Case Law Details
Service Now Nederland BV Vs ACIT (ITAT Delhi)
ITAT Delhi held that subscription, professional and training services rendered by the assessee do not fall within the definition of FTS under India-Netherland DTAA and, therefore, cannot be taxed in India.
Facts- The case of the assessee was selected for scrutiny assessment. AO observed that assessee had claimed INR 171,92,37,658/- as exempt from taxation under Article 12 of India-Netherlands DTAA. Rejecting the claim of the assessee, the AO taxed INR 171,92,37,658/- as FTS under DTAA.
The assessee filed objections against the action of the AO before the learned DRP. Learned DRP considered the objections and held that there was no reason to deviate from the finding of the learned DRP for A.Y. 2019-20, whereby the learned DRP had upheld that the receipts from subscription payments training and professional fees were taxable in India as FTS. However, in respect of the credit of taxes the AO was directed to verify the factual submissions of the assessee and grant credit as per law. Thereafter the AO passed the impugned order u/s 143(3) read with section 144C(13) vide order dated 29.05.2023.
Conclusion- Held that the assessee had merely granted only access to software and there is no transfer of technology by the assessee. Hence we have no hesitation to hold that the services rendered by the assessee does not fall within the definition of FTS as per the Treaty.
Held that subscription, professional and training services rendered by the assessee do not fall within the definition of FTS under DTAA and, therefore, cannot be taxed in India.
FULL TEXT OF THE ORDER OF ITAT DELHI
These two appeals preferred by the assessee pertain to A.Y. 2020-21 and 2022-23.
Since facts and grounds for adjudication are similar, both the appeals were taken up for hearing together and are being disposed of by a consolidated order for the sake of brevity.
2. First we take up ITA no. 2022/Del/2023 pertaining to the A.Y. 2020-21. The assessee has raised following grounds of appeal:
“1. On the facts and in the circumstances of the case and in law, the Hon’ble Dispute Resolution Panel ( DRP”) erred in not quoting a valid computer-generated DIN on the body of DRP directions dated 19 A 2023 under section 144C(5) of the Act, in contravention to the Circular No. 19 of 2019 by the Cen Board of Direct Taxes (‘CBDT”), thus rendering such an order/direction to be invalid and never to ha been issued as per para 4 of the said circular.
2. On the facts and in the circumstances of the case and in law, the final assessment order dated 29 M 2023 passed by the Ld. AO under section 143(3) read with section 144C(13) of the Act pursuant to inv and non-est directions passed by the Ld. DRP, is bad in law, null and void and liable to be quashed.
3. Without prejudice to Ground No.1 and 2 above, on the facts and circumstances of the c and in law, the Ld. AO and Ld. DRP erred in making an addition of INR 171,92,37,658 to the income of the Appellant on account of subscription, professional and training services without appreciate the fact that these services do not fall within the purview of fees for technical services (‘FTS”) une Article 12 of the India-Netherlands Double Taxation Avoidance Agreement (DTAA’) and hence taxable in India.
4. On the facts and circumstances of the case and in law, the Id. AO and the Ld. DRP erred in mer assuming that there is make available of technical knowledge by the Appellant to the serve recipient without bringing any materials on record to substantiate the same.
5. On the facts and circumstances of the case and in law, the Ld. AO and Ld. DRP erred in making. addition of INR 171,92,37,658 to the income of the Appellant on account of subscripti professional and training services without appreciating the fact that these services do not fall wit the purview of FTS under Article 12 of the India-Netherlands DTAA by virtue of the Most Favou Nation (MFN) clause of the India-Netherlands DTAA read with India- Finland DTAA and hem not taxable in India.
6. Without prejudice to the above grounds, on the facts and circumstances of the case and law, the Ld. AO erred in not granting credit for entire taxes as appearing in Form 26AS in impugned order as directed by the Ld. DRP and even though the entire receipts have been assesm to tax.
7. On the facts and circumstances of the case and in law, the Ld. AO has erred in charging inter under section 234C/234D of the Act.
8. On the facts and circumstance of the case and in law, the interest under section 234A and 234B the Act are consequential in nature and would undergo change on the basis of relief provided in the aforesaid grounds of appeal.
9. On the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings by issuing notice under section 274 read with section 270A of the Act.
The Appellant craves leave to alter, amend, or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary either before or during the hearing.”
