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Judgment
PER NAVEEN CHANDRA, ACCOUNTANT MEMBER:
The above captioned two appeals are preferred by the same assessee against the assessment order dated 31.05.2022, passed by The Assistant Commissioner Of Income Tax, Circle Int Tax 3(1)(2), Delhi (hereinafter referred to as 'Id. AO), passed under section 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (hereinafter 'the Act') in pursuance of directions of the Id. Dispute Resolution Panel-1, New Delhi (in short ‘ld. DRP') dated 10.05.2022 pertaining to Assessment Years 2018-19 & 2019-20.
Since the above captioned appeals were heard together and the facts in issues and grounds of appeal (except amounts) are identical, both the appeals are being disposed of by this common order for the sake of convenience and brevity.
Grounds of appeals filed by assessee in ITA No.1696/Del/2022 read as under:
“1.That on facts and in law, the Learned Assessing Officer (hereinabove referred to as the "AO") Dispute Resolution Panel (hereinabove referred to as the "DRP") erred in holding that receipts to the tune of INR 232,83,88,797/- from customers constitute "Fee for Technical Services" ('FTS') and is eligible to tax as such, under the provisions of section 9(1)(vii) of the Income-tax Act ('Act") or Article 12 of the Double Tax Avoidance Agreement ('DTAA') between India and Netherlands.
2.That on facts and in law, the AO/DRP have erred in not appreciating that services rendered by the Appellant to its customers in India do not "make available" any technical knowledge, skill or know-how to customer such that it can apply the same on its own without recourse to the assessee and therefore consideration for the same does not qualify to be FTS as per Article 12 of D'TAA between Indian and Netherlands.
2.1That on facts and in law, the AO/ DRP have erred in not appreciating that trainings provided by the Appellant to its customer are only for use of services and not for transfer of knowledge or skills to enable customer apply such services independently in future.
3.That on facts and in law, the AO/ DRP have erred in not appreciating that services provided by Appellant are provisioned through system/servers located outside India, without human intervention, and thus, the services do not qualify to be FTS under the Act or DTAA between India and Netherlands, in accordance with the judgement of Hon'ble Supreme Court in the case of Bharti Cellular Ltd. v CIT (2010) 193 Taxmann 97 (SC).
3.1That on facts and in law, the AO/ DRP have erred in holding human involvement in development of solutions/systems would qualify as human intervention in rendition of actual services.
4.That on facts and in law, the AO has erred in not appreciating that the Appellant provides similar standard services and solutions to all its customers in India, and therefore the consideration received by the Appellant does not qualify to be FTS under the Act or DTAA between India and Netherlands, in accordance with the judgement of the Hon'ble Supreme Court in the case of Kotak Securities Ltd. [2016] 67 taxmann.com 356.
5.That on the facts and in law, the AO has erred in holding that the taxation of FTS is at par with the proposed taxation of automated digital services under the proposed Article 12B of the United Nations ('UN') Model Convention and therefore, minimized human intervention shall lead to consideration for the services to qualify as FTS.
6.That on facts and in law, the AO has erred in levying interest under Section 234B of the Act.
7.That on facts and in law, the AO has erred in initiating penalty proceedings under section 270A of the Act.
That the appellant prays for leave to add, alter, amend and/or vary the ground(s) of appeal at or before the time of hearing.”
Sabre Marketing Netherland, BV (SMNBV) is a company incorporated in Netherlands. It is a tax resident of Netherlands within the meaning of Article 4 of the India-Netherlands DTAA. The assessee possess a Tax Residency Certificate (TRC) issued by the authorities in Netherlands for the Financial Year ('FY') relevant to the subject AY.
The assessee is a technology solutions provider to the airline industry. It markets and distributes travel related products and services to airlines. The assessee primarily earns revenues from its only customer in India, Jet Airways (hereinafter referred as JA), by provision of subscription services in respect of Sabre Sonic Reservations systems and Air-Vision/Air-Centre systems (which comprise of services such as web-check in, crew control, kiosk check in, automated exchanges and refunds, codeshare manager, movement manager, crew trip optimizer etc). The assessee had entered into a Master Agreement (hereinafter referred as MA) with Jet Airways dated 30.12.2014, for 10 years, for provision of specialised set of continuous service as follows:
Passenger solutions, such as hosted reservations and departure control systems;
Airline decision support applications; and
Implementation and support services for Sabre software packages.
