BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI …1)(vii) - Atos Informati… · PER AMIT SHUKLA, JM: The aforesaid appeals have been filed by the assessee against separate impugned

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “L”, MUMBAI

BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND

SHRI ASHWANI TANEJA, ACCOUNTANT MEMBER

ITA NO. 237,238,239

&240/MUM/2016

A.Ys : 2006-07, 2007-08,

2008-09 & 2012-13)

Atos Information Technology HK Ltd.C/o Atos India Pvt. Ltd.,Plant No. 5, Godrej & Boyce Mfg. Co. Ltd., Pirojshanagar, LBS Marg, Vikhroli (W), Mumbai 400 097. PAN : AAKCS8720L (Appellant)

Vs. DCIT (IT)-1(1)(2), Mumbai (Respondent)

Assessee by: Shri Kanchan Kaushal,

Shri Dhanesh Bafna,

Shri Aliasgar Rampurwalla

Shri Ravi Sawana & Shri Pratik S. Shah

Revenue by: Shri Jasbir Chauhan, CIT DR

Date of Hearing: 27/10/2016 & 9.02.2017

Date of Pronouncement: 09/02/2017

O R D E R

PER AMIT SHUKLA, JM:

The aforesaid appeals have been filed by the assessee

against separate impugned final assessment orders of even date

11.12.2015, passed by the Assessing Officer in pursuance of

directions given by Dispute Resolution Panel (DRP) vide

separate orders dated 30.11.2015 u/s 144C(5) of Income Tax

Act, 1961 (in short „the Act‟) for quantum of assessment passed

2 ITA Nos. 237 to 240/MUM/2016 Atos Information Technology HK Ltd.

u/s 143(3) r.w.s. 144C(13) for Assessment Years 2006-07,

2007-08, 2008-09 and 2012-13. Since common issues are

involved in all the appeals arising out of identical set of facts,

therefore, same were heard together and are being disposed of

by way of this consolidated order.

2. To understand the facts and issues involved and its

implications thereof, we are taking up the appeal for

Assessment Year 2006-07 being ITA No. 237/Mum/2016, which

has been passed in pursuance of order of Tribunal setting-aside

the matter to the file of Assessing Officer to re-adjudicate the

following issues :-

“(a) Whether payments made to Standard Chartered Bank

(SCB), India to the assessee are payments for “Royalty” or

“Fees for Technical Services (FTS)”?

(b) Whether the benefits of Sec. 115A of the Act will be

available to the assessee in case it is held that the

payments from SCB, India are held to be taxable as

Royalty or/and FTS?”

3. In the grounds of appeal, assessee has raised the following

grounds:-

“1.1 On the facts and in the circumstances of the case and

in law, the learned Deputy Commissioner of Income-tax

(International Taxation) 1(1)(2), Mumbai ('the learned AO')

and the Dispute Resolution Panel ('the DRP') erred in

holding the sum of Rs.11,78,20,808 as 'Royalty' and 'Fees

for Technical Services' under Section 9(1)(vi) and 9(1)(vii) of

the Income tax Act, 1961 ('the Act').


In doing so, the learned AO and the DRP disregarded the

Contract for Provision of Computing Services entered into

between the Appellant and Standard Chartered Bank, India

(„SCB India‟) for the services rendered by the Appellant to

SCB India.

The Appellant humbly prays that the aforesaid receipts

should not be taxed in India and the learned AO be directed

accordingly.

1.2 Without prejudice to above Ground No. 1.1, the

Learned AO and the DRP erred in denying the benefit of the

rate prescribed under section 115A of the Act.

In doing so, the learned AO and the DRP held that SCB

India being a non-resident company does not fall within the

ambit of the term 'Indian concern' as per the provisions of

section 115A of the Act and accordingly, the provisions of

section 115A of the Act do not apply to the payments made

by SCB India.

The Appellant humbly prays that the Learned AO be

directed to apply the rate as prescribed under section 115A

of the Act.

1.3 Without prejudice to Ground Nos. 1.1 to 1.2, on the

facts and in the circumstances of the case and in law, while

calculating the tax liability of the Appellant, the learned AO

has erred in taxing income on gross receipts instead of net

receipts received by the Appellant (i.e. after deducting the

expenses attributable to gross receipts).


directed to compute the chargeable income of the Appellant

by adopting net receipts instead of gross receipts.

2. On the facts and in the circumstances of the case and

in law, the Learned AO erred in not giving tax credit for the

taxes paid amounting to Rs.2,00,00,000 consisting of


Rs.1,00,00,000 each on 31 January 2012 and 19 April

2013 as per the stay directions provided by the Hon'ble

Income-tax Appellate Tribunal.


directed to allow the credit for the taxes paid.


in law, the Learned AO erred in levying interest under

section 234B of the Act amounting to Rs. 2,88,24,483

without appreciating that the entire income of the Appellant

is subject to deduction of tax at source and hence, the

question of advance tax does not arise.


directed to delete the interest levied under section 234B of

the Act.


in law, the Learned AO erred in initiating penalty

proceedings under section 271 (1)(c) of the Act.


directed to not to initiate the penalty proceedings.”

4. Before us, the ld. Counsel, Shri Kanchan Kaushal

explaining the background and facts of the case submitted that

assessee, Atos Information Technology HK Ltd. is a non-resident

company, engaged in the business of providing

services/facilities for data processing through computer

hardware and software from Hong Kong. It had entered into a

contract for provision of computing services,for the provision of

data process support to „Standard Chartered Bank India‟ (SCB

India), which is engaged in banking business in India. Under

the said contract, assessee processes the data for SCB in Hong


Kong. The said services are being provided by assessee to SCB

since August, 2005. He pointed out that the contract for

computing services was governed by a “Cocteau agreement”

dated 12.2.2004 which the assessee had entered with SCB

worldwide for the provision of data processing support to SCB in

68 countries during the years under consideration. Considering

the involvement of 68 countries, the „Cocteau agreement‟ which

is typical of any other outsourcing contract contained detailed

framework for providing adequate safeguards to SCB and the

requisite services to be performed by the assessee at certain

standards so as to meet the outsourcing objectives of SCB. He

also pointed out that the Reserve Bank of India vide letter dated

5.10.2004 has approved the processing of data pertaining to

Indian operations in Hong Kong by the assessee. As per the

aforesaid contract with SCB India, the consideration payable to

the assessee for rendering the data processing services have

been computed having regard to the following:-

(i) The overall service provision is processing of data

furnished by SCB India into stipulated information form and

category. In order to provide the data centre processing

services with the desired quality / service level as required

under the „Cocteau Agreement‟, the assessee (Atos) has the

following responsibilities (in respect of the facility / system,

which is located in Hong Kong):-

• ensure adequate facility, systems and software which

are located in Hong Kong;

• ensure all hardware which is housed in Hong Kong is

maintained and housed in secured building space and

infrastructure;


• manage performance of the hardware, SAN and

operating systems components;

• perform routine computer operations according to the

operation documentation;

• ensure adequate technical support of operating systems

to ensure system performance;

• measure and predict resource needs required to

maintain service level;

• maintain adequate system security measures;

• maintain an effective internal control environment; and

• put in place appropriate Disaster Recovery Plan.

(ii) The manner in which the processing activity is carried out

by the assessee has been explained as under:-

• the input data, i.e., the raw data relating to branch

transactions is fed by the SCB India users via their

workstations in India and transmitted to the assessee‟s

data centre in Hong Kong that commenced to operate in

Hong Kong since 7.8.2005. Such consolidation was

driven by platforms and applications deemed most

appropriate by the parties to upgrade and/ or refresh.

