ATOS INFORMATION TECHNOLOGY SINGAPORE PTE. LTD.,MUMBAI vs. D.C.I.T. (INTERNATIONAL TAXATION) RANGE - 1(1)(2), MUMBAI

In these appeals the assessee, basically, has called into question the taxability of certain amount received from the Indian subsidiary, as royalty or/and fees for technical services (FTS). Of course, assessee has raised couple of more issues besides the main issue. Since, facts relating to the disputed issues are common in both the appeals, except, variation in figures, for the sake of brevity we will deal with the facts in ITA No. 7144/Mum/2018.

As far as the main issue of taxability or otherwise of certain amount received as royalty or/and FTS is concerned, relevant facts are, the assessee is a company incorporated in Singapore and is also a tax resident of that country. As stated by the assessing officer, during the year under consideration the assessee had provided certain services to its group concern in India, viz. Atos India Pvt Ltd (Atos India) and received payment. The details of services rendered and payment received are as under:- 1. Project related services pertaining to Nokia Siemens Project Rs.1,41,70,645/-

It is also a fact on record, the aforesaid services are provided to Atos India in pursuance to agreements executed between them.In the return of income filed for the impugned assessment year, the assessee did not offer the payment noted

Assessee challenged the aforesaid decision before learned DRP. After considering the submissions of the assessee, in the context of facts and materials on record, learned DRP observed that each of the services rendered by the assessee are of distinctly different type; hence, cannot be clubbed together to determine their character. Learned DRP observed, the assessee has not made any effort to substantiate how various services rendered would not fall within the category of royalty/FTS with reference to the provisions of India-Singapore DTAA. Having so observed, the learned DRP went on to analyse and examine each of the services rendered by the assessee and observed that while rendering managed services, the assessee provides entire server hosting services and carries out support services of the server for enabling efficient and secured availability of server. They observed, the managed servers are leased out to the service recipient and is in control and possession of the lessee for all practical purposes. They observed, the provision of hosting service inherently involves use of assessee’s hardware and software by the person who has rented the server. The access and control over the server are with the user and the assessee is merely required to ensure 24 hours availability of the server. While coming to such conclusion, learned DRP referred to certain information available in web. Thus, learned DRP concluded that the assessee provides equipment and associated software and services to manage the equipment, hence, such services clearly fall within the ambit of section 9(1)(vi) read with Explanation 4(a) as well as Article 12(3)(b) of the India-Singapore DTAA.

As far as project related services relating to Nokia Siemens projects and Standard Chartered Bank project, learned DRP observed, the assessee practically provides all the managed services relating to maintenance of servers of Atos India. Further, the assessee also provides access to its specialized software and application. Therefore, such right to use granted to Atos India falls within the ambit of royalty under Article 12(3) of the India-Singapore DTAA as it amounts to right to use literary, scientific or artistic work. Thus, ultimately, the learned DRP approved the decision of the assessing officer in treating the amount received from managed services and project related services royalty and FTS.

Insofar as cost recharge pertaining to salary of employee, viz. Thomas Boutard, learned DRP observed that the assessee did not provide the exact nature of services rendered by the said person. However, considering the submissions of the assessee that the said employee has provided assistance for finalization of annual accounting results of Atos India, learned DRP concluded that the person concerned has imparted technical knowledge, experience or skill to the employees of Atos India which would enable the employees to render the task in future without his assistance. Therefore, the amount received towards cost recharge is in the nature of FTS under Article 12(4) of the India-Singapore DTAA. Accordingly, learned DRP upheld the decision of the assessing officer in this regard. 8. Drawing our attention to the details of various services rendered by the learned Counsel for the assessee submitted, the project related service pertaining to Nokia Seimens project are in the nature of data service centre and windows services. Similarly, project related services pertaining to Standard Chartered Bank project are in the nature of managed services which require the employees of the I.T.As. No.7144/Mum/2017 & 5744/Mum/2018 6 assessee to remotely maintain and monitor the servers and computer equipments. Further, the assessee is required to manage databases and carry out overall monitoring activity. The third kind of services provided in this project is service delivery management and support which includes timely delivery and problem resolution to the customers of Atos India. As far as the other projects are concerned, the assessee provided service in the nature of server hosting services and database management service. Thus, the learned Counsel submitted, the core activity of the assessee is to provide data centre/managed services to Atos India, which essentially are in the nature of Information Technology (IT) infrastructure management and mailbox hosting services to Atos India. He submitted, all these services are performed by assessee’s employees in Singapore and from the data centers located in Singapore. To support his contention regarding the nature of services provided by the assessee, the learned Counsel drew our attention to certain documents placed in the paper book, stated to be the agreement executed for Nokia Seimens project and Standard Chartered Bank project. Referring to these documents, the learned Counsel submitted, the services rendered by the assessee cannot be termed as royalty.

