INTERNATIONAL TAXATION
JUDICIAL PRONOUNCEMENTS
IROYALTY AND FEES FOR TECHNICAL SERVICES
- Oncology Services India (P.) Ltd vs.ADIT, International Taxation-III
[2017] 82 taxmann.com 42 (Ahmedabad - Trib.)
Assessment Year: 2008-09 order dated: 16th February,2017
Basic Facts
The assesse company has purchased the copyrighted SOP fromone Germany based entity named Oncology ServiceEurope S.a.r.l(OSE, in short).The assessee is allowed to view only SOP established by OSE. These SOPs are non transferable and the assessee is not allowed to make any changes in it. During the relevant previous year, the assessee had payments of Euros 45,000 to OSE without any tax deduction at source. The A.O was of the view that these payments are made for "using the name, goodwill and market reputation" of OSE and, therefore, taxable in India as royalties under section 9(1)(vi) of the Act. It was explained by the assessee that OSE did not have any permanent establishment in India, and that since the payments made to OSE were only for the purpose of sharing SOPs, access to database, email server, hardware and software, these payments, in the absence of the PE of OSE in India, were not taxable in India. These receipts by the OSE were required to be treated as business profits in the hands of the OSE, and, as such, taxability could arise only if the OSE had a PE in India. It was also explained by the assessee that as for the use of brand name, logo and website, the same was permitted by the OSE "without any cost or financial obligation". These arguments were rejected by the A.O. Holding that "the assessee has made payments for the use of technology, patent, trademark and accordingly the same is treated as royalty under section 9(1)(vi) of the Income Tax Act and as per tax treaty between India and Germany", the Assessing Officer proceeded to raise the impugned demand under section 201 r.w.s 195. Aggrieved, assesseeis in appeal.
Issue
Whether consideration for the sharing of SOPs can be brought to tax as royalties under the India Germany Double Taxation Avoidance Agreement?
Held
Article 13(3) of Indo German tax treaty, which defines the expression 'royalties', provides that " The term 'royalties' as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience". The sharing of standard operating procedures, even going by the claim of the assessee, does amount to sharing 'information concerning industrial, commercial or scientific experience'. The assessee is allowed to view only SOP established by OSE.Thus, it is only sharing of the information about the scientific experiences by the OSE, but then it is consideration for such a sharing of scientific, or for that purpose industrial and commercial, experiences that is covered by article 13(3). The access to database, and allied activities like harmonization of software systems, policy and process, are only incidental to this main object of sharing the SOPs and cannot thus be viewed in isolation. In this view of the matter, the payment for sharing of the SOPs indeed taxable as 'royalties' under the Indo German tax treaty.
2. ONGC as Representative Assessee of University of Calgary, Alberta, Canada vs. ADIT, International Taxation
[2017] 81 taxmann.com 419 (Delhi - Trib.)
Assessment Year: 2011-11 & 2011-12 order dated: 28th April, 2017
Basic Facts
M/s ONGC Ltd. is a representative assessee of M/s University of Calgary, Alberta, Canada. ONGC in the relevant A.Y., had made payments to the M/s University of Calgary, Canada (non-resident) in terms of contract for long term collaboration, participation, training, maintenance of air injection equipment which is used for increasing the recovery of oil. The assessment was completed and the aforesaid payment was treated as 'fees for technical services' as per the provisions contained in section 9 (l)(vii) of the Act to be taxed on gross basis by applying section 115(A) of the Act. The assessee is in appeal.
Issue
Where Company had made payments to Foreign entity in terms of contract for long term collaboration, participation, training, maintenance of air injection equipment for increasing recovery of oil, said payment was to be treated as 'fees for technical services' as per provisions contained in section 9(1)(vii) ?
Held
The scope of work under the contract shows that it was a service agreement and was entered towards collaborative research, participation, training, maintenance and service for the air injection equipment of ONGC in, India. Theknow how possessed by the non-resident appellant has been shared and made available to the ONGC personnel. The agreement not only contemplates participation but also training and collaborative research between the personnel of the non-resident and ONGC. Article 12(4) of the DTAA thus becomes applicable in the present facts and circumstances of the case. In view thereof, Sum paid to foreign co. for maintenance of air injection equipment to increase recovery of oil was 'FTS'
3. Visteon Technical & Services Centre (P.) Ltd vs, DCIT, International Taxation
[2017] 81 taxmann.com 390 (Chennai - Trib.)
