M/s. Organisation Development Pte Ltd., CHENNAI v. DDIT, CHENNAI

ITA 2137/CHNY/2010 | 2007-2008
Pronouncement Date: 09-02-2012 | Result: Dismissed

Appeal Details

RSA Number 213721714 RSA 2010
Assessee PAN AABCO1288L
Bench Chennai
Appeal Number ITA 2137/CHNY/2010
Duration Of Justice 1 year(s) 1 month(s) 19 day(s)
Appellant M/s. Organisation Development Pte Ltd., CHENNAI
Respondent DDIT, CHENNAI
Appeal Type Income Tax Appeal
Pronouncement Date 09-02-2012
Appeal Filed By Assessee
Order Result Dismissed
Bench Allotted D
Tribunal Order Date 09-02-2012
Date Of Final Hearing 30-01-2012
Next Hearing Date 30-01-2012
Assessment Year 2007-2008
Appeal Filed On 20-12-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH CHENNAI BEFORE SHRI ABRAHAM P. GEORGE ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN JUDICIAL MEMBER I.T.A. NO. 2137/MDS/2010 (ASSESSMENT YEAR : 2007-08) M/S ORGANISATION DEVELOPMENT PTE LTD. C/O R. VENKATAKRISHNAN & ASSOCIATES CHARTERED ACCOUNTANTS 1/4 4 TH MAIN ROAD R.A.PURAM CHENNAI - 600 028. PAN : AABCO1288L (APPELLANT) V. THE DEPUTY DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) CHENNAI - 600 034. (RESPONDENT) APPELLANT BY : SHRI VIKRAM VIJAYARAGHAVAN ADVOC ATE RESPONDENT BY : SHRI K.E.B. RENGARAJAN JUNIOR STANDING COUNSEL DATE OF HEARING : 30.01.2012 DATE OF PRONOUNCEMENT : 09.02.2012 O R D E R PER ABRAHAM P. GEORGE ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE ASSESSEE ITS GRIEVAN CE IS THAT A.O. TREATED LUMPSUM PAYMENT RECEIVED ON SALE OF SOFTWAR E AS ROYALTY UNDER ARTICLE 12 OF DOUBLE TAXATION AGREEMENT (DTA) BETWEEN INDIA AND SINGAPORE. AS PER THE ASSESSEE THE AMOUNTS RE CEIVED WERE I.T.A. NO. 2137/MDS/2010 2 BUSINESS PROFITS IN VIEW OF ARTICLE 7 DTT BETWEEN I NDIA AND SINGAPORE. FURTHER AS PER ASSESSEE THE ASSESSING OFFICER TREATED BALANCE SCORE CARD (BSC) PROJECT AS A TOOL PROVIDED BY THE ASSESSEE TO ITS CLIENTS WHICH GAVE RISE TO TECHNIC AL SERVICES FEE WHEN IT OUGHT NOT HAVE BEEN CONSIDERED SO THERE BEING N O TECHNICAL SERVICES RENDERED. 2. FACTS APROPOS ARE THAT ASSESSEE A FOREIGN COMPA NY LOCATED IN SINGAPORE WAS GIVING SERVICES TO VARIOUS CLIENTS A LL OVER THE WORLD FOR DEVELOPMENT OF BSC PROJECT. DURING THE RELEVANT PR EVIOUS YEAR ASSESSEE HAD RENDERED SERVICES TO COMPANIES LOCATED IN INDIA ALSO. ASSESSEE FURNISHED COPIES OF AGREEMENTS ENTERED WIT H THREE OF ITS CLIENTS IN INDIA NAMELY M/S ADANI WILMAR LTD. M/ S PMC PROJECTS PVT. LTD. AND M/S MUNDRA PORT AND SPECIAL ECONOMIC ZONE LTD TO THE ASSESSING OFFICER. INCIDENTALLY ASSESSEE HAD FILED RETURN FOR IMPUGNED ASSESSMENT YEAR DECLARING NIL INCOME AND C LAIMING REFUND OF TAX DEDUCTED AT SOURCE ON THE PAYMENTS RE CEIVED FROM THE INDIAN CLIENTS. ASSESSING OFFICER WAS OF THE OPINI ON THAT THE SERVICES FOR DEVELOPMENT OF BSC WHICH WAS A BUSINESS MANAGE MENT TOOL COULD BE DIVIDED INTO TWO SEGMENTS ONE PART BEING PROFESSIONAL FEES RECEIVED BY THE ASSESSEE AND SECOND BEING LUMP SUM AMOUNT RECEIVED FOR SALE OF RELEVANT SOFTWARE. ACCORDING TO A.O. RECEIPTS I.T.A. NO. 2137/MDS/2010 3 WERE FOR TECHNICAL SERVICES INSOFAR AS IT RELATED T O PROFESSIONAL FEES. WITH REGARD TO LUMPSUM AMOUNTS RECEIVED FOR SOFTWAR E THE A.O. CONSIDERED IT TO BE ROYALTY. ASSESSEES ARGUMENT BEFORE A.O. WAS THAT THESE WERE ALL BUSINESS PROFITS OF THE ASSESSE E AND IN VIEW OF ARTICLE 7 OF DTA BETWEEN INDIA AND SINGAPORE SUCH BUSINESS PROFITS WERE NOT TAXABLE IN INDIA. ASSESSING OFFICER MADE AN ANALYSIS OF THE INVOICES RAISED BY THE ASSESSEE ON THE ABOVE