Income Tax Appellate Tribunal - Delhi
Mixpanel, Inc, San Francisco, United ... vs Assistant Commissioner Of Income Tax, ... on 25 September, 2024
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : D : NEW DELHI
BEFORE DR. B.R.R. KUMAR, ACCOUNTANT MEMBER
AND
SHRI ANUBHAV SHARMA, JUDICIAL MEMBER
ITA No.3894/Del/2023
Assessment Year: 2021-22
Mixpanel, Inc., Vs ACIT,
405, Floor 2, San Francisco, Circle 2(2)(1),
Howard Street, International Taxation,
United States, New Delhi.
USA, 999999.
PAN: AAJCM2431M
(Appellant) (Respondent)
Assessee by : Shri Nishank Vashistha, Advocate
Revenue by : Shri Abhishek Sharma, CIT-DR
Date of Hearing : 03.09.2024
Date of Pronouncement : 25.09.2024
ORDER
PER ANUBHAV SHARMA, JM:
This appeal is preferred by the Assessee against the final assessment order dated 30.10.2023 passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter referred as 'the Act') for AY 2021-22 by the ACIT, Circle International Taxation, Ward 2(2)(1), New Delhi (hereinafter referred to as the Ld. AO).
ITA No.3894/Del/2023
2. Heard and perused the record.
2.1 At the time of hearing, the ld. AR has endorsed on the ground of appeal that the grounds No.1 and 2 are not pressed.
2.3 As regards ground No.3, the ld. AR has submitted that the issue has primarily two aspects: one, whether the software licensing amounts to Fee for Included Services under Article 12(4)(b) of India-US DTAA; and the second issue is whether the professional service such as installation of software into customer system amount to Fee for Included Services under Article 12(4)(b) of India-US DTAA. It was submitted that on identical facts and circumstances for AY 2018-19 in assessee's own case vide ITA No.1996/Del/2022, order dated 25.07.2024, the issue No.1 with regard to software licensing has been decided in favour of the assessee.
2.4 In this regard, the ld. DR could not dispute that the issue with regard to software licensing is squarely covered by the order of the coordinate bench in which one of us i.e., Judicial Member was also on the Bench. Therein, by order dated 25.07.2024 (supra) it was held as follows:-
"13. Thus it becomes necessary to examine that if DRP was right to conclude that the report or information generated by access to the software of assessee, can be called 'Technical' as with regard to the nature of services generating FIS. Admittedly what the customer of assessee can generate by access to the software of assessee is data analysis of information provided by the users of the product of the assessee. The reports so generated are merely commercial information which helps the 2 ITA No.3894/Del/2023 customers of assessee in product analysis in real time to identity trends, understand user behavior, and make decisions about your product.
14. In the present case, only commercial information is transferred to the end user and not technical knowledge as required under Article 12(4)(b) to constitute FIS. In this regard, reference was drawn by Ld. Counsel to Example No. 7 given in the MoU dated 12.09.1989 on the similar subject i.e., product market analysis. We consider the same to be quite relevant and reproduce the same below, as this example 7 reads as follows:
Facts: The Indian vegetable oil manufacturing firm has mastered the science of producing cholesterol free oil and wishes to market this product worldwide. It hires an American marketing consultancy firm to do computer simulation of the world market for such oil and to advise it on marketing strategies. Are the fees paid to the US company for included services?
Analysis: The fees would not be for included services. The American company is providing a consultancy which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc., nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. The fact that technical skills were required by the performer of the service in order to perform the commercial information does not make the service a technical service within meanings of para (4)(b).
15. Clearly, commercial information/output from a technical application does not constitute FIS as there is no technical design, process or plan which has been transferred to the client providing enduring benefit.
16. Ld. Sr. Counsel has also relied on the MOU dated 12 September, 1989 to India USA DTAA and we are of considered view that same also sheds light on the scope of Article 12(4)(b) in the following words:
"Paragraph 4(h) Paragraph 4(b) of Article 12 refers to technical or consultancy services that make available to the person acquiring the services, technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plant or technical design to such person. (For this purpose, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person). This category is narrower than the category described in paragraph 4(a) because it excludes 3 ITA No.3894/Del/2023 any service that does not make technology available to the person acquiring the service. 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. Typical categories of services that generally involve either the development and transfer of technical plants or technical designs, or making technology available as described in paragraph 4(b), include:"
17. Taking aforesaid into consideration we find that that there is nothing in the order of DRP, as to how assessee was providing any services to any of the clients who acquired the service in a manner that it enabled said client to apply the said technology. In fact said client may not be even aware of the technological aspects in place in the software that is used to generate the reports.
