MUREX SOUTHEAST ASIA PRIVATE LIMITED , MUMBAI V. DEPUTY COMM. OF INCOME TAX (IT) 3(2)(2) , MUMBAI

ITA 2338/MUM/2022

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The case revolves around the taxability of income earned by M/s. Murex Southeast Asia Pvt. Ltd. from maintenance and support services provided to Indian customers under the India-Singapore Double Taxation Avoidance Agreement (DTAA). The Deputy Commissioner of Income Tax, International Tax 3(2)(2), Mumbai, had assessed this income as 'fee for technical services' (FTS) under the Indian tax law and the DTAA, leading to the appeal. The Tribunal examined whether the services rendered constituted 'make available' technical knowledge, which would classify them as FTS. The Tribunal concluded that the services did not enable the Indian customers to apply the technology independently, thus not meeting the 'make available' requirement.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 302468 (ITAT-MUMBAI)
• Duration Of Justice: 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-05-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 01-02-2023
• Assessment Year: 2018-2019
• Appeal Filed On: 14-09-2022
• Laws Referred To: Income Tax Act, India-Singapore DTAA
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Double taxation relief
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, ‘I‘ BENCH MUMBAI BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI S RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA No.2338/Mum/2022 (Assessment Year :2018-19) M/s. Murex Southeast Asia Pvt. Ltd., 19-01, 10 Marina Boulevard, Marina Bay Financial Centre Tower-2 Singapore-018983 Vs. Deputy Commissioner of Income Tax International Tax 3(2)(2) Mumbai 16 th Floor, Air India Building, Nariman Point, Mumbai- 400 021 PAN/GIR No.AAICM4006F (Appellant) .. (Respondent) Assessee by Shri Ajit Jain & Shri Siddesh Chaugule Revenue by Shri Soumendu Kumar Dash Date of Hearing 02/02/2023 Date of Pronouncement 08/05/2023 आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against the final assessment order dated 18/07/2022 passed u/s. 143(3) r.w.s. 144C(13) passed in pursuance of direction given by the ld. DRP vide order dated 09/09/2021 for the A.Y.2018-19. 2. The only issue raised in various grounds of appeal is taxability of Rs.28,29,01,594/- which has been taxed as „fee for technical services‟ on payments received from provision of ITA No.2238/Mum/2022 M/s. Murex Southeast Asia Pvt. Ltd. 2 income from maintenance and other support and training services under India Singapore DTAA. 3. The facts in brief are that the assessee company was incorporated on 15/06/2000 in the Republic of Singapore, engaged in the business of providing/sub-licensing software to entities, majorly engaged in the financial service sector and rendering related maintenance and other support services and training services in relation to the software sub-licensed to them. The assessee is a resident of Singapore as per the Double Taxation Avoidance Agreement between India and obtained from the Singapore ("DTAA" / "Tax Treaty') and holds a valid Tax Residency Certificate (TRC) Authorities in Singapore. Accordingly, assessee is eligible to claim the Tax Treaty benefits which is undisputed. 4. During the year under consideration, the assessee has sub- licensed software and provided related maintenance and other support services and training services as well as additional services with respect to the said sub-licensed software and has earned India sourced income from the same. The assessee's position with respect to income from sub-licensing of software and income from additional services has been accepted by the ld. Assessing Officer. However, the Income from maintenance and other support services and training services was alleged by the ld. AO to be in the nature of „Fees for Technical Services‟ (FTS) on account of the services satisfying the criteria of make available under the India Singapore Tax Treaty. ITA No.2238/Mum/2022 M/s. Murex Southeast Asia Pvt. Ltd. 3 5. The ld. AO after analyzing certain relevant portion of the relevant agreements drew following inferences:- 1.Technical expertise is required on part of the assessee to meet the challenges in maintenance and support to the clients. 2. Hence, it is beyond doubt that at a every stage the human intervention is also there to provide the required specialised advice in such technical matters. There is no automated machine generated solutions to the technical problems. 3. As per the 'Software Support and Maintenance Agreement' also the assessee will have to provide the services as mentioned above, on telephone, on email, remote login or on-site assistance, software upgrade on constant basis, training for the software to the personnel of the clients at mutually agreed place, followed by review meetings,/ maintenance services etc. The details of the maintenance services have been explained by a flow chart annexed to the Maintenance Agreement, wherein MSEA is required to explain step by step for every problem. 