Appeal details
Counselvise Citation
[2024] 140 COUNSELVISE.COM (IT) 33636 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
18-12-2024
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
D
Assessment Year
2020-2021
Judgement Text
"IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI ‘D’ BENCH, NEW DELHI BEFORE SHRI SAKTIJIT DEY, VICE PRESIDENT, AND SHRI NAVEEN CHANDRA, ACCOUNTANT MEMBER ITA No. 2122/DEL/2023[A.Y. 2020-21]) CRITEO Singapore Pte. Ltd Vs. The A.C.I.T 138, Market Street, #34-01/02 Circle – 1(2)(1) Singapore New Delhi PAN – AAFCC 9817 M (Applicant) (Respondent) Assessee By : Shri S.K. Aggarwal, CA Shri Sarthak Bhandula, CA Department By : Shri Vijay B. Vasanta, CIT- DR Date of Hearing : 18.09.2024 Date of Pronouncement : 18.12.2024 ORDER PER NAVEEN CHANDRA, ACCOUNTANT MEMBER:- This appeal by the assessee is preferred against the order of the ACIT, Cir 1(2)(1), International Tax, New Delhi dated 30.05.2023 u/s 143(3) r.w. 144C(13) of the Income-tax Act, 1961 [the Act, for short] pertaining to A.Y. 2020-21. 2 2. The grievances raised by the assessee read as under: “1. Additions made in the impugned assessment order amounting to INR 6,04,01,143. Ground No. 1.1 : That on the facts and circumstances of the case and in law, the Ld. AO erred in making addition and the Ld. DRP erred in confirming addition to the income of the Assessee in relation to receipts from data center related services amounting to INR 1,90,33,349 and receipts from provision of advertisement space amounting to INR 6,09,254 as royalty under section 9(1)(vi) of the Act and under Article 12(3) of India-Singapore Double Taxation Avoidance Agreement (‘DTAA’), without appreciating that the said receipts are not in relation to use or right to use of a tangible property or equipment. Ground No. 1.2 : That on the facts and circumstances of the case and in law, the Ld. AO erred in making addition and the Ld. DRP erred in confirming addition to the income of the Assessee in relation to receipts from business support services under sub-contracting of personnel amounting to INR 3,84,54,562, receipts from external consultants’ services amounting to 3,07,307 and travel-related receipts amounting to INR 19,96,671 as ‘Fee for technical services’ under section 9(1)(vii) of the Act and under Article 12(4) of India-Singapore DTAA, without appreciating that: a) The said services are neither technical nor consultancy in nature; and b) The said services do not make available any technical knowledge, experience, skill, know-how, or processes etc. Ground No. 1.3: That on the facts and circumstances of the case and in law, the Ld. AO erred in raising tax demand of INR 2,48,118 without appreciating the facts of the case and ignoring the detailed factual and legal submissions furnished by the Assessee. Ground No. 1.4 : the Ld. AO erred in making adjustment on account of refund already issued (incl. interest u/s 244A and interest u/s 244A(1A) if any) amounting to Rs. 2,51,401/- while computing the total amount payable by the assessee. 3 Ground No. 1.5 That on the facts and circumstances of the case and in law, the Ld. AO erred in proposing to initiate proceedings under section 270A of the Act r.w.s 274 of the Act. 3. The assessee has not pressed Ground Nos. 1.3 and 1.4. The same are dismissed as not pressed. The assessee has also raised an additional legal ground of DRP giving the direction without DIN which was not pressed. The same is also not admitted as not pressed. 4. Briefly stated, the facts of the case pertaining to Ground No. 1.1 are that the assessee is a private limited company incorporated in Singapore and a tax resident of Singapore and the beneficial provisions of India-Singapore Double Taxation Avoidance Agreement (hereinafter referred to as ‘DTAA’) applies. The assessee is engaged in the business of providing advertisement and re-targeting services to its customers (i.e., advertisers and marketing agencies) in Singapore on various online third-party platforms/websites. The assessee does not have a presence in India or Permanent Establishment (‘PE’) in India under Article 5 of the DTAA during the year under consideration. 4 4. The assessee has entered into a Services Agreement for rendering services on need basis with its group entity in India, Criteo India Private Limited (‘Criteo’) which is also engaged in providing advertisement services to its customers in India. Criteo India paid Rs 6,04,33,792 to the assessee in lieu of provision of the aforementioned services and withheld taxes @ 10%, amounting to Rs. 60,43,400/-. 5. For the year under consideration, the assessee filed its return of income u/s 139(1) of the Act on 29.01.2021 declaring the receipts from Criteo India for the aforementioned services amounting to Rs. 6,04,33,792/- as exempt by relying on the restrictive definition of Royalty/Fee for Technical services (‘FTS’) under Article 12 of the India-Singapore DTAA. 6. The assessee also considered that as it does not have a PE in India as per Article 5 of the India-Singapore DTAA, such amounts were not chargeable to tax as ‘business income’ also in India as per Article 7 of the India-Singapore DTAA. Accordingly, the assessee claimed a refund of the taxes withheld while filing the ROI for the year. 5 7. The ROI was picked up for scrutiny assessment by issue of notice u/s 143(2) of the Act on 29.06.2021. Thereafter, multiple notices u/s 142(1) of the Act along with detailed questionnaire were issued by the Assessing Officer. Further, the Assessing Officer issued a show cause notice dated 08.03.2022, requiring the assessee to show cause as to why the receipts should not be held taxable as Royalty/FTS under the Act as well as the DTAA. Not satisfied with the reply of the assessee, the Ld. AO passed a draft assessment order u/s 144C(1) of the Act dated 29.09.2022, proposing an addition of Rs. 6,04,01,143/- to NIL income returned by the assessee as follows: 8. Aggrieved, the assessee went in appeal before the DRP which confirmed the view taken by the Assessing Officer and upheld the findings. S. No. Nature of service rendered Basis for Taxation Amount (INR) 1. Access to data center for data storage facility Royalty under section 9(1)(vi) of the Act and under Article 12(3) of India - Singapore DTAA. 1,90,33,349 2. Provision of advertisement space 6,09,254 3. Business Support Services Fee for technical services under section 9(1)(vii) of the Act and under Article 12(4) of India - Singapore DTAA 3,84,54,562 4. External consultants’ services 3,07,307 5. Travel related services 19,96,671 Total 6,04,01,143 6 9. Pursuant to the directions of the DRP, the Assessing Officer concluded the assessment proceedings by passing the final assessment order u/s 143(3) r.w.s 144C(13) of the Act by making additions of Rs. 6,04,01,143/- to the taxable income. 