The application software owned and used by SCB India

for transmitting data to Hong Kong has neither been

designed nor acquired by/from the assessee. Further,

the SCB India workstation, hardware, network and

software are owned by SCB India. The assessee does not

supply or install any hardware or software in the

premises of SCB India's branches to provide the data

processing services.


• The transaction / data are processed by the assessee‟s

data centre computer equipment located in Hong Kong.

No staff of the assessee is required to be in India to

provide the data processing services and no staff of the

assessee provides data processing services to SCB India

in India. However, the staff of the assessee are only

required to oversee the data processing services to SCB

India so as to ensure uninterrupted services. SCB India

owns all the hardware, application software and

network in its India branches.

• After the raw data is transmitted into the hardware

facility of the assessee in Hong Kong, the assessee,

processes the raw data as per the requirement of SCB

India on application software owned by SCB India,

using the hardware infrastructural facility, of the

assessee in Hong Kong.

• The processed data i.e. the output data is transmitted

electronically to SCB India in India using the software

provided by SCB India, which has not been designed by

the assessee. A copy of the data is backed-up and stored

in the Hong Kong data centre for recovery purposes.

• The assessee has no right to access and to use the

processed data of SCB India.

5. The ld. Counsel further pointed out that prior to the

Assessment Year 2006-07, similar activity was carried out by

the assessee‟s sister concern based in Singapore, i.e. „Atos


Origin IT Services Singapore Pvt. Ltd‟. In the case of said Atos

Singapore, the matter relating to„Royalty‟ and „Fees for technical

services‟(FTS) for rendering a similar nature of services was

decided in favour of the assessee, though under Article 12(3) of

India-Singapore DTAA. However, in the said judgment the

Tribunal has discussed the entire issue threadbare as to how

the provision for data processing cannot be reckoned as „royalty‟

or FTS.

6. Ld. Counsel further pointed out that in the first round of

proceedings, the Assessing Officer following his predecessor‟s

order in the case of Atos Singapore held that payment made by

SCB India to Atos Hong Kong (assessee) is in the nature of

„royalty‟ u/s 9(1)(vi) of the Act. In the first appeal, the ld. CIT (A)

has confirmed the said findings. In the Assessment Year 2007-

08 also, a similar view was taken which has been upheld by the

DRP. In these years, the matter was carried in second appeal

before the Tribunal, wherein the matter was restored back to

the file of Assessing Officer to re-adjudicate the issues in

accordance with law. In the set-aside proceedings, the Assessing

Officer after extensively referring to the „Cocteau agreement‟ had

made various observations regarding „royalty‟ as well as „FTS‟

which are summarised as under:-

Royalty: The assessee has not provided mere data processing

services to SCB, but has also provided technology in the

form of data-centre, infrastructure, connectivity and

application technology for its banking operations.


The assessee has created and provided facility in the form

of dedicated centres for exclusive use of SCB with disaster

recovery facility and storage facility.Apart from the

infrastructure facility, secure network connectivity is

provided with modem technology support. The

infrastructure facility in the form of data centre, storage

area network, disaster recovery facility and dedicated

network connectivity is translated into functional process

by defined service flow for the various geographic

locations, for various business application, which would

constitute "process". The data computing services are

performed on the above said platform utilising the above

process. Thus, it could be seen that the assessee has

made available to SCB the use of its equipment, model,

design, invention and process and has also rendered

services in connection with the same, and hence the

nature of the transaction clearly fall within the purview of

"royalty", as defined in Explanation 2 to Section 9(1)(vi) of

the Act.

The fixed charges and variable charges are made for the

provision of facilities, infrastructure, network, system,

software and environment for the mainframe and

midrange servers categorised as mainframe services and

midrange services and are in the nature of payment for

royalties as u/s. 9(1)(vi) of the Act.

FTS:

Further, the Assessing Officer after extensively relying on

the „Cocteau agreement‟ also held that the assessee has


provided technical, managerial and consultancy services

to SCB and such services clearly fall within the purview of

technical services defined Explanation 2 to Section 9(1)(vii)

of the Act. In doing so, the Assessing Officer mainly relied

on the Schedule 24 to the „Cocteau agreement‟ at pages

1036 to 1065 of the Cocteau agreement and held that the

assessee is required to submit report for various activities

and services performed. Some of them relate to various

technical and managerial services such as:

(a) Database administration;

(b) Capacity management;

(c) Inventory management;

(d) Performance management;

(e) Business impact analysis;

(j) Disaster recovery planning and testing;

(g) Problem analysis and resolution;

(h) Change implementation;

(i) Risk reporting;

(j) Operating system installation and maintenance;

(k) Systems software and utility installation and

maintenance

(l) Software distribution;

(m) Virus updates and management;

(n) Operational acceptance testing;

(o) Governance;

(p) Service level report;

(q) Change management;

(r) Cocteau library;


(s) Finance reports (MIPS utilization covering disc capacity

used, MIPS utilization for each mainframe), Midrange

usage (covering CPU usage for each midrange with cost

of service by application, storage usage by application).

7. After analysing the agreement in the aforesaid manner,

the Assessing Officer held that provision of technology services

not only falls within the purview of „royalty‟, but also rendering

of „technical services‟ as defined by amended section 9(1)(vi) by

the Finance Act, 2012 with retrospective effect from 1.6.1976.

The assessee‟s submission in detail as to why the provision of

such services cannot be treated as „royalty‟ or „FTS‟ has been

incorporated by the Assessing Officer from pages 3 to 17 of

assessment order. However, the ld. Assessing Officer rejected

the entire contention of assessee after detailed analysis and

heavily relying upon the various provisions of „Cocteau

agreement‟ and came to the conclusion that payment made by

SCB to assessee is to be taxed in India, both as „royalty‟ as well

as „FTS‟. The analysis of ld. Assessing Officer and his reasoning

have been dealt with in page 18 to 34 of the assessment order.

8. Before us, the ld. Counsel, Shri Kanchan Kaushal

submitted that the payment made by SCB to assessee can

neither be termed as „royalty‟ nor as „FTS‟ under Sec. 9(1)(vi) or

u/s 9(1)(vii) of the Act. The provisions with regard to royalty and

FTS are mutually exclusive to each other and either it can be

royalty or FTS, but cannot be both. The income by way of

„royalty‟ connotes more „passive‟ in nature, whereas FTS relates

to rendering of managerial, technical or consultancy services


through constant human involvement. Thus, at the threshold,

the findings of Assessing Officer in characterising the impugned

payment, both as royalty as well as FTS is not in accordance

with the provisions of the Act and hence, on this ground alone

the entire addition made by Assessing Officer cannot be upheld.

9. On merits, as regards the payment not being in the nature

of royalty in terms of Sec. 9(1)(vi) of the Act, ld. Counsel

submitted that the main objection of Assessing Officer is that

“assessee has not provided mere data processing services to

SCB, but has also provided technology in the form of

datacentre, infrastructure, connectivity and application

technology for its banking operations.”. He pointed out that

under the „Cocteau agreement‟, the assessee was to provide data

centre and related computing services to the banking operations

of SCB and only such services were provided.The objectives as

set out in para 1.1 of Schedule 1 of the „Cocteau agreement‟ are

as under:

(a) To provide the SCB Group with a global reaching, flexible,

scalable and technologically innovative approach to

delivering data centre and related computing services;

(b) To achieve substantially improving data centre services

capability, operational risk and on an ongoing basis

continuous service excellence and improvement

consistently across the SCB Group;

(c) To recalibrate and sustain an ongoing basis, SCB's data

centre services cost with the outsourcing market by means

of transparent cost management so as to demonstrate

excellent value for money and cost effectiveness;


(d) By leveraging the capabilities and technology "thought

leadership" of the supplier companies. Position technology

in the SCB Group to sudden business growth and changes;

(e) To have an effective governance model to achieve these

outsourcing objectives and ensure observance and

performance of the Contract;

(j) Access a broader and deeper range of technology skills;

(g) Align the technology strategy of the SCB Group with the

overall business strategy of the SCB Group; and

(h) Keep the technology of the SCB Group up-to-date with best

practices relating to the delivery of data centre services and

related computing services.

