B. Ramakotaiah, A.M.

1. These two appeals are by the assessee against the orders of the CIT(A) XXXI, Mumbai 19.05.2009.

2. The grounds of appeal raised by the appellant are common in both the appeals except the amount involved. For the sake of reference the grounds raised in ITA No.4342/ Mum/2009 is reproduced as under:-

1. That on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) XXXI, Mumbai (hereinafter referred to as the CIT(A)) erred in confirming the decision of the Assessing Officer that the amount of US $ 19,11,754.37 payable by the appellant as data processing charges to M/s. Sema Group Outsourcing (Singapore) Pte Ltd. (now known as Schlumberger Sema Pte Ltd.) [SPL], is liable to tax in India and subject to withholding tax at 15% under Article 12(3)(a) of the double Taxation Avoidance Agreement [hereinafter referred to as"Treaty"] between India and Singapore.

2. That on the facts and in the circumstances of the case, the sum of US $ 19,11,754.37 payable by the appellant in favour of SPL, as referred to in ground no.1 above, neither being in the nature of "Royalties" or "Fees for Technical Services" within the meaning of Article 12 of the Treaty, but being in the nature of "Business Profits" which were not attributable to any "Permanent Establishment" of SPL in India, within the meaning of Article 5 of the Treaty, the same were not taxable in India as per Article 7 of the Treaty and in the said premises, the appellant had no obligation to withhold tax thereon under section 195 of the Income-tax Act,1961.

3. The Appellant is a Non-resident Company engaged in the business of banking in India through branches established in the different states of India. The appellant entered into a Hubbing agreement dated 26th Sept.1996(hereinafter referred to as the Agreement), with M/s. Sema Group Outsourcing (Singapore) Pte Ltd.(now known as Atos Origin IT Services Singapore Pte Ltd. and earlier also known as Schlumberger Sema Pte Ltd.) (hereinafter referred to as SPL), a company incorporated in Singapore. According to the Assessee, the agreement is for the provision of data processing support to the appellant for its business in India and that the data processing is done outside India. The main terms of the agreement in so far as it relates to a decision in the present appeals is as follows: (SPL is referred to as "Sema" and the appellant is referred to as "SCB")

1. Sema will make available SCB the following capacity in the Singapore Data Centre for SCBs exclusive use:-

From November 6th 1996 to 5th December 2001 inclusive 32 MIPS and 100 Gigabytes.

From March 6th 1997 to 5th December, 2001 inclusive - an additional 20 MIPS and 100 Gigabytes making a total of 52 MIPS and 200 Gigabytes in this period.

Sema Group will install disc capacity and supporting tape subsystem in Singapore as soon as possible so as to assist SCB in the migration of data from Hong Kong to Singapore prior to November 6th. Any capacity made available prior to November 6th will be provided without additional charge to SCB.

2. In respect of the subsequent capacity of 20 MIPS and 100 Gigabytes, Sema will make available to SCB such branches as will be required on demand by SCB up to a total capacity of 52 MIPS and 200 Gigabytes. SCB will always give a minimum of one calendar months notice of such additional requirements, and the first date upon which such notice can be served will be 6th February 1997, in order that the availability of the remaining resources can take place on or subsequent to 6th March 1997.

3. The service charges for the above requirements will be S $ 9.798 million for the entire period of five years. The scope of the price for all four metros will include the following elements:

- Maintenance CPU

- Disc space

- 36 track tape subsystem

- Staff

- Site Preparation

- Upgrade to communications front end processor

- System software

- Disaster recovery (In line with Contractual levels.)

The Service charges also takes into account lower maintenance and running costs compared with those of the current configuration in Singapore at 1st September 1996.

....

8. Should any of the capacity set out in 1 above not be required in connection with India Hubbing requirements at any time during the five years to November 5th 2001, SCB will have the right to utilize any residual capacity at no extra cost and on the same terms in connection with any other similar requirements it may have for data processing to be performed in the Singapore....

