Case Law Details
M/s. Savvis Communications Corporation Vs DCIT- International Taxation (ITAT Mumbai)
Undoubtedly, when the assessee receives an income on account of allowing a customer to use a scientific equipment, it does become taxable 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 test 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 computer 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 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.
FULL TEXT OF THE ITAT JUDGMENT
These are appeals by the assessee directed against the respective orders 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 section 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 Rs 18,146,720 (Rs.22,232,048 for assessment 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 action 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 equipment.
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. 7340/Mum/2012 while 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 that 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 by 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 represented 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 Assessing Officer concluded that apart from the use of 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 license 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 hosted 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 the client.
5. Upon the assessee’s appeal, the ld. Commissioner of Income Tax (Appeals) confirmed the Assessing Officer’s action. Though the assessee had also referred to Hon’ble 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 that the issue was decided in assessee’s own case for assessment year 2009-10 by the Tribunal in ITA No. 7340/Mum/20 12 vide order dated 31.03.2016. The Tribunal has held as under:
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 raised 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 on 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 of 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 used 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 taxable 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 test 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 computer 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 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 interfere 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 assessee’s appeal is allowed.
Order pronounced in the open court on 13.08.2018
