CRITEO SINGAPORE PTE. LTD.,SINGAPORE vs. ACIT CIRICLE 1(2)(1) INTERNATIONAL TAXATION, NEW DELHI

The assessee has not pressed Ground Nos. 1.3 and 1.4. The same are dismissed as not pressed. The assessee has also raised an additional legal ground of DRP giving the direction without DIN which was not pressed. The same is also not admitted as not pressed.

Briefly stated, the facts of the case pertaining to Ground No. 1.1 are that the assessee is a private limited company incorporated in Singapore and a tax resident of Singapore and the beneficial provisions of India-Singapore Double Taxation Avoidance Agreement (hereinafter referred to as ‘DTAA’) applies. The assessee is engaged in the business of providing advertisement and re-targeting services to its customers (i.e., advertisers and marketing agencies) in Singapore on various online third-party platforms/websites. The assessee does not have a presence in India or Permanent Establishment (‘PE’) in India under Article 5 of the DTAA during the year under consideration.

For the year under consideration, the assessee filed its return of income u/s 139(1) of the Act on 29.01.2021 declaring the receipts from Criteo India for the aforementioned services amounting to Rs. 6,04,33,792/- as exempt by relying on the restrictive definition of Royalty/Fee for Technical services (‘FTS’) under Article 12 of the India-Singapore DTAA.

The assessee also considered that as it does not have a PE in India as per Article 5 of the India-Singapore DTAA, such amounts were not chargeable to tax as ‘business income’ also in India as per Article 7 of the India-Singapore DTAA. Accordingly, the assessee claimed a refund of the taxes withheld while filing the ROI for the year.

Aggrieved, the assessee went in appeal before the DRP which confirmed the view taken by the Assessing Officer and upheld the findings.

Pursuant to the directions of the DRP, the Assessing Officer concluded the assessment proceedings by passing the final assessment order u/s 143(3) r.w.s 144C(13) of the Act by making additions of Rs. 6,04,01,143/- to the taxable income.

Aggrieved further, the assessee is in appeal before us.

Before us, the ld. counsel for the assessee forcefully submitted that the assessee owns, operates and manages a data center in a leased physical space in Singapore. The data center stores business information of the assessee company and it also allows various group companies within the Criteo Group for the Asia Pacific region to store data in respect of their customers. It was submitted that the assessee has placed its own infrastructure, networks, computers, data servers, etc. (together known as data center'). The assessee is responsible for maintaining the data center in a good working condition, provides adequate back-up, insures the data center, and is liable for the payment of taxes/third-party charges.

The ld AR stated that the assessee has provided Criteo India with online data storage facility in such data center outside India and the assessee does not have any data center or any other equipment in India. Criteo India has been provided with login credentials for it to remotely access only the data stored in relation to Criteo India's advertisers, which is used by Criteo India to render advertising services to its customers. There is no software or application provided by the Assessee to Criteo India. Further, there is no human intervention involved in the provision of data center related services by the Assessee to Criteo India. Further, Criteo India does not entail any physical access or possession or control over the data center or the server or any other related equipment of the Assessee. The assessee only provides a remote access to Criteo India for storage and retrieval of its data/business information. Thus, Criteo India does not own/control the underlying equipment/hardware or the software.

The ld. counsel for the assessee, referring to the concept of “the use of or right to use any scientific equipment” as provided in Article 12(3) of the India-Singapore DTAA for invoking “Royalty” provisions, submitted that provision of Data center related services does not result in use or right to use of any equipment or process by Criteo India.

The ld AR referred to the decision of the Hon'ble Supreme Court in case of Union of India v Azadi Bachao Andolan and Another (2003)

The ld AR also placed reliance on the OECD commentary – Model Tax Convention Commentary 2010 wherein vide paragraph 8, it was observed as under:

The ld AR also relied on Delhi AAR in the case of Dell International 305 ITR 037 dealing with a separate transaction in relation to use and right to use of equipment.

