Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, PUNE BENCH “C”, PUNE
Before: SHRI R.S. SYAL & SHRI S.S. VISWANETHRA RAVI
In this appeal, challenge is laid to the order of the CIT(A)-1, Pune, dated 04-08-2017 in relation to the assessment year 2012-13.
The first and the only substantial ground is against the confirmation of disallowance u/s. 40(a)(i) of the Income-Tax Act, 1961 (hereinafter also called ‘the Act’) in respect of CMA CGM Agencies India Pvt. Ltd., payment of ‘Software Maintenance charges’ amounting to Rs.6,85,69,596/-.
3. The factual matrix of the case is that the assessee, an Indian company, is engaged in the business as shipping agent.
Return was filed declaring total income at Rs.44,86,04,590/-.
The assessee reported certain international transactions in Form No.3CEB. Such transactions included `Payment of Software Maintenance charges’ to CMA CGM, France amounting to Rs.6,85,69,596/-. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determining the Arm’s Length Price (ALP) of the international transactions.
The TPO accepted the international transaction in question at ALP and did not recommend any transfer pricing adjustment.
The AO, vide his order dated 14-03-2016 passed u/s. 143(3) r.w.s. 92CA(4) of the Act observed that the assessee debited Software Maintenance charges at Rs.6.86 crore, which amount was about 400% higher in comparison with the preceding year, in which such Software charges stood at Rs.1.67 crore. The assessee was called upon to give the details of the expenses and further comments as to why no deduction of tax at source was CMA CGM Agencies India Pvt. Ltd., made from such payment. The assessee justified increase in Software services cost by stating that earlier it was using only Ocean Agents Accounting and Reporting Financial Tool provided by CMA CGM, France, its Associated Enterprise (AE) and from this year, it started using two more new Business Reporting tools, viz., LARA and DIVA provided by its AE. On the question as to why no deduction of tax at source was made, the assessee submitted that the amount was not covered either u/s.9(1)(vi) or 9(1)(vii) of the Act and further it was entitled to the benefit under India-France Double Taxation Avoidance Agreement (hereinafter also called ` the DTAA’) read along with Protocol having the Most Favoured Nation (MFN) clause. The AO did not concur with the submissions advanced on behalf of the assessee and held that it paid the said sum for availing IT Support services from its AE, which was not just Maintenance charges as claimed by the assessee.
Relying on the judgment of Hon’ble Karnataka High Court in CIT Vs. Synopsis International Old Ltd. (2013) 212 Taxman 454 (Kar.) it was held that the amount paid by the assessee was chargeable to tax in the hands of recipient as Royalty
CMA CGM Agencies India Pvt. Ltd., u/s.9(1)(vi) of the Act. He further came to hold that the amount paid by the assessee for use of Software was also covered within section 9(1)(vii) of the Act, being, ‘fees for technical services’ in the hands of payee. He further did not accept the contention of the assessee about the grant of the benefit under the DTAA read with the Protocol by observing that the ‘make available’ clause was not defined in the Treaty read with the Protocol. This is how, the addition of Rs.6.85 crore and odd was made. The ld. CIT(A) held the amount to be in the nature of `royalty’ and also ‘fees for technical services’ u/s. 9(1)(vi)/(vii) of the Act. He further did not approve the assessee’s contention of being covered by the DTAA along with the Indo- Portuguese DTAA on the premise that the use of the word ‘or’ between clauses (a) and (b) proved that there was no requirement of fulfilling the conditions stipulated in clause (b) regarding ‘make available’. He, therefore, echoed the disallowance made by the AO u/s. 40(a)(i) of the Act. The assessee is aggrieved by the confirmation of the disallowance.
