Income Tax Appellate Tribunal - Bangalore
Q2 Software Inc , Bangalore vs Deputy Commissioner Of Income Tax, ... on 20 August, 2024
IT(IT)A No.1132/Bang/2023
Q2 Software Inc., United States
IN THE INCOME TAX APPELLATE TRIBUNAL
"C'' BENCH: BANGALORE
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND
SHRI KESHAV DUBEY, JUDICIAL MEMBER
IT(IT)A No.1132/Bang/2023
Assessment Year: 2021-22
Q2 Software Inc
10355 Suite 100, Pecan Park Blvd.
Austin, United States
C/o Sharath Rao
BBSR & Associates DCIT (International Taxation)
Embassy Gold Links Business Park Vs. Circle-2(1)
Pebble Beach, 3rd Floor Bangalore
Off Intermediate Ring Road
Bangalore 560 071
PAN NO : AAACQ6327P
APPELLANT RESPONDENT
Appellant by : Shri Sharath Rao, A.R.
Respondent by : Ms. Neera Malhotra, D.R.
Date of Hearing : 07.08.2024
Date of Pronouncement : 20.08.2024
ORDER
PER KESHAV DUBEY, JUDICIAL MEMBER:
This appeal by assessee is directed agianst the order of DCIT (International Taxation) dated 31.10.2023. The assessee raised following grounds of appeal:
IT(IT)A No.1132/Bang/2023 Q2 Software Inc., United States Page 2 of 22 IT(IT)A No.1132/Bang/2023 Q2 Software Inc., United States Page 3 of 22
2. Ground Nos.1 & 2 are general in nature, which do not require any adjudication. Now grounds Nos.3 to 6 are inter-related with regard to treating the amount of Rs.5,41,46,596/- received by assessee from Indian entities during the financial year 2020-21 as fees for technical services/FIS.
3. Facts of the case are that Q2 Software Inc. ("Q2" or "the Company") is a company incorporated under the laws of USA and a tax resident of the USA (non-resident under Income tax Act, 1961 ("the Act"). Q2 is engaged in the business of providing cloud-based software products for banks, marketplaces, online lenders and lessors. During the AY 2021-22, the Company sold certain software products to the following Indian customers -
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(a) The Karur Vysya Bank Ltd Central Office ("KVB");
(b) Monexo Fintech Private Limited ("Monexo"); and
(c) Home First Finance Company India Limited ("Home First").
3.1 In addition, the assessee also provides support desk services (Basic/premium support services) to its customers in relation to the software product sold. Assessee wishes to rely on the agreement with the customer - Monexo Innovations Limited, wherein limited rights to use is granted as apparent from Clause 4 of the Agreement "Rights of use". Further, Assessee wishes to rely on support policy (Page 220) wherein the helpdesk support services include the following:
(i) Diagnostic of problems or issues with the product
(ii) Reasonable efforts to resolve reported and verifiable errors in the product so that it performs materially as described in the product documentation.
(iii) A review of cases logged by CDSU; and if needed, a recommend specific organization and process changes to help the customer comply with the support policies 3.2 Q2 has also provided services to Cloudkaptan Consultancy Services Private Limited ("Cloudkaptan") under a Statements of Work ("SOWs"). These services were provided to Cloudkaptan's customers outside India for integration of Assessee's software products (no transfer of technology, but simple integration services).
3.3 The Break-up of the receipts of Assessee from customers is provided as follows:
Particulars Monexo KVB Home First Cloudkaptan Income from software payments 7,75,903 2,24,94,090 84,31,605 Income from implementation 30,93,435 1,12,23,757 30,35,378 premium support and other related services ancillary to sale of software Income from Design and code 50,92,429 review Services Total 38,69,338 3,37,17,847 1,14,66,983 50,92,429 IT(IT)A No.1132/Bang/2023 Q2 Software Inc., United States Page 5 of 22 3.4 The ld. AO considered the same as chargeable to tax. The ld.
