REUTERS TRANSACTION SERVICES LTD.,MUMBAI vs. DCIT (INTERNATIOAL TAXATION) - 4(1)(1), MUMBAI

i) Kalyan Kumar Rai v/s CIT, [2991] 191 ITR 634 (SC); and ii) Vijay Corporation v/s ITO, [2012] 18 taxmann.com 88 (Mum.).

the Assessing Officer. He submitted, even the office copies of the draft assessment order kept on record have been duly stamped and signed by the Assessing Officer. Therefore, if due to an inadvertent mistake the copy of the draft assessment order forwarded by the assessee remained unsigned, it will not vitiate the order as it is a curable defect as per section 292B of the Act. The learned Departmental Representative submitted, no prejudice has been caused to the assessee, as the assessment proceedings at the stage of draft assessment order is not final and the assessee has remedy against the draft assessment order by way of objection before the DRP. He submitted, the assessment proceedings become final only when the final assessment order is passed as per the directions of the DRP. Therefore, it cannot be said that the final assessment order is invalid because the draft assessment order forwarded to the assessee was unsigned. Without prejudice, he submitted, if there is any defect in the draft assessment order due to non–signing by the Assessing Officer, it is a curable defect and can be rectified by the Assessing Officer by forwarded a fresh draft assessment order to the assessee. Therefore, he submitted, in case the Bench is of the view that the draft assessment order is invalid due to non signing, the matter may be restored to the Assessing Officer for passing a fresh draft assessment

5 Reuters Transaction Services Ltd. order. In support of his contention, the learned Departmental Representative relied upon the following decisions:– i) Deepak Agro Food v/s State of Rajasthan & Ors., Civil Appeal no.4327–28/2008, judgment dated 11.07.2008 (SC). ii) Home Finders Housing Ltd. v/s ITO, [2018] 93 taxmann.com 371 (Mad.); and iii) Home Finders Housing Ltd. v/s ITO,, [2018] 94 taxmann.com 84 (SC).

i) Fomento Resorts and Hospitals Ltd. v/s ACIT, judgment dated 30.08.2019 (Bom.); and ii) Fedex Express Transportation and Supply Chain Service (I) Pvt. Ltd. v/s DCIT, ITA no.857/Mum./2016, dated 11.07.2019.

6 Reuters Transaction Services Ltd. forwarded by the Assessing Officer does not bear any initial or signature of the Assessing Officer, hence, it is invalid. Consequently, the final assessment order is also invalid. Opposed to this, the case of the Revenue is, the final assessment order is a valid order as it has been signed and stamped by the Assessing Officer. As could be seen from facts on record, in the course of proceedings before learned DRP, a factual report was called from the Assessing Officer, wherein, he stated that the office copies of the draft assessment order kept in record are duly stamped and signed. Therefore, the copy forwarded to the assessee was not signed due to inadvertent mistake. Keeping in view the aforesaid factual position, if we examine the relevant statutory provisions, it is seen that as per section 144C(1) of the Act, the Assessing Officer is required to forward a draft of the proposed order of assessment if he intends to vary the income or loss returned which is prejudicial to the interests of the assessee. Thus, at the stage of the draft assessment order, the Assessing Officer is not required to pass a final assessment order which can only be passed either under section 144C(3) or section 144C(13) of the Act. Thus, at the time of proposing the draft assessment order, the assessment proceedings is still pending and not finalized until the final assessment order is passed. As per the scheme of the Act, the Assessing Officer has to pass the assessment order under section 143(3) of the Act

7 Reuters Transaction Services Ltd. determining the total income or loss of the assessee as well as determine the sum payable by him or refund due to the assessee. Every order of assessment has to be accompanied by a demand notice, as contemplated under section 156 of the Act, containing the computation of tax and interest as well as the total demand payable by the assessee or refund due to the assessee. Unless the assessment order is accompanied by a demand notice, the demand raised cannot be enforced. As per the scheme of the Act, at the stage of the draft assessment order, neither the tax is computed nor is the demand notice issued. Only a copy of the draft assessment order is forwarded to the assessee for enabling him to raise objections before the DRP against any variation proposed to the income or loss which can be prejudicial to the assessee. Considered in the light of the aforesaid statutory provisions, the draft assessment order does not carry the force of a final assessment order which results in an enforceable demand against the assessee. Thus, in strict sense of the term, the draft assessment order cannot be treated as assessment order passed under section 143(3) r/w section 144C(3) or section 144C(13) of the Act. Therefore, the non–signing of the draft assessment order forwarded to the assessee would not invalidate the final assessment order passed under section 143(3) r/w section 144C(13) of the Act. In any case of the matter, the report of the Assessing Officer furnished