We have heard the rival submissions and gone through the relevant material on record. The AO proceeded with the issue
CMA CGM Agencies India Pvt. Ltd., by firstly observing that the payment of Software charges made by the assessee for the year was excessive and secondly, it was hit by section 40(a)(i) of the Act for want of non deduction of tax at source. He, however, did not make any disallowance on account of excessive payment and restricted himself only to the disallowance u/s. 40(a)(i) of the Act on the ground that the assessee failed to withhold tax on the payment of Rs.6.85 crore and odd made to its AE, namely, CMA CGM, France. Whereas the case of the assessee is that no deduction of tax at source was warranted, the Revenue has set up a case that the amount was chargeable to tax in India in the hands of the CMA CGM, France and hence the assessee was obliged to deduct tax at source. The rival contentions can be properly appreciated by firstly examining the nature of services availed by the assessee under the respective Agreements for using these Software, namely, LARA & DIVA on one hand and the Ocean on the other.
In so far as services under LARA & DIVA are concerned, both were provided to the assessee under `Lara and Diva IT Agreement’ dated 23-12-2011 effective from 01-01-2011, a CMA CGM Agencies India Pvt. Ltd., copy of which has been placed at page 130 onwards of the paper book. Preamble of the LARA and DIVA IT Agreement states that: `CMA CGM (i.e. the French AE) is a company acting in the maritime transport which operates a fleet of vessels (and notably container ships) over worldwide shipping lines and whereas in order to pursue its business activity, CMA CGM has appointed an international network of agencies in order to render shipping services’. It further provides that :` the Agent (i.e. the assessee in question) is part of this international network of agencies and has been appointed as shipping agent by CMA CGM in order to represent and to provide the latter, in India, with some services regarding transport documentation, commercial, logistics and port operations services’. Not only the preamble of the Agreement, the relevant Articles of the Agreement also reiterate the scope of services in the same terms. Article 2 of the Agreement gives the `Description of the IT services’ separately by LARA and DIVA. In the context of LARA, this Article states that CMA CGM will provide to the assessee any and all IT services which, in turn, grants many
CMA CGM Agencies India Pvt. Ltd., functionalities/modules in order for the assessee to efficiently perform the following operations:-
-Sales - (by using LARA, the assessee described as Agent in the Agreement, will be able to record, clarify and retrieve of the operational data).
-Quotation/Booking - (by using LARA, the assessee will be able to scrutinize more efficiently and standardize its commercial tasks, such as, Quotation requests, Rates Confirmation to customers, Local Tariff Book, Process Booking Information and Manage cross bookings).
-Container Tracking - (LARA will offer modules, manage, supervise and make cost effective any and all logistic services including Managing Equipment Inventory, Managing and release of Empty Equipment, Capture equipment moves and manage pick up for on-hire/drop off.
-Export import documentation (including issuance of invoices to customers).
-Port call reports and Disbursements Accounts (by using LARA, the assessee will easily retrieve, check and set up the reports as concerning booking, confirmation to customer, booking status report and discharge list etc. ).
-Local Interface – (Local Accounting, Customer Manifest, Gate in Gate out moves, Container Load/Discharge order etc.)
CMA CGM Agencies India Pvt. Ltd., -Implementation/Deployment of LARA – (Training of employees on information system; Maintenance of the information system; Development of specific software etc.).
The other part of the Article 2 of the Agreement contains description of services provided under DIVA, which is an Operational Reporting Tool. This Article provides that based on LARA data, DIVA provides simple operation list/reports, decisional pivot table, cube and monitoring tools. The tools provided under DIVA are :
-Booking Forecasts -Operational list of loading, discharge and transshipment -Controlling Reports on Freighting and Invoicing -Control report of Detention and Demurrage -Report for disbursement account checking -Logistics and Tracking reports -Productivity, quality and performance monitoring -Sales activity and commercial reporting
On an overview of the relevant clauses of the LARA and DIVA IT Agreement, it is palpable that LARA and DIVA applications are meant for use by different entities of the CMA
CMA CGM Agencies India Pvt. Ltd., CGM all over the world so as to facilitate the business operations of CMA CGM group, which are confined to shipping. These two applications are basically aimed at facilitating the shipping business operations of the assessee and CMA CGM, France.
Now we turn to the other Agreement for use of Ocean IT System. A copy of such Agreement has been placed at page 141 onwards of the paper book. Preamble of the Ocean IT System Agreement is on the same lines as that of the LARA and DIVA Agreement. It also provides that CMA CGM is a company acting in the maritime transport and as such operates a fleet of freighters and container ships over worldwide shipping lines.
