2021 (11) TMI 37 - AT - Income Tax

Tribunal Upholds Tax on IT Services Receipt as per India-Switzerland Agreement

Rieter Machine Works Limited Versus ACIT (International Taxation), Circle-2 Pune

The Tribunal dismissed the appeal and upheld the inclusion of Rs. 3,88,94,824/- in the total income of the assessee, taxing it at 10%. The receipt was ... Taxability of receipts - Royalty / Fee for technical services - Switzerland based non-resident assessee from its Indian affiliate - main plank of the ld. AR for claiming the amount in question as not chargeable to tax, is that the receipt was in the nature of reimbursement of IT service cost from RIPL and, in the alternative, it was a receipt of software royalty not chargeable to tax - HELD THAT:- Given the fact that there are 19 global entities availing IT services from the assessee, we fail to comprehend as to how only the Indian entity has been allocated more than 17% of the total costs as against each of the other 18 entities getting allocation of 4.6% on average. From the above discussion, it is manifest that there is no proper and identifiable method of allocating the costs to RIPL under different IT service heads, claimed as reimbursement, thereby throwing the one-to-one correlation between the out go and in flow of the assessee on this score from RIPL to the winds. This shows that the assessee allocated costs for rendering IT Services in a peculiar manner, the modus operandi of which is not open for verification to the tax authorities. Clause (4) of the Agreement defines 'Consideration', which has been elaborated in Appendix-II. Relevant part of it states that: 'The basis for the calculation of the service fees shall include the direct as well as the indirect costs incurred. Generally for the following cost items a mark-up of 5% shall be added: Software and license fees - Charges/cost reimbursements from other related parties' - It shows that the Agreement firstly, talks of incurring software and license fee in rendering the services and then, of loading software and license fee cost with mark-up of 5%. This runs contrary to the assessee's stand that firstly, it did not use third party software for rendering IT services under the Agreement and secondly, that the software costs were recharged on cost to cost basis. This brings us to the inevitable conclusion that the second constituent of Reimbursement, being, recovery of the amount incurred as it is from the other without any plus or minus, also falls on the ground thereby jeopardizing the concept of Reimbursement. Cumulative satisfaction of both the conditions is essential for constituting 'reimbursement'. If one of them is lacking, the test of reimbursement fails. We are instantly confronted with a situation in which both the conditions are failing. Neither the undiluted benefit of the software cost was passed on to RIPL nor did the assessee recover the amount as it is from RIPL. We are ergo disinclined to countenance the contention of 'Reimbursement', which is hereby jettisoned. Is receipt a software royalty? - We are concerned with the second stage in which the software licenses, being in the nature of copyrighted article, were purchased by the assessee and then used in the providing various services, such as, Client Based Services (CBS), Business Applications for Sales, Marketing and Technology Users (BASMT), Business Applications for Parts and Service Users (BAPS), Business Applications for Operations Users (BAOP), Business Applications for Finance and Controlling Users (BAFC) etc. The fact that the assessee utilized the software purchased from third party vendors for integrating them with its own software for making a common centralized integrated IT infrastructure so as to render the IT services is further fortified by the details of the alleged reimbursement submitted by the assessee. First table has last two columns with captions 'Weights for IT infrastructure cost allocation' and 'Weighted average allocation'. On a specific query, the ld. AR submitted that the assessee company spent certain amount on IT infrastructure, independent of the software cost, which was allocated between all the 19 entities and the RIPL's share in it was determined at 17.09%. This shows that apart from purchasing the software for the centralized IT infrastructure Centre, the assessee also incurred certain IT infrastructure costs for integrating them into its centralized system so as to render services to the worldwide entities, which was charged to RIPL at 17.09%. This plentifully proves that the amount recovered by the assessee from RIPL is not towards transfer of any software so as to constitute software royalty. The contention of the ld. AR in this respect stands repelled. True nature of receipt - Since the nature of services rendered by incurring costs - on maintaining owned software and those purchased from third party vendors - is similar, the amount received by the assessee from RIPL for rendering such services cannot have two different characters viz., one part as taxable and the other as not taxable. On a pertinent query as to whether revenue of ₹ 20.04 crore received by the assessee from RIPL towards I.T. Services was offered and taxed as Royalty or Fees for technical services, as the same treatment would be given to ₹ 3.84 crore as well, the ld. AR submitted the it did not make any difference as both the royalty/FTS are taxable at the rate of 10% under the DTAA. We, therefore, hold that the authorities below were fully justified in including ₹ 3,88,94,824/- in the total income of the assessee and charging it to tax at 10% in parity with the assessee suo motu offering ₹ 20.04 crore to tax at that rate. Issues Involved:1. Is the receipt a reimbursementRs.2. Is the receipt a software royaltyRs.3. What is the true nature of the receiptRs.Analysis of Judgment:I. Is the Receipt a ReimbursementRs.The assessee claimed that the receipt of Rs. 3,88,94,824/- was a reimbursement of IT license costs from its Indian affiliate, Rieter India Private Limited (RIPL). For a receipt to be categorized as reimbursement, two conditions must be met: the expenditure should be incurred for and on behalf of the other party, and the amount should be recovered as it is without any markup. The assessee provided IT services to its group entities globally under a Master Services Agreement and received Rs. 20.04 crore from RIPL, which was offered for taxation at 10%. The assessee argued that the Rs. 3.88 crore was for recovery of software licenses costs transferred to RIPL without any markup. However, the Tribunal found that the nature of services listed in the Master Services Agreement and those claimed as reimbursement were identical, indicating that the transaction was not a simple reimbursement but part of the IT services provided. Additionally, the cost allocation method used by the assessee lacked verifiable evidence and did not support the claim of reimbursement. Thus, the Tribunal rejected the contention that the receipt was a reimbursement.II. Is the Receipt a Software RoyaltyRs.The assessee argued that the receipt was in the nature of software royalty, relying on the Supreme Court judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT. However, the Tribunal noted that there was no direct transfer of software licenses to RIPL. Instead, the assessee maintained a centralized IT infrastructure and provided access to it, integrating third-party software into its system. The Tribunal found that the receipt was not towards the transfer of any software licenses but for the provision of IT services using the centralized infrastructure. Therefore, the receipt did not constitute software royalty.III. What is the True Nature of the ReceiptRs.The Tribunal determined that the true nature of the Rs. 3.88 crore receipt was part of the IT services rendered by the assessee. The assessee had received Rs. 23.92 crore from RIPL for IT services, out of which Rs. 20.04 crore was offered for taxation, and Rs. 3.88 crore was claimed as reimbursement. The Tribunal found no inherent difference between the two amounts, as both were for IT services provided under the same agreement. Consequently, the Tribunal held that the Rs. 3.88 crore receipt should be taxed similarly to the Rs. 20.04 crore receipt, at the rate of 10% under the India-Switzerland Double Taxation Avoidance Agreement (DTAA).Conclusion:The Tribunal dismissed the appeal, upholding the inclusion of Rs. 3,88,94,824/- in the total income of the assessee and charging it to tax at 10%. The judgment clarified that the receipt was neither a reimbursement nor software royalty but part of the taxable IT services provided by the assessee.