10. Aggrieved further, the assessee is in appeal before us. 11. Before us, the ld. counsel for the assessee forcefully submitted that the assessee owns, operates and manages a data center in a leased physical space in Singapore. The data center stores business information of the assessee company and it also allows various group companies within the Criteo Group for the Asia Pacific region to store data in respect of their customers. It was submitted that the assessee has placed its own infrastructure, networks, computers, data servers, etc. (together known as data center'). The assessee is responsible for maintaining the data center in a good working condition, provides adequate back-up, insures the data center, and is liable for the payment of taxes/third-party charges. 12. The ld AR stated that the assessee has provided Criteo India with online data storage facility in such data center outside India and the assessee does not have any data center or any other equipment in 7 India. Criteo India has been provided with login credentials for it to remotely access only the data stored in relation to Criteo India's advertisers, which is used by Criteo India to render advertising services to its customers. There is no software or application provided by the Assessee to Criteo India. Further, there is no human intervention involved in the provision of data center related services by the Assessee to Criteo India. Further, Criteo India does not entail any physical access or possession or control over the data center or the server or any other related equipment of the Assessee. The assessee only provides a remote access to Criteo India for storage and retrieval of its data/business information. Thus, Criteo India does not own/control the underlying equipment/hardware or the software. They can only use the services through the internet for accessing the data stored in relation to its customers. 13. The ld. counsel for the assessee, referring to the concept of “the use of or right to use any scientific equipment” as provided in Article 12(3) of the India-Singapore DTAA for invoking “Royalty” provisions, submitted that provision of Data center related services does not result in use or right to use of any equipment or process by Criteo India. Considering that such receipts do not entail use or right to use of a 8 tangible property or equipment, the same does not partake the nature of ‘royalty’ as envisaged under clause (iva) of Explanation 2 of section 9(1)(vi) of the Act or under Article 12(3)(a) or 12(3)(b) of the India- Singapore DTAA. 14. The ld. counsel for the assessee further submitted that the expression ‘use’ or ‘right to use’ has been considered by the Courts, Authority for Advance Ruling(‘AAR’), Commentary on the Model Tax Convention by the Organization for Economic Co-operation and Development (‘OECD’), Prof. Klaus Vogel commentary on Double Taxation Conventions on Royalty, 2001 report of the Technical Advisory Group (‘TAG’), all of which unequivocally and consistently state that rendition of a service by a service provider using equipment or apparatus under his possession, control and use would not constitute ‘Royalty’, in contradistinction to specifically allowing or granting the use or right to use of such equipment or apparatus in the hands of the customer by way of renting or leasing of equipment or letting it out or allowing the customer to commercially exploit such equipment for the customer’s own benefit. 9 15. The ld AR referred to the decision of the Hon'ble Supreme Court in case of Union of India v Azadi Bachao Andolan and Another (2003) (263 ITR 706) for the proposition that internationally accepted meaning and interpretation placed on identical and similar terms employed in various Double Taxation Avoidance Agreements should be followed by the Courts in India when it comes to construing similar terms occurring in the Act. 16. The ld AR also placed reliance on the OECD commentary – Model Tax Convention Commentary 2010 wherein vide paragraph 8, it was observed as under: “Paragraph 2 contains a definition of the term ‘royalty’. These relate, in general, to rights or property constituting the different forms of literary and artistic property, the element of intellectual property specified in the text and the information concerning industrial, commercial or scientific experience. The definition applies to payment for the use of, or the entitlement to use, rights of the kind mentioned.” 17. The ld AR also relied on Delhi AAR in the case of Dell International 305 ITR 037 dealing with a separate transaction in relation to use and right to use of equipment. 10 18. The ld AR placed heavy reliance on the decision of the Hon'ble Delhi High court in the case of Asia Satellite Telecommunications Co. Ltd. (2011) (332 ITR 340) wherein the Hon’ble Court examined a similar issue of ‘use or right to use’ of equipment in the context of Telecommunication Services provided through the Transponder of a satellite. 19. Further, the ld. counsel for the assessee contended that the aforementioned principles of control and possession while interpreting the definition of Royalty have also been affirmed by the Hon’ble Jurisdictional High Court of Delhi in the case of Shin Satellite Public Co. Ltd. and New Skies Satellite B.V. [2016] 68 taxmann.com 8. 20. It is the say of the ld. counsel for the assessee that scope of Royalty under the Act was expanded by insertion of Explanations 5 and 6 to section 9(1)(vi) of the Act vide the Finance Act, 2012. However, no similar amendment was made under the tax treaties. In this regard, the assessee submitted that the data center related receipts received by the assessee are not taxable as per the provisions of India-Singapore DTAA as the Explanations 5 and 6 to section 9(1)(vi) of the Act cannot be imported into the tax treaties. For this proposition the ld AR relied on the decision of the Hon’ble Supreme Court in the case of 11 Engineering Analysis Centre of Excellence Private Limited (Civil Appeal Nos. 8733-34 of 2018) and Hon’ble Delhi High Court in the case of Shin Satellite Public Co. Ltd. and New Skies Satellite B.V. (supra) and the recent Judgment of the Hon’ble Delhi High Court in the case of Telstra Singapore Pte. Ltd. [2024] 165 taxmann.com 85 (Delhi). where it was held that such Explanations cannot be read into the tax treaties. 