-USA Treaty.


6. Let us now notice the material terms of MCL Agreement. The applicant is the Licensor and the Licensee is the subscriber/customer. Clause 1.a declares that the licensor grants to the licensee “limited, non-exclusive, non-transferable rights to use the software, hardware, consulting services and databases”. As regards the consulting service, it is stated that FactSet provides certain consultants who are able to demonstrate the FactSet’s products and its uses to the customers. It is clarified in the rejoinder that consulting services are not really required as FactSet provides helpdesk facilitation free of cost, though at present, there is no such facilitation Centre in India. As regards hardware, it is clarified in the rejoinder that at present no hardware is being provided to the customers in India.

4.1 According to cl. 2.a the licensor provides the services solely and exclusively for licensee’s own internal use and business purposes only in the licensee’s business premises. The licensee’s employees having a password or user ID can access the service. Further, the licensee cannot use or permit any individual or entity under its control to use the services and the licensed material for any unauthorized use or purpose. Clause 1.b makes it clear that all proprietary rights including intellectual property rights in the software, databases and all related documentation (“licensed material”) will remain the property of licensor or its third party data/software suppliers. The licensee is permitted to use licensor’s name for the limited purpose of source attribution of data got from the database in the internal business reports and the like. Licensee is solely responsible for obtaining required authorization from the suppliers for products received through them and in the absence of such authorization the licensor has the right to terminate the licensee’s access to any supplier product.


4.2 Clause 2.c reads as follows:

Clause 2.c. Except as permitted under this Agreement or under a written agreement with a Supplier, Licensee agrees that it will not copy, transfer, distribute, reproduce, reverse engineer, decrypt, decompile, disassemble, create derivative works from or make any part of the Service, including the data received from the Service available to others. Licensee may use Insubstantial amounts of the Licensed Materials in the normal conduct of its business for use in reports, memoranda and presentations to Licensee’s employees, customers, agents and consultants, but Licensor, its Suppliers and their respective affiliates reserve all ownership rights and rights to redistribute the data and databases.”

4.3 Clause 2.d on which the Revenue placed reliance may also be noticed.
Clause 2.d: Licensor represents and Licensee acknowledges that the Service and its component parts were developed, compiled, prepared, revised, selected and arranged by Licensor, its Suppliers or their respective affiliates through the application of methods and standards of judgment developed and applied through the expenditure of substantial time, effort, money and originality and that they constitute valuable intellectual property and trade secrets of Licensor and its Suppliers. At Licensor’s expense and reasonable request, Licensee agrees to cooperate with Licensor and its Suppliers to protect the proprietary rights in the software and databases during the terms of this Agreement.”

4.4 Coming to the other clauses, the fees is payable within 30 days of receiving the invoice failing which the Licensor may suspend the licensee’s access (vide clause 4). The initial term of the agreement is as set forth in Schedule (A) and thereafter the agreement can be renewed for successive one year periods (vide cl. 5). Clause 5.c stipulates that upon termination of the agreement, licensee will cease using all the licensed material, return any licensor hardware upon request and expunge all data and software from its storage facility and destroy all documentation except such copies of data to the extent required by law. Another restriction placed by cl. 5.d is that the Licensee may not use any part of the services (for eg., Index value) to create a proprietary financial instrument or to list on its exchange facilities. In various schedules relating to different databases, the rates of ‘fixed price service’ and ‘Pay-As-you-Go Service’ are set out.

7. Most of the focus was on ‘royalty’ provision contained in the Act and in the DTAA and the main and substantial question argued was whether the fee received by the applicant could be brought within any of the limbs of ‘royalty’ definition. Section 9(1)(vi) of the Act brings the income by way of royalty within the ambit of deemed income. Explanation 2 to clause (vi) of Section 9(1) defines ‘royalty’ as follows:

Explanation 2 – For the purposes of this clause “royalty” means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains”) for –

(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;

(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;

(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;

(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;

[(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in Section 44BB;]

(v) the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or

(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to [(iv), (iva) and] (v).

7.1 Article 12 of the DTAA between India and USA deals with ‘royalty’ and ‘fee for included services’. Such incomes can be taxed in the Contracting State in which they arise and according to the laws of that State (vide Art. 12.2). The term ‘royalty’ is defined in Art. 12.3 as follows:
Article 12.3 3. The term “royalties” as used in this Article means:

(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films, or work on film, tape or 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 information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and
(b) payments of any kind as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) of Article 8.

8. The first question is whether the amounts received by the applicant constitute consideration for the transfer of any rights in respect of the copyright or for the use or right to use any copyright of a literary/scientific work.