The ld AR placed heavy reliance on the decision of the Hon'ble Delhi High court in the case of Asia Satellite Telecommunications Co. Ltd. (2011) (332 ITR 340) wherein the Hon’ble Court examined a similar issue of ‘use or right to use’ of equipment in the context of Telecommunication Services provided through the Transponder of a satellite.

Further, the ld. counsel for the assessee contended that the aforementioned principles of control and possession while interpreting the definition of Royalty have also been affirmed by the Hon’ble Jurisdictional High Court of Delhi in the case of Shin Satellite Public Co. Ltd. and New Skies Satellite B.V. [2016] 68 taxmann.com 8.

Further, reliance was also placed on the decision of the co- ordinate bench at Mumbai in the case of Dy. Director of Income Tax vs. Savvis Communication Corporation [2016] 69 taxmann.com 106 wherein it was held that payment made for web hosting services (incl. data back-up, maintenance, security and uninterrupted services) is not taxable as royalty.

The assessee has also placed reliance on the following judicial precedents where the issue of royalty in case of data center and hosting services have been upheld in favour of the assessee:

Court([2024] equipment. [2022] 137 165 taxmann.com 3 taxmann.com Delhi ITAT:Subscription fees received for 580) providing CRM services and access to database for storage, retrieval of proprietary data / generating desired reports not royalty. Cloud based services do not involve any transfer of rights to the customers in the Delhi ITAT process nor does it provide any right of Microsoft Regional affirmed by reproduction to the subscriber. Such Sales Pte. Ltd. the Supreme services merely facilitate the flow of user 2. Court of India data from the front-end user through [2022]145 SLP (C) Diary Internet to the provider's system and back. taxmann.com 29 No(s). Accordingly, subscription fee charged is not 7916/2023 royalty but merely a consideration of online access of the cloud for process and storage of data to run the applications. Payments received for cloud computing Amazon Web services (AWS)not taxable as Royalty/FTS, since standard and automated services Services 3. Delhi ITAT provided with no customization for any [2023] 153 particular customer. Also, customers did taxmann.com 45 not receive any right to use copyright or other IP involved in AWS service. Reasoning Global E- Cloud based services do not involve any Application Ltd. Hyderabad 4. transfer of rights. Hence, not taxable as [2022] 145 ITAT Royalty. taxmann.com 464 Delhi ITAT MOL Corporation affirmed by Subscription fees received for online access [2022] the SC of India of cloud computing services not taxable as 5. 140taxmann.com SLP Appeal (C) royalty as subscribers did not get any right 121 No(s). 5857 of of reproduction of patent / copyright. 2023) Dow Jones & Payment made for access to database is not Company Inc. 6. (Delhi ITAT) taxable as ‘royalty’ since such services do [2022] 135 not result in transfer of a copyright. taxmann.com 270 Payment for storage and retrieval of data is Vishwak Solutions towards hiring of storage space and not (P.) Ltd. 7. (Chennai ITAT) taxable as ‘royalty’ and can only constitute [2015] 56 business income which in the absence of PE taxmann.com 158 cannot be taxed. Receipts for providing services/facilities for data processing through computer Atos Information hardware and software to banking entities Technology HK Ltd. 8. (Mumbai ITAT) cannot be held as Royalty/ FTS since there 2022] 138 was neither transfer of any of right in taxmann.com 439 respect of any patent or process or trademark or any similar property.

Per contra, the ld. DR relied upon the orders of the authorities below. The ld DR relied on the Explanation 2 clause (iva) and Explanation 5 of section 9(1)(vi) to forcefully argue that the services provided by the assessee to Criteo India falls under the definition of Royalty as provided in the Income Tax Act. The ld Dr relied on the decision of Cargo Community Network Pte. Ltd relied upon by the AO.The ld DR submitted that as the assessee is charging depreciation etc of the Data Center from the Criteo India, it means that Criteo India has control over the Data Center.

We have heard the rival submissions and have perused the relevant material on record. Having heard the rival submission we find that the facts of the case shows that the assessee has leased a physical space where it owns, operates and manages a data center. The data center stores business information of the assessee company and it also allows various group companies within the Criteo Group for the Asia Pacific region to store data in respect of their customers. The assessee maintains the data center in a good working condition, provides adequate back-up, insures the data center, and is liable for the payment of taxes/third-party charges.

