Post on 08-Apr-2020
IN THE HIGH COURT OF KARNATAKA AT BANGALORE
DATED THIS THE 9TH DAY OF JUNE, 2014
PRESENT
THE HON' BLE MR. JUSTICE N.KUMAR
AND
THE HON' BLE MR. JUSTICE B.MANOHAR
ITA.No.209/2008
c/w
ITA Nos.208/2008, 210/2008, 212/2008, 213/2008,
214/2008, 215/2008, 270/2009, 273/2009, 274/2009,
211/2008, 824/2009
ITA NO 209/2008
BETWEEN: 1. The Commissioner of Income Tax C.R.Building, Queens Road, Bangalore, 2.The Income Tax Officer Ward-19(2) International Taxation Bangalore. ...Appellants
(By Sri.K.V.Aravind, Advocate)
2
AND: CGI Information Systems and Management Consultants Pvt Ltd 38/1, Naganathapura Singasandra Post Bangalore – 560 068. ...Respondent
(By Sri.K.S.Ramabhadran, Advocate)
ITA filed u/S.260-A of I.T.Act, 1961 arising out of Order dated 05-10-2007 passed in ITA No. 949/BNG/2005, for the Assessment Year 2003-2004, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No. 949/BNG/2005,dated 05-10-2007 confirm the orders of the Appellate Commissioner and Income Tax Officer, Ward 19(2), Bangalore.
ITA NO 208/2008
BETWEEN: 1. The Commissioner Of Income Tax C.R.Building, Queens Road, Bangalore. 2. The Income Tax Officer, Ward-19(2), International Taxation, C.R.Building, Queens Road, Bangalore. …Appellants
(By Sri. K V Aravind, Advocate)
3
AND: CGI Information Systems and Management Consultants (P) Ltd., No 38/1, Naganathapura, Singasandra Post, Bangalore-560 068. ...Respondent
(By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao and Sri.K.S.Ramabhadran, Advocate)
ITA filed u/S.260-A of I.T.Act, 1961 arising out of
Order dated 05-10-2007 passed in ITA No. 948/BNG/2005, for the Assessment Year 2003-2004, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No. 948/BNG/2005, dated 05-10-2007 confirm the orders of the Appellate Commissioner and Assistant Commissioner of Income Tax Officer, Ward - 19(2), Bangalore. ITA.NO.210/2008
BETWEEN: 1. The Commissioner of Income Tax C.R.Building, Queens Road, Bangalore. 2. The Income Tax Officer, Ward-19(2), International Taxation, C.R.Building, Queens Road, Bangalore. …Appellants
(By Sri. K V Aravind, Advocate)
4
AND: CGI Information Systems and Management Consultants (P) Ltd., No 38/1, Naganathapura, Singasandra Post, Bangalore-560 068. ... Respondent
(By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao and Sri.K.S.Ramabhadran, Advocate)
ITA filed u/S.260-A of I.T. Act, 1961 arising out of
Order dated 05-10-2007 passed in ITA No. 950/BNG/2005, for the Assessment Year 2004-2005, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No. 950/BNG/2005,dated 05-10-2007 confirm the orders of the Appellate Commissioner and Income Tax Officer, Ward 19(2), Bangalore. ITA NO 212/2008
BETWEEN: 1. The Commissioner of Income Tax Central Circle, C.R.Building, Queens Road, Bangalore. 2. The Income Tax Officer, Ward-19(1), C.R.Building, Queens Road, Bangalore. ...Appellants
(By Sri. K V Aravind, Advocate)
5
AND: CGI Information Systems and Management Consultants (P) Ltd., No 38/1, Naganathapura, Singasandra Post, Bangalore-560 068. ...Respondent
(By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao and Sri.K.S.Ramabhadran, Advocate)
ITA filed u/S.260-A of I.T.Act, 1961 arising out of
Order dated 12-10-2007 passed in ITA No. 412/BNG/2006, for the Assessment Year 2006-2007, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No. 412/BNG/2006,dated 12-10-2007 confirm the orders of the Appellate Commissioner. ITA NO 213/2008
BETWEEN 1. The Commissioner Of Income Tax Central Circle, C.R.Building, Queens Road, Bangalore. 2. The Income Tax Officer, Ward-19(1), C.R.Building, Queens Road, Bangalore. …Appellants
(By Sri. K V Aravind, Advocate)
6
AND: CGI Information Systems and Management Consultants (P) Ltd., No 38/1, Naganathapura, Singasandra Post, Bangalore-560 068. ...Respondent
(By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao and Sri.K.S.Ramabhadran, Advocate)
ITA filed u/S.260-A of I.T.Act, 1961 arising out of
Order dated 12-10-2007 passed in ITA No. 413/BNG/2006, for the Assessment Year 2006-2007, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No. 413/BNG/2006, dated 12-10-2007 confirm the orders of the Appellate Commissioner. ITA.NO.214/2008
BETWEEN: 1. The Commissioner of Income Tax Central Circle, C.R.Building, Queens Road, Bangalore. 2. The Income Tax Officer, Ward-19(1), C.R.Building, Queens Road, Bangalore. …Appellants