8.1 The expression ‘copyright’ is not defined in the Income tax Act. It must be understood in accordance with the law governing copyright in India viz. Copyright Act, 1957. In State of Madras vs. Ganon Dunkrley & Co.*, the Supreme Court held that the expression ‘sale of goods’ in Entry 48 of List II (VII Schedule) of the Govt. of India Act is a nomen juris and shall be construed in its legal sense. The legal sense can only be what it has in the law relating to sale of goods and therefore the said expression shall bear the same meaning as it has in Indian Sale of Goods Act. Looking at the Treaty, we have Art.2.2 which clarifies how the undefined terms shall be understood. In substance, it says that an undefined term shall have the meaning which it has under the taxation law of the State concerned. When the term is not defined in the taxation law (I.T.Act), the definition in the law governing the subject-matter ought to be adopted, more so when there is no basic difference between the statutory definition and the ordinary legal concept. Section 16 of Copyright Act lays down that no person shall be entitled to copyright or any similar right in any work otherwise than under and in accordance with the provisions of this Act or any other law in force.

8.2. Section 14 gives the meaning of copyright. This Section was substituted for the previous one by the Copyright (Amendment) Act of 1994. Section 14 in so far as it is relevant is extracted hereunder:

14. For the purposes of this Act, “Copyright” means the exclusive right subject to the provisions of this Act, to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof, namely:

(a) in the case of a literary, dramatic or musical work, not being a computer programme –

(i) to reproduce the work in any material form including the storing of it in any medium by electronics means;

(ii) to issue copies of the work to the public not being copies already in circulation;

(iii) to perform the work in public, or communicate it to the public:

(iv) to make any cinematograph film or sound recording in respect of work;

(v) to make any translation of the work;

(vi) to make any adaptation of the work;

(vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clause (i) to (vi)
9.3 We are, therefore, of the view that the subscription fee received by the applicant from the licensee (user of data base) does not fall within the scope of clause (v) of Explanation (2) to Section 9(1) of the Act.

10. Even examining from the standpoint of Treaty, we do not think that “the use of or right to use any copyright of a literary or scientific work” is involved in the subscriber getting access to the database for his own internal purpose. It is like offering a facility of viewing and taking copies for its own use without conferring any other rights available to a copyright holder. The expression ‘use’ (of copyright) is not used in a generic and general sense of having access to a copyrighted work. The emphasis is on the “use of copyright or the right to use it”. In other words, if any of the exclusive rights which the owner of copyright (the applicant) has in the database are made over to the customer/subscriber so that he could enjoy such rights either permanently or for a fixed duration of time and make a business out of it, then, it would fall within the ambit of phrase ‘use or right to use the copyright’. What rights of exclusive nature attached to the ownership of copyright have been passed on to the subscriber atleast partially? Is the licensee conferred with the right of reproduction and distribution of the reproduced work to its own clientele? Can it be publicly exhibited or its contents be communicated to the public? Is the applicant given the right to adapt or alter the ‘work’ for the purpose of marketing it? The answer is obviously – no. The underlying copyright behind the data base cannot be said to have been conveyed to the licensee who makes use of the copyrighted product.

13. In the result, the questions are answered as follows :
Qn.Nos.(1) & (2):

The subscription fee is not taxable in India as royalty. It is liable to be taxed only as business income if at all it is found by the Department that an agency PE exists. At present, on the facts stated by the applicant, we must hold that PE is not in existence and therefore the income is not liable to be taxed in India.

Qn.No.(3):
The customers are not required to withhold the tax, until and unless the Department finds the existence of PE after due enquiry.



Qn.No.(4):
At present, there is no obligation to file the return in view of our finding that there is no royalty income and on the facts stated by the applicant, there is no PE


Accordingly, the ruling is pronounced on this 30th day of June, 2009.

No TDS on Sec-195 Payments, as it is a Business Income

ITA No.69 & 70/Bang/2009
Assessment Years : 2000-1 & 2001-02

INCOME TAX OFFICER (INTRNATIONAL TAXATION)
WARD-1(2), BANGALORE

Vs

M/s ITC HOTELS LTD
SANKEY ROAD, BANGALORE-560001



Income tax - Indo-USA DTAA - Assessee is a reputed hotel group - receives certain services from US-based hotel group and makes payment without TDS - Revenue treats it as royalty or fees for technical services u/s 9(1)(vi) or (vii) and also under Article 12(3) of the DTAA - CIT(A) goes by the Delhi HC decision in the assessee's case and treats it as business income and since the non-resident has no PE in India, the payment received is held to be non-taxable - Revenue refers to the Explanation inserted at the end of section 9 by the Finance Act, 2007 with retrospective effect from 1.6.1976 which states that TDS to be deducted under clauses (v), (vi) and (vii) of sub-section (1) of Sec 9 even if there is no PE - held, since the income of the non-resident is held to be business income, this Explanation has no applicability to this case - Revenue's appeal dismissed

ORDER

Per : R V Easwar :

These are two appeals filed by the revenue for the asst.years 2000-01 & 2001-02.