To pursue its business activity, CMA CGM has implemented an international network located within its main ports of call. It further provides that: `The common objective of the parties is to build, deploy and maintain a global group system in order to rationalize and to improve the CMA CGM Group organization as well as reducing its functional costs.’ Similar to the LARA and DIVA IT Agreement, the Ocean IT System Agreement also provides that it is for help in business operations of CMA
CMA CGM Agencies India Pvt. Ltd., CGM, France and its worldwide affiliates. The IT services provided under this Agreement include generic functions, such as, Accounting; Invoicing; Reporting System; Maintenance of the Information System; Development of specific software; Standardization of the Information System and provision of Functional and Technical Documentation etc. This Agreement also provides for IT Support services in the same manner as is under LARA and DIVA, such as, Training of employees, Maintenance of the information system and development of specific software, as may be agreed.
The crux of the factual matrix read with both the Agreements is that CMA CGM, France is a company acting in the maritime transport which operates fleet of vessels over worldwide shipping lines and in order to pursue its business activity, CMA CGM, France has appointed an international network of agencies. The assessee, an Indian entity, is a part of this international network of agencies and has been appointed as shipping agent in order to represent the parent Company in India. It is with a view to enhance the productivity and make the overall business tasks cost effective that CMA CGM,
CMA CGM Agencies India Pvt. Ltd., France got LARA, DIVA and Ocean business operation tools developed and implemented with several CMA CGM Affiliated companies including the assessee.
The authorities below have invoked section 40(a)(i) of the Act for making disallowance of the amount paid by the assessee to CMA CGM, France for the use of LARA, DIVA and Ocean tools. This section provides that no deduction shall be allowed to an assessee in computing the income chargeable under the head `Profits and gains of business or profession’, if any interest, royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India etc. on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139. Section 195 of the Act provides that any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of CMA CGM Agencies India Pvt. Ltd., payment thereof 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 rates in force. Instantly, we are not concerned with any interest payment by the assessee to CMA CGM, France. Thus, section 195 will be attracted only on the assessee paying to CMA CGM, France any ‘sum chargeable under the provisions of this Act’. When we read section 40(a)(i) in juxtaposition to section 195, the position which emerges is that the liability for deduction of tax at source in the hands of the assessee will arise only when the sum paid to CMA CGM, France is chargeable to tax in India in its hands. In case the amount is found to be not chargeable to tax in India, the payment made without deduction of tax at source would not magnetize disallowance u/s 40(a)(i) of the Act.
With the above prefatory remarks, we will examine if the amount paid by the assessee to CMA CGM, France is chargeable to tax in India. It is noted that the assessee made payment to CMA CGM, France in terms of the LARA, DIVA and Ocean IT System Agreements. Article 3 of the LARA and DIVA Agreement deals with `Consideration’ and provides that:
CMA CGM Agencies India Pvt. Ltd., ‘the Agent (i.e. the assessee) agrees to pay a consideration in order to participate to the expenses and costs which have been borne by CMA CGM when implementing and providing these IT services to the Agent.’ It further provides that: ‘Any and all costs related to implementation/deployment of LARA shall be invoiced to the Agent on the basis of the actual costs incurred by CMA CGM for the deployment/implementation of LARA within the organization of the Agent.’ Similar is the position qua the Ocean Agreement. Article 4 of the Ocean Agreement provides that it is a `Cost allocation arrangement’. The AO has not controverted the above averments regarding a mere cost allocation arrangement, albeit these Agreements were before him. In case, the services provided under both the Agreements are on cost sharing basis, meaning thereby, no profit element is embedded in the `consideration’ paid by the assessee to CMA CGM, France, then the amount received will be in the nature of reimbursement of costs in the hands of the French entity. In such a situation of cost-sharing, the receipt will bear no element of income in the hands of the recipient and resultantly the taxability in India of any part of the consideration paid by the CMA CGM Agencies India Pvt. Ltd., assessee to CMA CGM, France will be ruled out, thereby not requiring any deduction of tax at source in terms of section 195 of the Act.