(By Sri. K V Aravind, Advocate)
7
AND: CGI Information Systems and Management Consultants (P) Ltd., No 38/1, Naganathapura, Singasandra Post, Bangalore-560 068. ...Respondent
(By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao and Sri.K.S.Ramabhadran, Advocate)
ITA filed u/S.260-A of I.T.Act, 1961 arising out of Order dated 12-10-2007 passed in ITA No. 414/BNG/2006, for the Assessment Year 2006-2007, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No. 414/BNG/2006, dated 12-10-2007 confirm the orders of the Appellate Commissioner. ITA NO 215/2008
BETWEEN: 1. The Commissioner Of Income Tax Central Circle, C.R.Building, Queens Road, Bangalore. 2. The Income Tax Officer, Ward-19(1), C.R.Building, Queens Road, Bangalore. …Appellants
(By Sri. K V Aravind, Advocate)
8
AND: CGI Information Systems and Management Consultants (P) Ltd., No 38/1, Naganathapura, Singasandra Post, Bangalore-560 068. ... Respondent
(By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao and Sri.K.S.Ramabhadran, Advocate)
ITA filed u/S.260-A of I.T.Act, 1961 arising out of
Order dated 12-10-2007 passed in ITA No. 415/BNG/2006, for the Assessment Year 2006-2007, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No. 415/BNG/2006,dated 12-10-2007 confirm the orders of the Appellate Commissioner ITA NO 270/2009
BETWEEN: 1. The Director of Income Tax International Taxation, Rashtrothana Bhavan, No.14/3, 6th Floor, Nrupathunga Road, Bangalore-560 001. 2. The Income Tax Officer, Ward-19(1), International Taxation, Rashtrothana Bhavan, No.14/3, 6th Floor,
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Nrupathunga Road, Bangalore. …Appellants
(By Sri. K V Aravind, Advocate) AND: CGI Information Systems and Management Consultants (P) Ltd., No 38/1, Naganathapura, Electronic City Post, Bangalore-560 100. ...Respondent
(By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao and Sri.K.S.Ramabhadran, Advocate)
ITA filed u/S.260-A of I.T.Act, 1961 arising out of
Order dated 26-11-2008 passed in ITA.No.825/Bang/2008, for the Assessment year 2007-08, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.825/Bang/2008, dated 26-11-2008 and confirm the order passed by the Income Tax Officer,Ward-1(1), International Taxation, Bangalore, in the interest of justice and equity. ITA NO 273/2009
BETWEEN: 1. The Commissioner Of Income Tax International Taxation, Rashtrothana Bhavan, No.14/3 6th Floor, Nrupathunga Road, Bangalore.
10
2. The Income Tax Officer, Ward-19(1), International Taxation, Rashtrothana Bhavan, No.14/3 6th Floor, Nrupathunga Road, Bangalore. …Appellants
(By Sri. K V Aravind, Advocate) AND: CGI Information Systems and Management Consultants (P) Ltd., No 38/1, Naganathapura, Electronic City Post, Bangalore-560 100. ...Respondent
(By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao and Sri.K.S.Ramabhadran, Advocate)
ITA filed u/S.260-A of I.T. Act, 1961 arising out of
Order dated 26-11-2008 passed in ITA No.823/BNG/2008, for the Assessment Year 2006-2007, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.823/BNG/2008, dated 26-11-2008, confirming the order of the Appellate Commissioner and confirm the order passed by the Income Tax Officer, Ward-19(1), Bangalore in the interest of justice and equity. ITA NO 274/2009
BETWEEN 1. The Director (Commissioner) of Income Tax International Taxation,
11
Rashtrothana Bhavan, No.14/3, 6th Floor, Nrupathunga Raod, Bangalore – 560 001. 2. The Income Tax Officer Ward-19(1), International Taxation, No.14/3, 6th Floor, Nrupathunga Road, Bangalore. ...Appellants
(By Sri.K V Aravind, Advocate) AND: CGI Information Systems and Management Consultants (P) Ltd., No 38/1, Naganathapura, Electronic City Post, Bangalore. ...Respondent (By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao, Adv and
Sri.K.S.Ramabhadran, Advocate)
ITA filed u/S.260-A of I.T.Act, 1961 arising out of Order dated 26-11-2008 passed in ITA.No.824/Bang/2008, for the Assessment year 2006-07, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.824/Bang/2008,dated 26-11-2008 confirming the order of the Appellate Commissioner and confirm the order passed by the Income Tax Officer, Ward-19(1), Bangalore, in the interest of justice and equity.