Exhibit 4 of the MA, the assessee has provided following services to Jet Airways during the FY relevant to the subject AY
Implementation services (which comprise of interactive pilot, testing, training, user acceptance etc as specified in detail in Exhibit 7 of the Agreement)
Subscription services in respect of Sabre Sonic Reservations systems and Air-Vision/Air-Centre systems (which comprise of services such as web-check in, crew control, kiosk check in, automated exchanges and refunds, codeshare manager, movement manager, crew trip optimizer etc).
Other services such as termination assistance, restoration, migration to a new system etc.
SMNBV also acts as a distributor for Sabre's Hospitality Solutions business for Europe, Middle East, and Africa (EMEA) and Asia. For rendering above mentioned services, the assessee primarily makes use of software hosted on Sabre's servers located outside India. With respect to its India business for the FY relevant to the subject AY, SMNBV earned fees from Jet Airways for abovementioned services/solutions which is based on activities or number of transactions originating in India and such fee is received by SMNBV outside India. The assessee claims that SMNBV does not perform any function or activity in India. Its only activity in India is the origination of a request from an airline in India, which is transmitted through telecommunication links, owned by third parties to Sabre's servers outside India. All activities of analyzing the request and processing the message are performed by the servers completely outside India.
The assessee has earned fees from Jet Airways Ltd of Rs 212,94,37,552/- on which TDS of Rs 13,81,84,166/- was deducted. The assessee filed its Return of Income ('Rol') on October 15, 2018 adopting a position that revenues of Rs 212,94,37,552/- derived by it, being in the nature of business income, were not taxable in India as Royalty/FTS under India Netherland DTAA. The assessee further claims that SMNBV does not have any office/ place of business in India nor does it have any employees based in India, hence the assessee does not constitute a PE in India under Article 5 of the India-Netherlands DTAA.
The Rol was selected for scrutiny assessment and notice under Section 143(2) of the Act was issued to the assessee. A draft assessment order dated September 30, 2021 was issued to the assessee for the subject AY under Section 144C(1) read with Section 143(3) of the Act by the Ld. AO wherein total income of the assessee was proposed to be assessed at INR 2,129,437,552 holding that revenues derived by the assessee from its customer in India are in the nature of FTS under the provisions of section 9(1)(vii) of the Act and also under Article 12(4)(b) of the India-Netherlands DTAA to be taxed at the rate of 10%. The order of the AO was sustained by the ld DRP. Aggrieved the assessee is before us.
The ld counsel of the assessee submitted that the Revenue has prior to AY 2018-19, treated the receipts from Airlines as Royalty u/s 9(1)(vi) of the Act which was negatived by the ITAT in ITA 410/Del/2019, for AY 2015-16; 7534/Del/2019 for 2016-17 and ITA 381/Del/2019 for AY 2017-18. The decision of the ITAT was based on the same Master Agreement dated 30.12.2014.
The ld AR submitted that for the AY 2018-19 and 2019-20, the Revenue has treated the receipts as Fees for Technical Services. The ld AR strongly argued that the clause 12(5)(b) of the India Netherland DTAA of “make available” is not satisfied in its case. The ld AR referred to definition clause 182 of the Master Agreement to show that the assessee is to provide software system to Jet Airways; clause 2.5(b) provides for effect of termination of contract wherein each party shall return all property belonging to other; clause 4 to show that the Jet Airways shall pay fees and charges for System and Services provided by the assessee; page 78 to show that the assessee shall provide training for all support staff and the fact that the training is only for how to use the system and not how to build the system.
The ld AR further submitted that these services are provided by the assessee to the customers through servers/systems located outside India wherein all activity of analyzing the request and processing the message are performed by the servers without human intervention. Accordingly, the request is analysed by the servers, processing is performed by the servers and appropriate solution according to the request is also given by the servers. Thus, the complete process is fully automated/ computerized and does not involve human intervention at any stage.
The ld AR pointed to the Exhibit 6 of the aforesaid agreement wherein it has been specified that average response time for majority of Sabre Sonic services shall be just 2 seconds to strengthen its argument that no human intervention is involved in provision of subscription services by the assessee to its customer JA.
The ld AR stated that the airlines, being assessee's customers, do not have the in-house resources to carry on such functions and therefore, need continuous availment of the aforesaid services from the assessee to enable them carry on their operations efficiently. This fact is also evident from the consideration agreed for provision of the subscription services which are based on each reservation or request i.e the customer is required to go back to the assessee for provision of same services every time the requirement for the same arises as the customer cannot develop necessary capabilities to perform such services on its own. The customer cannot apply the technology of the services provided by the assessee independently since the customers are not privy to the technology. The ld AR referred to Para 5 of the aforesaid agreement of the assessee with Jet Airways wherein it has been provided that the assessee shall retain all the intellectual property rights in respect of Sabre System, documentation and other licenses/technology used by it for rendition of services to Jet Airways and that the right of Jet Airways shall be limited to use of Sabre systems. Accordingly, the training and support services that have been provided by the assessee are limited to use of assessee's systems and not the technology contained therein.
