AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2014 (3) TMI 726
X X X X Extracts X X X X
X X X X Extracts X X X X
....sing cost of Rs.34,03,734/- to the Head Office and that section 40(a)(i) of the Act is not applicable to this payment. 3. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in holding that the data processing expenses cannot be clubbed with general administrative expenses and that the deduction has to be allowed for the entire expenditure pertaining to the Indian branch. 4. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of interest to the extent of Rs.58,20,110/- on the ground the same amounts to double addition." 2. Facts in brief:- The assessee, Antwerp Diamond Bank N.V., is a bank incorporated in Belgium and is a tax resident of Belgium. The assessee is operating through branch in India and has claimed treaty benefit under the Indo-Belgium DTAA. The assessee has claimed Head Office expenses of Rs. 1,24,13,827, attributable to its banking business operation in India. These expenses were classified as general administrative expenses of Rs. 90,10,093 and data processing cost of Rs. 34,03,734. The assessee, before the Assessing Officer, submitted that the general....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ition of "royalty" given in Article 12(3) of Indo-Belgium treaty to contend that within the said definition, such a reimbursement of cost paid to the Head Office cannot be treated as payment towards royalty. 4. The Assessing Officer required the assessee to furnish various details including the books of account of the Head Office, where such expenses have been incurred and also original vouchers in support of the expenses, however, the assessee could not produce the books of account pertaining to the Head Office. The Assessing Officer, after relying upon the following decisions, held that in such a situation, the entire claim of deduction of expenses aggregating to Rs. 1,24,13,827, which also includes a sum of Rs. 34,03,734, on account of data processing cost should be disallowed under section 40(a)(i) of the Act. i) Micoperi S.P.A. Milano Vs DCIT, [2002] 82 ITD 369 (Mum.); ii) DCIT v/s Campaign Franchise ITA no.3445/Mum./ 1998, order datad 20th August 2003. 5. Further, as required by the Assessing Officer, the assessee furnished details of direct expenses incurred by the Head Office, in the form of general administrative expenses of Rs. 90,10,093 and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rther, once the assessee itself has disallowed the Head Office expenses of Rs. 98,63,746 under section 44C, the entire amount of Rs. 1,24,13,827 cannot be added, as it will result into double disallowance. 7. The learned Commissioner (Appeals), however, agreed to the aforesaid contention of the assessee and directed the Assessing Officer to modify the assessment and delete the double disallowance after observing and holding as under:- "3.10 I have considered the arguments of the AR. Perusal of the assessment order clearly reveals that the A.O. has made disallowance of Rs. 98,63,746 in the computation of income and subsequently has again disallowed Rs. 1,24,13,827. I, therefore, agree with the A.R. that the amount of Rs. 98,63,746 has been disallowed twice. The A.O. is accordingly directed to modify the assessment and delete the double disallowance." On this score, the Revenue is not in appeal before us. 8. With regard to the treatment of data processing cost as "royalty", the assessee heavily relied upon the decision of the co-ordinate bench of the Tribunal, Mumbai Bench, in Kotak Mahindra Primus Ltd. v/s DDIT, [2007] 11 SOT 578 (Mum.), whi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1976 such a payment will fall under the ambit of "royalty" or "fee for technical services". She also referred to the decision of the Madras High Court in Poomphor Shipping Corporation, order dated 9th October 2013, in TC(A) no.2206 to 2208/2006, wherein the High Court held that under clause (iva) to Explanation-2 to section 9(1)(vi), the royalty amounts to consideration paid for use or right to use, irrespective of the fact that there was any transfer or not. The same result or interpretation of Explanation 5 inserted by the Finance Act, 2012 will apply under Article-12 of DTAA also, because even if the possession of software is with the owner and he has parted with the right to use, then the consideration thereof constitutes "royalty" only. She again referred to another decision of the Madras High Court in Verizon Communication Singapore Pte. Passed in Tax Case Appeal no.147 to 149 / 2011, order dated 7th November 2013 and also the decision of Karnataka High Court in CIT v/s Wipro Ltd. [2012] 203 Taxman 621 (Kar.), wherein it was held that granting of right to use of online database and other software services is nothing but "royalty". She submitted that this decision has been fol....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d consequently, whether such a data processing expenses can be clubbed with general administrative expenses. Explaining upon the issue raised in the grounds of appeal, he submitted that the Head Office has acquired the software from an Indian company for its usage in the banking business. Such a usage of software has also been allowed to the branch and whatever cost is incurred by the Head Office for the payment of such software, the same is allocated to the various branches on prorata basis. There is no scientific knowledge or knowhow provided by the Head Office to the Branch. The decision of the co-ordinate bench of the Mumbai Tribunal in Kotak Mahindra Primus Ltd. (supra) as referred and relied upon by the learned Commissioner (Appeals), is clearly applicable and he also referred to the relevant facts and the observations made by the Tribunal in the said decision. He further referred to the definition of "royalty" given in Article 12(3) of Indo-Belgium DTAA and submitted that the usage of data processing by the branch of the software which has been acquired by the Head Office and permitted to be used by the Branch Office, cannot be held to be for the "use" of or "the right to us....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in IAC v/s Goodricke Group Ltd., [1985] 12 ITD 1 and the DDIT (IT) v/s Stock Engineer and Contractors B.V., [2009] 27 SOT 452 (Mum.). In these decisions, a clear cut demarcation has been made with regard to the general administrative expenses and the specific expenses. 13. As regards learned Departmental Representative's reliance on the Tribunal order for the assessment year 2005-06, he submitted that the issue of data processing was not before the Tribunal and in fact the learned Commissioner (Appeals) in that year vide Para-5 and 6, has decided this issue in favour of the assessee and the Revenue has not preferred any appeal before the Tribunal. Thus, this issue also stands concluded in favour of the assessee in the assessment year 2005-06. 