18. Further Clause 2 of agreement clearly mentions all rights and test of Application remains with assessee and end users have not been given source code of the application which constitute technical knowledge an per 12(4)(b). In this context, we find force in the contention of Ld. Counsel, that when no source code was shared with the end users, said end user cannot be said to have been enabled for any enduring benefit. In present case, this test is not satisfied by any stretch as the contract is limited only to grant of access to the software during the subscription period and on the expiry of the subscription period, the access to the software gets terminated and the customer content also stands deleted. 19. The concept of 'make available' as applicable to FTS, is now quite crystilised and we rely upon the findings of Hon'ble Karnataka High Court in the case of De Beers India Minerals (p.) Ltd. ITA 549 to 551 of 2007, where in the facts were quite similar as in that case the assessees entered into an agreement with M/s Fugro Elbocon B. V. Netherlands (hereinafter referred to as 'Fugro'). Fugro had a team of experts who are specialized in performing air borne geophysical services for clients, process the data acquired during the survey and provide necessary reports. The services are engaged to conduct the air borne survey for providing high quality, high resolution, geophysical data suitable for selecting probable kimberlite targets. For the technical services rendered by them the assessees had paid consideration. The Assessing Officer treated the consideration paid to Fugro under the agreement as falling within the definition of fees for technical services under Article 12 of the Indo-Netherlands Double Tax Avoidance Agreement (DTAA) read with Section 90 of the Income-tax Act, 1961.
4 ITA No.3894/Del/2023 19.1 In aforesaid set of fact the Hon'ble Karnataka High Court, explained the phrase 'make available' as appears in the Article 12(4) of India-USA DTAA, as follows;
"22. What is the meaning of "make available". The technical or consultancy service rendered should be of such a nature that it "makes available" to the recipient technical knowledge, knowhow and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, 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. 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 so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. 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). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as "fee for technical/included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied.
26. Thus, in terms of the contract entered into with Fugro, they have given the data, photographs and maps. But they have not made available technical expertise, skill or knowledge in respect of such collection or processing of data to the assessees, which the assessee can apply independently and without assistance and undertake such survey independently excluding Fugro in future. The Fugro has not made available the aforesaid technology with the aid of which they were able to collect the data, which was passed on to the assessees as a technical service. In other words, Fugro has rendered technical service to the assessees. They have not made available the technical knowledge with which they rendered technical service. There is no transmission of technical 5 ITA No.3894/Del/2023 knowledge, expertise, skill, etc., from Fugro along with technical services rendered by them. The assessees are completely kept in dark about the process and the technologies which the Fugro adopted in arriving at the information/data which is passed on to the assessees as technical service. The assessee is unable to make use of the said technical knowledge by itself in its business or for its own benefit without recourse to Fugro. In fact, the question whether along with rendering technical services, whether the technical knowledge with which that services was rendered was also made available to the assessees/customers is purely a question of fact which is to be gathered from the terms of the contract, the nature of services undertaken and what is transmitted in the end after rendering technical services. If along with technical services rendered, if the service provider also makes available the technology which they used in rendering services, then it falls with the definition of fee for technical services as contained in DTAA. However if the technology is not made available along with the technical services and what is rendered is only technical services and the technical knowledge is with-held, then, such a technical service would not fall within the definition of technical services in DTAA and not liable to tax."
"27. In the background of the aforesaid principles and facts of this case, it is clear that assessees acknowledge the services of Fugro for conducting aerial survey, taking photographs and providing data information and maps. That is the technical services which the Fugro has rendered to the assessees. The technology adopted by Fugro in rendering that technical services is not made available to the assessees. The survey report is very clear. Unless that technology is also made available, the assessees are unable to undertake the very same survey independently excluding Fugro in future. Therefore that technical services which is rendered by Fugro is not of enduring in nature. It is a case specific. That information pertains to 8 blocks. The assessees can make use of the data supplied by way of technical services and put its experience in identifying the locations where the diamonds are found and carrying on its business. But the technical services which is provided by Fugro will not enable the assesses to independently undertake any survey either in the very same area Fugro conducted the survey or in any other area. They did not get any enduring benefit from the aforesaid survey. In that view of the matter, though Fugro rendered technical services as defined under Section 9(1)(vi) Explanation 2, it does not satisfy the requirement of technical services as contained in DTAA. Therefore the liability to tax is not attracted. Accordingly the first substantial question of 6 ITA No.3894/Del/2023 law is answered in favour of the assessees and against the Revenue."
