2014 (11) TMI 44 - AT - Income Tax

TDS upheld for engineering services, software license expense remanded for verification.

M/s. AMD Research & Development Center India Private Limited Versus Dy. Commissioner of Income-tax, Circle 1 (2), Hyderabad

The Tribunal partly allowed the appeals, holding the assessee liable for TDS on payments for engineering services as 'fees for included services' but ... TDS u/s 195 - Nature of amount paid to parent company abroad on account of software expenses and engineering expenses - reimbursement of expenses or not - Whether the assessee company can be treated as an assessee in default u/s 201(1) - AO observed that the remittance made by the assessee to ATI Technologies, Canada constituting income from other sources was chargeable to tax in the hands of the said foreign company at the rate of 40% with surcharge and education cess as - Held that:-the amount in question was paid by the assessee company to ATI Technologies, Canada for the benefit it derived in the form of services procured from Soctronics India Private Limited and provided to it by ATI Technologies, Canada, and it is not a case of any payment of extra profit/cash by the assessee company to ATI Technologies, Canada as alleged by the authorities below, the next issue that arises for our consideration is whether it was a case of a mere reimbursement of actual expenses incurred by the ATI Technologies, Canada on cost basis without any profit element involved therein as claimed by the assessee. The amount in question was remitted by the assessee company to ATI Technologies, Canada for certain benefits received by it in the form of services procured by ATI Technologies, Canada from Soctronics India Private Limited and provided to the assessee company, and it was not a case of either gratuitous payment made by the assessee or mere reimbursement of expenditure incurred by the ATI Technologies, Canada, the question that now arises for our consideration is what exactly is the nature of this payment. Almost similar view, as taken by us on this issue, has been taken by the Commissioner of Service Tax vide his order dated 23.7.2012. In their respective orders, the Assessing Officer as well as the learned CIT(A) have observed that if one were to go by the conclusion of the Commissioner of Service Tax, the amount in question paid by the assessee to ATI Technologies, Canada for services procured from Soctronics India Private Limited and made available to the assessee company will be in the nature of ‘fee for included services’ which is chargeable to tax in the hands of ATI Technologies, Canada as per the domestic law as well as India Canada DTAA. The assessee company was liable to deduct tax at source from this amount as per the provisions of S.195, and having failed do so, it has to be treated as an assessee in default under S201(1) to the extent of tax payable by ATI Technologies, Canada in India on the mount in question which is in the nature of “fee for included services”. – Decided against assessee. TDS u/s 194J - Amount paid to Soctronics India Private Limited for the services availed through its parent company ATI Technologies, Canada – Held that:- The amount was remitted by the assessee company to its parent company in Canada for the services procured by the said company from Soctronics India Private Limited and provided to the assessee for which the assessee company was charged with profit – the order of the CIT(A) is upheld – Decided against assessee. Unreasonable and Excessive payment to parent company - Held that:- The entire amount claimed to be paid by the assessee to ATI Technologies, Canada for use of software licences was included in its cost and the same was subsequently recovered from ATI Technologies, Canada, alongwith mark up, which clearly shows that there was no ulterior motive on the part of the assessee to pay any extra profit or cash to ATI Technologies, Canada in the guise of software application cost - the authorities below are not justified in treating 50% of the software licence cost paid by the assessee company to ATI Technologies, Canada as excessive and unreasonable - the claim of the assessee of having paid the entire amount in question to ATI Technologies, Canada for use of software licences/applications is accepted – Decided in favour of assessee. Whether the nature of payment is Royalty – Article 12 DTAA – Held that:- In the absence of details and due to lack of proper examination/verification by the authorities below, it is not possible to ascertain the claim of the assessee that the amount was paid by it to ATI Technologies, Canada only for use or right to use a copy righted article, i.e. software and not for the use or right to use the copy right in the said software, and it was thus not in the nature of royalty within the meaning of Article 12 of the India-Canada DTAA – thus, the matter is remitted back to the AO for fresh adjudication – Decided in favour of assessee. Issues Involved:1. Non-deduction of tax at source on remittances made to ATI Technologies, Canada.2. Nature of payments made to ATI Technologies, Canada for engineering and software expenses.3. Classification of payments as 'income from other sources' or 'fees for included services.'4. Applicability of Section 195 and Section 194J of the Income Tax Act.5. Treatment of software license expenses as royalty under the India-Canada DTAA.6. Reasonableness of cross charges for software licenses.7. Alternative classification of payments as dividend income.Issue-Wise Detailed Analysis:1. Non-deduction of Tax at Source:The assessee, a subsidiary of ATI Technologies, Canada, made payments to its parent company for software and engineering expenses without deducting tax at source as required by Section 195 of the Income Tax Act, 1961. The Assessing Officer treated the assessee as in default under Sections 201(1) and 201(1A) for the assessment years 2007-08 to 2010-11.2. Nature of Payments:The assessee claimed that the payments were reimbursements for services rendered by Soctronics India Private Limited, initially paid by ATI Technologies, Canada. The Assessing Officer rejected this claim due to the absence of agreements and sufficient documentary evidence. Statements from Soctronics' directors indicated that services were provided to ATI Technologies, Canada, not the assessee.3. Classification of Payments:The Assessing Officer concluded that the remittances were fresh income to ATI Technologies, Canada, taxable in India as 'income from other sources' under Article 21(3) of the India-Canada DTAA. The CIT(A) upheld this view, noting the lack of direct agreements and the structuring of transactions.4. Applicability of Section 195 and Section 194J:The assessee argued that the payments were reimbursements without profit and thus not subject to TDS under Section 195. The CIT(A) and the Tribunal found that the payments were for services rendered, not mere reimbursements, making them subject to TDS. The Tribunal also dismissed the applicability of Section 194J, as the services were procured through ATI Technologies, Canada.5. Treatment of Software License Expenses:The assessee contended that payments for software licenses were not royalties but reimbursements for the right to use copyrighted software. The Tribunal found insufficient evidence to support this claim and remanded the issue to the Assessing Officer for further verification.6. Reasonableness of Cross Charges:The CIT(A) accepted only 50% of the software license expenses as reasonable, treating the rest as excessive. The Tribunal reversed this decision, accepting the entire amount as reasonable based on the cost-plus model followed by the assessee.7. Alternative Classification as Dividend:The assessee's alternative claim to classify the payments as dividend under Section 2(22)(a) was dismissed by the Tribunal, as the entire software license expense was accepted as reasonable.Conclusion:The Tribunal partly allowed the appeals, holding the assessee liable for TDS on payments for engineering services as 'fees for included services' but remanding the issue of software license expenses for further verification. The Tribunal accepted the entire software license expense as reasonable, dismissing the alternative classification as dividend.