2017 (3) TMI 1379 - AT - Income Tax

Tribunal rules on tax case: royalty income, SAP software, consultancy fees.

The Tribunal ruled in favor of the assessee in a tax case involving royalty income, recharge of SAP software, third-party service provider fees, ... Rate of tax to be applied on the royalty received under the royalty agreement - whether the said agreement executed on 01.04.2008 is an extension of earlier agreement dated 08.01.1998? - Held that:- New royalty agreement is not an extension of old agreement but an independent legally enforceable agreement. As per Contract law, the parties are bound by the terms and conditions of new agreement which are at variance with old agreement and hence, it is held that on the expiry of term of old agreement, the rights and obligations between the parties were extinguished and the assessee entered into a fresh agreement with fresh rights and obligations which may also called as revised but the same culminates into execution of new royalty agreement. Even if some of the terms and conditions in earlier agreement continued to govern the parties does not mean that a new agreement has not been executed between the parties. On the expiry of earlier agreement, new understanding has been culminated into a new agreement. Where the terms of new agreement shall now govern the rights and obligations of the parties, then we hold that the said agreement between the parties is a new royalty agreement and not an extension of old agreement. Under section 115A of the Act, it is provided that in case any new royalty agreement is entered into after first day of June, 2005, the applicable tax rates on the royalty income would be 10% plus surcharge and education cess. - Decided in favour of assessee Tax rate to be applied on the amount recovered by the assessee for recharge of supply of SAP software - case of the Revenue was that the same is to be taxed @ 20% in view of DTAA between India and Italy, whereas the case of assessee was that the provisions of section 115A of the Act were to be applied and the same is to be taxed @ 10% plus surcharge plus education cess - Held that:- In the succeeding year, the assessee had entered into an agreement with recipient company. The DRP while passing the order relating to assessment year 2011-12 had held the receipts to be royalty but by an order of rectification under section 154 of the Act, the same is held to be taxable @ 10% plus surcharge plus education cess. Even in assessment year 2012-13, similar receipts have been taxed by the Assessing Officer himself @ 10% plus surcharge plus education cess. The nature of receipts in the year under consideration are admittedly, same and following the same parity of reasoning, we hold that the receipts are to be taxed under the provisions of section 115A @ 10% plus surcharge plus education cess Chargeability of tax @ 20% as royalty under the Indian Italy DTAA, the amounts recovered towards reimbursement of expenses - Held that:- We find merit in the claim of assessee since in the facts of the case, it is a case of reimbursement of expenses incurred by the assessee, which in turn, were allocated to the entities. Such reimbursement of expenses without any mark up does not justify its taxability in the hands of assessee being royalty @ 20%. We reverse the order of Assessing Officer in this regard and allow the ground of appeal No.5 raised by the assessee. Amount received towards consultancy fees - charged by the Assessing Officer to tax @ 20% under India Italy DTAA as against 10.55% offered by the assessee - Held that:- The conditions prescribed under section 115A r.w.s. 9(1)(vii) of the Act are wide enough to include reimbursement of consultancy fees as fees for technical services in the hands of assessee. Accordingly, we hold that the amount received towards consultancy fees is to be taxed @ 10% plus applicable surcharge and education cess. Charging of interest under section 234B - Held that:- addition made in the hands of assessee is deleted, then no further interest is chargeable under section 234B of the Act. The assessee has also pleaded that it is foreign company and it is not liable to levy of interest under section 234B of the Act. We find that the rate of taxes to be applied is being decided in favour of the assessee and consequently, no interest is chargeable under section 234B of the Act. Issues Involved:1. Tax rate applicability on royalty received under the Royalty Agreement.2. Taxability and rate of amount received for recharge of supply of SAP Software.3. Taxability and rate of amount received for recharge of third-party service provider fees.4. Taxability and rate of consideration received for providing services in connection with SAP Software