4. This means that there is collaboration with the personnel of assessee with the personnel of clients. 5. There is this technical plan to resolve the issues delivered to clients by assessee while delivering the services through remote login etc. 6. Hence, there is "make available" of technical expertise as well as delivery of technical plan. In view of all the above factors it has to be considered as ‘Fees for included services’. Thus, AO held that, not only its fees for technical services under the provision of Section 9(1)(vii) but also falls in the ambit ITA No.2238/Mum/2022 M/s. Murex Southeast Asia Pvt. Ltd. 4 of Article 12(4) of India-Singapore DTAA. Accordingly, he taxed amount of Rs.28,29,01,594/- as fee for technical services. 6. We have heard both the parties at length and also perused the relevant finding given in the impugned order as well as material referred to before us and the maintenance agreement, which is core issue before us, whether income from rendering maintenance and other support services is taxable in India as FTS under Article 12 (4) of India- Singapore DTAA. The relevant portion of the article reads as under:- “The term fees for technical services us used in this Article means 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: (b) make available technical knowledge, experience, skill, know-how or processer, which enables the person acquiring the services to apply the technology contained therein.” 7. Thus, what is required is to be seen whether the said services satisfying “make available” clause. The sum and substance of the assessee‟s explanation before us has been that:-  The Indian customer (including its In-House support team) is not able to apply any expertise/technology contained therein or use knowledge on its own, without recourse to the Company. ITA No.2238/Mum/2022 M/s. Murex Southeast Asia Pvt. Ltd. 5  Further, the Indian customer is not at liberty to use the technical knowledge, skill, know-how and process of the Company in their own right; and  The Indian customer would not be in a position to perform services (of the nature provided by the Company) In-House. They have to necessarily seek services of the Company time and again. 8. Further before us, the ld. Counsel for the assessee has given comparison of relevant clauses of simple agreements submitted by the assessee that the software sub-license and services agreement as well as maintenance agreement vis-à-vis nature of maintenance, other support services and training services rendered by the assessee which have been highlighted as under:- Nature of services rendered / facts of the case of the Appellant Relevant clauses from the sample agreements During the year under consideration, the Appellant has rendered maintenance and other support services to the in-House support team of the Indian customers by way of telephone / email / remote log-in assistance with respect to usage of the software program. Such assistance consists of responding to the Indian Annex 5- Maintenance Procedure Clause 2- General Assistance 2.1 Service: MSEA's "General Assistance" services comprise the provision of telephone and/or email responses to reasonable questions communicated by an In-House Support Team member to the MSEA Office regarding the use or operation of the software program in accordance with the agreement.... ITA No.2238/Mum/2022 M/s. Murex Southeast Asia Pvt. Ltd. 6 customer's reasonable questions communicated by the In-house support team concerning use of Software program and resolving the discovery of bug. For example, there could be a time gap in input of data and the output generated i.e., Indian customer inputs data in the software at 10.54 am but the output is generated at 11.00 am. This time gap is a bug as the reports should be generated within seconds / a minute and timings cannot be haywire. The Appellant submits that these are the kind of bugs which the Company is resolving and providing by way of software maintenance. Further, the Company submits that during the year under consideration there is no on- site maintenance and support services assistance provided by MSEA to Indian customers during the year under consideration. The Company also submits that it is a non- resident with no presence / Permanent Establishment in terms of India-Singapore Clause 3: Corrective Maintenance 3.1 Service: MSEA's "Corrective Maintenance" services consist of using reasonable efforts to Resolve an Error or Critical Error in the Software Program identified by SUBLICENSEE during the applicable Maintenance Term, i.e., to identify and reproduce the Error or Critical Error and, to the extent practicable using reasonable efforts, to diagnose the Error or Critical Error, and upon such identification and diagnosis, to the extent practicable using reasonable efforts in the good faith judgment of