MENTIO NED THREE CLIENTS AND THE DATA AS PER THE AGREEMENTS WITH THESE CLIEN TS AND AFTER CONSIDERING THE REPLIES OF THE ASSESSEE CAME TO FO LLOWING CONCLUSIONS:- (I) THE LUMPSUM PAYMENT RECEIVED BY THE ASSESSEE FROM I TS CLIENTS FOR THE SOFTWARE DESIGNED FOR BSC WAS COVERED BY TH E DEFINITION OF ROYALTY UNDER SECTION 9(1) OF INCO ME-TAX ACT 1961 (IN SHORT 'THE ACT'). (II) PROFESSIONAL CHARGES RECEIVED BY THE ASSESSEE HAVE TO BE CONSIDERED AS ROYALTY AS PER CLAUSES (I) AND (II) O F EXPLANATION (2) TO SUB-SECTION (VI) OF SECTION 9(1) OF THE ACT. ALTERNATIVELY THE PAYMENTS COULD ALSO BE CONSIDERED AS FEE FOR TE CHNICAL SERVICES FALLING UNDER SECTION (9)(1)(VII) OF THE A CT. (III) SINCE ASSESSEE COULD LEGITIMATELY CLAIM THE BENEFIT OF SECTION 90(2) OF THE ACT IT BECAME NECESSARY TO LOOK INTO THE RELEVANT DTA WITH REGARD TO TREATMENT OF ROYALTY AND FEES FO R TECHNICAL SERVICES. THE BALANCE SCORE CARD DESIGNED ON LICEN SED SOFTWARE GIVEN BY THE ASSESSEE TO ITS CLIENTS WAS N OTHING BUT AN EQUIPMENT. THEREFORE LUMPSUM CONSIDERATION ON PRO FESSIONAL CHARGES COULD BE CONSIDERED AS PAYMENTS RECEIVED AS CONSIDERATION FOR THE RIGHT TO USE OF ANY INDUSTRIA L COMMERCIAL OR SCIENTIFIC EQUIPMENT OR ALTERNATIVELY COULD BE CONSIDERED AS FEES FOR SERVICES BEING ANCILLARY AND SUBSIDIARY TO THE I.T.A. NO. 2137/MDS/2010 4 APPLICATION OR ENJOYMENT OF RIGHT TO USE AN INDUSTR IAL COMMERCIAL OR SCIENTIFIC EQUIPMENT. (IV) THOUGH THE ASSESSEE RELY ON THE DECISION OF MCKINSE Y A CO. INC. (PHILIPPINES) V. ADIT (INTERNATIONAL TAXATION) 284 ITR(AT) 227 OF MUMBAI BENCH OF THIS TRIBUNAL THE TERMS TECHNI CAL AND CONSULTANCY COULD NOT DETERMINE THE TAXABILITY AN D THE TERM TECHNICALCOULD NOT BE CONFINED ONLY TO TECHNOLOGY RELATED TO ENGINEERING PROFESSIONAL AND CONSULTANCY SERVICES . (V) THOUGH THE ASSESSEE ARGUE THAT IT DID NOT HAVE ANY PERMANENT ESTABLISHMENT IN INDIA EXPLANATION TO SUB-SECTION (2) TO SECTION 9 OF THE ACT INSERTED BY FINANCE ACT 2010 WITH RETROSPECTIVE EFFECT FROM 1.6.1976 OBVIATED THE REQ UIREMENT FOR A NON-RESIDENT TO HAVE A RESIDENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTION IN INDIA FOR TAXING ITS INCOME ARISING ON ACCOUNT OF INTEREST ROYALTY AND FEE FOR TECHNICAL SERVICES. (VI) ARTICLE 7 OF DTA COULD NOT BE APPLIED SINCE THE NAT URE OF PAYMENTS RECEIVED BY THE ASSESSEE WERE CLEARLY IN T HE NATURE OF ROYALTY AND FEES FOR TECHNICAL SERVICES. HE THEREFORE PROPOSED THAT THE TOTAL INVOICE AMOU NT OF ` 2 07 86 482/- WAS TO BE CONSIDERED AS ROYALTY AND FEES FOR TECHNICAL SERVICES AND TAX HAS TO BE LEVIED ON THE ASSESSEE ACCORDINGLY. 3. AGAINST THE DRAFT ASSESSMENT SO PROPOSED ASSESS EE MOVED BEFORE THE DISPUTE RESOLUTION PANEL (DRP) IN TERMS OF SECTION 144C OF THE ACT. ARGUMENT OF THE ASSESSEE WAS THAT SUPP LY OF SOFTWARE AND CONSULTANCY SERVICES WERE INTERDEPENDENT INSOFA R AS DEVELOPMENT OF BSC WAS CONCERNED. ACCORDING TO ASS ESSEE THE A.O. FELL IN ERROR IN TREATING THEM SEPARATELY. AS PER THE ASSESSEE SOFTWARE DEVELOPED FOR THE PURPOSE OF BALANCE SCORE CARD WAS A PACKAGED SOFTWARE WHICH THE CLIENTS COULD DOWNLOAD FROM INTERNET. I.T.A. NO. 2137/MDS/2010 5 AGAIN AS PER THE ASSESSEE THE LUMP SUM PAYMENTS R ECEIVED FROM SUCH SOFTWARE COULD NOT BE TREATED AS EQUIPMENT RO YALTY BECAUSE USER HAD NO DOMAIN OR CONTROL OVER SUCH SOFTWARE TO SUIT ITS BUSINESS NEEDS. AS PER THE ASSESSEE THE SAME SOFTWARE WA S BEING SUPPLIED TO DIFFERENT CLIENTS AND ASSESSEE NEVER PARTED WITH POSSESSION OR CONTROL OVER THE RIGHTS IN SUCH SOFTWARE. THE