Ita/209/2008 Of The Commissioner Of Income Tax v. Cgi Information Systems

IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 9 DAY OF JUNE, 2014 PRESENT THE HON' BLE MR. JUSTICE N.KUMAR ANT) THE HON' BLE MR. JUSTICE B.MANOHAR ITA.No.209 /2008 c/w ITA Nos.208/2008, 2110/2008, 2123/2008, 213/2008 2214/2008, 2159/2008, 270/2009, 3273/2009, 274/200 211/2008, 824/2009 ITA NO 209 /200 BBRITIWE 1. The Commissioner ot Income Tax|C.R.Building,Queens Road,Bangalore, ”. The Income Tax OfficerWard-19(2) International TaxationBangalore... Appellants(By Sri.K.V.Aravind, Advocate) o AND: CGI Information Systems andManagement Consultants Pvt Ltd38/1, Naganathapurasingasandra PostBangalore — 560 O68....Respondent (By Sri.K.S.Ramabhadran, Advocate) ITA filed u/S.260-A of I.T.Act, 1961 arising out of|Order dated 05-10-2007 passed in ITA No. 949/BNG/2005,for the Assessment Year 2003-2004, praying that thisHon'ble Court may be pleased to: (i) formulate the|substantial questions of law stated therein; (ii) allow the|appeal and set aside the order passed by the ITAT Bangalorein ITA No. 949/BNG/2005,dated O5-10-2007 confirm theorders of the Appellate Commissioner and Income TaxOfficer, Ward 19(2), Bangalore. ITA NO 208/2008 BETWEEN: 1. The Commissioner Of Income TaxC.R.Building,Queens Road,Bangalore.2. The Income Tax Officer,Ward-19(2),International Taxation,C.R.Building,Queens Road,Bangalore... Appellant (By Sri. K V Aravind, Advocate) 3 AND: CGI Information Systems andManagement Consultants (P) Ltd.,No 38/1, Naganathapura,singasandra Post,Bangalore-560 068....Respondent (By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao andori.K.S.Ramabhadran, Advocate) ITA filed u/S.260-A of I.T.Act, 1961 arising out of|Order dated 05-10-2007 passed in ITA No. 948/BNG/2005,for the Assessment Year 2003-2004, praying that thisHon'ble Court may be pleased to: (i) formulate the)substantial questions of law stated therein; (ii) allow the|appeal and set aside the order passed by the ITAT Bangalorein ITA No. 948/BNG/2005, dated O5-10-2007 confirm theorders of the Appellate Commissioner and _ AssistanCommissioner of Income Tax Officer, Ward - 19(2),|Bangalore. ITA.NO.210/2008 BBRITIWE 1. The Commissioner ot Income Tax|C.R.Building,Queens Road,Bangalore. 2. The Income Tax Officer,Ward-19(2),International Taxation, |C.R.Building,Queens Road,Bangalore... Appellant(By Sri. K V Aravind, Advocate) v AND: CGI Information Systems andManagement Consultants (P) Ltd.,No 38/1, Naganathapura,singasandra Post,Bangalore-560 068.... Respondent, (By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao andori.K.S.Ramabhadran, Advocate) ITA filed u/S.2600-A of I.T. Act, 1961 arising out ofOrder dated 05-10-2007 passed in ITA No. 950/BNG/2005,for the Assessment Year 2004-2005, praying that thisHon'ble Court may be pleased to: (i) formulate the)substantial questions of law stated therein; (ii) allow the|appeal and set aside the order passed by the ITAT Bangalorein ITA No. 950/BNG/2005,dated O5-10-2007 confirm theorders of the Appellate Commissioner and Income TaxOfficer, Ward 19(2), Bangalore. ITA NO 2123/200 BETWEEN: 1. The Commissioner ot Income TaxCentral Circle,C.R.Building,Queens Road,Bangalore. 2. The Income Tax Officer,Ward-19(1),C.R.Building,Queens Road,Bangalore... Appellants (By Sri. K V Aravind, Advocate) 5 AND: CGI Information Systems andManagement Consultants (P) Ltd.,No 38/1, Naganathapura,singasandra Post,Bangalore-560 068....Respondent (By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao andori.K.S.Ramabhadran, Advocate) ITA filed u/S.260-A of I.T.Act, 1961 arising out of|Order dated 12-10-2007 passed in ITA No. 412/BNG/2006,for the Assessment Year 2006-2007, praying that thisHon'ble Court may be pleased to: (i) formulate the)substantial questions of law stated therein; (ii) allow the|appeal and set aside the order passed by the ITAT Bangalorein ITA No. 412/BNG/2006,dated 12-10-2007 confirm theorders of the Appellate Commissioner. ITA NO 213/2008 BBRTWER 2. The Income Tax Officer,Ward-19(1),C.R.Building,Queens Road,Bangalore... Appellants (By Sri. K V Aravind, Advocate) 5 AND: CGI Information Systems andManagement Consultants (P) Ltd.,No 38/1, Naganathapura,singasandra Post,Bangalore-560 068....Respondent (By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao andori.K.S.Ramabhadran, Advocate) ITA filed u/S.260-A of I.T.Act, 1961 arising out of|Order dated 12-10-2007 passed in ITA No. 412/BNG/2006,for the Assessment Year 2006-2007, praying that thisHon'ble Court may be pleased to: (i) formulate the)substantial questions of law stated therein; (ii) allow the|appeal and set aside the order passed by the ITAT Bangalorein ITA No. 412/BNG/2006,dated 12-10-2007 confirm theorders of the Appellate Commissioner. ITA NO 213/2008 BBRTWER 1. The Commissioner Of Income TaxCentral Circle,C.R.Building,Queens Road,Bangalore. 2. The Income Tax Officer,Ward-19(1),C.R.Building,Queens Road,Bangalore... Appellant(By Sri. K V Aravind, Advocate) @ AND: CGI Information Systems andManagement Consultants (P) Ltd.,No 38/1, Naganathapura,singasandra Post,Bangalore-560 068....Respondent (By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao andori.K.S.Ramabhadran, Advocate) ITA filed u/S.260-A of I.T.Act, 1961 arising out of|Order dated 12-10-2007 passed in ITA No. 413/BNG/2006,for the Assessment Year 2006-2007, praying that thisHon'ble Court may be pleased to: (i) formulate the)substantial questions of law stated therein; (ii) allow the|appeal and set aside the order passed by the ITAT Bangalorein ITA No. 413/BNG/2006, dated 12-10-2007 confirm theorders of the Appellate Commissioner. ITA.NO.214/2008 BETWEEN: 1. The Commissioner ot Income TaxCentral Circle,C.R.Building,Queens Road,Bangalore. 