A perusal of the above would reveal that the objective of

Cocteau agreement is to provide the SCB Group with a global

reaching, flexible, scalable and technologically innovative

approach to delivering data centre and related computing

services and not any technology/ infrastructure/application

technology per se to SCB. Thus, the Assessing Officer has

misinterpreted the objective as provision of technology/

connectivity/ infrastructure/ application to SCB group. The

intention of SCB was outsourcing activities and not any

rendering of technical or consultancy services. He also referred

to the approval letter of RBI, which is titled as “Storing and

Processing of Indian data in Hong Kong” in the case of SCB

wherein the approval given by RBI was for storing and

processing of SCB's data relating to Indian operations in Hong

Kong and also to outsource the processing activities to the

assessee. The said approval was given on certain conditions,

relevant to the present case are reproduced below:-


“(i) ....

(ii) All bank office functions, including treasury functions,

are performed in India. Only processing of data can be

done overseas. Processed output should be received in

India on a day to day basis.

(iii) The bank will remain responsible for maintaining the

secrecy and confidentiality of the data processed / to

be processed.”

Thus, the approval granted by RBI to SCB was only for

processing of data. Regarding Assessing Officer‟s objection that

assessee has provided technology in the form of data centre,

infrastructure, connectivity and application technology to SCB,

the ld. Counsel submitted that under the Cocteau agreement,

the assessee provides data processing services to SCB Group

which has presence in approximately 68 countries for the years

under consideration. With the exorbitant size of the assignment,

work that is required to be transacted between SCB and the

assessee, it is but natural for SCB to be sure about the capacity

(i.e. the infrastructure, human resources, facilities, technology,

internal processes etc.) of the assessee in handling the

assignment.By way of an example, he submitted that if any

MNE wants to get its data work done, then it may negotiate with

audit firm and seek information like number of auditors

working in the firm, about human resources, about level of

understanding, the process that they might adopt to conduct

their work, internal process which would be adopted while

conducting the assignment or the technology which they will

use. The client and their consultant may also mutually discuss

the role, responsibilities, obligation, technology to be used and


everything may be put in writing for better understanding.

However, this does not mean that any kind of knowledge or

rendering of technical services is being given. Similarly, by way

of Cocteau agreement, SCB made sure what is required to be

done, when, how, by whom, etc. at the assessee‟s end and same

should be clear in writing for better understanding. He

submitted that considering the involvement of 68 countries

during the year under consideration and each country having

100‟s of branches, it was necessary that the Cocteau agreement

contained detailed framework providing adequate safeguards to

SCB and the assessee. These safeguards are availability of

adequate data centres, disaster recovery facility, storage facility,

network connectivity. These safeguards are also justified by the

amount of work involved, the number of countries involved and

the nature of work. For any multinational enterprises while

entering into any such kind of agreement whereby the work

carried out in multiple parts of the world would be affected, it

becomes necessary that such agreement contains necessary and

adequate provisions and clauses to protect and secure their

business and interests. In the present case, the necessary and

adequate provisions as a part of the assessee‟s responsibility,

were to:

• ensure adequate facility, systems and software which are

located in Hong Kong;

• ensure all hardware which is housed in Hong Kong is


infrastructure;

• manage performance of the hardware, SAN and operating

systems components;


• perform routine computer operations according to the

operation documentation;

• ensure adequate technical support of operating systems to

ensure system performance;

• measure and predict resource needs required to maintain

service level;

• maintain adequate system security measures;

• maintain an effective internal control environment; and

• put in place appropriate Disaster Recovery Plan.

The above responsibilities of the assessee under the Cocteau

agreement, is also justified by the “outsourcing objectives” of the

SCB for which it has entered into the Cocteau agreement. The

said objectives contemplates provision of technologically

innovative approach to render data centre and related

computing services, improving data centre service capability,

minimizing operational risks, justifying the provision of services

against the cost incurred by SCB, employing best practices to

render such services.

10. Further, all the infrastructural facilities and software,

located in Hong Kong, have been used by the assessee, to

provide data computing services to the SCB. The assessee is

using its infrastructure and software facilities to provide the

data computing and related services to the SCB. The Cocteau

agreement nowhere suggests that any of the hardware or

software facilities of the assessee, have been lent to SCB Group.

The SCB Group do not have any access to the methodology and

process used by the assessee in provision of data computing

and related services.


11. Thus, it was submitted that it has not provided the SCB

Group with the technology in the form of datacentre,

infrastructure, connectivity and application technology, rather it

has used such technology and infrastructure on its own, to

render services to the SCB Group and the Assessing Officer/

DRP erred in considering that the assessee has made available

to SCB the use of its equipment, model, design, invention and

process.

12. Lastly, with regard to Assessing Officer‟s objection that

fixed charges and variable charges made for provision of

facilities, infrastructure, network, system, software and

environment for main framework, etc. are in the nature of

royalty, the ld. Counsel drew our attention to Schedule – 5 of

Cocteau agreement dealing with “charges”, wherein it has been

clearly mentioned that break-up of charges for main framework

services and midrange services is merely a “methodology” for

determining the charges. The methodology of payment cannot

change the characteristic of the income.

13. Coming to the Assessing Officer‟s contention that the

impugned payment is in the nature of „royalty‟ mainly on two

counts; firstly, use of process, model, design, invention and;

secondly, use of equipment, the ld. Counsel gave written

submissions, which for the sake of ready reference is

reproduced hereinbelow :-

“(i) Why there is no use of "process, model, design,

invention"?


a. Decision in the case of Atos Singapore:

In the case of Atos Singapore for the Assessment Year

2004-05, the Assessing Officer ("the AO") and the

Commissioner of Income Tax (Appeals) ["the CIT(A)"]

had taken a stand that the Payment by the SCB to Atos

Singapore is in the nature of 'Royalty' as it is for "use of

process". At Page 30 of the said order, the Hon'ble

Tribunal has also observed that the nature of services

rendered is very important and to come to a conclusion

as to whether the payment is in the nature of Royalty

or not, the Hon'ble Tribunal recapitulated the facts in

three stages:

First Stage: SCB transmits raw data through

operating software owned by it to the hardware facility

of Atos Singapore. Atos Singapore merely receives the

data so transmitted. Thus at this stage there is no use

or right to use any process of the Atos Singapore by

SCB.

Second Stage: The raw data transmitted is processed

by Atos Singapore's staff as per the requirements of

SCB using the application software owned by SCB. At

this stage SCB does not use or have any right to use

any process. Consideration paid for carrying out

processing is not a payment for use or right to use a

process.

Third Stage: The processed data, i.e., the output data

is transmitted electronically to SCB in India using the

software provided by SCB, which is not designed by

Atos Singapore. Even at this stage there is no use or

right to use any process.

From the above three stages, it can be very well

seen that the Hon'ble Tribunal has categorically

given a finding that (i) there was 'no use' or 'right


to use' of any process by SCB and (ii) there was no

consideration for use of process.

Further, there cannot be any presumption of indirect

use by SCB as the Process is ONLY used by Atos

Singapore in earlier years and by the assessee during

the year under consideration. Hence, in the absence of

direct as well as indirect use by SCB, Explanation 5

will have no application.

b. Non-applicability of Explanation 6:

Explanation 6 is being retrospectively inserted, w.e.f

1st June, 1976 and same reads as under:

"Explanation 6: For the removal of doubts, it is hereby

clarified that the expression "process" includes and

shall be deemed to have always included transmission

by satellite (including up-linking, amplification,

conversion for down-linking of any signal), cable, optic

fibre or by any other similar technology, whether or not

such process is secret;'."