We find that the assessee did not set up a case of reimbursement of costs in the hands of the payee before the authorities below. Notwithstanding the discussion in the foregoing para, we proceed to deal with the situation of the payment made by the assessee having profit element in the hands of the recipient.
We have noted supra that CMA CGM, France is involved in the shipping business. At this stage, let us examine the relevant parts of Article 9 of the DTAA with France, as is applicable to CMA CGM, France, dealing with `Shipping’ income, as under :-
`1. Profits derived by an enterprise of a Contracting State from the operation of ships in international traffic shall be taxable only in that Contracting State. 2. Notwithstanding the provisions of paragraph 1, such profits may be taxed in the other Contracting State from which they are derived provided that the tax so charged shall not exceed :
CMA CGM Agencies India Pvt. Ltd., (a) during the first five fiscal years after the entry into force of this Convention, 50 per cent, and (b) during the subsequent five fiscal years, 25 per cent, of the tax otherwise imposed by the internal law of that Contracting State. Subsequently, only the provisions of paragraph 1 shall be applicable. 3. …..
4. For the purposes of this article interest arising on funds connected with the operation of ships in international traffic shall be regarded as profits derived from the operation of such ships, and the provisions of Article 12 shall not apply in relation to such interest.’
Para 1 of the DTAA states that the profits derived by an enterprise of a Contracting State (France) from the operation of ships in international traffic shall be taxable only in that Contracting State of which the enterprise is resident (France).
Thus, any profits and gains derived by an enterprise from the operations of ships in the hands of CMA CGM, France is not chargeable to tax in India in terms of para 1 of Article 9.
Para 2 opens with a non-obstante clause and provides that profits from operation of ships may be taxed in the other Contracting State (India) from which they are derived provided that the tax so charged shall not exceed 50% during the first
CMA CGM Agencies India Pvt. Ltd., five fiscal years after the entry into force of this Convention and 25% during the subsequent five fiscal years. This para further provides that: ‘Subsequently, only the provisions of paragraph 1 shall be applicable’. The DTAA with France came into force in 1994. The period of 10 years as per clauses (a) and (b) of para 2 of Article 9 came to an end in the year 2004. The assessment year under consideration is 2012-13. Hence the prescription of clauses (a) and (b) shall not apply and the case will be governed by the latter part of para 2 of Article 9, which provides that after the period of 10 years, `only the provisions of paragraph 1 shall be applicable’, meaning thereby, that profits derived by an enterprise of France from operation of ships in the international traffic shall be taxable only in that Contracting State of which the enterprise is resident (France).
On a conjoint reading of paras 1 and 2 of the Article 9, it becomes evident that profits derived by CMA CGM, France from operation of ships during the year will not be chargeable to tax in India.
CMA CGM Agencies India Pvt. Ltd.,
Now, let us proceed to determine the nature of the instant income earned by CMA CGM, France from the assessee. We have seen above the contents of the LARA & DIVA and the Ocean Agreements, which chiefly deal with the provision of services which are in the nature of sales, quotation/booking, container tracking, export import documentation, port call reports etc. CMA CGM, France is a company acting in the maritime which operates a fleet of vessels over worldwide shipping lines. In order to pursue its business activities, CMA CGM, France appointed its affiliates for the other countries.
The assessee in question is one of such affiliates, who is looking after Indian operations of CMA CGM, France. The provision of the software by CMA CGM, France to its worldwide entities is mainly aimed at facilitating its shipping business. If that be the position, then the amount received by CMA CGM, France from the assessee will assume the character of profit derived from the operation of ships as it is inextricably linked with its shipping activity.
The Mumbai Bench of the Tribunal in A.P. Moller Maersk Vs. DDIT (IT) (2013) 33 taxmann.com 44 (Mumbai)
CMA CGM Agencies India Pvt. Ltd., (Trib.) considered a case in which the assessee, a non-resident, was engaged in the business of shipping. In the course of its international shipping business, the assessee received certain amount from MIPL, LIL and SIPL on account of cost shared cost of global tracking system which was considered as linked to the shipping income. The AO held such amount to be Royalty/Fees for technical services. The Tribunal upheld the action of the CIT(A) in treating the amount as profit derived from operation of ships. Eventually, when this matter came up before the Hon’ble Supreme Court in DIT Vs. A.P. Moller Maersk (2017) 392 ITR 186 (SC), their Lordships held that the High Court was correct in holding that the income from the use of Global Telecommunication Facility called 'Maersk Net' was income arising out of shipping business and not as `Fees for technical services’. In reaching this conclusion, the Hon’ble Supreme Court noted that the communication system in question was an integral part of shipping business which was allowed use by Agents in order to enable them to discharge their role more effectively.