PAYM ENTS RECEIVED THEREFORE COULD NOT BE CONSIDERED AS EQUIPMENT ROY ALTY. RELIANCE WAS PLACED ON THE DECISIONS OF HONBLE APEX COURT I N THE CASE OF BHARAT SANCHAR NIGAM LIMITED AND OTHERS V. UOI & OT HERS (282 ITR 273) AND TATA CONSULTANCY SERVICES V. STATE OF ANDH RA PRADESH (271 ITR 401) AND THAT OF BANGALORE BENCH OF THIS TRIBUN AL IN THE CASE OF SAMSUNG ELECTRONICS CO. LTD V. ITO [276 ITR (AT) 1] . HOWEVER DRP WAS NOT APPRECIATIVE. ACCORDING TO IT DECISIO N OF HONBLE APEX COURT IN THE CASE OF BHARAT SANCHAR NIGAM LIMITED ( SUPRA) WAS IN RELATION TO SALE OF GOODS AND INSOFAR AS DECISION O F BANGALORE BENCH OF THIS TRIBUNAL WAS CONCERNED IT RESTED ON THE FA CTS OF THAT CASE ONLY. 4. INSOFAR AS THE TREATMENT OF THE AMOUNTS RECEIVED AS FEES FOR TECHNICAL SERVICES WAS CONCERNED ARGUMENT OF THE A SSESSEE BEFORE DRP WAS THAT BSC WAS NOT A TOOL BUT ONLY A MANAGEME NT SYSTEM AND SUCH SYSTEM COULD BE USED EVEN WITHOUT SOFTWARE . FURTHER AS I.T.A. NO. 2137/MDS/2010 6 PER ASSESSEE ARTICLE 12 OF DTA CLEARLY SPECIFIED T HAT IF A PAYMENT WAS TO BE CONSIDERED AS FEE FOR TECHNICAL SERVICES SUCH SERVICES SHOULD MAKE AVAILABLE TECHNICAL KNOWLEDGE EXPERIEN CE SKILL KNOW- HOW OR PROCESS WHICH ENABLED THE PERSON ACQUIRING T HE SERVICES TO APPLY THE TECHNOLOGY CONTAINED THEREIN. AS PER THE ASSESSEE IT WAS NOT MAKING AVAILABLE ANY TECHNICAL KNOWLEDGE WHICH COULD BE USED BY ITS CLIENT AND HENCE THE RECEIPTS WOULD NOT FALL WITHIN THE DEFINITION OF FEE FOR TECHNICAL SERVICES. HOWEVER DRP WAS NOT IMPRESSED ON THIS LINE OF REASONING AS WELL. ACCORDING TO IT A SSESSEE WAS PROVIDING CONSULTANCY SERVICES TO ITS CLIENT-ORGANIZATIONS AN D SUCH SERVICES WERE OF MANAGERIAL OR TECHNICAL IN NATURE. ASSESSE E HAD THROUGH ITS PRINCIPAL CONSULTANT SHRI V. RAMAKRISHNAN MADE AVA ILABLE TECHNICAL KNOWLEDGE EXPERIENCE AND SKILL POSSESSED BY THE AS SESSEE TO SUCH CLIENTS WHO IN TURN USED SUCH SKILLS TO APPLY THE KNOWLEDGE CONTAINED THEREIN FOR ITS BUSINESS PURPOSES. 5. THUS THE DRP REJECTED BOTH THE CONTENTIONS OF T HE ASSESSEE WITH REGARD TO LUMP SUM PAYMENT RELATABLE TO THE SO FTWARE AND PROFESSIONAL FEE RELATABLE TO SERVICES RENDERED BY THE ASSESSEETO ITS CLIENTS. ASSESSING OFFICER ACCORDINGLY PASSED THE ASSESSMENT ORDER IN CONFORMITY WITH THE DIRECTIONS OF THE DRP. I.T.A. NO. 2137/MDS/2010 7 6. NOW BEFORE US LEARNED A.R. STRONGLY ASSAILING T HE ORDER OF THE AUTHORITIES BELOW SUBMITTED THAT BALANCE SCORE CAR D WAS A MANAGEMENT TOOL IN WHICH PRESENTATION OF FINANCIAL AND NON-FINANCIAL MEASURES WERE CONTINUALLY MADE AND COMPARED WITH CE RTAIN TARGET VALUE WITHIN A SIMPLE CONCISE REPORT IN SUCH A MANN ER THAT WOULD HELP THE MANAGEMENT TO EFFECTIVELY FOCUS ON AREAS WHERE PERFORMANCE DEVIATED FROM EXPECTATIONS. IN OTHER WORDS ACCORD ING TO HIM BALANCE SCORE CARD WAS A TRIGGER WHICH CALLED FOR I MPROVED PERFORMANCE AND KEPT THE MANAGEMENT ON ALERT ON DE FICIENCIES IN MEETING TARGETS. RELYING ON THE AGREEMENT ENTERED BY THE ASSESSEE WITH ONE OF ITS CLIENTS NAMELY M/S ADANI WILMAR LIMITED (PLACED AT PAGES 1-2 OF PAPER-BOOK) LEARNED A.R. SUBMITTED T HAT THERE WAS A LICENSED SOFTWARE AND THE TEAM FROM ASSESSEE-COMPAN Y WAS ONLY HELPING THE CLIENT TO IMPLEMENT SUCH LICENSED SOFTW ARE. ACCORDING TO HIM THE ASSESSING OFFICER FELL IN ERROR WHEN HE CO NSIDERED THE SOFTWARE AS SOMETHING UNCONNECTED TO THE PROCESS OF DEVELOPING BALANCE SCORE CARD. LEARNED A.R. SUBMITTED THAT S UCH A SOFTWARE WAS ONLY A TOOL USED IN THE DEVELOPMENT OF BALANCE SCORE CARD. LOWER AUTHORITIES