We find that the assessee has provided Criteo India with data storage facility in such data center outside India and the Assessee does not have any data center or any other equipment in India. Criteo India has been provided with login credentials for it to remotely access only the data stored in relation to Criteo India's advertisers, which is used by Criteo India to render advertising services to its customers. There is no software or application provided by the assessee to Criteo India.

The assessee has received an amount of Rs 1,90,33,349/- from Criteo India during AY 2020-21 for the use of data center services. The basis of service charge is arrived at by recharging hosting charges (including rent, amortization/ depreciation, maintenance charges etc.) to Criteo India, along with a mark-up in proportion to the turnover.

With the facts as narrated above, we now come to the issue of the nature of receipts received by the assessee from data center related services, whether the same is “Royalty” or not. We find that the Article 12(3) of the India-Singapore DTAA defines the term ’Royalty’ as follows:

Clause (iva) of Explanation 2 of section 9(1)(vi) defines the meaning of “Royalty” as “the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;”

From the conjoint reading of the meaning of “Royalty” as provided in the India-Singapore DTAA and the Income Tax Act, we find that the Act, by way of amendment by the Finance Act 2012 w.e.f.

The concept of ‘use’ or ‘right to use’ any equipment and/or process was elaborated by the hon’ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. (supra) wherein the Hon’ble Court examined a similar issue of ‘use or right to use’ of equipment in the context of Telecommunication Services provided through the Transponder of a satellite. The Hon’ble Court observed that the transponder is an integral part of the satellite and it is entirely wrong to assume that a transponder is a self-contained operating unit, the control and constructive possession of which can be handed over by the satellite operator to its customers. The Court has categorically held that the satellite companies do not lease out the transponder to its customers. It rather uses the same itself for providing services to its customers. The assessee had merely given an access to the broadband available with the transponder to a particular customer. When the customer does not acquire physical possession of the transponder but simply its transmission capacity and when the satellite is operated by the Lessor and the Lessee has no access to the transponder, such payments would only be service payments.

The above proposition was also accepted by the Hon’ble Delhi High Court in its recent Judgment in the case of Telstra Singapore Pte. Ltd. [2024] 165 taxmann.com 85 (Delhi) where with respect to the discussion on “Use or right to Use” of equipment the Hon’ble Delhi High Court held as under:

Further, the co-ordinate bench at Mumbai in the case of Dy.

We therefore find that the expression “use or right to use” demands possession, active usage and control of the equipment in the hands of the customer. In the present case, the equipment relating to the data center related services is under control, possession, operation and use of the Assessee and not with Criteo India. There was no direct use by Criteo India either of the portal or of the server as was there in the case of Cargo Community Network Pte. Ltd placed reliance upon by the AO. By granting access to the information stored in the data center, the Assessee neither shares its own experience, technique or methodology employed in evolving data centers with Criteo India, nor imparts any information relating to them. In view of the above discussion and judicial pronouncements, we hold that the data center related receipts received by the assessee are not taxable as “Royalty” as per the provisions of India-Singapore DTAA as the Explanations 5 and 6 to section 9(1)(vi) of the Act cannot be imported into the tax treaties. We accordingly direct the AO to delete the said addition.

On the issue of provision of advertising space purchased from third party publishers, we find that the assessee has entered into contracts with third-party publishers (such as Google, Facebook, Twitter etc.) outside India to purchase online advertising space. Such space is used to display the advertisement banners of the assessee’s customers (the advertisers) to the internet users/ online shoppers in Singapore. The control of such advertising space continued to remain with the third-party publishers. The assessee does not get any right to the advertising space of the third-party publishers.

In certain circumstances, when Criteo India exhausts the online advertising space purchased by it from the third-party publishers, Criteo India approaches the assessee for such online advertisement space provided to the assessee by third-party publishers. The assessee provides online advertising space to Criteo India for display of the advertisement banners of Criteo India’s customers and is responsible for preparing the customized advertisement banners of its advertisers.

