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Income Tax Appellate Tribunal, MUMBAI BENCH “L”, MUMBAI
Before: SHRI AMIT SHUKLA & SHRI ASHWANI TANEJA
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “L”, MUMBAI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI ASHWANI TANEJA, ACCOUNTANT MEMBER ITA NO. 237,238,239 A.Ys : 2006-07, 2007-08, &240/MUM/2016 2008-09 & 2012-13) Atos Information Vs. DCIT (IT)-1(1)(2), Technology HK Ltd.C/o Mumbai (Respondent) Atos India Pvt. Ltd.,Plant No. 5, Godrej & Boyce Mfg. Co. Ltd., Pirojshanagar, LBS Marg, Vikhroli (W), Mumbai 400 097. PAN : AAKCS8720L (Appellant)
Assessee by: Shri Kanchan Kaushal, Shri Dhanesh Bafna, Shri Aliasgar Rampurwalla Shri Ravi Sawana & Shri Pratik S. Shah Revenue by: Shri Jasbir Chauhan, CIT DR Date of Hearing: 27/10/2016 & 9.02.2017 Date of Pronouncement: 09/02/2017
O R D E R PER AMIT SHUKLA, JM:
The aforesaid appeals have been filed by the assessee against separate impugned final assessment orders of even date 11.12.2015, passed by the Assessing Officer in pursuance of directions given by Dispute Resolution Panel (DRP) vide separate orders dated 30.11.2015 u/s 144C(5) of Income Tax Act, 1961 (in short „the Act‟) for quantum of assessment passed
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u/s 143(3) r.w.s. 144C(13) for Assessment Years 2006-07, 2007-08, 2008-09 and 2012-13. Since common issues are involved in all the appeals arising out of identical set of facts, therefore, same were heard together and are being disposed of by way of this consolidated order.
To understand the facts and issues involved and its implications thereof, we are taking up the appeal for Assessment Year 2006-07 being ITA No. 237/Mum/2016, which has been passed in pursuance of order of Tribunal setting-aside the matter to the file of Assessing Officer to re-adjudicate the following issues :-
“(a) Whether payments made to Standard Chartered Bank (SCB), India to the assessee are payments for “Royalty” or “Fees for Technical Services (FTS)”?
(b) Whether the benefits of Sec. 115A of the Act will be available to the assessee in case it is held that the payments from SCB, India are held to be taxable as Royalty or/and FTS?”
In the grounds of appeal, assessee has raised the following grounds:-
“1.1 On the facts and in the circumstances of the case and in law, the learned Deputy Commissioner of Income-tax (International Taxation) 1(1)(2), Mumbai ('the learned AO') and the Dispute Resolution Panel ('the DRP') erred in holding the sum of Rs.11,78,20,808 as 'Royalty' and 'Fees for Technical Services' under Section 9(1)(vi) and 9(1)(vii) of the Income- tax Act, 1961 ('the Act').
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In doing so, the learned AO and the DRP disregarded the Contract for Provision of Computing Services entered into between the Appellant and Standard Chartered Bank, India („SCB India‟) for the services rendered by the Appellant to SCB India.
The Appellant humbly prays that the aforesaid receipts should not be taxed in India and the learned AO be directed accordingly.
1.2 Without prejudice to above Ground No. 1.1, the Learned AO and the DRP erred in denying the benefit of the rate prescribed under section 115A of the Act.
In doing so, the learned AO and the DRP held that SCB India being a non-resident company does not fall within the ambit of the term 'Indian concern' as per the provisions of section 115A of the Act and accordingly, the provisions of section 115A of the Act do not apply to the payments made by SCB India.
The Appellant humbly prays that the Learned AO be directed to apply the rate as prescribed under section 115A of the Act.
1.3 Without prejudice to Ground Nos. 1.1 to 1.2, on the facts and in the circumstances of the case and in law, while calculating the tax liability of the Appellant, the learned AO has erred in taxing income on gross receipts instead of net receipts received by the Appellant (i.e. after deducting the expenses attributable to gross receipts).
The Appellant humbly prays that the Learned AO be directed to compute the chargeable income of the Appellant by adopting net receipts instead of gross receipts.
On the facts and in the circumstances of the case and in law, the Learned AO erred in not giving tax credit for the taxes paid amounting to Rs.2,00,00,000 consisting of
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Rs.1,00,00,000 each on 31 January 2012 and 19 April 2013 as per the stay directions provided by the Hon'ble Income-tax Appellate Tribunal.
The Appellant humbly prays that the Learned AO be directed to allow the credit for the taxes paid.
On the facts and in the circumstances of the case and in law, the Learned AO erred in levying interest under section 234B of the Act amounting to Rs. 2,88,24,483 without appreciating that the entire income of the Appellant is subject to deduction of tax at source and hence, the question of advance tax does not arise.
The Appellant humbly prays that the Learned AO be directed to delete the interest levied under section 234B of the Act.
On the facts and in the circumstances of the case and in law, the Learned AO erred in initiating penalty proceedings under section 271 (1)(c) of the Act.
The Appellant humbly prays that the Learned AO be directed to not to initiate the penalty proceedings.”
Before us, the ld. Counsel, Shri Kanchan Kaushal explaining the background and facts of the case submitted that assessee, Atos Information Technology HK Ltd. is a non-resident company, engaged in the business of providing services/facilities for data processing through computer hardware and software from Hong Kong. It had entered into a contract for provision of computing services,for the provision of data process support to „Standard Chartered Bank India‟ (SCB India), which is engaged in banking business in India. Under the said contract, assessee processes the data for SCB in Hong
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Kong. The said services are being provided by assessee to SCB since August, 2005. He pointed out that the contract for computing services was governed by a “Cocteau agreement” dated 12.2.2004 which the assessee had entered with SCB worldwide for the provision of data processing support to SCB in 68 countries during the years under consideration. Considering the involvement of 68 countries, the „Cocteau agreement‟ which is typical of any other outsourcing contract contained detailed framework for providing adequate safeguards to SCB and the requisite services to be performed by the assessee at certain standards so as to meet the outsourcing objectives of SCB. He also pointed out that the Reserve Bank of India vide letter dated 5.10.2004 has approved the processing of data pertaining to Indian operations in Hong Kong by the assessee. As per the aforesaid contract with SCB India, the consideration payable to the assessee for rendering the data processing services have been computed having regard to the following:-
(i) The overall service provision is processing of data furnished by SCB India into stipulated information form and category. In order to provide the data centre processing services with the desired quality / service level as required under the „Cocteau Agreement‟, the assessee (Atos) has the following responsibilities (in respect of the facility / system, which is located in Hong Kong):- • ensure adequate facility, systems and software which are located in Hong Kong; • ensure all hardware which is housed in Hong Kong is maintained and housed in secured building space and infrastructure;
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• manage performance of the hardware, SAN and operating systems components; • perform routine computer operations according to the operation documentation; • ensure adequate technical support of operating systems to ensure system performance; • measure and predict resource needs required to maintain service level; • maintain adequate system security measures; • maintain an effective internal control environment; and • put in place appropriate Disaster Recovery Plan.
