TATA TECHNOLOGIES INC, PUNE V. ACIT(IT), Circle-2, PUNE

ITA 1967/PUN/2019

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 5925 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-12-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2015-2016
• Appeal Filed On: 11-12-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Double taxation relief
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH, ‘C’ PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER आयकर अपील सं. / ITA No.1967/PUN/2019 िनधा रण वष / Assessment Year : 2015-16 Tata Technologies Inc., C/o. Tata Technologies Ltd., Plot No.25, Rajiv Gandhi Infotech Park, Hinjewadi, Pune 411 057 PAN : AAECT7173N Vs. ACIT (IT), Circle-2, Pune Appellant Respondent आदेश / ORDER PER R.S.SYAL, VP : This appeal by the assessee is directed against the final assessment order dated 03-10-2019 passed by the Assessing Officer (AO) u/s. 144C(13) r.w.s. 143(3) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation to the assessment year 2015-16. 2. The first issue raised in this appeal is against the chargeability of Rs.52,73,977/- as `Fees for technical services’. 3. The facts of the case, in a nut shell are that the assessee is a Company incorporated in the United States of America. It is Assessee by Shri Dhanesh Bafna & Smt. Chandni Shah Revenue by Shri Piyush Kumar Singh Yadav Date of hearing 14-12-2021 Date of pronouncement 21-12-2021 ITA No.1967/PUN/2019 M/s. Tata Technologies Ltd., 2 engaged in the business of providing design engineering, PLM and related IT services to leading manufacturers and their suppliers in the automotive, aerospace and general manufacturing industries. A return of income was filed declaring Nil income, claiming that it did not have any Permanent Establishment (PE) in India. During the course of the draft assessment proceedings, the AO observed that the assessee received a sum of Rs.1,69,29,769/- towards ‘Provision of Design and Engineering services’. The AO did not dispute the non-chargeability of Rs.1.17 crore out of such receipts. The remaining sum of Rs.52,73,977/- received from Tata Technologies Limited, India (TTL) for providing services to Tata Motors Limited, India (TML) was construed by the AO as fees for technical services. The assessee’s contention that it did not ‘make available’ any technical knowledge, experience or skill etc. through the services and hence, was outside the ambit of taxation in terms of Article 12(4) of the Double Taxation Avoidance Agreement between India and USA (DTAA), did not find favour with the AO. Treating the said amount as `fees for technical services/fees for included services’, the AO proposed to include Rs.52.73 lakh in the total income. The assessee remained unsuccessful before the Dispute Resolution Panel (DRP), which ITA No.1967/PUN/2019 M/s. Tata Technologies Ltd., 3 echoed the view of the AO that the amount received by the assessee was for services with reference to contract between TTL and TML and was hit by section 9(1)(vii) of the Act and also Article 12 of the DTAA. The AO passed the final assessment order including such amount in the total income. Aggrieved thereby, the assessee has come up in appeal before the Tribunal. 4. We have heard the rival submissions and scanned through the relevant material on record. Before deciding as to whether the amount received by the assessee is includible in its total income, we need to understand the real nature of the transaction. TTL is an Indian company which provides Engineering Solutions and Systems. TML is a manufacturer of motor vehicles in India. TML intended to develop and produce vehicles for both domestic and overseas markets and it entered into an Agreement with TTL in the year 2008 for availing the latter’s knowledge, experience and engineering work. A copy of the Agreement is available at page 4 onwards of the paper book. Article 3 of the Agreement defines `Scope of work’. Para 3.1 states that: “The work scope of this Agreement will be limited to those activities as set forth in Exhibit- 1. TTL will carry out the Project specified in accordance with the Schedule. TTL will report the Project results as set out in Exhibit- ITA No.1967/PUN/2019 M/s. Tata Technologies Ltd., 4 1”. Para 3.2 of the Agreement enumerates that “TML may at any time during the term of this Agreement request a variation to the work scope. This will be communicated in writing to TTL. TTL will inform TML about the implications of the project variation in- terms cost, timeline and work scope and submit a proposal for the same”. Article 6 of the Agreement provides that: “All Intellectual Property Rights created, developed or otherwise generated or arising from the services under this Agreement shall be owned solely by TML”. On perusal of the relevant Articles of the Agreement, it transpires that TML wanted to manufacture certain vehicles both for domestic and overseas markets and thus it engaged TTL for the rendition of engineering services. In terms of Article 3.2 of the Agreement about variation to the to the work scope, TTL and TML signed a Project Variation Request (PVR) dated 27-06-2014, whose copy is available at page 21 onwards of the paper book. This PVR is in connection with Vista Facelift (FL) Left hand Drive (LHD) and New Car Assessment Programme (NCAP) 3 star. Clause 2 of the PVR