12
ITA NO 211/2008
BETWEEN 1. The Commissioner of Income Tax C.R.Building, Queens Road, Bangalore. 2. The Income Tax Officer Ward-19(2) C.R.Building, Queens Road, Bangalore. ...Appellants
(By Sri.K.V.Aravind, Advocate) AND: CGI Information Systems and Management Consultants Pvt Ltd 38/1, Naganathapura Singasandra Post Bangalore – 560 068. ... Respondent
(By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao, Adv)
ITA filed u/S.260-A of I.T.Act, 1961 arising out of Order dated 05-10-2007 passed in ITA No. 530/BNG/2006, for the Assessment Year 2005-2006, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No. 530/BNG/2006, dated 05-10-2007 confirm the orders of the Appellate Commissioner and Income Tax Officer, Ward 19(2), Bangalore.
13
ITA.NO.824/2009
BETWEEN 1. The Director of Income Tax International Taxation Rashtrothana Bhavan, Nrupathunga Road, Bangalore. 2. The Income Tax Officer, Ward – 19(1), International Taxation, Rashtrothana Bhavan, Nrupathunga Road, Bangalore. ...Appellants
(By Smt.K.V.Aravind, Advocate) AND: CGI Information Systems and Management Consultants P. Ltd. 38/1, Naganathapura Electronic City Post, Bangalore – 560 100. ...Respondent
(By Sri.G.Sarangan, Sr. Adv for Sri.Balram.R.Rao, Adv)
ITA filed u/S.260-A of I.T.Act, 1961 arising out of
order dated 17-07-2009 passed in ITA.No.1376/Bang/2008, for the Assessment year 2007-08, praying that this Hon'ble Court may be pleased to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.1376/Bang/2008, dated 17-07-2009 and confirming the order of the Appellate Commissioner and confirm the order
14
passed by the Income Tax Officer, Ward-19(1), International Taxation, Bangalore. These appeals coming on for Hearing this day, N. KUMAR J., delivered the following:
J U D G M E N T
All these appeals are by the revenue challenging the
order passed by the Income Tax Appellate Tribunal,
Bangalore Bench, holding that the assessee was not liable to
deduct tax under Section 195(1) of the Income Tax Act, 1961
(for short hereinafter referred to as ‘the Act’) from the
remittances made to a non-resident.
2. The substantial question of law that arises for
consideration in these appeals is as under:-
Whether the Tribunal was correct in
holding that the payments made by the
assessee for utilizing intranet facilities
provided by the non-resident assessee is not
liable to tax in India and no TDS need be made
as the provisions of Section 195(1) read with
15
9(1)(vi) and (vii) read with Article 12 of the
DTAA between India and Canada are not
applicable?
FACTS IN BRIEF
3. The assessee is engaged in the business of
design, development, implementation and support systems
for the Information Technology (IT) Sector. The assessee
entered into an agreement with CGI Group Inc., a company
incorporated in Canada for sharing costs by which the
Canada Company would procure licenses from Microsoft and
also the communication tool developed by CGI Group Inc.,
and the costs relating to that would be subsequently
invoiced on the assessee. Accordingly, invoice was raised on
the assessee by the Canada Company. While making the
remittance, the assessee deducted TDS at 20% under
Section 195(1) of the Act and also paid the same to
Government account. However, according to the assessee,
since it is a cost sharing agreement and payments were
made by the assesee for reimbursement of cost/expenses, no
16
income is embedded therein. Therefore, the assessee is not
liable to deduct tax under Section 195(1) of the Act. The
appeals were filed by the assessee before the CIT(A) under
Section 248 of the Act. The Appellate Authority sought for a
remand report from the Assessing Officer. The claim of the
assessee was that the payment was in the nature of
reimbursement of expenses. Hence, it was not liable to
deduct tax under Section 195(1) of the Act. Further, the
payments are not in the nature of royalty. The Appellate
Authority held that the payment made by the assessee to the
Canada Company cannot be considered as royalty as the
assessee was not liable to make deduction in respect of this
payment. However, it held the payment made by the
assessee is for rendering “any technical or consultancy
services” and, therefore, the assessee was liable to deduct
tax at source and dismissed the appeal.