(ii) The manner in which the processing activity is carried out by the assessee has been explained as under:-
• the input data, i.e., the raw data relating to branch transactions is fed by the SCB India users via their workstations in India and transmitted to the assessee‟s data centre in Hong Kong that commenced to operate in Hong Kong since 7.8.2005. Such consolidation was driven by platforms and applications deemed most appropriate by the parties to upgrade and/ or refresh. The application software owned and used by SCB India for transmitting data to Hong Kong has neither been designed nor acquired by/from the assessee. Further, the SCB India workstation, hardware, network and software are owned by SCB India. The assessee does not supply or install any hardware or software in the premises of SCB India's branches to provide the data processing services.
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• The transaction / data are processed by the assessee‟s data centre computer equipment located in Hong Kong. No staff of the assessee is required to be in India to provide the data processing services and no staff of the assessee provides data processing services to SCB India in India. However, the staff of the assessee are only required to oversee the data processing services to SCB India so as to ensure uninterrupted services. SCB India owns all the hardware, application software and network in its India branches.
• After the raw data is transmitted into the hardware facility of the assessee in Hong Kong, the assessee, processes the raw data as per the requirement of SCB India on application software owned by SCB India, using the hardware infrastructural facility, of the assessee in Hong Kong.
• The processed data i.e. the output data is transmitted electronically to SCB India in India using the software provided by SCB India, which has not been designed by the assessee. A copy of the data is backed-up and stored in the Hong Kong data centre for recovery purposes.
• The assessee has no right to access and to use the processed data of SCB India.
The ld. Counsel further pointed out that prior to the Assessment Year 2006-07, similar activity was carried out by the assessee‟s sister concern based in Singapore, i.e. „Atos
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Origin IT Services Singapore Pvt. Ltd‟. In the case of said Atos Singapore, the matter relating to„Royalty‟ and „Fees for technical services‟(FTS) for rendering a similar nature of services was decided in favour of the assessee, though under Article 12(3) of India-Singapore DTAA. However, in the said judgment the Tribunal has discussed the entire issue threadbare as to how the provision for data processing cannot be reckoned as „royalty‟ or FTS.
Ld. Counsel further pointed out that in the first round of proceedings, the Assessing Officer following his predecessor‟s order in the case of Atos Singapore held that payment made by SCB India to Atos Hong Kong (assessee) is in the nature of „royalty‟ u/s 9(1)(vi) of the Act. In the first appeal, the ld. CIT (A) has confirmed the said findings. In the Assessment Year 2007- 08 also, a similar view was taken which has been upheld by the DRP. In these years, the matter was carried in second appeal before the Tribunal, wherein the matter was restored back to the file of Assessing Officer to re-adjudicate the issues in accordance with law. In the set-aside proceedings, the Assessing Officer after extensively referring to the „Cocteau agreement‟ had made various observations regarding „royalty‟ as well as „FTS‟ which are summarised as under:- Royalty: The assessee has not provided mere data processing services to SCB, but has also provided technology in the form of data-centre, infrastructure, connectivity and application technology for its banking operations.
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The assessee has created and provided facility in the form of dedicated centres for exclusive use of SCB with disaster recovery facility and storage facility.Apart from the infrastructure facility, secure network connectivity is provided with modem technology support. The infrastructure facility in the form of data centre, storage area network, disaster recovery facility and dedicated network connectivity is translated into functional process by defined service flow for the various geographic locations, for various business application, which would constitute "process". The data computing services are performed on the above said platform utilising the above process. Thus, it could be seen that the assessee has made available to SCB the use of its equipment, model, design, invention and process and has also rendered services in connection with the same, and hence the nature of the transaction clearly fall within the purview of "royalty", as defined in Explanation 2 to Section 9(1)(vi) of the Act.
The fixed charges and variable charges are made for the provision of facilities, infrastructure, network, system, software and environment for the mainframe and midrange servers categorised as mainframe services and midrange services and are in the nature of payment for royalties as u/s. 9(1)(vi) of the Act.
FTS: Further, the Assessing Officer after extensively relying on the „Cocteau agreement‟ also held that the assessee has
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provided technical, managerial and consultancy services to SCB and such services clearly fall within the purview of technical services defined Explanation 2 to Section 9(1)(vii) of the Act. In doing so, the Assessing Officer mainly relied on the Schedule 24 to the „Cocteau agreement‟ at pages 1036 to 1065 of the Cocteau agreement and held that the assessee is required to submit report for various activities and services performed. Some of them relate to various technical and managerial services such as:
(a) Database administration; (b) Capacity management; (c) Inventory management; (d) Performance management; (e) Business impact analysis; (j) Disaster recovery planning and testing; (g) Problem analysis and resolution; (h) Change implementation; (i) Risk reporting; (j) Operating system installation and maintenance; (k) Systems software and utility installation and maintenance (l) Software distribution; (m) Virus updates and management; (n) Operational acceptance testing; (o) Governance; (p) Service level report; (q) Change management; (r) Cocteau library;
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(s) Finance reports (MIPS utilization covering disc capacity used, MIPS utilization for each mainframe), Midrange usage (covering CPU usage for each midrange with cost of service by application, storage usage by application).
After analysing the agreement in the aforesaid manner, the Assessing Officer held that provision of technology services not only falls within the purview of „royalty‟, but also rendering of „technical services‟ as defined by amended section 9(1)(vi) by the Finance Act, 2012 with retrospective effect from 1.6.1976. The assessee‟s submission in detail as to why the provision of such services cannot be treated as „royalty‟ or „FTS‟ has been incorporated by the Assessing Officer from pages 3 to 17 of assessment order. However, the ld. Assessing Officer rejected the entire contention of assessee after detailed analysis and heavily relying upon the various provisions of „Cocteau agreement‟ and came to the conclusion that payment made by SCB to assessee is to be taxed in India, both as „royalty‟ as well as „FTS‟. The analysis of ld. Assessing Officer and his reasoning have been dealt with in page 18 to 34 of the assessment order.
Before us, the ld. Counsel, Shri Kanchan Kaushal submitted that the payment made by SCB to assessee can neither be termed as „royalty‟ nor as „FTS‟ under Sec. 9(1)(vi) or u/s 9(1)(vii) of the Act. The provisions with regard to royalty and FTS are mutually exclusive to each other and either it can be royalty or FTS, but cannot be both. The income by way of „royalty‟ connotes more „passive‟ in nature, whereas FTS relates to rendering of managerial, technical or consultancy services
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through constant human involvement. Thus, at the threshold, the findings of Assessing Officer in characterising the impugned payment, both as royalty as well as FTS is not in accordance with the provisions of the Act and hence, on this ground alone the entire addition made by Assessing Officer cannot be upheld.
On merits, as regards the payment not being in the nature of royalty in terms of Sec. 9(1)(vi) of the Act, ld. Counsel submitted that the main objection of Assessing Officer is that “assessee has not provided mere data processing services to SCB, but has also provided technology in the form of datacentre, infrastructure, connectivity and application technology for its banking operations.”. He pointed out that under the „Cocteau agreement‟, the assessee was to provide data centre and related computing services to the banking operations of SCB and only such services were provided.The objectives as set out in para 1.1 of Schedule 1 of the „Cocteau agreement‟ are as under:
(a) To provide the SCB Group with a global reaching, flexible, scalable and technologically innovative approach to delivering data centre and related computing services; (b) To achieve substantially improving data centre services capability, operational risk and on an ongoing basis continuous service excellence and improvement consistently across the SCB Group; (c) To recalibrate and sustain an ongoing basis, SCB's data centre services cost with the outsourcing market by means of transparent cost management so as to demonstrate excellent value for money and cost effectiveness;
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(d) By leveraging the capabilities and technology "thought leadership" of the supplier companies. Position technology in the SCB Group to sudden business growth and changes; (e) To have an effective governance model to achieve these outsourcing objectives and ensure observance and performance of the Contract; (j) Access a broader and deeper range of technology skills; (g) Align the technology strategy of the SCB Group with the overall business strategy of the SCB Group; and (h) Keep the technology of the SCB Group up-to-date with best practices relating to the delivery of data centre services and related computing services.