2. The assessee is a public limited company engaged in the running of hotels. It made payments of Rs.2,52,93,968/- and Rs.1,11,35,305/- respectively for the two years to Sheraton International, USA, a non-resident company. The question whether the assessee was liable to deduct tax from the above payments came up before the Assessing Officer. The Assessing Officer held that the assessee was liable to deduct the tax and since it had not done so, he passed an order u/s.201(1) and section 201(1A) of the IT Act on 31.7.2001 holding the assessee to be in default and directing it to pay the taxes which it ought have deducted and also charging interest. The tax amount came to Rs.33,47,733/- and Rs.15,02,609/-. The interest charged came to Rs.10,00,935/- and Rs.2,57,918/-. This order reached the Bangalore Bench of the ITAT in ITA Nos.145 to 148/Bang/2004 and by order dt.11.11.2005, the issue was restored to the file of the Assessing Officer with the following directions :

"Since the chargeability or otherwise is yet to be decided we think it fit not to prejudge the issue so as to hamper the judicial decision to be arrived at by the Assessing Officer in view of the remand by the Tribunal at New Delhi. The Assessing Officer, after determination of the taxability or otherwise of the payee, may appropriately pass order in the case of the present assessee. The matter is therefore restored back to the file of the Assessing Officer. The Assessing Officer shall determine the nature of payment as well as the amount taxable therein."

3. The Assessing Officer appears to have contacted his counterpart in New Delhi where Sheraton International, USA was being proceeded against as recipient of the aforesaid payments made by the assessee. The latter seems to have sent to the Assessing Officer all the relevant papers including the order of the Delhi Bench of the Tribunal in the case of Sheraton International which is reported in (2007) 293 ITR (AT) 68 = (2007-TIOL-288-ITAT-DEL). In this order it was held that the payments made by the present assessee under the agreement to Sheraton International did not amount to royalty or fees for technical services or fees for included services and that the payments represented business profits in the hands of Sheraton International and since Sheraton did not have any permanent establishment in India, the profits were not taxable in India in terms of Article 7 of the DTAA between India and America. The issues have been elaborately dealt with by the Tribunal but suffice to note paragraph 87 of the said order (page 152 of the report) which is as under :

"As such, considering all the facts of the case, the relevant provisions of the income-tax Act, 1961 as well as that of the Double Taxation Avoidance Agreement between India and USA and keeping in view the legal position emanating from various judicial pronouncements discussed above, we are of the opinion that the amount received by the assessee from the Indian hotels/clients for the services rendered under the relevant agreements was not in the nature of "royalties" within the meaning given in section 9(1)(vi) read with Explanation 2 thereto of the Income tax Act, 1961 or as given in article 12(3) of the Indo-American DTAA. The same was also not "fees for technical services" or "fees for included services" as defined in section 9(1)(vii) read with Explanation 2 thereto of the Income-tax Act, 1961 or article 12(4) of the Indo-American DTAA respectively. Having regard to the integrated business arrangement between the assessee-company and the Indian hotels/clients as evident from the relevant agreements as well as the nature of the assessee's own business, the said amount clearly represented its "business profit" which was not liable to tax in terms of article 7 of the Indo-American DTAA. We, therefore, allow the relevant grounds raised in the assessee's appeals on this issue and dismiss the additional grounds raised by the Revenue in its appeals."

4. On receipt of the aforesaid order of the Tribunal the Assessing Officer in the present proceedings held that the order of the Tribunal did not have any bearing on the question of the assessee's liability to deduct tax from the payments. He, accordingly, directed the assessee to deduct tax from the payments and reiterated the earlier order passed on 31.7.2001, by order passed on 30.11.2006.

5. On appeal, the Commissioner of Income-tax (Appeals) accepted the assessee's plea based on the order of the Tribunal cited above and held as follows :