AO considered the entire receipts of assessee as feed for technical services (FTS) even though included services (FIS) chargeable to tax as per Article 12 of India-USA DTAA and not appreciating the fact that out of Rs.5,41,46,597/- the amount of Rs.3,17,01,598/- is the income pertain to the right to use of the software. Against this assessee is in appeal before us.
4. The ld. A.R. with regard to para 3.4 of DRP directions and para 7.7 & 7.8 of FAO, submitted that Assessee's business model is not that of offshore-onsite development model. The Indian AE (MFI Flex Technologies Pvt Ltd) is purely providing software development services to its parent company, Q2 Inc ("Assessee"). Indian AE does not have any contract with the customer in India. Under the software development services contract between the Indian AE and Assessee, the Indian AE transfers the "Developed Technology" to Assessee. Assessee's contracts with Indian customers does not provide for transfer of technology and knowhow to the Indian customers. Contract is only for software licensing and helpdesk support services provided to customers. He submitted that the payments received from customer, Cloudkaptan, was for integrating Assessee's software products (no transfer of technology) to Cloudkaptan's customers outside India. Even as per the provisions of section 9(1)(vii) of the Act, it can be said that the payment received by assessee from Cloudkaptan with respect to the above services will fall under the exception of fees payable by a resident in respect of services utilized for the purposes of making or earning any income from any source outside India.
4.1 With regard to para 3.5 of DRP directions and para 8.5 of FAO the ld. A.R. submitted that the conclusion of the ld. AO/DRP is without any basis and not borne from facts of the case. Even assuming (without admitting that technical inputs are provided to AEs), no income is received by Assessee from the AE. Further, during IT(IT)A No.1132/Bang/2023 Q2 Software Inc., United States Page 6 of 22 the subject year, it would not have been possible to send technical personnel onsite as there were travel restrictions on account of COVID-19.
4.2 With regard to para 3.6 to 3.8 of DRP directions and paras 9.4, 9.5, 11 and 17(i) of FAO the ld. A.R. submitted that the ld. AO/DRP have misdirected himself by referring to the various clauses (like confidentiality, IPR, developed technology, etc) in the Software Services Contract between Indian AE company and the parent US company (assessee company) to conclude that the Assessee company has transferred technology to the customers. This is clearly misplaced as the transfer of developed technology is the other way round (ie, from the Indian AE company to the assessee under the software services contract). The services are provided by AE to assessee as per the terms of the Agreement, ie, Assessee is the service recipient and not service provider under this contract. The Intellectual Property (IP) in services provided by the AE to assessee vests with the assessee. Even the ld. AO vide page 29 para 11 observed that AE has made technology available to the assessee (and not other way round). Therefore, ld. AO has wrongly concluded that Assessee has transferred technology on the basis of contract where Assessee is service recipient and not service provider. As per Assessee's contracts with customer in India, as demonstrated earlier, there are no such clauses. Even in the context of customized software provided by the Assessee to it is customers, the SC in Engineering Analysis held that same rules will apply. Therefore, what is important is the nature of rights in the licensing Agreement for the customized software. If it is a mere use - only right to use even if it is a customized software will not amount to royalty. He submitted that the decision of the Bangalore ITAT relied on by the ld. AO in the case of Filtrex Technologies (P.) Ltd. [2011] 47 SOT 69 (Bangalore Trib.) is distinguishable on facts, given that said case IT(IT)A No.1132/Bang/2023 Q2 Software Inc., United States Page 7 of 22 involved a clear knowledge transfer of the manufacture of carbon blocks used in water purification system.
4.3 With regard to para 8.4.2.2 of FAO the ld. A.R. submitted that reliance of the ld. AO on the 'General and Administrative Service Agreement' entered into by Assessee with MFI Flex is misplaced as, under the said agreement, Assessee provides back-office support, administrative services to MFIFlex for which MFI Flex will pay Assessee service fees. However, it is important to note that during the subject AY 2021-22, no such transaction / service has taken place between Assessee and MFI Flex and Assessee has not received any payment from MFI Flex.