3. Facts, in brief, are that the assessee company filed its original return of income for the assessment year 2020-21 on 12.02.2021 declaring total income at INR 172,56,16,120/-. The case was selected for scrutiny assessment for refund claim. The AO observed that in its ITR the assessee had claimed a refund of INR 1,37,18,050/- against TDS amounting to INR 1,43,55,898/- u/s 195 of the Income-tax Act, 1961(hereafter referred to as the “Act”). The assessee had claimed INR 171,92,37,658/- as exempt from taxation under Article 12 of India-Netherlands DTAA. The AO in order to satisfy about the veracity of claim of the assessee issued notice to the assessee to explain about its claim. Rejecting the claim of the assessee, the AO taxed INR 171,92,37,658/- as FTS under DTAA. Remaining income of INR 63,78,464/- was taxed as per return of income. The assessee filed objections against the action of the AO before the learned DRP objecting draft order passed u/s 144C(1) of the Act. Learned DRP considered the objections and held that there was no reason to deviate from the finding of the learned DRP for A.Y. 2019-20, whereby the learned DRP had upheld that the receipts from subscription payments training and professional fees were taxable in India as FTS. However, in respect of the credit of taxes the AO was directed to verify the factual submissions of the assessee and grant credit as per law. Thereafter the AO passed the impugned order u/s 143(3) read with section 144C(13) vide order dated 29.05.2023.
4. Apropos to ground nos. 1 & 2, learned counsel for the assessee submitted that he does not wish to press the same. Therefore, ground nos. 1 & 2 are dismissed as not pressed.
5. Ground nos. 3, 4 & 5 are against addition of INR 171,92,37,658/- . Learned counsel for the assessee submitted that the issue is squarely covered by the decision of the Tribunal in assessee’s own case for A.Y. 2019-20 rendered in ITA no. 2242/Del/2022 vide order dated 29.08.2023. He took us through the decision of the Tribunal for A.Y. 2019-20, wherein the Tribunal has decided the issue in favour of the assessee.
6. On the other hand, learned CIT(DR) supported the assessment order and contended that the learned DRP has examined the issue. However, he fairly conceded that similar issue has been decided in favour of the assessee by following the binding precedents.
7. We have heard rival contentions and perused the material available on record. We find that identical ground was taken by the assessee in A.Y. 2019-20 wherein the Tribunal had examined the issue relating to taxability of the amount as fee for technical services by observing as under:
7. We find that the Master Agreement of ServiceNow was placed on record and the same was also furnished before the lower authorities. It would be relevant to address some of the clauses in the said contract :-
Definitions:
Clause 1.14: “Intellectual Property Rights” means all intellectual property rights throughout the world, including, without limitation, patents, copyrights, trademarks, trade secrets and contractual or other rights in confidential information , moral rights, rights of privacy and publicity , and any other intellectual and industrial property and proprietary rights including registrations, applications, renewals and extensions of such rights worldwide.
Clause 1.29: “ServiceNow Professional Services” means consulting, training, implementation integration or other professional services provided by ServiceNow, including: (a) standardized and branded professional services as published by ServiceNow; or (b) customized professional services including the production of any related deliverables, performed y ServiceNow pursuant to a statement of work. Clause 1.32: “Subscription Service” means the ServiceNow subscription services and the Technology used by the ServiceNow or its affiliates to deliver such subscription services, including Configurable Elements and APIs, but excluding Ancillary Software.
2. PARTNERNOW OVERVIEW
2.1. Enrollment in Partner Now. Partner Now consists of Programs, including the Sales Partner Program and Services Partner Program, described in the applicable Program Terms and Guides. Participant shall be deemed enrolled in Partner Now, subject to the terms of this Agreement, when it is initially appointed to one or more Programs as evidenced by an Appointment Confirmation.
2.3. Benefits. Upon appointment to a Program, Participant may access certain ServiceNow Technology, including one or more Partner Instances, all subject to and in accordance with the Licenses and use authorizations granted under Section 4 (Licenses to Participant) below and the other terms and conditions of this Agreement.
4. LICENSES TO PARTICIPANT. Subject to the limitations set forth below in Section 4.7 (Certain Limitations) , the other terms conditions of this Agreement and the applicable Program Terms, ServiceNow hereby grants to Participant the following licenses and use authorizations with respect to ServiceNow Technology upon Participant’s acceptance into any Partner Now Program:
4.1. Partner Instances. ServiceNow grants to Participant a limited, non-exclusive right and license to access and use the Partner Instances (if any) provided by ServiceNow , solely to: (a) configure and customize the Partner Instance to develop and test Partner Applications; (b) evaluate the Partner Instances; (c ) train Participant’s employees in the use of the Partner Instances; (d) conduct demonstrations for existing and prospective Customers to promote the use of Partner Applications and the Subscription Service; and (e) any other purpose permitted in the applicable Program Terms. Service Now may determine the number of Partner Instances that Participant is permitted to access hereunder in ServiceNow’s sole discretion, except as provided in an applicable Guide or Program Terms for a Program to which Participant was appointed.