Drawing our attention to Article 12(3) of the India Singapore DTAA, he submitted, while providing data centre / managed services, the assessee has not transferred any information concerning industrial, commercial or scientific experience. Further, he submitted, the assessee has also not allowed use or transferred any right to use of any copyright of a literary, artistic or scientific worth including cinematograph films or films or tapes used for television or radio broadcasting, any patent, trademark, design or model, plan, secret formula or process.

Further, drawing our attention to the agreement with Atos India relating to Standard Chartered Bank, the learned Counsel submitted, the ownership of intellectual property right remains always with the assessee and nothing is transferred to Atos India. He submitted, it cannot also be said that the assessee has allowed use or right to use of any industrial, commercial or scientific equipment. He submitted, while providing data centre services / managed hosting services with the help of sophisticated, scientific equipment viz. servers, neither Atos India nor any other party has any independent right to use it. It is only the assessee, who uses the equipment for rendering services. Thus, he submitted, the payment received for managed services and project related services cannot come within the purview of royalty under Article 12(3) of the tax treaty. In support of such contention he relied upon the following decisions:- 1. DCIT vs Suvvis Communictions Corporation 158 ITD 750 (Mum)

As regards the decision of the departmental authorities that the payment can also be regarded as FTS, the learned Counsel drawing our attention to Article 12(4) of the tax treaty submitted, while rendering project related services and managed services, the assessee has not made available any technical knowledge, experience, skill, know-how or process which would enable Atos India to apply the technology contained therein independently. Therefore, he submitted, the payment cannot be regarded as FTS under Article 12(4) of the tax treaty. In support of such contention, he relied upon the following decisions:-

As regards the cost recharge pertaining to the salary of Mr. Thomas Boutard, the learned Counsel reiterating the stand taken before the departmental authorities submitted, the amount received cannot be treated as FTS. He submitted, the concerned person has assisted Atos India in consultation and finalization of accounts. While doing so, he has not made available any technical knowhow to Atos India’s employees which can be used by Atos India independently. He submitted, this can be ascertained from the fact that in future years also, though, the assessee had received payment towards assistance provided to Atos India by Mr. Thomas Boutard, the assessing officer has not made any addition. Thus, he submitted, the amount received cannot be treated as FTS. For such proposition, assessee has relied upon the decision of Hon’ble jurisdictional High Court in case of Diamond Services International P Ltd vs UOI (supra).

The learned Departmental Representative submitted, the payment received by the assessee for various services rendered is clearly in the nature of royalty and FTS. In this context, he specifically referred to various observations of learned DRP. Further, he submitted, the terms “royalty & FTS” have to be interpreted as per the laws of the contracting state wherein they arise. That being the case, he submitted, the provisions of section 9(1)(vi) and 9(1)(vii) would apply. Referring to the aforesaid provisions, the learned Departmental Representative submitted, the payment received by the assessee squarely falls within the ambit of royalty & FTS as per the provisions of the Act.

Without prejudice, he submitted, even going by the treaty provisions, the amount received would be taxable in India, as by virtue of an amendment to the India Singapore DTAA in 2005, royalty & FTS can also be taxed in the contracting state wherein they arise and according to the laws of that contracting state, subject to the condition that if the recipient is the beneficiary of royalty or FTS, the tax to be charged will not exceed 10%. Thus, he submitted, the provisions of Income-tax Act relating to royalty & FTS including the clarificatory amendment have to be considered while determining the taxation and taxability of royalty & FTS.