4.4 The ld. A.R. with regard to para 8.4.2.5 of FAO submitted that the AO has failed to prove that how, by merely being involved in all the stages of SDLC, Q2 is making available any technical knowledge, skill, know-how etc. to the AE/ sub-contractor. The ld. AO has also incorrectly referred to Q2 being engaged in all the stages of the SDLC process, since the SDLC process is part and parcel of MFI Flex's software development services to Q2. The AO's reference to SDLC is therefore without any basis.
4.5 The ld. A.R. with regard to para 12 of FAO submitted that here again, the AO confuses himself with the testing and implementation phase of the software services provided by MFIFlex under the software services agreement. The ld. AO has misguided himself by treating these as services provided by Q2 to its customers. Therefore, the basis of AO's conclusions is incorrect.
4.6 The ld. A.R. with regard to para 13 of FAO submitted that the maintenance and support services are provided so as to ensure functioning of the software. No skill, technology etc is made available to the AE or the customers. Further, the said services are to be considered as ancillary to the supply of the software. Where the receipts from the sale of the software supplied by Q2 itself do not give rise to any "Royalty Income" under the India - USA DTAA, the IT(IT)A No.1132/Bang/2023 Q2 Software Inc., United States Page 8 of 22 support services, which are ancillary to the main supply of right to use of software, shall also not be chargeable to tax as per the India - USA DTAA.
4.7 With regard to para 17(ii) of FAO the ld. A.R. submitted that the AO has failed to appreciate that presence of a customizable software to suit the needs of a client does not imply that the technical knowledge etc. used in the development of the software itself is made available to the AE/ customer. Technical know-how of the software would not be shared with the customer and the software itself is akin to goods/copyrighted article as held by the SC. It is submitted that the support services which are ancillary to the sale of software is not FTS/FIS. Assessee relied on the following judicial precedence:
(i) TSYS Card Tech Ltd [TS-36-ITAT-2023(DEL)]
(ii) Kony Inc Vs. DCIT [2023] 147 taxmann.com 527 (Delhi Trib.) 4.7.1 He submitted that the service recipient is not enabled independently to make use of the technical knowledge, etc, by himself in his business or for his own benefit without recourse to Q2.
The Hon'ble jurisdictional Karnataka High Court ("KHC") in the case of CIT vs. De Beers India Minerals (P) Ltd. [2012] 21 taxmann.com 214 (Karnataka HC) dealt with the concept of "make available" in detail and held as under:
"....To attract the tax liability, that technical knowledge, experience, skill, know how or process which is used by service provider to render technical service should also be made available to the recipient of the services, so that the recipient also acquires technical knowledge, experience, skill, know how or processes so as to render such technical Services. .....Merely because his business is dependent on the technical service which he receives from the service provider, it does not follow that he is making use of the technology which the service provider utilises for rendering technical services...."
4.7.2 He drawn our attention to MoU to the India-USA DTAA wherein the first part of paragraph 4(b) of Article 12 of the DTAA, the following is provided in the MoU:
IT(IT)A No.1132/Bang/2023 Q2 Software Inc., United States Page 9 of 22 "......Generally speaking, technology will be considered 'make available' when the person acquiring the service is enabled to apply the technology. ....... Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available".
4.7.3 Further, he submitted that the support services which are rendered by Q2 are not enduring in nature and is limited to the term of the agreement. Reliance is also placed on plethora of decisions which have upheld the principle of 'make available' condition. He relied on some important case laws which are below:
(i) Murex Southeast Asia (P.) Ltd. V. DCIT [2023] 152 taxmann.com 442 (Mumbai - Trib.),
(ii) Redcore (India) (P.) Ltd. vs Income-tax Officer [2019] 107 taxmann.com 317
(iii) US Technology Resources (P.) Ltd. V CIT [2018] 97 taxmann.com 642 (Kerala HC),
(iv) Koninklijke Philips Electronics N.V V DCIT (IT)-1(1), Kolkata [2018] 99 taxmann.com 23 (Kolkata - Trib.).
4.8 The ld. A.R. with regard to para 17(iii) of FAO submitted that this is incorrect as the right to use software would be available only during the term of the agreement as the agreement is not a perpetual license. Hence the test of 'make available' is not satisfied. Further all IPR in the software remain with Q2 itself.