A perusal of the above would reveal that the objective of Cocteau agreement is to provide the SCB Group with a global reaching, flexible, scalable and technologically innovative approach to delivering data centre and related computing services and not any technology/ infrastructure/application technology per se to SCB. Thus, the Assessing Officer has misinterpreted the objective as provision of technology/ connectivity/ infrastructure/ application to SCB group. The intention of SCB was outsourcing activities and not any rendering of technical or consultancy services. He also referred to the approval letter of RBI, which is titled as “Storing and Processing of Indian data in Hong Kong” in the case of SCB wherein the approval given by RBI was for storing and processing of SCB's data relating to Indian operations in Hong Kong and also to outsource the processing activities to the assessee. The said approval was given on certain conditions, relevant to the present case are reproduced below:-
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“(i) .... (ii) All bank office functions, including treasury functions, are performed in India. Only processing of data can be done overseas. Processed output should be received in India on a day to day basis. (iii) The bank will remain responsible for maintaining the secrecy and confidentiality of the data processed / to be processed.” Thus, the approval granted by RBI to SCB was only for processing of data. Regarding Assessing Officer‟s objection that assessee has provided technology in the form of data centre, infrastructure, connectivity and application technology to SCB, the ld. Counsel submitted that under the Cocteau agreement, the assessee provides data processing services to SCB Group which has presence in approximately 68 countries for the years under consideration. With the exorbitant size of the assignment, work that is required to be transacted between SCB and the assessee, it is but natural for SCB to be sure about the capacity (i.e. the infrastructure, human resources, facilities, technology, internal processes etc.) of the assessee in handling the assignment.By way of an example, he submitted that if any MNE wants to get its data work done, then it may negotiate with audit firm and seek information like number of auditors working in the firm, about human resources, about level of understanding, the process that they might adopt to conduct their work, internal process which would be adopted while conducting the assignment or the technology which they will use. The client and their consultant may also mutually discuss the role, responsibilities, obligation, technology to be used and
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everything may be put in writing for better understanding. However, this does not mean that any kind of knowledge or rendering of technical services is being given. Similarly, by way of Cocteau agreement, SCB made sure what is required to be done, when, how, by whom, etc. at the assessee‟s end and same should be clear in writing for better understanding. He submitted that considering the involvement of 68 countries during the year under consideration and each country having 100‟s of branches, it was necessary that the Cocteau agreement contained detailed framework providing adequate safeguards to SCB and the assessee. These safeguards are availability of adequate data centres, disaster recovery facility, storage facility, network connectivity. These safeguards are also justified by the amount of work involved, the number of countries involved and the nature of work. For any multinational enterprises while entering into any such kind of agreement whereby the work carried out in multiple parts of the world would be affected, it becomes necessary that such agreement contains necessary and adequate provisions and clauses to protect and secure their business and interests. In the present case, the necessary and adequate provisions as a part of the assessee‟s responsibility, were to: • ensure adequate facility, systems and software which are located in Hong Kong; • ensure all hardware which is housed in Hong Kong is maintained and housed in secured building space and infrastructure; • manage performance of the hardware, SAN and operating systems components;
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• perform routine computer operations according to the operation documentation; • ensure adequate technical support of operating systems to ensure system performance; • measure and predict resource needs required to maintain service level; • maintain adequate system security measures; • maintain an effective internal control environment; and • put in place appropriate Disaster Recovery Plan.
The above responsibilities of the assessee under the Cocteau agreement, is also justified by the “outsourcing objectives” of the SCB for which it has entered into the Cocteau agreement. The said objectives contemplates provision of technologically innovative approach to render data centre and related computing services, improving data centre service capability, minimizing operational risks, justifying the provision of services against the cost incurred by SCB, employing best practices to render such services.
Further, all the infrastructural facilities and software, located in Hong Kong, have been used by the assessee, to provide data computing services to the SCB. The assessee is using its infrastructure and software facilities to provide the data computing and related services to the SCB. The Cocteau agreement nowhere suggests that any of the hardware or software facilities of the assessee, have been lent to SCB Group. The SCB Group do not have any access to the methodology and process used by the assessee in provision of data computing and related services.
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Thus, it was submitted that it has not provided the SCB Group with the technology in the form of datacentre, infrastructure, connectivity and application technology, rather it has used such technology and infrastructure on its own, to render services to the SCB Group and the Assessing Officer/ DRP erred in considering that the assessee has made available to SCB the use of its equipment, model, design, invention and process.
Lastly, with regard to Assessing Officer‟s objection that fixed charges and variable charges made for provision of facilities, infrastructure, network, system, software and environment for main framework, etc. are in the nature of royalty, the ld. Counsel drew our attention to Schedule – 5 of Cocteau agreement dealing with “charges”, wherein it has been clearly mentioned that break-up of charges for main framework services and midrange services is merely a “methodology” for determining the charges. The methodology of payment cannot change the characteristic of the income.
Coming to the Assessing Officer‟s contention that the impugned payment is in the nature of „royalty‟ mainly on two counts; firstly, use of process, model, design, invention and; secondly, use of equipment, the ld. Counsel gave written submissions, which for the sake of ready reference is reproduced hereinbelow :-
“(i) Why there is no use of "process, model, design, invention"?
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a. Decision in the case of Atos Singapore: In the case of Atos Singapore for the Assessment Year 2004-05, the Assessing Officer ("the AO") and the Commissioner of Income Tax (Appeals) ["the CIT(A)"] had taken a stand that the Payment by the SCB to Atos Singapore is in the nature of 'Royalty' as it is for "use of process". At Page 30 of the said order, the Hon'ble Tribunal has also observed that the nature of services rendered is very important and to come to a conclusion as to whether the payment is in the nature of Royalty or not, the Hon'ble Tribunal recapitulated the facts in three stages:
First Stage: SCB transmits raw data through operating software owned by it to the hardware facility of Atos Singapore. Atos Singapore merely receives the data so transmitted. Thus at this stage there is no use or right to use any process of the Atos Singapore by SCB.
Second Stage: The raw data transmitted is processed by Atos Singapore's staff as per the requirements of SCB using the application software owned by SCB. At this stage SCB does not use or have any right to use any process. Consideration paid for carrying out processing is not a payment for use or right to use a process.
Third Stage: The processed data, i.e., the output data is transmitted electronically to SCB in India using the software provided by SCB, which is not designed by Atos Singapore. Even at this stage there is no use or right to use any process.
From the above three stages, it can be very well seen that the Hon'ble Tribunal has categorically given a finding that (i) there was 'no use' or 'right
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to use' of any process by SCB and (ii) there was no consideration for use of process.