As can be seen, the Explanation has been inserted to

extend the meaning of 'Royalty' by providing the

explanation of the term 'process' to also include

transmission by satellite (including up-linking,

amplification, conversion for down-linking of any

signal), cable, optic fibre or by any other similar

technology, whether or not such process is secret. This

Explanation has been inserted specifically for the

categories of "Satellite and Transponder facilities".

Since, the assessee‟s case is not falling under such

category, Explanation 6 is not applicable to it.

(ii) Why there is no "use of equipment?

a. Clause (iva) of Explanation 2 to Section 9(1)(vi)

applies only to income from the leasing of

industrial, commercial or scientific equipment:


As can be seen from the wordings of Clause (iva) of

Explanation 2 to Section 9(1)(vi) of the Act, it deals with

the use or right to use any industrial, commercial or

scientific equipment (but not including the amounts

referred to in section 44BB).

At the outset, it is submitted that clause (iva) applies

only to income from the leasing of industrial,

commercial or scientific equipment and hence, same

will not apply to assessee‟s case in the absence of any

income from leasing. A reference in this connection can

also be made to the provisions of S. 44BB of the Act,

the reading of which gives completeness to the intent of

the legislature in coining the provision. Such intension

of leasing/hiring is also contained in the memorandum

to the Finance Bill, 2001 enumerated in subsequent

paragraph.

This clause has been inserted by the Finance Bill, 2001

with effect from April 1, 2002. The Memorandum to

Finance Bill, 2001 explains the intention of legislature

behind insertion of the clause and same reads as

under:

"Under the existing provisions contained in clause (vi) of

sub-section (1) of section 9, income by way of royalty

payable is deemed to accrue or arise in India subject to

certain conditions. The term "royalty" has been defined

in Explanation 2 to this clause. The definition of the

term "royalty" as used in the Double Taxation

Avoidance Agreements entered into by India

includes inter alia payments "for the use of, or

the right to use, industrial, commercial or

scientific equipment". Presently, these payments

are not included in the definition of royalty in the

aforesaid Explanation. The result is that income

from the leasing of industrial, commercial or

scientific equipment becomes taxable in the

source country as business income only.


Consequently, there is no withholding tax on such

payments as the taxpayer takes shelter under the

definition of the term "royalty" as provided in the

Income-tax Act since the same is more beneficial to him.

It is therefore, proposed to amend section 9 so as

to widen the scope of the term "royalty" as

provided in Explanation 2 of clause (vi) of sub-

section (1) of section 9 so as to include in its

ambit consideration for the use of, or the right to

use, industrial, commercial or scientific

equipment."

Thus, it is clear that the insertion of Clause (iva) was to

bring the leasing of industrial, commercial or scientific

equipment under the scope of Royalty. Since, in this

case there is no leasing of equipment, the question of

invoking clause (iva) does not arise. The said view is

also adopted by the decision of Yahoo India P, Ltd.

Vs DCIT (140 TTJ 195)(Mum) which has observed as

under:

"5. .......... A perusal of the relevant portion of the

Board circular shows that the legislative intention

behind insertion of the said clause is to overcome the

situation where no tax at source was being deducted

from the payment of lease rent of industrial,

commercial and scientific equipment by taking shelter

under the erstwhile definition of the term "royalty" as

given in the IT Act, 1961. The legislative intention to

insert cl. (iva) of Explanation 2 to s. 9(1)(vi) in the

statute thus is to cover the lease rent of

industrial, commercial and scientific equipments

in the definition of "royalty" and the said

definition has been widened to that extent only."

In the assessee‟s case there is no hiring of equipment

by it. On the other hand the assessee itself utilises the

equipment / environment to provide standard facility.

In light of the above discussion, it is submitted that


Clause (iva) will have no application on the assessee‟s

case at any point of time as there is no lease of

equipment.

b. Non-applicability of Explanation 5 and Clause

(iva) of Explanation 2 to Section 9(1)(vi):

On close reading of Clause (iva) and Explanation 5 of

Section 9(1)(vi), it would be noticed that Explanation 5

has no application to clause (iva) of the Explanation 2

for the reasons enumerated below:

As per the Explanation 5 which was introduced by

Finance Act, 2012 w.r.e.f 01-04-1962, royalty

includes and has always included consideration in

respect of any right, property or information.

The three words used in Explanation 5 (i.e any right

property or information) finds place in clause (i), (ii)

(iii), (iv) and (v) only and not in clause (iva) of

Explanation 2 of Section 9. Therefore, one can

reasonably interpret that the Explanation 5 was

sought to be introduced to explain clauses (i) to (v)

and not clause (iva).

Explanation 5 has been inserted with retrospective

effect from June 1, 1976. In other words,

Explanation 5 has been inserted retrospectively

from the birth of Section 9(1)(vi) to clarify the

intention behind the legislation. Hence, Explanation

5 is to be read with the Section 9(1)(vi) which was

there on the statute as on April 1, 1976. It may

kindly be noted that clause (iva) was inserted from

April 1, 2002. Thus, it cannot be said that

Explanation 5 also applies to the said clause as this

clause never existed as on April 1, 1976 and

accordingly, the legislation cannot clarify the

intention of the clause which never existed on the

said date.


Thus, it is humbly submitted that Explanation 5 will not

apply to Clause (iva) of Explanation 2 to Section 9(1)(vi)

of the Act.”

Thus, he submitted that the impugned payment received by

assessee from SCB India is not for any processing, model,

invention, design or equipment, albeit it is payment for

provision of data computing services and hence cannot be

reckoned as royalty.

14. Regarding the impugned payment not being in the nature

of FTS, he submitted that Assessing Officer has mainly

emphasised on Schedule – 24 of the Cocteau agreement,

wherein assessee is required to submit reports for various

activities and services performed and, therefore, the services

provided fall in the nature of managerial and technical services.

The relevant clauses and the submissions made by the ld.

Counsel to rebut the observations of Assessing Officer are

reproduced hereunder:-

“(a) Managed Platforms and Managed Infrastructure

Scope: This section provides an overview of the

Managed Platforms and Managed Infrastructure in

Datacentres in respect of which the Appellant shall

provide the services.

"Managed Platform" means a unit of hardware or

firmware (together with any embedded software)

providing a specific functionality, which is located

within a Datacentre for the time being. “Managed

Infrastructure” means, (i) the managed network; (ii)

Managed components that provide interconnectivity

between managed platforms (e.g. cable trays, patch

panels and other passive LAN components); (iii)


managed components that provide a suitable

operating environment for the managed platforms (e.g.

power, racking, air conditioning, fire protection devices

and physical security devises); (iv) managed

components that support the Applicant's operation

and / or provision of services (e.g. telephones, foxes,

shredders), located in a datacentres.

Thus, using the above components and

infrastructures, the assessee shall provide the data

centre and related computing services to the SCB

group.

(b) Batch and Online Operations: The assessee shall

provide high quality day-to-day computer operations

for both batch and online workloads on all managed

systems. Where the managed systems are to be

operated from a remote location, secure and

appropriate tools must be used to facilitate this

process.

Under this, the assessee is required to provide high

quality computer operations for batch and online

workloads.

(c) Backup and Restore: The assessee shall perform

regular scheduled System Backups and Application

Backups for all Managed Systems. The required scope

and frequency of Application Backups is defined in

the relevant ASRM and / or SLA. System Backups

and Application Backups may include (but not be

limited to), intra-day, daily, weekly, monthly,

quarterly, half yearly, calendar year-end and financial

year-end Backups.