4. As can be seen from clause-1 of the agreement SPL has a Data Centre at Singapore and it has to make available for exclusive use by the appellant from November 6th 1996 to 5th December 2001 32 MIPS and 100 Gigabytes to start with. It is not in dispute that the tenure of this agreement was further extended to cover the period in dispute in these appeals. The Agreement does not make any reference to any data processing to be carried out by SPL for the appellant at Singapore. However, clause-8 of the Agreement mentions that the appellant will have the right to utilize any residual capacity at no extra cost on the same terms in connection with any other similar requirement it may have for data processing to be performed in Singapore. Further, the permission granted by Reserve Bank of India to the appellant vide letter dated 6/11/1996, shows that SPL was carrying out data processing for the appellant at Singapore. As per the agreement appellant was required to pay SPL fixed monthly instalments with effect from January 1, 1998 over a period of 60 months. The Reserve Bank of India (RBI) had granted permission to renew the agreement between the appellant and SPL for data processing at SPLs Data Centre at Singapore vide letter of RBI dated December 19, 2001 subject to conditions stipulated in their letter dated November 6, 1996.

5. As per the agreement the appellant had to make payment to SPL for services rendered. The appellants filed applications u/s.195(2) of the Income Tax Act, 1961 (hereinafter referred to as "Act") before the AO for issue of the No Objection Certificate for making payments to SPL without deduction of tax at source at the time of making payment. According to the appellant, the nature of the fees paid by it to SPL does not fall within the ambit of the definition of royalty given in Section 9(1)(vi) of the Income Tax Act, 1961 (hereinafter referred to as the Act) as well as Article 12(3) of the Double Taxation Avoidance Agreement between India and Singapore (hereinafter referred to as the Treaty). It was the further claim of the Assessee that the receipts from the appellant in the hands of SPL would be in the nature of business profits and since SPL did not have a Permanent Establishment (PE) in India, the receipts are not income chargeable to tax in India in view of Article-7 of Treaty. It is an admitted position that in case the fee is not considered as royalty then the same would be business profits of SPL and since SPL did not have a PE in India, its business income in India would not be taxable under the Act.

6. As we have already seen the Agreement is not very clear about the nature of services to be rendered by SPL. Based on Clause-8 of the Agreement and approval of the RBI referred to earlier, the appellant claimed that under the agreement SPL was processing data for the appellant in Singapore for appellants exclusive use. The appellant submitted before the AO that the consideration payable to SPL for the data processing services has been computed having regard to the following -

1. Computer hardware and system software for operations of the appellants computer applications.

2. Computer hardware to support data communications for using the services as stated above.

3. Manpower to handle daily and periodic computer based processing.

4. Suitable environment for housing the computer systems.

5. Disaster recovery capability for the services provided and testing of the same twice a year.

7. The nature of services rendered by SPL to the appellant was explained by the appellant in their letter dated 7.11.2003 in one of the application filed u/s.195(2) of the Act, dated 9/10/2003, for no objection to remit payments to SPL without deduction of tax at source, as follows:

1. The input data i.e., the raw data relating to branch transactions is by appellant via application software owned by it and then transmitted to SPL mainframe computer in Singapore for processing.

2. The application software owned and used by the appellant in this regard is not designed by SPL nor acquired from SPL.

3. After the raw data is transmitted into the hardware facility of SPL in Singapore, SPL staff based in Singapore process the raw data on an application software owned by appellant using the mainframe computer of SPL.

4. The raw data is processed by SPL staff as per the requirements of appellant using fed the application software owned by the appellant.

5. The processed data, i.e., the output data is transmitted electronically to the appellant in India using the software provided by the appellant, which is not designed by SPL.