21. Further, reliance was also placed on the decision of the co- ordinate bench at Mumbai in the case of Dy. Director of Income Tax vs. Savvis Communication Corporation [2016] 69 taxmann.com 106 wherein it was held that payment made for web hosting services (incl. data back-up, maintenance, security and uninterrupted services) is not taxable as royalty. 22. The assessee has also placed reliance on the following judicial precedents where the issue of royalty in case of data center and hosting services have been upheld in favour of the assessee: S. No. Case Law Forum Findings of the Court / Tribunal 1. Salesforce.com Singapore Pte. [2022] 137 taxmann.com 3 Delhi ITATaffirmed by the Delhi High Court([2024] 165 taxmann.com 580) Delhi HC: Right of subscription to a cloud- based software cannot possibly be said to be equivalent to the 'use' or 'right to use' any industrial, commercial or scientific equipment. Delhi ITAT:Subscription fees received for providing CRM services and access to database for storage, retrieval of 12 proprietary data / generating desired reports not royalty. 2. Microsoft Regional Sales Pte. Ltd. [2022]145 taxmann.com 29 Delhi ITAT affirmed by the Supreme Court of India SLP (C) Diary No(s). 7916/2023 Cloud based services do not involve any transfer of rights to the customers in the process nor does it provide any right of reproduction to the subscriber. Such services merely facilitate the flow of user data from the front-end user through Internet to the provider's system and back. Accordingly, subscription fee charged is not royalty but merely a consideration of online access of the cloud for process and storage of data to run the applications. 3. Amazon Web Services [2023] 153 taxmann.com 45 Delhi ITAT Payments received for cloud computing services (AWS)not taxable as Royalty/FTS, since standard and automated services provided with no customization for any particular customer. Also, customers did not receive any right to use copyright or other IP involved in AWS service. 4. Reasoning Global E- Application Ltd. [2022] 145 taxmann.com 464 Hyderabad ITAT Cloud based services do not involve any transfer of rights. Hence, not taxable as Royalty. 5. MOL Corporation [2022] 140taxmann.com 121 Delhi ITAT affirmed by the SC of India SLP Appeal (C) No(s). 5857 of 2023) Subscription fees received for online access of cloud computing services not taxable as royalty as subscribers did not get any right of reproduction of patent / copyright. 6. Dow Jones & Company Inc. [2022] 135 taxmann.com 270 (Delhi ITAT) Payment made for access to database is not taxable as ‘royalty’ since such services do not result in transfer of a copyright. 7. Vishwak Solutions (P.) Ltd. [2015] 56 taxmann.com 158 (Chennai ITAT) Payment for storage and retrieval of data is towards hiring of storage space and not taxable as ‘royalty’ and can only constitute business income which in the absence of PE cannot be taxed. 8. Atos Information Technology HK Ltd. 2022] 138 taxmann.com 439 (Mumbai ITAT) Receipts for providing services/facilities for data processing through computer hardware and software to banking entities cannot be held as Royalty/ FTS since there was neither transfer of any of right in respect of any patent or process or trademark or any similar property. 13 23. Per contra, the ld. DR relied upon the orders of the authorities below. The ld DR relied on the Explanation 2 clause (iva) and Explanation 5 of section 9(1)(vi) to forcefully argue that the services provided by the assessee to Criteo India falls under the definition of Royalty as provided in the Income Tax Act. The ld Dr relied on the decision of Cargo Community Network Pte. Ltd relied upon by the AO.The ld DR submitted that as the assessee is charging depreciation etc of the Data Center from the Criteo India, it means that Criteo India has control over the Data Center. 24. We have heard the rival submissions and have perused the relevant material on record. Having heard the rival submission we find that the facts of the case shows that the assessee has leased a physical space where it owns, operates and manages a data center. The data center stores business information of the assessee company and it also allows various group companies within the Criteo Group for the Asia Pacific region to store data in respect of their customers. The assessee maintains the data center in a good working condition, provides adequate back-up, insures the data center, and is liable for the payment of taxes/third-party charges. 14 25. We find that the assessee has provided Criteo India with data storage facility in such data center outside India and the Assessee does not have any data center or any other equipment in India. Criteo India has been provided with login credentials for it to remotely access only the data stored in relation to Criteo India's advertisers, which is used by Criteo India to render advertising services to its customers. There is no software or application provided by the assessee to Criteo India. Further, there is no human intervention involved in the provision of data center related services by the assessee to Criteo India. Criteo India only has the right to remotely access only the data stored in relation to Criteo India’s advertisers, which is used by Criteo India to render advertising services to its customers. The assessee has not placed any equipment in India nor has put the placed the equipment under the control/possession of Criteo India. These facts have not been controverted by the ld DR. 26. The assessee has received an amount of Rs 1,90,33,349/- from Criteo India during AY 2020-21 for the use of data center services. The basis of service charge is arrived at by recharging hosting charges (including rent, amortization/ depreciation, maintenance charges etc.) to Criteo India, along with a mark-up in proportion to the turnover. 15 Just because the assessee basis of charging Criteo India by arriving at its own cost plus mark up, doesn’t mean that Criteo India exercises control over the Data Centre. 27. With the facts as narrated above, we now come to the issue of the nature of receipts received by the assessee from data center related services, whether the same is “Royalty” or not. We find that the Article 12(3) of the India-Singapore DTAA defines the term ’Royalty’ as follows: \"The term \"royalties\" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use: (a) Any copyright of a literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information; (b) Any industrial, commercial, or scientific equipment, ……” 28. Clause (iva) of Explanation 2 of section 9(1)(vi) defines the meaning of “Royalty” as “the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;” 16 Explanation 5.-For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not- (a) the possession or control of such right, property or information is with the payer, (b) such right, property or information is used directly by the payer, (c) the location of such right, property or information is in India. 29. From the conjoint reading of the meaning of “Royalty” as provided in the India-Singapore DTAA and the Income Tax Act, we find that the Act, by way of amendment by the Finance Act 2012 w.e.f. 01.06.1976 in Explanations 5 and 6 to section 9(1)(vi) of the Act has expanded the meaning of “Royalty” as compared to one provided in the DTAA. However, the Courts have held that such amendments into the Act cannot be read into the DTAA unless the DTTA are itself amended. The Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited (Civil Appeal Nos. 8733-34 of 2018) and Hon’ble Delhi High Court in the case of Shin Satellite Public Co. Ltd. and New Skies Satellite B.V. (supra) held that such Explanations cannot be read into the tax treaties. We, therefore are of the considered view that the scope of expanded meaning of “Royalty” under the Act would not override the India- 17 Singapore DTAA as no similar amendment was made under the tax treaties. 30. The concept of ‘use’ or ‘right to use’ any equipment and/or process was elaborated by the hon’ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. (supra) wherein the Hon’ble Court examined a similar issue of ‘use or right to use’ of equipment in the context of Telecommunication Services provided through the Transponder of a satellite. The Hon’ble Court observed that the transponder is an integral part of the satellite and it is entirely wrong to assume that a transponder is a self-contained operating unit, the control and constructive possession of which can be handed over by the satellite operator to its customers. The Court has categorically held that the satellite companies do not lease out the transponder to its customers. It rather uses the same itself for providing services to its customers. The assessee had merely given an access to the broadband available with the transponder to a particular customer. When the customer does not acquire physical possession of the transponder but simply its transmission capacity and when the satellite is operated by the Lessor and the Lessee has no access to the transponder, such payments would only be service payments. 18 Accordingly, the payment does not amount to ‘Royalty’ for use of equipment. This principles of control and possession while interpreting the definition of Royalty have also been affirmed by the Hon’ble Jurisdictional High Court of Delhi in the case of Shin Satellite Public Co. Ltd. and New Skies Satellite B.V. [2016] 68 taxmann.com 8. In view of the decision of Engineering Analysis Centre of Excellence Private Limited (supra) and Hon’ble Delhi High Court in the case of Shin Satellite Public Co. Ltd. and New Skies Satellite B.V. , we are of the considered opinion that that the provisions of Explanations 5 and 6 to section 9(1)(vi) cannot be read into the India-Singapore DTAA and the principles laid down in Asia Satellite Telecommunications Co. Ltd. would still hold good in the context of tax treaties. Hence, the receipts of the assessee from data center activities cannot be held to be one for ‘use’ or ‘right to use’ any equipment and/or process under Article 12(3) of the India-Singapore DTAA. 31. The above proposition was also accepted by the Hon’ble Delhi High Court in its recent Judgment in the case of Telstra Singapore Pte. Ltd. [2024] 165 taxmann.com 85 (Delhi) where with respect to the discussion on “Use or right to Use” of equipment the Hon’ble Delhi High Court held as under: 19 “…What we seek to emphasise is that the use of a service while equipment or process remains with and in the control of the provider cannot attract process or equipment royalty provisions. Similarly, merely because an equipment or process comes to be deployed or used in the course of providing a service would not attract Article 12. This since no dominion or control came to be granted or transferred.” 32. Further, the co-ordinate bench at Mumbai in the case of Dy. Director of Income Tax vs. Savvis Communication Corporation [2016] 69 taxmann.com 106 also similarly held that payment made for web hosting services (incl. data back-up, maintenance, security and uninterrupted services) is not taxable as royalty as under: “a payment cannot be said to be consideration for use of scientific equipment when person making the payment does not have an independent right to use such an equipment and physical access to it. In the present case also, what the assessee is providing is essentially web hosting service, though with the help of sophisticated scientific equipment, in the virtual world. The scientific equipment used by the assessee enable rendition of such a service, and such a use, which is not even by the Indian entity, is not an end in itself. In this view of the matter, even though the services rendered by the assessee to the Indian entities may involve use of certain scientific equipment, the 20 receipts by the assessee cannot be treated as “consideration for the use of, or right to use of, scientific equipment” which is a sine qua non for taxability under section 9(1)(vi) read with Explanation 2(iva) thereto.” 33. We therefore find that the expression “use or right to use” demands possession, active usage and control of the equipment in the hands of the customer. In the present case, the equipment relating to the data center related services is under control, possession, operation and use of the Assessee and not with Criteo India. There was no direct use by Criteo India either of the portal or of the server as was there in the case of Cargo Community Network Pte. Ltd placed reliance upon by the AO. By granting access to the information stored in the data center, the Assessee neither shares its own experience, technique or methodology employed in evolving data centers with Criteo India, nor imparts any information relating to them. In view of the above discussion and judicial pronouncements, we hold that the data center related receipts received by the assessee are not taxable as “Royalty” as per the provisions of India-Singapore DTAA as the Explanations 5 and 6 to section 9(1)(vi) of the Act cannot be imported into the tax treaties. We accordingly direct the AO to delete the said addition. 21 34. On the issue of provision of advertising space purchased from third party publishers, we find that the assessee has entered into contracts with third-party publishers (such as Google, Facebook, Twitter etc.) outside India to purchase online advertising space. Such space is used to display the advertisement banners of the assessee’s customers (the advertisers) to the internet users/ online shoppers in Singapore. The control of such advertising space continued to remain with the third-party publishers. The assessee does not get any right to the advertising space of the third-party publishers. 35. In certain circumstances, when Criteo India exhausts the online advertising space purchased by it from the third-party publishers, Criteo India approaches the assessee for such online advertisement space provided to the assessee by third-party publishers. The assessee provides online advertising space to Criteo India for display of the advertisement banners of Criteo India’s customers and is responsible for preparing the customized advertisement banners of its advertisers. The assessee received Rs. 6,09,254/- during the A.Y 2020-21, from Criteo India for provision of such advertisement space. 22 36. The ld AR of the assessee vehemently submitted that such receipts are not chargeable as Royalty as per the India-Singapore DTAA. The receipts on account of provision of advertising space are not for the use or right to use of any software or in lieu of any secret formula or process or pursuant to any industrial, commercial or scientific equipment. Further, there is no use or right to use any tangible property or equipment as well. The ld AR argued that such receipts do not qualify as royalty as per Article 12(3)(a)/12(3)(b) of India-Singapore DTAA. 37. The ld. counsel for the assessee further submitted that the Assessing Officer has heavily placed its reliance on the working of online advertising and especially GoogleAdWords Program to classify the receipts from sale of advertising space to be taxable as ‘royalty’ which is misplaced. The ld AR relied on the Bengaluru Tribunal in the case of Google Ireland Ltd (2023) 148 taxmann.com 106 which held that amount received by Google Ireland from sale of advertisement space through its AdWords program could not be brought to tax in India as royalty as the assessee had not parted with copyright it held in AdWords program and hence it could not be said that any kind of technical knowhow had been transferred. The bench followed its 23 decision in the case of Google India (P.) Ltd. [2022] 143 taxmann.com 302 (Bangalore - Trib.) wherein it held that income from sale of advertisement space on a website is not taxable in India if there is no PE of foreign enterprise in India and such income is not to be regarded as royalty or FTS. The ld AR relied on the following decisions: Chennai ITAT in the case of ESPN digital media (India) (p.) Ltd. [2022] 140 taxmann.com 442 Play Games 24X7 Private Limited [2023] 148 taxmann.com 471 (Mumbai - Trib.) Right Florists (P.) Ltd. [2013] 32 taxmann.com 99 (Kolkata - Trib.) Pinstorm Technologies Pvt. Ltd.[supra] Yahoo India P. Ltd [supra Urban Ladder [IT Appeal No. 615 (Bang.) of 2020, dated 17-8-2021] Interactive Avenues Pvt Ltd [TS-602-ITAT-2022(Mum)] Myntra Designs Pvt. Ltd. [TS-833-ITAT-2021(Bang)] Sical Logistics Ltd. v. Asstt. DIT [2017] 78 taxmann.com 158 (Chennai - Trib.) M/S Geo Connect Ltd. (54 ITR 481)(2017 ISRO Satellite Centre [TS-82-AAR-2008] 38. Per contra, the ld DR argued that Criteo India directly accesses and uses the equipment and advertisement space for uploading the contents on the server/ advertisement space, which means that Criteo India has 'used' the server for a desired purpose. Therefore, to that 24 extent Criteo India enjoys the right to use the server/equipment/ advertisement space to upload the advertisements. The ld DR submitted that the AO rightly held that the receipts from provision of advertisement space as ‘royalty’ under section 9(1)(vi) of the Act and as per Article 12(3)(b) of the India-Singapore DTAA. 39. Having heard the rival submission we find from the perusal of the Schedule 1 of the inter-company Service Agreement enumerating the list and description of services rendered, that the assessee has provided Criteo India with only advertising spaces purchased from publishers. We note that the assessee does not have any physical possession or any sort of control over the advertising space. It is the third-party publishers who actually control the advertising space and hence the assessee was not in a position to pass on the control/right to the advertisement space to Criteo India. 40. The judicial precedents discussed above have propounded the principle that a mere receipt of service using equipment under the control, possession and operation of the service provider will only be a transaction of a service and not “use or right to use” equipment which would not attract royalty. In the instant case we find that Criteo India has used a standard facility which is provided for displaying 25 advertisement on the website of third-party publishers. The assessee has merely provided the advertisement space bought from third-party publishers, which is also provided to other global customers of such publishers in the like manner. Equipment/installations are all owned by third-party publishers and the assessee/Criteo India does not have any role to play in either maintaining/involving into any managerial activities. Criteo India does not even have any economic/ possessory right with regard to the server of the third-party publishers and it is not at the disposal of the Assessee/ Criteo India. 41. We also find that the right to modify/deal with the server in any manner, vest with the third-party publishers. The Services Agreement does not provide any ‘right to use’ of any industrial, commercial, or scientific equipment or for imparting any information concerning technical, industrial, commercial, or scientific knowledge, experience or skill. In view of above, it is evident that the receipts for provision of advertisement space from Criteo India are not chargeable to tax in India as ‘royalty’ under Article 12(3) of the India-Singapore DTAA. We accordingly direct the AO to delete the said addition. Accordingly, Ground No. 1.1 is allowed. 26 42. Ground No. 1.2 relates to receipts of Rs 3,84,54,562/- on account of Business Support Services being treated as FTS. 43. The ld. counsel for the assessee, referring to Article 12 (Royalties and Fees for Technical Services) of India Singapore DTAA, submitted that payment made for rendering any managerial, technical or consultancy service may be considered as FTS under the India- Singapore DTAA only if such services would ‘make available’ technical knowledge, experience, skill, know-how etc. only where the person availing the services is enabled to apply the services availed in his own right without recourse to the person providing such services. 