The "Managed System" means a combination of

managed infrastructure, managed platform,

peripherals and managed software that must operate

in conjunction with one another in order to deliver a

"Managed System" includes "New Managed Systems".


From the above, it can be said that a managed

system, is a combination of hardware and software

and in respect of which, the assessee is required to

keep backups at regular intervals.

(d) Health Checks and Monitoring: "Health checks and

monitoring relates to the responsibilities of the

Supplier whereby the Supplier is required to perform

24X7X365 continuous operational health checks,

monitoring and timely event and Problem reporting to

guarantee the required levels of Availability of the

Managed Systems. Where feasible, such health

checks and monitoring should be fully automated".

Under this, the assessee is required to health check

the necessary infrastructures and softwares so that

they are available for rendering services. Further,

such health check are required to be fully automated.

(e) Availability Management: “This section describes

the Services to be provided by the Supplier for the

purpose of maintaining appropriate levels of

Availability for Production Environments. The Supplier

shall proactively monitor Managed Systems resources

and individual/clustered Managed Systems

components, in order to detect bottlenecks and

potential Problems, and to automatically (where

possible) recover from critical situations and / or

notify support personnel."

Under this, the assessee is required to monitor all of

its hardware and softwares and detect any

bottlenecks and repair them automatically.

(f) Database Administration: "This section describes

the Services to be provided by the Supplier in relation

to the management of tall databases forming part of

the Managed Systems from time to time. The primary


objective of the database administration is to ensure

continuous, uninterrupted and efficient database

operation."

This section describes the Appellant's responsibilities

to ensure continuous uninterrupted and efficient

database operation. The Appellant is required to

prepare and maintain an efficient database for

continuous and uninterrupted database operation.

The entire functioning of the database is

computerized. The assessee‟s staff is merely required

to oversee the functioning of the database and take

corrective measure in the event of any interruption.

(g) Capacity Management: "The primary purpose of

capacity management is to analyse current and

historical performance information in relation to the

Managed Systems, business events and configuration

of the Managed Systems and prepare

recommendations ensuring that adequate computing

resources are available to handle the workload

projected for production Managed Systems and

systems under development"

This section describes the assessee‟s responsibilities

for analyzing the current and historical performance

of the managed systems, and prepare

recommendations ensuring that adequate computing

resources are available to handle the work load

projected of data processing of the SCB. In other

words, this clause ensures that the assessee has

adequate capacity of managed systems for the

purpose of rendering data processing services.

(h) Inventory Management: "Inventory Management

includes identification and tracking of each Managed

Platform and each item of Managed Infrastructure

and their related financial attributes as they change


during their life cycles from entry into a Data centre

until eventual retirement".


for maintaining an up to date inventory of each

managed platform, each item of managed

infrastructure and at the end of each month, an up to

date copy of inventory is to be made available in the

Cocteau library which is accessible to staff of SCB

and selective team members of the assessee.

(i) Storage Management: "Storage management

includes the initial set-up, configuration, management

and maintenance of the storage capabilities for all

Managed Systems, ensuring that such Managed

Systems have efficient storage processes to provide

access to, performance of and recovery for data

resources."

Under this, the assessee is required to set-up,

configure, manage and maintain storage facilities for

managed systems.

(j) Performance Management: "Performance

management is the continuous process of evaluating

each Managed System to determine whether it can

deliver the level of performance required by SCB, and

then tuning it until it does."


to evaluate whether each managed system can

deliver the level of performance required by SCB for

handling data computing / processing services and

then tuning it until it does.

(k) Business Impact Analysis: "The Business Impact

Analysis process is an internal SCB process managed

and implemented by SCB, in order to identify key

business functions and recovery time frames, when


viewed in the context of monetary, workflow and

intangible effects of inoperability of the Managed

Systems (or anyone of them)."


in analyzing the impact in the event of failure of any

hardware or software.

(l) Disaster Recovery Planning and Testing: This

section describes the assessee‟s responsibilities for

planning and testing in advance, the disaster

recovery.

(m) Problem Analysis and Resolution: This section

describes the assessee‟s responsibilities in technically

diagnosing the problem which is affecting the

managed systems, identification of such problems

and implantation of resolutions.

(n) Change implementation: "Change implementation

describes the implementation of Change into the

Managed Environments. The Change Management

Process is intended to provide sufficient control in

relation to the implementation of a Change such that

associated risks are minimized during planning and

implementation, including from a logical security

standpoint."

This section lays down the procedure for

implementing any change in the data centre activities

and to minimise the effect of such change.

(o) Hubs and Switches: Responsibilities of the Supplier

shall include provisioning of fault tolerant, reliable

and resilient LAN environment (encompassing hubs

and switches) to ensure un-interrupted Availabilities

of the Managed Network for the smooth functioning of

the Managed Systems.



in managing an smooth and fault tolerant LAN

environment for smooth functioning of the managed

systems.

(p) Risk Reporting: This section describes the

assessee‟s responsibilities in reporting on various

operational risks in the hardware and software

responsible for rendering services to the SCB.

(q) Operating system installation and maintenance:


in researching, evaluating and providing a roadmap

for each operating software forming part of the

managed systems. It provides for identifying the

features of the new system and its benefits thereon.

(r) Systems software and utility installation and

maintenance: This section describes the assessee‟s

responsibilities in researching, evaluating and

providing a roadmap for all managed softwares.

(s) Software distribution: This section describes the

assessee‟s responsibilities in controlling, coordinating,

installing and managing the software distribution

process.

(t) Virus updates and management: The assessee is

required to comply with the antivirus standards and

procedures provided by the SCB group, to ensure

adequate protection for the managed systems. The

assessee is also required to comply with antivirus

updates and management processes stipulated by

SCB.

Under this, the assessee is required to antivirus

standards and procedures, prescribed by SCB so that

its data is protected.


A reading of the foregoing paras suggests that the

assessee is required to install and maintain and protect all

the infrastructures and softwares which are used for

rendering data computing services. All these services are

ancillary to the main services which is of "rendering data

computing services.”

15. Ld. counsel thus submitted that, Assessing Officer has

mainly cherry-picked some of the clauses from the agreement to

conclude that provision of services constitutes managerial and

technical services without actually understanding and

examining the terms of such clauses in the light of entire

agreement. He further submitted that the agreement has to be

understood in its overall context and also to be understood in

the light of objective of the parties entering into such an

agreement. The main object of the Cocteau agreement was

provision of data computing services by the assessee to SCB. It

was only looking to the amount of work and the number of

countries involved that the Cocteau agreement was made in

such detail so that both parties have defined obligations, roles

and responsibilities so that their respective interests are

protected. He again referred to the approval letter of RBI,

wherein RBI has clearly required SCB India to observe the

following terms and conditions:-

“(i) All original records, source documents and all books of

accounts will be maintained in India. Hard copies of

books of accounts and processed outputs must also be

maintained in India. Indian office should have full and

effective control over the critical process of debit /

credit of the accounts;


(ii) All bank office functions, including treasury functions,

are performed in India. Only processing of data can be

done overseas. Processed output should be received in

India on a day to day basis;

(iii) The bank will remain responsible for maintaining the

secrecy and confidentiality of the data processed/ to

be processed;

(iv) The bank must maintain clean record of cross border

data transmission with reference to data, time,

duration and media and the same should be made

available to Reserve Bank of India for inspection;

(v) The data relating to Indian operations should be kept

separate from the other data maintained at the data

centre;

(vi) Adequate back up and disaster recovery

arrangements should be in place:

(vii) The bank should ensure that reasonable security

precautions are taken in transmitting the data;

(viii) Any change proposed in its system of data processing

as applicable to Indian operations or any change /

upgradation in the hardware / net-working

technology or any material change in the legislative

frame work in the country in which data processing is

carried out which has an impact on banking secrecy

or has the effect of extending the jurisdiction on Indian

companies should be reported to us promptly with

declaration that such changes are inconsistent with

the conditions specified in this approval.”

