M/S. INFOSYS BPO LIMITED,BANGALORE vs. THE DEPUTY COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION, CIRCLE-1(1), BANGALORE

Since the assessee paid taxes on the amounts payable to the non- resident after grossing up and since the assessee has prayed for declaration that payments made to non-resident were not chargeable to tax under the Act, the assessee filed appeal u/s.248 of the Act directly before CIT(A) and hence there will be no order of the AO in such cases. The CIT(A) in the appeal filed by the assessee u/s.248 of the Act, was of the view that the payment in the form of training, fees fall within the ambit of definition of FTS under the Act and is taxable in India.

In this appeal before the Tribunal, the learned Counsel for the assessee filed before us a list of decisions wherein it has been held that payment for training services does not amount to FTS under the Act.

In addition to the above, learned Counsel for the assessee placed strong reliance on the decision of the Hon’ble Delhi High Court in the case of Director of Income Tax (International Taxation) Vs. Panalfa Autolectrick Ltd. [2014 49 taxmann.com 412 (Delhi). It was a case where the Court had to decide whether commission paid to a non- resident for procuring export order could be regarded as FTS. The Hon’ble Delhi High Court while rendering its decision that the payment could not be taxed as FTS has referred to OECD Report on e- commerce titled Tax Treaty Charaterization Issues arising from e- commerce, wherein the nature of FTS in the context of has been discussed. It was clarified by the learned Counsel for the assessee that in the present appeal, the training was provided by the non-resident through online. The paper book filed by the assessee contains quotation given by the non-resident. The nature of the service to be provided by the non-resident is described as “Leadership Growth Progress Review” mini survey. The Purchase order given by the assessee to the non-resident has the description of the service as “Fee, Training for Soft Skills” – Leadership Growth Progress Review Mini Survey. Admittedly the non-resident does not have a Permanent Establishment or any presence in India and is a tax resident of Hong Kong. The nature of remittance as described in Form No.15CB by the Chartered Accountant before effecting remittance has the following IT(IT)A No.989/Bang/2017 Page 6 of 18 description, viz., ‘TRAIN-THE COACH CERTIFICATION WORKS”. It is thus clear that the nature of services is impart training in developing leadership skills. The business of the Assessee is rendering BPO services and in rendering those services, the leadership skills imparted by the non-resident would not or cannot be used. It is in this context that the OECD Report on e-commerce titled Tax Treaty Charaterization Issues arising from e-commerce, wherein the nature of FTS in the context of has been discussed, becomes relevant.

The OECD commentary referred to by the Hon’ble Delhi High Court states as follows:

The fact that technology is used in providing a service is not indicative of whether the service is of a technical

In that respect, it is crucial to determine at what point the special skill or knowledge is used. Special skill or knowledge may be used in developing or creating inputs to a service business. The fee for the provision of a service will not be a technical fee, however, unless that special skill or knowledge is required when the service is provided to the customer. For example, special skill or knowledge will be required to develop software and data used in a computer game that would subsequently be used in carrying on the business of allowing consumers to play this game on the internet for a fee. Similarly, special skill or knowledge is used to create a troubleshooting database that customers will pay to access over the Internet. In these examples, however, the relevant special skill or knowledge is not used when providing the service for which the fee is paid, i.e. allowing the consumer to play the computer game or consult the troubleshooting database.

Many categories of e-commerce transactions similarly involve the provision of the use of, or access to, data and software (see, for example, categories 7, 8, 9, 11, 13, 15, 16, 20 and 21 in annex 2). The service of making such data and software, or functionality of that data or software, available for a fee is not, however, a service of a technical nature. The fact that the development of the necessary data and software might itself require substantial technical skills is irrelevant as the service provided to the client is not the development of that data and software (which may well be done by someone other than the supplier) but rather the service of making the data and software available to that client. For example, the IT(IT)A No.989/Bang/2017 Page 8 of 18 mere provision of access to a troubleshooting database would not require more than having available such a database and the necessary software to access it. A payment relating to the provision of such access would not, therefore, relate to a service of a technical nature. Managerial services 43. The Group considers that services of a managerial nature are services rendered in performing management functions. The Group did not attempt to give a definition of management for that purpose but noted that this term should receive its normal business meaning. Thus, it would involve functions related to how a business is run as opposed to functions involved in carrying on that business. As an illustration, whilst the functions of hiring and training commercial agents would relate to management, the functions performed by these agents (i.e. selling) would not.

The comments in paragraphs 40 to 42 above are also relevant for the purposes of distinguishing managerial services from the service of making data and software (even if related to management), or functionality of that data or software, available for a fee. The fact that this data and software could be used by the customer in performing management functions or that the development of the necessary data and software, and the management of the business of providing it to customers, might itself require substantial management expertise is irrelevant as the service provided to the client is neither managing the client‟s business, managing the supplier‟s business nor developing that data and software (which may well be done by someone other than the supplier) but rather making the software and data available to that client. The mere provision of access to such data and software does not require more than having available such a database and the necessary software. A IT(IT)A No.989/Bang/2017 Page 9 of 18 payment relating to the provision of such access would not, therefore, relate to a service of a managerial nature. Consultancy services 45. For the Group, "consultancy services" refer to services constituting in the provision of advice by someone, such as a professional, who has special qualifications allowing him to do so. It was recognised that this type of services overlapped the categories of technical and managerial services to the extent that the latter types of services could well be provided by a consultant." We broadly agree with the aforesaid observations. However, in the case of selling agents, we add a note of caution that taxability would depend upon the nature of the character of services rendered and in a given factual matrix, the services rendered may possibly fall in the category of consultancy services. Paragraphs 41 and 42 do not emanate for consideration in the present case, and effect thereof can be examined in an appropriate case [However, see Commissioner of Income Tax vs. Estel Communication P. Ltd. (2009) 318 ITR 185 (Del) and Skycell Communications Ltd. (supra)].