8. SPL further confirmed by their letter dated 4/4/2005 filed before the AO (in the form of confirmation by Atos Origin), the nature of services performed by it for the appellant. The same refers to the following as the nature of services performed by SPL pursuant to the Agreement.

a) The appellant would send raw input bank transaction data through telecommunication lines to SPL at Singapore for processing.

b) The processing is done by SPL at Singapore as per appellants requirement using system hardware and software (through human intervention), whenever required.

c) The operating software of SPLs mainframe computer was developed by the manufacturer of the computer and third party vendors and is not designed by SPL for the specific processing of appellants data.

d) The output of the processing generated in the form of reports as per appellants specifications are transmitted to appellant in India through telecommunication lines.

e) SPL also keeps the back-up of the processed data which are made available to appellant upon request.

Accordingly, the appellant filed an application for an NOC before the AO, who vide his order dated 23.01.2004 directed the appellant to deduct TDS @ 15% on the gross payment to be made or payable to the service provider (SPL). The other order was dated 18-02-05 involving an amount of USD 23,96,893.66 contested in appeal ITA No.4392/Mum/2009.

9. This mater was contested before the CIT(A) who vide his order discussed the issue with reference to Kotak Mahindra Primus Ltd. 11 SOT 578( Mum) which has been cited and relied before him by assessee and also relied on his predecessor order in main appeal No. CIT(A)XXXI/DDIT2()/IT- 50/04-05 dated 27.03.2006.

10. At the outset it was submitted this issue has already been decided by the Tribunal in assessees own case in ITA No. 3824 to 3828/Mum/2006 and ITA No. 1932 to 1938/Mum/2008 dated 11th May 2011 in which the Tribunal has considered the issue and held that the amount paid to M/s. Sema Group Outsourcing (Singapore) Pte. Ltd. cannot be considered as royalty and similar decision was also given in the hands of the recipient M/s. Atos Origin IT Services Singapore Pte. Ltd. in ITA No. 2428/Mum/2009 dated 27.05.2011 and ITA/1457/mum/2008 dt 11-05-11.

11. The learned D.R. without conceding the issue fairly admitted that the facts are similar to the earlier order decided in assessees case and the issue was covered by the said decision of the Tribunal.

12. We have perused the record and considered the matter carefully. The dispute is regarding taxability of the amounts paid by assessee to M/s. Sema Group Outsourcing (Singapore) Pte. Ltd. (now name changed to Atos Origin IT Services Singapore Pte. Ltd.) for the use of disc space in the hardware of the said company at its data centre in Singapore. The ITAT in assessees own case on similar payments in ITA No. 3824 to 3828/Mum/2006 & ITA NO. 1932 to 1938/Mum/2008 vide order dated 11th May 2011 has considered the issue and held as under: -

29. We have very carefully considered the rival submissions. At the outset we have to reject the argument of the learned D.R. regarding the absence of evidence to show that SPL carried out the work of data processing for the appellant at Singapore. In this regard, we have already noticed that the Agreement is not clear in as much as there is no reference to any data processing to be carried out by SPL at Singapore. We have also referred to the fact that the RBI permissions refer to the payment by the appellant to SPL as towards data processing to be carried out by SPL at Singapore. Before the AO the Appellant has explained the nature of the transaction between the appellant and SPL. SPL also filed a confirmation before the AO regarding the nature of services rendered by it to the appellant. The AO did not at any stage dispute or call for any additional evidence regarding the claim made by the appellant before him. It is not open to the learned D.R. at this stage to raise dispute regarding the nature of services claimed to have been rendered by SPL. We therefore have to proceed on the basis of the agreement and the claim made by the appellant before the AO.