7. INTELLECTUAL PROPERTY
7.1. Ownership. Subject to the limited licenses set forth in this Agreement, nothing in this Agreement transfers or assigns to ServiceNow any of Participant’s Intellectual Property Rights in Participant Technology (including in any source code originally authored by Participant using the Subscription Service), Participant Trademarks, or Participant’s marketing materials; and nothing in this Agreement transfers or assigns to Participant any of Service Now’s Intellectual Property Rights in ServiceNow Technology (including in any preexisting works of ServiceNow that are modified by Participant), ServiceNow Trademarks, or Collateral. There are no implied licenses under this Agreement, and any rights of a party that are not expressly granted to the other party hereunder are reserved. PROGRAM TERMS (APPENDIX 1 to the aforesaid Agreement)
FOR THE PARTNERNOW SALES PARTNER PROGRAM
3. RESLLER RIGHTS
3.1. Appointment. An Appointment Confirmation that appoints Participant to the Program alone does not constitute an authorization for Participant to resell the Subscription Services, ServiceNow Professional Services or any other products or services of ServiceNow. Such resale authorization may only be granted pursuant to an Appointment Confirmation that expressly appoints Participant as ServiceNow’s authorized reseller (which may be provided separately or in the same communication that appoints Participant to the Program). Upon Participant’s receipt of such Appointment Confirmation, Participant may resell ServiceNow products and packaged professional services as provided in the Guide.
8. We find that this is no different than a copyrighted article. The revenue had all along been treating the same as Royalty and during the year under consideration, the same is sought to be treated as Fee for Technical Services (FTS).
7. It would be pertinent to examine the FTS clause in Article 12 of India Netherlands Treaty which reads as under:-
ARTICLE 12
ROYALTIES AND FEES FOR TECHNICAL SERVICES
1……..
[2……
3…….
1 [4………
5. For purposes of this Article, “fees for technical 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 4 of this Article 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. 6 to 9……
7.1. We find that Article 12(5)(a) above is not applicable in the instant case. Article 12(5)(b) insist on make available clause to fall within the ambit of FTS. In the instant case, the assessee has only access to software. There is no transfer of technology by the assessee. We are unable to persuade ourselves to accept to the argument of the ld. DR in this regard wherein it was argued that services provided by assessee are standard and customized services and that ‘make available’ clause is not relevant for the second part of Article 12(5)(b) i.e it is not relevant for development and transfer of a technical plan or technical design. In our considered opinion, ‘make available’ is for the entire expressions mentioned in Article 12(5)(b) of the India Netherlands Treaty. In this regard, it would be relevant to address the decision of Hon’ble Karnataka High Court in the case of CIT vs De Beers India Minerals (P) Ltd reported in 346 ITR 467 (Kar) to understand the meaning of expression ‘make available’. The relevant operative portion of the judgement of Hon’ble Karnataka High Court is reproduced hereunder:-
13 Under the Act if the consideration paid for rendering technical services constitutes income by way of fees for technical services, it is taxable. However, Article 12 of the aforesaid India-Netherlands Treaty defines fees for technical services for the purpose of Article 12 which deals with royalties and fees for technical services. The fees for technical services means the payment of any amount to any person in consideration for rendering of any technical services only, if such services make available technical knowledge, expertise, skill, know-how or processes. If the technical knowledge expertise, skill, know how or process is not made available by the service provider, who has rendered technical service for the purpose of Article 12 of DTAA it would not constitute fees for technical services. To that extent the definition of fee for technical services found in the agreement is inconsistent with the definition of fees for technical services provided in Explanation 2 to Clause (vii) of sub Section (1) of Section 9. In view of Section 90 the definition of fees for technical services contained in the agreement overrides the statutory provisions contained in the Act. In fact, the latest agreement between India and Singapore further clarifies this position, where they have explained the meaning of the word ‘make available’. According to the aforesaid definition fees for technical service means payments of any kind to any person in consideration for services of technical nature if such services make available technical knowledge, experience, skill, know how or processes, which enables the person acquiring the service to apply technology contained therein. Though this provision is not contained in India Netherlands Treaty, by virtue of Protocol in the agreement, Clause (iv) (2) reads as under:-
“If after the signature of this convention under any Convention or Agreement between India and third State which is a member of the OECD India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention.”
