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US company's software license cost reimbursements from Indian subsidiaries not taxable as royalty under India-USA DTAA ITAT Delhi ruled in favor of a US-incorporated non-resident corporate assessee regarding cost-to-cost reimbursement of software license expenses from ...
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US company's software license cost reimbursements from Indian subsidiaries not taxable as royalty under India-USA DTAA
ITAT Delhi ruled in favor of a US-incorporated non-resident corporate assessee regarding cost-to-cost reimbursement of software license expenses from Indian subsidiaries. The tribunal held that such reimbursements do not constitute taxable royalty income under India-USA DTAA provisions. The assessee purchased shrink-wrapped software from third-party vendors and distributed to group entities without owning copyright or intellectual property rights. Since the assessee merely sold copyrighted articles rather than transferring copyright usage rights, and no evidence showed markup inclusion in reimbursements, the receipts were not taxable as royalty. The addition was directed to be deleted.
Issues involved: The judgment involves a dispute regarding the addition of reimbursement of expenses from Indian subsidiaries as royalty.
Details of the judgment:
1. Background and Dispute: The appellant, a non-resident corporate entity from the USA, challenged the final assessment order concerning the addition of reimbursement of expenses from Indian subsidiaries as royalty.
2. Facts and Assessment: The appellant procured software licenses from third-party vendors and received reimbursement from Indian subsidiaries. The Assessing Officer treated the receipts as royalty income due to a perceived markup, leading to the draft assessment order.
3. Appeal and Arguments: The appellant contended that the reimbursements were on a cost-to-cost basis without any markup. They emphasized the lack of ownership of copyright in the software, thus disputing the royalty classification.
4. Decision and Analysis: The tribunal observed that the reimbursements were indeed on a cost-to-cost basis, supported by invoices from third-party vendors. The Assessing Officer's confusion between software transactions and back-office support services led to the incorrect royalty classification.
5. Legal Precedent: Citing the Supreme Court case of Engineering Analysis Centre of Excellence Pvt. Ltd., the tribunal concluded that the reimbursements for software costs did not constitute royalty income under treaty provisions.
6. Final Verdict: The tribunal directed the Assessing Officer to delete the addition, ruling in favor of the appellant. The appeal was allowed, and the judgment was pronounced on 20th September 2023.
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