4. Aggrieved by the said order, the assessee
preferred an appeal to the Tribunal. The Tribunal by a
17
lengthy order, after considering the rival contentions and
referring to various judgments held that, the payments made
by the assessee are reimbursement of expenses and no
income element is embedded therein; therefore, the
remittances cannot be considered as fees for technical
services. The assessee is liable to deduct tax under Section
195(1) of the Act only on the income embedded in the
remittance. Since there was no income element embedded in
the remittance, the assessee was not liable to deduct tax
from the remittance. It also affirmed the finding of the
Appellate Authority that the remittance made by the
assessee cannot be treated as royalty and Section 44D is
not applicable to the facts of this case. Therefore, the
appeals were allowed. The order passed by the Appellate
Authority as well as the original authority was set aside.
Aggrieved by this order, the revenue is in appeal.
5. The learned counsel for the revenue assailing
the impugned order contended that, the Tribunal has
18
proceeded on the assumption that, as the agreement
between the parties is a cost sharing agreement, the
remittance made by the assessee to the Canada Company is
towards such charges and no profit is embedded in the said
amount paid to the Canadian Company. Therefore, the said
amount was not chargeable to tax under the Act and
consequently, there is no liability on the part of the assessee
to deduct tax at source. He submits that though the
agreement is styled as “cost sharing agreement”, a reading of
the agreement shows that the Canadian Company had
granted a licence to use the facilities which exclusively
belongs to them and the consideration paid under the
agreement is for the right to use that right and, therefore, it
falls within Section 9(1) (vi) of the Act. It constitutes royalty
and the Tribunal has not properly appreciated the facts of
the case and the material placed on record. Therefore, the
order is liable to be set aside.
19
6. Per contra, the learned senior counsel appearing
for the assessee submitted that, no right in the intellectual
property is transferred under the agreement nor any licence
is granted under the agreement. As is clear from the
agreement, the Canadian Company developed a tool
providing Eportal-intranet facility. It was available only to
the members of the Group. The other members of the Group
agreed to share the cost of the said tool. Therefore,
the assessee agreed to share the cost of the tool. No profit is
embedded in the said payment as is clear from the clauses in
the agreement. Clause 4.4. provides that the term ‘cost’
incurred does not include any mark up and is limited to the
actual cost. Therefore, the Tribunal was justified in holding
that it is neither a payment towards royalty nor payment
towards technical services.
7. In the light of what is stated above and the rival
contentions, it is necessary for us to look in to the terms of
the agreement entered into between the parties, understand
20
the intention of the parties and then find out the nature of
transaction. Based on that factual finding, we have to decide
whether it falls within the definition of royalty as provided
under Section 9(1)(vi) or technical services as provided under
Section 9(1)(vii) of the Act. Only if the income is chargeable
to tax under the Act under the aforesaid provisions, the
liability of the assessee to deduct at source would arise. A
copy of the cost sharing agreement is made available to us,
which reads as under:-
COST SHARING AGREEMENT This agreement is made by and between CGI
Information Systems and Management
Consultants Private Limited (CGI-India), a
Company incorporated under the Indian
Companies Act having its Registered Office at
38/1, Naganathapura, Singasandra Post,
Bangalore – 560 034 and CGI Group Inc. a
company incorporated under the provisions of the
laws of Quebec and having its registered office at
1130 Sherbrooke Street West, 4th Floor, Montreal,
Quebec, H3A 2MB8.
21
1. CGI Group Inc. has developed an internal
telecommunication and communication tool,
which is accessible only to the members of
CGI worldwide. This is historically known
as CGI Information Technology
Infrastructure. CGI Group Inc. is the
absolute owner of the CGI Information
technology Infrastructure facility and holds
the Intellectual Property rights (IPR) for the
same but no licenses are transferred to
CGI- India. This is purely a communication
related facility and includes the following:
• Network facility
• Collaborative facility
• Security facility
• Eportal-intranet facility
2. CGI-India is providing Information
Technology Solutions to companies within
the CGI Group and other global customers.
3. As the communication tool developed by
CGI Group Inc. is for mutual benefit, the
parties propose to enter into a cost sharing
agreement by which certain costs as
22
mutually agreed upon, is shared between
them.
4. CGI Group Inc. allows CGI-India to use the
above facilities subject to the following
terms and conditions
4.1 CGI Group Inc. allows CGI-India to
use the above facilities as an
operational guidance for its day-
today business.
4.2 For using the above facilities, CGI
Group Inc. shall allocate the cost in
respect of the facilities on an agreed
basis.
4.3 CGI Group Inc. shall allocate the cost
to CGI-India on the basis of number
of employees of CGI-India based on
the following formula:
Cost incurred *Number of employees
of CGI-India
--------------------------------------------------------
Total number of employees of CGI
Group Worldwide
23
4.4 The term ‘cost’ incurred under clause
4.3 does not include any mark up
and is limited to the actual cost.
