M/s. COLGATE PALMOLIVE MARKETING SDN BHD, MUMBAI V. DDIT INT. TAXATION (I.T) 1(2), MUMBAI

ITA 2278/MUM/2006

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 8347 (ITAT-MUMBAI)
• Duration Of Justice: 10 year(s) 10 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-02-2017
• Appeal Filed By: Assessee
• Bench Allotted: L
• Next Hearing Date: 23-02-2017
• Assessment Year: 2000-2001
• Appeal Filed On: 13-04-2006
• Court: TRIBUNAL
• Assessee Lawyers: RAJAN VORA SHRI RAJGURU M V
• Keywords: Business income; Double taxation relief; Source of fund; Permanent establishment; Advance ruling
• Section: 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL L , BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI AMARJIT SINGH , JM ITA NO. 2278 / MUM/20 06 & ITA 4012/MUM/2008 ( ASSESSMENT YEAR : 2000 - 01 & 2002 - 03 ) M/S.COLGATE PALMOLIVE MARKETING SDN BHD, C/O. SRBC & ASSOCI ATES LLP, 14 TH FLOOR, THE RUBY, SENAPATHI BAPAT MARG, DADAR (W) - 400 028 VS. DDIT,INTERNATIONAL TAXATION 1(2), MUMBAI PAN/GIR NO. AABCC1474G APPELLANT ) .. RESPONDENT ) ASSESSEE BY SHRI RAJAN VORA REVENUE BY SHRI RAJGURU M.V DATE OF HEARING 23 / 02 /201 7 DATE OF PRONOUNCEME NT 27 / 02 /201 7 / O R D E R PER R.C.SHARMA (A.M) : THESE ARE THE APPEALS FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A) - XXXI, MUMBAI DATED 31/01/2006 FOR THE A.Y.2000 - 01 AND 2002 - 03 IN THE MAT TER OF PENALTY IMPOSED U/S. 271(1)(C) OF THE IT ACT. 2. AT THE OUTSET, LEARNED AR PLACED ON RECORD QUANTUM ORDER OF THE TRIBUNAL DATED 25/01/2017 WHEREIN ADDITIONS WITH RESPECT TO WHICH PENALTY WAS IMPOSED , HAS BEEN DELETED BY THE TRIBUNAL. 3. WE HAVE GON E THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOUND FROM RECORD THAT THE ASSESSEE IS AN ENTITY INCORPORATED IN AND A TAX RESIDENT OF MAL AYSIA AND IS ENTITLED TO CLAIM BENEFITS OF THE DOUBLE TAX AVOIDANCE AGREEMENT BETWEEN INDIA AND MALAYSIA ('DT AA'). IT IS ITA NO.2278/MUM/2006 & 4012/MUM/2008 M/S .COLGATE PALMOLIVE MARKETING SDN BHD 2 ENGAGED IN THE BUSINESS OF MARKETING, DISTRIBUTION AND SALE OF HOUSEHOLD PRODUCTS, FABRIC AND PERSONAL CARE . 4. ASSESSEE ENTERED INTO AN AGREEMENT DATED 14 MAY 1998 WITH COLGATE PALMOLIVE INDIA LTD. ('CPI') FOR GRANTING ACCESS AND 'USE OF SYSTEM' AND 'RENDERING OF SERVICES' FOR WHICH CPI HAS PAID USD 10,59,750 (EQUIVALENT TO RSA,65,60,040) TO CPM IN CONSIDERATION FOR ACCESS AND USE OF THE SAP SYSTEM AND FURTHER PAID USD 3,66,000 (EQUIVALENT TO RS.1 ,59,01,050) IN CONSIDERATION FOR CPM RENDERING CERTAIN