Goldman Sachs Services Pvt. Ltd., Bangalore V. DDIT, Bangalore

ITA 197/BANG/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 63815 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 9 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 08-11-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 25-02-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K AMBASTHA
• Assessee Lawyers: SHARAT RAO
• Keywords: Double taxation relief; Opportunity of being heard; Deemed to accrue or arise in india; Permanent establishment
• Section: 201(1)

Judgement Text

PAGE 1 OF 12 ITA NOS.196 & 197/BANG/2011 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T.A. NOS.196 & 197/BANG/2011 (ASSESSMENT YEAR : 2007-08) M/S. GOLDMAN SACHS SERVICES PVT. LTD., CRYSTAL DOWNS, EMBASSY GOLF LINKS BUSINESS PARK, OFF. INTERMEDIATE RING ROAD, BANGALORE-560 071 PAN AACCG 2435N DY. DIRECTOR OF INCOME TAX (INTL. TAXATION), CIRCLE 1(1), BANGALORE. APPELLANT VS. RESPONDENT. APPELLANT BY : SHRI SHARAT RAO. RESPONDENT BY : SHRI S.K. AMBASTHA. DATE OF HEARING : 8.11.2012. DATE OF PRONOUNCEMENT : 30/11/2012 O R D E R PER SHRI JASON P. BOAZ, A.M . : THESE TWO APPEALS ARE DIRECTED AGAINST THE ORDER O F THE COMMISSIONER OF INCOME TAX (APPEALS)-IV, BANGALORE DT.12.11.2010 FO R ASSESSMENT YEAR 2007-08. 2. THE FACTS OF THE CASE, IN BRIEF ARE AS UNDER : 2.1 THE ASSESSEE COMPANY M/S. GOLDMAN SACHS & SERVIC ES PVT LTD (HEREINAFTER REFERRED TO AS GSSPL), IS IN THE BUSIN ESS OF PROVIDING IT ENABLED SERVICES IN INVESTMENT BANKING, SECURITIES TRADING AND OTHER FINANCIAL SERVICES TO PAGE 2 OF 12 ITA NOS.196 & 197/BANG/11 2 OTHER COMPANIES OF THE GOLDMAN SACHS GROUP. IN THE RELEVANT PERIOD, THE ASSESSEE BY AGREEMENT DT.23.3.2006 ENGAGED M/S. IBM CORPORATION, USA TO PROVIDE SOFTWARE SERVICES IN RELATION TO CERTAIN AC COUNTING SYSTEMS OF THE ASSESSEE (VIZ. PEOPLE SOFT GL, HYPERION, CONSOLIDATI ONS MODULE AND HYPERION BUSINESS TOOLS) FOR WHICH IT MADE PAYMENTS / REMITTA NCES AMOUNTING TO USD 1,65,253 (I.E. RS.73,12,465) ON 10.2.2007 WITHOUT D EDUCTING TAX AT SOURCE THEREON. IN THESE CIRCUMSTANCES, THE ASSESSING OFF ICER INITIATED PROCEEDINGS UNDER SECTION 201(1) OF THE INCOME TAX ACT, 1961 (H EREIN AFTER REFERRED TO AS 'THE ACT') ON THE ASSESSEE AS A DEFAULTER FOR NON-D EDUCTION OF TAX AT SOURCE. THE ASSESSEE SUBMITTED THAT THE SERVICES RENDERED T O IT BY M/S. IBM CORPORATION, USA WERE NOT IN THE NATURE OF ROYALTY AS CONTEMPLATED IN THE PROVISIONS OF SECTION 9(1)(VI) OF THE ACT AS PER D OMESTIC LAW AND ALSO DID NOT FALL UNDER THE PURVIEW OF THE SECTION OF ARTICLE 12(3) O F THE INDIA-USA-DTAA. IT WAS ALSO SUBMITTED BY THE ASSESSEE THAT THE SERVICES RENDERED BY M/S. IBM CORPORATION, USA, DID