FELL IN ERROR ACCORDING TO HIM IN SPLITTING INTO THE RECEIPTS FROM CLIENTS TO PRICE FOR SOFTWARE AND FEE FOR MANAGEMENT CONSULTANCY. THERE WAS NO ROYALTY SINCE THERE WAS NO EQUIPMENT I.T.A. NO. 2137/MDS/2010 8 WHICH WAS IN THE DOMAIN OF THE CLIENT AT ANY TIME. THE SOFTWARE WAS DOWNLOADED BY THE CLIENTS. SUCH SOFTWARE WAS NOT C USTOMIZED TO SUIT ANY PARTICULAR CLIENTS AND HENCE THERE WAS NO QUEST ION OF ANY ROYALTY. THE SALE ONLY RESULTED IN BUSINESS INCOME. INSOFAR AS CLAIM OF THE A.O. THAT ASSESSEE HAD MADE AVAILABLE TECHNICAL KNO WLEDGE TO ITS CLIENTS LEARNED A.R. POINTED OUT THAT THE TECHNICA L KNOWLEDGE WAS NEVER MADE AVAILABLE TO THE CLIENTS. ONLY THE OUTP UT OF THE CONSULTANCY WAS AVAILABLE TO THE CLIENTS AND METHOD OLOGY OF DEVELOPING THE BALANCE SCORE CARD AS WELL AS TECHNI CAL KNOWLEDGE RELATED THERETO ALWAYS REMAINED WITH ASSESSEE. AS PER LEARNED A.R. THE ASSESSEE WAS ONLY GETTING BUSINESS INCOME FROM SUCH TRANSACTIONS AND IN VIEW OF ARTICLE 7 OF DTA BETWEE N INDIA AND SINGAPORE BUSINESS INCOME COULD NOT BE TAXED IN IN DIA UNLESS ASSESSEE WAS HAVING A P.E. IN INDIA. PARTICULAR RE LIANCE WAS PLACED ON THE DECISION OF AUTHORITY FOR ADVANCE RULINGS IN THE CASE OF INTERTEK TESTING SERVICES INDIA (PVT) LTD. [307 ITR 418 (AAR)] BHARTI AXA GENERAL INSURANCE IN.RE (AAR NO.845 OF 2009 DA TED 6 TH AUGUST 2010) AND ERNST & YOUNG IN.RE (AAR NO.820 OF 2009 DATED 19 TH MARCH 2010) FOR HIS ARGUMENT THAT ASSESSEE HAD NOT MADE AVAILABLE ANY TECHNICAL KNOWLEDGE EXPERIENCE SKILL KNOW-HO W OR PROCESS TO ITS CLIENTS. ACCORDING TO HIM TECHNICAL KNOWLEDGE COULD BE I.T.A. NO. 2137/MDS/2010 9 CONSIDERED AS MADE AVAILABLE ONLY WHEN THE PERSON A CQUIRING THE TECHNOLOGY COULD APPLY SUCH TECHNOLOGY. THE FACT T HAT RENDERING OF THE SERVICE REQUIRED TECHNICAL INPUT BY THE PERSON PROVIDING THE SERVICE WOULD NOT PER SE MEAN THAT TECHNICAL KNOWLE DGE SKILL ETC. WAS MADE AVAILABLE TO THE PERSON RECEIVING THE SERV ICE. FOR THESE CONTENTIONS RELIANCE WAS ALSO PLACED ON MEMORANDUM OF UNDERSTANDING DATED 15 TH MAY 1989 BETWEEN GOVERNMENT OF INDIA AND U.S. GOVERNMENT WITH REGARD TO DOUBLE TAXATION TREATY WHICH INTER ALIA EXPLAIN THE TERMS USED IN SUCH TREATY IN CLUDING FEES FOR TECHNICAL SERVICES. RELYING ON THE MUTUAL NON-DIS CLOSURE AGREEMENT BETWEEN ASSESSEE AND ITS CLIENT M/S ADANI WILMAR LIMITED (COPY PLACED AT PAPER-BOOKS PAGES 7-10) LE ARNED A.R. SUBMITTED THAT THE INTELLECTUAL PROPERTY ALWAYS VES TED WITH THE ASSESSEE ONLY. 7. PER CONTRA LEARNED D.R. SUBMITTED THAT THE INVO ICES RAISED BY THE ASSESSEE ON ITS CLIENTS PLACED IN ITS PAPER-BO OK PAGES 23-34 CLEARLY DEMONSTRATED THAT THERE WERE TWO LIMBS FOR THE PAYMENT RECEIVED BY THE ASSESSEE - ONE FOR SUPPLY OF SOFTWA RE AND THE OTHER FOR PROFESSIONAL SERVICE. ACCORDING TO HIM TECHNI CAL SERVICES WERE MADE AVAILABLE TO ITS CLIENTS. PLACING RELIANCE ON THE PAYMENT TERMS WHICH APPEAR ON PAGE 1 OF PAPER-BOOK IN THE AGREEME NT BETWEEN THE I.T.A. NO. 2137/MDS/2010 10 ASSESSEE AND M/S ADANI WILMAR LIMITED LEARNED D. R. SUBMITTED THAT THE SOFTWARE WAS TO BE SUPPLIED FOR A FEE OF S$ 171 025. SUCH SOFTWARE WHICH WAS DOWNLOADED FROM THE DESIGNATED S ITE WAS FOR THE STAGES OF DEVELOPMENT OF BSC AND DEPLOYMENT AND IMP LEMENTATION OF BSC. THEREFORE ACCORDING TO HIM THE WHOLE OF THE AMOUNT RECEIVED BY THE ASSESSEE WAS EITHER ROYALTY OR TECH NICAL SERVICE FEES AND THESE WERE CLEARLY TAXABLE IN ACCORDANCE WITH D TT BETWEEN INDIA AND SINGAPORE. ASSESSEE COULD NOT SAY THAT THESE W ERE BUSINESS INCOME