M/S. COLGATE-PALMOLIVE MARKETING SDN BHD,MUMBAI vs. DDIT 1(2), MUMBAI

In the quantum appeal, CIT(A) confirmed the action of the AO holding that payment of USD 3,66,000 was fees for technical services. Aggrieved by the order of CIT(A), assessee was in further appeal before the Tribunal.

We had carefully gone through the order of the Tribunal. In this regard, the Hon'ble Tribunal has ruled in favour of the assessee and categorically held at the payment received by the assessee from CPI towards use of SAP system can neither be treated as "equipment royalty" nor "process royalty" or "software royalty" either under the provisions of the Act or the relevant DT AA. The relevant finding of the Hon'ble Tribunal is reproduced as under: On Taxability of payments as Equipment Royalty or Process Royalty: "19. Admittedly, in the facts of the present case also, it has not been established by the Department that CPI while accessing the SAP system, exercises any control and possession thereof. Hence, the amount paid cannot be treated as "royalty". More so, when the facts on record suggests that the CPI has been granted a limited access to the SAP system by establishing a communication line at its own cost for use of data available in the SAP system. As far as the reasoning of the Departmental Authorities that it is a process "royalty", under clause(iii) to 4 & 4012/Mum/2008 M/s.Colgate Palmolive Marketing SDN BHD Explanation-2 to section 9( 1 )(vi) as per which "royalty" would mean consideration received for use of any patent, invention, model, design, secret formula or process or trade mark or similar property. If the language employed in clause (iii) of Explanation-2 to section 9(1 )(vi), is properly analyzed, it can be seen that there must be a right to use of some of the categories of items as mentioned therein. However, in the present case, there is nothing to suggest that the CPI has obtained the right to use of any of such things as mentioned in clause (iii) for which it has paid the amount to CPM. On the contrary, it is very much evident that the payment made by CPI is for the purpose of accessing the SAP system hosted by CPM at its facilities for exchange of information / data. As far as the reliance upon Explanation-6 to section 9(1 )(vi), in our considered opinion, it will have no bearing on the issue at hand as the expansion of scope of process in Explanation-6 would not apply to the assessee as it does not relate to payment made towards transmission by satellite. What is meant by the aforesaid Explanation is live transmission of programs such as channel feed and not SAP which is used for input of data and generation of reports. Therefore, in our considered opinion, the payment received by the assessee from CPI towards use of SAP system can neither be treated as "equipment royalty" nor "process royalty" either under the provisions of the Act or the relevant DTAA." On Taxability of payments as Royalty for use of Copyright: "27 As far as the issue whether there is any transfer of right in respect of any copyright or literary work by the assessee to CPI, we do not find any merit in such submissions of the learned Departmental Representative. It is accepted by the learned Commissioner (Appeals) that CPM has acquired computer hardware along with the customized software system for integrated computerized recording, summation and generation of reports of business transaction in supply chain. The CPI is only permitted to access the system by input of data and the report generated is supplied to the CPI. Thus, we are in serious doubt whether the provisions of clause (v) of Explanation-2 to section 9(1 )(vi) can at all be stretched to such transaction. Even, assuming that it will be covered under the said provision, nevertheless, it is to be concluded that the right obtained by CPI is in respect of a copyrighted article and not copyright because such rights obtained by CPI is only for its own use and he cannot commercially exploit such right. " Accordingly, it was held by the Tribunal that the consideration will be treated as Business profit in India and since the assessee did 5 & 4012/Mum/2008 M/s.Colgate Palmolive Marketing SDN BHD not have a Permanent Establishment ('PE') in India, the same could not be taxed in India. The relevant para is reproduced as under: "28. Having held so, we have to decide whether the consideration received can at all be taxed in India. Since we have held that the consideration received by the assessee from CPI towards use of SAP system is not royalty, in terms of Indo- Malaysian treaty, it will be a business profit under Article-7 of the treaty. Therefore, in terms of Article-7, unless the enterprise of a contracting State has a P.E. in the other contracting State, the business profit cannot be brought to tax in the other contracting State. That being the case, the consideration received by the assessee from CPI towards use of SAP system is not taxable in India. Ground no. 1, is allowed. In view of the above, the payment received of USD 10,59,750 was held to be not taxable in India. The detailed finding of the Hon'ble Tribunai is at Para 15, Page 30 to Para 28, Page 55 of the Tribunal order. 3.2. Ruling of Tribunal on Taxability of payments of USD 3,66,000 as Fees for Technical Services ('FTS') 3.2.1 Ruling in favour of the assessee, the Hon'ble Tribunal has held that though section 9(1 )(vi) of the Act treats income by way of FTS to be taxable in India, however, there is no such expression under the India - Malaysia DTAA. The relevant para from the Hon'ble Tribunal order is reproduced as under: "31. Having considered the submissions of the parties and perusing the material on record, we find merit in the submissions of the assessee. Though, section 9(1 )(vii) of the Act treats income by way of fees for technical services to be taxable in India, however, there is no such expression under the India Malaysia treaty (old). Therefore, the amount received towards service charges has to be treated as business profit of the assessee under Article-7 of the DTAA. Admittedly, as the assessee has no P.E. in India, the amount cannot be brought to tax in India. Though, it is the stand of the department that in view of Article 3(2) of the treaty, definition of FTS provided u/s 9 (1 )(vii) of the Act would also apply to the treaty, however, we are unable to accept it. In our view, some expression is used in the treaty but not defined, whereas, a definition of such expression is provided in the Act, in that event, in terms of Art. 3(2) of the treaty the provisions of the Act will apply. In this context we may refer to the decisions of ITAT in case of Mckinsey Business Consultants vs. DDIT(supra) and ACIT vs. Viceroy Hotels Itd.(supra). As far as observations of the teemed Commissioner 6 & 4012/Mum/2008 M/s.Colgate Palmolive Marketing SDN BHD (Appeals) that the assessee cannot switch its option to be taxed either under the Act or DTAA, in respect of different sources of income, on reading the provisions of section 90(2) of the Act, we do not find any such restriction imposed therein. As per the plain reading of section 90(2), the provisions of the Act shall apply to the extent they are more beneficial to the assessee. In other words, if the provision of DTAA qua a particular item of income is more beneficial to the assessee, the same has to apply. Ground no.2, is allowed. " Therefore, the amount of USD 3,66,000 received towards service charges has to be treated as Business Profit of the assessee and accordingly, in the absence of PE, the same will not be taxable in India. The finding of the Hon'ble Tribunal is at Para 29, Page 55 to Para 31, Page 57 of the Tribunal order.

Since the addition itself has been deleted by the Tribunal, the penalty has no legs to stand. Accordingly, we delete penalty so imposed by the AO in both the years under consideration.

In the result, both the appeals of the assessee are allowed.