RELATED SERVICES TO BE RENDERED TO CPI . CPI HAS DEDUCTED TAXES WHILE MAKING PAYMENTS TO CPM. IN ITS RETURN OF INCOME, CPM HAS CLAIMED THAT SUCH RECEIPTS WERE IN THE NATURE OF BUSINESS INCOME TO THE ASSESSEE AND SINCE CPM DOES NOT HAVE A PERMANENT ESTABLIS HMENT ('PE') IN INDIA, THE SAME IS NOT LIABLE TO TAX IN INDIA AS PER ARTICLE 7 OF INDI A MALAYSIA TAX TREATY AND CPM HAD FILED ITS RETURN OF INCOME ON 29 DECEMBER 1999, DECLAR ING A TOTAL INCOME OF RS. NIL. 5. THE ASSESSING OFFICER HELD THAT THE PAYMENT FOR USE OF SYSTEM WAS IN THE NATURE OF ROYALTY U NDER CLAUSE (III) OF EXPLANATION 2 TO SECTION 9(1 )(VI) OF TH E ACT, WHICH DEFINES ROYALTY AS CONSIDERATION FOR THE USE OF ANY PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA OR PROCESS OR TRADEMARK OR SIMILAR P ROPERTY. ACCORDING TO HIM, THE SAP SYSTEM WAS COVERED WITHIN THE AMBIT OF THE WORDS MODEL OR DESIGN, SECRET FORMULA, PROCESS, INVENTION AND SIMILAR PROPERTY, WITH EMPHASIS ON 'PROCESS'. HE RELIED ON THE DECISION OF THE AUTHORITY FOR ADVANCE RULINGS IN P. N O. 30 OF 1999 (238 ITR 296) AND THE DECISION OF THE DELHI TRIBUNAL IN THE CASE OF M / S ASIA ITA NO.2278/MUM/2006 & 4012/MUM/2008 M/S .COLGATE PALMOLIVE MARKETING SDN BHD 3 SATELLITE TELECOMMUNICATIONS CO., LTD. HONG KONG VS. DCIT (85 ITD 478). HE ALSO HELD THAT THE AMOUNT WAS ROYALTY UNDER ARTICLE 13(5)(B) OF THE DTM, WHICH DEFINES ROY ALTY AS CONSIDERATION FOR THE USE, OR THE RIGHT TO USE INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EQUIPMENT, THUS ALLEGING THAT THE USE OF SYSTEM WAS USE OF EQUIPMENT. HE TREATED THE SUM OF USD 3,66,000 RELATED TO SERVICES AS FEES FOR TECHNICAL SERVICES AND CHAR GED BOTH AMOUNTS TO TAX AT 20%. 6. IN THE QUANTUM APPEAL, CIT(A) CONFIRMED THE ACTION OF THE AO HOLDING THAT PAYMENT OF USD 3,66,000 WAS FEES FOR TECHNICAL SERVICES. AGGRIEVED BY THE ORDER OF CIT(A), ASSESSEE WAS IN FURTHER APPEAL BEFORE THE TRIBUNAL. 7. W E HAD CAREFULLY GONE THROUGH THE ORDER OF THE TRIBUNAL. IN THIS REGARD, THE HON'BLE TRIBUNAL HAS RULED IN FAVOUR OF THE ASSESSEE AND CATEGORICALLY HELD AT THE PAYMENT RECEIVED BY THE ASSESSEE FROM CPI TOWARDS USE OF SAP SYSTEM CAN NEITHER BE TREATED AS 'EQ UIPMENT ROYALTY' NOR 'PROCESS ROYALTY' OR 'SOFTWARE ROYALTY' EITHER UNDER THE PROVISIONS OF THE ACT OR THE RELEVANT DT AA. THE RELEVANT FINDING OF THE HON'BLE TRIBUNAL IS REPRODUCED AS UNDER: ON TAXABILITY OF PAYMENTS AS EQUIPMENT ROYALTY OR PROCESS ROYAL TY: '19. ADMITTEDLY, IN THE FACTS OF THE PRESENT CASE ALSO, IT HAS NOT BEEN