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Rajendra Nayak |
Ganesh Pai |
The Mumbai Tribunal in the case of Standard Chartered Bank (taxpayer) [2011-TII-80-ITAT-MUM-INTL] recently adjudicated on the taxability of data processing charges under the Indian tax law (ITL) and the India-Singapore tax treaty (treaty). The taxpayer is a non-resident, engaged in the business of banking through various branches in India. It entered into an agreement with a Singapore company (S Co) for receiving data processing support for its India operations. To provide the required support, S Co maintained a data centre at Singapore and made available a portion of its disc storage capacity exclusively for the taxpayer. S Co processed the raw data received from the taxpayer using certain licensed software on its mainframe computer and electronically transmitted the output data back to India in the form of reports as per the taxpayer's specifications. The taxability of the payments was to be adjudicated having regard to the definition of royalty under the ITL and the treaty, which includes within its ambit the consideration for the use of a process and payments for the use or the right to use industrial, commercial or scientific equipment (equipment royalty clause).
The tribunal observed that the taxpayer had no control over the actual processing of data nor had physical access or control over the mainframe computer in Singapore. These functions were performed by S Co and it was only a facility made available to the taxpayer. The tribunal held that there was no use or right to use any process of S Co by the taxpayer at any of the stages, such as during the transmission of raw data, processing of data by the staff of S Co and electronic transmission of the processed data. To come within the purview of the equipment royalty clause, the tribunal observed that there must be some positive act of utilisation, application or employment of equipment for the desired purpose. Mere use of the facility created by the service provider, who was the owner and controller of the equipment, would not be covered under this clause. The tribunal also placed reliance on tests suggested by the Technical Advisory Group of the OECD for determining fulfillment of conditions under the equipment royalty clause and concluded that the taxpayer should have domain or control over the equipment or in other words it should be at its disposal, to satisfy this clause. Since none of these were satisfied, the equipment royalty clause was not triggered. The tribunal concluded that the payments would not be taxed as royalty under the ITL as well as under the treaty, but would be characterised as business income, not taxable in the absence of a permanent establishment of S Co in India.
Rajendra Nayak (rajendra.nayak@in.ey.com) & Ganesh Pai (ganesh.pai@in.ey.com)
Ernst & Young
Tel: +91 80 2224 5646
Fax: +91 80 2224 0695
Website: www.ey.com
