Ashutosh Chandra, Revenue Member
1. Akamai Technologies Inc. (the Applicant), is a company incorporated under the laws of the USA and is controlled and managed from USA. It had filed an application under section 245Q(1) of the IT Act, 1961, and the same was admitted for our Ruling on 09.01.2013.
2. The Applicant is a technology company and is the leading global service provider for accelerating content and business processes online (Solutions).It caters to customers who have web based applications/websites, etc. on the Internet, to help deliver the web content faster and more reliably, as also handling specific requirements of the customers.
2.1 Accordingly, the Applicant has built its Akamai Edge Platform comprising of 73,000 secure servers equipped with proprietary software and deployed in 70 countries. The Akamai Edge Platform pulls content from the customer's web server by replicating the data therefrom, and continually monitors the Internet - traffic, trouble spots and overall conditions. This information is used intelligently to optimize routes and replicate content for faster, more reliable delivery. The end-users access the customer's website through the Akamai Edge-Platform, thereby avoiding the (slower) web server maintained by the customer.
2.2 In order to sell its Solutions in India, the Applicant has entered into an Akamai Services Reseller Agreement, dated 07.01.2010 (w.e.f 01.04.2009) with Akamai Technologies Solutions India Private Limited (Akamai India or Reseller), a company incorporated in India. Under this Reseller Agreement, the Applicant has appointed Akamai India as a non-exclusive reseller who is authorized to resell the Applicant's Solutions directly to customers in India. The key terms of the Reseller Agreement are as follows:
i. Akamai India would resell the Applicant's Solutions by directly entering into contracts with customers in India.
ii. Akamai India would invoice the Indian customers for the Solutions.
iii. Akamai India is required to dedicate adequate resources, financial and otherwise and maintain facilities and staff to re-sell the Solutions.
iv. Akamai India would not have any rights, title and interest in any intellectual property and software of the Applicant, including Akamai Edge Platform and
v. Akamai India is required to pay a fee to the Applicant for the Solutions purchased from the Applicant.
3. On the above facts stated by the Applicant, it has sought a Ruling from us on the following questions:
1. Whether based on the facts and circumstances of the case, the payments received by the Applicant from Akamai India under the Akamai Services Reseller Agreement, dated 7 January 2010, for the content delivery solutions would be in the nature of 'fees for technical services' within the meaning of the term in Explanation 2 to clause (vii) of section 9(1)of the Act?
2. If the answer to Question 1 is in the affirmative, whether the amounts received by the Applicant towards the Solutions would be in the nature of 'fees for included services' within the meaning of the term in Article 12(4) of the India-US Treaty?
3. If the answer to Question 2 above is in the negative, whether the amounts received by the Applicant towards the Solutions would be in the nature of "royalty" within the meaning of the term in Explanation 2 to clause (vi) of section 9(1) of the Act and Article 12(3) of the India-US Treaty?
4. Whether based on the facts and circumstances of the case a Permanent Establishment is created for the Applicant in India under the provisions of Article 5 of the India-US Treaty?
5. Where the answer to question 1,2,3 and 4 are in the negative, whether the payments received by the Applicant for the services would be subject to withholding tax in accordance with the provisions of section 195 of the Act?
4. With regard to question no. 1, the Applicant has contended that the payments received by it from Akamai India, for the above referred services are not taxable in India as FTS as the Solutions are not managerial or consultancy or technical in nature.
4.1 The Applicant submits that firstly the Solutions provided are in the form of a standard facility. It manages the content delivery through its Akamai Edge Platform automatically and on a continuous basis for any customer who is willing to pay for availing such a facility. The fact that technology (such as the Akamai Edge Platform) is used by the Applicant to deliver the standard facility does not affect the nature of the transaction. To support its contention, the Applicant placed reliance on the ratio held in M/s. Commissioner of Income Tax v. Kotak Securities Ltd (2016) (383) ITR 1) (SC). The Solutions provided are neither specialized nor exclusive and do not cater to individual requirements of the customer. The Solutions offered remain the same for all customers who avail the Applicant's facility irrespective of their business/website content. Hence these Solutions cannot be termed as 'technical services' for the purposes of Explanation 2 to section 9(1)(vii) of the Act. It also relied on the Hon'ble Madras High Court's decision in Skycell Communications Ltd v. DCIT (2001 (251) ITR 53) (Mad.), as also on Atos Information Technology HK Ltd. (2017) (79 taxmann.com 26) (Mum.), Wipro Limited v. Income Tax Officer (2003 (80) TTJ 191), Software Technology Parks of India v. Income Tax Officer (2005 (2) SOT 529), DCIT v. Est
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el Communications (P) Ltd. (ITA no. 3375/Del/2007), Pacific Internet India (P) Limited v. Income Tax Officer (2009 (318) ITR 179), ACIT v. Merchant Shipping Services (P) Ltd (ITA No 192/ Mum/2010), Jaipur Vidyut Vitran Nigam Ltd. v. DCIT (2009 (123) TTJ 888) and Millennium Infocom Technologies Ltd. v. ACIT (2009 (309) ITR 18).