FOR THE SIMPLE REASON THAT ONLY WHERE THE AM OUNTS COULD NOT BE CORRECTLY CLASSIFIED COULD IT BE CONSIDERED AS BUSINESS INCOME. THE QUESTION OF P.E. OR BUSINESS CONNECTION AROSE O NLY IF IT WAS BUSINESS INCOME AND HENCE THIS WAS NOT RELEVANT HE RE ACCORDING TO LEARNED D.R. 8. IN REPLY LEARNED A.R. SUBMITTED THAT THERE WERE 11 STEPS FOR THE DEVELOPMENT OF BALANCE SCORE CARD AS MENTIONED IN P APER-BOOK PAGES 16-19. ACCORDING TO HIM SOFTWARE BECAME REL EVANT ONLY IN THE 11 TH STEP AND THERE WAS NO QUESTION OF ANY ROYALTY ARIS ING TO THE ASSESSEE ON SUCH SOFTWARE. ACCORDING TO HIM ASSES SEE HAD NOT MADE AVAILABLE ANY TECHNICAL SERVICES AND ASSESSING OFFICER FELL IN ERROR IN NOT RECOGNIZING THAT DEFINITION OF TECHNI CAL SERVICES FEE AS I.T.A. NO. 2137/MDS/2010 11 PER DTA BETWEEN INDIA AND SINGAPORE WAS DIFFERENT F ROM THE DEFINITION OF TECHNICAL SERVICES UNDER SECTION 9( 1)(VII) OF THE ACT. 9. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. THE ISSUE BOILS DOWN TO CLASSIFICATION OF THE NATUR E OF RECEIPTS OF THE ASSESSEE ON ACCOUNT OF SERVICES RENDERED BY IT IN DEVELOPING BALANCE SCORE CARD SYSTEM FOR ITS CLIENTS. FOR THE DEVELOPMENT OF SUCH BALANCE SCORE CARD SYSTEM CLIENTS WERE REQUIR ED TO DOWNLOAD FROM THE SITES DESIGNATED BY THE ASSESSEE A LICENSE D SOFTWARE. AGREEMENTS ENTERED BY THE ASSESSEE WITH THE THREE C LIENTS ARE TYPICALLY SIMILAR. FOR EASY APPRECIATION ONE SUCH AGREEMENT AS APPEARING ON PAGES 1-2 OF PAPER-BOOK IS REPRODUCED HEREUNDER:- DEAR SIRS WE THANK YOU FOR SELECTING US TO ASSIST YOU IN THE DEVELOPMENT OF A BALANCED SCORECARD (BSC) FOR DEVELOPMENT ON APRIL 1 2007 SUBJECT TO YOU MAKING AVAILABLE THE REQUIRED DATA A ND INPUTS IN TIME. WE OUTLINE THE BROAD FRAMEWORK AROUND WHICH WE WILL BE HAPPY TO SEE YOU STARTING DECEMBER 2006. OUR PRINCIPAL CONSULTANT MR. V. RAMAKRISHNAN WILL BE LEADING A TEAM OF OUR ASSOCIATES TO HELP IMPLEMENT THE LICENS ED SOFTWARE TO HELP DEVELOP THE BALANCED SCORECARD OVER THE TIM E OUTLINED IN OUR PROPOSAL TO COMPLETE DEVELOPMENT OF THE BSC. S EVERAL OF OUR ASSOCIATES WILL BE VISITING THE SITE. MORE WILL AS SIST US IN THE BACK OFFICE IN ANALYSIS AND COLLATION. WE WOULD REQUIRE YOU AND YOUR COLLEAGUES TO TREAT A S CONFIDENTIAL THE IPR AND FORMATS WE WILL BE SHARING WITH YOU. W E WOULD HOPE I.T.A. NO. 2137/MDS/2010 12 YOUR STAFF ARE SUITABLY BOUND IN RESTRICTING THE US E OF THIS INFORMATION FOR PURPOSES OTHER THAN FOR THE BENEFI T OF YOUR FIRM AND ARE OBLIGED TO DO SO BY YOUR CURRENT STAND ING ORDERS. A SEPARATE NDA SECURING OUR MUTUAL INTERESTS CAN BE E NTERED INTO AS WE MOVE FORWARD SHOULD YOU SEE NECESSARY. THE SOFTWARE WILL BE DOWNLOADED FROM THE DESIGNATED SITE IN TWO PHASES; THE DEVELOPMENT OF PHASE OF BSC AND DEPLOYM ENT AND IMPLEMENTATION PHASE OF BSC. THE FEE OF S$ 171 025 IS A LUMP SUM PAYABLE FOR THE SOFTWARE FOR DEVELOPMENT OF THE BSC BY END MARCH 207 DEPLOYMENT AND IMPLEMENTATION SUPPORT FO R A PERIOD OF 18 (EIGHTEEN MONTHS STARTING APRIL 1 2007) OF T HIS SUM OF S$ 171 025 THE SUM OF S$ 112 500 WILL BE FOR THE DEVEL OPMENT PHASE OF THE PROJECT; THE BALANCE WILL BE SPREAD OUT OVER 18 MONTHS. FOR ANY ADDITIONAL WORK OVER AND ABOVE THE CONTRACT ED TIME THE DAILY RATE WILL BE S$ 8750 PER DAY PER CONSULTANT AND WILL BE UNDERTAKEN SUBJECT TO YOUR APPROVAL BEFORE INCURRI NG THE ADDITIONAL EFFORT. THE SCHEDULE AND FEE IN CASE OF EXTENSION OF THE CONTRACT WILL HAVE TO REVIEWED AND MUTUALLY ACC EPTED BEFORE START OF THE NEXT PHASE. TRAVEL FOR THE PRINCIPAL CONSULTANT AND