16. Lastly, he submitted that for rendering of technical

services, human intervention is involved and here in this case,


for providing data processing services, no human intervention is

required. In this regard, his submissions are as under:-

“The assessee submits that the raw data fed into by the

SCB India are transmitted to the assessee. Thereafter, the

data so transmitted, stands captured by the mainframe

computers owned by the assessee wherein such data are

processed automatically and the final result is then

retransmitted to the SCB India. Such transmission and

processing of data is done automatically/mechanically by

computers. In such processing there is no human

intervention.

The assessee‟s employee has no role to play in the data

transmitted by SCB India for processing to the assessee,

neither is there any application of mind on such data by

such employed of the assessee. No verification or further

analysis is carried out on such data for the purpose of

generating reports. The processing and generation of report

is done automatically in the mainframe computers of the

assessee. The employees of the assessee are only required

to oversee as to whether the computer systems are

functioning properly and performing well, and there any

breakdown or fault in running of such systems.

The assessee reiterates that there is no human

intervention during the process of generation of reports

which is the main objective of Cocteau agreement. This is

done automatically. The Human intervention, as stated

above, is required only for maintaining, repairing and

monitoring the hardware and softwares which are

processing the raw data of SCB. It was also pointed by

drawing the Hon'ble Tribunal's attention to page no 66

para 2.3.1 of the Agreement that even the faults were to be

corrected automatically.

During the course of the hearing, the assessee had

submitted the photographs of its data centre which clearly

showed that the no human finds place in such centres. The


human intervention is required only for maintenance of

such data centres and managing such data centres in the

event of any failure.

The assessee further submits that number of transactions

transmitted by the SCB India to the assessee are in such

large numbers that would be impossible for any number of

human to apply their minds and generate reports. This can

also be understood with the help of an example:

Countries in which SCB has presence

68 (Actual)

Cities in which SCB has branches

X 10

Total Cities 680

Branches in each City X 5

Total Branches 3,400

Clients X 1,000

Total 34,00,000

Daily transactions X 1,000

Number of daily

transactions

3,40,00,00,000 or say,

340 Crore transactions

Days in a month X 30

Number of transactions in

month

1,02,00,00,00,000 or

say,

10,200 Crore

transactions

Number of month in a year X 12

Number of transactions in

a year

12,24,00,00,00,000 or

say,

1,22,400 Crore

transactions

By assuming in the example 1,000 daily transactions, the

total number of daily transactions in 68 countries

amounted to 340 Crore and in a month, such transactions

amounted to 10,200 Crore transactions which is

impossible to be handled without automation and then

generate report on daily basis in respect of each such

transactions for different countries with different

regulatory environment. Thus, it shows that number of


transactions captured into by the assessee can only be

processed through with the help of computers.

Further, attention is also invited to the Clause (a) of the

"Outsourcing objectives" which reads as under:

(a) to provide the SCB Group with a global reaching,

flexible, scalable and technologically innovative

approach to delivering data centre and related

computing services;

The above objective also shows that the outsourcing

objective are to be achieved only through a

"technologically innovative approach".

Thus, the above facts clearly shows that the data

processing services provided by the assessee to SCB, are

provided automatically through the use of mainframe

computers.

Further, reliance is also placed on the decision of the

Hon'ble Income-tax Appellate Tribunal, Mumbai in the

case of Siemens Limited vs. CIT (Appeals) - 11,

Mumbai (ITA No. 4356/Mum/2010) wherein it has been

held that:

“14 .....The learned CIT (DR) had argued that for observing

the process, preparing the report, issuance of certificate

and for monitoring of machines, human involvement is

definitely there, therefore, it cannot be held that there is no

human intervention. In our opinion, this cannot be the

criteria for understanding the term "technical services" as

contemplated in Explanation 2 to section 9 (1)(vii). If any

person delivers any technical skills or services or make

available any such services through aid of any machine,

equipment or any kind of technology, then such a

rendering of services can be inferred as "technical

services". In such a situation there is a constant human

endeavour and the involvement of the human interface. On


the contrary, if any technology or machine developed by

human and put to operation automatically, wherein it

operates without any much of human interface or

intervention, then usage of such technology cannot per se

be held as rendering of "technical services" by human

skills. It is obvious that in such a situation some human

involvement could be there but it is not a constant

endeavour of the human in the process. Merely because

certificates have been provided by the humans after a test

is carried out in a Laboratory automatically by the

machines, it cannot be held that services have been

provided through the human skills.

In view of the above, the assessee submits that the

processing of data is done automatically without any

human intervention and thus, the payments made by SCB

India to the assessee cannot be regarded as "FTS".

b. Standard facility:

The data processing services provided by the assessee are

in the nature of standard services, which are provided not

just to the SCB Group, but to the other entities as well. In

this regard, attention is invited to the page 3 of submission

on "Cocteau agreement and its purpose" wherein list of

customers to whom similar services has been rendered, is

provided. For ready reference, such list is reproduced here

as under:

i. Hong Kong Government (OGCIO);

ii. Manulife;

iii. Mass Manual;

iv. Noble;

v. China Construction Bank Asia ("CCBA");

vi. Bankard;

vii. Taifook.

The Hon'ble DR relied on the undernoted judgement to

state that the assessee is providing specialized service to

SCB.


Recently, the Hon'ble Supreme Court in the case of M/s.

Kotak Securities Ltd. (Civil Appeal No. 3141 of 2016)

has held that:

"8. ..... All such services, fully automated, are available to

all members of the stock exchange in respect of every

transaction that is entered into. There is nothing special,

exclusive or customized service that is rendered by the

Stock Exchange. "Technical services" like "Managerial and

Consultancy service" would denote seeking of services to

cater to the special needs of the consumer/ user as may

be felt necessary and the making of the same available by

the service provider. It is the above feature that would

distinguish / identify a service provided from a facility

offered. While the former is special and exclusive to the

seeker of the service, the latter, even if termed as a

service, is available to all and would therefore stand out in

distinction to the former. The service provided by the Stock

Exchange for which transaction charges are paid fails to

satisfy the aforesaid test of specialized, exclusive and

individual requirement of the user of consumer who may

approach the service provider for such assistance/service.

It is only service of the above kind that according to us,

should come within the ambit of the expression "technical

services" appearing in Explanation 2 of Section 9(1)(vii) of

the Act. In the absence of the above distinguishing feature,

service, though rendered, would be mere in the nature of a

facility offered or available which would not be covered by

the aforesaid provision of the Act."

In reply to the DR's argument and his reliance on the Apex

Court judgement, it was submitted that the same para as

relied upon by the Ld. DR supports the case of the

assessee. It was submitted that with the help of the same

infrastructure the assessee also provides services to

others. In this connection, the Hon'ble Tribunal's attention

was drawn to the use of client services by the assessee

and stated in Point 4.3.14. Further, the fact that the


assessee is already engaged in rendering data processing

services, is further substantiated by the "introductory

paragraph" of Cocteau agreement wherein it has been

stated that "the supplier companies have represented that

they are specialists in the provision of computing services

to the banking industry".

In light of the fact that similar services are being rendered

to the other entities as well as the decision of the Hon'ble

Supreme Court, it can well be said that the data computing

services provided to SCB, are not exclusive to it or to cater

to special needs of SCB. The assessee has also provided

similar services to other clients such as Hong Kong

Government (OGCIO), Manulife, Mass Manual, Noble,

China Construction Bank Asia ("CCBA"), Bankard and

Taifook. There is nothing special or exclusive about such

services.

