Case Law Details
IN THE ITAT BANGALORE BENCH ‘A’
Goldman Sachs Services (P.) Ltd.
Versus
Deputy Director of Income-tax (International Taxation)
IT APPEAL NOS. 196 & 197 (BANG.) OF 2011
[ASSESSMENT YEAR 2007-08]
NOVEMBER 30, 2012
ORDER
Jason P. Boaz, Accountant Member
These two appeals are directed against the order of the Commissioner of Income Tax (Appeals)-IV, Bangalore dt.12.11.2010 for Assessment Year 2007-08.
2. The facts of the case, in brief are as under :
2.1 The assessee company M/s. Goldman Sachs & Services Pvt Ltd (hereinafter referred to as GSSPL), is in the business of providing IT enabled services in investment banking, securities trading and other financial services to other companies of the Goldman Sachs group. In the relevant period, the assessee by agreement date 23.3.2006 engaged M/s. IBM Corporation, USA to provide software services in relation to certain accounting systems of the assessee (viz. People soft GL, Hyperion, Consolidations Module and Hyperion Business Tools) for which it made payments/remittances amounting to USD 1,65,253 (i.e. Rs.73,12,465) on 10.2.2007 without deducting tax at source thereon. In these circumstances, the Assessing Officer initiated proceedings under section 201(1) of the Income Tax Act, 1961 (herein after referred to as ‘the Act’) on the assessee as a defaulter for non-deduction of tax at source. The assessee submitted that the services rendered to 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 domestic law and also did not fall under the purview of the section of Article 12(3) of 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 technology, 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 relation to development or transfer of any technical plan or technical design. These submissions of the assessee that the services rendered by M/s. IBM Corporation, 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 rendered 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 Officer. The Assessing Officer examined the contents of the agreement and held that the main deliverables made available by the consultant, IBM Corporation, USA, are technical specification, programme code, unit test results, etc relatable to development of Project ‘Trident’ and also made available technology, knowledge and skills and staff in application of the technical development project. The Assessing Officer was of the view that the services rendered by M/s. IBM Corporation, USA to the assessee were fees for technical services as it fulfills the conditions contemplated in Article 12(4) of the India-USA DTAA and was therefore taxable in India. Since the assessee had not deducted tax at source under section 195 of the Act on the payment to IBM Corporation, 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 the 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 date 31.7.2008 for Assessment Year 2007-08, the assessee went in appeal before the CIT(Appeals) who dismissed the assessee’s appeal by order dt.12.11.2010.
3. Aggrieved with the order of the CIT(Appeals) for 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 on facts in upholding the order of the Dy. Director of Income Tax (International Taxation), Circle 1(1) that the appellant is an assessee in default under section 201(1) of the Income Tax Act, 1961 (“Act”).
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 nature 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) incoming 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 giving detailed reasons on applicability of the AAR Ruling to the subject payment.
7. The learned CIT (Appeals) has erred in upholding the conclusion of the Assessing Officer that the appellant was obliged to deduct tax at source under section 195 of the Act, and
8. The learned CIT (Appeals) has erred on facts and 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 reiterated the arguments put forth in the grounds of appeal (supra). In written submissions filed on 16.8.2012, the learned counsel for the assessee has inter alia submitted 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 arises only where the payments are taxable in India in the hands of the non-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 recipient by way of FTS. The AO had impliedly concluded that the said payment was towards FTS under section 9(1)(vii) of the Act having directly 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 section 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 the said services would not amount to FTS under section 9(1)(vii) of the Act. These submissions were also made before the lower authorities. We refer to page no 7 of the paper book filed on January 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 fees are payable in respect of services utilised in a business or profession 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 an undertaking registered under the STP scheme. The entire turnover of the Appellant Company is derived from export of IT and IT-enabled services. There were no domestic revenues during the relevant year. We refer to page no 18 of the paper book filed on January 20, 2012 to show that the Appellant had no domestic revenues during the relevant year. This extract reflects that the entire turnover of the Appellant is derived from export of IT and IT-enabled services. Therefore, although the business of the Appellant is being carried on in India, entire income is from exports and therefore the export revenues constitutes ‘source’ of income, which is outside India. It is therefore submitted that the subject payment to IBM is towards earning income from sources outside India, which are excluded from the purview of ‘FTS’ under the Act.
The following decisions are relied upon in support of this submission:
• CIT v. Aktiengesellschaft (Mad HC) (262 ITR 513) (enclosed as Annexure A); and
• Synopsys India Pvt Ltd v. ITO, TDS (Bangalore Tribunal) 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 therefore there is no need for examination of the DTAA provisions, we wish to submit further as follows:
4.2. Reasons why the said payment does not amount to 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 beneficial to the assessee, will apply.
