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
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
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.
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
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
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
(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.
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.
(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
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.