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19. [2017] 77 taxmann.com 166 (Ahmedabad - Trib.) DCIT vs. Bombardier Transportation India (P.) Ltd. A.Ys.: 2013-14, Date of Order: 3rd January, 2017

GEETA JANI
DHISHAT B. MEHTA
Chartered Accountants
Sections - 9(1)(vi) / 9(1)(vii) of the Act, Article 12 of India-Canada DTAA – Use of certain equipment in course of rendition of services does not result in any use of or right to use the equipment for recipient of service. Hence, payment for such services cannot be treated as royalty

Facts 1

The Taxpayer, an Indian company, was a member-company of an international Group engaged in the business of manufacturing and supply of rail transportation system. It was a wholly owned subsidiary of a Singapore based Group Company. During the relevant assessment year, Taxpayer had made payments to its Canadian Group Company towards its share of costs in relation to the information system support services availed by Canadian company at group level.

Before the AO the Taxpayer contended as follows.

-  The payments were made towards information system support services at group level. The amounts were determined on the basis of cost allocation. The Taxpayer contended that the since the payments were in the nature of reimbursements, they could not partake the character of income.

-  Provisions of section 9(1)(vi) of the Act treating the payments as ‘royalty’ could not be invoked unless there was transfer of all or any of the rights (including granting of any license) in respect of copyright of a literary, artistic or scientific work.

-  Additionally, in terms of Article 12(3) of India-Canada DTAA, only payments having an element of use of IPRs could be considered as royalties whereas the impugned payments were for standard facilities. Further, the Canadian company had not received any payment for commercial exploitation of copyright embedded in the applications.

-  Hence, such payments did not qualify as ‘royalty’.

     However, the AO concluded that the impugned payments were consideration for "use or right to use any industrial, commercial or scientific equipment" and hence, taxable u/s. 9(1)(vi) of the Act as well as article 12(3)(b) of India-Canada DTAA. After a detailed analysis of the payments, he was of the view that a major portion of the payment was for the use or right to use industrial, commercial or scientific equipment.

Held 1

(i)  The payments made by the Taxpayer to Canadian company were in the nature of reimbursements based on cost allocations and did not involve any income element.

(ii) Though rendition of service may involve use of certain equipment it does not result in any use of or right to use the equipment. Even if a part of consideration could be said to be on account of use of equipment by breaking down all the components of economic activity for which consideration is paid, it is neither practicable, nor permissible, to assign monetary value to each of the components and consider that amount in isolation for deciding character of that amount.

(iii) Even if the payment is considered as payment for use of software, in absence of transfer of copyright, it cannot be treated as royalty.

(iv) In Kotak Mahindra Primus Ltd vs. DDIT [(2007) 11 SOT 578 (Mum)], deciding on a similar issue, the Tribunal observed that the Indian company did not have any control over, or physical access to, the mainframe computer in Australia, and that since the payment was for specialised data processing, there cannot be any question of payment for use of the mainframe computer.

(v) Thus, even if one were to proceed on the basis that equipment was used in rendition of services, such payment, or part thereof, cannot be treated as payment for use of equipment. Further, details furnished by the Taxpayer support the fact of reimbursement. Hence, the payment was not FTS. In absence of any income embedded in reimbursement payment, question of withholding of tax did not arise.

Facts 2

The Taxpayer additionally availed administrative, marketing and procurement services from the Canadian company. AO contended that the services rendered by the Canadian company were technical in nature and such services made available, technical, knowledge, skill and experience to the Taxpayer. Hence, payment for such services was covered as FTS under article of India-Canada DTAA.

Held 2

(i)  Article 12(4)(a) could be invoked only if the services provided, inter alia, “make available” technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design.

(ii) The services provided by the Canadian company were simply management support or consultancy services which did not involve any transfer of technology. The AO had also not contended that the recipient of service was enabled to perform these services on its own without any further recourse to the service provider.

(iii) In this context the connotation of the expression ‘make available’ needs to be examined. Technology is “made available” when the person acquiring the service is enabled to apply the technology. in CIT vs. De Beers India Pvt. Ltd [(2012) 346 ITR 467 (Kar)], the Court held that the technical or consultancy service rendered should be such that it “makes available” (i.e., imparts) technical knowledge, etc. to the recipient whereby he could derive enduring benefit and utilise the knowledge or know-how on his own in future without the aid of the service provider.

(iv)  Since the aforementioned tests were not satisfied in case of the Taxpayer, the payment for services could not be considered as FIS. The fact that the services rendered involved provision of certain technical inputs and that such inputs resulted in providing value addition to the Taxpayer, was not relevant in determining if make available condition is satisfied or not.