Standard Chartered Bank vs. DDIT (ITAT Mumbai)

DATE: (Date of pronouncement)
DATE: May 17, 2011 (Date of publication)

Click here to download the judgement (standard_chartered_equipment_use_royalty.pdf)

No “Equipment-Use” Royalty If Payer has no control over equipment

The assessee, a UK bank carrying on business in India, entered into an agreement with Sema Group, Singapore, for the provision of data processing support to the assessee for its business in India. Sema had a Data Centre at Singapore which it agreed to make available for “exclusive use” by the assessee for a specified period. Broadly, the service rendered was that the raw data relating to branch transactions of the assessee was transmitted to Sema’s mainframe computer in Singapore for processing. The raw data was processed by Sema’s staff as per the requirements of the assessee using the application software owned by the assessee. The processed data, i.e., the output data was transmitted electronically to the assessee in India using the software provided by the assessee, which was not designed by Sema. The AO & CIT (A) held the payments made by the assessee to Sema to be “royalty” u/s 9(1)(vi) & Article 12 of the DTAA on the ground that (i) the provision of the computer facility to process the data was consideration for use of a “process” and (ii) the consideration was for “the use or right to use, any industrial, commercial or scientific equipment”. On appeal by the assessee to the Tribunal, HELD allowing the appeal:

(i) The argument of the revenue that the ‘data processing’ by Sema is consideration for “use of a process” is not correct. The activity of transmitting raw data to Sema, processing of the data by Sema using software belonging to the assessee and the transmission of the proceessed data to the assessee did not, at any stage, involve the “use of any process” by the assessee so as to constitute “royalty” under Article 12(3)(a). The consideration received by Sema was for using the computer hardware which does not involve use or right to use a process;

(ii) The argument of the revenue that the consideration paid was for the “use of equipment” is also not correct because in order to constitute user of equipment, the customer should actually have domain or control over the equipment, or in other words, the equipment should be at its disposal. The customer should be in a position to use the equipment in its business activities. If a customer is given the mere access to some infrastructural facilities of the service provider and where the service provider has all the control, disposition and possession of such infrastructure and also the service provider operates such infrastructure on its own, then the customer cannot be said to have been assigned a right to use the equipment in the form of the infrastructure. In that case, the transaction partakes of the character of provision of services or facilities by the owner of the infrastructure in favour of the customer, as against giving the infrastructure to the customer itself for being used in the manner desired by the customer;

(iii) On facts, though the Data Centre was made available for the assessee’s “exclusive use”, the assessee had no right to access the computer hardware except for transmitting raw data for further processing. The assessee had no control over the computer hardware or physical access to it. The assessee could not come face to face with the equipment, operate it or control its functions in any manner. The assessee had no possessory rights in relation to the computer mainframe. The assessee merely took advantage of a facility of use of sophisticated equipment installed and provided by another. Accordingly, the payment was not royalty under Article 12(3)(b) of the DTAA.

Note: Kotak Mahindra Primus 105 TTJ (Mum) 578 & Asia Sat 332 ITR 340 (Del) was followed

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