MIXPANEL INC.,USA vs. ACIT CIRCLE- 2(2)(1) INT.TAXATION., NEW DELHI

ITA No.- 1996/Del/2022 Mixpanel Inc. owner (such as reproduction, issuing copies, commercial exploitation, etc.) does not qualify as copyright under the Indian Copyrights Act, 1957 ('ICA') and therefore cannot be characterized as royalty payment. Further that since the payment made by the end users did not involve payment for grant of any right specified under the ICA, payments made by the end users does not qualify as royalty under DTAA” 3. The AO considered the plea of assesses and found not tenable holding that Hon'ble Supreme Court judgment in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. (supra) is not applicable in this case as facts of assessee and one relied upon are different. AO observed that the said ruling covered the following categories of software payments;  Sales of software directly to an end-user by a non-resident  Sales of software by a non-resident to Indian distributors for resale to customers in India  Sales of software by a non-resident to a foreign distributor for resale to customers in India  Software bundled with hardware and sold by foreign suppliers to Indian distributors or end-users

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ITA No.- 1996/Del/2022 Mixpanel Inc. 3.1 AO concluded that from the perusal of the submission and information available in open domain, the Assessee Company provides access to customers in India to certain software applications in its website and also provides services to implement the software applications into customer's website. Therefore, assessee's case does not fall in any of the above four categories of software payments. 4. The assessee before DRP has raised objections to draft assessment submitting that the AO has erroneously captured the facts from the extracts of the master service agreement which was provided and has erred in concluding that the Assessee maintains a database of information, provides access to it for its customers and so earns Income in nature of Royalty. Further AO has erroneously captured the facts from the extracts of mail correspondence of the Assessee with its client, which was provided, to AO. It was submitted to DRP that the AO erred in holding that Assessee divulges special knowledge as part of its services to its Customer which tantamount to transfer of right to use industrial, commercial or scientific experience as per the India-USA DTAA and so falls within the definition of Royalty under section 9(1)(vi) Page 5 of 21

ITA No.- 1996/Del/2022 Mixpanel Inc. Explanation 2(1) of the Act and Article 12(3) of the India - USA DTAA. It was submitted that AO has erred in not recognising the differences in definition of income in nature of Royalty as per the provisions of the Act and as per the India-USA DTAA, thereby failing to appreciate that the said income does not fall under the definition of Royalty as per the India USA DTAA. Further that AO has erred in failing to appreciate the difference between transfer of "copyright" and "copyrighted article" as explained by the Assessee in the submissions furnished which in principle has been upheld by the Supreme Court of India (SC) in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. (Supra) and is squarely applicable to the Assessee's case. 5. DRP considered the objections and after considering the AO’s observation and the relevant clauses of the agreements concluded that the assessee is not only giving access to the databases but also facilitating its customers to modify the use of application according to there requirement. Further, the assessee provides support services for maximizing the benefit to its customers. Some of these functions may be provided by artificial intelligence based system while others by the involvement of Page 6 of 21

ITA No.- 1996/Del/2022 Mixpanel Inc. personnel. However, the fact remains that customers are being provided services specific to their requirement. Further, it was observed that the agreement clearly restricts the use of services to the customer only. Hence, contention of the assessee that it cannot be taxed as royalty has merit and the AO is directed not to treat the income as royalty. This is in accordance with the Hon'ble Apex Court ruling in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. (supra). 5.1 However, DRP held that given the nature of services being highly technical, these falls clearly under the definition of FTS/FIS given in the Act as well as India-US DTAA. Reliance was placed on the definition of fees for technical services given in explanation 2 under section 9(1)(vii) of the Act and Article 12(4) of India-USA DTAA, where fees for included services is defined. 6. The assessee is in appeal raising following grounds;