MSEA, to provide a correction of the Error or Critical Error or, if no correction is available, a reduction of the effects of, or a work-around solution with respect to, the Error or Critical Error (e.g. reversion of a change in configuration or a change in the way of using the Software Program by the Users to its previous value) Article 1: Maintenance Services 1.1.1 Telephone' and Email Assistance to SUBLICENSEE or Sublicensee Affiliates: MSEA will provide telephone and/or email assistance to the In-House Support Group (as defined in Article 1.3.1 ITA No.2238/Mum/2022 M/s. Murex Southeast Asia Pvt. Ltd. 7 DTAA in India and there is no maintenance team of the Company in India. hereof) during MSEA's normal business hours (09:00 to 18:00 Singapore time, Monday through Friday excluding holidays in Singapore)...Such assistance will consist of responding to SUBLICENSEE'S reasonable questions concerning SUBLICENSEE'S or the Sub licensee Affiliates' use of the Software Program, as the case may be... The Role and requirement of the la-House support team:- As highlighted in the agreement, the In-House support team is required to understand the concerns / requirements from the Indian customers employees who are actually using the software and explain the same to the Appellant's technical team to help them resolve the errors / bugs. As you will appreciate the Indian customers to whom the Appellant caters to are generally large financial organizations with many employees in its organization. For example, say SBI, which is one of the customers to Clause 4: In-House Support Team The Maintenance Services provided by MSEA hereunder constitute second-level maintenance. Accordingly, SUBLICENSEE must establish and maintain an in-house technical support team of Users at each Site whose members possess the requisite business and technical competencies and knowledge in respect of each Site and in respect of each Authorized Business and have received appropriate training from MSEA and are competent in the use of the Software Program ("In-House Support Team") ... 1.3.1 In-House Support. SUBLICENSEE'S in-house support group in Mumbai ("In-House Support Group") will be generally responsible for providing Internal ITA No.2238/Mum/2022 M/s. Murex Southeast Asia Pvt. Ltd. 8 whom the Appellant sub- licenses its software, has lakhs of employees, some of whom are using the Murex Software. Similar to any large organization, SBI has also established an internal Information Technology ('IT') team i.e. In-House support team. The employees using the MSEA software raise their software usage related queries / bugs to the In- House support team. Thereafter, the In-House support team co-ordinates with the Appellant for resolving such queries / bugs. If every employee in the organization co-ordinates with the Appellant for their independent queries / bugs, it would become difficult for the Appellant to resolve the queries / bugs. Thus, the In- House support team of the Indian customers is mainly a centralized point of contact for purpose of coordination of queries / bugs and related activities of Indian customers with MSEA. Since the role of In-House support team involves coordinating with MSEA regarding the issues in and External Users with technical assistance and training regarding the use of the software program("In-House Support"). The In-House Support will include general technical assistance and training of SUBLICENSEE'S Internal and External Users. 1.3.2 Maintenance Services. ... The In –House support Group will be responsible for all communications with MSEA in respect of any questions encountered in any Site concerning SUBLICENSEE'S use of the Software Program ITA No.2238/Mum/2022 M/s. Murex Southeast Asia Pvt. Ltd. 9 the MSEA software program, the personnel in such In- House support team / IT team need to be competent to know how to use the software program to be able to effectively explain the query / bug to MSEA which would then enable MSEA to identify the issue and resolve the same. Description of training provided as part of the Maintenance services: The Company submits that it provides training to the end users and In-house team members of the Indian customers only with respect to the proper usage of the program. Considering it is a specific software for financial sector customers, it is necessary for the Appellant to provide training to the Indian customers else the software would be of little value / use to the said customers. In simple terms, such training is akin to training provided to an individual for operating any product such as a software like SAP, Tally, Microsoft Excel or even a refrigerator / water purifier. 