4.9 The ld. A.R. with regard to para 18.1 of FAO submitted that the AAR rulings are applicable only with respect to that applicant who sought the ruling and is not a judicial precedence. Notwithstanding this, the understanding of the AO does not seem correct in this case as the AAR had held the services to be taxable as business profits, and not taxable as FIS.
4.10 With regard to para 18.2 of the FAO the ld. A.R. submitted that the AO has failed to note that the same ruling has been set aside by the Delhi High Court in [2014] 52 taxmann.com 161 (Delhi) on the basis that the applicable tax treaties were not analyzed appropriately and matter has been remanded for fresh adjudication. Hence the said ruling of the AAR can be said to non-applicable in the present case.
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5. On the other hand, ld. D.R. with regard to Para 3.4 of DRP Directions and Para 7.7 & 7.8 of FAO submitted that the assessee is a foreign company and it is following offshore-onsite development model wherein a major portion of the software development activity is either subcontracted to AE in India or third party in India as the clients of the assessee are in India ...... Therefore, it cannot be held that the business of the assessee is carried out outside India 5.1 The ld. D.R. with regard to Para 3.5 of DRP Directions and para 8.5 of FAO submitted that Assessee would be constantly giving technical inputs to the AEs and as is evident from the Agreements with the clients, would not only be sending its trained / skilled personnel to the clients onsite but at the same time provide technical inputs to the subcontractors 5.2 The ld. D.R. with regard to Paras 3.6, 3.7 & 3.8 of DRP Directions and Paras 9.4, 9.5, 11 and 17(i) of FAO submitted that the presence of confidentiality and intellectual property rights ('IPR') clauses in the agreement along with non-disclosure obligation proves the fact that technical knowledge, skill, experience, technology etc. have been made available by Q2 to the AEs / sub contractors / clients.
5.3 The ld. D.R. with regard to Para 8.4.2.2 of FAO submitted that for the purposes of substantiating that Assessee is executing its contracts with Indian clients with the help of its Indian AE and third- party sub-contractors situated in India, the ld. AO has relied on the 'Software Support Services Agreement' and 'General and Administrative Service Agreement' entered into by Q2 with its Indian AE, MFIFlex 5.4 The ld. D.R. with regard to Para 8.4.2.5 of FAO submitted that Q2 is engaged in all the stages of Software Development Life Cycle (SDLC) and that Q2 is providing technical and consultancy services to the AE/ sub-contractor and the client.
IT(IT)A No.1132/Bang/2023 Q2 Software Inc., United States Page 11 of 22 5.5 The ld. D.R. with regard to Para 12 of FAO submitted that the test plans and implementation plans which are required for the purpose of testing and implementation are shared with the AE/ sub contractor to ensure successful running of the software. 5.6 The ld. D.R. with regard to Para 13 of FAO submitted that in the maintenance stage, Q2 maintains the software solution deployed at the client's site. This involves providing upgrades as desired by the client and software solution to new hardware platform etc. As per the AO, the same would amount to "make available" of knowledge etc. 5.7 The ld. D.R. with regard to Para 17 (ii) of FAO submitted that the AE/ client are enjoying enduring benefit from the knowledge. He has held that the entire software is customizable to suit the needs of the client and they are provided with necessary skill by Q2 so that they can run the IT platform on their own after its deployment. 5.8 The ld. D.R. with regard to Para 17 (iii) of FAO submitted that the technology remains with the client even after the particular contract comes to an end.
5.9 The ld. D.R. with regard to Para 18.1 of FAO submitted that the AO has relied on the decision of AAR in P.No.28 of 1999 (AAR) ([2000] 242 ITR 208) holding that the services involved in this case satisfies the make available condition.
5.10 The ld. D.R. with regard to Para 18.2 of FAO submitted that the AO has relied on the decision of the AAR in Perfetti Van Melle Holding B.V. (342 ITR 200) (AAR) wherein support services were termed as FIS.