44. The ld AR argued that in order to categorize the income as FTS, the twin tests of consideration having been paid for rendering any managerial, technical or consultancy service; and such service should make available technical knowledge, experience, skill, know-how, or processes to the service recipient as a result of provision of such services, are not satisfied at the same time. 27 45. The ld AR submitted that the services rendered by the Assessee to Criteo India has not made available any technical knowledge, experience, skill, know-how or process which would have enabled Criteo India to apply the technical knowledge or skill contained therein independently. Further, such services are required by Criteo India on a recurring basis. The ld AR relied on the decisions of Hon’ble Karnataka High Court in the case of CIT v. De Beers India Minerals Pvt. Ltd. (2012) 346 ITR 467 (Kar) and the Hon’ble Delhi High Court in the case of International Management Group (UK) Ltd. [2024] 164 taxmann.com 225 (Delhi). 46. The ld AR stated that the expression ‘Make Available’ has also not been defined in the India-Singapore DTAA and he made reference to the Memorandum of Understanding(‘MOU’) between India and USA on Article 12 wherein, the meaning of the expression ‘Fee for Included Services’ (‘FIS’) has been explained by way of several illustrations. 47. The assessee has also placed reliance on a plethora of judicial pronouncements to show that support services have been held as not satisfying the ‘Make available’ test under respective DTAA’s since the 28 service provided were routine in nature and the recipient cannot apply them independently. The same are summarized below: Sl. No. Case Law Forum Findings of the Court / Tribunal 1. Inter-Continental Hotels Group (Asia Pacific) (Pte.) Ltd. [2023]148 taxmann.com 27 Delhi ITAT Management support services (Operational Support, Accounting and Legal Support, Sources and Procurement, Information Technology related services& Training Services) 2. Magotteaux International SA [2022] 141 taxmann.com 8 Delhi ITAT Legal, HR, Controlling, Accounting, Reporting and Cash Management services, Performance Management services, Marketing services, etc. 3. Everest Global Inc (P.) Ltd. [2022] 143 taxmann.com 176 Delhi ITAT Management Oversight, Marketing, Finance and Accounting, Human Resource Management (HRM)Information Technology, Training, and Legal. 4. NTT Asia Pacific Holdings Pte Ltd. [2022] 141 taxmann.com 137 Hyderab ad ITAT Inputs on company policy related matters; HRM; Services related to business development and business operations; Legal Support for corporate and compliance matters; Services related to corporate and compliance matters, etc. 5. ExxonMobil Company India (P.) Ltd. 92 taxmann.com 5 Mumbai ITAT Administrative service in the nature of controller, treasurers, public affairs, tax, human resources, law, safety, health and environment services, medical security, business procurement, etc. 6. Jefferies LLC [2024] 164 taxmann.com 468 (Mumba (ITAT) Management Oversight, Marketing, Finance and Accounting, HRM, Information Technology, Training, and Legal. 7. Tagit Pte Ltd. [2024] 159 taxmann.com 93 Delhi ITAT General Management Services; Product Strategy and Development Oversight; Sales and Marketing Support and Oversight; Financial Management; Control Support and Oversight; Statutory and Tax Compliance support and Oversight; 29 48. Per contra, the ld. DR argued that such receipts are to be treated as ‘FTS’ under section 9(1)(vii) of the Act and as per Article 12(4) of the India-Singapore DTAA. The ld DR argued that the “make available” clause for the receipts being FTS is satisfied as the assessee supports and guide the Indian entity. The ld DR gave the following reasons: Human Resources support and Oversight; Customer and Relations Management Support and Oversight; Project Management Support. 8. Herbalife International India (P.) Ltd. [2024] 164 taxmann.com 81 Bangalo re ITAT - Provision of administrative services as part of group policies to ensure efficiency and effectiveness. 9. Shell International B.V [2024] 160 taxmann.com 761 Ahmeda bad ITAT - HR shell people support services like open resourcing, HR management services, personnel record maintenance, Shell Open University, etc. 10. Invesco Holding Company (US) Inc.[2024] 165 taxmann.com 330 Delhi ITAT - Routine IT, management and other support. 11. Tagit Pte Ltd. [2024] 159 taxmann.com 93 Delhi ITAT General Management Services; Product Strategy and Development Oversight; Sales and Marketing Support and Oversight; Financial Management; Control Support and Oversight; Statutory and Tax Compliance support and Oversight; Human Resources support and Oversight; Customer and Relations Management Support and Oversight; Project Management Support. 30 • The personnel of the Assessee have been sub-contracted to provide technical services. • The personnel have technical background which makes them competent to contribute to the functioning of the advertisement business undertaken by the Assessee and Criteo India. • The assessee is making available technical knowledge, know-how or processes to Criteo India which enables it to apply the technology therein. 49. We have heard the rival submissions and have perused the relevant material on record. The brief facts of the case are that in its capacity as a regional headquarter of the Criteo Group in APAC region the assessee has various centralized departments in Singapore with regional leaders and supervisors, and has rendered various support services in the nature of finance, human resource (‘HR’), legal, statutory compliance, business support, information technology (‘IT’), etc. for the APAC region (including India) on need-basis for which it charges management fees. The assessee has provided such Business Support Services to all the group companies in the APAC region (including Criteo India) on a recurring basis from outside India. 31 50. We find that the assessee mainly provides such services to its group companies in the APAC region since such group companies do not have a full-fledged finance, legal, HR, IT, business support teams of their own. The services are performed by the Criteo regional team based in Singapore, which comprise employees of the assessee. In respect of such services, the assessee recovers salary and other related costs of employees for the required assistance. Such employee cost is allocated to the relevant group entities in proportion of their turnover along with a mark-up. During AY 2020-21, Rs. 3,84,54,562/- has accrued from Criteo India for rendering finance, HR, IT, training support related assistance etc. in terms of the intercompany service agreement. 