talks of `Scope of work’ by stating that: “TTL shall perform the activities required for the management, design, engineering and development for the 2014 Vista FL LHD and Vista FL LHD with NCAP 3 star”. The ITA No.1967/PUN/2019 M/s. Tata Technologies Ltd., 5 activities to be performed by TTL include - Review key requirements for packaging/layout as required for NCAP 3 star, benchmark data, design brief and any other relevant necessary documents; Define modified architecture/structure for systems and components; Develop all 3D and 2D math data to TML Standards for all component assembly; Track the cost and BOM changes; Carry out interior ergonomic and safety evaluation study; Creation of graphical BOM for all change parts; Coordination and update designs to meet manufacturing and technical services requirements regarding infrastructure modifications to ensure complexity with current products; Construct the required Vehicle Configuration (VC) with all necessary components required to construct the full VC for the X101Aa (Vista FL LHD and FL LHD NCAP 3 star) including existing component designs necessary to support the specified content; Suggest Vehicle technical Specification for Vista FL LHD and FL LHD NCAP 3 star etc. Clause III of the PVR states that: “TTL shall prepare the Overall schedule, project plan and manage according to the agreed plan; Conduct periodic technical and design reviews; and Ensure Quality gate reporting using TML templates”. Clause IV refers to Deliverables for Phase I, which states that TTL shall deliver the Report of the work ITA No.1967/PUN/2019 M/s. Tata Technologies Ltd., 6 containing, inter alia, “Full Vehicle level directional assessment and options for ENCAP 3 star; Battery packaging options; Seat belt and anchorage considerations; Vehicle Configuration (VC) with all necessary components required to construct the full VC for the X101Aa (Vista FL LHD and FL LHD NCAP 3 star) VTS; Advanced Supplier Landscape; Manufacturing Feasibility Considerations; Virtual Benchmarking Data”. Annexure II is a Format for Project Variation Request, whose filled-up copy dated 27-06-2014 between TML and TTL is available at page 28 onwards of the paper book. The subject of the PVR has been mentioned: `PVR for Phase 2 of Engineering & Development of cockpit & console for Vista X101A LHD non-ENCAP version’. ‘Scope of work’ states that TTL shall be responsible, inter alia, for Updating the 3D cad data of components & assemblies to latest level of RHD cad data; Engineering Data Finalization/updating based on peripheral part changes for LHD; Packaging & Integration of the items in cockpit; Design reviews in TML; Design optimization; 3D CAD standards; 2D Drawings; Documents; Regulations; PLM support; and TTL support required. It is clear from this PVR that TML wanted TTL to give design and engineering services for development of cockpit and console for a ITA No.1967/PUN/2019 M/s. Tata Technologies Ltd., 7 new vehicle Vista X101A LHD. TTL was to provide complete engineering and design of cockpit & console under this Project Variation Request for Vista X101 LHD vehicle. The ambit of TTL’s work extended to design reviews; design optimization, drawings and also preparing and submitting documents till SOP. One of the responsibilities of TTL, which is material for our purpose, has been enshrined under `TTL Support required’ which states as under: “Manpower Support from TTL US: Following manpower support required from TTL US 01 Project engineer : From start of project till FDJ. Project Engineer to responsible for a. Ensuring delivery at each milestone on time b. Managing issue tracker c. Ensuring all issues has been resolved with solution from TTL d. Update Project status e. Participate in all the reviews/meeting in TML, with supplier. Understand the requirements of CFT members. Provide technical solutions. 01. Design Lead : From Start of Project till SOP. Design lead to responsible for a. CAD & 2D release on time b. Resolution of all the issue till SOP c. Give solutions for all the issues & failures from testing, supplier, service, design reviews, design optimizations. f. Participate in all the reviews/meeting in TML, with supplier. Understand the requirements of CFT members & ensure the delivery in time.” ITA No.1967/PUN/2019 M/s. Tata Technologies Ltd., 8 5. The same para further provides for the manpower support required from TTL India. It states that TTL India shall send manpower support required to complete the project on time and to meet all the deliveries as indicated in this documents, who will be responsible for update 3D CAD & 2D drawings as per design lead; release 3D CAD, drawings in PLM; Participate in reviews & meeting in TML or outside the TML; and Give Solutions for all the issues & failures from testing, supplier, service, design reviews, design optimizations. 