2. The Income Tax Officer,Ward-19(1),C.R.Building,Queens Road,Bangalore... Appellant (By Sri. K V Aravind, Advocate) AND: CGI Information Systems andManagement Consultants (P) Ltd.,No 38/1, Naganathapura,singasandra Post,Bangalore-560 068....Respondent (By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao andori.K.S.Ramabhadran, Advocate) ITA filed u/S.260-A of I.T.Act, 1961 arising out of|Order dated 12-10-2007 passed in ITA No. 414/BNG/2006,for the Assessment Year 2006-2007, praying that thisHon'ble Court may be pleased to: (i) formulate the|substantial questions of law stated therein; (ii) allow the|appeal and set aside the order passed by the ITAT Bangalorein ITA No. 414/BNG/2006, dated 12-10-2007 confirm theorders of the Appellate Commissioner. ITA NO 2195/200 BETWEEN: 1. The Commissioner Of Income TaxCentral Circle,C.R.Building,Queens Road,Bangalore. 2. The Income Tax Officer,Ward-19(1),C.R.Building,Queens Road,Bangalore... Appellant (By Sri. K V Aravind, Advocate) 8 AND: CGI Information Systems andManagement Consultants (P) Ltd.,No 38/1, Naganathapura,singasandra Post,Bangalore-560 068. ... Respondent, (By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao andori.K.S.Ramabhadran, Advocate) ITA filed u/S.260-A of I.T.Act, 1961 arising out of|Order dated 12-10-2007 passed in ITA No. 415/BNG/2006,for the Assessment Year 2006-2007, praying that thisHon'ble Court may be pleased to: (i) formulate the)substantial questions of law stated therein; (ii) allow the|appeal and set aside the order passed by the ITAT Bangalorein ITA No. 415/BNG/2006,dated 12-10-2007 confirm theorders of the Appellate Commissioner ITA NO 2770/200 BETWEEN: 1. The Director of Income TaxInternational Taxation, Rashtrothana Bhavan,No.14/3, 6[6$]Floor,Nrupathunga Road,Bangalore-560 OO1. 2. The Income Tax Officer,Ward-19(1),International Taxation,Rashtrothana Bhavan,No.14/3, 6[6$]Floor, 0 Nrupathunga Road,Bangalore. .. Appellant (By Sri. K V Aravind, Advocate) AND: CGI Information Systems andManagement Consultants (P) Ltd.,No 38/1, Naganathapura,Electronic City Post,Bangalore-560 100....Respondent (By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao andori.K.S.Ramabhadran, Advocate) ITA NO 2770/200 BETWEEN: 1. The Director of Income TaxInternational Taxation, Rashtrothana Bhavan,No.14/3, 6[6$]Floor,Nrupathunga Road,Bangalore-560 OO1. 2. The Income Tax Officer,Ward-19(1),International Taxation,Rashtrothana Bhavan,No.14/3, 6[6$]Floor, 0 Nrupathunga Road,Bangalore. .. Appellant (By Sri. K V Aravind, Advocate) AND: CGI Information Systems andManagement Consultants (P) Ltd.,No 38/1, Naganathapura,Electronic City Post,Bangalore-560 100....Respondent (By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao andori.K.S.Ramabhadran, Advocate) ITA filed u/S.260-A of I.T.Act, 1961 arising out of|Order dated 26-11-2008 passed in ITA.No.825/Bang/2008,for the Assessment year 2007-08, praying that this Hon'bleCourt may be pleased to: (i) formulate the substantialquestions of law stated therein; (11) allow the appeal and setaside the order passed by the ITAT Bangalore in ITANo.825/Bang/2008, dated 26-11-2008 and confirm theorderpassedby|theIncome|TaxOfficer,Ward-1(1),International Taxation, Bangalore, in the interest of justiceand equity. ITA NO 2273/200 BETWEEN: 1. The Commissioner Of Income TaxInternational Taxation,Rashtrothana Bhavan,No.14/3 6[6$]Floor,Nrupathunga Road,Bangalore. 10 2. The Income Tax Officer,Ward-19(1),International Taxation, Rashtrothana Bhavan,No.14/3 6[6$]Floor,Nrupathunga Road,Bangalore... Appellant (By Sri. K V Aravind, Advocate) AND: CGI Information Systems andManagement Consultants (P) Ltd.,No 38/1, Naganathapura,Electronic City Post,Bangalore-560 100. ...Respondent (By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao andori.K.S.Ramabhadran, Advocate) ITA filed u/S.260-A of I.T. Act, 1961 arising out of|Order dated 26-11-2008 passed in ITA No.823/BNG/2008,for the Assessment Year 2006-2007, praying that thisHon'ble Court may be pleased to: (i) formulate the)substantial questions of law stated therein; (ii) allow the|appeal and set aside the order passed by the ITAT Bangalorein ITA No.823/BNG/2008, dated 26-11-2008, confirming theorder of the Appellate Commissioner and confirm the orderpassed by the Income Tax Officer, Ward-19(1), Bangalore inthe interest of justice and equity. | ITA NO 274/2009 BBRTWER 1. The Director (Commissioner) of Income TaxInternational Taxation, 11 Rashtrothana Bhavan,No.14/3, 6[6$]Floor,Nrupathunga Raod,Bangalore — 560 OO1. ”.. The Income Tax OfficerWard-19(1),International Taxation,No.14/3, 6[6$]Floor,Nrupathunga Road,Bangalore. .. Appellants (By Sri.K V Aravind, Advocate) ANT) CGI Information Systems andManagement Consultants (P) Ltd.,No 38/1, Naganathapura,Electronic City Post,Bangalore.... Respondent (By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao, Adv andsri.K.S5.Ramabhadran, Advocate) ITA filed u/S.260-A of I.T.Act, 1961 arising out of'Order dated 26-11-2008 passed in ITA.No.824/Bang/2008,|for the Assessment year 2006-07, praying that this Hon'ble|Court may be pleased to: (i) formulate the substantial|questions of law stated therein; (11) allow the appeal and set|aside the order passed by the ITAT Bangalore in ITA|No.824/Bang/2008,dated 26-11-2008 confirming the order|of the Appellate Commissioner and confirm the order passedby the Income Tax Officer, Ward-19(1), Bangalore, in the|interest of justice and equity. 