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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRIMANOJ KUMAR AGGARWAL
The aforesaid appeal has been filed by the assessee challenging the final assessment order dated 27th September 2016, passed under section 143(3) r/w section 144C(13) of the Income Tax Act, 1961 (for short "the Act") for the Assessment Year 2013–14. .
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Though, the assessee in the memorandum of appeal has raised four grounds, however, at the outset, the leaned Counsel for the assessee as per instructions submitted that grounds no.3 and 4, are not pressed. Accordingly, these grounds are dismissed as not pressed.
The only other surviving grounds being ground no.1 and 2, read as under:–
“On the facts and in the circumstances of the case and in law, the DRP erred in confirming the action of the Assessing Officer in characterizing subscription revenue received by the appellant in the nature of royalty or fee for technical services under the Act and under the Indian–United Kingdom Tax Treaty. Without prejudice to the above, based on the facts and circumstances of the case and in law, the DRP has erred in facts and in law in not applying the provisions of the Article–13(6) of the treaty, despite the fact that the Assessing Officer has himself adjudicated that the appellant has a Permanent Establishment in India.”
4. As could be seen from the grounds raised, the issue involved in these grounds pertain to the nature and character of subscription revenue received by the assessee from the customers in India and without prejudice claim of the assessee regarding applicability of Article–13(6) of the India–United Kingdom (UK) Tax Treaty to such revenue insofar as to bring to tax only the royalty income attributable to the Permanent Establishment (PE) in India.
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We have heard the rival contentions and perused the material on record. Identical issues arising in assessee’s own case in assessment year 2014–15 came up for consideration before this Bench in ITA no.5121/Mum./2017. While deciding the issue vide order dated 20th December 2019, the Bench has held as under:– “14. We have considered rival submissions and perused the material on record. The first issue which arises is regarding the nature of subscription charges received by the assessee from the customers in India. While it is the claim of the assessee that it is not in the nature of royalty/fee for technical services and only a business profit, however, the Revenue has treated it as royalty. As could be seen from the facts on record, while deciding the dispute relating to nature of subscription charges received by the assessee in assessee’s own case for the assessment years 2008– 09 and 2009–10, the Tribunal in the decision reported in [2014] 47 taxmann.com 10 (Mum.) (Trib.), has held that the amount received by the assessee is in the nature of royalty as per Article– 13(3) of the Tax Treaty. The same view was reiterated by the Tribunal wile deciding identical issue in assessee’s own case for the assessment year 2012–13 in DCIT v/s Reuters Transaction Services Ltd., [2018] 96 taxmann.com 354. Therefore, in our considered opinion, the issue whether the amount received by the assessee from the customers in India is in the nature of royalty stands covered against the assessee by the aforesaid decisions of the Co–ordinate Bench. That being the case, we concur with the view expressed by the Revenue authorities that the amount received by the assessee from the customers in India is in the nature of royalty as per Aricle–13(3) of the India–UK Tax Treaty as well as the provisions of the Act.
15. Having held so, the next issue which falls for consideration is the alternative claim made by the assessee as per ground no.8 to the effect that only the royalty income attributable to the PE can be brought to tax in India as per the provisions of section 115A r/w section 44DA of the Act r/w Article 13(6) of the India–UK Tax Treaty. While supporting the aforesaid ground, the leaned Sr. Counsel submitted, since the Assessing Officer himself has agreed that the assessee has a PE in India, Article–13(6) of the India–UK Tax Treaty applies to assessee’s case. It is relevant to observe, identical stand was taken by the assessee before the Co–ordinate Bench in course of hearing of appeal for the assessment year
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2012–13. In this context, it is necessary to reproduce the submissions made on behalf of the assessee in this regard. “8. The learned A.R. of the assessee referred to the decision of the ITAT Mumbai in assessee’s on case for assessment years 2008-09 and 2009-10 to submit that although the issue has been decided against the assessee in so far as the issue of PE and nature of income in the light of the services rendered by the assessee in India, yet the findings of the ITAT in so far as applicability of Article 13(6) of DTAA between India and UK is contrary to its own finding that the assessee is having PE in India. Therefore the decision requires reconsideration and accordingly, vehemently argued on the issue of taxability income. The learned A.R. further submitted that once the AO held that there is a PE in India, then the income of the assessee from revenue generated in India should be taxed under Article 13(6) of the India-UK tax treaty, but the AO has taxed the income under the provisions of Section 115A of the Act. Therefore it was submitted that once there is no dispute about the existence of PE and also the fact that the assessee has not taken any ground challenging the findings of the AO on existence of PE, then the AO ought to have computed the income under Article 13(6), but the AO has determined the income in accordance with the provisions of Section 115A of the Act which is incorrect. The learned A.R., in response to a query from the Bench that is there any change in the facts during the current year when compared to the facts already considered by the Tribunal in the earlier years, fairly accepted that there is no change in the facts, but still reiterated his argument that once the assessee has not challenged existence of PE income shall be computed in accordance with the provisions of Article 13(6) of India-UK treaty and not under the provisions of the Income Tax Act.”