30. The nature of services rendered is very important to come to a conclusion as to whether the payment by the appellant to SPL is in the nature of Royalty. The facts are therefore recapitulated. SPL had a Data Centre at Singapore and it agreed to make available for exclusive use by the appellant the From November 6th 1996 to 5th December 2001 inclusive 32 MIPS and 100 Gigabytes and thereafter increased capacity. It is not in dispute that the tenure of this agreement was further extended to cover the period in dispute in these appeals. The Agreement does not make any reference to any data processing to be carried out by SPL for the appellant at Singapore. However, clause-8 of the Agreement mentions that the appellant will have the right to utilize any residual capacity at no extra cost on the same terms in connection with any other similar requirement it may have for data processing to be performed in Singapore. Further, the permission granted by Reserve Bank of India to the appellant vide letter dated 6/11/1996, shows that SPL was carrying out data processing for the appellant at Singapore. As per the agreement appellant was required to pay SPL fixed monthly installments with effect from January 1, 1998 over a period of 60 months. The Reserve Bank of India (RBI) had granted permission to renew the agreement between the appellant and SPL for data processing at SPLs Data Centre at Singapore vide letter of RBI dated December 19, 2001 subject to conditions stipulated in their letter dated November 6, 1996. The appellant submitted before the AO that the consideration payable to SPL for the data processing services has been computed having regard to the following -

1. Computer hardware and system software for operations of the appellants computer applications.

2. Computer hardware to support data communications for using the services as stated above.

3. Manpower to handle daily and periodic computer based processing.

4. Suitable environment for housing the computer systems.

5. Disaster recovery capability for the services provided and testing of the same twice a year.

31. The nature of services rendered by SPL to the appellant was explained by the appellant in their letter dated 7.11.2003 in one of the application filed u/s.195(2) of the Act, dated 9/10/2003, for no objection to remit payments to SPL without deduction of tax at source, as follows: (the same was also confirmed by SPL in their confirmation filed before the AO)

1. The input data i.e., the raw data relating to branch transactions is fed by appellant via application software owned by it and then transmitted to SPL mainframe computer in Singapore for processing.

2. The application software owned and used by the appellant in this regard is not designed by SPL nor acquired from SPL.

3. After the raw data is transmitted into the hardware facility of SPL in Singapore, SPL staff based in Singapore process the raw data on an application software owned by appellant using the mainframe computer of SPL.

4. The raw data is processed by SPL staff as per the requirements of appellant using the application software owned by the appellant.

5. The processed data, i.e., the output data is transmitted electronically to the appellant in India using the software provided by the appellant, which is not designed by SPL.

32. The case of the Revenue is on two counts. Firstly according to the revenue the payment by the appellant to SPL is in the nature of royalty because it is a payment falling within Clause (iii) of the Explanation (2) to Sec.9(1)(iv) of the Act and Article 12(3)(a) of DTAA since the payment in question was a consideration for the use of process. According to the revenue SPL has provided a process by providing its computer facility to process the data provided by the appellant. The fact that the software and hardware of the computer system of the SPL has not been designed or manufactured by SPL or the fact that SPL itself did not design, assemble and set up the computer system is no ground to hold that the payment is not for use of any process. SPL without being the owner of the process can obtain various components from the market including copyrighted software or using software and hardware available from the market. It can also design or can get the software and hardware designed for use of its computer system for the efficient processing of data. In clause (iii) of explanation (2) there is no requirement that the process should be a copy right process of which the provider should be the owner. It is sufficient if the provider of a process provides such a process for which payment is made to him.

33. The second reason assigned by the revenue is that the payment falls within the ambit of Expln-2 clause (iva) to sec. 9(1)(vi) of the Act viz., the use or right to use, any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB and Article 12(3)(b) of the Treaty which provides that payment of any kind received as a consideration for the use of, or the right to use any industrial, commercial or scientific equipment.