14. Therefore the Clause in Singapore agreement which explicitly makes it clear the meaning of the word ‘make available’, the said clause has to be applied, and to be read into this agreement also. Therefore, it follows that for attracting the liability to pay tax not only the services should be of technical in nature, but it should be made available to the person receiving the technical services. The technology will be considered ‘made available’ when the person who received service is enabled to apply the technology. The service provider in order to render technical services uses technical knowledge, experience, skill, know how or processes. To attract the tax liability, that technical knowledge, experience, skill, know how or process which is used by service provider to render technical service should also be made available to the recipient of the services, so that the recipient also acquires technical knowledge, experience, skill, know how or processes so as to render such technical Services. Once all such technology is made available it is open to the recipient of the service to make use of the said technology. The tax is not dependent on the use of the technology by the recipient. The recipient after receiving of technology may use or may not use the technology. It has no bearing on the taxability aspect is concerned. When technical service is provided, that technical service is to be made use of by the recipient of the service in further conduct of his business. Merely because his business is dependent on the technical service which he receives from the service provider, it does not follow that he is making use of the technology which the service provider utilises for rendering technical services. The crux of the matter is after rendering of such technical services by the service provider, whether the recipient is enabled to use the technology which the service provider had used. Therefore, unless the service provider makes available his technical knowledge, experience, skill, know how or process to the recipient of the technical service, in view of the Clauses in the DTAA. the liability, to tax is not attracted.
7.2. In the instant case, as stated earlier, we find that the assessee had merely granted only access to software and there is no transfer of technology by the assessee. Hence we have no hesitation to hold that the services rendered by the assessee does not fall within the definition of FTS as per the Treaty. In any case, we find that the since assessee had merely granted access to software, it does not fall within the definition of FTS even as per the Act. In this regard, analogy could be drawn from the decision of Hon’ble Supreme Court in the case of CIT vs Kotak Securities Ltd reported in 383 ITR 1 (SC) wherein it was held that service made available by Bombay Stock Exchange [BSE Online Trading (BOLT) System] for which transaction charges are paid by members of BSE are common services that every member of Stock Exchange is necessarily required to avail of to carry out trading in securities in Stock Exchange; such services do not amount to ‘technical services’ provided by Stock Exchange, not being services specifically sought for by user or consumer and, therefore, no TDS would be deductible under section 194J on payments made for such services.
8. In view of the aforesaid observations and respectfully following the judicial precedents relied upon hereinabove, we hold that the subscription, professional and training services rendered by the assessee does not fall within the definition of FTS both under the Act as well as under the DTAA and accordingly the same cannot be taxed in India. Accordingly, the Grounds 1 to 3 raised by the assessee are allowed.
7.1 Therefore, taking a consistent view we do not see any reason to deviate from the decision of the Tribunal in earlier year. Consequently, grounds nos. 3 to 5, raised by the assessee are allowed.
8. As regards the issue of TDS credit, raised in ground no. 6, the same requires factual verification. The AO is directed to grant TDS credit after due verification in accordance with law.
9. Charging of interest raised in ground nos. 7 & 8 is consequential. The AO will recalculate the interest, if any, while giving effect to the appellate order.
10. Initiation of penalty proceedings, raised in ground no. 9, is premature and needs no adjudication.
11. Consequently, assessee’s appeal in ITA No. 2022/Del/2023 for A.Y. 202021 is partly allowed.
12. Now we take up assessee’s appeal for A.Y. 2021-22 in ITA no. 2023/Del/2023. The assessee has raised following grounds of appeal:
“1. On the facts and in the circumstances of the case and in law, the Hon’ble Dispute Resolution Panel (‘Ld. DRP’ ) erred in not quoting a valid computer-generated DIN on the body of DRP directions dated 19 April 023 under section 144C(5) of the Act, in contravention to the Circular No. 19 of 2019 by the Central Board of Direct Taxes (‘CBDT”), thus rendering such an order/direction to be invalid and never to have been issued as per para 4 of the said circular.
2. On the facts and in the circumstances of the case and in law, the final assessment order dated 31 May 2023 passed by the Ld. AO under section 143(3) read with section 144C(13) of the Act pursuant to invalid and non-est directions passed by the Ld. DRP, is bad in law, null and void and liable to be quashed.