4.2 Secondly, the Applicant submits that a human element is a pre-requisite for characterizing a service as a technical service. In this case the Applicant itself is using its own software and hardware to provide the Solutions to the customers/end users. The customers/end users are not provided with any access to the Applicant's infrastructure (neither software nor hardware) nor is such access even required for availing the standard facility provided by the Applicant. Solutions are provided automatically and on a continuous basis to the customers through Akamai Edge Platform and thus, there is no human intervention while delivering the Solutions. The human involvement is only in relation to the development of the Akamai Edge Platform and for marketing or after sale services. Accordingly, the provision of the above facility which enables end-users to access the Internet at an accelerated pace cannot be considered as provision of a technical service. Reliance in this regard is placed on the decision of the Hon'ble Delhi High Court in the case of Commissioner of Income Tax v. Bharti Cellular Limited (2009 (319) ITR 139).
4.3 The Applicant also submits that at the point of delivery of the Solutions, it does not provide any services to Akamai India/Indian customers. The services are utilized only when developing the Edge Platform. Only after that services are offered to end customers who are willing to pay. No services are offered to the end customers at the time of providing solutions. Reference in this regard is made to the TAG Report, and specifically para 41 of the same.
4.4 In view of the above, the Applicant submits that the Solutions provided by it would be regarded as a provision of a standard facility and not 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 section 9(1)(vii) of the Act.
5. As regards considering tax-ability or otherwise of the fees under discussion above, under the provisions of the DTAA, (as raised under question no. 2), the Applicant submits that under Article 12, even if the services are of a technical nature, it would be regarded as FIS under the India - US Treaty only when conditions in either (a) or (b) of Article 12 (4) are satisfied. As regards Article 12 (4)(a), the Applicant submitted that the arrangement with Akamai India does not envisage use of any right, property, or information for which royalty under Article 12(3)(a) is paid. The detailed submissions in this regard are made while dealing with question no. 3 below.
5.1 Article 12(4)(b) of the India-US Treaty excludes from the definition of FIS any service that does not enable the person acquiring the service to apply the technology contained therein. The Applicant submitted that the arrangement with Akamai India does not "make available" any technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein. It was reiterated that the Solutions are provided by the Applicant using the Akamai Edge Platform which is a standard facility. In the provision of this facility, the Applicant's platform of distributed network and intelligent software, incorporated with complex algorithms, work on an automatic and continuous basis without making available any sort of technical knowledge, experience, skill, know-how processes to the customer/end users, which can enable them to apply the technology contained therein. For interpreting the term "make available" used in Article 12(4)(b), the Applicant placed reliance on the MOU between India and the US concerning FIS in Article 12 of the India US Treaty. It further relied on the Hon'ble Karnataka High Court's decision in De Beers India Minerals Pvt. Ltd. (TS-312-HC-2012 (Kar)] wherein it was held that to fit into the terminology "making available", the technical knowledge, skill, etc., must remain with the person receiving the services even after the particular contract comes to an end. Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b).
5.2 In support, the Applicant has cited the following cases: Anapharm Inc in re, 2008 (305) ITR 394, (AAR 746/2007), Intertek Testing Services India (P) Ltd., In re, (AAR. 760/2007), Federation of Indian Chambers of Commerce and Industry, In re, 2010 (320) ITR 124, (AAR 811/2009), Ernst & Young Private Limited, In re, 2010 (323) 184, (AAR 820/2009), M/s Invensys Systems Inc, In re, 2009 (317) 438 (AAR 796/2009) and other decisions in the case of Raymond Limited v. DCIT (86 ITD 791), National Organic Chemical Industries Ltd. v. DCIT (2005 (96) TTJ 765), Bharat Petroleum Corpn Ltd v. JDIT (2007 (14) SOT 307), Meakins and Phyllips v. ACIT (287 ITR 227) and NQA Quality Systems Register Ltd v. DCIT (2005 (92) TTJ 946).