34. We shall take up for consideration the first reason assigned by the Revenue authorities viz., that the payment in question is a payment for use or right to use process. In this regard, we notice that the AO has made vague observations while concluding that the payment in question is Royalty. The CIT(A) has held that SPL provided a process by providing its computer facility to process the data provided by the appellant. The CIT(A) has further gone on to hold that the fact that SPL was not manufacturer of the hardware or the software of the computer system will not make any difference. According to CIT(A) there is no requirement in clause (iii) of expln.2 to Sec.9(1)(vi) of the Act that the process should be owned by the person who allows a right to use the process. This line of reasoning of the CIT(A) in our view is fallacious. We have already seen the manner in which the appellants use the mainframe computer owned by SPL. The appellant transmits raw data through operating software owned by it to the hardware facility of SPL in Singapore. SPL merely receives the data so transmitted. Thus at this stage there is no use or right to use any process of SPL by the appellant. The next stage is that the raw data transmitted is processed by SPL staff as per the requirements of appellant using the application software owned by the appellant. At this stage the appellant 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. The third stage is that the processed data, i.e., the output data is transmitted electronically to the appellant in India using the software provided by the appellant, which is not designed by SPL. Even at this stage there is no use or right to use any process. The application software by which data is transmitted to hardware at Singapore and processed by SPL at Singapore is owned by the appellant. Thus what is used by the Appellant is the Computer hardware owned by SPL. The payment in question can therefore be said to be a payment for a facility which is available to any person willing to use the facility as laid down by the Honble Madras High Court in the case of Skycell communications Ltd. Vs. DCIT : 251 ITR 53 (Mad). The system software which is embedded in the computer hardware by which the computer hardware functions is not owned by SPL and SPL only has a licence to use the system software. SPL employs manpower to process the data and also provides disaster recovery. The consideration received by SPL from the appellant is therefore for using the computer hardware which does not involve use or right to use a process. The data is received by application software which is owned by the appellant. The consideration paid by the appellant to SPL is for processing its data. This part of the consideration cannot be said to be a consideration paid for use or right to use process as the processing of the data is done by SPL using the system software owned by the appellant. Therefore it cannot be said that the payment by the appellant to SPL is Royalty within the meaning of Article 12(3)(a) of the treaty.

35. The CIT(A) in coming to the conclusion to the contrary has placed reliance on the decision in the case of Asia Satellite Telecommunication Co. Ltd. 85 ITD 478 (Del)(SB) for the proposition that process need not be secret process and that the definition in Sec.9(1)(vi) Expln.2 and the treaty are one and the same. The aforesaid decision of the Special Bench has since been reversed by the Honble Delhi High Court in the case of Asia Satellite Telecommunications Co. Vs. CIT : 332 ITR 340 (Del) wherein it was held that where transponder is allowed to be used for transmitting signals, it would not amount to allowing right to use process. The decision of the AAR in the case of P.No.30 of 1999 (supra) is materially different from the facts as it prevails in appellants case. In the case before AAR, an entity (Non-Resident) maintained a centralised computer in the USA. The centralised computer or the central processing unit (CPU) which was accessed and used by various group entities located worldwide through a consolidated data network maintained in Hong Kong. The transactions done by a traveller in a particular country were reported to a centralised computer in that country. In India, this was done by an Indian company, located at Delhi. The said Indian company received information on computer through telephonic and microwave links about the use of credit cards and travellers cheques by travellers all over the country. The Indian company also serviced thirteen group companies in Asia and the Pacific, in a similar manner. The Nonresident charged the Indian company, for the use of its computer set up in Hong Kong and that in the USA. As can be seen from the facts of the aforesaid case, the Indian company had a right to access the data by having access to the computer maintained at USA. In the present case before the Tribunal, the appellant did not have any right to access the mainframe of the computer at Singapore. The Appellant can only send data to the mainframe and receive back processed data in a particular form. In the case before the AAR, the right to access the software (by encryption) of the non-resident was a right to use secret process and this is a very crucial distinction. Thus the facts that prevailed in the case before AAR are totally different from the facts of the Appellants case.