12 ITA NO 211/2008 BBRTWER 1. The Commissioner of Income Tax|C.R.Building,Queens Road,Bangalore. ”.2. The Income Tax OfficeWard-19(2) C.R.Building,Queens Road,Bangalore... Appellants (By Sri.K.V.Aravind, Advocate) ANT) CGI Information Systems andManagement Consultants Pvt Ltd38/1, Naganathapurasingasandra PostBangalore — 560 O68.... Respondent. (By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao, Adv). 12 ITA NO 211/2008 BBRTWER 1. The Commissioner of Income Tax|C.R.Building,Queens Road,Bangalore. ”.2. The Income Tax OfficeWard-19(2) C.R.Building,Queens Road,Bangalore... Appellants (By Sri.K.V.Aravind, Advocate) ANT) CGI Information Systems andManagement Consultants Pvt Ltd38/1, Naganathapurasingasandra PostBangalore — 560 O68.... Respondent. (By Sri.G.Sarangan, Sr.Adv for Sri.Balram.R.Rao, Adv). ITA filed u/S.260-A of I.T.Act, 1961 arising out of'Order dated 05-10-2007 passed in ITA No. 530/BNG/2006,for the Assessment Year 2005-2006, praying that this|Hon'ble Court may be pleased to: (i) formulate the,substantial questions of law stated therein; (ii) allow the|appeal and set aside the order passed by the ITAT Bangalorein ITA No. 5380/BNG/2006, dated 05-10-2007 confirm theorders of the Appellate Commissioner and Income Tax|Officer, Ward 19(2), Bangalore. 13 ITA.NO.824 /200 BBRTWER 1. The Director of Income TaxInternational TaxationRashtrothana Bhavan,Nrupathunga Road,Bangalore. 2. The Income Tax Officer,Ward — 19(1), International Taxation,Rashtrothana Bhavan, |Nrupathunga Road,Bangalore... Appellants (By Smt.K.V.Aravind, Advocate) AND: CGI Information Systems andManagement Consultants P. Ltd.38/1, NaganathapuraElectronic City Post,Bangalore — 560 100....Respondent (By Sri.G.Sarangan, Sr. Adv for Sri.Balram.R.Rao, Adv) ITA filed u/S.260-A of I.T.Act, 1961 arising out of'order dated 17-07-2009 passed in ITA.No.1376/Bang/2008,for the Assessment year 2007-08, praying that this Hon'ble|Court may be pleased to: (i) formulate the substantial|questions of law stated therein; (11) allow the appeal and set|aside the order passed by the ITAT Bangalore in ITA|No.1376/Bang/2008, dated 17-07-2009 and confirming the|order of the Appellate Commissioner and confirm the order| passed by the Income Tax Officer, Ward-19(1), InternationalTaxation, Bangalore. N. KUMAR J.,delivered the following: | These appeals coming on for Hearing this day, | JU DBGMENT All these appeals are by the revenue challenging the|order passed by the Income Tax Appellate Tribunal,Bangalore Bench, holding that the assessee was not liable todeduct tax under Section 199(1) of the Income Tax Act, 1961(ior short hereinafter referred to as ‘the Act?) from theremittances made to a non-resident. | 2. The substantial question of law that arises for)consideration in these appeals is as under:- Whether the Tribunal was correct inholding that the payments made by theaSSCSSCCforutilizingintranetfacilitiesprovided by the non-resident assessee is not|liable to tax in India and no TDS need be made|as the provisions of Section 195f(1) read with A1)(vi) and (vit) read with Article 12 of theDTAA between [ndiq and Canada are not'applicable? FACTS IN BRIEF 3. COThe assessee is engaged in the business ofdesign, development, implementation and support systemsfor the Information Technology (IT) Sector. The assesseeentered into an agreement with CGI Group Inc., a companyincorporated in Canada for sharing costs by which theCanada Company would procure licenses from Microsoft andalso the communication tool developed by CGI Group Inc.,and the costs relating to that would be subsequentlyinvoiced on the assessee. Accordingly, invoice was raised onthe assessee by the Canada Company. While making theremittance, the assessee deducted TDS at 20% undersection 195(1) of the Act and also paid the same toGovernment account. However, according to the assessee,since it is a cost sharing agreement and payments weremade by the assesee for reimbursement of cost/expenses, no 16 3. COThe assessee is engaged in the business ofdesign, development, implementation and support systemsfor the Information Technology (IT) Sector. The assesseeentered into an agreement with CGI Group Inc., a companyincorporated in Canada for sharing costs by which theCanada Company would procure licenses from Microsoft andalso the communication tool developed by CGI Group Inc.,and the costs relating to that would be subsequentlyinvoiced on the assessee. Accordingly, invoice was raised onthe assessee by the Canada Company. While making theremittance, the assessee deducted TDS at 20% undersection 195(1) of the Act and also paid the same toGovernment account. However, according to the assessee,since it is a cost sharing agreement and payments weremade by the assesee for reimbursement of cost/expenses, no 16 income is embedded therein. Therefore, the assessee is notliable to deduct tax under Section 195(1) of the Act. Theappeals were filed by the assessee before the CIT(A) undersection 248 of the Act. The Appellate Authority sought for aremand report from the Assessing Officer. The claim of theassessee was that the payment was in the nature of|reimbursement of expenses. Hence, it was not lable todeduct tax under Section 195(1) of the Act. Further, thepayments are not in the nature of royalty. The AppellateAuthority held that the payment made by the assessee to theCanada Company cannot be considered as royalty as theassessee was not liable to make deduction in respect of thispayment. However, it held the payment made by the|assessee is for rendering “any technical or consultancyservices” and, therefore, the assessee was lable to deducttax at source and dismissed the appeal. a4|Agerieved by the said order, the assessee|preferred an appeal to the Tribunal. The Tribunal by a 17 lengthy order, aiter considering the rival contentions andreferring to various judgments held that, the payments madeby the assessee are reimbursement of expenses and noincome.element1S embeddedtherein;therefore,theremittances cannot be considered as fees for technicalservices. The assessee is liable to deduct tax under Section195(1) of the Act only on the income embedded in theremittance. Since there was no income element embedded inthe remittance, the assessee was not liable to deduct taxfrom the remittance. It also affirmed the finding of theAppellate Authority that the remittance made by theassessee cannot be treated as royalty and Section 44D isnot applicable to the facts of this case. Therefore, theappeals were allowed. The order passed by the AppellateAuthority as well as the original authority was set aside.Agerieved by this order, the revenue is in appeal. 