The training or support services provided to the JA does not make aware about the process or technology or software that the assessee uses for provision of the requisite output/services to the customer and therefore the ld AR strongly argued that the assessee has not 'made available' technology to its customers. The ld AR relied on judicial precedents that consideration for a service shall be considered to be “made available” only where the technology contained for provision of such services is provided to the customer so that it can be independently used by such customer in future. Since, no such technology has been provided to the customer to develop complicated global distribution system, the services cannot be said to have “made available”.
The ld AR further submitted that there is no human intervention' for subscription services and relied on the decision of Supreme Court in the case of Bharti Cellular Ltd. v CIT (2010) 193 Taxmann 97 (SC) and Madras High Court in the case of Skycell Communications Ltd and Another vs. DCIT and Another [2001) (251 ITR 53) (Madras HC). In the case of Commissioner of Income-tax-4, Mumbai v. Kotak Securities Ltd. [2016] 67 taxmann.com 356. The ld AR submitted that for considering managerial, technical or consultancy services as FTS, the clause “make available” is to be established. The Ld AR relied on Hon'ble Delhi High Court in the case of DIT vs Guy Carpenter and co Ltd reported in 346 ITR 504 (Del.); Hon'ble Delhi High Court in the case of CIT vs Bio-Rad Laboratories (Singapore) Pte Ltd reported in 459 ITR 5 (Del.); Hon'ble Delhi High Court in the case of Tungsten Automation England Ltd vs DCIT reported in 480 ITR 93 (Del.).
The ld DR argued that the assessee has transferred the ‘experience and skill’ to the Jet Airways and relied on the decision of CIT V Ernst and Young U.S.LLP 187 taxmann.com 711(Del). The ld DR referred to Master Agreement definition clause 164 to show that Services means support service. The ld DR further argued that there is human intervention in supply of service. The ld DR further emphasized that training has been imparted by the assessee to the assessee year wise and not for 10 years. The ld DR referred to clause 6 at page 8 of Agreement to show that the assessee provided warranty for the system supplied by the assessee.
In rejoinder the ld AR stated that there is no annual subscription fees but the revenue model is fees per passenger in the reservation system. The Ld AR reiterated that there is no transfer of technical knowledge and distinguished the case of Ernst and Young. The ld AR submitted that warranty is only for the system.
We have heard the rival submissions and have perused the materials on record. The issue for our determination is whether the revenue earned from Jet Airways is FTS in terms of 12(5)(b) of the India-Netherland DTAA. At this juncture it would be appropriate to reproduce the relevant provisions of the DTAA as under:
1[ARTICLE 12
ROYALTIES AND FEES FOR TECHNICAL SERVICES
1.Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.]
2[2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or the fees for technical services.]
3.The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2.
1[4. 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, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.]
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.
2 [6. Notwithstanding paragraph 5, "fees for technical services" does not include amounts paid :
(a)for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property;
(b)for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic;
(c)for teaching in or by educational institutions;
(d)for services for the personal use of the individual or individuals, making the payment; or
(e)to an employee of the person making the payments or to any individual or partnership for professional services as defined in Article 14 (Independent Personal Services) of this Convention.]
7.The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of one of the States, carries on business in the other State, in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for technical services are effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 14, as the case may be, shall apply.
8.Royalties or fees for technical services shall be deemed to arise in one of the States when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of one of the States or not, has in one of the States a permanent establishment or a fixed base in connection with which the contract under which the royalties or fees for technical services are paid was concluded, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.
9.Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of royalties or fees for technical services, having regard to the royalties fees for technical services for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payment shall remain taxable, according to the laws of each State, due regard being had to the other provisions of this Convention.]
In the light of provisions of Article 12(5) of DTAA above, we have to adjudicate whether the service provided by the assessee to Jet Airways are Technical Services and if yes whether the technical knowledge is made available to the Jet Airways. From the perusal of the Article 12 of the DTAA, it is apparent that there are mandatory conditions for treating the consideration received as FTS i.e., rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) and if such services makes available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.