Further, there cannot be any presumption of indirect use by SCB as the Process is ONLY used by Atos Singapore in earlier years and by the assessee during the year under consideration. Hence, in the absence of direct as well as indirect use by SCB, Explanation 5 will have no application.
b. Non-applicability of Explanation 6:
Explanation 6 is being retrospectively inserted, w.e.f 1st June, 1976 and same reads as under: "Explanation 6: For the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;'."
As can be seen, the Explanation has been inserted to extend the meaning of 'Royalty' by providing the explanation of the term 'process' to also include transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. This Explanation has been inserted specifically for the categories of "Satellite and Transponder facilities". Since, the assessee‟s case is not falling under such category, Explanation 6 is not applicable to it.
(ii) Why there is no "use of equipment?
a. Clause (iva) of Explanation 2 to Section 9(1)(vi) applies only to income from the leasing of industrial, commercial or scientific equipment:
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As can be seen from the wordings of Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Act, it deals with the use or right to use any industrial, commercial or scientific equipment (but not including the amounts referred to in section 44BB).
At the outset, it is submitted that clause (iva) applies only to income from the leasing of industrial, commercial or scientific equipment and hence, same will not apply to assessee‟s case in the absence of any income from leasing. A reference in this connection can also be made to the provisions of S. 44BB of the Act, the reading of which gives completeness to the intent of the legislature in coining the provision. Such intension of leasing/hiring is also contained in the memorandum to the Finance Bill, 2001 enumerated in subsequent paragraph.
This clause has been inserted by the Finance Bill, 2001 with effect from April 1, 2002. The Memorandum to Finance Bill, 2001 explains the intention of legislature behind insertion of the clause and same reads as under: "Under the existing provisions contained in clause (vi) of sub-section (1) of section 9, income by way of royalty payable is deemed to accrue or arise in India subject to certain conditions. The term "royalty" has been defined in Explanation 2 to this clause. The definition of the term "royalty" as used in the Double Taxation Avoidance Agreements entered into by India includes inter alia payments "for the use of, or the right to use, industrial, commercial or scientific equipment". Presently, these payments are not included in the definition of royalty in the aforesaid Explanation. The result is that income from the leasing of industrial, commercial or scientific equipment becomes taxable in the source country as business income only.
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Consequently, there is no withholding tax on such payments as the taxpayer takes shelter under the definition of the term "royalty" as provided in the Income-tax Act since the same is more beneficial to him. It is therefore, proposed to amend section 9 so as to widen the scope of the term "royalty" as provided in Explanation 2 of clause (vi) of sub- section (1) of section 9 so as to include in its ambit consideration for the use of, or the right to use, industrial, commercial or scientific equipment."
Thus, it is clear that the insertion of Clause (iva) was to bring the leasing of industrial, commercial or scientific equipment under the scope of Royalty. Since, in this case there is no leasing of equipment, the question of invoking clause (iva) does not arise. The said view is also adopted by the decision of Yahoo India P, Ltd. Vs DCIT (140 TTJ 195)(Mum) which has observed as under:
"5. .......... A perusal of the relevant portion of the Board circular shows that the legislative intention behind insertion of the said clause is to overcome the situation where no tax at source was being deducted from the payment of lease rent of industrial, commercial and scientific equipment by taking shelter under the erstwhile definition of the term "royalty" as given in the IT Act, 1961. The legislative intention to insert cl. (iva) of Explanation 2 to s. 9(1)(vi) in the statute thus is to cover the lease rent of industrial, commercial and scientific equipments in the definition of "royalty" and the said definition has been widened to that extent only."
In the assessee‟s case there is no hiring of equipment by it. On the other hand the assessee itself utilises the equipment / environment to provide standard facility. In light of the above discussion, it is submitted that
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Clause (iva) will have no application on the assessee‟s case at any point of time as there is no lease of equipment.
b. Non-applicability of Explanation 5 and Clause (iva) of Explanation 2 to Section 9(1)(vi):
On close reading of Clause (iva) and Explanation 5 of Section 9(1)(vi), it would be noticed that Explanation 5 has no application to clause (iva) of the Explanation 2 for the reasons enumerated below:
As per the Explanation 5 which was introduced by Finance Act, 2012 w.r.e.f 01-04-1962, royalty includes and has always included consideration in respect of any right, property or information. The three words used in Explanation 5 (i.e any right property or information) finds place in clause (i), (ii) (iii), (iv) and (v) only and not in clause (iva) of Explanation 2 of Section 9. Therefore, one can reasonably interpret that the Explanation 5 was sought to be introduced to explain clauses (i) to (v) and not clause (iva).
Explanation 5 has been inserted with retrospective effect from June 1, 1976. In other words, Explanation 5 has been inserted retrospectively from the birth of Section 9(1)(vi) to clarify the intention behind the legislation. Hence, Explanation 5 is to be read with the Section 9(1)(vi) which was there on the statute as on April 1, 1976. It may kindly be noted that clause (iva) was inserted from April 1, 2002. Thus, it cannot be said that Explanation 5 also applies to the said clause as this clause never existed as on April 1, 1976 and accordingly, the legislation cannot clarify the intention of the clause which never existed on the said date.
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Thus, it is humbly submitted that Explanation 5 will not apply to Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Act.”
Thus, he submitted that the impugned payment received by assessee from SCB India is not for any processing, model, invention, design or equipment, albeit it is payment for provision of data computing services and hence cannot be reckoned as royalty.
Regarding the impugned payment not being in the nature of FTS, he submitted that Assessing Officer has mainly emphasised on Schedule – 24 of the Cocteau agreement, wherein assessee is required to submit reports for various activities and services performed and, therefore, the services provided fall in the nature of managerial and technical services. The relevant clauses and the submissions made by the ld. Counsel to rebut the observations of Assessing Officer are reproduced hereunder:-
“(a) Managed Platforms and Managed Infrastructure Scope: This section provides an overview of the Managed Platforms and Managed Infrastructure in Datacentres in respect of which the Appellant shall provide the services.
"Managed Platform" means a unit of hardware or firmware (together with any embedded software) providing a specific functionality, which is located within a Datacentre for the time being. “Managed Infrastructure” means, (i) the managed network; (ii) Managed components that provide interconnectivity between managed platforms (e.g. cable trays, patch panels and other passive LAN components); (iii)
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managed components that provide a suitable operating environment for the managed platforms (e.g. power, racking, air conditioning, fire protection devices and physical security devises); (iv) managed components that support the Applicant's operation and / or provision of services (e.g. telephones, foxes, shredders), located in a datacentres.
Thus, using the above components and infrastructures, the assessee shall provide the data centre and related computing services to the SCB group. (b) Batch and Online Operations: The assessee shall provide high quality day-to-day computer operations for both batch and online workloads on all managed systems. Where the managed systems are to be operated from a remote location, secure and appropriate tools must be used to facilitate this process.
Under this, the assessee is required to provide high quality computer operations for batch and online workloads.
(c) Backup and Restore: The assessee shall perform regular scheduled System Backups and Application Backups for all Managed Systems. The required scope and frequency of Application Backups is defined in the relevant ASRM and / or SLA. System Backups and Application Backups may include (but not be limited to), intra-day, daily, weekly, monthly, quarterly, half yearly, calendar year-end and financial year-end Backups.