36. The decision relied upon by the learned counsel for the Appellant in the case of Kotak Mahindra Primus Limited (supra), that payment made for specialized data processing of raw data using mainframe computers located abroad is not liable to tax as royalty and the company is not liable to withhold tax from such payments in our view is squarely applicable to the facts of the present case. Kotak Mahindra Primus Ltd., the taxpayer, an Indian Company, was engaged in the business of providing finance for purchase of cars. The company was jointly formed by Kotak Mahindra Finance Limited, India and Ford Credit International Inc., USA (FCII). The company which is engaged in the business of providing finance for purchase of cars, had entered into a data processing agreement with Ford Credit Australia Limited (FCAL) to enable it to upload the raw data in the mainframe computer in Australia and the output data, after due processing would be transmitted back to the company. The fee payable had a fixed component for annual maintenance and licensing charges and a variable component based on the amount of data processed. On the above facts, the question that was to be considered by the Tribunal was as to whether the payment by the taxpayer was Royalty and therefore taxable in India and therefore there was an obligation to withhold tax at source at the time of making payment to the non-resident. The Tribunal held that though the payment had a fixed and a variable component they had to be taken together and not in isolation. The fixed fee did not give any independent rights to the Indian company as it was only paid as the company could not avail the unit cost of processing unless the fixed fee was paid. The Tribunal held that both these payments taken together were only payments for processing of data. The Tribunal further observed that no part of the payment could be said to be for use of specialized software on which data is processed as no right or privilege were granted to the company to independently use the computer. The company had no control over the actual processing of data which was exclusively controlled by FLCA. It was further observed that the company did not have any physical access or control over the mainframe computer therefore it could not be said that the payment was for the use or right to use of mainframe computer. The Tribunal held that the payment was being made for data processing and not for the use of the computer though the use of the computer was an important aspect of the activity of data processing. The Tribunal did not accept the Ruling of the Authority for Advance Rulings (AAR) in the case of P.No.30 of 1999 In re (supra) where it was held that such payments are in the nature of royalty and therefore subject to tax. The Tribunal held that it was not in agreement with the views of the AAR. The Tribunal also observed that the decisions of the AAR could at best only have a persuasive value and the ruling was only binding on the applicant and therefore they were not obliged to follow it. For the reasons given above, we hold that the payment by the appellant to SPL is not "Royalty" within the meaning of Article 12(3)(a) of the treaty.

37. We shall now examine the second reason assigned by the revenue authorities for treating the payment in question as royalty viz., consideration paid for use or right to use any industrial, commercial or scientific equipment within the meaning of Article 12(3)(b) of the Treaty.

38. The conclusion of the CIT(A) in this regard was that the payment being made by appellants to SPL was for the purpose of availing CPU and disc capacity and supporting tape subsystem capacity i.e. the capacity which has been created for the exclusive use of appellants. The further reasoning is that though the appellants do not have any physical possession of the property, it is exercising constructive control over the infrastructure facilities because these facilities can be utilized only by the appellants as per the terms of agreements. According to CIT(A), the arrangement was one of renting out disc space in the hardware system of SPL in favour of the appellants and the payments made by appellants to SPL is for right to use the scientific equipments.