"31. Therefore the assessees not being possessed with the technical know how to conduct this prospecting operations and reconnaissance operations, engaged the services of Fugro which is expert in the field. By way of technical services Fugro delivered to the axsexsees the data and information after such operations. The said data is certainly made use of by the assessees. Not only the said data and information was furnished in the digital form, it is also provided to the assessees in the form of maps and photographs. These maps and photographs which were made available to the assessees cannot be construed as Technology made available. Fugro has not devised any technical plan or technical design. Therefore the question of Fugro transferring any technical plan or technical design did not arise in the facts of these cases. The maps which are delivered are not of kind of any developmental activity. As such, earlier the information which is furnished to the assessees by way of technical services in the digital form is also given in the form of maps. Therefore the case on hand do not fail in the second part of the aforesaid clause dealing with development and transfer of plans and designs. Therefore the second substantial question of law is also answered in favour of the assessees and against the Revenue."
20. Reliance is also placed on decision of Mumbai Bench in the case of ICICI BANK LTD. v/s DCIT-ITA 486/2004 [MUMBAI ITAT]. The relevant paragraphs reads as follows:
3. The Assessee bank had appointed Moody's Investors Service, a credit rating agency for the purpose of ratings its floating rate euro notes issue amounting to US $ 150,00,00, The fees charged by Moody's Investors Service for rendering analytical services in connection with counter party rating of the issue amounted to US $ 45,000
14. Having given a close look to the facts of the case in the light of definition of fees for included services given in DTAA and the Memorumdum of Understanding along with example, we find that the assessee has obtained the commercial information of rating from Moody's and the remuneration was paid outside India. Now it is to be seen whether the assessee acquired any technical skill or technology on the basis of which commercial information was prepared. The answers is certainly in the negative because assessee has only got the commercial information and not the technical know- how/technical expertise or the technologies on the 7 ITA No.3894/Del/2023 basis of which it was prepared. For bringing any payment within the definition of "fee for included services' the non- resident must make available the technical skill, expertise or technical know-how to the assessee, on the basis of which non-resident has prepared or developed the commercial information. Undisputedly in the instant case the technical skill, expertise or technical know-how used in preparing the commercial information was not made available to the assessee and hence the remittance made by the assessee for obtaining such commercial information cannot be called to be the 'fees for the included services to make it chargeable to tax in India.
21. In light of the above discussed proposition of law and facts the 'make available' clause is not satisfied, as erroneously held by the DRP......"
3. As with regard to the second issue arising out of installation of software, Admittedly, the professional services are -
i. Installation of customer Mixpanel software into customer's system ii. Integration of customer content with application services. 3.1 We find that the scope of professional services as admitted by the DRP in para (iv) of 8.4 at page no. 30 of the order, is as follows:
" From the above reproduced parts of Master Service Agreement it can be seen that the Information available on the website of the assessee company gets substantiated with the clauses of the agreement and bring out the actual nature of services provided by the assessee company. It also reveals that the professional services being provided are not any ancillary or subordinate services instead they are very sophisticated services which are separately solicited by customers through a separate "Order Form ("Professional Services") and these services primarily involve "supporting the implementation of Mixpanel's software development kit into Customer's software and integration of Customer Content with and into the Application Services which by no means are ancillary/ subordinate services. It is also observed that the assessee is storing and utilising the customer data, mentioned in the draft order."
3.2 We are of the considered view that clearly, these services are merely support services dealing with installation and integration and when the primary 8 ITA No.3894/Del/2023 services themselves are not taxable as FTS, these ancillary services qua the primary services cannot be taxed as FTS. Reliance is rightly placed by Ld. AR on decision of Coordinate Bench in TSYS Card Tech v/s DCIT ITA 2006/Del/2022 and Net B.V v/s DCIT ITA 4781/Del/2013 wherein it is held that installation and integration services are support services and not taxable as FTS.
4. In the light of the aforesaid, we allow the ground No.3 and the remaining grounds become academic or consequential and are accordingly left open. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 25.09.2024.
Sd/- Sd/-
(DR. B.R.R. KUMAR) (ANUBHAV SHARMA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 25th September, 2024
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asstt. Registrar, ITAT, New Delhi
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