6. The Revenue in its report has stated that the nature of the Applicant's solutions is provision of technical services which accelerate the performance of the websites, and the services rendered are also technical in nature.
6.1 The Revenue has relied on the company profile and Form 3CEB reports of Akamai Technology Solutions (India) Pvt. Ltd. and contended that the Reseller is engaged in providing back-office support services and software development services to the Applicant. Para 5.2 of the Services Reseller Agreement has been mentioned to state that the Applicant is providing technical services since it renders technical support to Akamai India. Without such technical support, Akamai India which was established with the very purpose of reselling the products of Applicant in India, will be unable to deliver the job.
6.2 Further, the Revenue states that in the era of technology and online/wire communication, physical presence of humans to render the services is not required. This is the very feature of Telecom or internet revolution that the data or services may travel through wires which saves the time and effort of the physical movement of human beings. Also, the development of the software and solutions cannot happen without human involvement.
6.3 It is also stated that the Applicant needs the technical expertise and a setup to perform the services which are 'made available' to Indian customers either through Indian company or sometimes even directly; hence the Applicant's submission cannot be accepted that it was not in the receipt of fee for technical services, as services rendered by it to the reseller are very much technical in nature which is described in detail in the agreement and the 3CEB report also.
7. In response to the above objections taken by the Revenue, the Applicant submits in its rejoinder that merely because Applicant's Solutions result in acceleration of content and better performance of websites does not make the nature of services technical in nature. The Revenue's reliance on 3CEB report of kamai Technologies India Private Limited is misplaced as that entity is a sister concern of the Reseller, Akamai Technologies Solutions (India) Private Limited. Hence, the Revenue has mistaken the sister concern to be the Reseller and proceeded to draw conclusions that the Applicant provides 'technical services'. The Applicant further states that paragraph 5.2 of the Reseller Agreement relied upon by the Revenue refers to providing Customer Support to customers post sale of Solutions by the Applicant. The words used in the agreement are 'technical support'. Merely because of use of the word 'technical' therein, it cannot be concluded that the services are technical in nature. Further, there is human involvement from the Applicant's end only at the time of development of the Edge Platform. Thereafter, the Solutions are provided to the customers on a continuous and automatic basis by the network platform without any human intervention or involvement. It was also reiterated that it provides the Solutions to the Indian Customers pursuant to the request placed by Akamai India or the Indian customers. Thus, the Solutions do not make available any technical knowledge, experience, skill, etc. to Akamai India/Indian customers.
8. We have considered the above arguments. Let us examine the issue under the relevant provisions and judicial precedents, keeping in mind the agreement and activities undertaken by the Applicant.
8.1 As per Explanation 2 to section 9(1)(vii) of the Act, 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel)". It is nobody's case that the services rendered are managerial or consultancy in nature. As far as whether the services are in the nature of 'technical services', the term is not defined under the Act; however, the same has been interpreted in various judicial precedents. The Hon'ble Apex Court in the case of M/s Kotak Securities Limited (supra) has analyzed the term in the context of transaction charges paid to the stock exchange for facilities of sale and purchase of shares through automated services of online trading, as follows:
"8.....All such services, fully automated, are available to all members of the stock exchange in respect of every transaction that is entered into. There is nothing special, exclusive or customised service that is rendered by the Stock Exchange. "Technical services" like "Managerial and Consultancy service" would denote seeking of services to cater to the special needs of the consumer-user as may be felt necessary and the making of the same available by the service provider. It is the above feature that would distinguish/identify a service provided from a facility offered. While the former is special and exclusive to the seeker of the service, the latter, even if termed as a service, is available to all and would therefore stand out in distinction to the former. The service provided by the stock exchange for which transaction charges are paid fails to satisfy the aforesaid test of specialized, exclusive and individual requirement of the user or consumer who may approach the service provider for such assistance/service. It is only service of the above kind that, according to us, should come within the ambit of the expression "technical services" appearing in Explanation 2 of Section 9(1)(vii) of the Act. In the absence of the above distinguishing feature, service, though rendered, would be merely in the nature of a facility offered or available which would not be covered by the aforesaid provision of the Act.
