TaxTMI 
TaxTMI 
2012 (4) TMI 189
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....may be decided accordingly. 2. He furnished background facts in brief that the assessee-company is based in Singapore and it has no presence in India. Its income consists of receipts from licensing of software to four customers in India. One of the customers is CSC India Pvt. Ltd., which is its hundred per cent subsidiary company. Other three customers are unrelated to the assessee. Two main questions arise in the appeal-(i) whether, the royalty/ Fees for Technical Services ('FTS' for short) is to be taxed on the basis of the gross amount, and (ii) whether, reimbursement of certain expenses are to be included in the receipts for the purpose of the levy of tax? There are other minor ground regarding chargeability of interest u/s 234B, liability to pay surcharge and reconciliation of the receipts. 2.1 Coming to facts, it is submitted that SAP software is internally used by all the group companies. This software is procured from an unrelated party. The expenditure incurred for the use of the license by the group companies is shared by them on the basis of the extent of user. The whole of the payment is made by the head office. This expenditure pertains to the business of the gro....
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.... 1 SIC0706037 20.6.2007 9835 428,708 Sl. No. 39-Cost allocation Ground 1-SAP License maintenance charges 2 SIC0608031 25.08.2006 3904 175,479 Sl.-43 Reimbursement of expense Ground 1-Travel expense reimbursements 3 2006/10-475 27.10.2006 98 4,458 -do- Ground 1-Travel expenses reimbursement 4 2006/11-295 22.11.2006 116 5,218 -do- Ground 1-RAS charges reimbursement 5 SIC0701028 23.1.2007 16328 695,427 -do- Ground 1-Travel expense reimbursements 6 SIC0703003W 16.3.2007 7448 197,756 -do- Ground 1-Travel expense reimbursements Ground 1 total 1,507,046 7 SIC0604012 26.4.2006 2249 100,902 -do- Ground 2-Travel expense reimbursements 8 SIC0605035 26.5.2006 4319 194,738 -do- Ground 2-Travel expense reimbursements Ground 2 Total 295,640 9 SIC0604024 TDS amount 28.4.2006 46,223 208,401 Sl. No. 3 Technical services provided Ground 3-Labour cross charge Ground 3 Total ....
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....98 4458 4 2006/11-295 22.11.2006 116 5218 5 SIC0701028 23.01.2007 16328 695427 6 SIC0703003W 16.03.2007 7448 197756 Ground 1 Total 1507046 7 SIC0604012 26.04.2006 2249 100902 8 SIC0605035 26.05.2006 4319 194738 Ground 2 Total 295640 9 SIC0604024 28.04.2006 46223 2084017 Ground 3 Total 2084017 10 SIC0606015 26.06.2006 Refer remarks 41369 Total 41369 Grand Total 3928072 2.8 The case of the ld. counsel is that royalty/FTS are taxable on receipt basis as provided under the DTAA. Therefore, what is not received from India has not been included in the total income. The assessee is not required to maintain India-accounts as it has no presence in India. It has followed cash system of accounting as in past. Therefore, it is argued that no addition can be made to the total income on the ground of discrepancies mentioned above. 3. In reply, the ld. senior DR submitted that two main questions are involved....
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....f the Indian subsidiary, the payment for which is made on the basis of the cost incurred by the assessee company, there may be no tax angle as the assessee has no presence in India. However, the same is not true in respect of reimbursement of traveling expenses. The expenses have been incurred in relation to earning of the royalty/FTS. Such receipts are taxable on gross basis. If the payer is allowed for deduction of expenses incurred for earning royalty/FTS, the principle of taxation on gross basis provided in Article 12 of the DTAA is violated. In this connection, references are made to page nos. 5 and 6 of the technical services agreement entered into between the assessee-company and the Indian subsidiary. Under the head "fees", it is provided that in consideration of performance of services by the assessee company under this agreement, the Indian subsidiary company agrees to pay all costs, plus a mark-up of 8%. However, under the scheme of taxation of royalty/FTS under the DTAA, the fee is taxable on gross basis. Therefore, the cost incurred on earning the fee cannot be passed on to the Indian company. Accordingly, it is argued that at least reimbursement of travelling expenses....