ESTABLISHED BY THE DEPARTMENT THAT CPI WHILE ACCESSING THE SAP SYSTEM, EXERCISES ANY CONTROL AND POSSESSION THEREOF. HENCE, THE AMOUNT PAID CANNOT BE TREATED AS 'ROYALTY'. MORE SO , WHEN THE FACTS ON RECORD SUGGESTS THAT THE CPI HAS BEEN GRANTED A LIMITED ACCESS TO THE SAP SYSTEM BY ESTABLISHING A COMMUNICATION LINE AT ITS OWN COST FOR USE OF DATA AVAILABLE IN THE SAP SYSTEM. AS FAR AS THE REASONING OF THE DEPARTMENTAL AUTHORITIES T HAT IT IS A PROCESS 'ROYALTY', UNDER C L AUSE(III) TO ITA NO.2278/MUM/2006 & 4012/MUM/2008 M/S .COLGATE PALMOLIVE MARKETING SDN BHD 4 EXPLANATION - 2 TO SECTION 9( 1 )(VI) AS PER WHICH 'ROYALTY' WOULD MEAN CONSIDERATION RECEIVED FOR USE OF ANY PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY. I F THE LANGUAGE EMPLOYED IN CLAUSE (III) OF EXPLANATION - 2 TO SECTION 9(1 )(VI), IS PROPERLY ANALYZED, IT CAN BE SEEN THAT THERE MUST BE A RIGHT TO USE OF SOME OF THE CATEGORIES OF ITEMS AS MENTIONED THEREIN. HOWEVER, IN THE PRESENT CASE, THERE IS NOTHING TO SUGGEST THAT THE CPI HAS OBTAINED THE RIGHT TO USE OF ANY OF SUCH THINGS AS MENTIONED IN CLAUSE (III) FOR WHICH IT HAS PAID THE AMOUNT TO CPM. ON THE CONTRARY, IT IS VERY MUCH EVIDENT THAT THE PAYMENT MADE BY CPI IS FOR THE PURPOSE OF ACCESSING THE SAP SY STEM HOSTED BY CPM AT ITS FACILITIES FOR EXCHANGE OF INFORMATION / DATA. AS FAR AS THE RELIANCE UPON EXPLANATION - 6 TO SECTION 9(1 )(VI), IN OUR CONSIDERED OPINION, IT WILL HAVE NO BEARING ON THE ISSUE AT HAND AS THE EXPANSION OF SCOPE OF PROCESS IN EXPLANA TION - 6 WOULD NOT APPL Y TO THE ASSESSEE AS IT DOES NOT RELATE TO PAYMENT MADE TOWARDS TRANSMISSION BY SATELLITE. WHAT IS MEANT BY THE AFORESAID EXPLANATION IS LIVE TRANSMISSION OF PROGRAMS SUCH AS CHANNEL FEED AND NOT SAP WHICH IS USED FOR INPUT OF DATA AND GENERATION OF REPORTS. THEREFORE, IN OUR CONSIDERED OPINION, THE PAYMENT RECEIVED BY THE ASSESSEE FROM CPI TOWARDS USE OF SAP SYSTEM CAN NEITHER BE TREATED AS 'EQUIPMENT ROYALTY' NOR 'PROCESS ROYALTY' EITHER UNDER THE PROVISIONS OF THE ACT OR THE RELEVANT DTAA.' ON TAXABILITY OF PAYMENTS AS ROYALTY FOR USE OF COPYRIGHT: '27 AS FAR AS THE ISSUE WHETHER THERE IS ANY TRANSFER OF RIGHT IN RESPECT OF ANY COPYRIGHT OR LITERARY WORK BY THE ASSESSEE TO CPI, WE DO NOT FIND ANY MERIT IN SUCH SUBMISSIONS OF THE L EARNED DEPARTMENTAL REPRESENTATIVE. IT IS ACCEPTED BY THE LEARNED COMMISSIONER (APPEALS) THAT CPM HAS ACQUIRED COMPUTER HARDWARE ALONG WITH THE CUSTOMIZED SOFTWARE SYSTEM FOR INTEGRATED COMPUTERIZED RECORDING, SUMMATION