5.11 The ld. D.R. relied on the order of Delhi Bench in the case of Volvo Information Technology AB Vs. DCIT (2017) 162 taxmann.com 679 (Del.), wherein held as follows:
"Undisputedly, the assessee has entered into an agreement with the Indian group entities for providing various services. Under Business Application Related Services, the assessee providesaccess to the business application softwares, which are IT(IT)A No.1132/Bang/2023 Q2 Software Inc., United States Page 12 of 22 used for various purposes, such as, inventory management, sales management, data warehousing applications, product design and modeling, human resource management etc. Under the End User Services and Shared Infrastructure, the assessee providesfacilities and various services keeping in view the End User requirement, such as, emails, personal computer environment, voice/telephone. Under the voice support, mobile and fixed voice services are provided to connect people in local and global context. Under the IT support services, the assessee operates service desk for all types of IT related issues from end users. Under the Volvo Corporate Network, assessee provides a secured access to Volvo Network, which is prerequisite for use of any business application other IT services provided by the assessee. The assessee also provides Business Consultancy Services in terms of which it renders consultancy services with respect to IT services provided by it. (Para 14) Though, the assessee has claimed that these are standard and routine services, however, fact remains that the assessee has provided managerial, consultancy and technical services. Copies of invoices placed in the paper-book do not provide the description/details of services provided. (para 15) The definition of FTS under Article 12(3)(b) of India - Sweden DTAA, covers any kind of payment for rendering of any managerial, technical or consultancy services including provision of servicesby technical or other personnel. Thus, the definition of FTS under Article 12(3)(b) is wide enough to cover all kinds of payments made towards managerial, technical or consultancy services. It is fairly well settled that rules of interpretation of statute will not apply while interpreting treaty provisions. The treaty provisions are to be interpreted based on the language used in the treaty. (para 16) In any case of the matter, the issue in the instant case is whether the receipts qualify as FTS in terms of Article 12(3)(b) of India
- Sweden DTAA. It is viewed that the definition of FTS under the aforesaid Article is wide enough to cover the amounts received by the assessee towards various services provided to Indian group entities. (para 17) Now, reverting back to the first part of assessee's argument that applying rule of consistency, the Assessing Officer cannot re- characterize the receipts as FTS, as, in the earlier assessment years, he has consistently treated identical receipts as royalty. Though, it may be a fact that in the earlier assessment years, the Assessing Officer might have treated similar receipts as royalty, however, that cannot preclude the Assessing Officer to freshly examine the nature of receipts in a subsequent assessment year, as, each assessment IT(IT)A No.1132/Bang/2023 Q2 Software Inc., United States Page 13 of 22 year, being an independent unit, the principle of res-judicata does not apply to tax proceedings. Furthermore, in case, the Assessing Officer has made a mistake in the earlier assessment years in characterizing the nature of income, that cannot be allowed to be perpetuated forever. In the facts of the present appeal, undoubtedly, the assessee has rendered certain services to the group entities in India and received payments. Therefore, the nature and character of such services, whether managerial, technical or consultancy have to be examined. Obviously, the receipts qua managerial, technical or consultancy services would definitely fall within the ambit of FTS and not royalty. (para 18) In the instant case, the Assessing Officer has examined the nature of receipts in respect of certain services rendered by the assessee to the Indian entities and found them to be FTS. The aforesaid factual position is not disputed even by the assessee. Therefore, it is established on record that the receipts are in respect of certain services rendered by the assessee. If that is the case, it needs to be examined, whether the receipts in relation to services rendered fall within the definition of FTS. The Assessing Officer has done exactly the same. Therefore, the action of the Assessing Officer in characterizing the receipts as FTS cannot be called into question by advancing the theory of rule of consistency. Thus, the judicial precedents cited by the assessee would be of no help to the assessee, as, what is essential to determine is, the nature and character of receipts in the instant assessment year and not, what the Assessing Officer has erroneously assessment years. Thus, on overall consideration of facts and materials on record, it is to be held that the payments received by the assessee for providing certain services to the Indian group entities are in the nature of FTS as defined under Article 12(3)(b) of India-Sweden
6. We have heard the rival submissions and perused the materials available on record. In this case, AO observed that assessee's entire receipts are taxable as FTS/FIS in view of the Article 12(4) of India-USA DTAA. Article 12(4) reads as follows:
"4. For purposes of this Article, "fees for included services" means 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 is received; or IT(IT)A No.1132/Bang/2023 Q2 Software Inc., United States Page 14 of 22
(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."