1.1.3 Training Upon the request of SUBLICENSEE, and at times and locations to be mutually agreed between the parties, MSEA will train SUBLICENSEE and Sub licensee Affiliates on the proper usage of the Software Program. ITA No.2238/Mum/2022 M/s. Murex Southeast Asia Pvt. Ltd. 10 Further, the training is generally provided at the initial stage when the software is sub-licensed and subsequently provided only on need basis e.g. if there is an additional module which is sub-licensed or there is a change in the Indian customers users / In-House support team etc. Updates to the software sub- licensed: As a pan of the maintenance services, the Appellant also provides updates to the software program. Such updates include e.g., correction of errors, improvements concerning existing functioning of program, and changes intended to improve calculations / results / formulate of software program etc. There is no addition in the functionalities through such update. The updates are standard, provided to all the customers, not customized and the installation of such updates is at the discretion of the Indian customers. 1.2 Updates 1.2.1 Updates: From time to time, MSEA will provide SUBLICENSEE with an update to the Software Program including, for example, correction of errors, improvements concerning the existing functioning of the program or the screens, and program changes intended to improve the calculations, results and formulae of the Software Program. Additional functionalities shall not generally be delivered in connection with an update. "Updates": Updates to the Software Program that MSEA distributes to its general customer base having a similar scope of use of the Software Program as SUBLICENSEE as part of the maintenance services which they are entitled to receive, and ITA No.2238/Mum/2022 M/s. Murex Southeast Asia Pvt. Ltd. 11 provided to SUBLICENSEE as part of the Maintenance Services, or otherwise at no additional sublicense fee or maintenance fee (and "Updated Version" means the version of the Software Program resulting from the installation of an Update). The maintenance services contract is dependent on the software sublicensing agreement. In case of separate agreements for sublicensing and maintenance, there is a termination clause which provides that maintenance services will automatically terminate if software sublicensing contract is expired or terminated 5.3 Automatic Termination: In the event of the expiration or termination of the Sublicense Agreement. this Maintenance Agreement shall automatically terminate The Company submits that the fees for maintenance services are annual and based on a percentage of licence fee. The said fees are not based on the number of queries / bugs raised / resolved by the Appellant. The said fee increases year on year according to the agreed inflation index which implies that there is no diminishing services and the Indian customers year on year Article III Maintenance Fees 3.1 Annual Basic Maintenance Fee: 3.1. 1 SUBLICENSEE shall pay MSEA in advance on an annual basis, an annual basic maintenance fee for the Software Program (for one hundred (100) named Users as set forth in Annex 1-D of the Sublicense Agreement) as follows: ITA No.2238/Mum/2022 M/s. Murex Southeast Asia Pvt. Ltd. 12 continue with such maintenance service contract. Year 2005 Year 2006 Year 2007 Year 2008 Year 2009 Year 2010 and after USD 120, 000 USD 180,0 00 USD 240,00 00 USD 300,0 00 USD 360, 000 USD 360, 000 9. On the other hand, ld. DR had referred to the same agreement and submitted that the ld. AO has rightly concluded that the income earned from maintenance agreement is nothing but fee for technical services and also „make available‟ for technical expertise as well as delivery of technical plan is there. 10. After considering the relevant clauses of the maintenance agreement, we find that the assessee rendered maintenance and other support services to the in-house support team of Indian customers through telephone / email/ login assistance with respect to usage of the software programme. Such assistance is by responding to reasonable questions communicated by the in- house support team concerning the use of software programme and resolving the discovery of bug in respect of software supplied by the assessee. Before us, certain instances and examples have been cited as to how the assessee has been resolving the issue arising out of bugs provided by the software during the software maintenance. Further there are no onsite maintenance and support services, assistance provided by the assessee to the Indian customers. Apart from that, another very important fact is that there is no permanent establishment or any maintenance ITA No.2238/Mum/2022 M/s. Murex Southeast Asia Pvt. Ltd. 13 team of the company in India. Indian customers have in-house support team which is required to understand the source / requirements from the Indian customers. Employees of the Indian customers who are using the software, if they happen to come across any problem, then the same is referred to the assessee‟s technical team to help them to resolve errors / bugs. These Indian customers are mainly big organizations and the one of the biggest customer was SBI, to whom