5The learned counsel for the revenue assailing|the impugned order contended that, the Tribunal has proceeded on the assumption that, as the agreementbetween the parties is a cost sharing agreement, theremittance made by the assessee to the Canada Company istowards such charges and no profit is embedded in the saidamount paid to the Canadian Company. Therefore, the saidamount was not chargeable to tax under the Act andconsequently, there is no liability on the part of the assesseeto deduct tax at source. He submits that though theagreement is styled as “cost sharing agreement”, a reading ofthe agreement shows that the Canadian Company haderanted a licence to use the tftacilities which exclusivelbelongs to them and the consideration paid under theagreement is for the right to use that right and, therefore, it falls within Section 9(1) (vi) of the Act. It constitutes royalty|and the Tribunal has not properly appreciated the facts ofthe case and the material placed on record. Therefore, theorder is liable to be set aside. 19 19 6.|Per contra, the learned senior counsel appearingfor the assessee submitted that, no right in the intellectualproperty is transferred under the agreement nor any licenceis granted under the agreement. As is clear from theagreement, the Canadian Company developed a_ toolproviding Eportal-intranet facility. It was available only tothe members of the Group. The other members of the Groupagreed to share the cost of the said tool. Therefore, |the assessee agreed to share the cost of the tool. No profit is embedded in the said payment as is clear from the clauses inthe agreement. Clause 4.4. provides that the term ‘cost’incurred does not include any mark up and is limited to theactual cost. Therefore, the Tribunal was justified in holdingthat it is neither a payment towards royalty nor paymenttowards technical services. | To|In the light of what is stated above and the rivalcontentions, it is necessary for us to look in to the terms ofthe agreement entered into between the parties, understand 20 the intention of the parties and then find out the nature oftransaction. Based on that factual finding, we have to decidewhether it falls within the definition of royalty as providedunder Section 9(1)(vi) or technical services as provided under|section 9(1)(vii) of the Act. Only if the income is chargeable|to tax under the Act under the aforesaid provisions, the|liability of the assessee to deduct at source would arise. A|copy of the cost sharing agreement is made available to us,which reads as under:- COST SHARING AGREEMENT This agreement is made by and between CGIInformationoystemsandManagementConsultantsPrivateLimited(CGI-India), CmCompanyincorporatedundertheIndianCompanies Act having its Registered Office at38/ 1,Naganathapura,singasandraPost,Bangalore — 560 034 and CGI Group Inc. acompany incorporated under the provisions of thelaws of Quebec and having its registered office at1130 Sherbrooke Street West, 4[th]Floor, Montreal,Quebec, H3A 2MB8. 1.CGI Group Inc. has developed an internal)telecommunication and communication tool,which is accessible only to the members ofCGI worldwide. This ts historically knownas|CGTInformationTechnology|Infrastructure. CGI Group Inc. is theabsolute owner of the CGI Information|technology Infrastructure facility and holds|the Intellectual Property rights (IPR) for the|same but no licenses are transferred toCGI- India. This is purely a communication|related facility and includes the following: Network facility Collaborative facility security facility Eportal-intranet facility D2 CGI[-India1SprovidingInformationTechnology Solutions to companies within|the CGI Group and other global customers. 3.| As the communication tool developed by|CGI Group Inc. is for mutual benefit, the|parties propose to enter into a cost sharingagreement by which certain costs as oo mutually agreed upon, is shared betweenthem. 4 |CGI Group Inc. allows CGIl-India to use theabove facilities subject to the following|terms and conditions| 4.1CGI Group Inc. allows CGIl-India touUSCthe|abovefacilitiesas|aT?operational guidance for its day-today business.uUSCthe|abovefacilitiesas|aT?operational guidance for its day-today business. 9:%For using the above facilities, CGIGroup Inc. shall allocate the cost inrespect of the facilities on an agreedbasis.Group Inc. shall allocate the cost inrespect of the facilities on an agreedbasis. 9:2CGI Group Inc. shall allocate the costto CGl-India on the basis of numberof employees of CGl-India based onthe following formula:to CGl-India on the basis of numberof employees of CGl-India based onthe following formula: Cost incurred *Number of employeesof CGL-India Total number of employees of CGIGroup Worldwide O3 9:9The term ‘cost’ incurred under clause4.3 does not include any mark upand is limited to the actual cost.4.3 does not include any mark upand is limited to the actual cost. 9:%For using the above facilities, CGIGroup Inc. shall allocate the cost inrespect of the facilities on an agreedbasis.Group Inc. shall allocate the cost inrespect of the facilities on an agreedbasis. 