8 Reuters Transaction Services Ltd. before learned DRP clearly states that the office copies of the draft assessment order has been duly stamped and signed. Therefore, non– signing of the draft assessment order forwarded to the assessee would not be that fatal to invalidate the final assessment order. The decisions relied upon by the leaned Sr. Counsel are clearly distinguishable on facts. In case of Kalyan Kumar Rai (supra), the issue was relating to an assessment order passed under section 143(3) of the Act which certainly is not a draft assessment order. As we have observed earlier, in case of a draft assessment order, there is no necessity of either computing the tax liability or issuing a demand notice under section 156 of the Act. Therefore, this decision is not applicable to the facts of the present case. Same are the facts in case of Vijay Corporation (supra), wherein the Bench was considering the validity of an unsigned assessment order passed under section 143(3) of the Act which is in all sense of the term is a final assessment order. In the facts of the present case, there is no dispute that the final assessment order has been duly signed and stamped by the Assessing Officer. That being the case, there cannot be any issue regarding the validity of the final assessment order. Accordingly, we do not find merit in the ground raised by the assessee, hence, ground no.1, is dismissed.

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Officer, however, did not find merit in the submissions of the assessee. The Assessing Officer observed, while considering identical issue in its own case in earlier assessment year, the Tribunal has held that the subscription fee received by the assessee is in the nature of royalty, hence, taxable in India. Following the decision of the Tribunal in assessee’s own case, the Assessing Officer ultimately held that the subscription/revenue received by the assessee being in the nature of royalty is taxable in India and accordingly brought it to tax. Of course, while doing so, the Assessing Officer also held that the assessee has a PE in India. Be that as it may, against the aforesaid decision of the Assessing Officer, the assessee has raised objections before learned DRP.

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DRP, the Assessing Officer passed the final assessment order confirming the addition made in the draft assessment order.

11. The leaned Sr. Counsel for the assessee submitted before us, the issue whether the revenue received by the assessee from the customers in India is in the nature of royalty has already been decided against the assessee by the Tribunal in the assessment years 2008– 09, 2009–10 and 2012–13. In this context, he submitted that the Assessing Officer has categorically held that the assessee has a PE in India. Further, he submitted, the aforesaid decision of the Assessing Officer regarding existence of PE has not been contested by the assessee before learned DRP. Therefore, it has to be accepted that the assessee has a PE in India. Drawing our attention to Article–13(6) of the India–UK Tax Treaty, the leaned Sr. Counsel submitted, as per the said provision, the royalty income attributable to the PE can only be brought to tax in India. The leaned Sr. Counsel submitted, section 115A of the Act provides for taxation of royalty in India in respect of a foreign company. Therefore, only that part of royalty which is attributable to PE in India can be brought to tax on net basis as per section 115A of the Act as well as Article–13(6) r/w Article–7 of the India–UK Tax Treaty. The leaned Sr. Counsel submitted, without prejudice to the submission that the Revenue received by the assessee

12 Reuters Transaction Services Ltd. from the customers in India is not in the nature of royalty, the assessee also has an alternative claim that since it has a PE in India, it will be governed by Article–13(6) of the Tax Treaty and royalty income attributable to PE can only be brought to tax in India.

12. The leaned Sr. Counsel for the assessee submitted, in the assessment year 2010–11 and 2011–12, the Assessing Officer himself has brought to tax only the income attributable to the PE in terms of Article–13(6) of the Tax Treaty.

13. The learned Departmental Representative submitted, since under identical facts and circumstances the Tribunal has decided the issue against the assessee in earlier assessment years, assessee’s claim that the amount received is not in the nature of royalty or even the alternative claim that only the royalty income attributable to the PE is taxable in India, cannot be accepted as the issue is squarely covered by the earlier decisions of the Tribunal.

13 Reuters Transaction Services Ltd. 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.

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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 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 15 Reuters Transaction Services Ltd.

India-UK treaty and not under the provisions of the Income Tax Act.”

16. 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 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

16 Reuters Transaction Services Ltd. 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 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).

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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 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 18 Reuters Transaction Services Ltd. 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.

4. For the purpose of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term “fees for technical services”

19 Reuters Transaction Services Ltd. 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.”

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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.”

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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.

17. 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 22 Reuters Transaction Services Ltd.

assessee for their commercial/business 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

23 Reuters Transaction Services Ltd. 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 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.

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.”

18. Ground no.5, has become academic in view of our decision as aforesaid.

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