the assessee has sub- licensed its software and which is used by lakhs of employees. SBI has an internal IT team to cater assistance to their employees in case there are any queries / bugs. That in-house team coordinates with assessee for resolving such queries / bugs. The in-house support team of the Indian customers is mainly a centralized point of contact for purpose of co-ordination and related activities of Indian customers with the assessee. Since, the role of in-house support team involves coordinating with the assessee regarding MSEA software programme supplied by the assessee, the personnel in such In-House support team / IT team need to be competent to know how to use the software program to be able to effectively explain the query / bug to MSEA which would then enable MSEA to identify the issue and resolve the same. This fact is clearly borne out from the relevant clauses of the agreements which has been filed before us and also which has been noted in the foregoing paragraphs. 11. In so far as the training part is concerned, the assessee company provides training to the end users and in-house team members of the Indian customers only with respect to the proper ITA No.2238/Mum/2022 M/s. Murex Southeast Asia Pvt. Ltd. 14 usage of the program. This training is a akin to training provided for operating any product, software and it is generally provided at the initial stage when the software is sub-licensed and subsequently provided only on need basis. Apart from that, as a part of maintenance services, assessee also provides updates to the software programmes like correction of errors, improvements concerning existing functioning of program, and changes intended to improve calculations / results / formulate of software program etc. There is no addition in the functionalities through such update which are only standard updates and not customization. Thus, the entire maintenance service contract is dependent on the software sublicensing agreement. In case of separate agreements for sublicensing and maintenance, there is a termination clause which provides that maintenance services will automatically terminate if software sublicensing contract is expired or terminated. Here, fees for maintenance services are annual and based on a percentage of licence fee and is not dependent upon the number of queries / bugs raised or resolved by the assessee. 12. If it is of recurring annual fees, there is no question that assessee was making available any technology or knowhow of the Indian customers on year to year basis as has been interpreted by the ld. AO. Assessee is having the technical expertise in the software sub-licensed by it. If there is any bug or problem faced by the customers while using the software, assessee provides trouble shooting to fix those bugs and helps them for ITA No.2238/Mum/2022 M/s. Murex Southeast Asia Pvt. Ltd. 15 maintaining and support of the software used by the clients. This does not mean that assessee had made available any technology in software. 13. Another allegation is that services have been provided on on telephone, on email, remote login and providing training for the software and therefore, it is „make available‟. If assessee is resolving the problems on software sub-licensed by it, this does not per se mean that any technology has been transferred or any know how has been make available which can enable the in- house team of the customer to acquire the technology. Thus, such maintenance support services and training services do not fall in the ambit and nature of FTS within Article 12(4) of India- Singapore DTAA, as these services do not make available any technical skill knowledge or expertise etc., which can enable Indian customer to apply the technology content therein. Thus, we hold that these services are not liable to be taxable. In the result, this issue is passed in favour of the assessee. 14. Lastly, in so far as interest u/s.234D is concerned, the same has not been argued and admitted that it is consequential; and initiation of penalty u/s. 270A is admitted to be premature. 15. In the result, appeal of the assessee is allowed. Order pronounced on 8 th May, 2023 Sd/- (S. RIFAUR RAHMAN) Sd/- (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 08/05/2023 KARUNA, sr.ps ITA No.2238/Mum/2022 M/s. Murex Southeast Asia Pvt. Ltd. 16 Copy of the Order forwarded to : BY ORDER, (Asstt. Registrar) ITAT, Mumbai Date Initial 1. Draft dictated on 12/05/2023 Sr.PS 2. Draft placed before author 15/05/2023 Sr.PS 3. Draft proposed & placed before the second member JM/AM 4. Draft discussed/approved by Second Member. JM/AM 5. Approved Draft comes to the Sr.PS/PS Sr.PS/P S 6. Kept for pronouncement on Sr.PS 7. File sent to the Bench Clerk Sr.PS 8. Date on which file goes to the AR 9. Date on which file goes to the Head Clerk. 10. Date of dispatch of Order. 11. Dictation Pad is enclosed Yes 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy//