SAVVIS COMMUNICATIONS CORPORATION, USA V. DDIT (IT) 2(2), MUMBAI

ITA 5670/MUM/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 3721 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-08-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 20-09-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V VIDHYADHAR
• Assessee Lawyers: FORUM MEHTA
• Keywords: Business income; Double taxation relief; Permanent establishment
• Section: 143(3); 12; 144; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI BEFORE SHRI SHAMIM YAHYA, AM AND SHRI RAVISH SOOD, JM I.T.A. NO S . 5670 & 5671/MUM/2016 ( ASSESSMENT YEAR S : 2011 - 12 & 2010 - 11 ) M/S. SAVVIS COMMUNICATIONS CORPORATION 1 SAVVIS PARKWAY, ST. LOUIS, TO WN & COUNTRY MISSOURI, USA - 63017 VS. DY. CIT - INTERNATIONAL TAXATION, CIRCLE - 4(2)(1), 1 ST FLOOR, R. NO. 119, SCINDIA HOUSE, BALLARD PAN/GIR NO. AANCS 2551 E ( APPELLANT ) : ( RESPONDENT ) APPELLANT BY : SHRI DHANESH BAFNA & SHRI FORUM MEHTA RESPON DENT BY : SHRI V. VIDHYADHAR DATE OF HEARING : 24.05.2018 DATE OF PRONOUNCEMENT : 13.08 .2018 O R D E R PER S HAMIM YAHYA, A. M.: THE S E ARE A PPEAL S BY THE ASSESSEE DIRECTED AGAINST THE RESPECTIVE O RDER S OF THE COMMISSIONER OF INCOME TAX (APPEALS) FOR THE ASSESSMENT YEAR 2010 - 11 & 2011 - 12 RESPECTIVELY. 2. THE COMMON ISSUES RAISED READS AS UNDER; 1. THAT THE ORDER PASSED BY THE LEARNED DEPUTY COMMISSIONER OF INCOME - TAX, ('LEARNED ASSESSING OFFICER' OR 'LEARNED AO') UNDER SECTION 144 READ WITH SEC TION 143(3) READ WITH SECTION 1440(3) OF THE INCOME - TAX ACT, 1961 ('ACT') AND THE ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) [LEARNED CIT(A)] UNDER SECTION 250 OF THE ACT, TO THE EXTENT PREJUDICIAL TO THE APPELLANT, IS BAD IN LAW AND CONTRARY TO THE FACTS AND CIRCUMSTANCES OF THE CASE. 2.A. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED IN UPHOLDING THE ACTION OF THE LEARNED AO IN BRINGING TO TAX THE SUM OF 2 ITA NO S . 5670 & 5671/MUM/2016 M/S. SAVVIS COMMUNICATIONS CORPORATION RS 18,146,720 (RS.22,232,048 FOR AS SESSMENT YEAR 2010 - 11) RECEIVED BY THE APPELLANT FROM CUSTOMERS FOR MANAGED HOSTING SERVICES AS INCOME CHARGEABLE TO INCOME TAX IN INDIA. 2,B. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED IN UPHOLDING THE ACTIO N OF THE LEARNED AO IN TREATING THE IMPUGNED AMOUNT RECEIVED BY THE APPELLANT AS 'ROYALTY' AND / OR 'FEES FOR INCLUDED SERVICES' UNDER SECTION 9(I)(VI) / (VII) OF THE ACT AND UNDER ARTICLE 12 (3) / (4) OF THE INDIA - USA DOUBLE TAXATION AVOIDANCE AGREEMENT ( 'DTAA'). 2.C. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT THE INCOME EARNED BY THE APPELLANT FROM CUSTOMERS FOR PROVIDING MANAGED HOSTING SERVICES CONSTITUTED CONSIDERATION FOR USE OR RIGHT TO USE EQU IPMENT. 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED IN NOT FOLLOWING THE DECISION OF THE JURISDICTIONAL TRIBUNAL IN APPELLANT'S OWN CASE FOR ASSESSMENT YEAR 2009 - 10 ORDER DATED MARCH 31, 2016 IN ITA NO. 734O/MUM/2OI2 WH ILE ADJUDICATING ON THE TAXABILITY OF THE INCOME EARNED BY THE APPELLANT FROM PROVISION OF MANAGED HOSTING SERVICE. 3. SINCE THE FACTS ARE IDENTICAL, WE ARE REFERRING TO FACTS AND FIGURES FROM ASSESSMENT YEAR 2011 - 12. 