4.5 CGI-India shall not have any right to
the Intellectual Property rights (IPR)
nor have any right to sell or license or
lease or in any manner “transfer the
right assigned therein” to other
parties.
5. Any right in respect of CGI information
Technology Infrastructure, or whatsoever in
respect of any invention, improvements and
other intellectual property rights in respect
of CGI Information Technology
Infrastructure or products shall vest with
CGI Group Inc.
6. Disclosure of information.
6.1 CGI-India agrees to hold all such
information in confidence to CGI
Group Inc. and not to disclose such
information to any other person or
organization without the prior written
consent of CGI Group Inc.
24
6.2 All materials received from CGI
Group Inc. under this Agreement
shall be and remain the property of
CGI Group Inc. and shall be returned
to CGI Group Inc. upon termination of
this agreement.
7. This Agreement is effective 1st October
2001 and shall remain in effect unless
terminated by either party as otherwise
provided in this Agreement. Termination of
this Agreement shall not relieve either party
to any obligations, which may have
accrued prior to such termination.
8. All payments under this agreement are
subject to statutory levies, if any.
9. Any notices permitted or required to be
given under this Agreement shall be
deemed given upon delivery, if delivered by
hand or sent by facsimile followed by
registered or certified mail, return receipt
requested, to the parties at the address as
mentioned in this agreement or other
address if the same is notified to the
respective parties.
25
10. The provisions of this agreement shall be
construed in accordance with the laws of
province of Quebec and applicable laws of
Canada and the parties agree to attorn to
the jurisdiction of the Courts of Quebec,
Canada.
11. CGI-India shall deduct Withholding Tax
(WHT) as applicable under India Income
Tax Laws.
For CGI information systems and Management Consultants Private Limited Sd/- Name: Santosh Bhargava Title: Sr. Vice President Date: 24th March 2003
For CGI Group Inc Sd/- Name: Jacques Roy Title: S.V.P. Finance & Treasury Date: 14th March 2003
8. A reading of the aforesaid agreement shows that
the Canadaian Company has developed an internal
telecommunication and communication tool at their cost. It
could be accessed only to the members of CGI worldwide.
26
This is historically known as CGI Information Technology
Infrastructure. This Canadian Company is the absolute
owner of the CGI Information Technology Infrastructure
facility. It holds the Intellectual Property rights (IPR) in its
name. The Canadian Company has not granted any licenses
to the assessee. The tool which they have developed is purely
a communication related facility and includes, network
facility; Collaborative facility, Security facility and Eportal-
intranet facility. The assessee is providing Information
Technology Solutions to companies within the CGI Group
and other global customers.. The tool developed by the
Canadian Company is purely for mutual benefit. Therefore,
the assessee entered into a cost sharing agreement by which
certain costs as mutually agreed upon, is shared between
them.
9. Clause (4) of the agreement categorically states
that, the Canadian Company allows the assessee to use the
above facilities subject to the terms and conditions
27
mentioned therein. Therefore, the Canadian Company has
permitted the assesee to use the tool which they have
developed. The said tool is required by the assessee as an
operational guidance for its day-today business. For using
the said facilities, the assessee has allocated the cost in
respect of the facilities on an agreed basis as mentioned in
clause 4.3. It is made clear the term ‘cost’ incurred under
clause 4.3 does not include any mark up and is limited to
the actual cost. In other words, no profit or income is
embedded in this cost.
10. Clause 4.5 is of utmost importance. It declares
the assessee shall not have any right to the Intellectual
Property rights. In other words, though the assessee pays
the cost stipulated in the agreement for using the facility it
does not confer any right in the intellectual property rights.
In other words though the agreement is styled as ‘cost
sharing agreement’, and the cost is paid, the assesee would
not get any right in the said tool to any extent whatsoever.
28
Further, the said clause makes it clear the assessee will not
have any right to sell or license or lease the facility which is
made available by the Canadian Company to the assessee.
That clause does not stop there. It further says “or in any
manner transfer the right assigned therein to other parties”.
It means under the agreement some right is assigned to the
assessee. However, the assessee has no right to sell, licence
or lease that right. Therefore, it is clear from this agreement,
though the word used is “Canadian Company allows the
assesee to use the facilities for its day-today operational
guidance” it has assigned some interest which the Canadian
Company possess in the said tool. Therefore, the argument
that it is a cost sharing agreement, under this agreement
nothing is transferred to the assessee, there is no profit
margin and, therefore, the amount paid by the assessee to
the Candian Company cannot be construed as royalty or for
technical services rendered is ex facie incorrect. Therefore,
what follows is, the Candian Company is the absolute owner
of the intellectual property. It is making available the said
29
facility to its group Company. For allowing them to use this
facility the Group Company like the assessee has to pay
cost. Though they have paid cost and some right in that is
assigned to them, they cannot sell, license or lease that
right.