Insofar as case laws cited by the learned Counsel for the assessee, the learned Departmental Representative submitted, the decisions being factually distinguishable, would not apply to the assessee’s case. 16. In rejoinder, the learned Counsel for the assessee submitted, the meaning of the terms “royalty and FTS” have to be found as per the definition provided under Article 12(3) and 12(4) of the India-Singapore DTAA. He submitted, though, Article 12(2) of India-Singapore DTAA provides for taxability of royalty and FTS in the contracting state from where it is received, however, it is only for the purpose of withholding tax at source at the prescribed rates. He submitted, since the term, ‘royalty and FTS’ have been specifically defined under Articles 12(3) and 12(4) of the tax treaty, there is no need to refer to their definition under domestic law. In this context, he relied upon the decision of the co-ordinate bench in cases of ACIT vs Reliance Jio Infocom Ltd 111 taxmann.com 371; Capgemini Business Services India Ltd vs ACIT Ltd vs DIT ITA No.673/Kol/2013. 17. We have carefully considered the rival submissions in the light of number of judicial precedents cited before us and have perused materials on record. The I.T.As. No.7144/Mum/2017 & 5744/Mum/2018 10 core issue which arises for consideration is, whether certain payments received by the assessee towards services rendered to Atos India is taxable as royalty and FTS. As discussed earlier, the payments received are for project related services pertaining to Nokia Seimens’ project, project related services pertaining to Standard Chartered Bank project and services relating to other projects. Besides these, the assessee has also received payment towards cost recharge pertaining to salary of a person, viz. Mr. Thomas Boutard. There is no dispute between the parties that the assessee is a tax resident of Singapore; hence, is governed by the provisions of the India-Singapore DTAA.

As per the scope of work under the agreement, insofar as project related services pertaining to Nokia Siemens’ project, the assessee is required to provide storage services for email and datacenter hosting. Similarly, for project related services to Standard Chartered Bank, the scope of services includes the I.T.As. No.7144/Mum/2017 & 5744/Mum/2018 11 employees of the assessee in remotely maintaining and monitoring the server and computer equipment and in case of any breakdown in the server, to take immediate remedial measure for its smooth and continuous functioning. Further, the assessee is required to remotely manage databases and carry out overall monitoring activities. Further, the assessee has to ensure timely delivery and problem resolution to the customers of Atos India. As far as services relating to other projects are concerned, the assessee is required to provide server hosting services and carry out support services of the said server.

The departmental authorities have held, while providing the services the assessee has allowed the use or right to use of any industrial, commercial or scientific experience as well as allowed use or right to use of industrial, commercial or scientific equipment. According to the departmental authorities, the assessee has rented out the servers to Atos India which amounts to allowing use or right to use of an industrial, commercial, scientific equipment.

Keeping in view the aforesaid factual position, we have to examine whether the payments received by the assessee come within the ambit of “royalty and FTS”, as per Articles 12(3) and 12(4) of India-Singapore DTAA. The term ‘royalty’ has been defined under Article 12(3) of the tax treaty and reads as under:- “3. 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 : (a) any copyright of a literary, artistic or scientific work, including cinematograph film or films or tapes used for 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, property or information? (b) any industrial, commercial or scientific equipment, other than payments derived by an enterprise / from activities described in paragraph 4(A) or4(f) of Article 8.”

Further, while rendering the managed services, the assessee has not allowed the recipient to use or right to use of any copyright of literary, artistic or scientific work including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process. The payment received is also not for use of information concerning industrial, commercial or scientific experience. In our considered opinion, the services rendered by the assessee are purely IT infrastructure management and mailbox hosting services and for rendering which the assessee has neither allowed use or right to use of any copyright of literary, artistic or scientific work, etc. or use of information concerning industrial, commercial or I.T.As. No.7144/Mum/2017 & 5744/Mum/2018 14 scientific experience or has allowed use or right to use any industrial, commercial or scientific equipment.

In case of DCIT vs Suvvis Communication Corporation (supra), the co- ordinate bench has held, the true test for finding out whether the consideration is for rendition of services, though, involving the use of scientific equipment or the consideration is for use of equipment simpliciter. In the facts of the present case, there cannot be two opinions about the fact that, though, in course of rendition of services there may be involvement of or use of scientific equipments, but, the consideration received is not for use of equipment simpliciter, but for rendering services.

In case of Edenred Pte Ltd vs DCIT (supra), the co-ordinate bench, while considering a somewhat similar issue has held as under:-

The observations of the co-ordinate bench in the aforesaid decision would squarely apply to the facts of the present case. Therefore, we are of the considered opinion that the payment received by the assessee for rendering services relating to various projects would not qualify as royalty under Article 12(3) of the India-Singapore DTAA. Once it is held so, it becomes immaterial whether the payment qualifies as royalty under the domestic law as the treaty provisions being more beneficial to the assessee would override the provisions of domestic law as per section 90(2) of the Act.