9:2CGI Group Inc. shall allocate the costto CGl-India on the basis of numberof employees of CGl-India based onthe following formula:to CGl-India on the basis of numberof employees of CGl-India based onthe following formula: Cost incurred *Number of employeesof CGL-India Total number of employees of CGIGroup Worldwide O3 9:9The term ‘cost’ incurred under clause4.3 does not include any mark upand is limited to the actual cost.4.3 does not include any mark upand is limited to the actual cost. 9:!CGE-India shall not have any right tothe Intellectual Property rights (IPR)nor have any right to sell or license orlease or in any manner “transfer therightassignedtherein”to other'parties.the Intellectual Property rights (IPR)nor have any right to sell or license orlease or in any manner “transfer therightassignedtherein”to other'parties. !:Any right in respect of CGI informationTechnology Infrastructure, or whatsoever in|respect of any invention, improvements and)other intellectual property rights in respectofCGTInformationTechnologyInfrastructure or products shall vest withCGI Group Inc. |Technology Infrastructure, or whatsoever in|respect of any invention, improvements and)other intellectual property rights in respectofCGTInformationTechnologyInfrastructure or products shall vest withCGI Group Inc. | 7:Disclosure of information. 6. CGl-India agrees to hold all suchinformation in confidence to CGIGroup Inc. and not to disclose suchinformation to any other person ororganization without the prior writtenconsent of CGI Group Inc.information in confidence to CGIGroup Inc. and not to disclose suchinformation to any other person ororganization without the prior writtenconsent of CGI Group Inc. 4 7:%All materials receiwed from CGIGroup Inc. under this AgreementShall be and remain the property ofCGI Group Inc. and shall be returnedto CGI Group Inc. upon termination ofthis agreement.Group Inc. under this AgreementShall be and remain the property ofCGI Group Inc. and shall be returnedto CGI Group Inc. upon termination ofthis agreement. E:This Agreement is effective 1[St]~ October2001 and shall remain in effect unlessterminated by either party as otherwiseprovided in this Agreement. Termination ofthis Agreement shall not relieve either partyTo|obligations,which.mayhaveaccrued prior to such termination. 3: All payments under this agreement aresubject to statutory levies, if any. :Any notices permitted or required to be|given under this Agreement shall be|deemed given upon delivery, tf delivered byhand or sent by facsimile followed byregistered or certified mail, return receiptrequested, to the parties at the address as|mentioned in this agreement or otheraddress if the same is notified to the|respective parties. Pi 10;The provisions of this agreement shall beconstrued in accordance with the laws of|province of Quebec and applicable laws of|Canada and the parties agree to attorn tothe jurisdiction of the Courts of Quebec,Canada.Ld.CGl-India shall deduct Withholding Tax|(WHT) as applicable under India IncomeTax Laws.For CGI information|For CGI Group Inc|systems andSd/-|ManagementConsultants PrivateName: Jacques RoyLimitedTitle: S.V.P. Finance &|Sd/-|TreasuryName: SantoshDate: 14[th]March 2003Bhargava Title: Sr. Vice PresidentDate: D4[th]March 2003 8S.|A reading of the aforesaid agreement shows that|theCanadaianCompanyhasdevelopeda©#internal telecommunication and communication tool at their cost. It |could be accessed only to the members of CGI worldwide.| 22 Pi 10;The provisions of this agreement shall beconstrued in accordance with the laws of|province of Quebec and applicable laws of|Canada and the parties agree to attorn tothe jurisdiction of the Courts of Quebec,Canada.Ld.CGl-India shall deduct Withholding Tax|(WHT) as applicable under India IncomeTax Laws.For CGI information|For CGI Group Inc|systems andSd/-|ManagementConsultants PrivateName: Jacques RoyLimitedTitle: S.V.P. Finance &|Sd/-|TreasuryName: SantoshDate: 14[th]March 2003Bhargava Title: Sr. Vice PresidentDate: D4[th]March 2003 8S.|A reading of the aforesaid agreement shows that|theCanadaianCompanyhasdevelopeda©#internal telecommunication and communication tool at their cost. It |could be accessed only to the members of CGI worldwide.| 22 This is historically known as CGI Information Technology|Infrastructure. This Canadian Company is the absolute|owner of the CGI Information Technology Infrastructure|facility. It holds the Intellectual Property rights (IPR) in its|name. The Canadian Company has not granted any licensesto the assessee. The tool which they have developed is purely|a communication related facility and includes, network|facility; Collaborative facility, Security facility and Eportal-intranet facility. The assessee is providing Information|Technology Solutions to companies within the CGI Group|and other global customers.. The tool developed by the|Canadian Company is purely tor mutual benefit. Therefore,the assessee entered into a cost sharing agreement by whichcertain costs as mutually agreed upon, is shared between|them. | QO.Clause (4) of the agreement categorically states|that, the Canadian Company allows the assessee to use the| above facilities subject to the terms and _ condition oT mentioned therein. Therefore, the Canadian Company has|permitted the assesee to use the tool which they have|developed. The said tool is required by the assessee as an|operational guidance for its day-today business. For using|the said facilities, the