4. BRIEF FACTS OF THE CASE ARE THA T DURING THE FINANCIAL YEAR, THE ASSESSEE EARNED INCOME OF RS.18,146,720/ - FROM PROVISIONING OF MANAGED HOSTING SERVICES TO MALAYALA MANORAMA CO LTD AND CYBERMEDIA INDIA ONLINE LTD. IN ITS RETURN OF INCOME, THE ASSESSEE CLAIMED THAT THE SERVICES RENDERED B Y IT DO NOT MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW HOW OR PROCESSES TO ITS CUSTOMERS AND CONSEQUENTLY THESE DO NOT CONSTITUTE FEE FOR INCLUDED SERVICES WITHIN THE MEANING OF ARTICLE 12 OF INDIA US DTAA. IT CLAIMED THAT THE AMOUNT REPRE SENTED BUSINESS INCOME OF THE ASSESSEE AND SINCE IT DID NOT HAVE ANY PERMANENT ESTABLISHMENT (PE) IN INDIA UNDER ARTICLE 5 OF THE TREATY, THE INCOME WAS NOT LIABLE TO TAX UNDER ARTICLE 7(1) OF THE DTAA. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSE SSING OFFICER CONCLUDED THAT APART FROM THE USE OF 3 ITA NO S . 5670 & 5671/MUM/2016 M/S. SAVVIS COMMUNICATIONS CORPORATION TELECOMMUNICATION EQUIPMENTS, THE CUSTOMERS ALSO USED VARIOUS KNOW - HOW, TECHNOLOGY AND SOFTWARE PROVIDED BY THE ASSESSEE WHICH WERE EITHER OWNED BY THE ASSESSEE OR WERE AVAILABLE TO THE ASSESSEE UNDER LICE NSE AGREEMENT WITH THIRD PARTY. THE USE OF SUCH KNOW - HOW, TECHNOLOGY AND SOFTWARE WAS FOUND TO BE COVERED BY THE PROVISIONS OF SECTION 9(L)(VI) OF THE ACT AS WELL AS ARTICLE 12 OF INDIA - US DTAA. BEFORE THE ASSESSING OFFICER , THE ASSESSEE SUBMITTED THAT THE MANAGED HOSTING SERVICES WERE IN THE NATURE OF SERVICE AND USE OF SERVERS, RACK SPACE, WIRES, CABLES, INTERNET FACILITY, SOFTWARE WERE INCIDENTAL TO PROVIDING THESE SERVICES. THE CORE OF TRANSACTION WAS TO PROVIDE ACCESS TO THE DATA/APPLICATIONS BEING HOS TED BY THE COMPANY WITH THE CUSTOMER ACCESSING ITS OWN DATA AND NOT THE DATA OF THE ASSESSEE. IT FURTHER CLAIMED THAT THE ASSESSEE DID NOT GRANT ANY RIGHT/LICENSE TO THE CLIENT AND RIGHT OVER THE SOFTWARE ETC. USED DURING THE TRANSACTION DID NOT PASS TO TH E CLIENT. 5. UPON THE ASSESSEES APPEAL, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) CONFIRMED THE ASSESSING OFFICERS ACTION. THOUGH THE ASSESSEE HAD ALSO REFERRED TO HONBLE DELHI HIGH COURT DECISION IN THE CASE OF DIRECTOR OF INCOME TAX VS. NEW SKIES SATELLITE BV [2016] 382 ITR 114 (DEL), THE LD. COMMISSIONER OF INCOME TAX (APPEALS) DID NOT DISCUSSED THIS CASE LAW. 6. AGAINST THIS ORDER, THE ASSESSEE IS IN APPEAL BEFORE US. 7. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. IT TRANSPIRES T HAT THE ISSUE WAS DECIDED IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2009 - 10 BY THE TRIBUNAL IN ITA NO. 7340/MUM/2012 VIDE ORDER DATED 31.03.2016. THE TRIBUNAL HAS HELD AS UNDER: 4 ITA NO S . 5670 & 5671/MUM/2016 M/S. SAVVIS COMMUNICATIONS CORPORATION 6. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE APPLICABLE LEGAL POSITION. 7. WE HAVE NOTED THAT WHILE THE CIT(A] HAS GIVEN RELIEF IN THE LIGHT OF THE PROVISIONS OF THE INDO US TAX TREATY AS ALSO THE PROVISIONS OF THE ACT, BUT LIMITED GRIEVANCE RAIS ED BEFORE US IS WITH RESPECT TO THE PROVISIONS OF THE ACT. THE ISSUE SO RAISED IS PURELY ACADEMIC IN THE SENSE THAT EVEN IF THE GRIEVANCE OF THE ASSESSING OFFICER IS UPHELD, THE FINDINGS ON THE TREATY ASPECT WILL REMAIN INTACT, AND AS THE PROVISIONS OF THE ACT COME INTO PLAY ONLY WHEN THESE PROVISIONS ARE MORE BENEFICIAL VIS - A - VIS THE TREATY PROVISIONS, THE RELIEF UNDER THE TREATY PROVISIONS WILL CONTINUE TO HOLD THE FIELD. THE SUCCESS OF THE ASSESSING OFFICER, EVEN IF HE WAS ACTUALLY ENTITLED TO THE SAME O N MERITS, WOULD HAVE BEEN RATHER HOLLOW. 