However, even after taking note of the aforesaid submissions of the assessee, the Tribunal was not persuaded to accept it as it found that the decision rendered earlier in assessment years 2008–09 and 2009–10 are on identical facts and there is no difference in the factual position in the impugned assessment year. The same is the factual position in the impugned assessment year as well. The argument advanced by the assessee with regard to the applicability of Article–13(6) has already been dealt with by the Tribunal while deciding identical issue in assessee’s own case for the assessment year 2012–13. The observations of the Tribunal is reproduced hereunder for ease of reference:– “10. We have heard both the parties and perused the material on record. The issue of characterising subscription revenue of 5 Reuters Transaction Services Ltd.
the assessee whether it is in the nature of royalty or fees for technical services under the Income Tax Act or under the India-UK tax treaty and applicability of provisions of Article 13(6) of the tax treaty between India and UK has been already considered by the ITAT. The Coordinate Bench of ITAT, in assessee’s own case for assessment years 2008-09 and 2009-10 in 2012 and ITA No. 7211/ Mum/2012 vide its order dated 18.07.2014 had dealt with the issue at length after considering the relevant provisions of India-UK Tax Treaty and nature of services rendered by the assessee in India through its server located at Geneva and held that subscription charges received by the assessee from its customers in India is in the nature of royalty. The ITAT, further 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 and applying Article 13(6) of the India-UK Tax Treaty to determine the income attributable in India. The relevant portion of the order is extracted below: - “11. We have considered the rival submissions as well as relevant material on record. The assessee has entered into a contract with Indian clients for providing its foreign exchange deal matching system services namely dealing 2000-02. The clients of the assessee are mainly Indian Banks. The services are provided against the monthly charges as per the agreement. In order to provide the service and access to the foreign exchange deal matching system, the assessee has also entered into agreements with its Indian Subsidiary namely Reuters India Pvt. Ltd in short (RIPL). The said agreements are called as promotion service agreement as well as advertising and marketing service agreement both dated 20.11.2006. The terms and conditions of the services provided to the Indian subscribers are stipulated in the Reuters Trading Service agreement (in short RTS agreement). The agreements are executed in accordance with the Reuters Business Principles reduced in writing being part and parcel of the RTS agreement. The RIPL in turn also entered into Reuters Service Contract with the Indian clients for providing the necessary equipments, connection facility, installation and support service in order to avail the foreign exchange deal matching system provided by the assessee. Thus the Indian clients could avail the services of the assessee only through the equipments and connectivity provided by the assessee itself through its Indian subsidiary namely RIPL. The fee for providing the services is charged by the assessee from the Indian subscribers and actual uses of telecommunication are paid to the RIPL. The assessee is remunerating the RIPL for the services of marketing and installation of the equipment on behalf of the assessee to its clients. Thus though the equipments and other installation and connectivity are installed and provided through RIPL but the charges for the 6 Reuters Transaction Services Ltd. entire services and facility are paid by the clients to the assessee and not to the RIPL. The Ld. Counsel has also submitted that it is an integrated service rendered to the clients from its server situated in Geneva, therefore, there is no control or possession of the Indian clients to use or right to use the server of the assessee situated outside India. It is also contended that the assessee is rendering the services to the Indian clients by using its own server situated in Geneva and, therefore, in view of the decision of Hon’ble High Court of Delhi in the case of Asia Satellite Telecommunications Co. Ltd (supra), the charge/fee received by the assessee in rendering the services is not royalty. He has also strongly relied upon the decision of Hon’bld Andhra Pradesh High Court in the case of Sanofi Pasteur Holding SA (354 ITR 316)(supra). 