AND GENERATION OF REPORTS OF BUSINES S TRANSACTION IN SUPPLY CHAIN. THE CPI IS ONLY PERMITTED TO ACCESS THE SYSTEM BY INPUT OF DATA AND THE REPORT GENERATED IS SUPPLIED TO THE CP I . THUS, WE ARE IN SERIOUS DOUBT WHETHER THE PROVISIONS OF CLAUSE (V) OF EXPLANATION - 2 TO SECTION 9(1 )(VI) CAN AT ALL BE STRETCHED TO SUCH TRANSACTION. EVEN, ASSUMING THAT IT WILL BE COVERED UNDER THE SAID PROVISION, NEVERTHELESS, IT IS TO BE CONCLUDED THAT THE RIGHT OBTAINED BY CPI IS IN RESPECT OF A COPYRIGHTED ARTICLE AND NOT COPYRIGHT BECAUSE SUCH RIGHTS OBTAINED BY CPI IS ONLY FOR ITS OWN USE AND HE CANNOT COMMERCIALLY EXPLOIT SUCH RIGHT. ' ACCORDINGLY, IT WAS HELD BY THE TRIBUNAL THAT THE CONSIDERATION WILL BE TREATED AS BUSINESS PROFIT IN INDIA AND SINCE THE ASSESSEE DID ITA NO.2278/MUM/2006 & 4012/MUM/2008 M/S .COLGATE PALMOLIVE MARKETING SDN BHD 5 NOT HAVE A PERMANENT ESTABLISHMENT ('P E') IN INDIA, THE SAME COULD NOT BE TAXED IN INDIA. THE RELEVANT PARA IS REPRODUCED AS UNDER: '28. HAVING HELD SO, WE HAVE TO DECIDE WHETHER THE CONSIDERATION RECEIVED CAN AT ALL BE TAXED IN INDIA. SINCE WE HAVE HELD THAT THE CONSIDERATION RECEIVED BY THE ASSESSEE FROM CPI TOWARDS USE OF SAP SYSTEM IS NOT ROYALTY, IN TERMS OF IND O - MALAYSIAN TREATY, IT WILL BE A BUSINESS PROFIT UNDER ARTICLE - 7 OF THE TREATY. THEREFORE, IN TERMS OF ARTICLE - 7, UNLESS THE ENTERPRISE OF A CONTRACTING STATE HAS A P.E. IN THE OT HER CONTRACTING STATE, THE BUSINESS PROFIT CANNOT BE BROUGHT TO TAX IN THE OTHER CONTRACTING STATE. THAT BEING THE CASE, THE CONSIDERATION RECEIVED BY THE ASSESSEE FROM CPI TOWARDS USE OF SAP SYSTEM IS NOT TAXABLE IN INDIA. GROUND NO. 1, IS ALLOWED. IN V IEW OF THE ABOVE, THE PAYMENT RECEIVED OF USD 10,59,750 WAS HELD TO BE NOT TAXABLE IN INDIA. THE DETAILED FINDING OF THE HON'BLE TRIBUNAI IS AT PARA 15, PAGE 30 TO PARA 28, PAGE 55 OF THE TRIBUNAL ORDER. 3.2. RULING OF TRIBUNAL ON TAXABILITY OF PAYMENTS O F USD 3,66,000 AS FEES FOR TECHNICAL SERVICES ('FTS') 3.2.1 RULING IN FAVOUR OF THE ASSESSEE, THE HON'BLE TRIBUNAL HAS HELD THAT THOUGH SECTION 9(1 )(VI) OF THE ACT TREATS INCOME BY WAY OF FTS TO BE TAXABLE IN INDIA, HOWEVER, THERE IS NO SUCH EXPRESSION UN DER THE INDIA - MALAYSIA DTAA. THE RELEVANT PARA FROM THE HON'BLE TRIBUNAL ORDER IS REPRODUCED AS UNDER: '31. HAVING CONSIDERED THE SUBMISSIONS OF THE PARTIES AND PERUSING THE MATERIAL ON RECORD, WE FIND MERIT IN THE SUBMISSIONS OF THE ASSESSEE. THOUGH, SECTION 9(1 )(VII) OF THE ACT TREATS INCOME BY WAY OF FEES