The ld AR of the assessee vehemently submitted that such receipts are not chargeable as Royalty as per the India-Singapore DTAA. The receipts on account of provision of advertising space are not for the use or right to use of any software or in lieu of any secret formula or process or pursuant to any industrial, commercial or scientific equipment. Further, there is no use or right to use any tangible property or equipment as well. The ld AR argued that such receipts do not qualify as royalty as per Article 12(3)(a)/12(3)(b) of India-Singapore DTAA.

The ld. counsel for the assessee further submitted that the Assessing Officer has heavily placed its reliance on the working of online advertising and especially GoogleAdWords Program to classify the receipts from sale of advertising space to be taxable as ‘royalty’ which is misplaced. The ld AR relied on the Bengaluru Tribunal in the case of Google Ireland Ltd (2023) 148 taxmann.com 106 which held that amount received by Google Ireland from sale of advertisement space through its AdWords program could not be brought to tax in India as royalty as the assessee had not parted with copyright it held in AdWords program and hence it could not be said that any kind of technical knowhow had been transferred. The bench followed its decision in the case of Google India (P.) Ltd. [2022] 143 taxmann.com 302 (Bangalore - Trib.) wherein it held that income from sale of advertisement space on a website is not taxable in India if there is no PE of foreign enterprise in India and such income is not to be regarded as royalty or FTS. The ld AR relied on the following decisions:

Per contra, the ld DR argued that Criteo India directly accesses and uses the equipment and advertisement space for uploading the contents on the server/ advertisement space, which means that Criteo India has 'used' the server for a desired purpose. Therefore, to that extent Criteo India enjoys the right to use the server/equipment/ advertisement space to upload the advertisements. The ld DR submitted that the AO rightly held that the receipts from provision of advertisement space as ‘royalty’ under section 9(1)(vi) of the Act and as per Article 12(3)(b) of the India-Singapore DTAA.

Having heard the rival submission we find from the perusal of the Schedule 1 of the inter-company Service Agreement enumerating the list and description of services rendered, that the assessee has provided Criteo India with only advertising spaces purchased from publishers. We note that the assessee does not have any physical possession or any sort of control over the advertising space. It is the third-party publishers who actually control the advertising space and hence the assessee was not in a position to pass on the control/right to the advertisement space to Criteo India.

The judicial precedents discussed above have propounded the principle that a mere receipt of service using equipment under the control, possession and operation of the service provider will only be a transaction of a service and not “use or right to use” equipment which would not attract royalty. In the instant case we find that Criteo India has used a standard facility which is provided for displaying advertisement on the website of third-party publishers. The assessee has merely provided the advertisement space bought from third-party publishers, which is also provided to other global customers of such publishers in the like manner. Equipment/installations are all owned by third-party publishers and the assessee/Criteo India does not have any role to play in either maintaining/involving into any managerial activities. Criteo India does not even have any economic/ possessory right with regard to the server of the third-party publishers and it is not at the disposal of the Assessee/ Criteo India.

We also find that the right to modify/deal with the server in any manner, vest with the third-party publishers. The Services Agreement does not provide any ‘right to use’ of any industrial, commercial, or scientific equipment or for imparting any information concerning technical, industrial, commercial, or scientific knowledge, experience or skill. In view of above, it is evident that the receipts for provision of advertisement space from Criteo India are not chargeable to tax in India as ‘royalty’ under Article 12(3) of the India-Singapore DTAA. We accordingly direct the AO to delete the said addition. Accordingly, Ground No. 1.1 is allowed.

Ground No. 1.2 relates to receipts of Rs 3,84,54,562/- on account of Business Support Services being treated as FTS.

The ld. counsel for the assessee, referring to Article 12 (Royalties and Fees for Technical Services) of India Singapore DTAA, submitted that payment made for rendering any managerial, technical or consultancy service may be considered as FTS under the India- Singapore DTAA only if such services would ‘make available’ technical knowledge, experience, skill, know-how etc. only where the person availing the services is enabled to apply the services availed in his own right without recourse to the person providing such services.