NOT MAKE AVAILABLE ANY TECHNOL OGY, KNOW HOW, KNOWLEDGE, SKILLS ETC. AND WOULD NOT ATTRACT THE PROVISIONS OF ARTICLE 12(4)(B) OF THE INDIA- USA, DTAA TO CONSTITUTE FEES FOR TECHNICAL SERVICES (FTS). IT WAS FURTHER CONTENDED THAT THE SERVICES RENDERED ARE NOT IN REL ATION TO DEVELOPMENT OR TRANSFER OF ANY TECHNICAL PLAN OR TECHNICAL DESIGN. THESE SUBMISSIONS OF THE ASSESSEE THAT THE SERVICES RENDERED BY M/S. IBM CORP ORATION, USA WERE NOT IN THE NATURE OF LIABILITY AS CONTEMPLATED IN SECTION 9(1)(VI) OF THE ACT AND ARTICLE 12(3) OF THE INDIA-USA, DTAA OR THAT THE SERVICES R ENDERED WOULD NOT CONSTITUTE FTS UNDER ARTICLE 12(4)(B) OF THE INDIA- USA, DTAA AS IT DID NOT MAKE AVAILABLE ANY TECHNOLOGY, KNOW HOW, KNOWLEDGE, SKILL, TECHNICAL PLAN OR DESIGN ETC., WAS NOT ACCEPTED BY THE ASSESSING OFFIC ER. THE ASSESSING OFFICER EXAMINED THE CONTENTS OF THE AGREEMENT AND HELD THA T THE MAIN DELIVERABLES PAGE 3 OF 12 ITA NOS.196 & 197/BANG/11 3 MADE AVAILABLE BY THE CONSULTANT, IBM CORPORATION, U SA, ARE TECHNICAL SPECIFICATION, PROGRAMME CODE, UNIT TEST RESULTS, E TC RELATABLE TO DEVELOPMENT OF PROJECT TRIDENT AND ALSO MADE AVAILABLE TECHNO LOGY, KNOWLEDGE AND SKILLS AND STAFF IN APPLICATION OF THE TECHNICAL DEVELOPMENT P ROJECT. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE SERVICES RENDERED BY M/S. IBM CORPORATION, USA TO THE ASSESSEE WERE FEES FOR TECHNICAL SERVICE S AS IT FULFILS THE CONDITIONS CONTEMPLATED IN ARTICLE 12(4) OF THE INDIA-USA DTAA AND WAS THEREFORE TAXABLE IN INDIA. SINCE THE ASSESSEE HAD NOT DEDUC TED TAX AT SOURCE UNDER SECTION 195 OF THE ACT ON THE PAYMENT TO IBM CORPORA TION, USA, THE ASSESSEE WAS TREATED AS AN ASSESSEE IN DEFAULT UNDER SECTION 201(1) OF THE ACT AND TAX @ 10% ON THE OUTWARD REMITTANCE WAS CHARGED AS PER TH E PROVISIONS OF SECTION 115(A)(B)(BB) OF THE ACT AND THE ASSESSEE WAS ALSO CHARGED INTEREST UNDER SECTION 201(1A) OF THE ACT. 2.2 AGGRIEVED BY THE ORDERS UNDER SECTION 201(1) AND 201(1A) OF THE ACT DT.31.7.2008 FOR ASSESSMENT YEAR 2007-08, THE ASSES SEE WENT IN APPEAL BEFORE THE CIT(APPEALS) WHO DISMISSED THE ASSESSEE'S APPEA L BY ORDER DT.12.11.2010. 3.0 AGGRIEVED WITH THE ORDER OF THE CIT(APPEALS) FO R ASSESSMENT YEAR 2007-08, THE ASSESSEE IS NOW BEFORE THIS TRIBUNAL. IN THE GROUNDS OF APPEAL RAISED, THE ASSESSEE HAS CONTENDED AS UNDER : 1. THE LEARNED CIT (APPEALS) HAS ERRED IN PASSING AN ORDER WHICH IS BAD IN LAW AND ON FACTS. 