Therefore, in view of the above submissions, the

judgement of the Hon'ble Tribunal submitted above and

the Apex Court judgement, payment by SCB India to the

assessee for provision of data processing services, is not in

the nature "fee for technical services" under Explanation 2

to Section 9(1)(vii) of the Act.”

17. On the other hand, the ld. DR after extensively referring to

the various observations and the findings of Assessing Officer

submitted that the data processing services which has been

provided by the assessee to SCB is nothing but rendering of

technical and consultancy services. Under the Cocteau

agreement, assessee has to provide technology and services to

the banking operations of SCB, which is evident from the

objectives given in para 1.1 of Schedule – 1 of the Cocteau

agreement. It is not only providing data processing services, but

also providing technology in the form of data centre,


infrastructure, connectivity and application technology for its

banking operations. This clearly means that assessee was

providing some kind of technical services. Not only that,

assessee has provided information consisting the working of, or

use of the invention, model, design or process which would fall

within the purview of „royalty‟ defined in Explanation – 2 to Sec.

9(1)(vi). In support, he again referred to the various clauses of

Cocteau agreement as reproduced by the Assessing Officer in

the impugned order. Thus, he submitted that the payments as

received by the assessee from SCB is liable to be taxed in India

both u/s 9(1)(vi) and also u/s 9(1)(vii) of the Act.

18. We have carefully considered the entire gamut of facts as

discussed above, relevant findings given in the impugned order

as well as the rival submissions made before us. The main issue

involved, which has been raised vide ground no. 1.1 is, whether

the payments made by Standard Chartered Bank India (SCB) to

the assessee is in the nature of „royalty‟ u/s 9(1)(vi) or „fees for

technical services‟. Since the assessee-company is incorporated

in Hong Kong and is providing services/facilities for processing

data to SCB from Hong Kong, therefore, the payment made by

SCB India to assessee has to be seen from the perspective of

domestic law, i.e. Income-tax Act and not under any treaty. The

assessee-company is mainly engaged in the business of

providing services/facilities for data processing through

computer hardware and software to banking entities. It had

entered into an agreement which has been termed as “Cocteau

agreement” with SCB for provision of data processing support,

which is for 68 countries with various branches. Under the said

„Cocteau agreement‟, the role and responsibilities of assessee in


respect of providing data processing services has already been

discussed in detail in the earlier part of the order including the

manner in which the entire processing activity is carried out.

The Revenue‟s case is that first of all, it is in the nature of

royalty and for coming to this conclusion, the main contention

of Assessing Officer is that, firstly, the assessee is not merely

providing data processing services, but also providing

technology in the form of data centre, infrastructure,

connectivity and application technology for its banking

operations; and secondly, it has created and provided facility in

the form of dedicated centres for exclusive use of SCB with

disaster recovery facility and storage facility. These

infrastructure facilities in the form of data centre, storage area

network, disaster recovery facility and dedicated network

connectivity is translated into functional process by defined

service flow for the various geographic locations for various

business application which would constitute process. The

assessee in this process has also made available SCB use of its

equipment, model, design, invention and process. After coming

to the conclusion that the payment is in the nature of “royalty”

within the scope of section 9(1)(vi), the revenue went further to

hold that, since assessee has provided technical, managerial

and consultancy services to SCB, therefore, it also falls in the

nature of „FTS‟ and for coming to this conclusion, certain

clauses in the Cocteau agreement has been referred to.

19. First of all, we will deal with the issue whether the said

payment falls within the realm of „royalty‟ or not. From the

perusal of the various clauses of the agreement which has been

referred to extensively by both the parties at the time of hearing


and discussed herein above, we find that the main objective of

the „Cocteau agreement‟ is to provide SCB group all across the

world, processing of data through a network of computer

systems in Hong Kong. In the entire agreement there is no

whisper of any technology transfer or application of technology

per se to SCB. This is a kind of outsourcing activity which has

been given by SCB to Atos to process its data from various

branches across the country. We agree with the contention of

the ld. Counsel that the reference to the various details in the

agreement is merely to ensure quality, standard and various

safeguards which are to be adopted in the course of processing

data especially looking the volume of data required to be

processed from all around the Globe. The provisions mainly

contains assessee‟s responsibility to ensure adequate facility,

systems and software which are located in Hong Kong and to

ensure that all the hardware which is used in Hong Kong is


infrastructure, manage proper performance of the hardware and

operating systems, ensure adequate technical support of

operating systems, to ensure system performance, maintain

adequate security measures and effective internal control

environment and also put in place appropriate disaster recovery

plan. All these are to be maintained by the assessee to conduct

the processing of data through computers. There is no providing

or giving any use or right to use of any process to SCB. The

technology, infrastructure, data centre, connectivity, etc. is

solely used by the assessee for its own purposes and not to

make available any such thing to SCB as explained by the ld.

Counsel. At the first stage, SCB transmits raw data through

operating software owned by it to the hardware facility of


assessee in Hong Kong. The assessee in Hong Kong mainly

receives the data so transmitted and at this stage there is

absolutely no use or right to use of any process of assessee in

Hong Kong by SCB. At the second stage, the raw data

transmitted by SCB is processed by the assessee in its

computer system/hardware as per the requirement of SCB and

at times may be using the application software owned by SCB.

At this stage also, SCB does not use or have any right to use

any process. At the third stage, the processed data is

transmitted electronically to SCB in India and at this stage also

there is no use or right to use of any process which is given or

made available to SCB. Here, in this case there is absolutely no

use of equipment also as alleged by the Department within the

definition given in clause (iv a) of Explanation 2 to Sec. 9(1)(vi) of

the Act. The said clause deals mainly with the „use‟ or „right to

use‟ any industrial, commercial or scientific equipment and

applies only to income from leasing of such industrial,

commercial or scientific equipment. This is borne out from the

Memorandum to the Finance Bill, 2001 through which the said

clause was inserted w.e.f. 1.4.2002, the relevant extract of the

Memorandum has already been incorporated in the earlier part

of our order and same proposition is also held by Mumbai

Bench in Yahoo India P, Ltd. Vs DCIT (supra). Here, in the case

of assessee, there is no income from leasing of any equipment.

The legislature thus, has clearly envisaged that clause (iva) is to

cover lease rent of industrial, commercial and scientific

equipment in the definition of royalty and the said definition has

been widened to that extent only. Thus, there is no concept of

right to use of equipment here in this case. So far as

applicability of Explanation 5 & 6 are concerned, we agree with


the contentions of ld. Counsel, as reproduced above, that same

would not be applicable at all in the case of assessee because,

firstly, Explanation 6 enlarges the scope of process to include

transmission by satellite cable, fibre optic, etc.; and secondly,

Explanation 5 is applicable where consideration is of any right,

property or information as defined in clauses (i) to (v) of

Explanation 2 only and not in clause (iva) for the reason that

Explanation 5 has been inserted with retrospective effect from

June 1, 1976. In other words, Explanation 5 has been inserted

retrospectively from the birth of Section 9(1)(vi) to clarify the

intention behind the legislation. Hence, Explanation 5 is to be

read with the Section 9(1)(vi) which was there on the statute as

on April 1, 1976. Whereas clause (iva) to Explanation 2 was

inserted from April 1, 2002. Thus, retrospective effect of clause

(iva) cannot be deemed from 1.06.1976 and hence it cannot be

held that Explanation 5 also applies to the said clause as this

clause never existed as on April 1, 1976 and accordingly, the

legislation cannot clarify the intention of the clause which never

existed on the said date. Hence Explanation 5 & 6 would not be

applicable in the case of assessee.