implementation.5. Taxability of amount recovered towards reimbursement of expenditure.6. Taxability of amount recovered towards reimbursement of consultancy fees.7. Levy of interest under section 234B of the Act.8. Initiation of penalty proceedings under section 271(1)(c).Issue-wise Detailed Analysis:1. Tax Rate Applicability on Royalty Received Under the Royalty Agreement:The assessee contested that the royalty received under the Royalty Agreement dated 01.04.2008 should be taxed at 10% under section 115A of the Income Tax Act, 1961, rather than 20% under the India-Italy DTAA. The Assessing Officer (AO) considered the 2008 agreement as an extension of the 1998 agreement and applied a 20% tax rate. However, the Tribunal found significant differences between the old and new agreements, such as the parties involved, scope, object, and terms of payment, determining that the 2008 agreement was a new agreement. Consequently, the Tribunal held that the applicable tax rate on the royalty income as per section 115A of the Act is 10% plus surcharge and education cess.2. Taxability and Rate of Amount Received for Recharge of Supply of SAP Software:The assessee argued that the amount received for the recharge of SAP software should be taxed at 10% under section 115A of the Act. The AO taxed it at 20% under the India-Italy DTAA. The Tribunal noted that there was no formal agreement during the year under consideration but acknowledged that similar receipts in subsequent years were taxed at 10% plus surcharge and education cess. Hence, the Tribunal directed that the receipts for the recharge of SAP software be taxed at 10% plus surcharge and education cess.3. Taxability and Rate of Amount Received for Recharge of Third-Party Service Provider Fees:Similar to the SAP software recharge, the assessee contended that the amount received for the recharge of third-party service provider fees should be taxed at 10% under section 115A of the Act. The Tribunal held that the receipts are to be taxed under the provisions of section 115A at 10% plus surcharge and education cess, following the same reasoning as in the case of SAP software recharge.4. Taxability and Rate of Consideration Received for Providing Services in Connection with SAP Software Implementation:The assessee claimed that the consideration received for providing services in connection with SAP software implementation should be taxed at 10% under section 115A of the Act. The Tribunal, following the same reasoning as in the previous issues, held that the receipts are to be taxed under the provisions of section 115A at 10% plus surcharge and education cess.5. Taxability of Amount Recovered Towards Reimbursement of Expenditure:The assessee argued that the amounts recovered for re-work charges and insurance costs were reimbursements without any income element and should not be taxed. The AO treated these as part of the SAP implementation project and taxed them as software royalty at 20%. The Tribunal found merit in the assessee's claim, noting that the reimbursements were without any mark-up and not related to the SAP project. Therefore, the Tribunal reversed the AO's order and held that these reimbursements are not taxable.6. Taxability of Amount Recovered Towards Reimbursement of Consultancy Fees:The assessee contended that the reimbursement of consultancy fees should be taxed at 10% under section 115A of the Act. The AO taxed it at 20% under the India-Italy DTAA. The Tribunal held that the reimbursement of consultancy fees qualifies as fees for technical services under section 115A and should be taxed at 10% plus applicable surcharge and education cess.7. Levy of Interest Under Section 234B of the Act:The assessee argued that interest under section 234B should not be levied as the entire income was subject to withholding tax in India. The Tribunal agreed, stating that since the main issues were decided in favor of the assessee, the interest charged under section 234B should be deleted.8. Initiation of Penalty Proceedings Under Section 271(1)(c):The Tribunal did not provide a detailed analysis of this issue, as it typically follows the outcome of the primary issues. Given that the primary issues were decided in favor of the assessee, the initiation of penalty proceedings would likely be impacted accordingly.Conclusion:The Tribunal allowed the appeals of the assessee, directing that the royalty income and other receipts be taxed at 10% plus surcharge and education cess under section 115A of the Act, and reversed the AO's orders on the reimbursement of expenses and consultancy fees. The Tribunal also directed the deletion of interest charged under section 234B. The Stay Applications filed by the assessee were dismissed as infructuous.