2. THE LEARNED CIT (APPEALS) HAS ERRED IN LAW AND O N FACTS IN UPHOLDING THE ORDER OF THE DY. DIRECTOR OF INCOME TAX (INTERNATION AL TAXATION), CIRCLE 1(1) THAT THE APPELLANT IS AN ASSESSEE IN DEFAULT U NDER SECTION 201(1) OF THE INCOME TAX ACT, 1961 (ACT). PAGE 4 OF 12 ITA NOS.196 & 197/BANG/11 4 3. THE LEARNED CIT (APPEALS) HAS ERRED IN LAW AND ON FACTS IN HOLDING THAT THE PAYMENT MADE TO IBM CORPORATION, USA (IBM) WAS FOR A SERVICE WHICH WOULD CONSTITUTE FEES FOR TECHNICAL SERVICES UNDER THE PROVISIONS OF SECTION 9(1)(VII) OF THE ACT. 4. THE LEARNED CIT (APPEALS) HAS ERRED ON FACTS AND IN LAW IN HOLDING THAT THE PAYMENTS MADE BY THE APPELLANT TO IBM IS IN THE N ATURE OF FEES FOR INCLUDED SERVICES (FIS) UNDER ARTICLE 12(4)(B) OF THE INDIA-USA DOUBLE TAXATION AVOIDANCE AGREEMENT(DTAA). 5. THE LEARNED CIT (APPEALS) HAS ERRED IN RELYING ON THE AAR RULING IN 325 ITR 71 (HMS REAL ESTATE PRIVATE LIMITED) INCOM ING TO A CONCLUSION THAT THE SUBJECT PAYMENT TO IBM IS FOR A SERVICE IN THE NATURE OF FIS. 6. THE LEARNED CIT (APPEALS) HAS ERRED IN NOT GIVI NG DETAILED REASONS ON APPLICABILITY OF THE AAR RULING TO THE SUBJECT PAYMEN T. 7. THE LEARNED CIT (APPEALS) HAS ERRED IN UPHOLDI NG THE CONCLUSION OF THE ASSESSING OFFICER THAT THE APPELLANT WAS OBLIGED T O DEDUCT TAX AT SOURCE UNDER SECTION 195 OF THE ACT, AND 8. THE LEARNED CIT (APPEALS) HAS ERRED ON FACTS AN D IN LAW IN UPHOLDING THE AMOUNT DETERMINED BY THE ASSESSING OFFICER OF RS.731 ,244 AS PAYABLE BY THE APPELLANT UNDER SECTION 201(1) OF THE ACT. 4.1 THE LEARNED COUNSEL FOR THE ASSESSEE REITERAT ED THE ARGUMENTS PUT FORTH IN THE GROUNDS OF APPEAL (SUPRA). IN WRITTEN SUB MISSIONS FILED ON 16.8.2012, THE LEARNED COUNSEL FOR THE ASSESSEE HAS INTER ALIA SUB MITTED AS UNDER : 4. SUBMISSIONS ON WHY THE PAYMENT IS NOT TAXABLE AND HENCE NO TDS IS REQUIRED UNDER SECTION 195 OF THE ACT 4.1 THE SUBJECT PAYMENT IS NOT FEES FOR TECHNICAL SERVICES UNDER SECTION 9(1)(VII) OF THE ACT THE TDS REQUIREMENT UNDER SECTION 195 OF THE ACT AR ISES ONLY WHERE THE PAYMENTS ARE TAXABLE IN INDIA IN THE HAND S OF THE NON- PAGE 5 OF 12 ITA NOS.196 & 197/BANG/11 5 RESIDENT RECIPIENT. THE INCOME WOULD BE TAXABLE IN THE HANDS OF THE NON-RESIDENT RECIPIENT IN INDIA IF IT IS DEEMED TO ACCRUE OR ARISE IN INDIA AND THE INCOME IS SAID TO BE DEEMED TO ACCRUE OR ARISE IN INDIA IF IT IS AN INCOME OF THE NON-RESIDENT RECIPI ENT BY WAY OF FTS. THE AO HAD IMPLIEDLY CONCLUDED THAT THE SAID PAYMEN T WAS TOWARDS FTS UNDER SECTION 9(1)(VII) OF THE ACT HAVING DIREC TLY EXAMINED WHETHER THE SAID SERVICES ARE IN THE NATURE OF FIS UNDER ARTICLE 12 OF THE INDIA-USA DTAA AND WITHOUT TESTING THE SAME IN THE CONTEXT OF FTS DEEMED TO ACCRUE OR ARISE IN INDIA UNDER SECTIO N 9(1)(VII) OF THE ACT. THE CIT(A) HAS MERELY APPROVED THE VIEW TAKEN BY THE AO. HOWEVER, WE WISH TO PROVIDE OUR SUBMISSION ON WHY T HE SAID SERVICES WOULD NOT AMOUNT TO FTS UNDER SECTION 9(1) (VII) OF THE ACT. THESE SUBMISSIONS WERE ALSO MADE