8. THAT, HOWEVER, IS NOT THE ONLY REASON WHY THE APPEAL MUST FAIL. 9. WE HAVE NOTED THAT THE VERY BASIS OF THE IMPUGNED ADDITION IS ASSESSING OFFICER'S FINDING THAT THE RECEIPTS IN QUESTION WERE ON ACCOUNT O F USE OF SCIENTIFIC EQUIPMENT, AND, FOR THAT REASON, GIVING RISE TO AN INCOME TAXABLE UNDER SECTION 9(L)(VI] OF THE ACT AS ALSO ARTICLE 13[1)( OF THE INDO US TAX TREATY. THIS FINDING, HOWEVER, PROCEEDS ON THE FALLACY THAT WHEN A SCIENTIFIC EQUIPMENT IS US ED BY THE ASSESSEE FOR RENDERING A SERVICE, THE RECEIPT WILL BE CONSTRUED AS A RECEIPT FOR USE OF SCIENTIFIC EQUIPMENT. UNDOUBTEDLY, WHEN THE ASSESSEE RECEIVES AN INCOME ON ACCOUNT OF ALLOWING A CUSTOMER TO USE A SCIENTIFIC EQUIPMENT, IT DOES BECOME TAXABL E FOR THE REASON OF ITS BEING CHARACTERIZED AS SUCH, BUT THE USE OF A SCIENTIFIC EQUIPMENT BY THE ASSESSEE, IN THE COURSE OF GIVING A SERVICE TO THE CUSTOMER, IS SOMETHING VERY DISTINCT FROM ALLOWING THE CUSTOMER TO USE A SCIENTIFIC EQUIPMENT. THE TRUE TES T IS IN FINDING OUT THE ANSWER TO THE FUNDAMENTAL QUESTION - IS IT THE CONSIDERATION FOR RENDITION OF SERVICES, EVEN THOUGH INVOLVING THE USE OF SCIENTIFIC EQUIPMENT, OR IS IT THE CONSIDERATION FOR USE OF EQUIPMENT SIMPUCTOR BY THE ASSESSEE? IN THE CASE OF FORMER, THE CONSIDERATION IS NOT TAXABLE, IN THE CASE OF THE LATTER, THE CONSIDERATION IS TAXABLE. IN THE CASE OF KOTAK MAHINDRA PRIMUS LTD VS DDIT [(2007) 11 SOT 578 (BOM)], A COORDINATE BENCH, DEALING WITH A SITUATION IN WHICH THE MAINFRAME COMPUTER AND THE SPECIALIZED SOFTWARE WAS USED FOR RENDERING DATA PROCESSING SERVICES TO AN INDIAN ENTITY, HELD SO AND OBSERVED THAT, 'NO PART OF THIS PAYMENT CAN BE SAID TO BE FOR THE USE OF SPECIALIZED SOFTWARE ON WHICH DATA IS PROCESSED OR FOR THE USE OF MAINFRAME C OMPUTER BECAUSE THE INDIAN COMPANY DOES NOT HAVE ANY INDEPENDENT RIGHT TO USE THE COMPUTER OR EVEN PHYSICAL ACCESS TO THE MAINFRAME COMPUTER, SO AS TO USE THE MAINFRAME COMPUTER OR THE SPECIALIZED SOFTWARE.' 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 5 ITA NO S . 5670 & 5671/MUM/2016 M/S. SAVVIS COMMUNICATIONS CORPORATION INDIAN ENTITIES MAY INVOLVE USE OF CERTAIN SCIENTIFIC EQUIPMENT, THE 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(L)(VI) READ WITH EXPLANATION 2 (IVA) THERETO. 10. IN VIEW OF THE ABOVE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THE CASE, WE APPROVE THE CONCLUSIONS ARRIVED AT BY THE LEARNED C1T[A) AND DECLINE TO INTER FERE IN THE MATTER. 8. SINCE THE FACTS ARE IDENTICAL AND IT IS NOT THE CASE THAT THE HON'BLE JURISDICTIONAL HIGH COURT HAS REVERSED THIS DECISION, WE FOLLOW THE SAME. HENCE, WE SET ASIDE THE ORDER OF THE AUTHORITIES BELOW AND DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. 9. IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 13.08.2018 SD/ - SD/ - ( RAVISH SOOD) (S HAMIM YAHYA) J UDICIAL MEMBER A CCOUNTANT MEMBER MUMBAI ; DATED : 13.08.2018 ROSHANI , SR. PS COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. CIT - CONCERNED 5. DR, ITAT, MUMBAI 6. GUARD F ILE BY ORDER, (DY./ASSTT. REGISTRAR) ITAT, MUMBAI