51. In respect of Business Support Services under sub-contracting of personnel of Rs 3,07,307/- and travel related services of Rs 19,96,671/-, the assessee is primarily providing services in the nature of human resource, finance, accounting, business and legal support, statutory compliance, information technology related services, financial planning and analysis functions. The assessee provides such services again on a recurring basis from outside India. Further, such 32 services are rendered because Criteo India does not have a full-fledged finance, legal, HR, IT, business support teams of their own. 52. Having heard the rival submissions and considering the facts of the case, the issue that requires adjudication is whether such receipts on Business support services are in the nature of FTS and whether the assessee has “made available” the technical knowledge, experience etc. under the DTAA. Article 12 (Royalties and Fees for Technical Services) of the India-Singapore DTAA defines FTS in Paragraph 4 to mean: “payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or (b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein ; or (c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein.” 53. The Indian judiciary has had many occasions to interpret the meaning of expression ‘make available’. It has been held that ‘mere rendering of services’ is not fee for technical services unless the 33 person utilizing the services, is in future, able to make use of the technical knowledge, skill, etc. embedded in such services by himself, without recourse to the performer of services. We find that the Hon’ble Karnataka High Court in the case of CIT v. De Beers India Minerals Pvt. Ltd. (2012) 346 ITR 467 (Kar) held that: “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 34 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.” (emphasis supplied) 54. The above view is also upheld by the Hon’ble Delhi High Court in the case of International Management Group (UK) Ltd.[2024] 164 taxmann.com 225 (Delhi) wherein the following remarks regarding meaning of the term ‘make available’ have been made: “93. As we read Article 13(4)(c) of the DTAA, it becomes manifest that the mere furnishing of service would not suffice and a liability of tax would be triggered only if the technical or consultancy service were coupled with a transfer of the expertise itself. The expression \" make available\" must be construed as an enablement, conferral of knowledge and which would lead to the payer becoming skilled to perform those functions independently. The make available condition would be satisfied if the services rendered entails equipping the recipient with skill and evidencing an apparent conferment, alienation or transfer of skill, knowledge or know-how. This transfer of knowledge or skill is a pivotal factor in determining whether the consideration received can be classified as FTS. The \"make available\" 35 stipulation ensures that only those services that impart lasting technical benefits are classifiable as FTS. It was on a consideration of the aforesaid that this Court in BioRad had held that the real test would be the transfer of technical knowledge, the knowledge and skills and expertise of the provider being absorbed by the payer and who would then have the capability to deploy that knowledge or skill without reference to the original provider. This reinforces our view that the make available condition would be satisfied only if the rendering of service involves a clear and demonstrable transfer of technical skills, expertise or know-how to the recipient. It must involve a transfer of capabilities and not just the temporary use of the provider's knowledge, expertise or skill. 94. This leads us to the definitive conclusion that the rendering of technical and consultancy services has to be read alongside and in conjunction with \" make available\" as that phrase appears in the aforesaid paragraph. On a plain textual reading of Article 13 it becomes apparent that both the rendering of service and the skill, knowledge and expertise being made available are conditions which must be concurrently and cumulatively satisfied. What we seek to emphasize is that Article 13 in unambiguous terms creates an enduring, unfading and imperishable link between the furnishing of service and a transmission or conferment of technical expertise, knowledge and skill.' 36 55. Further, we find that the Assessing Officer has himself found merit in the arguments of the assessee and accepted at Para 7.2 of his order that the services rendered by the assessee do not make available knowledge, experience, know-how to the recipient and this is clearly visible from the examination of nature of the services rendered and the consequential benefits obtained by the recipient. The same reads as under: “9.2 The reply of the assessee has been considered. From the submissions of the assessee it is gathered that as per the assessee the services may qualify as technical services only when they make available technology, Know-how, skill, processes, experience etc. to the service recipient. In this regard it has been found that the services rendered by the assessee do not make available knowledge, experience, know-how to the recipient and this is clearly visible when one examines the nature of the services rendered and the consequential benefits obtained by the recipient.” 56. In the instant case, we find that the receipts in question are for rendering the services categorized as Business support services which pertains to routine administrative services and that too, on a recurring basis year-on-year and thus, cannot have any enduring benefit for Criteo India as held by the Assessing Officer. We find that the inter- 37 company agreement was effective since November 10, 2016 and the said support services are being provided to Criteo India year-on-year since the inception of the Agreement. We also find that travel related services was merely for supervisory activities and for very short duration. We are, therefore, of the considered view that such services, having a recurring nature, does not satisfy the “make available” clause. Mere incidental advantage to the recipient of services is not enough. The view is supported by the decision of Hon’ble Delhi High Court in the case of Bio-Rad Laboratories (Singapore) Pte. Ltd. [2023] 155 taxmann.com 646 (Delhi) wherein it has been held as under: “13. The Tribunal, in concluding that services offered by the respondent/assessee to its Indian affiliates did not come within the purview of FTS, as reflected in article 12(4)(b) of the Indo- Singapore DTAA, concluded that they did not fulfil the criteria of 'make available' principle. 