CMA CGM Agencies India Pvt. Ltd.,
On a consideration of the gamut of facts instantly obtaining before us, in the hue of the decision of the Hon’ble Supreme Court in the case of A.P. Moller Maersk (supra), it becomes graphically clear that CMA CGM, France received the amount from the assessee in order to facilitate its shipping business. As such, the amount will rightly qualify as profit derived from shipping business in the international traffic.
We fortify our view further with the assistance of para 4 of Article 9 of the DTAA, which states that : `For the purposes of this article interest arising on funds connected with the operation of ships in international traffic shall be regarded as profits derived from the operation of such ships, and the provisions of Article 12 shall not apply in relation to such interest.’ This para explicitly provides that interest arising on funds connected with the operation of ships shall be regarded as profits derived from the operation of such ships, and such interest will be dealt with as per Article 9 and not Article 12 (which specifically deals with Interest income). Thus, it is ostensible that an item of income, which is not only directly connected with the shipping business but also indirectly
CMA CGM Agencies India Pvt. Ltd., connected with the shipping business, such as, interest on funds connected with the operation of ships, has also been understood as profits derived from shipping business under the DTAA. When we examine the nature of income of CMA CGM, France under consideration, it becomes unequivocal that the same, being, directly concerned with the operation of ships, cannot be considered as anything other than profits derived from operation of ships and hence covered under Article 9 of the DTAA. As such, it would not magnetize any taxation in the hands of CMA CGM, France. Ex-consequenti, there will be no obligation on the part of the assessee to deduct tax at source and the fortiori is that there will not be any disallowance u/s.40(a)(i) of the Act.
Now let us examine the case from the perspective of the authorities below, whereby it has been held that the amount paid/payable by the assessee on this count is royalty and fees for technical services under the Act and the DTAA does not come to the rescue of the assessee.
CMA CGM Agencies India Pvt. Ltd.,
On going through the above clauses of the Agreements for which the assessee paid Software Maintenance charges, it emerges that two types of services were availed by the assessee.
First and the foremost is the assistance in carrying out the business operations, such as, in sales, quotation/booking, container tracking, export import documentation and disbursements of accounts. The second, which is a small part of the overall amount, concerns with the maintenance of the information system of LARA & DIVA and Ocean. The authorities below have held that the amount paid by the assessee is not only `royalty’ towards use of software but also ‘fees for technical services’. Impliedly they have referred to the payment made towards maintenance of software as ‘fees for technical services’ and for carrying out other business operations, as ‘Royalty’.
Section 9(1)(vi) of the Act deals with taxation of income by way of `royalty’. It provides that the `royalty’ will be taxed if it is payable in respect of any right, property or information used or services utilized. Explanation 2 gives the definition of CMA CGM Agencies India Pvt. Ltd., the term ‘royalty’. Explanation 4, which is relevant for our purpose, reads as under:-
`For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred.’
On going through the mandate of the Explanation 4, which has been inserted by the Finance Act, 2012 w.r.e.f.
01-06-1976, it clearly emerges that rights in respect of any right, property or information shall include transfer of all or any right for use of a computer software including granting of a licence. The hitherto controversy about the payment for a copyrighted article whether amounting to Royalty or not has been set at rest with the Explanation 4 read with Explanation 5 to make it clear that even granting of a license of a computer software would constitute `Royalty'. Thus, there remains no issue about the taxability of income from computer software in any form as constituting royalty under the Act.
