TII Instant Update - 2018-TII-INSTANT-ALL-569

2018-TII-13-ARA-IT

AKAMAI TECHNOLOGIES INC: AAR (Dated: May 21, 2018)

Income Tax - Sections 9(1)(vi) & (vii) - India-USA DTAA - Articles 5(4), 12(3) & (4) - Copyright Act, 1957 - Section

Keywords: Computer programme - Fees for Included Services - FIS - Human involvement - 'Make available' - MOU - Royalty - right to use - Software product - Standard facility.

The Applicant, a tax resident of USA, is engaged in providing services for accelerating content and business processes online (Solutions). Accordingly, the Applicant had built its Akamai EdgePlatform® comprising of 73,000 secure servers equipped with proprietary software and the same was deployed in 70 countries. The Platform pulled content from the customer's web server which was then used to optimize routes and replicate content for faster and more reliable delivery. The Applicant had entered into a Reseller agreement with Akamai Technologies Solutions India Private Limited (Akamai India /Reseller) to sell its Solutions in India. Under such an agreement, the Akamai India was appointed as a non-exclusive reseller to resell the Applicant's Solutions directly to customers in India.

The Applicant submitted that the payments received by it from Akamai India, for the said services were not taxable in India as FTS since, the Solutions were not managerial or consultancy or technical in nature. It was also submitted that such Solutions were in the form of a standard facility. The content delivery was managed by the Applicant through its Akamai EdgePlatform®. The technology (Akamai EdgePlatform®) was used by the Applicant to deliver the standard facility did not affect the nature of the transaction. Further, the Applicant had also emphasised that the said Solutions were neither specialized nor exclusive and did not cater to any individual requirements of the customer. Hence, the same could not be termed as ‘technical services’ for the purposes of Explanation 2 to Sec. 9(1)(vii). Moreover, a human element was required for characterizing a service as a 'technical service'. The Applicant itself was using its own software and hardware to provide the Solutions to the customers/end users through Akamai EdgePlatform and thus, there was no human intervention. The human involvement was only in relation to the development of the Akamai EdgePlatform and for marketing or after sale services. Accordingly, the same could not be considered as provision of a 'technical service'. Thus, the payments received from Akamai India for the sale of the solutions would not be FTS as per Explanation 2 to Sec. 9(1)(vii).

The Applicant had also submitted that the arrangement with Akamai India does not “make available” any technical knowledge, experience, skill, know-how or processes, which enabled the person acquiring the services to apply the technology contained therein. It was reiterated that the Solutions were provided by the Applicant using the Akamai EdgePlatform® which was a standard facility. For interpreting the term “make available” used in Article 12(4)(b), the reliance was placed on the MOU between India and the US concerning FIS in Article 12 of the India-US Treaty.

On application, the AAR held that,

Whether payments received from the reseller for selling content delivery solutions to Indian customers through a customised online platform, without granting any right to use, are not to be treated as fees for included services as per the DTAA provisions - YES: AAR

Whether when the reseller is an indepenent agent having an agreement with the non-resident, it can still be construed as a PE as per Article 5(4) of the DTAA - NO: AAR

Whether when the sum paid is not towards IPRs the same can still be treated as royalty as per Sec 9(1)(vi) - NO: AAR

+ in the case of the Applicant, the Reseller Agreement does not entail providing any software (either in original or a copy) for the customer to use. The Applicant does not part with either any software or a copy of the software with the customer nor with the Reseller. The customer or the Reseller are not provided with any software either on a tangible medium like a CD nor any link through which the computer software is accessed/downloaded by the customer. The software of the Applicant is always housed in its own network and the Reseller/customers do not get either the software or a copy of the software or access to the software. Thus, the Applicant does not appear to be a software product distribution company. The Applicant is a technology company which addresses internet access issues by using its own network of hardware and proprietary software to provide facilities to its customers – such facilities as granted to the customers of the Applicant and end users of such customers, seamless and obstruction free access to these websites;

+ since the equipment is used by the Applicant itself or to provide Solutions to Akamai India which are re-sold to the India customers, and Akamai India / Indian customers are not granted any right to use any equipment, the transaction is not covered under the definition of royalty. Akamai India/ Indian customers are neither aware of the tangible property which is used for providing the service nor are they aware of the location of the tangible property. The arrangement merely enhances the performance of the customer's websites. This view gets support from our Ruling in Dell International Services India (P) Ltd., on the meaning of the expression “use” of equipment wherein it was held that "... The word 'use' in relation to equipment occurring is not to be understood in the broad sense of availing of the benefit of equipment. The context and collocation of the two expressions 'use' and 'right to use' followed by the words 'equipment' suggests that there must be some positive act of utilization, application or employment of equipment for the desired purpose. If an advantage is taken from sophisticated equipment installed and provided by another, it is difficult to say that the recipient / customer uses the equipment as such. The customer merely makes use of the facility, though he does not himself use the equipment ..." Applying the said principles to the facts of the Applicant's case, even though the Solutions may be provided using tangible property such as servers, databases, Akamai India / the Indian customers do not have possession and control over the Akamai EdgePlatform® / website / server / any tangible property used in the provision of the Solutions;

