BEFORE THE AUTHORITY FOR ADVANCE RULINGS

(INCOME TAX) NEW DELHI 

P  R  E  S  E  N  T 

Honble Mr. Justice Syed Shah Mohammed Quadri (Chairman)

Mr. A.S.Narang (Member)

Mr. A.Sinha (Member) 

Monday, the twenty second January Two Thousand-Seven 

A.A.R. NO. 688 OF 2006 

Head Note : The payments made by the Indian subscriber to the Cargo Community Network Private Limited at Singapore, for providing a password to access and use the portal hosted from Singapore, are taxable in India and subject to deduction of tax at source (Para 9) 

R  U  L  I  N  G

(By Mr. A.S.Narang) 

This application under section 245Q(1) of the Income-tax Act (for short the Act) in form No.34C (meant for non-resident applicants) has been filed on 23.2.2006 by M/s Cargo Community Network Pte Limited (hereinafter referred to as the applicant), a tax resident of Singapore.  The applicant is a company incorporated under the Companies Act, Singapore having its registered office in Singapore.  It is a matter of record that earlier the applicant had filed an application (AAR/664/2005) before the Authority on 30^th May, 2005 but on the ground that the relevant facts had not been incorporated in the Annexure to the application, it was withdrawn with liberty to file a fresh application and accordingly that application was rejected as withdrawn on 18^th January 2006. 

The applicant is engaged in the business of providing access to an Internet based Air Cargo Portal known as Ezycargo at Singapore.  An agent who books cargo through various airlines can subscribe for the portal Ezycargo which enables him to access the data bank of the airlines like fight schedules, availability of cargo space etc.  The portal enables an agent to check the connect flight details to the desired place and enables him to arrive at the economics of transporting the cargo to the desired destination.  The cargo space availability for booking cargo can be checked only for a specified aircraft of specified airlines.  The agent can book the cargo by choosing a specified airline and submitting the details asked for in the booking sheet like airway bill number etc., as provided by the airlines, dimension and weight of the cargo.  In addition the portal performs other functions like furnishing the status of booking to the agent, creating database for various bookings by furnishing the status of the shipment etc.  The portal transmits date from the agent to the airlines by transmitting from simple English language to Cargo IMP data and on receiving the reply of the airlines converts the Cargo IMP into simple English language and transmits the same to the agent.  For this services the applicant charges subscription fee, system connects fee and helpdesk support fee etc.  The applicant opened a liaison office in Chennai with the permission of Reserve Bank of India to act as a communication channel between the Head Office and parties in India.  It is, however, mentioned that the liaison office does not take up any activity of a trading or commercial nature nor does it provide any consultancy or other services with or without consideration.  The expenses of the liaison office are met exclusively out of funds remitted from Singapore through normal banking channel.  It maintains account with Deutsche bank at Chennai.  There are two employees in the liaison office who receive messages from subscribers in India for the purpose of communicating with the Head Office and supplying information to the intending agents.  Agents make subscription directly to the Head Office at Singapore and the agreement for the use of the portal is also signed at the Head Office at Singapore.  No software or programme is installed in the computer system of agent who is given an exclusive password to access the portal.  The applicant also imparts training to agents to use the portal in its entirety.  The training, it is stated, consists of only demonstration and no technical knowledge is imparted to the subscribers.  The Head Office at Singapore maintains the portal.  The applicant also imparts training to agents to use the portal in its entirety.  The training, it is stated, consists of only demonstration and no technical knowledge is imparted to the subscribers.  The Head Office at Singapore maintains the portal.  The applicant has helpdesk support in India through which the agents may clarify their doubts like using the portal.  The agents propose to deduct Income-tax at source under Section 195 of the Act from the subscription amount which necessitates the applicant to approach the Authority. 

On the basis of these facts applicant has sought advance ruling from the Authority on the following question:- 

Whether the payments made by the Indian Subscriber to the Cargo Community Network Pte Limited towards the portal located at Singapore is taxable in India and is subject to Tax Deduction at Source. 

During the course of hearing of the application on 27.9.2006, Mr. S.Ramesh, learned counsel for the applicant, sought and was granted permission to amend the question.  Following is the amended question:- 

Whether the payment made by the Indian subscriber to the Cargo Community Network Private Limited at Singapore, for providing a password to access and use the portal hosted from Singapore, is taxable in India and is subject to deduction of tax at source? 

2.The Commissioner in his comments has stated that Ezycargo is a secure carrier-neutral service portal developed by Cargo Community Network Singapore (CCN).  It is a sophisticated platform offering a complete range of services that enable the forwarders to manage their time-critical transactions with major carriers quickly, in a simplified and cost effective way.  The result is a one-step, integrated communications solution catering to the needs of the airfreight community.  It offers forwarders and carriers global online-access convenience to a comprehensive range of functions used for their day-to-day time-critical transactions.  It also offers a range of complete management solutions to perform a variety of functions on one single platform.  Its Key Features are: 

1)Flight Schedule & Availability 

2)proactive Shipment Monitoring Alerts. 