“On the facts and in the circumstances of the case and in law, the learned Assistant Commissioner of Income Tax, Circle 2(2)(1) (International tax), New Delhi ('Ld. AO') has erred in passing the final assessment order dated May 20, 2022 (received on 29.06.2022) under section 143(3) read with section 144C of the Income-tax Act, 1961 ('the Act') and the Ld. Dispute Resolution Panel- II. New Delhi ('Ld. DRP) has erred in issuing

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ITA No.- 1996/Del/2022 Mixpanel Inc. the directions as per section 144C of the Act, on the following grounds. 1. On the facts and circumstances of the case and in law, the final assessment order passed by the learned AO as per the directions of the Hon'ble DRP is bad-in-law and liable to be quashed. 2. On the facts and circumstances of the case and in law, the Ld. AO has grossly erred in passing the final assessment order without considering the material available on record and is bad in law and void ab initio since it has been passed without giving sufficient opportunity to the appellant. 3 On the facts and circumstances of the case and in law, the final assessment order passed by the learned AO as per the directions of the Hon'ble DRP is bad-in-law, since absence of a show-cause notice for treating the incomes under question as fees for included services, and non-granting of any opportunity to the assessee to present its case on this issue, results in violation of principles of natural justice, making the impugned order void ab initio and liable to be quashed. 4 On the facts and circumstances of the case and in law, the Ld. AO has erred in holding that receipts of INR 9,09,42,347 earned by the Appellant from sale of software is taxable as Fees for Technical Services ('FTS') under the Act, and Fees for Included Services ('FIS) under the India - USA Double Taxation Avoidance Agreement ('DTAA') 5. On the facts and circumstances of the case and in law, the DRP has itself admitted that the amounts received by the Assessee do not qualify as royalty under the Act and India US DTAA. However, the DRP has erroneously concluded that the payments qualify as FTS under the Act / FIS under India-USA DTAA

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ITA No.- 1996/Del/2022 Mixpanel Inc. 6. On the facts and circumstances of the case and in law, the learned AO erred in initiating penalty proceedings under section 270A of the Act. 7. Heard and perused the records. 7.1 Ld. Counsel has submitted the DRP had no powers to enhance the addition by changing head of income alleged by AO as Royalty to FTS. Relying heavily on the business model of assessee it was submitted that, assessee was not providing any technical services. It was submitted, providing merely “output from a software does not make available” the technology so as to enable the use of technology. 7.2 Ld. DR however, relied the orders of DRP. 8. As we examine the Business model, which is also considered by the AO, on the basis of portal of assessee company it comes up that the assessee is a business analytics service company. It tracks user interactions with web and mobile applications and provides tools for targeted-communication with them. Data collected is used to build custom reports and measure user engagement arid retention. It lets customers track thousands of intricate events and properties. This allows customers to run sophisticated queries and unearth powerful product insights in seconds. Mixpanel is a tool Page 9 of 21

ITA No.- 1996/Del/2022 Mixpanel Inc. that allows customers to analyze how users interact with their Internet-connected product. It is designed to make teams more efficient by allowing everyone to analyze user data in real time to identity trends, understand user behavior, and make decisions about your product. 9. The primary basis of DRP classifying the income as FIS is as follows: i. That "nature of services being highly technical, these falls clearly under the definition of FTS/FIS" ii. That knowledge imparted through application "become knowledge base for future use "

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ITA No.- 1996/Del/2022 Mixpanel Inc. 11. As per plain terms of Article 12(4)(b) of the India-US Tax Treaty, following twin conditions are required to be cumulatively satisfied in order to qualify as FIS: i. such services are technical or consultancy services if they make available knowledge, experience, skill, know-how, or processes or alternatively consist of development and transfer of a plan or design ii. and such knowledge, experience, plan, design etc. is technical. 12. Relying the DRP direction the AO held in the impugned Assessment Order that report/solutions as generated from the Application and ‘made available’ to end users the knowledge available in these reports and which may also be put to future use, therefore, the income qualifies as FIS. In addition, the Assessment Order classifies the said services as FIS on the reasoning that the nature of services is highly technical. 13. Thus it becomes necessary to examine that if DRP was right to conclude that the report or information generated by access to the software of assessee, can be called ‘Technical’ as with regard to the nature of services generating FIS. Admittedly what the customer of assessee can generate by access to the software of