39. The meaning of the expression "use or right to use" as used in Article 12(3)(b) has to be first understood. In the case of ISRO Satellite Centre(ISAC), In Re (Supra), the AAR had to decide whether the consideration paid by ISRO to Inmarsat Global of the U. K. for leasing of the Inmarsat navigation transponder capacity, would be Royalty under the DTAA between India and U.K. The Authority after looking into the nature of the agreement, ruled that by earmarking a space segment capacity of the transponder for use by the applicant, the applicant did not get possession (actual or constructive) of the equipment of Inmarsat Global of the U. K.; nor did the applicant use any equipment of Inmarsat Global of the U. K. The payment made by the applicant could not, therefore, be regarded as payment made for the use of the equipment of Inmarsat Global of the U. K. This decision was followed by the Honble Delhi High Court in the case of Asia Satellite Telecommunications Ltd. (supra). In the case of Dell International Services (India) P.Ltd. In Re (supra) it was held the word "use" in relation to equipment occurring in clause (iva) was not to be understood in the broad sense of availing of the benefit of an equipment. The context and collocation of the two expressions "use" and "right to use" followed by the word "equipment" indicated that there must be some positive act of utilization, application or employment of equipment for the desired purpose. If an advantage was taken from sophisticated equipment installed and provided by another, it could not be said that the recipient/customer "used" the equipment as such. The customer merely made use of the facility, though he did not himself use the equipment. What was contemplated by the word "use" in clause (iva) of Explanation 2 to section 9(1)(vi) was that the customer came face to face with the equipment, operated it or controlled its functions in some manner. But if it did nothing to or with the equipment and did not exercise any possessory rights in relation thereto, it only made use of the facility created by the service provider who was the owner of the entire network and related equipment. There was no scope to invoke clause (iva) in such a case because the element of service predominated. The predominant features and underlying object of the agreement unerringly emphasized the concept of service. That even where an earmarked circuit was provided for offering the facility, unless there was material to establish that the circuit/equipment could be accessed and put to use by the customer by means of positive acts, it did not fall within the category of "royalty" in clause (iva) of Explanation 2 to section 9(1)(vi) of the Act. The ITAT Mumbai in the case of Kotak Mahindra Primus Ltd. (supra) has also taken a similar view.

40. Though the payment made for the user of equipment, is included in the scope of "royalties" under the UN model tax treaties, the same is currently not included in the scope of "royalties" under the OECD model tax treaties. Earlier, the OECD model tax treaties contained such a provision, however, by virtue of the amendments made to such model in the year 1977, payment made for the user of equipment, was deleted from the scope of "royalties However, in a Report to Working Party No.1 of the OECD Committee on Fiscal Affairs, submitted by the Technical Advisory Group of OECD on Treaty Characterization of Electronic Commerce Payments, dated February 1, 2001, the Technical Advisory Group of OECD specifically considered the scope of payments made for the user of equipment in the context of electronic commerce related issues. Since a number of tax treaties across the world still covered such payments within the scope of "royalties". Commenting upon under what circumstances a computer hardware, namely an equipment, could be said to have been made available for user to a customer, the Technical Advisory group of OECD brought out the following "tests", the fulfillment of all or some of which would render the transaction to be user of equipmenta)

a) The customer is in physical possession of the property.

b) The customer control the property.

c) The customer has a significant economic or possessory interest in the property.

d) The provider does not bear any risk of substantially diminished receipts or substantially increased expenditure if there is nonperformance under the contract.

e) The provider does not use the property concurrently to provide significant services to entities unrelated to the service recipient.

f) The total payment does not substantially exceed the rental value of the equipments for the contract period.

On a close reading of the said tests" suggested by the Technical Advisory Committee of OECD, it appears that in order to constitute user of equipment, the customer should actually have domain or control over the equipment, or in other words, the equipment should be at its disposal. The customer should be in a position to use the equipment in its business activities. However, if a customer is given the mere access to some infrastructural facilities of the service provider, in a situation where the service provider has all the control, disposition and possession of such infrastructure and also the service provider operates such infrastructure on its own, then the customer cannot be said to have been assigned a right to use the equipment in the form of the infrastructure. In that case, the transaction partakes of the character of provision of services or facilities by the owner of the infrastructure in favour of the customers, as against giving the infrastructure to the customer itself for being used in the manner desired by the customer. Incidentally, the Technical Advisory Committee of OECD has expressly clarified that data warehousing services would not give rise to user of equipment, since the customer does not have possession or control over the equipment and shall utilize the equipment concurrently with other customers.

41. The facts of the present case are that SPL has a Data Centre at Singapore and as per the agreement between the appellants and SPL it has to make available for exclusive use by the appellant 32 MIPS and 100 Gigabytes in its computer hardware at its Data Centre in Singapore. From November 6th 1996 to 5th December 2001. From March 6th 1997 to 5th December, 2001 an additional 20 MIPS and 100 Gigabytes has to be made available making a total of 52 MIPS and 200 Gigabytes in this period. SPl has to provide to the appellants, the following elements:

- Maintenance CPU

- Disc space

- 36 track tape subsystem

- Staff

- Site Preparation

- Upgrade to communications front end processor

- System software

- Disaster recovery (In line with Contractual levels.)