14. We have heard the rival contentions and also perused the relevant findings of the learned Commissioner (Appeals) and the Assessing Officer. The Assessing Officer had disallowed the reimbursement of expenses paid by the Branch Office to the Head Office, which consisted of general administrative expenses of Rs. 90,10,093 and data processing cost of Rs. 34,03,734, on the ground that firstly, the assessee could not produce b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ain issue i.e., whether the reimbursement of data processing cost of Rs. 34,03,734, amounts to royalty or not, we find from the record that the assessee is engaged in the banking business and operates in India through branch in Mumbai. It has acquired a banking application software named as "Flexcube" from an Indian software company which is exclusively used for the banking purpose by the assessee all over the world. When the Mumbai Branch was set-up, the Branch was allowed to use the said software by making it assessable through servers located at Belgium. The Branch sends its data to the Belgium server from where the data gets processed as per the requirement of the banking operations. As per the terms of agreement between the Branch and the Head Office for the usage of software by the Branch, which has been incorporated above, it is evident that the Head Office only has the non-exclusive non-transferrable rights to use the computer software brought for personal use and clause 16 of the said agreement specifically provides that the Head Office does not have any right to assign, sub-license or otherwise transfer the license of this agreement. Thus, the payment by the Branch ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....led in Belgium, but it simply sends the data to the Head Office for getting it processed. Insofar as the Branch is concerned, it is only reimbursing the cost of processing of such data to the Head Office, which has been allocated on prorata basis. Such reimbursement of payment does not fall within the ambit of definition of "royalty" within the Article 12(3)(a). To fall within its ambit, the Branch should have exclusive and independent use or right to use the software and for such usage, payment has to be made in consideration thereof. It is not the case of the Revenue that the Head Office has provided any copy right of software or any copyrighted article developed by the Head Office for the exclusive use of the assessee for, which the assessee is making the payment along with the mark-up exclusively for the purpose of royalty. If the payment for license for the software which is installed in the Head Office is being made by the Head Office, then any allocation of cost and reimbursement thereof by the Branch to the Head Office cannot be termed as independent payment for the purpose of royalty. To fall within the ambit of "royalty" under Article, the payment should be exclusively qu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t for the use of, or the right to use of, any copyright, patent, design or model, plan, secret formula or process, trademark, or other like property or right. The case of the revenue is that the payment is made for the use of specialized software with the help of which data is processed. We are not persuaded. As we have concluded earlier in this order, on the facts of this case, the payment made by the Indian company is not for the use of, or right to use of, software, the payment is for data processing. Be that as it may, even if stand of the revenue is to be upheld and it is to be concluded that the payment is made for software per se, that does not lead to taxability of receipt in the .hands of the Australian company either. It is also by now settled that the payment for software is for a copyrighted article and not copyright per se, and, therefore, is not covered by the scope of payment for copyright. The authority for this proposition is contained in Special Bench decision in the case of Motorola Inc. v. Dy. CIT (2005) 95 ITD 269 (Del)(SB), Samsung Electronics Company Ltd. v. ITO (2005) 94 ITD 91 (Bang), and Lucent Technologies Hindustan Ltd. v. ITO (2005) 92 ITD 366 (Bang). I....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e computer, and that the payment is for act of specialized data processing by the Australian company. Use of mainframe computer in the course of processing of data is one of the important aspects of the whole activity but that is not the purpose of, and consideration for, the impugned payment being made to Australian company. The payment, as we have observed earlier, is for the activity of specialized data processing. It is neither practicable, nor permissible, to assign monetary value to each of the segment of this economic activity and consider that amount in isolation, for the purpose of deciding character of that amount. Therefore, neither the impugned payment can be said to be towards use of, or right to use of, the mainframe computer, nor is it permissible to allocate a part of the impugned payment, as attributable to use of, or right to use of, mainframe computer. Accordingly, the provisions of article 12(3)(b) cannot have any application in the matter." 18. Insofar as the reliance placed by the learned Departmental Representative on the decisions of the Madras High Court and also the scope of "royalty" as given in Explanation 4 and 5 to section 9(1)(vi) brought in statut....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd general administrative expenses only, as defined in Explanation (iv) to section 44C and it does not apply in respect of each and every expenses incurred by the H.O. The data processing cost, as have been discussed in the forgoing paragraphs, pertains to allocation of expenses incurred by the Head Office on prorata basis for the banking application software acquired by the Head Office. Such expenditure does not fall within the meaning of "Head Office Expenses" as provided in section 44C. The nature of expenses as given in section 44C, has to be necessarily in the nature of executive and general administrative expenses only. The conclusion drawn by the learned Commissioner (Appeals) that such expenditure does not fall within the purview of section 44C, is in consonance of the decision of the Special Bench and the co-ordinate bench of the Tribunal cited supra, which we uphold. Thus, ground no.3, as raised by the Revenue, is dismissed. 24. In ground no.4, the Revenue has challenged that the deletion of disallowance of interest of Rs. 58,20,110. The learned Commissioner (Appeals) has not only deleted the said disallowance on merit but has also held that this amount has alrea....