20. Further, for any payment to fall within the term of

“royalty” it is sine qua non that there should be some kind of a

transfer of any right in respect of various items as given in

Explanation – 2 or any imparting of any information or use of

any patent, invention, model, design, secret formula, process,

etc. Here, in this case, there is neither transfer of any of right in

respect of any patent, invention, model, design, secret formula

or process or trademark or any similar property by the assessee

to SCB, nor there is any imparting of any information or use of


any of similar nature of things. Here, the entire equipment and

technology which are used for processing the data is solely for

performing the activity of assessee for itself while rendering data

processing services to SCB. There is absolutely no transfer of

any technology, information, knowhow or any of the terms used

in Explanation 2 or any kind of providing of technology in the

form of data centre, infrastructure, connectivity and application

technology by the assessee to SCB for SCB‟s banking

operations. Thus, we are of the opinion that the payment made

by SCB to assessee-company does not fall within the realm of

“royalty” and hence cannot be taxed in India as royalty u/s

9(1)(vi) of the Act.

21. As regards whether the payment is in the nature of FTS

or not, we find that the provision regarding services provided by

assessee to SCB is mainly a standard facility and there is no

constant human endeavour or human intervention which is

required to provide the data servicing service. As stated earlier,

raw data fed into by SCB India are transmitted to assessee and

the data so transmitted stands captured by the mainframe

computers owned by assessee wherein such data are processed

automatically and the final result is then transmitted to SCB

India. All these transmission and processing of data is done

automatically by computers and there is not much human

involvement or intervention. There is no application of mind by

the employees of assessee on said data because, they are

processed through programmed software and neither any

verification nor any analysis is carried out by the assessee on

such data. The employees of the assessee-company are only

required to oversee as to whether the computer systems are


functioning properly and performing well and if there is any

breakdown or fault, then same needs to be taken care of. The

human intervention if at all is mainly for repairing and

monitoring the hardware and software of the assessee which are

processing the raw data of SCB and there is no human

involvement or endeavour for rendering any kind of technical or

consultancy services in data processing. It has been stated that

before us that even the faults are corrected automatically.

Further, looking to the number of volume of transactions

transmitted by SCB to assessee, it would be impossible for any

number of humans to apply their mind and generate reports.

This has been demonstrated by the ld. Counsel before us by

way of an example which has been already incorporated above.

Thus, the magnitude of transactions undertaken by assessee

itself goes to show that the computer systems installed by the

assessee in Hong Kong is standard facility through which data

is processed. In this regard, strong reliance was placed on the

decision of ITAT, Mumbai Bench in the case of Siemens Limited

(supra), wherein the Tribunal has emphasised upon the element

of human intervention for rendering of technical services. The

relevant observation in this regard reads as under:-

“------------------------In our opinion, this cannot be the criteria

for understanding the term "technical services" as

contemplated in Explanation 2 to section 9 (1)(vii). If any

person delivers any technical skills or services or make

available any such services through aid of any machine,

equipment or any kind of technology, then such a

rendering of services can be inferred as "technical

services". In such a situation there is a constant human

endeavour and the involvement of the human interface. On

the contrary, if any technology or machine developed by

human and put to operation automatically, wherein it


operates without any much of human interface or

intervention, then usage of such technology cannot per se

be held as rendering of "technical services" by human

skills. It is obvious that in such a situation some human

involvement could be there but it is not a constant

endeavour of the human in the process. Merely because

certificates have been provided by the humans after a test

is carried out in a Laboratory automatically by the

machines, it cannot be held that services have been

provided through the human skills.

Even in the latest decision of Hon'ble Supreme Court in the

case of M/s. Kotak Securities Ltd. (supra), (the relevant portion

of which has already been reproduced above), the Hon‟ble Court

opined that, if services are provided through fully automated

standard facility, the same cannot be reckoned as rendering of

technical services as contemplated u/s 9(1)(vii) of the Act. The

relevant observation reads as under:-

"8. ..... All such services, fully automated, are available to

all members of the stock exchange in respect of every

transaction that is entered into. There is nothing special,

exclusive or customized service that is rendered by the

Stock Exchange. "Technical services" like "Managerial and

Consultancy service" would denote seeking of services to

cater to the special needs of the consumer/ user as may

be felt necessary and the making of the same available by

the service provider. It is the above feature that would

distinguish / identify a service provided from a facility

offered. While the former is special and exclusive to the

seeker of the service, the latter, even if termed as a

service, is available to all and would therefore stand out in

distinction to the former. The service provided by the Stock

Exchange for which transaction charges are paid fails to

satisfy the aforesaid test of specialized, exclusive and

individual requirement of the user of consumer who may

approach the service provider for such assistance/service.


It is only service of the above kind that according to us,

should come within the ambit of the expression "technical

services" appearing in Explanation 2 of Section 9(1)(vii) of

the Act. In the absence of the above distinguishing feature,

service, though rendered, would be mere in the nature of a

facility offered or available which would not be covered by

the aforesaid provision of the Act."

Before us, the ld. Counsel has also pointed out that assessee is

also providing similar services to other clients like Hong Kong

Government and other big MNEs and there is nothing special or

exclusive about the services which are being rendered to SCB.

In view of the entire gamut of facts as discussed above, we are

of the opinion that the payment made by SCB to assessee-

company does not fall within the realm of „fees for technical

services‟ as contained in Sec. 9(1)(vii), albeit the assessee has

only provided a standard facility for data processing without any

human intervention. Accordingly, we hold that the said payment

is not taxable in India as „fees for technical services‟ in terms of

Sec. 9(1)(vii) of the Act. Thus, the issue raised in ground no. 1.1

is decided in favour of the assessee.

22. So far as the issue raised in ground no. 1.2 with regard to

rate of tax u/s 115A of the Act, it has been submitted that the

Assessing Officer has taken 40% of the gross amount on the

ground that SCB India has no role in „Cocteau agreement‟. The

ld. Counsel pointed out that the rate applicable should be

reckoned from the cut-off date of the agreement, which for the

purpose of Sec. 115A of the Act is before 1.6.2005 then it is 20%

and if agreement is post 1.6.2005 then it is 10%. Even, though

we agree with the ld. Counsel, however this issue will become


purely academic because we have already held that the amount

of payment received by assessee from SCB is not taxable in

India. Likewise, the issue raised in ground no. 1.3 is also being

rendered infructuous.

23. Regarding ground no. 2 it has been pointed out that

Assessing Officer may be directed to give credit of tax paid

amounting to Rs. 2 crores. Accordingly, we direct the Assessing

Officer to look into this issue and allow credit of tax paid as per

the directions given by Tribunal in the stay petition.

24. Regarding chargeability of interest u/s 234B of the Act, it

is admitted that this issue is covered in favour of assessee in

view of the decision of Hon'ble Bombay High Court in the case of

NGC Network Asia LLC, 313 ITR 187 (Bom.). Accordingly,

respectfully following the same we direct to delete the interest

u/s 234B.

25. Ground no. 4 is admitted to be premature and

accordingly, same is dismissed.

26. In the result, appeal of assessee is allowed in the manner

indicated above.

Order pronounced in the open court on 9th February,

2017.

Sd/- Sd/-

(ASHWANI TANEJA)

ACCOUNTANT MEMBER (AMIT SHUKLA)

JUDICIAL MEMBER

Mumbai, Date: 9th February, 2017

*SSL*


Copy to :

1) The Appellant

2) The Respondent

3) The CIT(A) concerned

4) The CIT concerned

5) The D.R, “L” Bench, Mumbai

6) Guard file

By Order

Dy./Asstt.Registrar

I.T.A.T, Mumbai

Documents

BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI …1)(vii) - Atos Informati… · PER AMIT SHUKLA, JM: The aforesaid appeals have been filed by the assessee against separate impugned