6. On going through the above PVR, it clearly transpires that the TTL was supposed to do complete engineering and development of cockpit & console for Vista X101A LHD non- ENCAP version starting from design till the completion of the project. The PVR also talks of manpower support required from the TTL, US, the assessee under consideration in connection with the project. It is in lieu of providing such support by the assessee to TTL in the project of TML that it was paid Rs.52.73 lakh under consideration, which has been held by the AO to be `fees for technical services’ as well as `fees for included services’ and hence chargeable to tax. The manpower support required from the assessee by TTL was only of two personnel, viz., one Project ITA No.1967/PUN/2019 M/s. Tata Technologies Ltd., 9 Engineer and one Design Lead. The Project engineer was responsible from the start till the end of the project for ensuring delivery at each milestone on time; Managing issue tracker; Ensuring all issues has been resolved with solution from TTL; Update Project status; Participate in all the reviews/meeting. On going through the above responsibilities of the Project engineer of the assessee, it becomes graphically clear that his role was of supervisory nature for ensuring timely delivery at each milestone, issuing trackers and ensuring that all the issues were resolved. The second person extending manpower support from the assessee is one Design Lead who was responsible for CAD & 2D release on time; Resolution of all the issue till SOP; Give solutions for all the issues & failures from testing, supplier, service, design reviews, design optimizations; and Participate in all the reviews/meeting for ensuring the delivery in time. This shows that the duty of the Design Lead was from start of the project till devising Standard Operating Procedures. He was responsible for releasing CAD & 2D in time, resolving all the issues till SOP, and participating in all the review meetings in TML etc. 7. On going through the responsibilities of the Project Engineer and Design Lead provided by the assessee to TTL in connection ITA No.1967/PUN/2019 M/s. Tata Technologies Ltd., 10 with the project with TML, it gets abundantly clear that they were to ensure that the requisite milestones were timely achieved and that all the issues were properly resolved. No doubt, such services were also laced with some technical knowledge, but were predominantly of supervisory nature, which were to assist TTL in the project with TML. Whereas the project entailed provision by TTL to TML of Engineering and developing cockpit & console services for the new vehicle, the role of the assessee was confined only to ensuring smooth sailing of the project with the help of two of its personnel. Por una parte, the services by TTL can be loosely described as making available the technical services to TML, por otra parte, the services provided by the assessee are principally in the realm of supervisory having a touch of technical knowledge, which did not provide anything tangible either to TTL or TML. 8. The ld. AR did not dispute the consideration received by the assessee from TTL in the TML project as fees for technical services covered u/s.9(1)(vii) of the Act. His reliance was only on the DTAA for claiming that the amount received by the assessee was not in the nature of `Fees for Included services’ covered under Article 12 of the DTAA, which defines the expression `Fees for included services’ in para 4 as under : ITA No.1967/PUN/2019 M/s. Tata Technologies Ltd., 11 “4. For purposes of this Article, ‘fees for included services' means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of 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, or consist of the development and transfer of a technical plan or technical design.” 9. The opening part of para 4 of Article 12 of the DTAA states that `Fees for included services’ means payment of any kind in consideration for rendering of any technical or consultancy services including through the provision of services of technical or other personnel. The nature of services provided by the assessee to TTL are covered within the opening part of para 4. However, such services can be considered as `Fees for Included services’ liable to tax in the source country only if, insofar as we are concerned, they make available technical knowledge, experience, skill etc. The expression make available contemplates providing technical knowledge, experience or skill etc. by one person to another for enabling the other to utilize the same after its receipt at a time disassociated from its receipt. To put it simply, the technical knowledge, experience, skill etc. should not get exhausted in the service itself. Something should be provided in such a manner that ITA No.1967/PUN/2019 M/s. Tata Technologies Ltd., 12 the receiver may use it after its receipt. If certain technical or consultancy services etc. are provided by one, which get exhausted in the process of providing such services, they do not ‘make available’ any technical knowledge, experience, skill etc., to the other. Extantly, we are confronted with a situation in which the assessee provided technical or consultancy services through its two employees which were consumed in the provision of services itself and nothing was ‘made available’ to TTL or TML for afterwards use. The PVR clearly refers to certain deliverables by TTL to TTM, such as, Vehicle Configuration (VC) with all necessary components required to construct the full VC for the X101Aa (Vista FL LHD and FL LHD NCAP 3 star) VTS and Manufacturing Feasibility Considerations, which refer to making available the requisite design or engineering to TML. Unlike TTL, there is no reference to any deliverables in the PVR by the assessee either to TTL or