Whether fees received for “foreign exchange deal matching system services” constitutes “royalty” under Article 13 of India-UK DTAA & Section. 9(1)(vi) of Income Tax Act, 1961?

Last updated: 24 July 2014

Court :
ITAT Mumbai

Brief :
The assessee company is a tax resident of United Kingdom incorporated under the laws of England. The assessee is engaged in the business of providing “foreign exchange deal matching system” which enables foreign exchange authorized dealers to effect deals in spot foreign exchange with other foreign exchange dealers. The main server is located in Geneva and the assessee has executed a Dealing Services Marketing Agreement with M/s. Reuters India Pvt. Ltd (‘RIPL’) whereby RIPL will market the services of the assessee to the subscribers in India. The assessee claimed that the revenue earned by the assessee from its subscribers in India are in the nature of business profit which is taxable in India only if it has a PE in India as per Article -7 of the India-UK DTAA. The assesse claimed that for the A.Ys under consideration, it did not have PE in India as contemplated under Article-5 nor the services are in the nature of royalty or fee for technical services and accordingly not taxable under Article -13 of DTAA. The Cousel for the assessee submitted that the Revenue erred in law in holding that the consideration for services received by Appellant is taxable as “royalty” under Article 13 of the India-UK DTAA and even if the Indian Subsidiary of the assessee constitues PE, Para 6 of Article 13 of DTAA shall be invoked and the royalty shall be taxed under Article 7 or 15. The Court dismissed the Appeal and held that once the receipt in question has been decided as royalty in nature then there is no need to go into the question of assessee having PE in India. Para 6 of Article 13 can be pressed into service only in the case when the existence of PE of a non resident is not in dispute. In the case at hand, the assessee has not come up with the claim that the services rendered to the Indian banks are through its PE. Rather the assessee has vehemently contended that it has no PE in India. In these facts and circumstances, the provision of para 6 of Article 13 cannot be invoked in case when the receipt is found as royalty in terms of Article-13(3) of the DTAA and assessee has not admitted any PE in India.

Citation :
M/s Reuters Transaction Services Ltd. – Appellant – Versus – The Deputy Director of Income Tax (International Taxation) - Respondent

BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER

AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER

ITA NO.6947/Mum/2012

Assessment year: - 2008-09

ITA NO.7211/Mum/2012

Assessment year: - 2009-10

Reuters Transaction Services Ltd.

C/o BMR & Associates LLP

36- B Dr RK Shirodkar Marg,

Parel-East, Mumbai – 400 012.

Appellant

Versus

The Deputy Director of Income Tax (International Taxation)-2(1)

1st Floor, Room No. 120, Scindia House,

Ballard Estate, Mumbai – 400 038

Respondent

Assessee By - Mr. P.J Pardiwalla and Shri Nishant Thakkar

Revenue By - Shri Ajay Kumar Srivastava

Date of hearing: 12.06.2014

Date of pronouncement: 18.07.2014

ORDER

Per Vijay Pal Rao, JM

These two appeals by the assessee are directed against the order dated 28.09.2012 of CIT(A) and assessment order passed u/s 143(3) r.w.s 144C(13) of the Income Tax Act in pursuance to the directions of DRP u/s 144C(5) of the Act for A.Y. 2008-09 and 2009-10 respectively. For the A.Y. 2008-09 the assessee has raised following grounds:-

In the facts and in circumstances of the case, Reuters Transaction Services Limited (the 'Appellant') respectfully submits that the learned Commissioner of Income-tax (Appeals) ['Ld CIT (A)'] has:

1. Failed to comprehend the facts of the case and erred in law and in facts in, disregarding the contractual arrangement between the Appellant, its customers and Reuters India Private Limited ('RIPL') and holding that:

a. the contractual arrangement lacks commercial substance and is illusionary and is a camouflage entered into to avoid payment of legitimate taxes;

b. the corporate veil of RIPL, a separate legal entity, be lifted; and

c. the equipment installed at the premises of the customer of Appellant is provided by the Appellant and not RIPL;

2. Failed to comprehend the facts and has erred in law and in facts in presuming certain facts listed in Annexure 1;

3. Erred in law and in facts in holding that the Appellant has provided equipment and related services including connectivity, network access, maintenance, updates and training to the customers through RIPL and in holding that the revenue received by Appellant is for use of equipment and is in the nature of royalty income under Article 13(3)(b) of the Double Taxation Avoidance Agreement between India and the United Kingdom ('India-UK DTAA') and under clause (iva) of Explanation 2 to Section 9(1 )(vi) of the Income-tax Act, 1961 ('the Act');

4. Erred in law and in facts in holding that the dealing matching service provided by the Appellant to its customers entails matching of bids in a 'secret environment' and in holding that the revenue received by the Appellant is for use of secret process and is in the nature of royalty income under Article 13(3)(a) of the India-UK DT AA and under clause (ii) of Explanation 2 to Section 9( 1 )(vi) of the Act;