Assessment Year:2014-15 order dated: 28th April, 2017
Basic Facts
The assessee-company made payment towards purchase of software license from Vector, a U S company.The Assessing Officer noticed that the assessee acquired the license to use the software for a particular tenure subject to certain terms and conditions and held that the said payment was in the nature of royalty and taxable under section 9(1)(vi). Accordingly, the Assessing Officer treated the assessee as the assessee-in-default and charged interest under section 201(1)/(1A) for non-deduction of tax at source. The assessee is in appeal.
Issue
Whether the payment by a Company should be treated as royalty where it had been provided access to copyrighted software and not right to use copyright embedded in the software?
Held
The assessee had purchased the software license from the 'Vector' for internal use of the company. As per the agreement the assessee could not transfer/share externally or sub-license to the third party or commercially exploit. It was not permitted to make any alteration of the software and did not get any ownership right except rights of use in the company. The assessee referred the Indo-US treaty and the 'computer software' does not fall under the definition of Royalty. As per the clauses and License agreement, section 14 of the Copyright Act, the assessee is not authorized to do any of acts mentioned in the Copyrights Act. The Indo-US treaty also excluded the computer software from the definition of Royalty in the treaty. Thus, the company had merely been provided the access to the copyrighted software and not right to use the copyright embedded in the software. As per the terms and conditions of the purchase agreement, payment made to acquire the software license did not fit into the definition of royalty and non-taxable as per section 9(1)(vi).
4. PB Asia Ltd. vs. ADIT, International Taxation
[2017] 81 taxmann.com 395 (Delhi - Trib.)
Assessment Year2005-06 order dated: 28th April, 2017
Basic Facts
The assessee was a company established under the laws of Thailand and was engaged in the business of providing architectural and engineering services relating to infrastructure projects throughout the Asia Pacific region. An Indian company (PBIPL) entered into an agreement with Larsen and Toubro for providing engineering consultancy services in connection with the second Tollway. In connection with the aforesaid agreement, PBIPL entered into a contract with the assessee for rendering certain services. In consequence, the assessee received payment from PBIPL.A.O contended that the payment received from PBIPL should be taxed as'Fee for Technical Services' ('FTS') under section 9(1)(vii) or alternatively taxable as 'Royalty' under article 12 of the DTAA read with section 9(1)(vi). Further, in the absence of assessee's PE in India under article 5 of the DTAAThe Assessing Officerpassed assessment order under section 144C/143(3) by treating the income as 'royalty'. The assessee is in appeal.Issue
Whether payment made towards an agreement for supply of package of design and drawing to enable assessee to effectively render engineering services was royalty or not?
Held
It was held that though it was titled as a service agreement, it was actually an agreement for supply of a package of designs and drawings to enable the assessee to effectively render engineering consultancy services to the consortium which was found in charge of constructing Tollway. The transaction in question is an outright sale of design and drawings and does not constitute royalty in the hands of the assesse. The payment being in nature of business income, it was not taxable in India in the absence of PE in India and consequently, the amount remitted to the assessee by PBIPL was not 'royalty' within the meaning of section 9(1)(vi) and article 12(3).
IIPERMANENT ESTABLISHMENT
1. ACIT vs. Valentine Maritime (Gulf) LLC
[2017] 82 taxmann.com 200 (Mumbai - Trib.)
Assessment Year 2009-10 order dated: 24th May, 2017
Basic Facts
The assessee was a foreign company incorporated in Abu Dhabi, UAE, to cater to oil and gas construction industry. It had undertaken three projects in India during the year under consideration. It entered into a contract with a company (LCI) in India to provide services of personnel, provision of survey services and provision of a barge. The assessee did not have a Permanent Establishment in India and the three contracts were for a period of less than 9 months and, therefore, the total receipts was not taxable under the DTAA.The A.O observed that the assessee-company was doing small contracts in order to avoid a PE and to claim exemption under the DTAA. Since it had contracts throughout the year, it was held that the assessee had a PE in India for all the projects and its income was held to be taxable in India.The Commissioner (Appeals) came to the conclusion that assessee could not be said to be having a PE in India. From the period of projects, it was evident that the assessee had not spent 9 months in India for any project or during the period of any 12 months since assessment year 2008-09 and, therefore, it could not be said to have a PE within the meaning of article 5(2)(h) or 5(2)(i).Revenue is in appeal.
Issue
Whether actual period of two projects unconnected undertaken by a foreign company could be combined to determine its PE in India?
Held
The duration for each of services rendered was less than nine months. The Commissioner (Appeals) has given a clear finding and the Tribunal agreed with the same. The A.O has not based his order on any cogent reasoning and he had presumed that assessee's representative might have come earlier before the actual arrival of the barge in the Indian waters. Such hypothesis cannot be sustained. The actual period of the two projects cannot be combined as they are unconnected works. In such situation, the A.O's view that the period of the two works should be combined cannot be sustained.