Thus, the technical services consists of services of technical nature, when special skills or knowledge relating to technical field are required for their provision, managerial services are rendered for performing management functions and consultancy services relate to provision of advice by someone having special qualification that allow him to do so. In the present case, the aforesaid requisites and required necessities are not satisfied. Indeed, technical, managerial and consultancy services may overlap and it would not be proper to view them in water tight compartments, but in the present case this issue or differentiation is again not relevant.”

His submission was that the training in soft skills could not fall either within the term ‘technical, managerial or consultancy services’. He pointed out that the services rendered by non-resident cannot be termed as consultancy service. The fact that technology is used in providing a service is not indicative of whether the service is of a technical nature. Similarly, the delivery of a service via technological means does not make the service technical. Special skill or knowledge may be used in developing or creating inputs to a service business. The fee for the provision of a service will not be a technical fee, however, unless that special skill or knowledge is required when the service is provided to the customer. He submitted that the employees developing leadership skill through service provided by the non-resident do not use such knowledge when they provide BPO service to the customers of the Assessee and hence, the services rendered cannot be regarded as technical service. The service cannot be regarded as managerial service because the service rendered by the non-resident does not teach the employees of the Assessee how the business has to be run but relates only developing leadership skills and hence the service provided by the non-resident cannot be regarded as managerial services. It cannot be regarded as consultancy service also because provision of advice by someone, such as a professional, who has special qualifications allowing him to do so, would be consultancy service but imparting training in leadership skills cannot be said to be providing advice by a professional.

Learned DR placed reliance on the following decisions and submitted that the services were in the nature of FTS and were rightly brought to tax by the CIT(A). In this regard, he referred to decisions where Tribunal has held that fees paid to non-residents for training services were held to be not taxable under DTAA. According to him, it is implicit in these decisions that the sum paid for providing training services is taxable under the Act, as otherwise, there was no occasion for tribunal to examine taxability under the DTAA, unless it is taxable under the Act. The decisions referred to by the learned DR, were as follows :

We have carefully considered the rival submissions. At the outset, we may deal with the argument of the learned DR that the decisions cited by him, implicitly hold that training fees is taxable under the Act. We do not think that the argument has no any force, because when there is a DTAA between India and the country of which the payee is a tax resident, the taxability has to be analyzed only from the definition of FTS as per the relevant DTAA and the definition in the Act, because irrelevant. Therefore, the fact that the tribunal has examined the payment from the terms of the treaty defining FTS, it does not follow that the Tribunals have held that training fee is taxable under the Act.

We agree with the contention of the learned counsel for the assessee that the nature of service rendered by the non-resident in the present case is neither in the nature of technical, managerial or consultancy service as defined under the Act. In this regard, the submissions made and the nature of service rendered in the present case, clearly shows that the services rendered by non-resident cannot be termed as technical service for the mere reason that technology is used in providing service. The delivery of a service via technological means does not make the service technical. Special skill or knowledge

In the decision cited by the learned counsel for the assessee in the case of Ershisanye Construction Group India (P) Ltd. (supra), the tribunal had to deal with taxability of training fee paid to non-resident, being a tax resident of Republic of China. The definition of FTS under the DTAA between India and China and under the Act was identical. The Tribunal dealt with the issue as follows:

The question whether training expenses would constitute FTS was considered by the Tribunal Mumbai in the case of Lloyds Register Industrial Services (India) Pvt.Ltd. (2010) 36 SOT 293 (Mumbai). The Mumbai Bench held that going by common sense training expenses cannot be called as "fee for technical services". The Mumbai Bench went on to hold that even highly qualified personnel might require training to carry out the job for which they are recruited and the person imparting training cannot be said to be rendering technical, managerial or consultancy service. It was held that such training was a continuous process because technology is changing very fast and one needs to keep touch with such technology and therefore, expenses incurred towards training cannot be termed as "fee for technical services". In the case of Cosmic Global Ltd., 48 taxmann.com 365 (Chennai.Trib), the question for consideration was as to whether an Assessee who got translation of the text from one language to another could be said to be rendering Technical service. The Chennai Bench of the Tribunal held that ■ The expression "technical services" has not been defined anywhere in the Act. However, "fees for technical services" has been defined in Explanation 2 to section 9(1)(vii). [Para 7] ■ In the present case, the assessee is getting the translation of the text from one language to another. The only requirement for IT(IT)A No.989/Bang/2017 Page 16 of 18

The decisions rendered as above, clearly support the plea of the assessee the sum paid to non-resident cannot be regarded as FTS within the meaning of Sec.9(1)(vii) of the Act and cannot be taxed in the hands of the non-resident in India. Consequently, the assessee would be entitled to grant of refund of taxes paid together with interest thereon as per law. In view of the above conclusion, the question of rate of tax to be deducted on payments made to non-resident in terms of Sec.206AA of the Act becomes academic and hence not adjudicated.

In the result, appeal by the assessee is allowed.