3)Multi-shipment, Multi-Carrier Track and Trace 

4)Allotment Management & Allotment Booking  

5)Multi-carrier, Multi-Air Waybill e-Booking 

6)Air Waybill Stock Management & Air Waybill Printing 

7)E Invoicing & e-Payment. 

With information available on demand there is vast improvement in the quality of service and information provided to the customers of the Cargo Agents/Forwarders, as and when they need it.  Therefore, the business of the Applicant is not merely holding of the portal or providing access through the portal, but much more than that as specified above.  The company was permitted to establish a liaison office at Chennai in India by the Reserve Bank of India for the sole purpose of acting as a communication channel between the head office and parties in India.  The RBI permission was granted subject to certain conditions.  The Liaison office is headed by a General Manager with two executives, one looking after administrative function and the other providing Technical Support.  The Technical person is trained on Ezycargo programme and he is training the agents in Chennai.  The subscription fee for the first Ezycargo concurrent access is USD 180.00 per month.  For the second to the fifth Ezycargo concurrent access, the subscription fee shall be USD 50.00 per month for each additional access.  A connect fee (one-time) of USD 200.00will be charged for the first Ezycargo concurrent access, which shall include a one day classroom training on the usage of Ezycargo, limited to two participants.  Subject to seats availability, a subscriber may nominate more than two participants to the training course by paying a surcharge of USD80.00 for each additional participant (Limited to training in Chennai).  For each subsequent concurrent access a connect fee of USD150.00 is levied.  This shall include one day classroom training on the usage of Ezycargo, limited to two participants.  Help desk support is provided during office hours, via telephone or email until the problem is resolved.  In the event of an on site support required to fix a problem due to no fault of CCN, a charge of USD 100.00 is levied.  The Applicant has opened a liaison office at Chennai for three years from 2004-05 for the purpose of undertaking solely liaison activities, i.e. to act as communication channel between the head office and parties in India, subject to conditions laid down by the RBI.  Clause (vii) of the conditions in the Annexure is as under: 

The office in India will not render any consultancy or any other service directly/indirectly with or without consideration. 

The applicant violates this clause by providing training at Chennai on the usage of Ezycargo.  Further the provision of on site Helpdesk support by the technical staff and training to the Agents indicate that Liaison office is carrying on the business of the Applicant either wholly or partly.  The applicant, therefore, carries on the business through the P.E. in India and the payments of subscription fees, System connect fee and Help Desk charges are directly or indirectly attributable to the P.E. in India. 

The provisions of article 7(1) (Business Profits) of DTAA states as under: 

The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein.  If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment. 

Accordingly the payments made by the subscriber/cargo agent for the use of portal are taxable as business income.  Moreover the consideration paid as subscription fees etc., amount to payments for use of portal and server of the applicant on the seven features of the comprehensive Ezycargo System, is well within the ambit of royalty as per sub clause (iva) of explanation 2 to section 9(1)(vi) of the Act, especially when the contract for cargo booking is made in India and source of payments is also in India.  Article 12(3)(b) of the DTAA with Singapore defines royalty as payments of any kind received as a consideration for the use of, or the right to use of any industrial commercial or scientific equipment. 

3.In the rejoinder it has been stated that the applicants income is from subscription received from various agents towards portal for cargo booking and cargo tracking of various airlines.  The subscription consists of one time receipt of System connect Fees which includes training, monthly Subscription fees and Help Desk Charges as they arises.  The above income can fall within the definition of business income of the applicant.  In such situation, whether the same falls within the taxable territory of India, depends on whether the liaison office is a permanent establishment or not.  The company opened the Liaison Office (L.O.) at Chennai for the purpose of acting as a communication channel.  The L.O. at Chennai has not undertaken or is undertaking any activity of a trading or commercial nature nor it had entered into any business contracts in India.  The entire expenses of the L.O. at Chennai are met exclusively out of the funds remitted from Singapore through normal banking channel.  The L.O. at Chennai has employed two staff members to receive messages from subscribers in Chennai who intend to communicate with the Head Office.  The intending subscribers make the subscription directly to the head office at Singapore.  The agreement for usage of the portal on behalf of the company is signed at Head Office.  The information accessible and the statistics accessible in the web portal are that of various airlines.  The company does not undertake or offer any technical services to any subscribers.  No software or program is installed in the system of the subscribers.  Only an exclusive password is given to the subscribers to enable them to access the website.  This password is case sensitive and wrong usage would deny access to the portal by the subscriber.  The company demonstrates the user of the portal to familiarize the portal so that they can use the portal in its entirety.  The company termed this demonstration as imparting training to the subscribers.  The training is only a demonstration of how to access the website properly and to demonstrate the importance of entering data correctly for proper access.  That the Portal is wholly maintained by Head Office in Singapore and it has a helpdesk support through which the subscribers here clarify their doubts while using this Portal.  That the function of the portal is to translate the data sent by the subscribers from simple English language to airlines system language and to transmit the data to the specific airline and also vice versa.  The L.O. does not have access to any data of the subscribers nor their user E.D. and password.  The L.O. acts as a mere communication link between the Head Office and subscribers.  The L.O. is not carrying out any revenue earning activity within the territorial jurisdiction of India, which will be chargeable to tax under the Indian Tax Laws.  The entire expenditure of the L.O. has been met out of remittances from Head Office only.  The L.O. does not generate any revenue and that can be evidenced from the Receipts and Payments account of the L.O.  In view of this position Liaison Office cannot be treated as Permanent Establishment.  That Subscription Fee, System Connect Fee and Helpdesk support charges cannot be treated as Royalty or Fees for technical services either under the DTAA or the Act. 