6.1 Now we have to examine the provisions of section 9(1)(vii) of the Act.
(1) The following incomes shall be deemed to accrue or arise in India:
(vij) income by way of fees for technical services payable by--
(a) the Government; or
(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or
(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :
Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.
Explanation 1.--For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the •agreement is made in accordance with proposals approved by the Central Government before that date. Explanation 2.--For the purposes of this clause, "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) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries";
Explanation 2 to section 9(1)(vii) which was introduced by Finance Act, 1977 with effect from 01-04-1977 clearly says that fees for technical service means any consideration for rendering any managerial, technical or consultancy services.
6.2 A plain reading of the above Article 12(4) makes it clear that only such technical and consultancy services are covered by this clause as either (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information referred to in Article 12(3), or (b) 'make available' technical knowledge, experience, skill IT(IT)A No.1132/Bang/2023 Q2 Software Inc., United States Page 15 of 22 know-how etc. In the present case, only clause 12(4)(b) is applicable because there was no right, property or information that was transferred. The case of the Revenue therefore hinges on the applicability of Article 12(4)(b) which applies to rendering of only such technical or consultancy services as 'make available' technical knowledge, experience, skill or know-how etc. In other words, in order to attract the taxability of an income under Article 12(4)(b), not only the payment should be in consideration for rendering of technical or consultancy services, but in addition to the payment being consideration for rendering of technical services., the services so rendered should also be such that 'make available' technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.
6.3 The definition of 'fees for technical services' as given in Explanation 2 to section 9(1)(vii) of the Act is as follows :-
"Explanation 2 : For the purposes of this clause, 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provisions of services of technical or other personnel) but does not include consideration for nay construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'salaries'.
6.4 Section 9(1)(vii) Explanation 2, stops with the 'rendering' of technical services, the India Singapore DTAA goes further and qualifies such rendering of services with words to the effect that the services should also "make available" technical knowledge, experience, skill etc. to the person utilizing the services. These words are 'which make available'.
6.5 The meaning of the expression make available were considered by the Tribunal in the case of Raymond Ltd. Vs. DCIT (2003) 80 TTJ (Mum) 120. The Tribunal after elaborate analysis of all the related aspects observed as under:-
IT(IT)A No.1132/Bang/2023 Q2 Software Inc., United States Page 16 of 22 "The words 'making available' in Article 13.4 refers to the stage subsequent to the 'making use of' stage. The qualifying words is 'which' the use of this relative pronoun as a conjunction is to denote some additional function the 'rendering the services' must fulfil. And that is that it should also 'make available' technical knowledge, experience, skill etc. The word which occurring in the article after the word 'services' and before the words 'make available' not only described or defines more clearly the antecedent noun '(services') but also gives additional information about the same in the sense that it requires that the services should result in making available to the user technical knowledge, experience, skill, etc. Thus, the normal, plain and grammatical meaning of the language employed is that a mere rendering of services is not roped in unless the person utilizing the services is able to make use of the technical knowledge, etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill etc. must remain with the person utilizing the services even after the rendering of the services has come to an end. A transmission of the technical knowledge, experience, skill, etc. from the person rendering services to the person utilizing the same is contemplated by the article. Some sort of durability or permanency of the result of the 'rendering services' is envisaged which will remain at the disposal of the person utilizing the services. The fruits of the services should remain available to the person utilizing the services in some concrete shape such as technical knowledge, experience skill etc. 6.6 In Raymond's case (supra), the Tribunal also held that rendering of technical services cannot be equated with making available the technical services. In the case of CESC Ltd. Vs. DCIT (2003) 80 TTJ (Cal) (TM) 806: (2003) 87 ITD 653 (Cal)(TM) also the question regarding the scope of expression making available came up for the consideration of the Tribunal. In that case, the Tribunal was dealing with the scope of Article 13(4)(c) of the Indo-UK tax treaty which is admittedly in pari materia with Article 12(4) of the India-USA tax treaty. The majority view was that in order to be attracted by the provisions of the said article of the tax treaty, not only the services should be technical in nature but should be such as to result in making the technology available to person receiving the technical services in question. The Tribunal also referred to with approval the extracts from protocol to the Indo-US tax treaty to the effect that 'generally speaking, technology will be considered made IT(IT)A No.1132/Bang/2023 Q2 Software Inc., United States Page 17 of 22 available, when the person acquiring the service is enabled to apply the technology.