The "Managed System" means a combination of managed infrastructure, managed platform, peripherals and managed software that must operate in conjunction with one another in order to deliver a "Managed System" includes "New Managed Systems".
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From the above, it can be said that a managed system, is a combination of hardware and software and in respect of which, the assessee is required to keep backups at regular intervals.
(d) Health Checks and Monitoring: "Health checks and monitoring relates to the responsibilities of the Supplier whereby the Supplier is required to perform 24X7X365 continuous operational health checks, monitoring and timely event and Problem reporting to guarantee the required levels of Availability of the Managed Systems. Where feasible, such health checks and monitoring should be fully automated".
Under this, the assessee is required to health check the necessary infrastructures and softwares so that they are available for rendering services. Further, such health check are required to be fully automated.
(e) Availability Management: “This section describes the Services to be provided by the Supplier for the purpose of maintaining appropriate levels of Availability for Production Environments. The Supplier shall proactively monitor Managed Systems resources and individual/clustered Managed Systems components, in order to detect bottlenecks and potential Problems, and to automatically (where possible) recover from critical situations and / or notify support personnel."
Under this, the assessee is required to monitor all of its hardware and softwares and detect any bottlenecks and repair them automatically.
(f) Database Administration: "This section describes the Services to be provided by the Supplier in relation to the management of tall databases forming part of the Managed Systems from time to time. The primary
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objective of the database administration is to ensure continuous, uninterrupted and efficient database operation."
This section describes the Appellant's responsibilities to ensure continuous uninterrupted and efficient database operation. The Appellant is required to prepare and maintain an efficient database for continuous and uninterrupted database operation. The entire functioning of the database is computerized. The assessee‟s staff is merely required to oversee the functioning of the database and take corrective measure in the event of any interruption.
(g) Capacity Management: "The primary purpose of capacity management is to analyse current and historical performance information in relation to the Managed Systems, business events and configuration of the Managed Systems and prepare recommendations ensuring that adequate computing resources are available to handle the workload projected for production Managed Systems and systems under development"
This section describes the assessee‟s responsibilities for analyzing the current and historical performance of the managed systems, and prepare recommendations ensuring that adequate computing resources are available to handle the work load projected of data processing of the SCB. In other words, this clause ensures that the assessee has adequate capacity of managed systems for the purpose of rendering data processing services.
(h) Inventory Management: "Inventory Management includes identification and tracking of each Managed Platform and each item of Managed Infrastructure and their related financial attributes as they change
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during their life cycles from entry into a Data centre until eventual retirement".
This section describes the assessee‟s responsibilities for maintaining an up to date inventory of each managed platform, each item of managed infrastructure and at the end of each month, an up to date copy of inventory is to be made available in the Cocteau library which is accessible to staff of SCB and selective team members of the assessee.
(i) Storage Management: "Storage management includes the initial set-up, configuration, management and maintenance of the storage capabilities for all Managed Systems, ensuring that such Managed Systems have efficient storage processes to provide access to, performance of and recovery for data resources."
Under this, the assessee is required to set-up, configure, manage and maintain storage facilities for managed systems.
(j) Performance Management: "Performance management is the continuous process of evaluating each Managed System to determine whether it can deliver the level of performance required by SCB, and then tuning it until it does."
This section describes the assessee‟s responsibilities to evaluate whether each managed system can deliver the level of performance required by SCB for handling data computing / processing services and then tuning it until it does.
(k) Business Impact Analysis: "The Business Impact Analysis process is an internal SCB process managed and implemented by SCB, in order to identify key business functions and recovery time frames, when
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viewed in the context of monetary, workflow and intangible effects of inoperability of the Managed Systems (or anyone of them)."
This section describes the assessee‟s responsibilities in analyzing the impact in the event of failure of any hardware or software.
(l) Disaster Recovery Planning and Testing: This section describes the assessee‟s responsibilities for planning and testing in advance, the disaster recovery.
(m) Problem Analysis and Resolution: This section describes the assessee‟s responsibilities in technically diagnosing the problem which is affecting the managed systems, identification of such problems and implantation of resolutions.
(n) Change implementation: "Change implementation describes the implementation of Change into the Managed Environments. The Change Management Process is intended to provide sufficient control in relation to the implementation of a Change such that associated risks are minimized during planning and implementation, including from a logical security standpoint."
This section lays down the procedure for implementing any change in the data centre activities and to minimise the effect of such change.
(o) Hubs and Switches: Responsibilities of the Supplier shall include provisioning of fault tolerant, reliable and resilient LAN environment (encompassing hubs and switches) to ensure un-interrupted Availabilities of the Managed Network for the smooth functioning of the Managed Systems.
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This section describes the assessee‟s responsibilities in managing an smooth and fault tolerant LAN environment for smooth functioning of the managed systems.
(p) Risk Reporting: This section describes the assessee‟s responsibilities in reporting on various operational risks in the hardware and software responsible for rendering services to the SCB.
(q) Operating system installation and maintenance: This section describes the assessee‟s responsibilities in researching, evaluating and providing a roadmap for each operating software forming part of the managed systems. It provides for identifying the features of the new system and its benefits thereon.
(r) Systems software and utility installation and maintenance: This section describes the assessee‟s responsibilities in researching, evaluating and providing a roadmap for all managed softwares.
(s) Software distribution: This section describes the assessee‟s responsibilities in controlling, coordinating, installing and managing the software distribution process.
(t) Virus updates and management: The assessee is required to comply with the antivirus standards and procedures provided by the SCB group, to ensure adequate protection for the managed systems. The assessee is also required to comply with antivirus updates and management processes stipulated by SCB.
Under this, the assessee is required to antivirus standards and procedures, prescribed by SCB so that its data is protected.
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A reading of the foregoing paras suggests that the assessee is required to install and maintain and protect all the infrastructures and softwares which are used for rendering data computing services. All these services are ancillary to the main services which is of "rendering data computing services.”
Ld. counsel thus submitted that, Assessing Officer has mainly cherry-picked some of the clauses from the agreement to conclude that provision of services constitutes managerial and technical services without actually understanding and examining the terms of such clauses in the light of entire agreement. He further submitted that the agreement has to be understood in its overall context and also to be understood in the light of objective of the parties entering into such an agreement. The main object of the Cocteau agreement was provision of data computing services by the assessee to SCB. It was only looking to the amount of work and the number of countries involved that the Cocteau agreement was made in such detail so that both parties have defined obligations, roles and responsibilities so that their respective interests are protected. He again referred to the approval letter of RBI, wherein RBI has clearly required SCB India to observe the following terms and conditions:-
“(i) All original records, source documents and all books of accounts will be maintained in India. Hard copies of books of accounts and processed outputs must also be maintained in India. Indian office should have full and effective control over the critical process of debit / credit of the accounts;
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(ii) All bank office functions, including treasury functions, are performed in India. Only processing of data can be done overseas. Processed output should be received in India on a day to day basis;
(iii) The bank will remain responsible for maintaining the secrecy and confidentiality of the data processed/ to be processed;
(iv) The bank must maintain clean record of cross border data transmission with reference to data, time, duration and media and the same should be made available to Reserve Bank of India for inspection;
(v) The data relating to Indian operations should be kept separate from the other data maintained at the data centre;
(vi) Adequate back up and disaster recovery arrangements should be in place:
(vii) The bank should ensure that reasonable security precautions are taken in transmitting the data;
(viii) Any change proposed in its system of data processing as applicable to Indian operations or any change / upgradation in the hardware / net-working technology or any material change in the legislative frame work in the country in which data processing is carried out which has an impact on banking secrecy or has the effect of extending the jurisdiction on Indian companies should be reported to us promptly with declaration that such changes are inconsistent with the conditions specified in this approval.”