We have already seen the nature of services rendered by SPL to the appellants. The appellants as already seen have no right to access the computer hardware except for transmitting raw data for further processing. The appellants have no control over the computer hardware or physical access to it. There is nothing to show positive act of utilization, application or employment of equipment for the desired purpose. The appellants cannot come face to face with the equipment, operate it or control its functions in some manner. The appellants had no possessory rights in relation to the computer mainframe. The appellants took advantage of a facility of use of sophisticated equipment installed and provided by another, it could not be said that the recipient/customer "used" the equipment as such. The appellant merely made use of the facility, though they did not themselves use the equipment. There is nothing on record to establish that the hardware could be accessed and put to use by the appellants by means of positive acts. Therefore it cannot be said that the payment is royalty within the meaning of Article 12(3)(b) of the treaty.

42. The learned D.R. has placed reliance on the decision of the AAR in the case of Cargo Community Network Pte. Ltd. in Re (Supra). The question that was considered by the AAR was as to whether Providing access to internet based air cargo portal outside India which an Indian subscriber paying fees for access and use of portal for booking cargo with airlines, training subscribers and help connected therewith and Fees paid for such use, is income that can be said to arise in India and whether they are in the nature of royalties and fees for technical services. The AAR held that the fee so paid is Royalty and Fees for technical services and therefore Taxable in India. As rightly contended on behalf of the Appellant, the right to access various airlines for booking cargo is a vital distinction. In such cases, there is a positive right to use the equipment. The decision in the case of Frontline soft Ltd. (Supra) is a case where mere right to use an equipment was held to fall within the ambit of clause(iva) of Expln.-2 of Sec.9(1)(vi) of the Act. The tribunal in coming to the above conclusion followed the ruling of the ITAT Delhi Special Bench in the case of Asia Satellite Telecommunications Co. Ltd. Vs. DCIT 78 TTJ (Del) 489, which has been overruled by the Honble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. (Supra). We are of the view that the proposition laid down in this decision is contrary to the decision of the Honble Delhi High Court in the case of Asia Satellite (supra). The decision in the case of Millennium Infocom Technologies Ltd. Vs. ACIT(Supra) was a case where the question was whether payment for hosting websites on servers in USA i.e., whereby space is provided on the servers by the non-resident for the purpose of hosting website was royalty. The Tribunal ruled that clause (iva) to Expln.2 to Sec.9(1)(iv) was inserted by the finance Act, 2001 w.e.f. 1-4-2002 whereby the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in Sec.44BB was to be treated as royalty, since in the case related to AY 01-02 the tribunal held that the payment was not royalty. According to the learned D.R. the case of the Assessee being one relating to period after 1-4-2002, the payments should be treated as covered by clause(iva) to Expln.2 to Sec.9(1)(iv) of the Act. In our view the decision rendered as above cannot be said to be strictly a precedent as the issue was neither discussed or argued by the parties. Besides the above, the said decision is contrary to decision of the Honble Delhi High Court in the case of Asia Satellitte (supra). The decisions relied upon by the learned D.R. do not therefore support the case of the revenue. We therefore hold that the payment by the appellants to SPL is not royalty within the meaning of Article 12(3)(b) of the treaty.

13. For the reasons cited above with which we agree, respectfully following the above, we hold that the payments made by the assessee to SPL is not royalty within the meaning of Article 12(3)(b) of the treaty. As the business profits are not taxable by virtue of DTAA there is obligation to withhold tax thereon u/s 195 of the Act. The grounds are allowed.

14. In the result, assessees appeals are allowed.

Order pronounced in the open court on16th September 2011.