However, it is relevant to note that instantly we are not primarily concerned with the taxability or non-taxability of CMA CGM Agencies India Pvt. Ltd., income from computer software in the hands of the recipient, but the making of disallowance u/s. 40(a)(i) of the Act in the hands of the payer on the ground that it failed to deduct the tax at source from the payment made for use of software.
Notwithstanding the discussion made above, even if, for a moment, we accept the point of view of the Revenue, with which we actually do not agree, that the amount in question constitutes royalty income of CMA CGM France, still non- deduction of tax at source by the assessee in a period anterior to the actual insertion of the Explanation 4 cannot trigger disallowance because the amendment has been brought in by the Finance Act, 2012, which, in normal circumstances, would have been effective from financial year starting from 01-04-2012. As the assessment year under consideration is 2012-13 with the corresponding financial year from 2011-12, the assessee at the material time could not have anticipated that a future provision would make the income chargeable to tax retrospectively in the hands of the payee thereby mandating it to deduct tax at source. Even if this insertion is retrospective, it cannot take the hands of clock back in time in so far as the CMA CGM Agencies India Pvt. Ltd., deduction of tax at source is concerned since the time for deduction of tax at source stood expired before the insertion of the Explanation 4. With the retrospective insertion of the Explanation 4 by the Finance Act, 2012, the amount may become chargeable to tax in the hands of the recipient subject to other provisions, but certainly it cannot cast an obligation on the payer to deduct tax at source during the period in which the Explanation 4 was actually not there on the statute. It is axiomatic that law cannot require an impossible to be complied with. Resultantly, it is held that the retrospective insertion of Explanation 4 to section 9(1)(vi) cannot necessitate tax withholding during the period when the provision was actually not a part of the enactment, so as to warrant disallowance u/s 40(a)(i) of the Act.
At this stage, it would be relevant to note that section 90(1) of the Act provides that the Central Government may enter into an agreement with the Government of any other country for the granting of relief of tax in respect of income on which tax has been paid in two different tax jurisdictions. Sub- section (2) of section 90 unequivocally provides that where the CMA CGM Agencies India Pvt. Ltd., Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax or for avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, 'the provisions of this Act shall apply to the extent they are more beneficial to that assessee’. Crux of the sub-section (2) is that where a DTAA has been entered into with another country, then the provisions of the Act shall apply only if they are more beneficial to the assessee. In simple words, if there is a conflict between the provisions under the Act and the DTAA, the assessee will be subjected to the more beneficial provision out of the two, as has been held by the Hon’ble Supreme Court in CIT v. P.V.A.L. Kulandagan Chettiar (2004) 267 ITR 654 (SC) and the Hon’ble jurisdictional High Court in CIT v.
Siemens Aktiongesellschaft (2009) 310 ITR 320 (Bom.).
Having seen the position under the Act, now we proceed to examine the position under the DTAA with France. Article 13 of the DTAA deals with: `Royalties and Fees for Technical Services and Payments for the use of Equipment.’ It is not the case of the AO that the amount paid by the assessee is in the CMA CGM Agencies India Pvt. Ltd., nature of `Payment for the use of equipment’. The case set up by the AO is that the payment is in the nature of royalties and fees for technical services.
Para 1 of the Article 13 states that royalties and fees for technical services arising in a Contracting State (India) and paid to a resident of the other Contracting State (France) may be taxed in that other Contracting State (France). Para 2 provides that royalties and fees may also be taxed in the Contracting State in which they arise (India) and according to the laws of that Contracting State (India). Going by the mandate of para 2, royalties and fees for technical services paid by an Indian enterprise to a French enterprise can also be taxed in the hands of the French enterprise in India. However, what is material for consideration is the definition of `royalties’ and `fees for technical services’ as given in the Article 13, which is as under:-
The term "royalties" as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for CMA CGM Agencies India Pvt. Ltd.,
information concerning industrial, commercial or scientific experience. 4. The term "fees for technical services" as used in this Article means payments of any kind to any person, other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 15, in consideration for services of a managerial, technical or consultancy nature.
Para 3 of Article 13 clearly provides that the term `Royalties’ means a consideration for the use of or the right to use any copyright of literary, artistic or scientific work etc.
