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DDIT vs. Dharti Dredging & Infrastructure Ltd, Hyderabad (2012-TII-22-ITAT-HYD-INTL) dated February 15, 2012
Facts
Dharti Dredging & Infrastructure Ltd, made payments to M/s. East Marine Pvt. Ltd., Singapore (EMPL) during the period 2.2.2006 to 28.7.2006 aggregating to
Rs. 52,949,100 for subcontracting its works contract with Visakhapatnam Port Trust.
Two surveys u/s. 133A of Income-tax Act, 1961 were conducted at the assessee's office premises in Hyderabad and Visakhapatnam and a number of books, etc., including a copy of Standard Charter Agreement signed by the assessee-company and EMPL, was impounded.
The Assessing Officer held that the hire charges/charter fees paid to EMPL were in the nature of royalty, as it was made for the use or right to use the dredger by Dharti in terms of clause (iv a) of Explanation 2 to section 9(1)(vi) of the Act.
The Assessing Officer held that the assessee-company was liable to deduct TDS before making payment to M/s. EMPL, Singapore in accordance with the provisions of section 195 of the Act. Further he was held as assessee in default and was imposed interest under the provisions of section 201(1A) of the Act.
In appeal to the CIT(A), assessee argued the following points:
• The dredger remained in the control and possession of EMPL.
• It was operated by the personnel of EMPL who were answerable to EMPL.
• The payments made to EMPL was not for use or right to use of the dredger but for the job work done by dredger Ketam operated upon by EMPL.
Hence such payments could not be construed as Royalty within the meaning of Article 12 of Indo- Singapore DTAA and section 9 of the Income-tax Act.
The CIT (A) based on the assessee’s arguments held that the payments made to EMPL can neither be termed as royalties nor fees for technical’s services. It further held that since the dredger did not operate for more than 183 days, there was also no PE and hence the income could not be taxed in India.
Aggrieved, the Revenue appealed to the Tribunal and argued on the following points:
Under the 'Dredging Contract', the payment to EMPL was made based on the agreed minimum guaranteed charges or on pro rata minimum guaranteed charges.
EMPL was guaranteed to receive payments at agreed minimum charges regardless of whether the dredger is put to any use or not by Dharti.
Accordingly, the payments made by Dharti were in the nature of hire/charter charges for the dredger.
Issue
Whether a dredger hired by the assessee from a foreign company can be construed as place of business of the foreign company?
Whether the payment made to EMPL amounts to royalty or fees for technical services?
Whether there is a liability to deduct tax at source u/s 195?
Held
The equipment hired by the assessee from the foreign company cannot be construed as place of business of the foreign company for the following reasons:
the equipment has been used by EMPL under its supervision, control and employment of 18 member crew for 24 hours
The assessee took the dredger only on hire and paid only hire charges.
The payment cannot be treated as 'royalty' for the following reasons:
the assessee did not use the dredger or any part thereof on its own.
The assessee was neither given any right to use it nor it had acquired any right to use from EMPL.
From the descripttion of the work assigned by Dharti to East Marine Pte Ltd., Singapore it would be seen that payments made by them are in consideration of the execution of jobs assigned to them for dredging channel at Visakhapatnam port work undertaken by them. As the payments were not made for any services, it did not amount to fees for technical services.
Hence the payment made by the assessee to M/s East Marine can neither be construed as ‘Royalties' nor it is “fees for technical services” and it is nothing but hire charges.
The liability u/s 195 to deduct TDS depends upon chargeability of tax in the hands of recipient. In the present case, the entire dredging operation was carried out by East Marine Pte. Limited, Singapore and payment made to M/s East Marine is a contractual payment for execution of works contract assigned to them. Also EMPL has no PE in India as the dredger Ketam has been operated in India for less than 183 days. Hence assessee is not liable to deduct tax at source u/s 195.
Hence the tribunal confirmed the order of CIT(A) and dismissed the appeal of Revenue.
People Interactive (I) P Ltd [ITA Nos. 2180, 2179, 2181, 2182]
Dated: February 29, 2012
Facts
The taxpayer is owner/host of website www.shaadhi.com where individuals can register and exchange the relevant information for matrimonial alliances on payment of appropriate subscripttion amount. The taxpayer availed the services of Rackspace Inc, USA vide service agreement.
The Rackspace Inc. offered advanced type of dedicated hosting solution to the taxpayer and the services provided are categorised as follows:
• Server Management
• Bandwidtth and connectivity
• Security
The taxpayer did not deduct tax while making payments since it was of the view that such payments were in the nature of business income and in absence of a Permanent Establishment (PE) it is not taxable under Article 7 of the tax treaty.
The Assessing Officer (AO) held that Rackspace Inc. has given right to use the server to the taxpayer along with account manager and business development consultant in relation to its activities. Therefore, the payment made by the taxpayer to Rackspace Inc. falls under the definition of Royalty under the Act as well as under the tax treaty.