9. ...In other words, there is no exclusivity to the services rendered by the stock exchange and each and every member has to necessarily avail of such services in the normal course of trading in securities in the stock exchange. Such services, therefore, would undoubtedly be appropriate to be termed as facilities provided by the stock exchange on payment and does not amount to "technical services" provided by the stock exchange, not being services specifically sought for by the user or the consumer. It is the aforesaid latter feature of a service rendered which is the essential hallmark of the expression "technical services" as appearing in Explanation 2 to Section 9(1)(vii) of the Act."
8.2 In the facts of the present case, the Solutions provided by the Applicant are neither specialized nor exclusive and do not cater to individual requirements of the customer. The Solutions are offered by the Applicant through its Akamai Edge Platform and they remain the same for all customers who avail the Applicant's facility, irrespective of the business/website content. Applying the aforesaid ratio of the Apex Court, we are of the view that if the Applicant is providing a standard facility to all who are willing to pay for it, then such standard facility cannot be termed as 'technical services' for the purposes of Explanation 2 to section 9(1)(vii) of the Act. The Madras High Court's observations in the case of Skycell Communications Ltd. (supra) relied upon by the Applicant also supports this view where the question was whether the subscription fee charged for a communication service can be classified as FTS. The Court observed that:
5. "The fact that the telephone service provider has installed sophisticated technical equipment in the exchange to ensure connectivity to its subscriber, does not on that score, make it provision of a technical service to the subscriber."
6. ....technical service referred to in section 9(1)(vii) contemplates rendering of a 'service' to the payer for a fee. Mere collection of a 'fee' for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been received for technical services.
7. ....The Internet is very much a product of technology, and without the sophisticated equipment installed by the internet service providers and the use of the telephony, fixed or mobile through which the connection is established, the service cannot be provided. However, on that score, every subscriber of the internet service provider cannot be regarded as having entered into a contract for availing internet service, and such subscriber regarded as being obliged to deduct tax at source on the payment made to the internet service provider".
8.3 The principle upheld in other cases relied upon by the Applicant also lead us to conclude that since the Applicant is providing its Solutions through the Akamai Edge Platform to all customers alike, for accelerating the delivery of their content, irrespective of the nature of business/website content, they cannot be termed as specialised, exclusive and individual requirement of the customer so as to qualify as 'technical services'.
8.4 On the issue of human intervention in providing technical services, we agree with the principle held in Bharti Cellular Limited (supra), as also upheld by the Apex Court, that a human element is a pre-requisite for characterizing a service as a technical service and consequently treating payments for the same as fees for technical services. The Solutions provided by the Applicant without human intervention cannot be treated as provision of technical services. The human involvement in the Applicant's case is only in relation to the development of the Akamai Edge Platform and for marketing and after sale services. The Revenue's contention that there is human intervention while providing customer support and training is irrelevant to the question under consideration in the application. What is important to consider is whether there is any human intervention while rendering of 'Solutions' and not in providing customer support or training. The Solutions are independently provided by the use of technology and that too, sophisticated technology which operates on an automatic and continuous basis. That does not mean that the Applicant, which operates on such facilities, is rendering any technical services as contemplated in the definition of the term FTS.
8.5 In view of the above, the payments received by the Applicant from Akamai India for content delivery solutions are held to be outside the scope of 'fees for technical services' within the meaning Explanation 2 to clause (vii) of section 9(1) of the Act.
9. Coming to Question no. 2 on taxability under the India-USA DTAA, let us first have a look at the relevant provisions contained in the India USA DTAA, and then the arguments of both sides mentioned above.
9.1 Article 12(4) of the India-US Treaty defines Fees for Included Services to mean "payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services:
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 received; or
(b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design."
The MoU specifies as follows:
"Generally speaking, technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills etc. are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available."
9.2 Here, it is nobody' s case that the payments should be covered under Article 12(4)(a). As regard Article 12(4)(b), the Revenue has contended that services are 'made available' by the Applicant to Indian customers through the Indian company and/or directly by the Applicant without elaborating as to how the provision of Solutions by the Applicant falls under the meaning of 'make available'.
9.3 As we understand from the decisions on this issue, the term "Make available" connotes that it should result in transmitting the technical knowledge such that the recipient could derive an enduring benefit and utilize the same in future on his own without the aid and assistance of the provider. In other words, the technical knowledge, skill, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver and he is enabled to apply the technology. The fact that the provision of the service may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b).