11.1 It is pertinent to note that in the case of Asia Satellite Telecommunications Co. Ltd (supra), the issue fell for consideration of the Hon’ble Delhi High Court was whether rental charges for lease of transponder capacity to TV channels carrying out operations in India is the income deemed to accrue or arise in India and whether such income is royalty. The income to the non resident was for leasing out the transponder capacity to the non resident TV channels who are providing their channel services in India. The Hon’ble High Court in the case of Asia Satellite Telecommunications Co. Ltd (supra), after considering the fact that the appellant is a foreign company incorporated in Hongkong and carried on business of providing private satellite communications and broadcasting facilities to the clients with whom the appellant had entered into agreement are not resident of India. The appellant had merely given access to a broadband available with the transponder which could be utilized for the purpose of transmission of signals to the customers. Thus it was found by the Hon’ble High Court that the data sent by the telecast operator does not undergo any change for improvement through the media of transponder. Since the transponder was in control and used by the appellant/transponder owner and it does not vest with the telecast operator/TV channels, therefore, the Hon’ble High Court has held that the process carried on in the transponder in receiving signals and retransmitting the same, is an inseparable part of the process of the satellite and that process is utilized only by the owner of the transponder who is in control thereof and, therefore, there was no use of process by the T.V. channels. Moreover, no such purported use has taken place in India as both the assessee and the broadcaster/T.V. channels are situated outside India. In the said case the payment by the broadcaster/T.V. Channels were paid for using the transponder capacity of satellite and not for using any information or data to be provided to Indian customers. In the case in hand the assessee is rendering the services of 7 Reuters Transaction Services Ltd. providing foreign exchange deal matching system. This system facilitates the Indian subscribers i.e. Banks to deal in the foreign exchange with the other counterparts who are ready for the transaction of purchase and sale of foreign currency. Thus the role of the deal matching system is to provide a platform where both purchaser and seller find the respective match for the intended transaction of purchase and sale. Therefore, the decision of Hon’ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd (supra), is not applicable in the facts of the case and particularly when the said decision is based on the finding that the transponder capacity has only a media for uplinking and downlinking of signals of the broadcaster and TV operators to be transmitted to their customers without any manipulation for improvement, whereas in the case in hand, the assessee is providing not only media but also the necessary information and data which process the order of the clients and find the corresponding match to meet the order.
One more aspect which was involved and relevant for deciding the issue in the case of Asia Satellite Telecommunica–tions Co. Ltd (supra) was the income deemed to accrue or arise in India on account of lease of transponder capacity to TV channels which is not in dispute in the case before us as the income in question has been received by the assessee from the Indian clients. The limited issue before us is the nature of income whether it is business income or royalty or fee for technical services. The Ld. Counsel has forcefully contended that a unilateral amendment in the Act without a corresponding change in DTAA cannot take away the benefit available in the treaty. There is no dispute that if a particular income is not taxable as per the provisions of DTAA then a unilateral amendment in the statute of the contracting state alone would not bring the said income to tax because as per the provisions of section 90 of the Income Tax Act, the beneficial provisions of DTAA will have the overriding effect to the provisions of Act. Thus the question arises whether the amount received by the assessee is Royalty or FTS income under the provisions of DTAA. The definition of royalty and fee for technical services has been provided under Article -13(3) and (4) as under:- 3 “For the purpose of this Article, the term “royalties” means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematography films or work on films, tape pr other means & 2219/Mum/2016 M/s. Reuters Transaction Services Ltd. 10 of reproduction for use in connection with 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; and 8 Reuters Transaction Services Ltd.
(b) payments of any kind received as consideration for the use of, or the right to use, any industrial commercial or scientific equipment work, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic.
For the purpose of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term “fees for technical services” means payment of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which: (a) are ancilliary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received; or (b) are ancially and subsidiary to the application or enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or (c) make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design.”