FOR TECHNICAL SERVICES TO BE TAXABLE IN INDIA, HOWEVER, THERE IS NO SUCH EXPRESSION UNDER THE INDIA MALAYSIA TREATY (OLD). THEREFORE, THE AMOUNT RECEIVED TOWARDS SERVICE CHARGES HAS TO BE TREATED A S BUSINESS PROFIT OF THE ASSESSEE UNDER ARTICLE - 7 OF THE DTAA. ADMITTEDLY, AS THE ASSESSEE HAS NO P.E. IN INDIA, THE AMOUNT CANNOT BE BROUGHT TO TAX IN INDIA. THOUGH, IT IS THE STAND OF THE DEPARTMENT THAT IN VIEW OF ARTICLE 3(2) OF THE TREATY, DEFINITION OF FTS PROVIDED U/S 9 (1 )(VII) OF THE ACT WOULD ALSO APPLY TO THE TREATY, HOWEVER, WE ARE UNABLE TO ACCEPT IT. IN OUR VIEW, SOME EXPRESSION IS USED IN THE TREATY BUT NOT DEFINED, WHEREAS, A DEFINITION OF SUCH EXPRESSION IS PROVIDED IN THE A CT, IN THAT EVENT, IN TERMS OF ART. 3(2) OF THE TREATY THE PROVISIONS OF THE ACT WILL APPLY. IN THIS CONTEXT WE MAY REFER TO THE DECISIONS OF ITAT IN CASE OF MCKINSEY BUSINESS CONSULTANTS VS. DDIT(SUPRA) AND ACIT VS. VICEROY HOTELS ITD.(SUPRA). AS FAR AS O BSERVATIONS OF THE TEEMED COMMISSIONER ITA NO.2278/MUM/2006 & 4012/MUM/2008 M/S .COLGATE PALMOLIVE MARKETING SDN BHD 6 (APPEALS) THAT THE ASSESSEE CANNOT SWITCH ITS OPTION TO BE TAXED EITHER UNDER THE ACT OR DTAA, IN RESPECT OF DIFFERENT SOURCES OF INCOME, ON READING THE PROVISIONS OF SECTION 90(2) OF THE ACT, WE DO NOT FIND ANY SUCH RESTRICTION IMPOSED THEREIN. AS PER THE PLAIN READING OF SECTION 90(2), THE PROVISIONS OF THE ACT SHALL APPLY TO THE EXTENT THEY ARE MORE BENEFICIAL TO THE ASSESSEE. IN OTHER WORDS, IF THE PROVISION OF DTAA QUA A PARTICULAR ITEM OF INCOME IS MORE BENEFICIA L TO THE ASSESSEE, THE SAME HAS TO APPLY. GROUND NO.2, IS ALLOWED. ' THEREFORE, THE AMOUNT OF USD 3,66,000 RECEIVED TOWARDS SERVICE CHARGES HAS TO BE TREATED AS BUSINESS PROFIT OF THE ASSESSEE AND ACCORDINGLY, IN THE ABSENCE OF PE, THE SAME WILL NOT BE T AXABLE IN INDIA. THE FINDING OF THE HON'BLE TRIBUNAL IS AT PARA 29, PAGE 55 TO PARA 31, PAGE 57 OF THE TRIBUNAL ORDE R. 8. SINCE THE ADDITION ITSELF HAS BEEN DELETED BY THE TRIBUNAL, THE PENALTY HAS NO LEGS TO STAND. ACCORDINGLY, WE DELETE PENA LTY SO IMPOS ED BY THE AO IN BOTH THE YEARS UNDER CONSIDERATION. 9 . IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE ALLOWED. O RDER PRONOUNCED IN THE OPEN COURT ON THIS 27 / 02 /2017 SD/ - ( AMARJIT SINGH ) SD/ - ( R.C.SHAR MA ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED 27 / 02 /201 7 KARUNA SR. PS COPY OF THE ORDER FORWARDED TO : BY ORDER, ( ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6 . GUARD FILE. //TRUE COPY//