The ld AR argued that in order to categorize the income as FTS, the twin tests of consideration having been paid for rendering any managerial, technical or consultancy service; and such service should make available technical knowledge, experience, skill, know-how, or processes to the service recipient as a result of provision of such services, are not satisfied at the same time.

The ld AR submitted that the services rendered by the Assessee to Criteo India has not made available any technical knowledge, experience, skill, know-how or process which would have enabled Criteo India to apply the technical knowledge or skill contained therein independently. Further, such services are required by Criteo India on a recurring basis. The ld AR relied on the decisions of Hon’ble Karnataka High Court in the case of CIT v. De Beers India Minerals Pvt. Ltd. (2012) 346 ITR 467 (Kar) and the Hon’ble Delhi High Court in the case of International Management Group (UK) Ltd. [2024] 164 taxmann.com 225 (Delhi).

The ld AR stated that the expression ‘Make Available’ has also not been defined in the India-Singapore DTAA and he made reference to the Memorandum of Understanding(‘MOU’) between India and USA on Article 12 wherein, the meaning of the expression ‘Fee for Included Services’ (‘FIS’) has been explained by way of several illustrations.

The assessee has also placed reliance on a plethora of judicial pronouncements to show that support services have been held as not satisfying the ‘Make available’ test under respective DTAA’s since the service provided were routine in nature and the recipient cannot apply them independently. The same are summarized below:

Delhi Sales and Marketing Support and [2024] 159 ITAT Oversight; Financial Management; Control taxmann.com 93 Support and Oversight; Statutory and Tax Compliance support and Oversight;

Per contra, the ld. DR argued that such receipts are to be treated as ‘FTS’ under section 9(1)(vii) of the Act and as per Article 12(4) of the India-Singapore DTAA. The ld DR argued that the “make available” clause for the receipts being FTS is satisfied as the assessee supports and guide the Indian entity. The ld DR gave the following reasons:

We have heard the rival submissions and have perused the relevant material on record. The brief facts of the case are that in its capacity as a regional headquarter of the Criteo Group in APAC region the assessee has various centralized departments in Singapore with regional leaders and supervisors, and has rendered various support services in the nature of finance, human resource (‘HR’), legal, statutory compliance, business support, information technology (‘IT’), etc. for the APAC region (including India) on need-basis for which it charges management fees. The assessee has provided such Business Support Services to all the group companies in the APAC region (including Criteo India) on a recurring basis from outside India.

We find that the assessee mainly provides such services to its group companies in the APAC region since such group companies do not have a full-fledged finance, legal, HR, IT, business support teams of their own. The services are performed by the Criteo regional team based in Singapore, which comprise employees of the assessee. In respect of such services, the assessee recovers salary and other related costs of employees for the required assistance. Such employee cost is allocated to the relevant group entities in proportion of their turnover along with a mark-up. During AY 2020-21, Rs. 3,84,54,562/- has accrued from Criteo India for rendering finance, HR, IT, training support related assistance etc. in terms of the intercompany service agreement.

In respect of Business Support Services under sub-contracting of personnel of Rs 3,07,307/- and travel related services of Rs 19,96,671/-, the assessee is primarily providing services in the nature of human resource, finance, accounting, business and legal support, statutory compliance, information technology related services, financial planning and analysis functions. The assessee provides such services again on a recurring basis from outside India. Further, such services are rendered because Criteo India does not have a full-fledged finance, legal, HR, IT, business support teams of their own.

