Case Note & Summary
The present appeal was filed by the Revenue (Commissioner of Income Tax) challenging an order dated 25th January 2017 passed by the Income Tax Appellate Tribunal (ITAT). The respondent, M/s. Colgate Palmolive Marketing SDN BHD, is a company incorporated in Malaysia engaged in marketing, distribution and sale of household products. Colgate Palmolive (India) Limited (CPI) entered into an agreement dated 14th May 1998 with the Assessee for use of the Assessee's SAP system. Under the agreement, CPI was to pay for use of the SAP system (USD 11,80,500) and for rendering services comprising maintenance, up-gradation and training (USD 3,85,000) for the financial year 1998-99 (Assessment Year 1999-2000). The Assessee filed its return of income declaring Nil income. The Assessing Officer (AO) found that the payments for use of SAP system were covered under the definition of 'Royalty' as per Explanation 2(iii) to Section 9(1)(vi) of the Income Tax Act, 1961, and the payments for services were in the nature of 'fees for technical services'. The AO completed the assessment by taxing these payments. Aggrieved, the Assessee appealed to the Commissioner of Income Tax (Appeals) who dismissed the appeal. The Assessee then appealed to the ITAT, which allowed the appeal, holding that the payments were not royalty or fees for technical services. The Revenue appealed to the High Court. The High Court framed the question of law: whether the ITAT was correct in holding that the payments were not royalty or fees for technical services. The court held that the SAP system is computer software and payments for its use fall within the inclusive definition of royalty under Explanation 2(iii) to Section 9(1)(vi). The court also held that the payments for maintenance, up-gradation and training are fees for technical services under Section 9(1)(vii). The court allowed the appeal, setting aside the ITAT order and restoring the AO's order.
Headnote
A) Income Tax - Royalty - Computer Software - Section 9(1)(vi) read with Explanation 2 - The issue was whether payments for use of SAP system constitute royalty. The court held that SAP system is computer software and payments for its use fall within the inclusive definition of royalty under Explanation 2(iii) to Section 9(1)(vi). (Paras 2-3) B) Income Tax - Fees for Technical Services - Section 9(1)(vii) - The issue was whether payments for maintenance, up-gradation and training services constitute fees for technical services. The court held that such services are technical in nature and fall within the definition of fees for technical services. (Paras 2-3) C) Income Tax - Double Taxation Avoidance Agreement - India-Malaysia DTAA - Article 12 - The court considered whether the payments are taxable under the DTAA. The court held that since the payments are royalty and fees for technical services under the Act, they are also taxable under the DTAA, and the appeal was allowed. (Paras 2-3)
Issue of Consideration
Whether payments received by the Assessee for use of SAP system and for rendering services constitute 'Royalty' and 'Fees for Technical Services' under Section 9(1)(vi) and Section 9(1)(vii) of the Income Tax Act, 1961 respectively.
Final Decision
The High Court allowed the appeal, set aside the ITAT order dated 25th January 2017, and restored the order of the Assessing Officer dated 22nd March 2002.
Law Points
- Royalty includes consideration for use of computer software
- Fees for technical services includes rendering of technical services
- Explanation 2 to Section 9(1)(vi) has an inclusive definition
- SAP system is a computer software
- Payments for use of SAP system are royalty
- Payments for maintenance and training are fees for technical services