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ITA No.- 1996/Del/2022 Mixpanel Inc. assessee is data analysis of information provided by the users of the product of the assessee. The reports so generated are merely commercial information which helps the customers of assessee in product analysis in real time to identity trends, understand user behavior, and make decisions about your product. 14. In the present case, only commercial information is transferred to the end user and not technical knowledge as required under Article 12(4)(b) to constitute FIS. In this regard, reference was drawn by Ld. Counsel to Example No. 7 given in the MoU dated 12.09.1989 on the similar subject i.e., product market analysis. We consider the same to be quite relevant and reproduce the same below, as this example 7 reads as follows: Facts: The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol free oil and wishes to market this product worldwide. It hires an American marketing consultancy firm to do computer simulation of the world market for such oil and to advise it on marketing strategies. Are the fees paid to the US company for included services? Analysis: The fees would not be for included services. The American company is providing a consultancy which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc., nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. Page 12 of 21

ITA No.- 1996/Del/2022 Mixpanel Inc. The fact that technical skills were required by the performer of the service in order to perform the commercial information does not make the service a technical service within meanings of para (4)(b).

ITA No.- 1996/Del/2022 Mixpanel Inc. purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. Typical categories of services that generally involve either the development and transfer of technical plants or technical designs, or making technology available as described in paragraph 4(b), include:

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ITA No.- 1996/Del/2022 Mixpanel Inc. expiry of the subscription period, the access to the software gets terminated and the customer content also stands deleted. 19. The concept of ‘make available’ as applicable to FTS, is now quite crystilised and we rely upon the findings of Hon’ble Karnataka High Court in the case of De Beers India Minerals (p.) Ltd. ITA 549 to 551 of 2007, where in the facts were quite similar as in that case the assessees entered into an agreement with M/s Fugro Elbocon B. V. Netherlands (hereinafter referred to as 'Fugro'). Fugro had a team of experts who are specialized in performing air borne geophysical services for clients, process the data acquired during the survey and provide necessary reports. The services are engaged to conduct the air borne survey for providing high quality, high resolution, geophysical data suitable for selecting probable kimberlite targets. For the technical services rendered by them the assessees had paid consideration. The Assessing Officer treated the consideration paid to Fugro under the agreement as falling within the definition of fees for technical services under Article 12 of the Indo-Netherlands Double Tax Avoidance Agreement (DTAA) read with Section 90 of the Income-tax Act, 1961.

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ITA No.- 1996/Del/2022 Mixpanel Inc. 19.1 In aforesaid set of fact the Hon’ble Karnataka High Court, explained the phrase ‘make available’ as appears in the Article 12(4) of India-USA DTAA, as follows; “22. What is the meaning of "make available". The technical or consultancy service rendered should be of such a nature that it "makes available" to the recipient technical knowledge, know- how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology "making "available", the technical knowledge, skill?, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. 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. Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as "fee for technical/included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied. 26. Thus, in terms of the contract entered into with Fugro, they have given the data, photographs and maps. But they have not made available technical expertise, skill or knowledge in respect of such collection or processing of data to the assessees, which Page 16 of 21