assessee has allocated the cost in|respect of the facilities on an agreed basis as mentioned in clause 4.3. It is made clear the term ‘cost’ incurred under|clause 4.3 does not include any mark up and is limited to|the actual cost. In other words, no profit or income is|embedded in this cost. | 10. Clause 4.5 is of utmost importance. It declares|the assessee shall not have any right to the Intellectual|Property rights. In other words, though the assessee pays|the cost stipulated in the agreement for using the facility it does not confer any right in the intellectual property rights.In other words though the agreement is styled as ‘cost|sharing agreement’, and the cost is paid, the assesee would|not get any right in the said tool to any extent whatsoever. Further, the said clause makes it clear the assessee will not|have any right to sell or license or lease the facility whichismade available by the Canadian Company to the assessee.That clause does not stop there. It further says “or in any|manner transfer the right assigned therein to other parties”.It means under the agreement some right is assigned to the|assessee. However, the assessee has no right to sell, licenceor lease that right. Therefore, it is clear from this agreement,though the word used is “Canadian Company allows the|assesee to use the facilities for its day-today operational|suidance’ it has assigned some interest which the CanadianCompany possess in the said tool. Therefore, the argument|that it is a cost sharing agreement, under this agreement|nothing is transferred to the assessee, there is no profit|margin and, therefore, the amount paid by the assessee to the Candian Company cannot be construed as royalty or for|technical services rendered is ex facie incorrect. ‘Therefore,what follows is, the Candian Company is the absolute owner|of the intellectual property. It is making available the said| facility to its group Company. For allowing them to use thisfacility the Group Company like the assessee has to pay|cost. Though they have paid cost and some right in that isassigned to them, they cannot sell, license or lease that|right. 11. It is in this background, we have to find out!whether the right which is transferred or contferred on theassessee under the cost sharing agreement falls within the|definition of ‘royalty’ or ‘technical services’ in order to|chargeable to tax under the Act. 12. In order to appreciate the argument of the)assessee that no licence is granted and amounts paid under|the cost sharing agreement do not constitute licence fee, it isnecessary to understand what is ‘licence’. This Court had|an occasion to consider the said question in the case ofTHECOMMISSIONER OF INCOME TAX vs M/S' SYNOPSISINTERNATIONAL OLD LIMITED [ITA Nos. 11 TO 15/2008| 30 & 17/2008)decided on 3.8.2010. At para 40 what is a‘licence’ has been explained as under:- “40. A licence is a grant of authority to do aparticular thing. It enables a person to do lawfullywhat he could not otherwise lawfully do. Alicence does not, in law, confer a right. It onlyprevents that from being unlawful which, but forthe licence, would be unlawful. It amounts to aconsent or permission by an owner of copyrightthat another person should do an act which, butfor that licence, would involve an infringement ofthe copyright of licensor. A licence gives no morethan the right to do the thing actually licensed tobe done. It transfers an interest to a limitedextent,wherebythe.licenseeacquiresan.equitable right only in the copyrighted article.” It was further held as under:- “AZA licence is a permission to dosomething that would otherwise be unlawful.The question arises, therefore, as to what legalpermission is granted by a software licence. Theanswer is, briefly, that in some cases the licence willbe|OmpermissionTo|USECconfidentialinformation, and in virtually in all cases it will bea permission to copy a copyright work. If thesoftware has been kept secret by the producer, oronly supplied on conditions of confidentiality andhas not been published too widely, then thesoftware licence will be akin to a licence ofconfidential information or know-how. The owneror licensor of a copy right, has a right to grantpermission to use the software or a computerprogramme, in respect of which they have a copyright, without transferring the right in copy night. |It is one of the nights of a copy right owner orlicensor. Without such right being transferred,the end user has no right to use the software orcomputer programme. If he uses it, it amounts toinfringement of copy right. For transfer of suchright tf consideration is paid, it is not aconsideration for transfer of a copy right but foruse of intellectual property embedded in the copyright, and therefore it is for transfer of one ofthose rights of the owner of the copy right. It isnot a right in copy right but it is in respect of acopy right. When a copy righted article is soldalso, the end user gets the right to use the 39 intellectual property embedded in the copy rightand not a right in the copy right as_ such.Therefore the mode adopted or the terminologygiven is not decisive to decide the nature oftransfer. Ultimately, it is the substance whichhas to be looked into.” 39 intellectual property embedded in the copy rightand not a right in the copy right as_ such.Therefore the mode adopted or the terminologygiven is not decisive to decide the nature oftransfer. Ultimately, it is the substance whichhas to be looked into.” 13. Inthe background of the aforesaid legal position,if we look at Cost Sharing Agreement, it is clear that withoutentering into an agreement, the assessee was not permittedor allowed to use the facility which