The assessee is a non-resident company incorporated under the tax laws of Hong Kong. During the assessment year in question, the assessee had entered into a worldwide contract for provision of computing services and data process support to Standard Chartered Bank in 68 countries including India.
As per the terms of the agreement, the assessee was responsible to ensure adequate systems, software, hardware and security at a standard facility in Hong Kong. The transmission and processing of data was done automatically and without any human intervention whatsoever. The employees of the assessee were only required to oversee the computer systems and ensure that they are functioning properly and performing well. Moreover, the assessee was also providing similar services to other clients outside India and there was nothing exclusive about the service which was rendered to Standard Chartered Bank in India.
During the course of the assessment, the assessing officer and the Dispute Resolution Panel taxed the receipts received from provision of such service as ‘royalty’ and ‘fees for technical services (‘FTS’)’ under section 9(1)(vi) and 9(1)(vii) of the Income Tax Act, 1961 (‘Act’).
Further, the assessing officer determined 40% of the gross amount as revenues without giving the assessee benefit of 10% under section 115A of Act. Aggrieved, the assessee filed an appeal before the Tribunal contending that income received by it, outside India, was not in the nature of either royalty or FTS and accordingly, not taxable in India.
After consideration of entire gamut of facts, the Tribunal concluded that computing services and data processing services conducted without much human interface or intervention do not qualify as FTS defined under section 9(1)(vii) of the Act. Further, maintenance of standard facility for execution of contract would not tantamount to use or right to use such facility and accordingly do not qualify as ‘royalty’ under section 9(1)(vi) of the Act.
Data processing services without human interface has been the subject matter of litigation in a number of cases. What the tax department fails to appreciate is that the provision with regards to royalty and FTS are mutually exclusive to each other. Income by way of ‘royalty’ connotes more passive in nature whereas FTS relates to rendering of managerial, technical or consultancy services. This decision comes as a relief to entities operating in countries with which India does not have a Double Taxation Avoidance Agreement.