BEFORE THE LOWER A UTHORITIES. WE REFER TO PAGE NO 7 OF THE PAPER BOOK FILED ON JA NUARY 20, 2012. AS PER SECTION 9(1)(VII) OF THE ACT, THE INCOME BY WAY OF FTS SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA IF IT IS PAYABLE BY (B) A PERSON WHO IS A RESIDENT, EXCEPT WHERE THE F EES ARE PAYABLE IN RESPECT OF SERVICES UTILISED IN A BUSINESS OR PR OFESSION CARRIED ON BY SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA THE APPELLANT IS AN INDIAN COMPANY WHICH OPERATES A N UNDERTAKING REGISTERED UNDER THE STP SCHEME. THE ENTIRE TURNOV ER OF THE APPELLANT COMPANY IS DERIVED FROM EXPORT OF IT AND IT-ENABLED SERVICES. THERE WERE NO DOMESTIC REVENUES DURING T HE RELEVANT YEAR. WE REFER TO PAGE NO 18 OF THE PAPER BOOK FILED ON J ANUARY 20, 2012 TO SHOW THAT THE APPELLANT HAD NO DOMESTIC REVENUES DURING THE RELEVANT YEAR. THIS EXTRACT REFLECTS THAT THE ENTI RE TURNOVER OF THE APPELLANT IS DERIVED FROM EXPORT OF IT AND IT-ENABL ED SERVICES. THEREFORE, ALTHOUGH THE BUSINESS OF THE APPELLANT I S BEING CARRIED ON IN INDIA, ENTIRE INCOME IS FROM EXPORTS AND THEREFO RE THE EXPORT REVENUES CONSTITUTES SOURCE OF INCOME, WHICH IS O UTSIDE INDIA. IT IS THEREFORE SUBMITTED THAT THE SUBJECT PAYMENT TO IBM IS TOWARDS EARNING INCOME FROM SOURCES OUTSIDE INDIA, WHICH AR E EXCLUDED FROM THE PURVIEW OF FTS UNDER THE ACT. PAGE 6 OF 12 ITA NOS.196 & 197/BANG/11 6 THE FOLLOWING DECISIONS ARE RELIED UPON I N SUPPORT OF THIS SUBMISSION: CIT VS AKTIENGESELLSCHAFT (MAD HC) (262 ITR 513) (E NCLOSED AS ANNEXURE A) ; AND SYNOPSYS INDIA PVT LTD VS ITO, TDS (BANGALORE TRIBU NAL) IN ITA NO 919 & 920/BANG/2002. WITHOUT PREJUDICE TO OUR AFORESAID SUBMISSIONS THAT THE SUBJECT PAYMENT WOULD NOT AMOUNT TO FTS UNDER THE ACT AND T HEREFORE THERE IS NO NEED FOR EXAMINATION OF THE DTAA PROVIS IONS, WE WISH TO SUBMIT FURTHER AS FOLLOWS: 4.2. REASONS WHY THE SAID PAYMENT DOES NOT AMOUNT T O FEES FOR INCLUDED SERVICES (FIS) UNDER THE DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) AS PER SECTION 90(2) OF THE ACT, WHERE AN ASSESSEE IS A RESIDENT OF A COUNTRY WITH WHOM INDIA HAS ENTERED INTO A DTAA, THE PROVISIONS OF THE DTAA OR THE ACT, WHICHEVER IS MORE BENEFICIA L TO THE ASSESSEE, WILL APPLY. IBM IS A TAX RESIDENT OF THE USA AS PER ARTICLE 4 O F THE INDIA-USA DTAA. ACCORDINGLY, THE PROVISIONS OF THE INDIA-USA DTAA WILL APPLY TO IBM. SECTION 9(1)(VII) OF THE ACT DEALS W ITH FTS, WHICH IS RELEVANT TO THE SUBJECT SERVICES PROVIDED BY IBM TO THE APPELLANT. ARTICLE 12(4) OF THE DTAA DEALS WITH TAXATION OF RO YALTIES AND FIS. ARTICLE 12(4) OF THE INDIA-USA DTAA IS PROVIDED BEL OW: ARTICLE 12 - ROYALTIES AND FEES FOR INCLUDED SERVIC ES 4. FOR PURPOSES OF THIS ARTICLE, FEES FOR