Lastly, he submitted that for rendering of technical services, human intervention is involved and here in this case,
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for providing data processing services, no human intervention is required. In this regard, his submissions are as under:- “The assessee submits that the raw data fed into by the SCB India are transmitted to the assessee. Thereafter, the data so transmitted, stands captured by the mainframe computers owned by the assessee wherein such data are processed automatically and the final result is then retransmitted to the SCB India. Such transmission and processing of data is done automatically/mechanically by computers. In such processing there is no human intervention.
The assessee‟s employee has no role to play in the data transmitted by SCB India for processing to the assessee, neither is there any application of mind on such data by such employed of the assessee. No verification or further analysis is carried out on such data for the purpose of generating reports. The processing and generation of report is done automatically in the mainframe computers of the assessee. The employees of the assessee are only required to oversee as to whether the computer systems are functioning properly and performing well, and there any breakdown or fault in running of such systems.
The assessee reiterates that there is no human intervention during the process of generation of reports which is the main objective of Cocteau agreement. This is done automatically. The Human intervention, as stated above, is required only for maintaining, repairing and monitoring the hardware and softwares which are processing the raw data of SCB. It was also pointed by drawing the Hon'ble Tribunal's attention to page no 66 para 2.3.1 of the Agreement that even the faults were to be corrected automatically.
During the course of the hearing, the assessee had submitted the photographs of its data centre which clearly showed that the no human finds place in such centres. The
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human intervention is required only for maintenance of such data centres and managing such data centres in the event of any failure.
The assessee further submits that number of transactions transmitted by the SCB India to the assessee are in such large numbers that would be impossible for any number of human to apply their minds and generate reports. This can also be understood with the help of an example: Countries in which SCB has 68 (Actual) presence Cities in which SCB has X 10 branches Total Cities 680 Branches in each City X 5 Total Branches 3,400 Clients X 1,000 Total 34,00,000 Daily transactions X 1,000 Number of daily 3,40,00,00,000 or say, transactions 340 Crore transactions Days in a month X 30 Number of transactions in 1,02,00,00,00,000 or month say, 10,200 Crore transactions Number of month in a year X 12 Number of transactions in 12,24,00,00,00,000 or a year say, 1,22,400 Crore transactions By assuming in the example 1,000 daily transactions, the total number of daily transactions in 68 countries amounted to 340 Crore and in a month, such transactions amounted to 10,200 Crore transactions which is impossible to be handled without automation and then generate report on daily basis in respect of each such transactions for different countries with different regulatory environment. Thus, it shows that number of
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transactions captured into by the assessee can only be processed through with the help of computers.
Further, attention is also invited to the Clause (a) of the "Outsourcing objectives" which reads as under:
(a) to provide the SCB Group with a global reaching, flexible, scalable and technologically innovative approach to delivering data centre and related computing services; The above objective also shows that the outsourcing objective are to be achieved only through a "technologically innovative approach".
Thus, the above facts clearly shows that the data processing services provided by the assessee to SCB, are provided automatically through the use of mainframe computers.
Further, reliance is also placed on the decision of the Hon'ble Income-tax Appellate Tribunal, Mumbai in the case of Siemens Limited vs. CIT (Appeals) - 11, Mumbai (ITA No. 4356/Mum/2010) wherein it has been held that:
“14 .....The learned CIT (DR) had argued that for observing the process, preparing the report, issuance of certificate and for monitoring of machines, human involvement is definitely there, therefore, it cannot be held that there is no human intervention. In our opinion, this cannot be the criteria for understanding the term "technical services" as contemplated in Explanation 2 to section 9 (1)(vii). If any person delivers any technical skills or services or make available any such services through aid of any machine, equipment or any kind of technology, then such a rendering of services can be inferred as "technical services". In such a situation there is a constant human endeavour and the involvement of the human interface. On
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the contrary, if any technology or machine developed by human and put to operation automatically, wherein it operates without any much of human interface or intervention, then usage of such technology cannot per se be held as rendering of "technical services" by human skills. It is obvious that in such a situation some human involvement could be there but it is not a constant endeavour of the human in the process. Merely because certificates have been provided by the humans after a test is carried out in a Laboratory automatically by the machines, it cannot be held that services have been provided through the human skills.
In view of the above, the assessee submits that the processing of data is done automatically without any human intervention and thus, the payments made by SCB India to the assessee cannot be regarded as "FTS".
b. Standard facility: The data processing services provided by the assessee are in the nature of standard services, which are provided not just to the SCB Group, but to the other entities as well. In this regard, attention is invited to the page 3 of submission on "Cocteau agreement and its purpose" wherein list of customers to whom similar services has been rendered, is provided. For ready reference, such list is reproduced here as under:
i. Hong Kong Government (OGCIO); ii. Manulife; iii. Mass Manual; iv. Noble; v. China Construction Bank Asia ("CCBA"); vi. Bankard; vii. Taifook.
The Hon'ble DR relied on the undernoted judgement to state that the assessee is providing specialized service to SCB.
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Recently, the Hon'ble Supreme Court in the case of M/s. Kotak Securities Ltd. (Civil Appeal No. 3141 of 2016) has held that:
"8. ..... All such services, fully automated, are available to all members of the stock exchange in respect of every transaction that is entered into. There is nothing special, exclusive or customized service that is rendered by the Stock Exchange. "Technical services" like "Managerial and Consultancy service" would denote seeking of services to cater to the special needs of the consumer/ user as may be felt necessary and the making of the same available by the service provider. It is the above feature that would distinguish / identify a service provided from a facility offered. While the former is special and exclusive to the seeker of the service, the latter, even if termed as a service, is available to all and would therefore stand out in distinction to the former. The service provided by the Stock Exchange for which transaction charges are paid fails to satisfy the aforesaid test of specialized, exclusive and individual requirement of the user of consumer who may approach the service provider for such assistance/service. It is only service of the above kind that according to us, should come within the ambit of the expression "technical services" appearing in Explanation 2 of Section 9(1)(vii) of the Act. In the absence of the above distinguishing feature, service, though rendered, would be mere in the nature of a facility offered or available which would not be covered by the aforesaid provision of the Act."
In reply to the DR's argument and his reliance on the Apex Court judgement, it was submitted that the same para as relied upon by the Ld. DR supports the case of the assessee. It was submitted that with the help of the same infrastructure the assessee also provides services to others. In this connection, the Hon'ble Tribunal's attention was drawn to the use of client services by the assessee and stated in Point 4.3.14. Further, the fact that the
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assessee is already engaged in rendering data processing services, is further substantiated by the "introductory paragraph" of Cocteau agreement wherein it has been stated that "the supplier companies have represented that they are specialists in the provision of computing services to the banking industry".
In light of the fact that similar services are being rendered to the other entities as well as the decision of the Hon'ble Supreme Court, it can well be said that the data computing services provided to SCB, are not exclusive to it or to cater to special needs of SCB. The assessee has also provided similar services to other clients such as Hong Kong Government (OGCIO), Manulife, Mass Manual, Noble, China Construction Bank Asia ("CCBA"), Bankard and Taifook. There is nothing special or exclusive about such services.