We first examine the judicial interpretation of the term FTS, as per section 9(1)(vii) and find that the hon’ble Delhi High Court in the case of Bharti Cellular Ltd (2008) 175 Taxmann 573(Del) had held as follows:
“In the explanation 2 to section 9(1)(vii), the word 'technical is preceded by the word 'managerial and succeeded by the word 'consultancy'. Since the expression technical services' is in doubt and is unclear, the rule of noscitur a sociis is clearly applicable. This would mean that the word technical would take colour from the words 'managerial and consultancy', between which it is sandwiched. On going through the dictionary meaning of the words 'managerial and consultancy, it is apparent that both the words 'managerial and consultancy' involve a human element and both, managerial service and consultancy service, are provided by humans Consequently, applying the rule of noscitur a sociis, the word 'technical' as appearing in the Explanation 2 to section 9(1)(vii) would also have to be construed as involving a human element”.
On the issue of ‘Technical service’ requiring human intervention, the Hon'ble Supreme Court, while endorsing the hon’ble Delhi High Court in the case of Bharti Cellular Ltd. v CIT (2010) 193 Taxmann 97 (SC) and after examining the term technical services in detail, have held that an element of human interface or application of human mind or direct and constant involvement of human endeavor is necessary for provision of technical services and that mere collection of a fee for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been received for technical services. The Madras High Court in the case of Skycell Communications Ltd and Another vs. DCIT and Another [2001) (251 ITR 53) (Madras HC) held the same. In the case of Commissioner of Income-tax-4, Mumbai v. Kotak Securities Ltd. [2016] 67 taxmann.com 356, the Hon'ble Supreme Court observed as under "Managerial and consultancy services" and, therefore, necessarily "technical services", would obviously involve services rendered by human efforts. This has been the consistent view taken by the courts including this Court in Bharti Cellular Ltd's case (supra)."
Juxtaposing the judicial interpretation of the term FTS with the reading of the Master Agreement date 30.12.2014, valid for 10 years, we find that the assessee provides a software system in respect of Sabre Sonic Reservations systems and Air-Vision/Air-Centre systems wherein the assessee earns on the basis of subscription services per passenger. The assessee assertion that there is no human intervention involved in providing of subscription services by the assessee to its customers, and there is use of standard facility for providing the services, has not been rebutted by the Revenue. There is also no rebuttal from the Revenue that the software hosted on Sabre's servers are located outside India. Therefore, in view of the above judicial precedents, we are of the considered view that the services provided by the assessee to Jet Airways do not fall under the category of FTS under Article 12(5) of the India- Netherland DTAA.
Furthermore, another essential condition to term a technical service as FTS, is the fulfilment of the clause “make available”. We find that Jet Airways have to continuously avail the services to carry on their operations. We further note that Jet Airways does not apply the technology of the services provided by the assessee independently, and is not privy to the technology. Moreover, the Master Agreement provides that the assessee shall retain all the intellectual property rights in respect of Sabre System, documentation and other licenses/technology used by it for rendition of services to Jet Airways and that the right of Jet Airways shall be limited to use of Sabre systems. Furthermore, we find that the training and support services that have been provided by the assessee, are limited to use of assessee's systems and does not refer to the transfer of technology contained therein and therefore the services cannot be said to have 'made available’ to Jet Airways. We also note that the provision of such training or support services do not make the customer aware about the process or technology or software that the assessee uses for provision of the requisite output/services to the customer. Ultimately, we find that the assessee does not "make available” any technical knowledge, skill or know-how to customer such that the customers can apply the technology on its own without recourse to the assessee in future. In view of the above factual matrix of the instant case, we follow the judicial precedent of the Hon'ble Delhi High Court decisions in the case of DIT vs Guy Carpenter and co Ltd ; CIT vs Bio-Rad Laboratories (Singapore) Pte Ltd and Tungsten Automation England Ltd vs DCIT, specifically in the context of training services holding that the same do not 'make available' the technology therein. Accordingly, we are of the considered view that since the assessee does not "make available" any technical knowledge, skill or know-how to customer such that it can apply the technology on its own without recourse to the assessee in future, the consideration received by the assessee for provision of such services does not qualify as FTS under Article 12(5)(b) of the India-Netherlands DTAA as well as the provisions of section 9(1)(vii) of the Act. The ground 1 to 5 is allowed.
Ground 6 regarding interest under section 234B is consequential and ground 7 regarding penalty u/s 270A is premature.
In the result , the appeal in ITA 1696 & 1697/Del/2022 are partly allowed.