9.3.1 In the present case, the Solutions provided by the Applicant to the customers only enable faster content delivery of the customer's website, etc. to the end users. They do not provide the customers/end users with any technological knowledge, skill etc. which enable them to apply it on their own in future to enjoy faster content delivery without recourse to the Applicant. Thus, it cannot be said that the provision of Solutions by the Applicant to its customers in any way satisfy the 'make available' condition as contained in paragraphs (4)(b) of Article 12 of India - US Treaty.
9.4 In view of the foregoing, we are of the view that the Solutions provided by the Applicant to the customers only enable faster content delivery of the customer's website, etc. to the end users. They do not provide the customers/end users with any technological knowledge, skill, etc. which enable them to apply it on their own in future to enjoy faster content delivery without recourse to the Applicant. Hence, we hold that the consideration received by the Applicant from Akamai India cannot be considered to be in the nature of fees for technical services as referred to in Article 12 of the India-US DTAA.
10. We come now to the issue of Royalty, as arises in question number 3.
10.1 It is submitted by the Applicant that the sale of Solutions to Akamai India and the onward sale of the same to Indian customers does not involve transfer of any rights in relation to the Akamai Edge platform or any other intellectual property of the Applicant. Further, the payments are also not for the use or right to use the Akamai Edge Platform or any other intellectual property or equipment listed in the Explanation 2 to section 9(1)(vi) of the Act or Article 12(3) of the India-US Treaty, since the transaction does not involve provision of the right to use any copyright of a literary, artistic or scientific work, any patent, trade mark, design or model, plan, etc.; the arrangement between the Applicant and Akamai India/Indian customers is for the provision of a standard facility and not for the use of a "process" or "formula" the payments are not for the use of, or right to use, any information concerning industrial, commercial or scientific experience; and lastly the payments are not for right to use industrial, commercial or scientific equipment.
10.2 It is averred that in fact, the Applicant itself has exploited the right to use, operate or control its technology/intangibles, without granting the right to use the same to Akamai India/the Indian customers. The customers/end users are not provided with any access to the Applicant's infrastructure (neither software nor hardware) nor is such access even required for availing the standard facility provided by the Applicant. Thus, at no point of time, the customers/end user (who avails of the standard facility offered by the Applicant) has any access to any software of hardware of the Applicant. It is only the Applicant who has access to the network built by it which operates to pull the content from the customer's server and accelerate it to deliver to the end users in a speedy, efficient and reliable manner. Thus, the payments received by the Applicant are not for the use of or right to use any equipment of the Applicant and thus cannot constitute 'royalty'.
10.3 For understanding the term 'use' or 'right to use', the Applicant has placed reliance on the decision of the Mumbai ITAT in the case of Vodafone Essar Limited v. DIT (2011 (135) TTJ 385). Further reliance was placed on the AAR ruling in Dell International Services India (P) Ltd., in re (2008 (305) ITR 37) for the meaning of the expression 'use' of equipment. Similar reliance was placed on Kotak Mahindra Primus Ltd., v. DDIT (2006 (105) TTJ 578), Cable and Wireless Networks India (P) Ltd., in re, ISRO Satellite Centre v. DIT (2008 (307) ITR 59) and Asia Satellite Telecommunications Ltd. (2011 (332) ITR 340).
10.4 The Applicant has also placed reliance on Dr. Klaus Vogel's commentary on Double Taxation Conventions in relation to the issue of distinction between the rendering of services by a person using his own assets vis-a-vis the granting of the right to use the assets to the payer. Dr. Klaus Vogel (in pages 788 and 802 of Volume II of his commentary on Double Taxation Conventions) has made the following key observations:
"......the use of satellite is a service, not a rental; this would not be the case only in the event that the entire direction and control over the satellite such as piloting or steering etc were transferred to the use."
10.5 Based on the above, the Applicant submitted that the payment by Akamai India to the Applicant would not be royalty under section 9(i)(vi) of the Act or Article 12(3) of the India-US Treaty.
11. The Revenue argued that payments received by the Applicant amount to 'royalty' on many counts.
11.1 Firstly, the transaction involves transfer of right in copyright. Here the Applicant is the original copyright holder of the Akamai Solutions. The Reseller Agreement authorizes Akamai India to sell the Applicant's Solutions i.e. there is a grant of distribution rights to Akamai India in the Applicant's Solutions. Thus, the Reseller Agreement is in the nature of licensing agreement which involves transfer of right in copyright. Such license is granted to Akamai India by the copyright holder in respect of copyright mentioned in Section 14(b)(ii) of the Copy Right Act, 1957. Thus, Akamai India has got the license to resell the Akamai Solutions and the program itself is not sold to Akamai India.