3. Without prejudice to the Ground No.1 and 2 above, on the facts and circumstances of the case and in law, the Ld. AO and the Ld. DRP erred in making an addition of INR 248,32,06,556 to the income of the Appellant on account of subscription, professional and training services without appreciating the fact that these services do not fall within the purview of fees for technical services ‘FTS’) under Article 12 of the India-Netherlands Double Taxation Avoidance Agreement (‘DTAA’) and hence not taxable in India.
4. On the facts and circumstances of the case and in law, the Ld. AO and the Ld. DRP erred in merely assuming that there is make available of technical knowledge by the Appellant to the service recipient without bringing any materials on record to substantiate the same.
5. On the facts and circumstances of the case and in law, the Ld. AO and Ld. DRP erred in making an addition of INR 248,32,06,556 to the income of the Appellant on account of subscription, professional and training services without appreciating the fact that these services do not fall within the purview of FIS under Article 12 of the India-Netherlands DTAA by virtue of the Most Favored Nation (MFN’) clause of the India-Netherlands DTAA read with India – Finland DTAA and hence not taxable in India.
6. Without prejudice to the above grounds, on the facts and circumstances of the case and in law, the Ld. AO erred in not granting credit for entire taxes as appearing in Form 26AS in the impugned order as directed by the Ld. DRP though the entire receipts have been assessed to tax.
7. On the facts and circumstances of the case and in law, the Ld. AO has erred in charging interest under section 234C/234D of the Act.
8. On the facts and circumstance of the case and in law, the interest under section 2344 and 234B of the Act are consequential in nature and would undergo change on the basis of relief provided in the aforesaid grounds of appeal.
9. On the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings by issuing notice under section 274 read with section 270A of the Act.”
13. Facts, in brief, are that the assessee company filed its original return of income for the assessment year under consideration on 10.03.2022 declaring total income of INR 63,78,465/-. The case was selected for scrutiny assessment for the reason “receipt of large value foreign remittance and low receipts in ITR”. The AO in order to satisfy about the veracity of claim of the assessee issued notice to the assessee calling upon the assessee to explain about its claim. The AO treated the receipts as FTS amounting to INR 248,32,06,556/- under domestic as well as DTAA. The assessee filed objections against the action of the AO before the learned DRP objecting against draft order passed u/s 144C(1) of the Income-tax Act, 1961(hereafter referred to as the “Act”). Learned DRP considered the objections and held that there was no reason to deviate from the finding of the learned DRP for A.Y. 2019-20, whereby the learned DRP had upheld that the receipts from subscription payments training and professional fees were taxable in India as FTS. However, in respect of the credit of taxes the AO was directed to verify the factual submissions of the assessee and grant credit as per law.
Thereafter the AO passed the impugned order u/s 143(3) read with section 144C(13) vide order dated 31.05.2023.
14. At the hearing learned counsel for the assessee did not press ground nos. 1 & 2. Accordingly, ground nos. 1 & 2 stand dismissed as not pressed.
15. Ground nos. 3 to 5 are against addition of INR 248,32,06,556/- treating the same as FTS on account of subscription, professional and training services. Admittedly the facts are identical to earlier years in assessee’s own case. As observed in assessee’s appeal for A.Y. 2020-21, this issue has been elaborately discussed by the Tribunal in assessee’s own case for A.Y. 2019-20. Facts and circumstances of the case remaining the same, respectfully following Tribunal’s order for A.Y. 2019-20, herein also we hold that subscription, professional and training services rendered by the assessee do not fall within the definition of FTS under DTAA and, therefore, cannot be taxed in India. Accordingly, addition of INR 248,32,06,556/- stands deleted. Ground nos. 3 to 5 stand allowed.
16. As regards the issue of TDS credit, raised in ground no. 6, the same requires factual verification. The AO is directed to grant TDS credit after due verification in accordance with law.
17. Charging of interest raised in ground nos. 7 & 8 is consequential. The AO will recalculate the interest, if any, while giving effect to the appellate order.
18. Initiation of penalty proceedings, raised in ground no. 9, is premature and needs no adjudication.
19. Consequently, assessee’s appeal in ITA No. 2023/Del/2023 for A.Y. 202122 is partly allowed.
20. In the result, assessee’s appeals in ITA No. 2022/Del/2023 for A.Y. 2020-21 and ITA No. 2023/Del/2023 for A.Y. 2021-22 are partly allowed.
Order pronounced in open court on 13th December, 2023.
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