What is relevant in the phraseology of para 3 is that in order to qualify as `Royalties’ under the DTAA, it is necessary that the payment should be a consideration for use of any copyright and not copyrighted article. If an assessee is allowed to use a software product, the payment for the same would not fall within the expression consideration for the use of ‘any copyright’. It is only when the assessee is allowed to copyright the literary, artistic or scientific work etc. that the same would call for inclusion within the meaning of para 3 of the Article 13.
CMA CGM Agencies India Pvt. Ltd.,
Let us visit the Agreements for ascertaining as to what the assessee was allowed to do with the software. Article 6 of the LARA and DIVA Agreement, which is material for our purpose at this stage, reads as under :
“CMA CGM warrants that it is the legitimate owner of all intellectual property rights necessary to the performance of its obligations under this Agreement. No property title or interest owned by CMA CGM shall be transferred to the Agent with regards to any software licensed or developed under this Agreement by CMA CGM, even if developed specifically for the Agent, nor to any other intellectual property rights owned by CMA CGM. Rights granted to the Agent shall be limited to a licence to use the software for its sole business needs, with no rights to sublicense whatsoever. The Agent shall not attempt or permit to decompile or reverse-engineer any software licensed under this Agreement.”
Article 7 of the Ocean Agreement with the Caption: ` Intellectual Property Rights’, reads as under :
“CMA CGM warrants that it is the legitimate owner of all intellectual property rights necessary to the performance of its obligations hereunder. No property title or interest owned by CMA CGM shall be transferred to the Affiliated Company with regards to any software licensed or developed under this agreement by CMA CGM, even if developed specifically for Affiliated Company, nor to any other intellectual property rights owned by CMA CGM. Rights granted to the Affiliated Company shall be limited to a license to use the software for its sole business needs, with no rights to sublicense whatsoever. The Affiliated
CMA CGM Agencies India Pvt. Ltd.,
Company shall not attempt or permit to decompile or reverse-engineer any software licensed under this Agreement.”
On going through the above clauses of the Agreements, it is vivid that the assessee was allowed the use of the software for its own business purpose and there was no permission to sub-licence the same. There is a specific bar on the assessee in not sub-licensing the software, which were to be used for its sole business needs. In other words, the consideration was for the use of software for its own business purpose and not for the use of, or the right to use, any copyright of software. As the consideration payable by the assessee for use of LARA, DIVA and Ocean was only for the use of the software for its own business purpose and not having right to copyright, the same will not constitute ‘Royalties’ within Article 13(3) of the DTAA.
Even if for a moment, we presume that the amount is chargeable to tax in the hands of the CMA CGM, France as royalty u/s 9(1)(vi) of the Act with the assistance of Explanation 4, as urged by the ld. DR, the same would escape
CMA CGM Agencies India Pvt. Ltd., taxation in terms of the DTAA because the parallel of Explanation 4 to section 9(1)(vi) is not a part of the DTAA. We have noted above that on the plain language of section 9(1)(vi) de hors the effect of Explanation 4, the consideration does not fall in the realm of `royalty’.
Now we turn to the `Maintenance charges’ of the software paid by the assessee, which have been impliedly treated by the authorities below as `fees for technical services’ u/s 9(1)(vii) of the Act as well as the DTAA. Though there is no separate quantification of such an amount, but the same is a part of the overall consideration as per the Agreements.
Section 9(1)(vii) deals with income by way of `fees for technical services’. Explanation 2 gives definition of `fees for technical services’ to mean any consideration for the rendering of any managerial, technical or consultancy services. As the maintenance of software is in the nature of a technical service, it is held that the same is covered u/s. 9(1)(vii) of the Act.
CMA CGM Agencies India Pvt. Ltd.,
Reverting to the DTAA, it is seen that para 4 of the Article 13 deals with `fees for technical services’. In the present context, it provides that the term "fees for technical services" means consideration for services of a managerial, technical or consultancy nature. Thus, the definition of `fees for technical services’ in the present context given in the DTAA is almost similar to that used in Explanation 2 to section 9(1)(vii) of the Act, going by which the software maintenance charges fall within the ambit of `fees for technical services’.