Therefore, in view of the above submissions, the judgement of the Hon'ble Tribunal submitted above and the Apex Court judgement, payment by SCB India to the assessee for provision of data processing services, is not in the nature "fee for technical services" under Explanation 2 to Section 9(1)(vii) of the Act.”
On the other hand, the ld. DR after extensively referring to the various observations and the findings of Assessing Officer submitted that the data processing services which has been provided by the assessee to SCB is nothing but rendering of technical and consultancy services. Under the Cocteau agreement, assessee has to provide technology and services to the banking operations of SCB, which is evident from the objectives given in para 1.1 of Schedule – 1 of the Cocteau agreement. It is not only providing data processing services, but also providing technology in the form of data centre,
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infrastructure, connectivity and application technology for its banking operations. This clearly means that assessee was providing some kind of technical services. Not only that, assessee has provided information consisting the working of, or use of the invention, model, design or process which would fall within the purview of „royalty‟ defined in Explanation – 2 to Sec. 9(1)(vi). In support, he again referred to the various clauses of Cocteau agreement as reproduced by the Assessing Officer in the impugned order. Thus, he submitted that the payments as received by the assessee from SCB is liable to be taxed in India both u/s 9(1)(vi) and also u/s 9(1)(vii) of the Act.
We have carefully considered the entire gamut of facts as discussed above, relevant findings given in the impugned order as well as the rival submissions made before us. The main issue involved, which has been raised vide ground no. 1.1 is, whether the payments made by Standard Chartered Bank India (SCB) to the assessee is in the nature of „royalty‟ u/s 9(1)(vi) or „fees for technical services‟. Since the assessee-company is incorporated in Hong Kong and is providing services/facilities for processing data to SCB from Hong Kong, therefore, the payment made by SCB India to assessee has to be seen from the perspective of domestic law, i.e. Income-tax Act and not under any treaty. The assessee-company is mainly engaged in the business of providing services/facilities for data processing through computer hardware and software to banking entities. It had entered into an agreement which has been termed as “Cocteau agreement” with SCB for provision of data processing support, which is for 68 countries with various branches. Under the said „Cocteau agreement‟, the role and responsibilities of assessee in
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respect of providing data processing services has already been discussed in detail in the earlier part of the order including the manner in which the entire processing activity is carried out. The Revenue‟s case is that first of all, it is in the nature of royalty and for coming to this conclusion, the main contention of Assessing Officer is that, firstly, the assessee is not merely providing data processing services, but also providing technology in the form of data centre, infrastructure, connectivity and application technology for its banking operations; and secondly, it has created and provided facility in the form of dedicated centres for exclusive use of SCB with disaster recovery facility and storage facility. These infrastructure facilities in the form of data centre, storage area network, disaster recovery facility and dedicated network connectivity is translated into functional process by defined service flow for the various geographic locations for various business application which would constitute process. The assessee in this process has also made available SCB use of its equipment, model, design, invention and process. After coming to the conclusion that the payment is in the nature of “royalty” within the scope of section 9(1)(vi), the revenue went further to hold that, since assessee has provided technical, managerial and consultancy services to SCB, therefore, it also falls in the nature of „FTS‟ and for coming to this conclusion, certain clauses in the Cocteau agreement has been referred to.
First of all, we will deal with the issue whether the said payment falls within the realm of „royalty‟ or not. From the perusal of the various clauses of the agreement which has been referred to extensively by both the parties at the time of hearing
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and discussed herein above, we find that the main objective of the „Cocteau agreement‟ is to provide SCB group all across the world, processing of data through a network of computer systems in Hong Kong. In the entire agreement there is no whisper of any technology transfer or application of technology per se to SCB. This is a kind of outsourcing activity which has been given by SCB to Atos to process its data from various branches across the country. We agree with the contention of the ld. Counsel that the reference to the various details in the agreement is merely to ensure quality, standard and various safeguards which are to be adopted in the course of processing data especially looking the volume of data required to be processed from all around the Globe. The provisions mainly contains assessee‟s responsibility to ensure adequate facility, systems and software which are located in Hong Kong and to ensure that all the hardware which is used in Hong Kong is maintained and housed in secured building space and infrastructure, manage proper performance of the hardware and operating systems, ensure adequate technical support of operating systems, to ensure system performance, maintain adequate security measures and effective internal control environment and also put in place appropriate disaster recovery plan. All these are to be maintained by the assessee to conduct the processing of data through computers. There is no providing or giving any use or right to use of any process to SCB. The technology, infrastructure, data centre, connectivity, etc. is solely used by the assessee for its own purposes and not to make available any such thing to SCB as explained by the ld. Counsel. At the first stage, SCB transmits raw data through operating software owned by it to the hardware facility of
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assessee in Hong Kong. The assessee in Hong Kong mainly receives the data so transmitted and at this stage there is absolutely no use or right to use of any process of assessee in Hong Kong by SCB. At the second stage, the raw data transmitted by SCB is processed by the assessee in its computer system/hardware as per the requirement of SCB and at times may be using the application software owned by SCB. At this stage also, SCB does not use or have any right to use any process. At the third stage, the processed data is transmitted electronically to SCB in India and at this stage also there is no use or right to use of any process which is given or made available to SCB. Here, in this case there is absolutely no use of equipment also as alleged by the Department within the definition given in clause (iv a) of Explanation 2 to Sec. 9(1)(vi) of the Act. The said clause deals mainly with the „use‟ or „right to use‟ any industrial, commercial or scientific equipment and applies only to income from leasing of such industrial, commercial or scientific equipment. This is borne out from the Memorandum to the Finance Bill, 2001 through which the said clause was inserted w.e.f. 1.4.2002, the relevant extract of the Memorandum has already been incorporated in the earlier part of our order and same proposition is also held by Mumbai Bench in Yahoo India P, Ltd. Vs DCIT (supra). Here, in the case of assessee, there is no income from leasing of any equipment. The legislature thus, has clearly envisaged that clause (iva) is to cover lease rent of industrial, commercial and scientific equipment in the definition of royalty and the said definition has been widened to that extent only. Thus, there is no concept of right to use of equipment here in this case. So far as applicability of Explanation 5 & 6 are concerned, we agree with
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the contentions of ld. Counsel, as reproduced above, that same would not be applicable at all in the case of assessee because, firstly, Explanation 6 enlarges the scope of process to include transmission by satellite cable, fibre optic, etc.; and secondly, Explanation 5 is applicable where consideration is of any right, property or information as defined in clauses (i) to (v) of Explanation 2 only and not in clause (iva) for the reason that Explanation 5 has been inserted with retrospective effect from June 1, 1976. In other words, Explanation 5 has been inserted retrospectively from the birth of Section 9(1)(vi) to clarify the intention behind the legislation. Hence, Explanation 5 is to be read with the Section 9(1)(vi) which was there on the statute as on April 1, 1976. Whereas clause (iva) to Explanation 2 was inserted from April 1, 2002. Thus, retrospective effect of clause (iva) cannot be deemed from 1.06.1976 and hence it cannot be held that Explanation 5 also applies to the said clause as this clause never existed as on April 1, 1976 and accordingly, the legislation cannot clarify the intention of the clause which never existed on the said date. Hence Explanation 5 & 6 would not be applicable in the case of assessee.