exclusively belongs to theCanadian Company. The cost is paid for use of the saidfacility. By use of such facility, a right is conferred on theassessee. But a restriction is put on the assessee to sell or|license or lease or in any manner transfer the right soconferred. The assessee was given the right to use the saidfacility for its purposes on payment of cost stipulatedtherein. Therefore, the terminology of the said agreementwould not conclusively decide the nature of transactionbetween the parties. Once we read the entire agreement as awhole, it is clear that the Canadian Company under the said agreement has permitted or allowed the assessee to use thefacilities which they have developed at considerable cost tobe paid. Merely because the agreement provides that theterm ‘Cost’ does not include any mark-up and is limitedTO|the actual cost, it makes no difference in the eye of law. Butone thing that clearly emerges from the said agreement isthat in developing the facility or tool, it is the CanadianCompany which has invested the entire money. Prior to thedevelopment of the said facility, there was no agreementbetween the Canadian Company and the assessee forsharing the cost of development of the said tool. Further,the agreement expressly states that the Canadian Companyis the absolute owner of the CGI Information TechnologyInfrastructure facility and they hold the intellectual propertyrights. It has not transferred any licenses to the CGI- India|i.e. the assessee. Therefore, even after payment of cost, the|said product used would absolutely vests with the CanadianCompany. If really, the agreement was to share the cost ofdeveloping the facility, the assessee also would become a co- 34 owner. That is not the intention between the parties. Theassessee under no circumstances, would get any title to anyextent in the facility developed by the Canadian Companyand the right conferred is only for its user. Therefore, it is |nothing but a license though it is styled as the Cost ShareAgreement. 14. Section 9 provides for the income deemed to}accrue or arise in India. It reads as under: “O(1) The following incomes shall be deemed toaccrue or arise in India- | (i) all income accruing or arising, whether directlyor indirectly, through or from any businessconnection in India, or through or from anyproperty in India, or through orfrom any asset orsource of income in India[4]or through the transferof a capital asset situate in India. (vl) income by way of royalty payable by- (a) the Government; or 35 (b) a person who is a resident, except where theroyalty is payable in respect of any night,property or information used or services utilisedfor the purposes of a business or professioncarried on by such person outside India or for thepurposes of making or earning any income fromany source outside India; or (c) a person who is a non- resident, where theroyalty is payable in respect of any right,property or information used or services utilisedjor the purposes of a business or professioncarried on by such person in India or for thepurposes of making or earning any income fromany source in India: Provided that nothingcontained in this clause shall apply in relation toso much of the income by way of royalty asconsists of lump sum _ consideration for thtransfer outside India of, or the imparting ofinformation outside India in respect of, any data,documentation, drawing or specification relatingto any patent, invention, model, de sign, secretformula or process or trade mark or similarproperty, if such income is payable in pursuance 36 (c) a person who is a non- resident, where theroyalty is payable in respect of any right,property or information used or services utilisedjor the purposes of a business or professioncarried on by such person in India or for thepurposes of making or earning any income fromany source in India: Provided that nothingcontained in this clause shall apply in relation toso much of the income by way of royalty asconsists of lump sum _ consideration for thtransfer outside India of, or the imparting ofinformation outside India in respect of, any data,documentation, drawing or specification relatingto any patent, invention, model, de sign, secretformula or process or trade mark or similarproperty, if such income is payable in pursuance 36 of an agreement made before the Ist day of April,1976 , and the agreement is approved by theCentral Government: — Explanation 2.- For the purposes of this clause,"royalty" means consideration (including anylump sum _ consideration but excluding anconsideration which would be the income of therecipient chargeable under the head" Capitalgains") for- | (i) the transfer of all or any rights (including thegranting of a licence) in respect of a patent,invention, model, design, secret formula orprocess or trade mark or similar property; | (u) the imparting of any information concerningthe working of, or the use of, a patent, invention,model, design, secret formula or process or trademark or similar property; — (ui) the use of any patent, invention, model,design, secret formula or process or trade mark orsimilar property; 37 (w) the imparting of any information concerningtechnical, industrial, commercial or_ scientificknowledge, experience or skill; | (ui) the rendering of any services in connectionwith the activities referred to in sub-clauses (i) to(w), (va) and (v) Explanation 4 — For the removal of doubts, it ishereby clarified that the transfer of all or anyrights in respect of any right, properly orinformation includes and has always includedtransfer of all or any rightfor use or right to use acomputer software (including granting of alicence) irrespective of the