11. It is in this background, we have to find out
whether the right which is transferred or conferred on the
assessee under the cost sharing agreement falls within the
definition of ‘royalty’ or ‘technical services’ in order to
chargeable to tax under the Act.
12. In order to appreciate the argument of the
assessee that no licence is granted and amounts paid under
the cost sharing agreement do not constitute licence fee, it is
necessary to understand what is ‘licence’. This Court had
an occasion to consider the said question in the case of THE
COMMISSIONER OF INCOME TAX vs M/S SYNOPSIS
INTERNATIONAL OLD LIMITED [ITA Nos. 11 TO 15/2008
30
& 17/2008] decided on 3.8.2010. At para 40 what is a
‘licence’ has been explained as under:-
“40. A licence is a grant of authority to do a
particular thing. It enables a person to do lawfully
what he could not otherwise lawfully do. A
licence does not, in law, confer a right. It only
prevents that from being unlawful which, but for
the licence, would be unlawful. It amounts to a
consent or permission by an owner of copyright
that another person should do an act which, but
for that licence, would involve an infringement of
the copyright of licensor. A licence gives no more
than the right to do the thing actually licensed to
be done. It transfers an interest to a limited
extent, whereby the licensee acquires an
equitable right only in the copyrighted article.”
It was further held as under:-
“43. A licence is a permission to do
something that would otherwise be unlawful.
The question arises, therefore, as to what legal
permission is granted by a software licence. The
answer is, briefly, that in some cases the licence
31
will be a permission to use confidential
information, and in virtually in all cases it will be
a permission to copy a copyright work. If the
software has been kept secret by the producer, or
only supplied on conditions of confidentiality and
has not been published too widely, then the
software licence will be akin to a licence of
confidential information or know-how. The owner
or licensor of a copy right, has a right to grant
permission to use the software or a computer
programme, in respect of which they have a copy
right, without transferring the right in copy right.
It is one of the rights of a copy right owner or
licensor. Without such right being transferred,
the end user has no right to use the software or
computer programme. If he uses it, it amounts to
infringement of copy right. For transfer of such
right if consideration is paid, it is not a
consideration for transfer of a copy right but for
use of intellectual property embedded in the copy
right, and therefore it is for transfer of one of
those rights of the owner of the copy right. It is
not a right in copy right but it is in respect of a
copy right. When a copy righted article is sold
also, the end user gets the right to use the
32
intellectual property embedded in the copy right
and not a right in the copy right as such.
Therefore the mode adopted or the terminology
given is not decisive to decide the nature of
transfer. Ultimately, it is the substance which
has to be looked into.”
13. In the background of the aforesaid legal position,
if we look at Cost Sharing Agreement, it is clear that without
entering into an agreement, the assessee was not permitted
or allowed to use the facility which exclusively belongs to the
Canadian Company. The cost is paid for use of the said
facility. By use of such facility, a right is conferred on the
assessee. But a restriction is put on the assessee to sell or
license or lease or in any manner transfer the right so
conferred. The assessee was given the right to use the said
facility for its purposes on payment of cost stipulated
therein. Therefore, the terminology of the said agreement
would not conclusively decide the nature of transaction
between the parties. Once we read the entire agreement as a
whole, it is clear that the Canadian Company under the said
33
agreement has permitted or allowed the assessee to use the
facilities which they have developed at considerable cost to
be paid. Merely because the agreement provides that the
term ‘Cost’ does not include any mark-up and is limited to
the actual cost, it makes no difference in the eye of law. But
one thing that clearly emerges from the said agreement is
that in developing the facility or tool, it is the Canadian
Company which has invested the entire money. Prior to the
development of the said facility, there was no agreement
between the Canadian Company and the assessee for
sharing the cost of development of the said tool. Further,
the agreement expressly states that the Canadian Company
is the absolute owner of the CGI Information Technology
Infrastructure facility and they hold the intellectual property
rights. It has not transferred any licenses to the CGI- India
i.e. the assessee. Therefore, even after payment of cost, the
said product used would absolutely vests with the Canadian
Company. If really, the agreement was to share the cost of
developing the facility, the assessee also would become a co-
34
owner. That is not the intention between the parties. The
assessee under no circumstances, would get any title to any
extent in the facility developed by the Canadian Company
and the right conferred is only for its user. Therefore, it is
nothing but a license though it is styled as the Cost Share
Agreement.