11.2 Secondly, the transaction involves grant of right to use Trademarks and Brand features since there is a specific clause 4 regarding Marketing and Publicity in the Reseller Agreement, which allows Akamai India to use trademarks of the Applicant for the purpose of marketing and reselling of Akamai Solutions. Therefore use of trademarks or other similar property is covered by Explanation 2 to Section 9 (1)(vi) of the Act.
11.3 Thirdly, the Revenue contends that the transactions amount to grant of distribution rights, involving transfer of rights in process, and hence the payment received is in the nature of Royalty. The Revenue has cited the following decisions in support: Commissioner of Income Tax v. Synopsis International Pvt. Ltd. (2013) 212 taxman 454; CGI Information Systems Management Consultants (P) Ltd. (2014) 226 taxman 319); CIT & Another v. Samsung Electronics Co. Ltd., & Others (2011) 245 CTR (Kar) 481; Citrix Systems Asia Pacific Pvt. Ltd.(2012) 248 CTR 141, Gracemac Corporation v. Assistant Director Of Income Tax (International Taxation) (2011) 08 ITR 522) ; Cargo Community Network Pvt. Ltd.(2007) 208 CTR 814); In Re Skillsoft Ireland Ltd.(2015) AAR No. 985/2010, Vodafone South Ltd. v. DDIT (International Taxation(2015) 53 taxmann.com 441, Verizon Communications Singapore Pvt. Ltd. v. Income Tax Officer (International Taxation) (2013) 263 CTR 497 (Madras);and ABB FZ-LLC v. DCIT (International Taxation)(2017) 83 taxmann.com 86.
11.4 In particular, the Revenue has referred to the decisions in the case of Samsung Electronics (Supra) in which the meaning of copyright was discussed in detail with reference to the Copyright Act, 1957, and to say, inter alia, that even if any of the rights comprising a copyright are transferred by the original holder, but the transferor retains the copyright, the payment involved would be Royalty. In the Applicant's case, Akamai India had received a license to market and sell Akamai Solutions. Our Ruling in Citrix Systems (supra) has been cited to state that as per the Reseller Agreement, Akamai India was only authorized (licensed) to resell the Akamai Solution and the same was not sold to it. Hence the consideration was not a sale but for the granting of the license. The decisions in IBM India Pvt. Ltd. (supra), Synopsys International (supra) and Citrix Systems (supra) have been quoted extensively to make this point and highlight that it did not matter whether the exclusive right was transferred or not, as long as the right was granted to Akamai India which was a license as per the Copyright Act and the payment for the same would be in the nature of Royalty.
12. The Applicant has vehemently opposed the above understanding of its case. It is stated that it is not a software distributor but a technology company. It operates a global network of servers and related infrastructure to provide secure and fast content delivery to all end users for a fee. Under the Reseller Agreement it does not grant any licence to distribute any software product in a manner that grants any copyright to the Reseller. Further, it does not pass on any copyright rights in any software at any point in time either to Reseller or the end user. Again, the provisions of the Copyright Act are not applicable to the Applicant as section 14(b) of that Act applies only in the case of a computer programme which is not the case in the present facts of the Applicant. The dominant intention of the Applicant in entering into a Reseller Agreement is only to provide end users a facility for fast and secure internet access and does not contemplate any use or right to use Trademarks/IP transfer/IP sharing agreement so as to make the payments received taxable as royalty. The Reseller Agreement nowhere grants or transfers any right in the "process" as alleged by the Revenue nor is there any use of such process by the Reseller or end user. Without prejudice, it is submitted that the usage of process involved in providing the Solutions is by the Applicant itself. The Reseller Agreement entered into by the Applicant should be interpreted holistically in the light of the facts and circumstances and the intent with which the agreement was entered in to by the Applicant and the Reseller.
13. We have considered the submissions of the Applicant, the objections raised by the Revenue, and the details and agreements submitted with the application.
13.1 We may first look at the relevant provisions regarding taxability of royalty income under the Act and the DTAA. The definitions of royalty under Explanation 2 to section 9(1)(vi) of the Act and Article 12(3) of the India-US Treaty are as follows:
Explanation 2 to section 9(1)(vi) - "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 license) in respect of a patent, invention, model, design, secret formula or process or trademark 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 trademark or similar property;
iv. the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
iva. the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;]
v. the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or
vi. the rendering of any services in connection with the activities referred to in sub-clauses (i) to [(iv), (iva) and] (v)."