ASSOCIATES REQUIRED TO BE ON SITE FOR YOUR WORK OUTSIDE OF SINGAPORE AND WITH IN SINGAPORE & INDIA WILL BE TO YOUR ACCOUNT PER THE USUAL NORMS (BUSINESS CLASS AIRFARE APPROPRIATE LODGINGS BOARDING COSTS AND SUNDRY EXPENSES IF ANY). MISCELLANEOUS EXPENSES FOR COMMU NICATION ETC. WILL BE TO YOUR ACCOUNT AS AND WHEN THEY ARISE AND WILL BE BILLED UNDER SEPARATE HEADS- ONCE A QUARTER. TRAVEL TIME IS TO OUR ACCOUNT. PAYMENT FOR THE FIRST PHASE OF DEVELOPMENT THE PR OJECT BY END MARCH WILL BE IN THREE INSTALLMENTS 50% IN JAN UARY 2007 25% IN FEBRUARY 2007 AND BALANCE 25% IN MARCH 2007 AGAINST INVOICES. THE PAYMENT FOR SECOND PHASE OF DEPLOYME NT & IMPLEMENTATION WILL BE PAID IN 18 EQUAL INSTALLMENT S. WE WOULD REQUEST YOU TO PAY US WITHIN SEVEN WORKING DAYS OF THE DATE OF THE INVOICE; WE REQUEST YOU ADVISE US THE P AYMENT DETAILS BY EMAIL. THE TDS & SERVICE TAX FOR THE BSC DEVELO PMENT WILL BE I.T.A. NO. 2137/MDS/2010 13 BORNE BY YOU. ALL BANK CHARGES INCURRED AT YOUR EN D WILL BE TO YOUR ACCOUNT ANY TRANSACTION CHARGES INCURRED BY U S AT OUR END WILL BE BORNE BY US. WE WILL ADVISE THE BANK DETAI LS IN OUR INVOICE. AS A MARK OF ACCEPTANCE WE REQUEST YOU TO SIGN AND DATE BOTH PAGES OF THIS TWO PAGE DOCUMENT AND RETURN ONE COPY OF THIS DOCUMENT TO US. WE LOOK FORWARD TO A MUTUALLY REWARDING PARTNERSHIP AND WOULD REQUEST FULL PAYMENT SHOULD YOU DECIDE TO STOP USIN G OUR SERVICES MIDWAY. 10. WHAT IS CLEAR FROM THE ABOVE AGREEMENT IS THAT ASSESSEE HAD SENT ITS PRINCIPAL CONSULTANT SHRI V. RAMAKRISHNAN WITH A TEAM FOR HELPING ITS CLIENTS IN IMPLEMENTING A LICENSED SOFT WARE WHICH WAS REQUIRED TO DEVELOP THE BALANCE SCORE CARD FOR SUCH CLIENTS. THE CLIENTS WERE REQUIRED TO MAKE LUMP SUM PAYMENTS FOR DOWNLOADING SUCH SOFTWARE FROM THE DESIGNATED SITES AND SUCH SO FTWARE WAS TO BE USED IN VARIOUS PHASES OF DEVELOPING THE BALANCE SC ORE CARD SYSTEM. BALANCE SCORE CARD IS A STRATEGIC PERFORMA NCE MANAGEMENT TOOL FIRST DEVELOPED BY ONE ART SCHNEIDERMAN IN 198 7 BUT HAS THEREAFTER UNDERGONE A NUMBER OF REVISIONS BY VARIO US RESEARCHERS. BALANCE SCORE CARD SYSTEM HAS EVOLVED OVER TIME AND HAS BEEN MODIFIED TO ADDRESS THE DEFICIENCIES IN THE FIRST M ODELS AND THIRD GENERATION BALANCE SCORE CARD SYSTEM PRESENTLY USED IS BASED ON A DESTINATION STATEMENT CREATED AT THE BEGINNING OF T HE SCORE CARD DESIGNING PROCESS. THE SUCCESS OF BALANCE SCORE CA RD SYSTEM I.T.A. NO. 2137/MDS/2010 14 DEPEND ON THE TYPE OF MEASURES ADOPTED AND THE TARG ET VALUE FIXED FOR EACH SUCH MEASURES OR IN OTHER WORDS THE DASH BOARD DEVELOPED SHOULD IDEALLY BE A BREAK-UP OF LONG TERM GOALS AND STRATEGIES TO MANAGEABLE MEASUREMENT POINTS WHICH CAN BE CONTINUA LLY UPDATED. AS MENTIONED BY LEARNED A.R. A PROPERLY DESIGNED B ALANCE SCORE CARD CAN ALERT A MANAGER ON THE AREAS WHERE PERFORM ANCE DEVIATED FROM EXPECTED LEVELS AND TRIGGER IMPROVED PERFORMA NCE. SO THE MOST IMPORTANT STEP IN EVOLVING A BALANCE SCORE CAR D SYSTEM IS IDENTIFYING THE MEASURES THAT ARE TO BE USED AND A STUDY BY A TRAINED EXPERT IS REQUIRED FOR SUCH IDENTIFICATION BASED ON THE DESTINATION STATEMENTS. THE MEASURES WILL VARY FROM ORGANIZATI ON TO ORGANIZATION SINCE ANY TWO ORGANIZATIONS RARELY HA S SAME DESTINATION STATEMENTS. WE CANNOT SAY THAT THE CLIENTS OF THE ASSESSEE WERE HAVING THE SAME DESTINATION STATEMENTS. EACH WILL HAVE ITS OWN GOALS AND DIFFERENT STRATEGIES TO REACH SUCH GOALS. THE MEASURES WILL ALSO BE DIFFERENT. A TEAM WHICH IS EVOLVING A BAL ANCE SCORE CARD SYSTEM NECESSARILY HAS TO IDENTIFY