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....cie basis, it can be concluded that its accounts in respect of Indian receipts are liable to be audited u/s 44AB. Although it has been stated that it is liable to maintain accounts u/s 44AA, it has no where been asserted or shown that the accounts have been maintained. 6. The first question is-whether, revenues received by way of royalty/FTS are liable to be taxed on accrual basis or receipt basis? In paragraph no. 2, the AO has mentioned that the assessee has offered to tax all sums received from India as royalty/FTS. However, it has not offered certain sums for taxation in this year and not even till date. Some examples have been mentioned. It is also noted that the Indian subsidiary has claimed deduction in respect of certain amounts but the assessee-company has not offered such amounts for taxation. The ld. DRP has recorded a finding that the assessee is required to maintain accounts on mercantile basis as it is a company. The case of the ld. counsel is that the assessee is not required to maintain India-specific accounts as it has no PE in India. This submission is contrary to the representation made in the return of income that it is obliged to maintain accounts u/s 44AA. ....
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....no. 08-25181, dated 25.05.1996. In terms of provisions of Article 12 of Indo-Swiss Tax Treaty, twin conditions of accrual and payment are to be satisfied for the purpose of taxation. Thus, even if FTS has accrued or has arisen, but the same is not paid, the taxability under Article 12 in the source country does not come into play. 6.3 As against aforesaid case, the ld. senior DR relied on the decision of Madras High Court in the case of CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573. The question before the Court was-whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that royalty amounts should be assessed on cash basis for assessment years 1967-68 to 1969-70 if the books and balance-sheet of such receipts are found to be maintained on cash basis and in directing fresh assessment on such basis? The court mentioned that it must be remembered that section 145 is only a machinery provision and it cannot control the charging section so as to make the latter otiose. Therefore, section 145(1) should not be permitted to apply in such circumstances as those which arise from the facts of the case. It is immaterial whether th....
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....AO, it is held that the argument is not applicable to the facts of this case. Accordingly, it is held that royalty and FTS are taxable on payment basis and not on accrual basis. 7. This brings us to the second question regarding taxation of reimbursements. We have seen that reimbursement in respect of SAP licence and RAS charges are for the use of the licence belonging to a third party and getting the connectivity. Neither the AO nor the ld. senior DR has been able to make out a case that the expenditure has been incurred in connection with earning of royalty/FTS. It could be argued that the assessee-company should have charged reasonable margin from the Indian subsidiary. However, income, if any, would be in the nature of business income. The assessee does not have a PE in India. Therefore, such income is not liable to be taxed in India. Accordingly, it is held that reimbursements of SAP licence and RAS charges are not taxable in India. 7.1 However, the position of reimbursement of traveling expenses is quite different. These expenses have been incurred in connection with technical services agreement. Therefore, the expenditure has been incurred for earning royalty/FTS. In s....
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....), which inter-alia provides that the tax shall be levied in accordance with the DTAA, and the provisions of the Act will be applicable in so far as they are more beneficial to the assessee. He also referred to Board circular no. 734 dated 24.01.1996 issued in connection with rates of taxes applicable under DTAA between India and the UAE. In paragraph no. 3, it is clarified that in respect of payment to be made to the non-resident Indian at the UAE, tax at source must be deducted as under:- 5% of the gross amount of dividends if the beneficial owner is a company which owns at least 10% of the shares of the company paying the dividends, and 15% of the gross amount of dividends in all other cases. The rates for tax deduction at source have also been mentioned in respect of payment of interest and royalties. The circular does not mention anything about surcharge. The case of the ld. counsel is that the assessee is required to pay tax prescribed under Article 12 and no surcharge is payable. 8.1 In reply, the ld. senior DR submits that the rates are prescribed under the Finance Act and not the Income-tax Act. Section 90(2) of the Act does not contemplate treaty override over th....