INCLUDE D 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 O THER PERSONNEL) IF SUCH SERVICES : (A) ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATIO N 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, SKI LL, KNOW- HOW, OR PROCESSES, OR CONSIST OF THE DEVELOPMENT AN D TRANSFER OF A TECHNICAL PLAN OR TECHNICAL DESIGN. PAGE 7 OF 12 ITA NOS.196 & 197/BANG/11 7 ARTICLE 12(4) OF THE DTAA DEALS WITH TAXATION OF FI S. SECTION 9(1)(VII) OF THE ACT AND ARTICLE 12(4) OF THE DTAA ARE PARALLEL PROVISIONS ON THE ASPECT OF FEES FOR TECHNICAL SERV ICES. THERE IS NO DISPUTE ON THE POSITION THAT THE ARTICLE 12(4) DEFI NITION GIVES A RESTRICTED MEANING COMPARED TO SECTION 9(1)(VII) OF THE ACT. THERE IS ALSO NO DISPUTE THAT THE REQUIREMENT OF TAX DEDUCTI ON AT SOURCE UNDER SECTION 195(1) OF THE ACT ARISES ONLY IF THE PAYMENT FOR THE SUBJECT SERVICE CAN BE REGARDED AS FIS UNDER ARTICL E 12(4) OF THE DTAA. AS AFORESAID, THE DEFINITION IN ARTICLE 12(4 ) OF THE DTAA HAS TWO LIMBS. THE FINDING OF THE LOWER AUTHORITIES IS THAT THE SU BJECT PAYMENT IS FIS BECAUSE IT FALLS UNDER THE FIRST LIMB, IE, MAK E AVAILABLE. WE HAVE PROVIDED SUBMISSIONS AS TO WHY THE SUBJECT PAY MENTS ARE NOT FIS UNDER ARTICLE 12(4) OF THE DTAA. 4.3 FIS MAKE AVAILABLE THE INDIA-USA DTAA DOES NOT DEFINE THE EXPRESSION MAKE AVAILABLE IN ARTICLE 12. THOUGH INDIA-USA DTAA DO ES NOT DEFINE THE EXPRESSION MAKE AVAILABLE IN THE MAIN BODY, BUT I T HAS A PROTOCOL ANNEXED TO IT, WHICH WAS SIGNED ALONG WITH THE SAID DTAA. THE PROTOCOL DECLARES THAT ITS PROVISIONS SHALL FORM IN TEGRAL PART OF THE DTAA. THE PROTOCOL HAS A MEMORANDUM OF UNDERSTANDI NG (MOU) ATTACHED TO IT WHICH IS INTENDED TO GIVE GUIDANCE B OTH TO THE TAXPAYERS AND THE TAX AUTHORITIES OF THE TWO COUNTR IES IN INTERPRETING CERTAIN ASPECTS OF ARTICLE 12 RELATING TO THE SCOPE OF INCLUDED SERVICES. AS REGARDS PARAGRAPH 4 (B) OF ARTICLE 12 , THE FOLLOWING CLARIFICATION/INTERPRETATION IS GIVEN IN THE MOU: 'PARAGRAPH 4(B) OF ARTICLE 12 REFERS TO TECHNICAL O R CONSULTANCY SERVICES THAT MAKE AVAILABLE TO THE PERSON ACQUIRIN G THE SERVICE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HOW, O R PROCESSES, OR CONSIST OF THE DEVELOPMENT AND TRANSFER OF A TECHNI CAL PLAN OR TECHNICAL DESIGN TO SUCH PERSON (FOR THIS PURPOSE, THE PERSON ACQUIRING THE SERVICE SHALL BE DEEMED TO INCLUDE AN AGENT NOMINEE, OR TRANSFEREE OF SUCH PERSON.) THIS CATEGORY IS NAR ROWER THAN THE CATEGORY DESCRIBED IN PARAGRAPH 4(A) BECAUSE IT EXC LUDES ANY SERVICE THAT DOES NOT MAKE TECHNOLOGY AVAILABLE TO THE PERS ON ACQUIRING THE SERVICE. GENERALLY SPEAKING, TECHNOLOGY WILL BE CONSIDERED ' MAKE AVAILABLE' WHEN THE PERSON ACQUIRING THE SERVICE IS ENABLED TO