5. Erred in law and in facts in holding that provisions of dealing matching services entails provision of commercial information to the customers of the Appellant for commercial exploitation and in holding that the revenue received by the Appellant is for use of commercial information and is in the nature of royalty income under Article 13(3)(a) of the India-UK DTAA and under clause (iv) of Explanation to Section 9(1 )(vi) of the Act;

6. Erred in law and in facts in holding that the dealing matching services provided by the Appellant is ancillary and subsidiary to the alleged provision of equipments and commercial information to the customers by the Appellant and is in the nature of fees for technical services ('FTS') under Article 13(4)(a) and 13(4)(b) of India-UK DTAA;

7. Erred in law and in facts in disregarding the Appellant's contention that the dealing matching services provided by the Appellant do not make available any technical knowledge and holding that the Appellant has provided technical services to the customers through RIPL and in concluding that the provisions of Article 13(4)(c) of the India-UK DTAA are not operative;

8. Without prejudice to grounds 1 to 7 above, the Ld CIT(A) has erred in law and in facts in not adjudicating on all the grounds raised by the Appellant before the Ld CIT (A) especially dismissing the appellant's claim of characterising the income as business income.

For the Assessment Year 2009-10 the assessee has raised following grounds:-

A. On the facts and in the circumstances of the case and in law, the learned members of the Dispute Resolution Panel ('DRP') erred in directing the Learned Deputy Director of Income Tax (International Taxation), Range - 2(1), Mumbai ('Ld Assessing Officer') to proceed on the lines proposed in the draft assessment order, on the premise that the issues raised are similar to issues involved in the earlier assessment years and the matter is subjudice.

B. On the facts and in the circumstances of the case and in law, the learned members of the DRP erred in confirming the draft assessment proposed by the Ld Assessing Officer and in directing the Ld Assessing Officer to conclude the assessment on the following grounds:

1. That the subscription revenue received by Reuters Transaction Services Limited (,the Appellant') is in the nature of 'royalty' under Article 13(3) of the Double Taxation Avoidance Agreement between India and United Kingdom ('DTAA') and under Section 9(1)(vi) of the Income-tax Act, 1961 (,the Act'):

2. That the subscription revenue received by the Appellant is in the nature of 'Fees for Technical Services' ('FTS') under Article 13(4)(c) of the DTAA and under Section 9(1)(vii) of the Act;

3. That Reuters India Private Limited ('RIPL') is an 'agent' of the Appellant and that RIPL constitutes a Dependent Agent Permanent Establishment ('DAPE') of the Appellant in India under Article 5(4) of the DTAA;

4. That the server of the Appellant located in Geneva extends to the equipment provided by RIPL to the subscribers of the Appellant and hence the server located at Geneva constitutes a Permanent Establishment ('PE') of the Appellant under Article 5(1) of the DTAA;

5. That the Ld Assessing Officer may place reliance on the Australian Securities and Investments Commission's ('ASIC') market assessment report issued in 2005, on the activities of the Appellant in Australia to conclude that the Appellant controls the network through which services are provided to it subscribers in India;

6. That Section 44D read with Section 115A of the Act is applicable to the Appellant without appreciating the submissions made by the Appellant;

7. That interest under Section 234B of the Act may be levied on the Appellant, as there is no variation in the total income of the Appellant;

C. Based on the facts and circumstances of the case, the Ld Assessing Officer has erred in facts and in law in:

1. Holding that the subscription revenue received by the Appellant from its subscribers in India are towards the use of equipments and process and hence in the nature of 'royalty' income chargeable to tax in India under Section 9(1 )(vi) of the Act and Article 13(3) of the DTAA;

2. Holding that the subscription revenue received by the Appellant from its subscribers in India are in the nature of FTS chargeable to tax in India under Section 9(1 )(vii) of the Act and Article 13(4)(c) of the DTAA;

3. Relying on the communication obtained from Standard Chartered Bank during the assessment proceedings for AY 2005-06 and applying the same to the current year and holding that the server of the Appellant located in Geneva extends to the equipment provided by RIPL to the subscribers of the Appellant in India and hence, the server located in Geneva constitutes a PE of the Appellant in India under Article 5(1) of the DTAA;

4. Following the assessment order of the previous assessment years and in placing reliance on the ASIC Market Assessment Report issued in 2005 on the activities of the Appellant in Australia and applying the observations of the ASIC to the Appellant's case in India;

5. Observing that RIPL is an 'agent' of the Appellant in India and the Appellant is dependent on RIPL and hence RIPL constitutes a dependant agent PE of the Appellant in India;

6. Observing that services are supplied by the Appellant to its subscribers in India and hence the revenue received by the Appellant from its subscribers accrue and arise in India;

7. Without prejudice to the above, the Ld Assessing Officer erred in law and in facts in computing the income chargeable to tax in India of the Appellant at 20 percent of the gross revenue of Rs 65,228,026 as being profits attributable to the PE of the Appellant in India and ignoring the principles laid down by the Honourable Supreme Court in the case of DIT v Morgan Stanley (supra);

To read the full judgment, please find the attached file