+ the Revenue has tried to bring the Applicant within the ambit of Sec. 14(b) and specifically Sec. 14(b)(ii) of the Copyright Act. Sec. 14(b) of this Act is only applicable to the “doing any act” or the “authorizing of the doing of any act” only in case of a computer programme or a copy of the computer programme. By implication, if the acts purported to be done are not in the context of computer software/programme copy, then this section will not be applicable. In a situation where the provisions of the Sec. 14(b) of the Copyright Act, as against its meaning in the context of the Applicant, do not apply to the Applicant, the entire provisions of the Copyright Act do not apply to the Applicant’s transaction since by the said transaction the Applicant does not act or provide rights to act in any “work” which involves any computer or any copy of the computer software. The fact that it is for similar reasons as described that the Copyright Act itself provides an exception to the general rule of Copyright in a computer programme copy, namely that Sec. 14(b)(ii) would not apply in the cases of a computer programme where the programme itself is not the essential object of the rental. This also merits consideration in favour of the Applicant. The essence of the Reseller agreement entered into between the Applicant and the Reseller in India is not for a computer programme. It is rather for a facility that is provided by the Applicant to the customers, using the Applicant’s own private network;

+ a plain reading of Explanation 2 to Sec. 9(1)(vi) which defines royalty brings within the ambit of royalty, consideration for trademarks. Further, several clauses in the Explanation 2 precede the work “trademarks” with the word patent, invention, model, design, secret formula or process and is followed by the words “similar property”. The perusal of the entire tenor of the agreement, the conduct of the parties, the business model and the various agreements with end customers, the invoices, does not bear out any intention of use of trademark per se by Akamai India for which payment has been made to the Applicant. Thus, when payments under Reseller agreement are not towards any IPR/Trademarks, it cannot be covered within the definition of royalty for the purpose of taxability;

+ the Reseller agreement nowhere entails any grant nor a transfer of right in the “process” nor is there any use of “process” as is required under the India-US DTAA. If at all there is a process which is “used”, it is by the Applicant itself to render the outsourced infrastructure services to the end user. The Reseller agreement does not contemplate any use of process by the re-seller. Thus, we agree with the contentions of the Applicant in this regard. The cited rulings, especially in Synopsis International, CGI Information Systems, Samsung Electronics, Citrix Systems, Gracemac Corporation, Cargo Community and Skillsoft have been rendered in the context of software distribution transactions where there was a copy of the software or computer programme, distributed by a third party intermediary, to the end user who “used it” for its internal purposes – such software being common place, shrink wrapped application software. The Solutions provided by the Applicant do not involve distribution of computer software nor use of such software by anyone. The Applicant itself uses its network of servers and software to provide a standard facility to customers for faster and secure content delivery to its users. Hence, the cases relied upon by Revenue are not applicable to the facts of the Applicant’s case;

+ as per the Reseller agreement with Akamai India, it has appointed the latter as a non-exclusive reseller who is authorised to market, resell and support the Applicant’s Solutions directly to customers of Reseller in India. Akamai India would resell the Applicant’s solutions by directly entering into contracts with customers in India and invoice the India customers for the Solutions, as per the clause of the Reseller agreement. Akamai India is required to dedicate adequate resources, financial and otherwise and maintain facilities and staff to re-sell the Solutions, as per the Reseller agreement;

+ the Reseller agreement does not create a principal-agent relationship between the Applicant and the Reseller. According to the Reseller agreement, the relationship which is established is that of independent contractors, neither party has power to direct or control the day-to-day activities of the other; and they are deemed to be acting as partners, joint ventures, co-owners or otherwise as participants in a joint undertaking; nor shall the officers, directors, employees, agents or representatives create or assume any obligation of or on account of the other party. Akamai India concludes contracts on its own name; does not maintain any stock of goods of the Applicant; purchases the Akamai Solutions from the Applicant for onward sale to Indian customers; secures orders and enters into contract with customers in India on its own account and not on behalf of the Applicant. Their relationship is on a principal-to-principal basis. Hence, none of the conditions enumerated in Article 5(4) are satisfied;

+ the Applicant contends that there is no creation of a PE for the Applicant in India under the provisions of Article 5 of India-US Treaty. In the written submissions of the Applicant and during the course of the hearing in this case, Revenue has argued that the Applicant’s income was taxable as FTS/FIS or Royalty in India. No submissions or arguments have been made to the effect that the Applicant has a PE in India. In any case, once we have ruled that income does not accrue or arise in the hands of the Applicant as Royalty or FTS/FIS, under the Act or under the India-US DTAA, the question of existence of a PE under Article 5 becomes irrelevant and academic, as no income can be attributed to it, if at all there was one. The Applicant does not have a PE in India. However, since the question of a PE coming into existence is a fact based finding, in the case of any facts changing in future, with regard to the inter se relationship between the Applicant and Akamai India, such as to impact any of the clauses mentioned in Article of the DTAA, the Revenue would be free to examine the same;