APPLY THE TECHNOLOGY. THE FACT THAT THE PROVISION OF THE SERVICE MAY REQUIRE TECHNICAL INPUT BY THE PERSON PROVIDING THE SERVICE DOES NOT PER SE MEAN THAT TECHNICAL KNOWLEDGE, SKILLS, ETC., ARE MADE AVAILABLE TO THE PERSON PURCHASING THE SERVICE, WITHIN THE ME ANING OF PARAGRAPH 4(B). SIMILARLY, THE USE OF A PRODUCT WHI CH EMBODIES TECHNOLOGY SHALL NOT PER SE BE CONSIDERED TO MAKE T HE TECHNOLOGY AVAILABLE'. PAGE 8 OF 12 ITA NOS.196 & 197/BANG/11 8 FROM THE SAID MOU, IT CAN BE INFERRED THAT TECHNOLO GY WILL BE CONSIDERED AS MAKE AVAILABLE ONLY WHEN THE PERSON ACQUIRING THE SERVICE IS ENABLED TO APPLY THE TECHNOLOGY . THE FACT THAT THE PROVISION OF THE SERVICE MAY REQUIRE TECHNICAL INPU T BY THE PERSON PROVIDING THE SERVICE DOES NOT PER SE MEAN THAT TEC HNICAL KNOWLEDGE, SKILLS, ETC, ARE MADE AVAILABLE TO THE PERSON PURCH ASING THE SERVICE. SIMILARLY, THE USE OF THE PRODUCT WHICH EMBODIES TE CHNOLOGY SHALL NOT PER SE BE CONSIDERED TO MAKE THE TECHNOLOGY AVAILAB LE. THERE ARE SEVERAL JUDICIAL PRECEDENTS THAT HAVE UPH ELD THE AFORESAID POSITION. AS PART OF THE CASE LAW COMPILATION PROV IDED DURING THE HEARING, THE FOLLOWING CASE LAWS HAVE BEEN PROVIDED CIT V/S DE BEERS INDIA MINERALS PVT LTD (KAR HC) SL NO 3 OF THE COMPILATION ITO V/S DE BEERS INDIA MINERALS PVT LTD (BLORE ITAT) - SL NO 4 OF THE COMPILATION CIT V/S ISRO, BANGALORE - SL NO 5 OF THE COMPILATION SUN MICROSYSTEMS INDIA V/S ITO ( ITAT BANG) (130 TTJ 597) - SL NO 6 OF THE COMPILATION MCKINSEY & CO V/S ADIT (ITAT MUMBAI) (99 TTJ 857) - SL NO 7 OF THE COMPILATION ANAPHARM INC, IN RE (AAR) (305 ITR 394) - SL NO 8 O F THE COMPILATION INTERTEK TESTING SERVICES INDIA (AAR) (307 ITR 418) - SL NO 9 OF THE COMPILATION ALL THE AFORESAID CASES DEAL WITH THE ASPECT OF WHA T IS MAKE AVAILABLE UNDER ARTICLE 12 OF THE INDIA USA DTAA SO AS TO CONSTITUTE FIS UNDER THE INDIA USA DTAA. IN SHORT, THE SUBMISSIONS OF THE LEARNED COUNSEL FO R THE ASSESSEE CAN BE SUMMARIZED AS UNDER : I) THE PAYMENT MADE BY THE ASSESSEE TO M/S. IBM CO RPORATION, USA IS TOWARDS EARNING OF INCOME FROM A SOURCE OUTS IDE INDIA AND WOULD NOT CONSTITUTE FTS UNDER SECTION 9( 1)(VII)(B) OF THE ACT. PAGE 9 OF 12 ITA NOS.196 & 197/BANG/11 9 II) THAT WITHOUT PREJUDICE TO THE ABOVE, THE SAID PAYMENT TO IBM CORPORATION, USA ALSO DOES NOT CONSTITUTE FEES FOR INCLUDED SERVICES UNDER ARTICLE 12 OF THE INDIA US A DTAA SINCE (A) THE SERVICES RENDERED TO THE ASSESSEE DO NOT M AKE AVAILABLE TECHNICAL KNOWLEDGE, SKILLS, PROCESSES, ETC. SO AS TO ENABLE THE ASSESSEE TO APPLY THE TECHNOLOGY CONTAINED THEREIN AS MERE USE OF THE SERVICES DOES NOT CONSTITUTE MAKING AVAILABLE TECHNOLOGY, ETC. (B) THE SERVICES RENDERED DO NOT RESULT IN THE DEV ELOPMENT