Article 12(3) of India-US tax treaty -
"The term "royalties" as used in this Article means:
a. payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof ; and
b. payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8."
13.2 Based on the reading of the above legal provisions under the Act and the India-US Treaty, for a payment to be construed as "royalty", the same would need to be in relation to the use or right to use or transfer of all or any rights in relation to:
- Copyright, patent, trademark, design or model, plan, etc; or
- Any secret formula or process; or
- Information concerning industrial, commercial or scientific experience; or
- Industrial, commercial or scientific equipment.
13.3 The Applicant has entered into a non-exclusive Reseller Services Agreement with the Reseller to provide a global, secure and outsourced infrastructure facility using the Akamai network and technology, to the customers. The Reseller Services Agreement does not contemplate providing any kind of a software "product" to any of its customers or to the Reseller. The business model of the Applicant is very different from that of a normal software reseller or a distributor. The Applicant is in the business of content acceleration which is usually a function of efficient use of hardware (platform) and software. The Applicant has entered into an arrangement with the Reseller in order to sell Akamai Solutions to customers in India.
13.4 The Revenue has made out a case that the Applicant's case is similar to that of a software distributor. A regular software distributor distributes software to end users who would use it in their internal business which is actively used by the customer. However, 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.
13.5 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 granting to the customers of the Applicant and end users of such customers, seamless and obstruction free access to these websites.
13.6 We have perused the above stated factual position of the Applicant as mentioned in its affidavit forming part of Applicant's rejoinder of 04.12.2013. An extract of the same is reproduced below:
"2. The following statements are made in reference to the application filed by the Applicant under section 245Q of the Income Tax Act, 1961 before the Hon'ble Authority.
(a) That the Applicant is in the business of Content Delivery Network (CDN) and provides a global Internet content delivery service that improves Web site speed and reliability and enables richer, more engaging Web site content.
(b) That such services are rendered by the Applicant by using its own proprietary software and compatible hardware to provide customers with a secure and effective way of distributing internet traffic. The proprietary software monitors the internet regularly, recognizes congestion spots on the internet and diverts the internet traffic to the Applicant's own network. The software performs its functions automatically (without human intervention) and continuously.
(c) That the proprietary technology broadly enables front end optimization of websites by reducing the size of the data, removing unnecessary information, delaying non-essential tasks and decoupling performance of the website from performance of linked third party websites.
(d) That the software is used in the network hardware and remains affixed to the network and within such network, at all times. The software is neither downloaded by the customers nor copied or otherwise customized and the customers cannot and need not use the software on a stand-alone basis for receiving the Applicant's services.
(e) That the Applicant does not distribute, license or otherwise sell any software (shrink wrapped or customized) in India and that we use our proprietary software in India only for our own CDN business.
(f) That the Applicant does not provide any kind of hardware to its customers in India.
(g) That the Applicant is not in the business of building websites not hosting them for its customers nor does it provide internet connectivity to its customers though leased lines".
13.7 Considering the above factual position, we hold that 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 customers' websites. This view gets support from our Ruling in Dell International Services India (P) Ltd. (supra), on the meaning of the expression "use" of equipment wherein it was held as follows:
"......The word 'use' in relation to equipment occurring in (iv.a) 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.
...There is no scope to invoke clause (iv.a) in such a case because the element of service predominates.
...Usage of equipment connotes that the grantee of right has possession and control over the equipment and the equipment is virtually at his disposal."
Applying the above principles to the facts of the Applicant's case, even though the Solutions may be provided using tangible property such as servers, databases, etc, Akamai India/the Indian customers do not have possession and control over the Akamai Edge Platform/website/server/any tangible property used in the provision of the Solutions.
13.8 As regards Revenue's contention that grant of distribution rights to Akamai India involves transfer of copyright, we find that the Revenue has tried to bring the Applicant within the ambit of Section 14(b) and specifically Section 14(b)(ii) of the Copy Right Act. Section 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 Section 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 above that the Copyright Act itself provides an exception to the general rule of Copyright in a computer programme copy, namely that Section 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.
13.9 We are unable to agree with the Revenue's contention that grant of distribution rights by the Applicant involves grant to use Trademark, which appears based on the view that certain other IPR such as 'branding" are licensed to the Reseller in India. A plain reading of Explanation 2 to Section 9(1)(vi) which defines royalty brings within the ambit of royalty, consideration for trademarks etc. Further, several clauses in the above 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 etc., 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 tax-ability.