The Commissioner of Income-tax Appeals [CIT(A)] observed that Rackspace Inc is providing hosting services to the taxpayer and not given any equipment on hire. Accordingly, following the order of the Tribunal in the case of Kotak Mahindra Primus Ltd. as well as the ruling in the case of ISRO Satellite Centre it was held that the payment was not taxable.
Issue
Whether website hosting charges paid to a non-resident can be taxable as royalty under the Act or the tax treaty?
Held
On a perusal of the agreement it is clear that payments were made for providing web hosting services with all backup, security, maintenance and uninterrupted services. There is no dispute that all the equipments and machines relating to the services provided to the taxpayer are under the control of Rackspace Inc and situated outside India.
The Tribunal observed that the taxpayer could not operate or even does not have physical access to the equipments system which clearly indicates that the taxpayer would not be using the equipments but only availing the services provided by Rackspace Inc.
The Tribunal relied on the Delhi High Court’s decision in the case of Asia Satellite Telecommunications Co. Ltd. and held that when the equipments were not operated, used or under the control of the taxpayer, the payments made for availing the services of Rackspace Inc. could not be treated as royalty. When the payments are not in the nature of royalty as per the tax treaty and under the Act, the recipient of the said payments which does not have PE is not liable to tax in India.
When payments are not in the nature of royalty as per the tax treaty and as per the Act, the recipient of the payment being a non-resident which does not have PE in India is not liable to tax. Accordingly, tax withholding is not required under Section 195 of the Act in view of the Supreme Court’s decision in the case of GE India Technology Cente P. Ltd.
Acclerys K K (2012-TII-10-ARA-INTL) AAR No. 989 of 2010
Dated February 27, 2012
Facts
The applicant, a company incorporated in Japan, is a part of Acclerys Group of companies. It is a subsidiary of Acclerys USA, dealing in products of the Acclerys group in Asia. It has a Liaison Office (LO) in India and LO acts as a Co¨Cordinator. Further no sales are carried out through the LO. It is a scientific informatics software and services company which enables the customers to accelerate their research process to enable them to rapidly discover new therapeutics materials and compounds and to introduce new efficiencies into the process that drive lower cost.
The applicant has vast portfolio of copyrighted computer aided design modelling and stimulation offerings which assist customers in conducting scientific experiments in order to reduce the duration and cost of discovering and developing new drugs and materials. The product of the applicant are in a software form and the right to use the application is given to customers by way of vendor licence key and through an independent reseller in India for which the customers make a one time payment.
To enable the sale of its products in India, the applicant entered into an arrangement with Apsara Innovations Pvt. Ltd. (Apsara Innovations). Apsara Innovations acts as a reseller of products and it quotes its own prices to the end users. Post acceptance of the terms and prices by the customers, reseller places purchase orders to the applicant. Thereafter, the licence key is generated and delivered to the customer in India from overseas.
The applications developed by the applicants are copyrighted material. It authorises the end users / customers to have benefit of the data, modules and applications contained in copyrighted products without any further right to deal with them independently. The license given to the customers is copyrighted material which is provided to the customers on a non-exclusive and non-transferable basis.
Issue
Whether payment received by the applicant from sale of software is taxable as business profits under Article 7 of the tax treaty in absence of a Permanent Establishment (PE)?
Whether payments received for sale of software products constitutes Royalty and FTS under Article 12 of the tax treaty?
Whether Indian customers need to withhold tax while making the remittances to the applicant on such payments?
Held
In the case of P. No. 30 of 1999 in re, Millennium IT Software Ltd. and recent ruling in the case of Citrix Systems Asia Pacific Pty. Ltd it has been held that there cannot be a user of software over which there exists a copyright without a use of the copyright therein. Therefore, the payment for such use can only be royalty.
What is paid by a seller on behalf of the customer and what is paid by the customer direct, both partake the character of royalty. In the light of the ruling of Citrix Systems Asia Pacific Pty. Ltd, it does not appear to be necessary to further reason out the issue. The reasons given in the Citrix Ruling to find that what is paid by the reseller to the applicant is for updates and maintenance. Therefore it should be treated as royalty and not business income.
Accordingly, the payment received by the applicant through an independent reseller in India cannot be treated as business income under Article 7 of the tax treaty. Further the payments received by the applicant from the sale of software products to the end users / customers through its independent reseller in India will be royalty as defined under Article 12 of the tax treaty. Therefore, tax needs to be deducted by the customers while making the remittances to the applicant.
Citrix Systems Asia Pacific Pty. Limited (2012-TII-04-ARA-INTL) A.A.R. No.822 of 2009
Dated February 6, 2012
Facts
The applicant, a company incorporated in Australia, is one of the leading providers of software services which help in virtualisation, networking and application delivery. It also offers a range of application collaboration, firewall, networking and streaming solutions. It entered into a distribution agreement with Ingram Micro India Limited (Ingram).