AND TRANSFER OF TECHNICAL PLAN OR DESIGN AS THE PROJEC T DELIVERABLES ALWAYS BELONGED TO THE ASSESSEE AND THEREFORE THERE IS NO TRANSFER OF ANY PLAN OR DESIGN. III) SINCE AS PER THE ASSESSEE THE SAID PAYMENT TO I BM CORPORATION, USA, IS NOT TAXABLE UNDER THE ACT OR THE INDIA-USA DTAA, THERE IS NO REQUIREMENT FOR TDS UNDER SECTION 195 OF THE ACT SINCE THERE IS NO PERMANENT ESTABLISHMENT OF THE PAYEE VIZ . M/S. IBM CORPORATION, USA. 5.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. IN WRITTEN SUBMIS SIONS, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED AS UNDER : AS PER CLAUSE 1 & 2 OF THE STATEMENT OF WORK OF T HE AGREEMENT (SOW), IT IS CLEAR THAT THE CONSULTANT (I BMS) ONSITE ANALYST HAS TO CONTINUOUSLY CO-ORDINATE WITH T HE OFFSHORE TEAM IN DEVELOPING THE TECHNICAL SPECIFICA TIONS RELATED TO THE PROJECT. IBM WILL ALSO PARTICIPATE IN DEVELOPING THE REQUIRED TECHNICAL CODE AND TESTING THEREOF. T HE DELIVERABLES ARE TECHNICAL SPECIFICATIONS, PROGRAM CODE AND UNIT TEST RESULTS. THE TECHNICAL SPECIFICATION INCLUDES FUNCTIONAL OVERVIEW, PSEUDO CODE OR COMPARABLES, DELIMITATION OF PROGRAMME LOGIC, KEY TEST CONDITIONS ETC. PAGE 10 OF 12 ITA NOS.196 & 197/BANG/11 10 5.2 IT IS SIGNIFICANT TO NOTE CLAUSE 10.1 OF THE SO W AGREEMENT (PAGE 25 OF PAPER BOOK), WHICH CLEARLY IND ICATES THAT THE SOFTWARES (PRE-EXISTING MATERIALS) WHICH H AVE TO BE UPGRADED AND DEVELOPED BY IBM ARE OWNED BY THE ASSESS EE, AND THE DEVELOPED VERSION WOULD ALSO BE OWNED BY THE ASSESSEE WITH COPYRIGHT, WHICH HAS BEEN MADE AVAILABLE AFTER DEVELOPMENT TO THE ASSESSEE BY IBM. 5.3 THE FACTS IN THE CASE OF DE BEERS ARE TOTALLY DI FFERENT WHERE THE SERVICE PROVIDED HAS MERELY CARRIED OUT AE RIAL RECONNAISSANCE AND SURVEY USING THEIR OWN EQUIPMENT AND SKILL TO PRODUCE GEOPHYSICAL PICTURES AND MAPS TO BE FURTH ER PROCESSED BY THE ASSESSEE FOR EXPLORATION WORK. THE EQUIPMENT, TECHNOLOGY AND SKILL HAS NOT BEEN TRANSFE RRED TO THE ASSESSEE IN THIS CASE, AS HAS RIGHTLY BEEN HELD BY TH E HON'BLE HIGH COURT, WHICH CAN BE SAID TO BE RENDERING TECHN ICAL SERVICES RESULTING IN MAKE AVAILABLE ANY TECHNICAL KNOW-HOW. 5.4 IN THE PRESENT CASE COPYRIGHTED PRODUCT HAS COME INTO THE POSSESSION AND USE OF THE ASSESSEE, HENCE SECTI ON 195 IS CLEARLY ATTRACTED. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED T HAT WHILE THE ISSUE FOR ADJUDICATION WAS WHETHER THE PAYMENT BY THE ASSESSEE TO M/S. IBM CORPORATION, USA IS TAXABLE IN INDIA AS FTS OR FE ES FOR INCLUDED SERVICES, UNDER ARTICLE 12 OF THE INDIA-USA, DTAA, THE FUNDAM ENTAL ISSUE OF WHETHER THE SAID PAYMENT IS TAXABLE UNDER SECTION 9(1)(VII) OF THE ACT HAS NEVER BEEN EXAMINED/ADDRESSED BY THE AUTHORITIES BELOW. IT WAS URGED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT THIS ISSUE OF WHET HER THE SAID PAYMENT IS TAXABLE UNDER SECTION 9(1)(VII) OF THE ACT REQUIRES TO BE REMITTED TO THE FILE OF THE ASSESSING OFFICER FOR EXAMINATION. 