14. Section 9 provides for the income deemed to
accrue or arise in India. It reads as under:
“9(1) The following incomes shall be deemed to
accrue or arise in India-
(i) all income accruing or arising, whether directly
or indirectly, through or from any business
connection in India, or through or from any
property in India, or through or from any asset or
source of income in India 4 or through the transfer
of a capital asset situate in India.
(vi) income by way of royalty payable by-
(a) the Government; or
35
(b) a person who is a resident, except where the
royalty is payable in respect of any right,
property or information used or services utilised
for the purposes of a business or profession
carried on by such person outside India or for the
purposes of making or earning any income from
any source outside India; or
(c) a person who is a non- resident, where the
royalty is payable in respect of any right,
property or information used or services utilised
for the purposes of a business or profession
carried on by such person in India or for the
purposes of making or earning any income from
any source in India: Provided that nothing
contained in this clause shall apply in relation to
so much of the income by way of royalty as
consists of lump sum consideration for the
transfer outside India of, or the imparting of
information outside India in respect of, any data,
documentation, drawing or specification relating
to any patent, invention, model, de sign, secret
formula or process or trade mark or similar
property, if such income is payable in pursuance
36
of an agreement made before the 1st day of April,
1976 , and the agreement is approved by the
Central Government:
Explanation 2.- For the purposes of this clause,
"royalty" means consideration (including any
lump sum consideration but excluding any
consideration which would be the income of the
recipient chargeable under the head" Capital
gains") for-
(i) the transfer of all or any rights (including the
granting of a licence) in respect of a patent,
invention, model, design, secret formula or
process or trade mark or similar property;
(ii) the imparting of any information concerning
the working of, or the use of, a patent, invention,
model, design, secret formula or process or trade
mark or similar property;
(iii) the use of any patent, invention, model,
design, secret formula or process or trade mark or
similar property;
37
(iv) the imparting of any information concerning
technical, industrial, commercial or scientific
knowledge, experience or skill;
(vi) the rendering of any services in connection
with the activities referred to in sub-clauses (i) to
(iv), (iva) and (v)
Explanation 4 – For the removal of doubts, it is
hereby clarified that the transfer of all or any
rights in respect of any right, properly or
information includes and has always included
transfer of all or any right for use or right to use a
computer software (including granting of a
licence) irrespective of the medium through which
such right is transferred.
Explanation 5 – For the removal of doubts, it is
hereby clarified that the royalty includes and has
always included consideration in respect of any
right, property or information, whether or not –
(a) the possession or control of such right,
property or information is with the prayer;
(b) such right, property or information is used
directly by the payer;
38
(c) the location of such right property or
information is in India.
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 nay signal), cable, optic fibre or by any
other similar technology, whether or not such
process is secret;]
15. Explanations 4, 5 and 6 were inserted by the
Finance Act, 2012, which came into retrospective effect from
1-6-1976.
16. The facility which is provided by the Canadian
Company used by the assessee is the intranet facility.
Therefore, it is necessary for us to understand what
“Intranet” facility means. An intranet is a computer network
that uses Internet Protocol technology to share information,
39
operational systems, or computing services within an
organization. This term is used in contrast to extranet, a
network between organizations, and instead refers to a
network within an organization. Sometimes, the term refers
only to the organization's internal website, but may be a
more extensive part of the organization's information
technology infrastructure, and may be composed of multiple
local area networks. The objective is to organize each
individual's desktop with minimal cost, time and effort to be
more productive, cost efficient, timely, and competitive.
17. An intranet may host multiple private websites
and constitute an important component and focal point of
internal communication and collaboration. Any of the well
known Internet protocols may be found in an intranet, such
as HTTP (web services), SMTP (e-mail), and FTP (file transfer
protocol). Internet technologies are often deployed to provide
modern interfaces to legacy information systems hosting
corporate data. An intranet can be understood as a private
40
analog of the Internet, or as a private extension of the
Internet confined to an organization. The first intranet
websites and home pages were published in 1991, and began
to appear in non-educational organizations in 1994.
Intranets are sometimes contrasted to extranets. While
intranets are generally restricted to employees of the
organization, extranets may also be accessed by customers,
suppliers, or other approved parties. Extranets extend a
private network onto the Internet with special provisions for
authentication, authorization and accounting.