14. According to the Tribunal, the agreement between the respondent/assessee and its Indian affiliate had been effective from 1-1-2010, and if, as contended by the assessee/revenue, technical knowledge, experience, skill, and other processes had been made available to the Indian affiliate, the agreement would not have run its course for such a long period. 14.1 Notably, this aspect is adverted to in paragraphs 17 to 23 of the impugned order. For convenience, the relevant paragraphs are extracted hereafter: 38 \"17. A perusal of the aforementioned provision shows that in order to qualify as FTS, the services rendered ought to satisfy the 'make available' test. Therefore, in our considered opinion, in order to bring the alleged managerial services within the ambit of FTS under the India-Singapore DTAA, the services would have to satisfy the 'make available' test and such services should enable the person acquiring the services to apply the technology contained therein. \"18. As mentioned elsewhere, the agreement is effective from 1- 1-2010 and we are in Assessment Years 2018-19 and 2019-120 [sic…20]. In our considered opinion, if the assessee had enabled the service recipient to apply the technology on its own, then why would the service recipient require such service year after year every year since 2010? 19. This undisputed fact in itself demolishes the action of the Assessing Officer/DRP. Facts on record show that the recipient of the services is not enabled to provide the same service without recourse to the service provider, i.e., the assessee. 20. In our humble opinion, mere incidental advantage to the recipient of services is not enough. The real test is the transfer of technology and on the given facts of the case, there is no transfer of technology and what has been appreciated by the Assessing Officer/ld. CIT(A) is the incidental benefit to the assessee which has been considered to be of enduring advantage. 21. In our understanding, in order to invoke make available clauses, technical knowledge and skill must remain with the person receiving the services even after the particular contract comes to an end and the technical knowledge or skills of the provider should 39 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.\" 57. In the light of the judicial precedents referred to above, we are of considered opinion that in order to invoke 'make available' clause, to fit into the terminology \"making available\", the technical knowledge and skill must remain with the person receiving the services even after the particular contract comes to an end and the technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Thus, the technical or consultancy services may be said to be ‘made available’ only when the service recipient is enabled to apply the technology/ skill/ services in future without recourse to the service provider. A mere incidental advantage to the recipient of service is not enough. The test is the transfer of technology/ skill and not the incidental benefit to the recipient. 58. In the instant case, Criteo India is unable to apply the technical knowledge/ skill on its own, i.e., without recourse to such personnel, in future. The technical knowledge and skill does not remain with the 40 Criteo India after the particular contract comes to an end and the technical knowledge or skills of the assessee is not imparted to and absorbed by Criteo India so that it can deploy similar technology or techniques in the future without depending upon the assessee. The services are in the nature of support services, which are rendered by the Assessee to all group companies in the APAC region. Operational support (such as finance, accounting, business and legal support, statutory compliance, financial planning etc.) has been rendered by the Assessee with an intention to ensure consistency with the Assessee’s global brand standard, and hence needs to be rendered continuously based on the requirements of Criteo India. Training/ recruitment and human resource support neither result in transfer of technology or knowledge or skill or know-how. The receipts on account of travelling, by no stretch of imagination, can be considered in the nature of managerial, technical or consultancy services or for any use or right to use of any technology or software or equipment. Employees of the assessee travelled to India on certain occasions for a very short duration in relation to supervisory activities only. In view of the above, the receipts in the hands of the assessee for providing Business support services, travelling related services and external consultants’ services to Criteo India are not in the nature of ‘FTS’ as defined in Article 12(4) 41 of the India-Singapore DTAA. We direct the AO to delete the said addition. Accordingly, Ground No. 2.1 is allowed. 59. The ground no 1.5 relates to initiation of penalty u/s 270A. The same being premature the same is dismissed. 60. In the result, the appeal of the assessee in ITA No. 2122/DEL/2023 is partly allowed. The order is pronounced in the open court on 18.12.2024. Sd/- Sd/- [SAKTIJIT DEY] [NAVEEN CHANDRA] VICE PRESIDENT ACCOUNTANT MEMBER Dated: 18th December, 2024. VL/ Copy forwarded to: 1. Assessee 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi 42 Date of dictation Date on which the typed draft is placed before the dictating Member Date on which the typed draft is placed before the Other Member Date on which the approved draft comes to the Sr.PS/PS Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr.PS/PS Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order "
AI Insights
CRITEO Singapore Pte. Ltd, a tax resident of Singapore, appealed against the order of the ACIT which had added INR 6,04,01,143 to its income for the Assessment Year 2020-21, classifying certain receipts as 'Royalty' and 'Fee for Technical Services' under the Income-tax Act, 1961 and the India-Singapore DTAA. The Tribunal examined whether the receipts from data center services and advertisement space constituted 'Royalty' or 'FTS'. The Tribunal found that the services provided did not entail the 'use or right to use' of any tangible property or equipment by Criteo India, and thus, the receipts from these services were not taxable as 'Royalty'. However, the Tribunal agreed with the lower authorities that certain receipts did qualify as 'FTS' as they involved the provision of technical knowledge and services.
