2012 (10) TMI 240 - AT - Income Tax

Tax Tribunal: Software Payment Analysis - Royalty or Reimbursement?

Assistant Commissioner of Income-tax, International Taxation - 2 (2) Versus First Advantage (P.) Ltd.

Assistant Commissioner of Income-tax, International Taxation - 2 (2) Versus First Advantage (P.) Ltd. - TMI Issues:- Whether the payment made to First Advantage Corporation is taxable in India as royalty.- Whether the payment constitutes reimbursement of expenses or payment for the use of software.Analysis:1. Issue 1 - Taxability of Payment as Royalty:The Revenue contended that the payment made to First Advantage Corporation should be considered as royalty and hence taxable in India. The Revenue relied on the Supreme Court decision in Transmission Corporation of AP & Anr. v. CIT to support its argument. However, the assessee argued that the payment was reimbursement of expenses and did not include any profit element. The assessee further contended that the payment did not fall under the definition of royalty as per section 9(1)(vii) of the Income Tax Act. The first appellate authority agreed with the assessee, stating that the payment was not for the transfer of a copyright and hence not taxable as royalty. The Tribunal, after examining the agreement and invoices, concluded that the nature of the transaction was not a reimbursement of expenses but rather a purchase of software, indicating a sale by First Advantage Corporation to the assessee. Therefore, the Tribunal directed the matter to be reexamined to determine the nature of the software purchased.2. Issue 2 - Reimbursement of Expenses vs. Payment for Software Use:The assessee argued that the payment made was for the purchase of Microsoft software by its associate concern on its behalf, and it did not amount to payment for the use of copyright. The Tribunal observed that the agreement between the assessee and First Advantage Corporation indicated a purchase of software rather than reimbursement of expenses. The Tribunal noted that the invoices presented showed that First Advantage Corporation treated the assessee as its customer and raised bills, suggesting a sale of software. As the first appellate authority did not consider the nature of the software acquired by the assessee due to lack of evidence, the Tribunal directed the issue to be sent back for further examination. The Tribunal ultimately allowed the appeals for statistical purposes pending the reexamination of the nature of the software purchased.In conclusion, the Tribunal's judgment focused on determining whether the payment made to First Advantage Corporation was taxable as royalty and whether it constituted reimbursement of expenses or payment for software use. The Tribunal found discrepancies in the nature of the transaction based on the agreement and invoices, leading to the decision to reexamine the matter to ascertain the true nature of the software purchased by the assessee.