13.10 As regards Revenue's contention that grant of distribution rights by the Applicant involves grant to use "process" belonging to it, we find that 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.
13.11 Regarding reliance placed by the Revenue on a host of rulings, we observe that the cited rulings, especially in Synopsis International, CGI Information Systems, Samsung Electronics, Citrix Systems, Gracemac Corporation, Cargo Community and Skill-soft 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 above mentioned cases relied upon by Revenue are not applicable to the facts of the Applicant's case.
13.12 The Revenue's reliance on Vodafone South Ltd. v. DDIT (supra) and Verizon Communications Singapore Pvt. Ltd., v. Income Tax Officer (supra) is also misplaced, as these decisions have been rendered in the context of inter connectivity charges paid by a customer to telecom operators wherein the customer himself uses the telecom operator's facility/hardware/software. Thus, the facts are different from the Applicant's case where Applicant itself uses its network of servers and software to provide a standard facility as mentioned above and the customer/end user does not have any access at any point of time to the Applicant's hardware or software.
13.13 The Revenue had also placed reliance on ABB FZ-LLC v. DCIT (supra). This ruling was rendered in the context of use/sharing of specialized knowledge, skill, expertise, etc. by the assessee through its employee with its associated enterprise. The Applicant's facts are clearly distinguishable from the facts of this Ruling in the absence of any use/sharing of knowledge, information, etc. by the Applicant with the Reseller or the end user.
13.14 We are therefore of the view that the amount received by the applicant towards the Solutions would not be in the nature of "Royalty".
14. With regard to question no. 4, in its application the Applicant has submitted that it does not have PE in India as per provisions of Article 5 of the India-US treaty. A US tax resident can have a PE in India if, inter-alia: (i) It has a fixed place of business through which its business is wholly or partly carried on [Article 5(1) of the India-US Treaty]; or (ii) It carries on business through an agent in India other than an agent of independent status [Article 5(4) of India-US Treaty].
14.1 As regards Article 5(1) it is stated that it does not have an office or any other establishment in India, and neither does it have any employees hired in India not do its personnel/employees visit India for the purpose of the provision of services to the Indian subscribers.
14.2 To have a PE in terms of Article 5(4), the same would be formed if the Applicant: (i) has an authority to conclude contracts on behalf of the Applicant; (ii).maintains any stock of goods of the Applicant for delivery on behalf of the Applicant; or (iii) Secures orders wholly or almost wholly for the Applicant.
14.3 It is stated that the Applicant is a technology company and is the leading global service provider for accelerating content and business process online. As per its 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 Clause 2.1 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 Clause 4.2 of the Reseller Agreement.
14.4 It is further stated that the Reseller Agreement does not create a principal-agent relationship between the Applicant and the Reseller. Clause 13.6 of the Reseller Agreement, according to which the relationship 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.
14.5 In view of the above, the Applicant contends that there is no creation of a Permanent establishment for the Applicant in India under the provisions of Article 5 of India-US Treaty.
14.6 We have considered the submissions of the Applicant. In their written submissions 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 above 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.
14.7 On the arguments of the Applicant, as of now, and on the facts of the case discussed in the earlier part of our Ruling, we are in agreement that 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.
15. Keeping in view the findings in the foregoing paragraphs, the questions posed to us seeking a Ruling, are answered as under:
1. The payments received by the Applicant from Akamai India for the content delivery solutions would not be taxable as Fees for Technical Services within the meaning of the term in Explanation 2 to clause (vii) of section 9(1) of the Income tax Act, 1961.
2. The payments received by the Applicant are also not taxable as Fees for Included Services under Article 12(4) of the India-US Treaty.
3. The amount received by the Applicant from Akamai India do not constitute royalty within the meaning of the term in Explanation 2 to clause (vi) of section 9(1) of the Income tax Act, 1961 and Article 12(3) of the India-US Treaty and hence not liable to tax.
4. The Applicant does not create a Permanent Establishment in India in the facts and circumstances of the case under the provisions of Article 5 of India-US Treaty.
5. Since no income arises in the hands of the Applicant in India, there is no requirement to withhold tax under section 195 of the Income tax Act, 1961.
16. This Ruling is accordingly given and pronounced on this day of 21st day of May, 2018