Under an agreement, Ingram was appointed as a non-exclusive distributor of the products of the applicant in India. The software products are purchased by the distributor from the applicant and sold to the customer. With respect to the hardware products, the applicant shifted the products directly to the distributor which in turn supplied these products to re-sellers and end-user customers. However, for the software product, ‘Citrix XenApp’, while sale and collection is made through the distributor, no physical delivery of the product is made to the distributor.
On the basis of the demand of the customers, the distributor places purchase orders with the applicant and makes payments. The applicant then directly transmits a ‘key’ to the end-user customer who is required to download the XenApp software. On receipt of the key, the end-user customer downloads the software from the server of the applicant. Ingram owns the responsibility for collection of the price for the product from its customers.
In addition to the distribution of hardware products and Citrix XenApp software under the distribution agreement, Ingram also facilitates the execution of the Citrix Subscripttion Advantage Program between the applicant and its existing customers. The program is offered by the applicant in the form of a package of support services during the period of the program.
Issue
Whether the payment received by the applicant from the distributor for sale of the software product is in the nature of ‘royalty’ under the Act or under the tax treaty?
Whether the payment received for the right to download/receive version updates for the software products of the applicant (i.e., the Citrix Subscripttion Advantage Program) is in the nature of ‘royalty’ or Fees for Technical Services (FTS) under the Act?
Whether payments received by the applicant from the distributor for the Citrix Subscripttion Advantage Program is in the nature of royalty under Explanation 2 of Section 9(1) of the Act?
Whether the applicant needs to withhold tax on such payments?
Held
The Act or tax treaty does not define the term copyright. However, the Copyright Act provides the meaning of ‘copyright’ as an exclusive right subject to the provisions of the Copyright Act to do or authorise in doing of any of the acts referred to therein in respect of a work or any substantial part thereof.
The definition of royalty under the Act refers to transfer of all or any rights, including the granting of a licence, in respect of the copyright. It does not refer the grant of any exclusive right. In fact, if one were to go by the provisions of the Copyright Act, the transfer of a copyright itself may be, whole or partial, general or subject to limitations or for the whole term of the copyright or any part thereof. Therefore, even a partial right or confined right granted to the assignee would attract the definition of royalty as found in the Act.
The concept of conveying of exclusive right either by way of assignment or by way of licence does not appear to be the sine qua non for coming within the definition of royalty under the Act or tax treaty. Whenever software is transferred or licensed for use, it falls within it the copyright embedded in the software and one cannot be divorced from the other.
The AAR observed that the words ‘including the granting of a licence’ indicate an expansive definition and it is a devise to bring in something which might not otherwise be included in the words used. A license is a mere permission or authority to do a particular thing, it is not a transfer, hence in addition to the words ‘transfer of any rights’, the Act brought in by way of inclusion, the words ‘including the granting of a licence.’
In Azadi Bachao Andolan the Supreme Court Observed that the tax treaty is a contract between sovereign States and it is a matter of bargain between the two countries involving adjustments and compromises. Therefore, when the tax treaty speaks of royalty and defines it, it must be understood as it is commonly understood. It should not be constrained by the definition of the Copyright provided under the Copyright Act, a definition that explicitly states that it is for the purposes of that Act, especially when construing the tax treaty.
The article under the tax treaty provides the term royalty as ‘the use of or the right to use of any copyright’. Use of a copyright takes place, when the copyright is used. This is distinct from the right to use a copyright. The two expressions are used disjunctively and the expression used is ‘or’. The context does not warrant the reading of ‘or’ as ‘and’. Therefore, the consideration received for permitting another to use a copyright is also royalty.
When a copyrighted article is permitted or licensed to be used for a fee, the permission involves not only the physical or electronic manifestation of a programme, but also the use of or the right to use the copyright embedded therein.
In Airport Authority of India, In re it was held that the ratio of the decision in the case of Tata Consultancy Services cannot conclude the question since income relatable to supply of documents and software under the contract was royalty as the documents and software were copyrights which had been given to the applicant for use. The provisions of the Act and the tax treaty were clear on the point and no reference to the Copyright Act is necessary.
The Karnataka High Court in the case of Samsung Electronics Co. Ltd. and various High Courts have held that the argument that it would be only a sale of copy of the copyright software could not be accepted. The AAR is not persuaded to adopt the reasoning of the Delhi High Court’s decision in the case of Ericssion AB where it has been held that payment was not royalty. Accordingly, in the view of the ruling of Millennium IT Software Ltd. the payment is to be treated as royalty.
Accordingly, the payment received for sale of the software product is in the nature of royalty under the Act as well as tax treaty. Further the payment received by way of Subscripttion for the updates would also be payment received for grant of a right to use the copyright embedded in the Subscripttion Advantage Programme and it is in the nature of royalty. Therefore, Ingram is required to withhold taxes in India under Section 195 of the Act. However, since the payment for Subscripttion Advantage Programme is in the nature of royalty, it is not necessary to rule on whether such payments would be in the nature of FTS under the Act.
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