THE MEASURES THA T ARE RELATABLE TO THE ENTITY UNDER STUDY. WE CANNOT SAY THAT THIS IS A TYPE OF SERVICE WHICH CAN BE USED BY ANY ORGANIZATION BY APPLICATIO N OF AN OFF THE SHELF SOFTWARE. THE SOFTWARE MIGHT BE HELPFUL IN D EVELOPMENT OF THE PHASES OF THE BALANCE SCORE CARD AS WELL AS FUNCTIO NING THEREAFTER. I.T.A. NO. 2137/MDS/2010 15 BUT CONSIDERABLE SKILL WILL BE REQUIRED IN IDENTIF YING THE MEASURES AND FIXING THE TARGETS FOR EACH SUCH MEASURE FOR A DECI SIVE MEANINGFUL BALANCE SCORE CARD FOR DIFFERENT AREAS. SO WE ARE IN FULL AGREEMENT WITH THE OBSERVATION OF LEARNED A.R. THAT THE SOFTW ARE IS ONLY A PART OF THE TOTAL PROCESS OF DEVELOPMENT OF BALANCE SCORE C ARD. NO DOUBT THE FEE PAYABLE BY THE ASSESSEE HAS BEEN LINKED TO THE DOWNLOADING OF THE SOFTWARE BUT THIS BY ITSELF WILL NOT BE SUF FICIENT TO COME TO A CONCLUSION THAT THE SOFTWARE WAS AN EQUIPMENT BY IT SELF WHICH WOULD EARN THE ASSESSEE ANY ROYALTY. IN OUR OPINION THE WHOLE PROCESS COULD NOT HAVE BEEN DIVIDED INTO TWO JUST ON THE BA SIS OF A CLAUSE CONTAINED IN THE AGREEMENT AS ONE FOR ROYALTY RELA TABLE TO THE SOFTWARE AND THE OTHER FOR FEES FOR TECHNICAL SERVI CES. 11. NOW THE QUESTION REMAINING IS WHETHER THE AMOUN T RECEIVED CAN BE DEEMED AS FEES FOR TECHNICAL SERVICES. AS M ENTIONED BY AUTHORITY FOR ADVANCE RULINGS IN THE CASE OF BHARTI AXA GENERAL INSURANCE IN.RE (SUPRA) THE PROVISIONS IN A TREA TY WITH REGARD TO THE DEFINITION OF THE TERM FEES FOR TECHNICAL SERVICES IS MUCH DIFFERENT FROM THE DEFINITION AS GIVEN UNDER SECTION 9(1)(VII ) OF THE ACT. ASSESSEE NO DOUBT IS JUSTIFIED IN FALLING BACK ON SECTION 90(2) OF THE ACT FOR INSISTING THAT ARTICLE OF THE TREATY BEING MORE BENEFICIAL SHOULD BE APPLIED AND THIS VIEW IS WELL SUPPORTED BY HONB LE APEX COURT IN I.T.A. NO. 2137/MDS/2010 16 THE CASE OF UNION OF INDIA V. AZADI BACHAO ANDOLAN (263 ITR 706). FEES FOR TECHNICAL SERVICES AS DEFINED IN DTT BE TWEEN INDIA AND SINGAPORE IS REPRODUCED HEREUNDER:- THE TERM FEES FOR TECHNICAL SERVICES AS USED IN T HIS ARTICLE MEANS PAYMENTS OF ANY KIND TO ANY PERSON IN CONSIDERATION FOR SERVICES OF A MANAGERIAL TECHNIC AL OR CONSULTANCY NATURE (INCLUDING THE PROVISION OF SUCH SERVICES THROUGH TECHNICAL OR OTHER PERSONNEL) IF SUCH SERVI CES: (A) ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT PROPERTY OR INFORMATION FOR WHICH A PAYMENT DESCRIBED IN PARAGRAPH 3 IS RECEIV ED ; OR (B) MAKE AVAILABLE TECHNICAL KNOWLEDGE EXPERIENCE SK ILL KNOW-HOW OR PROCESSES WHICH ENABLES THE PERSON ACQUIRING THE SERVICES TO APPLY THE TECHNOLOGY CONT AINED THEREIN; OR (C) CONSIST OF THE DEVELOPMENT AND TRANSFER OF A TECHNI CAL PLAN OR TECHNICAL DESIGN BUT EXCLUDES ANY SERVICE THAT DOES NOT ENABLE THE PERSON ACQUIRING THE SERVICE TO APPLY THE TECHNOLOGY CONTAINED THEREIN. FOR THE PURPOSES OF (B) AND (C) ABOVE THE PERSON A CQUIRING THE SERVICE SHALL BE DEEMED TO INCLUDE AN AGENT NO MINEE OR TRANSFEREE OF SUCH PERSON. 12. AS ALREADY MENTIONED BY US THE SOFTWARE USED B Y THE ASSESSEE CANNOT BE CONSIDERED INDEPENDENT BUT ONLY AS A PA RT OF THE SERVICE RENDERED BY THE ASSESSEE TO ITS CLIENTS WITH REGARD TO THE DEVELOPMENT OF BSC. BY MEANS OF THE BALANCE SCORE CARD SYSTEM DEVELOPED BY THE ASSESSEE THE CLIENTS WERE GETTING AN ADVANTAGE WHICH WENT MUCH BEYOND THE PERIOD OF AGREEMENT BETW EEN THE I.T.A. NO. 2137/MDS/2010 17 ASSESSEE AND ITS CLIENTS. THE BALANCE SCORE CARD D EFINITELY ENABLED THE CLIENTS TO ACQUIRE THE SKILLS NECESSARY FOR IMP LEMENTING THEIR BUSINESS STRATEGIES MORE