The payment received by the assessee against the services rendered to the Indian Banks whether falls under the term royalty or fee for technical services has to be decided by considering the definition as provided under the treaty and the real nature of the service provided in terms of the various contracts entered into between the parties. The various terms of agreement are defined under clause 1 of the RTS agreement and some of the relevant terms are defined as under:- “Application Programming Interface(API) means a subscriber interface for use with the related service; Autoquote Subscriber Interface means a subscriber interface for use with the Autoquote service” Services Means the product, materials or services provided by Reuters to Subscriber from time to time purusant to the Agreement Site Means my location of subscriber to which Reuters supplies access to the services directly; Software
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Means software, including APIs and related documentation provided by Reuters;” System Means the Reuters Equipment and networks used for the provision for the Services: 14. The assessee is facilitating its clients to use its system and application programming interface which is subscriber interface for use with the related services includding Autoquote service. The assessee is also providing the equipments with pre-loaded software to its subscribers and network used for provision of the services. The assessee grants subscriber limited license of software to install and use at the site as per clause 8.1 of the agreement as under:- “8.1 Reuters grants Subscriber a non-exclusive, non- transferable, terminable license for so long as Subscriber receives the service to which the software relates, to install and use the software at the site solely in the ordinary course of its own business unless otherwise set forth in this Agreement.”
Even the said license can be sub-licensed by the subscriber with the prior consent of the assessee as per clause 9.5 as under:- “9.5 Upon Reuters’ prior written consent, subscriber may sublicense its license to use Development Tools to a Developer for the sole purpose of carrying out the development work described in clause 9.2 for the subscriber and only if subscriber ensures that the developer (a) Is made aware of any complies with the provisions of the agreement. (b) Does not re-use in any way the development work carried out for subscriber; (c) becomes a mamber of Reuters Developer Partner Program (or any successor program) and signs the Retuers Trading Application Partner Agreement (or any successor agreement).”
16. As per the Reuters license principles interactive features of the system includes messaging, chatroom, bulletin board or those that allow interactivity between the users. Hardware / software and related documentation supplied by the assessee’s group concern also includes the assessee’s Application Programming Interface (API). All the services are rendered by the assessee on the site /office of the subscriber
10 Reuters Transaction Services Ltd. as per the clause 2.1 and 2.1.1 of the business principles as under: 2.1 Usage rights for information We classify services containing information into families sharing common business terms, as follows 2.1.1 Individual Services (listed here) Individual services are user-based Services priced, postitioned and packaged for users. For as long as they take the relevant service, users can: a) View, manipulate and create Derived Data fron information for their individual use: b) Store information, Manipulated Information and/or Derived Data for their individual use; c) Distribute and Redistribute limited extracts of information, Manipulated information and/or Derived Data to anyone, provided this is doen in a non systematic manner and (except for derived data) is attributed to Reuters: d) Systematically Distribute Information and Manipulated Information if you comply with paragraph 2.4; and e) Systematically Distribute and Redistribute certain derived Data if you either (i) Pay the relevant Derived Date Redistribute Service fees; or (ii) Sent the relevant Derived Data to us as Contributed Data. Provided that, in each case, you pay any related charges specified in the Contract and such Redistribution does not form part of a saleable product. The rights in the paragraph 2.1.1(e) are granted only in respect of specified sources of information and are subject t further conditions imposed by Third Party Providers.
Therefore, the subscriber/user can view, manipulate and create the derived data from information for their individual use. Further the subscriber can Store information, Manipulate information for its use and also to Distribute or Redistribute information and Drive Data to anyone to a limited extent so far as it is not done in a systematic manner. The subscribers are allowed to use the information and even to manipulate and Drive the Data to anyone for their individual use. Thus it is clear from the terms and conditions of the contract between the parties that it is subscriber who is using the information and system of the assessee for their commercial/business
11 Reuters Transaction Services Ltd. purposes. The information is made available by the assessee through its system and other equipments installed at the site of the subscriber to facilitae the connectivity with the assessee’s system/reuter located in Geneva. The portal design having the system of matching the request of the clients of the Assessee is hoisted on its server. The system which is a complex, commercial device /apparatus provides a gateway for processing request of the clients and makes available the matching counter request and thereby ensures the transactions of purchase and sale of foreign exchange between the two counter parts of the clients. Therefore, the portal having system of matching the request along with the computer and internal access to the clients constitute integrated commercial equipment which performs complex functions of processing the request, providing information and facilitates the transaction of purchase and sale of foreign exchange by matching the demand and supply. The platform of transacting the purchase and sale is commercial equipment allowed to be used by clients/ subscribers for commercial purposes. The payments made by Indian clients/subscribers to the Assessee for use and right to use of such equipment and information for processing their request of purchase and sale of foreign exchange constitute royalty. 