6.7 In the case of De Beers India Minerals (P.) Ltd (21 taxmann.com
214) (Karnataka HC), the Hon'ble Karnataka High Court had to deal with identical issue of FTS being made available. In this case assessee is a domestic company, engaged in the business of prospecting and mining for diamonds and other minerals. For the purpose of carrying out geophysical survey, etc, assessee entered into an agreement with Furgo, a company based in Netherlands. Furgo had a team of experts who were specialized in performing geophysical survey, etc. The said experts provided technical services to assessee under the said agreement. The learned AO treated the consideration paid to Furgo under the aforesaid agreement as falling within the definition of fees for technical services under India -- Netherlands Tax Treaty. Hon'ble jurisdictional Karnataka High Court held that as per the Article 12 of the India Netherlands Tax Treaty, fees for technical services means the payment of any amount to any person in consideration for rendering of any technical services only; if such services make available technical knowledge, expertise, skill, know-
how, etc. If the technical knowledge, expertise, skill, know-how, etc. is not made available by the service provider, who renders technical services, it would not constitute fees for technical services. Accordingly, to attract the tax liability, technical knowledge, experience, skill, knowhow, etc. which is used by services provider to render the technical services should also be made available to the recipient of the services, so that the recipient also acquires technical knowledge, experience, skill, know-how, etc. so as to render such technical services. Further, court held that merely because business of service recipient is dependent on technical service which he receives from service provider, it does not follow that he is making use of technology which service provider utilizes for rendering technical services. The crux of the matter is after rendering of such IT(IT)A No.1132/Bang/2023 Q2 Software Inc., United States Page 18 of 22 technical services by the service provider, whether the recipient is enabled to use the technology which the service provider had used. Therefore, unless the service provider makes available his technical knowledge, experience, skill, know-how, etc. to the recipient of the technical service, the liability to tax is not attracted. Accordingly, 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 withheld, then, such a technical service would not fall within the definition of technical service in Tax Treaty and not liable to tax. Based on the above requirement of taxation of FTS as above, court held that there is no doubt that the services performed by Furgo are using technical knowledge and expertise but such technical experience, skill or knowledge had not been made available to assessee and accordingly, the said services are not taxable as fees for technical services under India - Netherlands Tax Treaty. The relevant extract of the decision has been reproduced below:
"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, know- how 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 IT(IT)A No.1132/Bang/2023 Q2 Software Inc., United States Page 19 of 22 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 lest of rendering services and making technical knowledge available at the same lime is satisfied."
6.8 Further, the aforesaid decision in the case of De Beers India Minerals (P.) Ltd has been followed in the case of Sun Microsystem India (P) Ltd (48 taxmann.com 93) (Karnataka), wherein Singapore based company had provided spare management services, provision of buffer stock, defective repair services, managing local repair centers, business planning to address service levels etc to the Indian company. It was held that Singapore Company has not made available any technology or technological services to the Indian company which are required to provide the aforesaid services.