Having held so, now let us examine whether the payment received can be treated as FTS. Before we proceed to decide the issue, it is necessary to look at the definition of FEES FOR TECHNICAL SERVICES as per Article 12(4) of the India- Singapore DTAA, which reads as under:- “4. The term "fees for technical services" as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services :

On a careful reading of Article 12(4) of the tax treaty, it becomes very much clear that Article 12(4)(a) and 12(4)(c) are not applicable to the present case. Insofar as Article 12(4)(b) is concerned, it clearly denotes that a payment can be treated as FTS, if it makes available technical knowledge, experience, skill, know- how or process which enables the person acquiring the services to apply the technology contained therein. Therefore, the most crucial factor which requires examination is, while rendering services, whether the assessee has made available any technical knowledge, experience, skill, know-how or process in terms of section 12(4)(b). In our view, the material on record would not persuade one to conclude so. The true meaning of the aforesaid provision is, not only the payment is received for providing technical or managerial services, but, while doing so the service provider also makes available any technical knowledge, experience, skill, know-how or process, etc. to the recipient of services, which enables the person acquiring such services to apply the technology contained therein independent of the service provider. In other words, the service recipient must be in a position to apply the technical knowledge, experience, skill, know- how, etc. without requiring the permission or presence of the service provider.

In the facts of the present case, there is nothing on record to suggest that Atos India can use any technical knowledge, experience, skill, know-how or process, etc. independently on its own without requiring the involvement of the assessee. Therefore, in our considered opinion, the tests and conditions of Article 12(4)(b) are not satisfied. That being the case, the payment received by the assessee from various projects related services would not qualify as FTS either. That being the case, the payment received by the assessee has to be treated as business profits; hence, would not be taxable in absence of a permanent establishment in India.

At this stage we must deal with the submission of learned Departmental Representative that as per Article 12(2) of the India-Singapore DTAA the amount received can be taxed in India in accordance with the domestic law. On a careful reading of Article 12 of India–Singapore DTAA as whole, it is found, Article 12(1) provides for taxation of royalty and FTS in the country of residence of the recipient. Definitions of royalty and FTS have been given under Article 12(3) and 12(4) of the tax treaty. Of course, Article 12(2) provides for taxation of royalty and FTS in the source country. However, in our considered view, Article 12(2) has to be read in conjunction with Article 12(1), 12(3) and (4) of the tax treaty and not on standalone basis. In our view, Article 12(2) will get triggered only if the amount received qualifies as royalty and FTS under the treaty provisions. Since, in the facts of the present case we have held that the payment received towards various project related services does not qualify as royalty and FTS under the treaty provisions, the applicability of Article 12(2) of the tax treaty would not arise.

As regards the payment of Rs.10,67,392/-, being the cost recharge pertaining to the salary of Mr. Thomas Boutard, we find from record, the learned DRP has very categorically observed that inspite of the fact that the assessee was specifically asked to provide the details of services rendered by Mr.Thomas Boutard, the assessee has neither furnished nature of services provided nor furnished other details. It is further observed, it is the case of the assessee that Mr. Thomas Boutard is an employee of the assessee, who assisted the employees of Atos India for finalizing annual accounts. However, the nature of services provided by Mr. Thomas Boutard needs to be examined. It also requires examination whether while rendering such services, the concerned person has made available any technical knowledge, skill, know-how, etc to the employees of Atos India to treat the payment received towards cost recharge as FTS. The learned Counsel has submitted before us that similar payment made to the concerned person in subsequent assessment years has been allowed by the assessing officer. All these factors need to be properly verified by the assessing officer to come to a definite conclusion, whether the payment received by the assessee towards cost recharge of salary paid to Mr. Thomas Boutard shall qualify as FTS under Article 12(4)(b) of India-Singapore Tax Treaty. Accordingly, this issue is restored to the assessing officer for fresh adjudication, after due opportunity of being heard to the assessee.

To sum up, the addition made of the payment received towards various project related services by treating them as royalty and FTS is hereby deleted in view of our detailed finding hereinabove. Whereas, the issue relating to payment

In ground 4, the assessee has raised the issue of levy of surcharge and education cess on the tax liability computed. It is the case of the assessee that the total tax payable cannot exceed the tax rate as prescribed under Article 2 of India -Singapore Tax Treaty. In support of such contention, the learned Counsel for the assessee has relied upon the following decisions:-

Ground 5 is on the issue of initiation of penalty proceedings u/s 271(1)(c) of the Act being premature at this stage, is dismissed.

In the result, appeal is partly allowed.

Grounds raised in being identical, our decision in would apply mutatis mutandis to this appeal as well.

In the result this appeal is also partly allowed.

To sum up, both the appeals are partly allowed.