"7.5. I have considered the submissions made by the AR on behalf of the appellant and perused the order passed by the Hon'ble ITAT, Delhi Bench in the case of Sheraton referred to above. It is an undisputed fact that the liability for TDS is a vicarious liability. The principal liability is of the recipient of income as provided u/s.191 of the Act. Since, in the instant case, the recipient i.e., Sheraton is assessed to tax in India, the interest of the revenue would be amply protected because upon conclusion of the litigation, the tax due on remittances, if any, will be liable to be paid or otherwise recovered from Sheraton direct. It is observed that proceedings u/s.201(1) were initiated against the appellant on receipt of information that the appellant had paid various amounts to Sheraton without deduction of tax as required u/s. 195. I find that the impugned order was passed by the ITO concerned at Bangalore as per direction of ITAT, Bangalore Bench after taking into account the findings contained in the order of his counterpart dated.28.11.2003 in the case of Sheraton. Since the said order of the Assessing Officer in the case of Sheraton has been set aside by the Hon'ble IT AT, Delhi Bench vide its order referred to above, there is no justification for the continuance of the impugned order. Once it has been held by the Hon'ble Tribunal that the services rendered by Sheraton to Indian hotels including the appellant are not chargeable to tax in India, there is no valid reason to hold the appellant to be an assessee in default ufs.201(1) of the Act for not deducting tax at source u/s.195 on remittances made towards availing the said services. Respectfully following the said order of the Hon'ble ITAT, Delhi Bench referred to above, I hold that as the very foundation of the impugned order has ceased to exist by virtue of the said order of the Hon'ble Tribunal, the impugned order cannot be sustained anymore. The impugned order is accordingly set aside. This ground of appeal is, therefore, decided in favour of the appellant."

As regards interest u/s.201(lA) the CIT(A) deleted the same consequential to his decision on the applicability of section 201(1).

6. The revenue is in appeal challenging the order of the CIT(A) as above. At the time of the hearing it was pointed out on behalf of the assessee that the order of the Delhi Bench of the Tribunal in the case of Sheraton International has been affirmed by the Hon'ble Delhi High Court in Director of Income tax v. Sheraton International Inc. by judgement dt.30.1.2009 reported in (2009) 221 CTR 752 (Del) = (2009-TIOL-57-HC-DEL-IT). A copy of the judgement was also filed. We find from paragraph 13 of the judgement of the High Court it has been observed as under :

"13. In view of the aforesaid findings of the Tribunal that the main service rendered by the assessee to its client-hotels was advertisement, publicity and sales promotion keeping in mind their mutual interest and, in that context, the use of trademark, trade name, or the stylized "S" or other enumerated services referred to in the agreement with the assessee were incidental to the said main service. It rightfully concluded, in our view, that the payments received were neither in the nature of royalty under s.9(1)(vi) r/w Expln. 2 or in the nature of fee for technical services under s.9(1)(vii) r/w Expln. 2 or taxable under art. 12 of the DTAA. The payments received were thus, rightly held by the Tribunal, to be in the nature of business income. And since the assessee admittedly does not have a PE under the art. 7 of the DTAA "business income" received by the assessee cannot be brought to tax in India. The findings of the Tribunal on this account cannot be faulted. The Tribunal pointedly observed that there was no evidence brought on record by the Revenue to enable them to hold that the agreement was a colourable device, in particular, that the payments received were for use of trademark, brand name and stylized mark "S". We agree with reasoning adopted by the Tribunal. Moreover, these are findings of fact which could be gone into only if a question was proposed impugning the findings of the Tribunal as perverse. We find that no such question has been proposed in the appeal."

Thus, after the judgement of the Hon'ble Delhi High Court, the argument of the revenue that the payments made by the assessee are to be treated either as royalty u/s.9(1)(vi) or as fees for technical services u/s.9(1)(vii) of the Income tax Act cannot be upheld. The Delhi Bench of the Tribunal has applied the Indo-US DTAA and held that the payments cannot be considered as royalty or fees for technical services as per the Act or as per the DTAA. It has further found that the payments represented business profits in the hands of Sheraton assessable as such but because of the fact that Sheraton had no permanent establishment in India, the payments cannot be taxed by the Income-tax department in India as per Article 7 of the DTAA. The Tribunal has also found that the agreement between the parties cannot be considered as a colourable device. All these findings of the Tribunal have been upheld by the Hon'ble Delhi High Court in the judgement cited supra. In this view of the matter and respectfully following the High Court's judgement, we hold that the Commissioner of Income-tax (Appeals) was right in cancelling the orders passed by the Assessing Officer on 30.11.2006 u/s.201(1) and 201(lA)of the Act.

7. The learned DR however submitted that the Explanation inserted at the end of section 9 by the Finance Act, 2007 with retrospective effect from 1.6.1976 makes a difference. The Explanation reads as under :

Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India.

It may be seen that the Explanation applies only where the income is deemed to accrue or arise to the non-resident company under clauses (v), (vi) or (vii) of section 9(1). These clauses speak of interest, royalty and fees for technical services, respectively, payable to the non-resident. We have already seen that the Delhi High Court has affirmed the finding of the Delhi Bench of the Tribunal in the case of Sheraton International that the character of the payments made by the assessee to Sheraton was that of business profits and not either royalty or as fees for technical or included services. The Explanation will apply only if the payments can be characterized as interest or royalty or fees for technical services. Therefore, we are of the opinion that the Explanation has no application to the present case. The argument of the learned DR cannot be upheld.

8. In the result the appeals of the department are dismissed with no order as to costs. Order pronounced in the open court on this 1st day of May, 2009.