Further, for any payment to fall within the term of “royalty” it is sine qua non that there should be some kind of a transfer of any right in respect of various items as given in Explanation – 2 or any imparting of any information or use of any patent, invention, model, design, secret formula, process, etc. Here, in this case, there is neither transfer of any of right in respect of any patent, invention, model, design, secret formula or process or trademark or any similar property by the assessee to SCB, nor there is any imparting of any information or use of
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any of similar nature of things. Here, the entire equipment and technology which are used for processing the data is solely for performing the activity of assessee for itself while rendering data processing services to SCB. There is absolutely no transfer of any technology, information, knowhow or any of the terms used in Explanation 2 or any kind of providing of technology in the form of data centre, infrastructure, connectivity and application technology by the assessee to SCB for SCB‟s banking operations. Thus, we are of the opinion that the payment made by SCB to assessee-company does not fall within the realm of “royalty” and hence cannot be taxed in India as royalty u/s 9(1)(vi) of the Act.
As regards whether the payment is in the nature of FTS or not, we find that the provision regarding services provided by assessee to SCB is mainly a standard facility and there is no constant human endeavour or human intervention which is required to provide the data servicing service. As stated earlier, raw data fed into by SCB India are transmitted to assessee and the data so transmitted stands captured by the mainframe computers owned by assessee wherein such data are processed automatically and the final result is then transmitted to SCB India. All these transmission and processing of data is done automatically by computers and there is not much human involvement or intervention. There is no application of mind by the employees of assessee on said data because, they are processed through programmed software and neither any verification nor any analysis is carried out by the assessee on such data. The employees of the assessee-company are only required to oversee as to whether the computer systems are
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functioning properly and performing well and if there is any breakdown or fault, then same needs to be taken care of. The human intervention if at all is mainly for repairing and monitoring the hardware and software of the assessee which are processing the raw data of SCB and there is no human involvement or endeavour for rendering any kind of technical or consultancy services in data processing. It has been stated that before us that even the faults are corrected automatically. Further, looking to the number of volume of transactions transmitted by SCB to assessee, it would be impossible for any number of humans to apply their mind and generate reports. This has been demonstrated by the ld. Counsel before us by way of an example which has been already incorporated above. Thus, the magnitude of transactions undertaken by assessee itself goes to show that the computer systems installed by the assessee in Hong Kong is standard facility through which data is processed. In this regard, strong reliance was placed on the decision of ITAT, Mumbai Bench in the case of Siemens Limited (supra), wherein the Tribunal has emphasised upon the element of human intervention for rendering of technical services. The relevant observation in this regard reads as under:- “------------------------In our opinion, this cannot be the criteria for understanding the term "technical services" as contemplated in Explanation 2 to section 9 (1)(vii). If any person delivers any technical skills or services or make available any such services through aid of any machine, equipment or any kind of technology, then such a rendering of services can be inferred as "technical services". In such a situation there is a constant human endeavour and the involvement of the human interface. On the contrary, if any technology or machine developed by human and put to operation automatically, wherein it
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operates without any much of human interface or intervention, then usage of such technology cannot per se be held as rendering of "technical services" by human skills. It is obvious that in such a situation some human involvement could be there but it is not a constant endeavour of the human in the process. Merely because certificates have been provided by the humans after a test is carried out in a Laboratory automatically by the machines, it cannot be held that services have been provided through the human skills.
Even in the latest decision of Hon'ble Supreme Court in the case of M/s. Kotak Securities Ltd. (supra), (the relevant portion of which has already been reproduced above), the Hon‟ble Court opined that, if services are provided through fully automated standard facility, the same cannot be reckoned as rendering of technical services as contemplated u/s 9(1)(vii) of the Act. The relevant observation reads as under:- "8. ..... All such services, fully automated, are available to all members of the stock exchange in respect of every transaction that is entered into. There is nothing special, exclusive or customized service that is rendered by the Stock Exchange. "Technical services" like "Managerial and Consultancy service" would denote seeking of services to cater to the special needs of the consumer/ user as may be felt necessary and the making of the same available by the service provider. It is the above feature that would distinguish / identify a service provided from a facility offered. While the former is special and exclusive to the seeker of the service, the latter, even if termed as a service, is available to all and would therefore stand out in distinction to the former. The service provided by the Stock Exchange for which transaction charges are paid fails to satisfy the aforesaid test of specialized, exclusive and individual requirement of the user of consumer who may approach the service provider for such assistance/service.
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It is only service of the above kind that according to us, should come within the ambit of the expression "technical services" appearing in Explanation 2 of Section 9(1)(vii) of the Act. In the absence of the above distinguishing feature, service, though rendered, would be mere in the nature of a facility offered or available which would not be covered by the aforesaid provision of the Act."
Before us, the ld. Counsel has also pointed out that assessee is also providing similar services to other clients like Hong Kong Government and other big MNEs and there is nothing special or exclusive about the services which are being rendered to SCB. In view of the entire gamut of facts as discussed above, we are of the opinion that the payment made by SCB to assessee- company does not fall within the realm of „fees for technical services‟ as contained in Sec. 9(1)(vii), albeit the assessee has only provided a standard facility for data processing without any human intervention. Accordingly, we hold that the said payment is not taxable in India as „fees for technical services‟ in terms of Sec. 9(1)(vii) of the Act. Thus, the issue raised in ground no. 1.1 is decided in favour of the assessee.
So far as the issue raised in ground no. 1.2 with regard to rate of tax u/s 115A of the Act, it has been submitted that the Assessing Officer has taken 40% of the gross amount on the ground that SCB India has no role in „Cocteau agreement‟. The ld. Counsel pointed out that the rate applicable should be reckoned from the cut-off date of the agreement, which for the purpose of Sec. 115A of the Act is before 1.6.2005 then it is 20% and if agreement is post 1.6.2005 then it is 10%. Even, though we agree with the ld. Counsel, however this issue will become
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purely academic because we have already held that the amount of payment received by assessee from SCB is not taxable in India. Likewise, the issue raised in ground no. 1.3 is also being rendered infructuous.
Regarding ground no. 2 it has been pointed out that Assessing Officer may be directed to give credit of tax paid amounting to Rs. 2 crores. Accordingly, we direct the Assessing Officer to look into this issue and allow credit of tax paid as per the directions given by Tribunal in the stay petition.
Regarding chargeability of interest u/s 234B of the Act, it is admitted that this issue is covered in favour of assessee in view of the decision of Hon'ble Bombay High Court in the case of NGC Network Asia LLC, 313 ITR 187 (Bom.). Accordingly, respectfully following the same we direct to delete the interest u/s 234B.
Ground no. 4 is admitted to be premature and accordingly, same is dismissed.
In the result, appeal of assessee is allowed in the manner indicated above.
Order pronounced in the open court on 9th February, 2017. Sd/- Sd/- (ASHWANI TANEJA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 9th February, 2017 *SSL*
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Copy to : 1) The Appellant 2) The Respondent 3) The CIT(A) concerned 4) The CIT concerned 5) The D.R, “L” Bench, Mumbai 6) Guard file By Order
Dy./Asstt.Registrar I.T.A.T, Mumbai