IBM is a tax resident of the USA as per Article 4 of the India-USA DTAA. Accordingly, the provisions of the India-USA DTAA will apply to IBM. Section 9(1)(vii) of the Act deals with FTS, which is relevant to the subject services provided by IBM to the Appellant. Article 12(4) of the DTAA deals with taxation of royalties and FIS. Article 12(4) of the India-USA DTAA is provided below:
ARTICLE 12 – Royalties and fees for included services –
4. For purposes of this Article, “fees for included 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 other personnel) if such services :
(a) are ancillary and subsidiary to the application 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, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.
Article 12(4) of the DTAA deals with taxation of FIS. Section 9(1)(vii) of the Act and Article 12(4) of the DTAA are parallel provisions on the aspect of fees for technical services. There is no dispute on the position that the Article 12(4) definition gives a restricted meaning compared to section 9(1)(vii) of the Act. There is also no dispute that the requirement of tax deduction at source under section 195(1) of the Act arises only if the payment for the subject service can be regarded as FIS under Article 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 subject payment is FIS because it falls under the first limb, ie, “make available”. We have provided submissions as to why the subject payments 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 does not define the expression “make available” in the main body, but it has a Protocol annexed to it, which was signed along with the said DTAA. The Protocol declares that its provisions shall form integral part of the DTAA. The Protocol has a Memorandum of Understanding (“MoU”) attached to it which is intended to give guidance both to the taxpayers and the tax authorities of the two countries 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 or consultancy services that make available to the person acquiring the service technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical 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 narrower than the category described in paragraph 4(a) because it excludes any service that does not make technology available to the person 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 meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available”.
From the said MOU, it can be inferred that technology 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 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. Similarly, the use of the product which embodies technology shall not per se be considered to make the technology available.
There are several judicial precedents that have upheld the aforesaid position. As part of the case law compilation provided during the hearing, the following case laws have been provided –
CIT v. De Beers India Minerals Pvt Ltd (Kar HC) – Sl No 3 of the compilation
ITO v. De Beers India Minerals Pvt Ltd (Blore ITAT) – Sl No 4 of the compilation
CIT v. ISRO, Bangalore – Sl No 5 of the compilation
Sun Micro systems India v. ITO (ITAT Bang) (130 TTJ 597) – Sl No 6 of the compilation
McKinsey & Co v. ADIT (ITAT Mumbai) (99 TTJ 857) – Sl No 7 of the compilation
Anapharm Inc, In Re (AAR) (305 ITR 394) – Sl No 8 of 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 what 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 for the assessee can be summarized as under :
(i) The payment made by the assessee to M/s. IBM Corporation, USA is towards earning of income from a source outside India and would not constitute FTS under section 9(1)(vii)(b) of the Act.
(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 USA DTAA since
(a) the services rendered to the assessee do not ‘make 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 “development and transfer of technical plan or design” as the project 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 IBM 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.
5.1 Per contra, the learned Departmental Representative supported the orders of the authorities below. In written submissions, the learned Departmental Representative submitted as under :
“As per clause 1 & 2 of the Statement of Work of the agreement (SOW), it is clear that the Consultant (IBM’s) onsite analyst has to continuously co-ordinate with the offshore team in developing the technical specifications related to the project. IBM will also participate in developing the required technical code and testing thereof. The 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.
5.2 It is significant to note Clause 10.1 of the SOW agreement (Page 25 of paper book), which clearly indicates that the softwares (pre- existing materials) which have to be upgraded and developed by IBM are owned by the assessee, 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 different where the service provided has merely carried out aerial reconnaissance and survey using their own equipment and skill to produce geophysical pictures and maps to be further processed by the assessee for exploration work. The equipment, technology and skill has not been transferred to the assessee in this case, as has rightly been held by the Hon’ble High Court, which can be said to be rendering technical 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 Section 195 is clearly attracted.”
The learned Departmental Representative submitted that 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 ‘Fees for included services’, under Article 12 of the India-USA, DTAA, the fundamental 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 whether 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.
5.2 The learned counsel for the assessee stated that he had no objection to the proposition put forth by the learned Departmental Representative that the issue of whether the assessee’s payment to the consultant 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 examination.
5.3 We have heard both the parties and have carefully 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 findings 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 India as royalty under Article 12(3) of the India-USA, DTAA or as Fees for included services under Article 12(4) of the India-USA, DTAA. There was no submission 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 services rendered to the assessee pursuant to their agreement dt.20.3.2006 are 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 thereby 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 whether the said payments to M/s. IBM corporation, USA by the assessee for services 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 Officer for examination and finding thereon after affording the assessee adequate opportunity of being heard in the matter. It is ordered accordingly.
6. In the result, the assessee’s appeals are allowed for statistical purposes.