17.1 The nature of service rendered by the assessee includes the information concerning commercial use by the subscriber. Further the entire system of the assessee including the equipments and connectivity facility is provided at the site of the subscriber. Therefore, the assessee is providing the service in the form of information and solution to the need of the subscribers by providing the matching party. The entire system along with the matching system and connectivity involves processing of subscriber’s business queries and orders and finding out the matching reply in the shape of counterpart demand or supply for execution of the transaction of purchase and sale of foreign exchange. This sytem of the assessee is available only to the subscribers who have been given the access to the information concerning commercial as well as processing the orders placed by the subscribers. It is the term of the contract/agreement that the subscriber is given the license to use the software running the system. 17.2 As per the terms and conditions stipulated in the agreement the Indian clients/subscribers accept the individual non-transferable and non exclusive license to use the licensed software programme for the purpose of carrying out the purchase and sale of foreign exchange. Thus, what is granted under the agreement is license to use the software for internal business of Indian clients. Further, the Assessee also permitted the Indian clients to sub-license the software with prior permission of assessee. It is pertinent to note that its not the license to use the software alone but the Assessee has 12 Reuters Transaction Services Ltd. made available the computer system along with the software. The Indian clients are paying for use and right to use of equipment (scientific, commercial) along with software for which license was granted by assessee. It is clear from the terms and conditions of the agreement and arrangement between parties that the Indian clients are not permitted to access the portal of the Assessee from any other computer system other than the computer provided by the Assessee and by use of software provided in the said computer system. Therefore, it is not a case of simplicitor payment for access to the portal by use of normal computer and internal facility but the access is given only by use of computer system and software system provided by the Assessee under license. Indian clients make use of the copyright software along with computer system to have access to the requisite information and data on this portal hoisting on the server of the Assessee. Accordingly, by allowing the use of software and computer system to have access to the portal of the Assessee for finding relevant information and matching their request for purchase and sale of foreign exchange amount to imparting of information concerning technical, industrial, commercial or scientific equipment work and payment made in this respect would constitute royalty.
As we have given the finding that the income received by the assessee from the Indian Banks is in the nature of royalty, therefore, the other issues of fee for technical services becomes academic and we do not propose to decide the same. Further, though the assessee has not raised any specific ground on the issue of PE, however, the Ld. Counsel for the assessee has submitted that even if the Indian subsidiary of the assessee constitute PE or otherwise the assessee has PE in India in that case para 6 of Article 13 of DTAA will apply and the royalty or fee for technical services is assessed to tax in terms of provisions of Article -7 or Article - 15 of DTAA. We do not agree with the contention of the ld. Counsel for the Assessee because 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 in 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 canot 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.”
The facts remained unchanged. The assessee failed to bring on record any evidence to prove that the finding of facts recorded by the ITAT for earlier year is incorrect. Therefore considering the facts and 13 Reuters Transaction Services Ltd.
circumstances and also respectfully following the decision of the ITAT in assessee’s own case for earlier years, we are of the considered view that subscription charges received by the assessee from the customers in India is in the nature of royalty. We further are of the opinion that once the receipt in question has been decided as royalty in nature, then there is no need to go in to the question of assessee having PE in India. Article 13(6) can be pressed into service only in the case when the existence of PE of non-resident is not in dispute. In this case the assessee has contended before the lower authorities that it does not have any PE in India and under these facts and circumstances the provisions of Article 13(6) cannot be invoked in the case when the receipt is found as royalty.”
Thus, when the issue has been decided by the Tribunal against the assessee in the preceding assessment years more than once and no difference in facts obtaining in the impugned assessment year has been brought to our notice by the assessee. Adhering to the norms of judicial discipline, we respectfully follow the decision of the Tribunal on the issue, as referred to above, and hold that the assessee cannot take the benefit of Article– 13(6) of India–UK Tax Treaty. These grounds are dismissed.”
There being no difference in facts, the issues raised in the present appeal are squarely covered by the aforesaid decision of the Tribunal. Respectfully following the aforesaid decision of the Tribunal, we hold that not only the subscription fee is in the nature of royalty but the provision of Article–13(6) of the Tax Treaty would not be applicable to the assessee. Accordingly, the grounds are dismissed.