5.3 THE LEARNED COUNSEL FOR THE ASSESSEE STATED THA T HE HAD NO OBJECTION TO THE PROPOSITION PUT FORTH BY THE LEARNED DEPARTMENTA L REPRESENTATIVE THAT THE PAGE 11 OF 12 ITA NOS.196 & 197/BANG/11 11 ISSUE OF WHETHER THE ASSESSEES PAYMENT TO THE CONSU LTANT M/S. IBM CORPORATION, USA IS TAXABLE UNDER SECTION 9(1)(VII) OF THE ACT BE REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER FOR EXAMINATIO N. 5.4 WE HAVE HEARD BOTH THE PARTIES AND HAVE CAREFUL LY PERUSED THE ORAL AND WRITTEN SUBMISSIONS OF BOTH THE LEARNED COUNSEL FOR THE ASSESSEE AND THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR REVENUE AND THE MATERIAL ON RECORD. FROM A PERUSAL OF THE ORDER OF ASSESSMENT, WE FIND THAT ALL THE SUBMISSIONS OF THE ASSESSEE BEFORE THE ASSESSING OFFICER AND HIS F INDINGS THEREON ARE ONLY IN RESPECT OF WHETHER THE PAYMENT MADE BY THE ASSESSEE TO THE CONSULTANT M/S. IBM CORPORATION, USA WAS OR WAS NOT TAXABLE IN INDI A AS ROYALTY UNDER ARTICLE 12(3) OF THE INDIA-USA, DTAA OR AS FEES FOR INCLUDE D SERVICES UNDER ARTICLE 12(4) OF THE INDIA-USA, DTAA. THERE WAS NO SUBMISS ION BY THE ASSESSEE OR EXAMINATION BY THE ASSESSING OFFICER AS TO WHETHER OR NOT THE PAYMENT MADE TO THE CONSULTANT M/S. IBM CORPORATION, USA FOR SER VICES RENDERED TO THE ASSESSEE PURSUANT TO THEIR AGREEMENT DT.20.3.2006 A RE NOT IN THE NATURE OF ROYALTY AS CONTEMPLATED BY THE PROVISIONS OF SECTION 9 (1)(VII) OF THE ACT IS EXIGIBLE TO TAX IN INDIA AS PER DOMESTIC LAW THEREB Y ATTRACTING THE PROVISIONS OF TDS UNDER SECTION 195 OF THE ACT. IN THIS FACTUAL MATRIX, WE ARE OF THE CONSIDERED OPINION THAT THE FUNDAMENTAL ISSUE OF WH ETHER THE SAID PAYMENTS TO M/S. IBM CORPORATION, USA BY THE ASSESSEE FOR SERVIC ES RENDERED ARE IN THE NATURE OF ROYALTY AS PER THE PROVISIONS OF SECTION 9( 1)(VII) OF THE ACT AND EXIGIBLE TO TAX THERE UNDER IN INDIA REQUIRES TO BE EXAMINED AND THEREFORE REMIT THE SAME ISSUE TO THE FILE OF THE ASSESSING O FFICER FOR EXAMINATION AND FINDING THEREON AFTER AFFORDING THE ASSESSEE ADEQUA TE OPPORTUNITY OF BEING HEARD IN THE MATTER. IT IS ORDERED ACCORDINGLY. PAGE 12 OF 12 ITA NOS.196 & 197/BANG/11 12 6. IN THE RESULT, THE ASSESSEE'S APPEALS ARE ALLOWE D FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH DAY OF NOVEMBER, 2012. SD/- SD/- (P. MADHAVI DEVI) (JASON P BOAZ) JUDICIAL MEMBER ACCOUNTANT MEMBER *REDDY GP COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, - A BENCH. 6. GUARD FILE. BY ORDE R SR. PRIVATE SECRETARY, ITAT, BANGALORE