medium through whichsuch right is transferred. Explanation 5 — For the removal of doubts, it ishereby clarified that the royalty includes and hasalways included consideration in respect of anyright, property or information, whether or not —| (a)the possession or control of such right,|property or information is with the prayer; (b)such right, property or information is used|directly by the payer; 38 (c)the location of such right property orinformation is in India. Explanation 6. — For the removal of doubts, it ishereby clarified that the expression “process”includes and shall be deemed to have alwaysincluded transmission by satellite (including up-linking, amplification, conversion for down-linking of nay signal), cable, optic fibre or by anyother similar technology, whether or not suchprocess 1s secret;] 15. Explanations 4, 5 and 6 were inserted by the|Finance Act, 2012, which came into retrospective effect from1-6-1976. 16. The tacility which is provided by the Canadian|Company used by the assessee is the intranet facility.Therefore, it iS necessary for us to understand whatKIntranet”facility means. An intranet is a computer networkthat uses Internet Protocol technology to share information, operational systems, or computing services within anorganization. This term is used in contrast to extranet, anetwork between organizations, and instead refers to anetwork within an organization. Sometimes, the term refersonly to the organization's internal website, but may be amore extensive part of the organization's informationtechnology infrastructure, and may be composed of multiplelocal area networks. The objective is to organize eachindividual's desktop with minimal cost, time and effort to bemore productive, cost efficient, timely, and competitive. operational systems, or computing services within anorganization. This term is used in contrast to extranet, anetwork between organizations, and instead refers to anetwork within an organization. Sometimes, the term refersonly to the organization's internal website, but may be amore extensive part of the organization's informationtechnology infrastructure, and may be composed of multiplelocal area networks. The objective is to organize eachindividual's desktop with minimal cost, time and effort to bemore productive, cost efficient, timely, and competitive. 17. An intranet may host multiple private websites|and constitute an important component and focal point ofinternal communication and collaboration. Any of the well|known Internet protocols may be found in an intranet, suchas HTTP (web services), SMTP (e-mail), and FTP (file transferprotocol). Internet technologies are often deployed to providemodern interfaces to legacy information systems hostingcorporate data. An intranet can be understood as a private 40 analog of the Internet, or as a private extension of theInternet confined to an organization. The first intranetwebsites and home pages were published in 1991, and beganto appear in non-educational organizations in 1994.Intranets are sometimes contrasted to extranets. Whileintranets are generally restricted to employees of theorganization, extranets may also be accessed by customers,suppliers, or other approved parties. Extranets extend aprivate network onto the Internet with special provisions forauthentication, authorization and accounting. 18. Explanation-4 inserted by the Finance Act, 2012has puts at rest all the controversies and doubts. Itexpressly states that transfer of all or any rights in respect otany right, property or information includes and has alwaysincluded transfer of all or any right for use or right to use aComputersottware includinggrantingOT|alicenceirrespective of the medium through which such right istransferred. Therefore, the terms of Cost Sharing Agreement 4 explicitlymention|thattheCanadianCompanyhasdeveloped internal telecommunication and communicationtool which is accessible only to the members of CGIworldwide. Therefore it is an intranet facility. Further itdeclares that the Canadian Company holds the intellectualproperty rights in the said CGI Information TechnologyInfrastructure facility. It has allowed the assessee to use thesaid facility subject to the terms and conditions stipulated inthe said agreement. Clauses 4.2 and 4.3 deal with thepayment of cost to be paid for using the said facility. Clause4.4 declares that the cost does not include any mark up andis limited to the actual cost. Further, Clause 4.5 declaresthe permission granted to the assessee to use the facility onpayment of cost does not extend to confer on the assesseeany right to sell or licence or lease or in any manner“transfer the right assigned therein to other parties”.Therefore, it is clear that some right is assigned to theassessee under the agreement on payment of cost. Thatright is a right to use the facility notwithstanding the fact 49 49 that the cost is paid. Clause 5 declares the rights of suchfacility vest with the Canadian Company only. Therefore, it |is clear that the cost is paid for using the computer software.When the assessee is allowed to use the said facility, it isnothing but a license to use the said facility. If really thecost paid represents the assessee’s share of cost fordevelopingthe internaltelecommuinicationandcommunication tool, on such payment, the CanadianCompany can never claim to be the absolute owner of thesaid intellectual property. If CGI group companies were to |pay costs for using the said facility, then the title of the saidfacility1.e.intellectual|propertyshouldequallyVESTproportionate to the cost share by this group companies.That is not the intention behind this agreement. Therefore,we have no hesit