Having heard the rival submissions and considering the facts of the case, the issue that requires adjudication is whether such receipts on Business support services are in the nature of FTS and whether the assessee has “made available” the technical knowledge, experience etc. under the DTAA. Article 12 (Royalties and Fees for Technical Services) of the India-Singapore DTAA defines FTS in Paragraph 4 to mean:

The Indian judiciary has had many occasions to interpret the meaning of expression ‘make available’. It has been held that ‘mere rendering of services’ is not fee for technical services unless the person utilizing the services, is in future, able to make use of the technical knowledge, skill, etc. embedded in such services by himself, without recourse to the performer of services. We find that the Hon’ble Karnataka High Court in the case of CIT v. De Beers India Minerals Pvt. Ltd. (2012) 346 ITR 467 (Kar) held that:

The above view is also upheld by the Hon’ble Delhi High Court in the case of International Management Group (UK) Ltd.[2024] 164 taxmann.com 225 (Delhi) wherein the following remarks regarding meaning of the term ‘make available’ have been made:

Further, we find that the Assessing Officer has himself found merit in the arguments of the assessee and accepted at Para 7.2 of his order that the services rendered by the assessee do not make available knowledge, experience, know-how to the recipient and this is clearly visible from the examination of nature of the services rendered and the consequential benefits obtained by the recipient.

In the instant case, we find that the receipts in question are for rendering the services categorized as Business support services which pertains to routine administrative services and that too, on a recurring basis year-on-year and thus, cannot have any enduring benefit for Criteo India as held by the Assessing Officer. We find that the inter- company agreement was effective since November 10, 2016 and the said support services are being provided to Criteo India year-on-year since the inception of the Agreement. We also find that travel related services was merely for supervisory activities and for very short duration. We are, therefore, of the considered view that such services, having a recurring nature, does not satisfy the “make available” clause.

According to the Tribunal, the agreement between the respondent/assessee and its Indian affiliate had been effective from 1-1-2010, and if, as contended by the assessee/revenue, technical knowledge, experience, skill, and other processes had been made available to the Indian affiliate, the agreement would not have run its course for such a long period. 14.1 Notably, this aspect is adverted to in paragraphs 17 to 23 of the impugned order. For convenience, the relevant paragraphs are extracted hereafter:

In our humble opinion, mere incidental advantage to the recipient of services is not enough. The real test is the transfer of technology and on the given facts of the case, there is no transfer of technology and what has been appreciated by the Assessing Officer/ld. CIT(A) is the incidental benefit to the assessee which has been considered to be of enduring advantage.

In the light of the judicial precedents referred to above, we are of considered opinion that in order to invoke 'make available' clause, to fit into the terminology "making available", the technical knowledge and skill must remain with the person receiving the services even after the particular contract comes to an end and the technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Thus, the technical or consultancy services may be said to be ‘made available’ only when the service recipient is enabled to apply the technology/ skill/ services in future without recourse to the service provider. A mere incidental advantage to the recipient of service is not enough. The test is the transfer of technology/ skill and not the incidental benefit to the recipient.

In the instant case, Criteo India is unable to apply the technical knowledge/ skill on its own, i.e., without recourse to such personnel, in future. The technical knowledge and skill does not remain with the Criteo India after the particular contract comes to an end and the technical knowledge or skills of the assessee is not imparted to and absorbed by Criteo India so that it can deploy similar technology or techniques in the future without depending upon the assessee. The services are in the nature of support services, which are rendered by the Assessee to all group companies in the APAC region. Operational support (such as finance, accounting, business and legal support, statutory compliance, financial planning etc.) has been rendered by the Assessee with an intention to ensure consistency with the Assessee’s global brand standard, and hence needs to be rendered continuously based on the requirements of Criteo India. Training/ recruitment and human resource support neither result in transfer of technology or knowledge or skill or know-how. The receipts on account of travelling, by no stretch of imagination, can be considered in the nature of managerial, technical or consultancy services or for any use or right to use of any technology or software or equipment. Employees of the assessee travelled to India on certain occasions for a very short duration in relation to supervisory activities only. In view of the above, the receipts in the hands of the assessee for providing Business support services, travelling related services and external consultants’ services to Criteo India are not in the nature of ‘FTS’ as defined in Article 12(4) of the India-Singapore DTAA. We direct the AO to delete the said addition. Accordingly, Ground No. 2.1 is allowed.

The ground no 1.5 relates to initiation of penalty u/s 270A. The same being premature the same is dismissed.

In the result, the appeal of the assessee in is partly allowed.