However, it is significant to note that a Protocol has been appended to the DTAA. Para 7 of the Protocol is relevant for our purpose, which reads as under:-
`In respect of Articles ... 13 (Royalties, fees for technical services and payments for the use of equipment), if under any Convention, Agreement or Protocol signed after 1st Sept., 1989, between India and a third State which is a member of the OECD, India limits its taxation at source on … royalties, fees for technical services …. to a rate lower or a scope more restricted than the rate of scope provided for in this Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items income shall also apply under this Convention, with effect from the date on which the present Convention or the relevant Indian Convention, Agreement or Protocol enters into force, whichever enters into force later.’
CMA CGM Agencies India Pvt. Ltd.,
The above para contains the Most Favoured Nation (MFN) clause in the DTAA between India and France, which seeks to provide that if India, after 1.9.1989, has limited, inter alia, its scope of fees for technical services in a DTAA with any other OECD country, then such limited scope shall stand substituted in the DTAA with France. Portuguese Republic is a member of the OECD with which Indian has entered into a DTAA on 30.4.2000. The term ‘fees for included services’ has been defined in the Article 12(4) of the DTAA between India and Portuguese, which reads as under : -
`For the purposes of this Article "fees for included services" means payments of any kind, other than those mentioned in Articles 14 and 15 of this Convention, to any person in consideration of the rendering of any technical or consultancy services (including through the provisions of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received, or …. (b) make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design which enables the person acquiring the services to apply the technology contained therein.’
The ld. CIT(A) has discussed this aspect on page 22 onwards of the impugned order. He found that the word `or’
CMA CGM Agencies India Pvt. Ltd., and not the word `and’ has been used between the clauses (a) and (b) of Article 12(4) of the DTAA with Portuguese. He held the case of the assessee to be falling under clause (a). Thus it is seen that the ld. CIT(A) admitted that the clause (b) is not attracted to the facts of the instant case because CMA CGM, France did not make available any technical knowledge, experience or skill etc. to the assessee. In so far as clause (a) is concerned, it talks of any payment for services which are ancillary and subsidiary to the application or enjoyment of the right, property or information for which payment described in paragraph 3 is received. It is only if the services ancillary to the enjoyment of right, property or information as per para 3 are availed that they will fall within the ambit of `fees for included services’. Para 3, in turn, defines the term ‘Royalties’ to mean :
`payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work ….’. To this extent, the definition of `royalties’ as per the DTAA with Portuguese is similar to that given under section 9(1)(vi) of the Act in as much as it also talks of `consideration for the use or, or the right to use, any copyright
CMA CGM Agencies India Pvt. Ltd., of literary, artistic or scientific work..’ . While discussing the Royalty aspect under the Act supra, we have held that payment for use of software made by the assessee to CMA CGM, France does not satisfy the requirement of `use of, or the right to use, any copyright of software’. Once it is held that para 3 of Article 12 is not attracted, as a sequitur, the application of clause (a) of para 4 of Article 12 of the DTAA with Portuguese would automatically be ousted, thereby making the amount of Rs.6.85 crore paid by the assessee to CMA CGM, France for use of LARA, DIVA and Ocean software as immune from taxation in India. Going by the beneficial provision in the DTAA vis-à-vis the Act, it is held that there was no requirement on the part of the assessee to deduct tax at source which should have called for any disallowance u/s.40(a)(i) of the Act. We, therefore, order to delete the addition.
Ground No. 6 is against the granting of correct amount of credit of TDS by the AO. The AO is directed to verify the amount of TDS and allow appropriate credit as per law.
Grounds regarding levy of interest u/ss. 234B and 234C are consequential and hence allowed.
CMA CGM Agencies India Pvt. Ltd.,
In the result, the appeal is allowed.
Order pronounced in the Open Court on 02nd January, 2020.
Sd/- Sd/- (S.S. VISWANETHRA RAVI) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; �दनांक Dated : 02-01-2020 सतीश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत आदेश आदेश अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. 3. The CIT(A)-1, Pune 4. The Pr. CIT -1, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे 5. “सी” / DR ‘C’, ITAT, Pune गाड� फाईल / Guard file 6.