EFFECTIVELY AND THIS IS DE FINITELY A LONG TERM OBJECTIVE. ASSESSEE HAD DEFINITELY MADE AVAILABLE TECHNICAL KNOWLEDGE AND SKILL WHICH ENABLED ITS CLIENTS TO AC QUIRE THE KNOWLEDGE FOR USING BALANCE SCORE CARD SYSTEM FOR T HEIR BUSINESS PURPOSES FOR MEETING THEIR LONG TERM TARGETS AND TH E BENEFITS RAN WELL INTO THE FUTURE. NO DOUBT ALL TECHNICAL AND CONSU LTANCY SERVICES CANNOT FALL WITHIN THE SCOPE OF DEFINITION OF FEES FOR TECHNICAL SERVICES AS DEFINED UNDER THE DTT AND THIS HAS BE EN CLEARLY HELD BY AAR IN THE CASE OF BHARTI AXA GENERAL INSURANCE IN .RE (SUPRA) AS WELL AS IN THE CASE OF ERNST & YOUNG IN.RE (SUPRA) AND ALSO IN THE CASE OF INTERTEK TESTING SERVICES INDIA (PVT) LTD. (SUPRA). TO FIT INTO THE TERMINOLOGY THE TECHNICAL KNOWLEDGE SKILL ET C. SHALL REMAIN WITH THE PERSON RECEIVING THE SERVICES EVEN AFTER THE PA RTICULAR CONTRACT COMES INTO END. THERE IS NO CASE FOR THE ASSESSEE THAT BALANCE SCORE CARD BECAME USELESS OR WAS NOT MEANT FOR THE USE OF THE BUSINESS NEEDS OF ITS CLIENTS AFTER THE TENURE OF T HE AGREEMENT IT HAD WITH SUCH CLIENTS. THE BALANCE SCORE CARD PREPARED FOR EACH CLIENT AND SYSTEM OF FILLING DATA IN SUCH BALANCE SCORE CA RD ON A CONTINUAL BASIS BASED ON DIFFERENT TYPES OF MEASURES ADOPTED WHICH AGAIN I.T.A. NO. 2137/MDS/2010 18 DEPENDED ON THE NEEDS OF EACH CLIENT AND THEIR FUNC TIONS CAN BE CONSIDERED AS TOOLS DESIGNED FOR EXCLUSIVE USE OF S UCH CLIENTS AND THE USE OF SUCH A MANAGEMENT TOOL WOULD CONTINUE WI TH SUCH CLIENTS. NECESSARILY THE TECHNICAL KNOWLEDGE AND SKILL FOR U SE IMBIBED BY THE ASSESSEE REMAINED WITH SUCH CLIENTS. THUS WE ARE OF THE OPINION THAT THE FEES RECEIVED FOR DESIGNING OF THE MANAGEM ENT TOOL CALLED BALANCE SCORE CARD WILL DEFINITELY FALL WITHIN THE DEFINITION OF FEES FOR TECHNICAL SERVICES AS GIVEN UNDER SUB-CLAUSE (IV) OF ARTICLE 12 OF DTT BETWEEN INDIA AND SINGAPORE. NO DOUBT BOTH THE A .O. AS WELL AS DRP FELL IN ERROR IN TREATING THE SOFTWARE INDEPEND ENTLY AND CONSIDERING A PART OF THE AMOUNTS RECEIVED BY THE A SSESSEE AS ROYALTY. AS ALREADY HELD BY US AND ALSO ACCEPTE D BY THE LEARNED A.R. THE SOFTWARE WAS ONLY A PART OF THE TOOL OF M ANAGEMENT CONSULTANCY AND WAS NEVER TO BE CONSIDERED AS INDEP ENDENT DIVORCED OF THE TOTAL SYSTEM. THUS WE ARE OF THE OPINION THAT THE WHOLE OF THE AMOUNT RECEIVED BY THE ASSESSEE WAS NO THING BUT FEES FOR TECHNICAL SERVICES AND THE AMOUNT WAS DEFINITEL Y TAXABLE UNDER THE DTT. INSOFAR AS ARGUMENT OF THE ASSESSEE THAT THE AMOUNT OUGHT HAVE BEEN CONSIDERED AS BUSINESS INCOME SINCE THE RECEIPTS COULD CLEARLY BE IDENTIFIED AS FEE FOR CONSULTANCY SERVIC ES THE QUESTION OF TREATING IT AS BUSINESS INCOME UNDER ARTICLE 7 WILL NOT ARISE. IN THIS I.T.A. NO. 2137/MDS/2010 19 REGARD LEARNED D.R. HAD RIGHTLY NOTED THAT ARTICLE 7.7 OF DTT EXCLUDED FROM THE SCOPE OF ARTICLE 7 ITEMS OF INCOM E DEALT WITH BY OTHER ARTICLES OF THE TREATY. THEREFORE WE ARE OF THE OPINION THAT THE A.O. WAS JUSTIFIED IN TREATING THE AMOUNT RECEIVED BY THE ASSESSEE FROM ITS CLIENTS AS INCOME TAXABLE IN INDIA IN ACCO RDANCE WITH DTT BETWEEN INDIA AND SINGAPORE. NO INTERFERENCE IS RE QUIRED. 13. IN THE RESULT APPEAL FILED BY THE ASSESSEE STA NDS DISMISSED. THE ORDER WAS PRONOUNCED IN THE COURT ON 9 TH FEBRUARY 2012. SD/- SD/- (GEORGE MATHAN) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI DATED THE 9 TH FEBRUARY 2012. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) SECRETARY DRP CHENNAI (4) ADIT INTERNATIONAL TAXATION CHENNAI-34. (5) D.R. (6) GUARD FILE