Royalty — Amount received by the assessee, a tax resident of Singapore, from SCB India for use of disk space in the hardware of the assessee at its data centre in Singapore is not taxable as royalty, as held by MumTrib in Atos Origin IT Services Singapore (P) Ltd v ADIT — In favour of: The assessee; ITA No 2428 (Mum) of 2009: (AY 2005–2006).
Atos Origin IT Services Singapore (P) Ltd. v ADIT
ITAT, Mumbai
ITA No. 2428 (Mum.) of 2009
Assessment Year: 2005-06
N.V. Vasudevan, JM and Rajendra Singh, AM
Decided on: 27 May 2011
Counsel appeared:
Dhanesh Bafna and Sheetal Bandekar for the appellant
Malathi Shridharan for the respondent
Order
Rajendra Singh, AM
1. This appeal by the assessee is directed against the order dated 30-1-2009 for the assessment year
2005-06. The only dispute raised by the assessee is regarding taxability of Rs.12,92,68,070 receivable
from the assessee from Standard Chartered Bank (SCB) as royalty.
2. Briefly stated facts of the case are that the assessee who was tax resident of Singapore had entered
into a hubbing agreement for providing data processing support to Standard Chartered Bank (SCB) a
non-resident company engaged in the business of banking in India. The Assessing Officer on perusal
of agreement noted that SCB India though it was not in physical possession of infrastructure owned
by the assessee for the purpose of data processing, it did have constructive control over the same
because it could utilize the same as per terms of agreement. It was also observed by him that these
equipments were at the disposal of SCB India and it was a case of renting out of disc space in
hardware system and therefore, the payment made by SCB was royalty as per Article 12(3)(a) of
DTAA between India and Singapore. The Assessing Officer further observed that use of embedded
secret software provided by the assessee for processing raw data also fell within the ambit of Article
12(3)(a) of DTAA. The Assessing Officer accordingly taxed payment as royalty.
3. The assessee disputed the decision of the Assessing Officer and submitted before CIT(A) that
providing services for processing of data of customers was part and parcel of normal business activity
of the assessee and, therefore, fee payable by assessee was per se business profit of the assessee. Thus,
under the provisions of Article 7(1) of DTAA, the business profit could be taxed in India only if the
assessee had permanent establishment (PE) in India. Since assessee did not have a PE in India,
income was not taxable. CIT(A) however, did not accept the contentions raised. He agreed with the
finding of Assessing Officer that it was a case of renting out of disc space in the hardware system and
embedded software by the assessee in favour of SCB India and therefore, the income earned by the
assessee was of the nature of royalty within the meaning of Article 12(3) of DTAA and also within
the meaning of clause (iii) of Explanation (2) below section 9(vi) of the Income-tax Act. He therefore
confirmed the order of Assessing Officer assessing the amount as royalty. Aggrieved by said decision
the assessee is in appeal before Tribunal.
4. Before us ld. AR for the assessee at the very outset pointed out that the same issue had already been
decided by the Tribunal in assessee's own case in ITA No. 1457/Mum./2008 for assessment year
2004-05 in which Tribunal allowed the case of the assessee holding that the amount receivable by
assessee was not taxable as royalty. The ld. Departmental Representative fairly conceded that the
issue was covered by the said decision of the Tribunal.
5. We have perused the records and considered the matter carefully. The dispute is regarding
taxability of the amount received by assessee from SCB India for use of disc space in the hardware of
the assessee at its data centre in Singapore. The authorities below have held that it was a case of
renting out of disc space along with embedded software of the infrastructure of the assessee and
therefore, the income was of the nature of royalty under the provisions of Article 12(3) of DTAA
between India and Singapore. We find that the same issue has already been considered by the
Tribunal in assessee's own case in assessment year 2004-05 in which the Tribunal noted that as per
definition in Article 12(3)(b), royalty meant payment of any kind received as a consideration for use
or right to use any industrial, commercial or scientific equipment, other than payments received from
activity described in para-4(b) of Article 8. The Tribunal observed that in the context and collocation
of 2 expressions 'use' and 'right to use' followed by the word "equipment" indicated that there must be
some positive use or employment of equipment for the desired purpose. The customer must come face
to face with the equipment, operate it or control it or control its functions in some manner. If an
advantage was taken from sophisticated equipment installed and provided by another person it could
not be said that the recipient/customer used the equipment as such. Even where an earmarked circuit
was provided for offering the facility, unless there was material to establish that the circuit/equipment
could be accessed and put to use by means of some positive acts, it did not fall within the category of
royalty. The Tribunal held that in this case, the assessee did not have the right to access the computer
hardware except for transmitting raw data for further processing. The assessee had no control over
computer hardware or physical access to it. Therefore, there was nothing to show any positive act of
utilization, application or employment of equipment for the desired purpose. The Tribunal
accordingly held that payment was not royalty within the meaning of Article 12(3)(b). Facts, in this
year are identical. Therefore, respectfully following the decision of the Tribunal in assessment year
2004-05 in assessee's own case (supra), we set aside the order of the CIT(A) and deleted the addition
made.
6. In the result, the appeal of the assessee is allowed.
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