ITA No.- 1996/Del/2022 Mixpanel Inc. the assessee can apply independently and without assistance and undertake such survey independently excluding Fugro in future. The Fugro has not made available the aforesaid technology with the aid of which they were able to collect the data, which was passed on to the assessees as a technical service. In other words, Fugro has rendered technical service to the assessees. They have not made available the technical knowledge with which they rendered technical service. There is no transmission of technical knowledge, expertise, skill, etc., from Fugro along with technical services rendered by them. The assessees are completely kept in dark about the process and the technologies which the Fugro adopted in arriving at the information/data which is passed on to the assessees as technical service. The assessee is unable to make use of the said technical knowledge by itself in its business or for its own benefit without recourse to Fugro. In fact, the question whether along with rendering technical services, whether the technical knowledge with which that services was rendered was also made available to the assessees/customers is purely a question of fact which is to be gathered from the terms of the contract, the nature of services undertaken and what is transmitted in the end after rendering technical services. If along with technical services rendered, if the service provider also makes available the technology which they used in rendering services, then it falls with the definition of fee for technical services as contained in DTAA. However if the technology is not made available along with the technical services and what is rendered is only technical services and the technical knowledge is with-held, then, such a technical service would not fall within the definition of technical services in DTAA and not liable to tax.”

“27. In the background of the aforesaid principles and facts of this case, it is clear that assessees acknowledge the services of Fugro for conducting aerial survey, taking photographs and providing data information and maps. That is the technical services which the Fugro has rendered to the assessees. The technology adopted by Fugro in rendering that technical

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ITA No.- 1996/Del/2022 Mixpanel Inc. services is not made available to the assessees. The survey report is very clear. Unless that technology is also made available, the assessees are unable to undertake the very same survey independently excluding Fugro in future. Therefore that technical services which is rendered by Fugro is not of enduring in nature. It is a case specific. That information pertains to 8 blocks. The assessees can make use of the data supplied by way of technical services and put its experience in identifying the locations where the diamonds are found and carrying on its business. But the technical services which is provided by Fugro will not enable the assesses to independently undertake any survey either in the very same area Fugro conducted the survey or in any other area. They did not get any enduring benefit from the aforesaid survey. In that view of the matter, though Fugro rendered technical services as defined under Section 9(1)(vi) Explanation 2, it does not satisfy the requirement of technical services as contained in DTAA. Therefore the liability to tax is not attracted. Accordingly the first substantial question of law is answered in favour of the assessees and against the Revenue.” “31. Therefore the assessees not being possessed with the technical know how to conduct this prospecting operations and reconnaissance operations, engaged the services of Fugro which is expert in the field. By way of technical services Fugro delivered to the axsexsees the data and information after such operations. The said data is certainly made use of by the assessees. Not only the said data and information was furnished in the digital form, it is also provided to the assessees in the form of maps and photographs. These maps and photographs which were made available to the assessees cannot be construed as Technology made available. Fugro has not devised any technical plan or technical design. Therefore the question of Fugro transferring any technical plan or technical design did not arise in the facts of these cases. The maps which are delivered are not of kind of any developmental activity. As such, earlier the information which is furnished to the assessees by way of technical services in the digital form is also given in the form of maps. Therefore the case on hand do not fail in the second part of the aforesaid clause dealing with

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ITA No.- 1996/Del/2022 Mixpanel Inc. development and transfer of plans and designs. Therefore the second substantial question of law is also answered in favour of the assessees and against the Revenue.” 20. Reliance is also placed on decision of Mumbai Bench in the case of ICICI BANK LTD. v/s DCIT-ITA 486/2004 [MUMBAI ITAT]. The relevant paragraphs reads as follows:

ITA No.- 1996/Del/2022 Mixpanel Inc. 21. In light of the above discussed proposition of law and facts the 'make available’ clause is not satisfied, as erroneously held by the DRP. We thus sustain the grounds no. 1, 4 and 5. Further, Ground no. 2 and 3, become academic and ground no. 6 is consequential. Resultantly the appeal is allowed.

Order pronounced in the Open Court on 26.07.2024

Sd/- Sd/- (GS PANNU) (ANUBHAV SHARMA) VICE PRESIDENT JUDICIAL MEMBER Dated: 26/07/2024. *MP* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT

ASSISTANT REGISTRAR ITAT NEW DELHI

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