4.During the course of oral hearing on 27.9.2006 and in the subsequent written submissions filed on 13.11.2006 it has been contended by Shri S.Ramesh, C.A. on behalf of the applicant that article 12(3)(b) defines the term royalty to mean payment of any kind received as consideration for the use of, or the right to use any industrial, commercial or scientific equipment.  This expanded definition of royalty covers the payment for use of equipment.  Obtaining access to the Singapore Companys portal for getting the commercial information by any stretch of reasoning does not amount to use of equipment of the Singapore Company.  Use of equipment involves at least some degree of domain or control over the equipment to suit the business needs of the person.  In this regard, the cargo-booking agent never uses the server of the applicant for processing or obtaining any data.  The server functions only as a gateway to submit the booking sheet into the system of airlines by translating from simple English to cargo IMP data (airlines system language).  Neither the portal of the applicant nor the server of the airlines is automated to take decision for booking the cargo.  In such a situation, the subscription made by the subscriber cannot be treated as usage for equipment.  The cargo-booking agent pays for the provision of data for booking the cargo in turn to be passed on to the airline system.  The subscription fee, system connect fee and helpdesk support charges are paid by the cargo booking agent to the applicant to pass on his requirement of booking the cargo to the specified airlines, the reason being airline never allows the cargo booking agent to access their server directly for security reasons.  Moreover, air cargo can never be booked without human intervention.  That is to say, whenever an agent books cargo at any given point of time, he can approach only for a specific flight for a specific consignment of a particular dimension and make request for booking.  The request is accepted or declined by the airline staff.  As the portal or server of the applicant cannot automate the decisions, the payments made cannot be regarded as payments made for use of equipment.  As per the Definition of Equipment from J.A. Parks Principles and practices of Valuation on page 483 as Equipment are the ancillary assets that are used to assist productive function in an enterprise, viz, trailers, lorries, tractors, computer installation, photo copier, telephone system, fire engine and the like.  Further it states that plant, machinery and equipments though often embodied (sic) (embedded) on the earth are regarded as fully replaceable assets.  From the above, it is evident that the portal cannot be treated as equipment.  In support of the above contentions reliance has been placed on the following cases: 

1.Madhya Pradesh High Court in 263 ITR 230 followed by the ITAT Bangalore Bench in Wipro Limited Vs. ITO 278 ITR at 57. 

2.Madras High Court in Skycell Communications Ltd. Vs. DCIT 251 ITR 53. 

It is also contended that even if it is presumed that article 12 applies in respect to the payments made by the cargo-booking agent as royalty or fees for technical services, clause 6 of article 12 should be applied.  This clause provides the application of article 7 wherein clause 1 states the profits of the enterprise may by taxed in the other State but only so much of them as is directly or indirectly attributable to, that permanent establishment.  On the other hand, if the payments are treated as business income, the business of the applicant falls under the category of shipping and air transport.  Clause 4(d) of article 8 of the DTAA between India and Singapore excludes the income from taxability in India.  It is taxable only in Singapore 

5.Shri S.D.Kapila, learned counsel for the Commissioner, has pleaded that applicant has a permanent Establishment in India in as much as it has a fixed place of business in Chennai that is DBS Business Centre where the applicant is providing training which is an ongoing process.  That for the purpose the applicant has employed two senior trainers and additional fees is charged for training depending on the number of persons who are sponsored by the cargo agent who subscribes for the use of the portal.  The training is not just a preparatory or auxiliary but an essential and inseparable part of the process of use of a complex portal and as such the business profits earned by the applicant in India are taxable under article 7(1)&(8) of the DTAA with Singapore, since applicant is having a P.E. in the garb of L.O. Alternatively, it is argued that portal, which the sever in Singapore hosts is nothing but a virtual market that is accessed by the booking agent in India, and it is displayed on the computer screen of the cargo agent.  Proposal for booking is made in India and acceptance is conveyed by the concerned airline in India and contract is concluded in India.  Thus, the portal equips the cargo agent to access the server of the airlines and in that sense it is intangible equipment by itself and the location of the server of the applicant (being in Singapore) is immaterial.  The systems connect fees that include training fee, monthly subscription fees and help desk charges, are therefore nothing but royalty for the use of, or the right to use scientific equipment under article 12(3)(b).  That the royalty is also taxable under explanation 2(iva) of section 9(1)(vi) of the Act.  That sub-clause (iva) was introduced w.e.f. 1.4.2002, therefore, old case law prior to that date would not be applicable.  It was also stated by the learned counsel that case law relied on by the applicant was distinguishable on facts and in law.