18. Explanation-4 inserted by the Finance Act, 2012
has puts at rest all the controversies and doubts. It
expressly states that transfer of all or any rights in respect of
any right, property or information includes and has always
included transfer of all or any right for use or right to use a
computer software including granting of a licence
irrespective of the medium through which such right is
transferred. Therefore, the terms of Cost Sharing Agreement
41
explicitly mention that the Canadian Company has
developed internal telecommunication and communication
tool which is accessible only to the members of CGI
worldwide. Therefore it is an intranet facility. Further it
declares that the Canadian Company holds the intellectual
property rights in the said CGI Information Technology
Infrastructure facility. It has allowed the assessee to use the
said facility subject to the terms and conditions stipulated in
the said agreement. Clauses 4.2 and 4.3 deal with the
payment of cost to be paid for using the said facility. Clause
4.4 declares that the cost does not include any mark up and
is limited to the actual cost. Further, Clause 4.5 declares
the permission granted to the assessee to use the facility on
payment of cost does not extend to confer on the assessee
any right to sell or licence or lease or in any manner
“transfer the right assigned therein to other parties”.
Therefore, it is clear that some right is assigned to the
assessee under the agreement on payment of cost. That
right is a right to use the facility notwithstanding the fact
42
that the cost is paid. Clause 5 declares the rights of such
facility vest with the Canadian Company only. Therefore, it
is clear that the cost is paid for using the computer software.
When the assessee is allowed to use the said facility, it is
nothing but a license to use the said facility. If really the
cost paid represents the assessee’s share of cost for
developing the internal telecommunication and
communication tool, on such payment, the Canadian
Company can never claim to be the absolute owner of the
said intellectual property. If CGI group companies were to
pay costs for using the said facility, then the title of the said
facility i.e. intellectual property should equally vest
proportionate to the cost share by this group companies.
That is not the intention behind this agreement. Therefore,
we have no hesitation to hold that this Cost Sharing
Agreement is only a device to avoid payment of tax as
contemplated under the aforesaid provision. It is nothing
but a royalty. Therefore, the order passed by the Tribunal is
erroneous and requires to be set aside.
43
19. Learned Senior Counsel for the assessee
contended that reimbursement is permissible in law. The
agreement is nothing but an agreement for reimbursing the
cost of development of internal telecommunication and
communication tool. In support of this contention relied
upon several judgments. When we looked into the Cost
Sharing Agreement, there is no whisper about
reimbursement of cost. On the contrary, under the
agreement, the assessee has agreed to share the cost. In
that view of the matter, the question of considering the case
of the assessee for reimbursement of cost would not arise.
Accordingly that argument of the learned Senior Counsel in
our opinion, does not arise for consideration in the facts of
this particular case.
20. The case of the Canadian Company is that it has
obtained the intellectual property right by way of license
from Microsoft and license fee is paid. After acquisition of
the said property by licence, that facility was permitted to be
44
used by its group members, one of which is the assessee. In
law, it makes no difference, whether Canadian Company
acquired intellectual property either by way of lease or it
independently developed the same. The question for
consideration in this case is whether what is paid by the
assessee to the Canadian Company represents royalty
payable for the licence granted to use the said facility or is it
a cost of acquisition of the said intellectual property rights.
Similarly in one of the cases, what is provided by the
Canadian Company to the assessee was not intranet facility
and it is only leased line charges. The same reasoning holds
good even in respect of the said facility made available to the
assessee.
21. It was also contended that this Court has
already held in the case of CIT v/s RANKA AND RANKA
reported in 352 ITR 0121 that Instruction No.3/2011 dated
9-2-2011 is retrospective in operation and equally applied to
the proceedings pending even prior to 9-2-2011
45
notwithstanding the fact that Circular expressly states that
it is only prospective and therefore, on that basis, relief has
to be granted in the case where tax liability is less than
Rs.10.00 lakhs. We do not find any substance in the said
contention. The question of extending the benefit of
Instruction No.3 would arise only in cases where the tax
liability is admitted and the tax payable is less than Rs.10.00
lakhs. It has no application to the case, where the very
liability is disputed. Therefore, in this case, we have held
that the assessee is liable to pay tax. In fact, the assessee
had paid the tax and therefore, in the facts and
circumstances, we are satisfied that the said judgment has
no application to the facts of the cases where the tax liability
is less than Rs.10.00 lakhs. It is placed on record that the
assessee had no doubt paid the tax, after, deducting the tax
at source as contemplated under Section 195(1) of the Act
after making payment to the Canadian Company. It is after
making the payment, the assessee wanted to test the legality
and preferred an appeal before the CIT(A) under Section 248
46
of the Income Tax Act. When we have held that the tax
liability exists and the assessee had already discharged the
tax liability by paying the money within the time stipulated,
the question of Revenue proceeding against the assessee for
recovery of the tax would not arise.
22. Hence, we pass the following
order:-
(a) Appeals are allowed.
(b) Impugned orders passed by the Tribunal are set
aside.
(c) The orders passed by the Assessing Authority
are restored.
(d) No costs.
Sd/-
JUDGE
Sd/- JUDGE
Ckl/mpk/-*