6.9 We have also carefully gone through the service agreement between the assessee and different service recipients which shows that the Assessee also provides support desk services to its customers in relation to the software license granted by the Assessee. The ld. A.R. relied on the agreement with Monexo Innovations Limited (page 210 of PB) wherein limited rights to use is granted as apparent from Clause 4 of the Agreement "Rights of use". It is support services and the technical support services include the following:
(i) Diagnostic of problems or issues with the product
(ii) Reasonable efforts to resolve reported and verifiable errors in the product so that it performs materially as described in the product documentation.
(iii) A review of cases logged by CDSU; and if needed, a recommend specific organization and process changes to help the customer comply with the support policies IT(IT)A No.1132/Bang/2023 Q2 Software Inc., United States Page 20 of 22 6.10 The details of the support services provided are as follows-
Support services Description
Premium support - 24*7 support
services - Fast responses for high-priority issues
- Unlimited number of support cases
- Online access to documentation and
technical resources,
- knowledge base, and discussion
forums
- Packaged version updates
- Access to the support desk
Basic Support services - 8 hours/day 5 days/week support
- Unlimited number of support cases
- Online access to documentation and technical resources,
- knowledge base
- Packaged version updates
- Access to support desk 6.11 Q2 has also provided Design/code review services to Cloudkaptan Consultancy Services Private Limited ("Cloudkaptan") under a Statements of Work ("SOWs") (Pg 196-209 of PB). These services were primarily to be provided to Cloudkaptan's clients.
Cloudkaptan has contracted with external customers outside India to install, configure, customize and otherwise integrate Q2 software as a service product into such customers environment wherein the customers had already purchased licensed software from Q2 under a separate agreement. These consultancy services provided by Q2 to Cloudkaptan during the subject AY 2021-22 was to assist the Cloudkaptan's customers outside India.
6.12 Apart from the above, Q2 receives the following services from Indian parties:
a. Services of Cloudkaptan as a third-party subcontractor for the performance of the software implementation, code development and code management for its customers in India.
IT(IT)A No.1132/Bang/2023 Q2 Software Inc., United States Page 21 of 22 b. Software development services (Pg 163-180 of PB) and marketing support services (Pg 146 162 of PB) from its Indian Associated Enterprise ("AE") MFiflex Technologies Private Limited' ('MFIflex'). 6.13 Q2 has also entered into General and administration services with its AE as per which, 02 would provide back-office support, administrative services to MFiflex. However, no such transaction has taken place during the captioned AY and no revenue has been earned by Q2 under this agreement.
6.14 Considering the above facts and circumstances of the case, we are of the opinion that the services rendered by the assessee and corresponding fees received by the assessee cannot be considered as FTS/FIS and it is to be considered as software licensing and help desk support services provided to its customers. 6.15 Further, we make it clear that the judgement relied by the ld.
D.R. in case of Volvo Information Technology AB cannot be applied to the facts of the case in view of the following distinguished factors:
o The Volvo case was dealing with a case of pure services whereas Q2's case is primarily that of sale of software and helpdesk services which are ancillary to sale of software. o The definition of FTS as per India-Sweden DTAA applicable in that case does not have 'make available' clause (Assessee is from USA and under India USA DTAA, Article 12, there is 'make available' clause).
6.15 Accordingly, we allow the ground Nos.3 to 6 taken up by the assessee.
7. Ground Nos.7 to 9 are infructuous in view of ouir above findings in ground Nos.3 to 6.
8. With regard to greound No.10, there is a grievance of the assessee with regard to statement by AO that an amount of Rs.1,45,232/- has been refunded to the assessee in the computation sheet when the same was not actually received by the assessee which IT(IT)A No.1132/Bang/2023 Q2 Software Inc., United States Page 22 of 22 may be considered by the AO by verifying assessment records. Ordered accordingly.
9. In the result, appeal filed by the assessee is allowed.
Order pronounced in the open court on 20th Aug, 2024 Sd/- Sd/-
(Chandra Poojari) (Keshav Dubey)
Accountant Member Judicial Member
Bangalore,
Dated 20th Aug, 2024.
VG/SPS
Copy to:
1. The Applicant
2. The Respondent
3. The CIT
4. The DR, ITAT, Bangalore.
5 Guard file
By order
Asst. Registrar,
ITAT, Bangalore.