TML, which further fortifies that services rendered by the assessee are albeit in realm of technical services but are not made available to anyone. Whereas the provision of Engineering and Design services by TTL to TML satisfy the test of ‘make available’, the provision of services by the assessee to TTL fall short of the same and hence they do not fall within the ITA No.1967/PUN/2019 M/s. Tata Technologies Ltd., 13 definition of `Fees for included services’ under Article 12(4) of the DTAA. Going with the mandate of section 90(2) of the Act, it is the definition of `Fees for Included services’ under the DTAA which would prevail over the definition of `Fees for technical services’ u/s.9(1)(vii) of the Act. Since the assessee did not receive any Fees for Included services under Article 12(4) of the DTAA to TTL, the sum of Rs.52.73 lakh, can’t be charged to tax as Fees for Technical services. 10. We have observed above that the assessee categorically stated before the AO that it did not have any Permanent Establishment in India, which point has not been controverted by the Officer. In the absence of the assessee having any PE in India as per Article 5 of the DTAA, the amount received from TTL cannot be considered as Business profits in terms of Article 7. We, therefore, hold that the amount of Rs.52.73 lakh is not chargeable to tax. This ground is allowed. 11. The next issue raised in this appeal is against the taxability of Software License fees amounting to Rs.65,28,405/-. The AO observed that the assessee is a distributor of software licenses, who acquired the software packages from third party and sold the same to TTL. In turn, TTL sold such software licenses to the customers ITA No.1967/PUN/2019 M/s. Tata Technologies Ltd., 14 in India after adding appropriate mark-ups. Relying on the judgment of the Hon’ble Karnataka High Court in CIT Vs. Synopsis International Old Limited (2013) 212 taxman 454 (Kar.) and host of other decisions, the AO opined that the sale of software licenses was to be charged to tax as Royalty both under the Act as well as the DTAA. No reprieve was given by the DRP, against which the assessee has come up in appeal before the Tribunal. 12. Having heard both the sides and gone through the relevant material on record, it is found as an admitted position that the assessee acquired software packages from third party for further distribution to the Indian entities. The question is only about chargeability of Rs.65.28 lakh received by the assessee from the sale of such software in India. 13. At this juncture, it would be relevant to take note of Article 12 of the DTAA, which defines the term ‘Royalties’ in para 3 as under: The term ‘royalties' as used in this Article means : (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information ITA No.1967/PUN/2019 M/s. Tata Technologies Ltd., 15 concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and (b).... 14. The above paragraph clearly indicates that the Royalty means consideration for use or right to use any copyright of a literary, artistic or scientific work etc. The question whether the sale of computer software would partake of the character of Royalties or Business Profits, recently came up for consideration before the Hon’ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (2021) 432 ITR 472 (SC). After analyzing the identical issue in the backdrop of similar expression as used in Article 12(3), it has been held that ownership of copyright in a work is different from the ownership of the physical material in which the copyrighted work may happen to be embodied. Parting with copyright entails parting with the right to do any of the acts mentioned in section 14 of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the “licensed” computer software product over which the licensee has no exclusive rights, no copyright is parted with. ITA No.1967/PUN/2019 M/s. Tata Technologies Ltd., 16 15. Adverting to the facts of the extant case, it is seen that the disputed receipt of Rs.65.28 lakh from TTL is on account of sale of Software license and not for parting with the copyright of the software. Since facts of the present case are similar to those considered and decided by the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. (supra), respectfully following the precedent, we hold that the amount cannot be brought within the ambit of ‘Royalties’ under Article 12 of the DTAA. Ergo, its taxability is not magnetized. This ground is accepted. 16. In the result, the appeal is allowed. Order pronounced in the Open Court on 21 st December, 2021. Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; िदनांक Dated : 21 st December, 2021 सतीश ITA No.1967/PUN/2019 M/s. Tata Technologies Ltd., 17 आदेश की ितिलिप अ ेिषत/Copy of the Order is forwarded to: 1. 2. अपीलाथ / The Appellant; The Respondent 3. थ / The DRP-3, Mumbai-1/ DRP-3, Mumbai-2/ DRP-3, Mumbai-3/ 4. The CIT(IT & TP), Pune 5. 6. DR, ITAT, ‘C’ Bench, Pune गाड फाईल / Guard file. आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune Date 1. Draft dictated on 14-12-2021 Sr.PS 2. Draft placed before author 20-12-2021 Sr.PS 3. Draft proposed & placed before the second member JM 4. Draft discussed/approved by Second Member. JM 5. Approved Draft comes to the Sr.PS/PS Sr.PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. **