+ the payments received by the Applicant from Akamai India for the content delivery solutions would not be taxable as FTS within the meaning of the term in Explanation 2 to Sec. 9(1)(vii). The payments received by the Applicant are also not taxable as FIS under Article 12(4) of the India-US Treaty. The amount received by the Applicant from Akamai India do not constitute royalty within the meaning of the term in Explanation 2 to Sec. 9(1)(vi) and Article 12(3) of the India-US Treaty and hence not liable to tax. The Applicant does not create a PE in India in the facts and circumstances of the case under the provisions of Article 5 of India-US Treaty. Since no income arises in the hands of the Applicant in India, there is no requirement to withhold tax u/s 195.

In favour of Applicant

2018-TII-12-ARA-IT

SOCIETE DE PROMOTION ET DE PARTICIPATION POUR LA COOPERATION ECONOMIQUE: AAR (Dated: May 21, 2018)

Income Tax - Section 245Q(1), India-Portugal & India-France DTAAs - Article 12(4).

Keywords - Fee for technical services - FTS - interest on loans - Front-end fee - 'Make Available' - MFN Clause - Protocol.

The applicant is a subsidiary of Agence Francaise de Development which is a government owned financial institution, engaged in private sector financing in different countries. The Applicant had entered into agreements with clients, engaged in the business of developing infrastructure projects in India, for grant of loan facility. Pursuant to the agreements, the applicant would earn fees ( Front end fee, Commitment fee, Cancellation fee, Monitoring fee, Amendment fee and Reimbursement of out of pocket expenses), in addition to interest on loans. The applicant sought advance ruling on taxability of fees received by it from the Indian clients. The Applicant submitted that these fees were neither taxable as interest, nor as FTS. Further, the applicant stated that since there was no PE, it had no taxable business income. The Applicant sought to invoke “make available” clause from Indo-Portuguese DTAA, relying on clause 7 of the India-France Protocol (MFN clause). The Applicant contended that the definition of FTS in the Indo-Portuguese treaty is more restrictive than the definition of FTS in India-France DTAA and hence should be automatically read into the India-France Treaty.

The AAR held that,

Whether front-end fee paid by the Indian customer to a non-resident is in the nature of interest - NO: AAR

Whether when the front-end fee is in the nature of appraisal fee it qualifies the test of 'make available' to be bracketed as FTS - NO: AAR

++ with regard to commitment fee, cancellation fee, amendment fee and monitoring fee it is clear that they are directly related to debt claim as the fees are charged after disbursement of loan. Since the fee would be in relation to debt claim which is already in existence and hence would fall under the definition of interest under India France DTAA. Monitoring fee is also in relation to debt claim as the debt is already in existence, since the Applicant is monitoring the work through financial analysis and doing a time to time review of credit arrangement. Hence, commitment fee, cancellation fee, amendment fee and monitoring fee are also treated as interest income under India-France DTAA;

++ front end fee in the nature of appraisal fee is not interest and all other fees are in the nature of interest. Once front end fee in the nature of appraisal fee is not interest, it needs to be examined if it is FTS. The decision with regard to FTS would depend upon whether the “make available” clause of Indo-Portuguese DTAA could be automatically read into India-France DTAA without any notification. If there is no “make available” clause, then relying on Supreme Court decision in the case of GVK Industries Limited & another - 2015-TII-01-SC-INTL, it would be a case of FTS. However, if “make available” clause is to apply then it is clear that the Applicant is not making available technical knowledge, experience, skill, know-how or processes to the borrower. In that case it cannot be held that these fees are FTS;

++ in Delhi High Court case of Steria (India) Limited, it was held that the benefit of the lower rate or restricted scope of fee for technical services under the Indo-French DTAA was not dependent on any further action by the respective governments. It was held that the more restricted scope of fee for technical services as provided for in a DTAA entered into by India with another OECD member country shall also apply under the Indo-French DTAA with effect from the date on which the Indo-French DTAA or such other DTAA comes into force. Following the decision of Delhi High Court, it was held that the fees cannot be taxed as FTS as they do not pass the “make available” test;

++ so far as existence of PE is concerned, the Applicant has only given a certificate that there is no PE. This needs to be examined by the AO in the relevant assessment. Thus no ruling was given as to whether there was PE or not. With regard to reimbursement of expenses as well, proper facts are not given about the nature of reimbursement. Hence, it is not possible to give a ruling as to whether they are actual reimbursement or camouflage for interest.

Partly in favour of applicant