TaxTMI 
TaxTMI 
2014 (11) TMI 44
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....any, which was a subsidiary of ATI Technologies, Canada during the years under consideration. It is basically set up as a R&D and Design Centre for providing captive services to its parent company in Canada. The services rendered by it mainly include development of software and hardware solutions in support of handheld and digital TV products, graphics and CPU and testing and validation of developed software and hardware and assistance in designs, development and support for the software and hardware solutions. During the years under consideration, the assessee had made the following payments to its parent company, ATI Technologies, Canada on account of software expenses and engineering expenses- Financial Year Software Expenses Engineering Expenses Amount (USD) Amount (INR) Amount (USD Amount (INR) 2006-07 13,46,924 6,07,40,520 3,51,910 1,58,81,871 2007-08 2,01,464 85,70,772 9,66,547 3,86,04,499 2008-09 ... 22,70,804 10,76,77,131 2009-10 -- 8,79,220 4,33,89,940 TOTAL 15,48,387 6,93,11,291 44,68,481 20,55,53,441 Since no tax at source was deducte....
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.... Soctronics India Private Limited were 'made available' in the repository of the recipient, ATI Technologies, Canada to enable them to use the same on their own. He therefore, held that the claim of the assessee of having remitted the amount on account of engineering expenses to ATI Technologies, Canada as reimbursement of expenses actually incurred by the assessee company on its behalf was untenable. He also noted that the so-called reimbursement had actually happened at a much later point in time than the corresponding dates of the invoices of rendering of services by Soctronics India Private Limited. He further noted that the assessee did not have separate account head for reimbursement to its parent company and all these reimbursement expenses were claimed under various heads of expenses like 'consultancy and contractual charges' or 'deliverable/consultancy service', 'software licence/IT services coupons', 'administrative expenses' etc. across the various years. The Assessing Officer also found from the information provided by the Directors of Soctronics India Private Limited that the payments received by the said concern from ATI Technologies, Canada were recorded as export sa....
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.... recorded his adverse findings in relation to the assessee's claim of having remitted the amount in question to ATI Technologies, Canada towards reimbursement of engineering expenses and software expenses as under- "(a) There are no agreements or any other documentary evidences like statements of work issued by the assessee to M/s. Soctronics, to show as to how the services of M/s. Soctronics were received, utilized wholly and solely by the assessee, priced delivered to the claimed recipient i.e., the assessee M/s. AMD R&D India (P)Ltd. (b) There was no proof provided by the assessee to establish that the services were rendered by M/s. Soctronics to the Indian entity, the assessee M/s. AMD R&D India (P)Ltd. only. It is not possible also, since the service provider M/s. Soctroncis itself has claimed the services as "export' to M/s. ATI Technologies Inc. Canada. Therefore, the claim of the assessee is baseless, factually incorrect and untenable for the purposes of IT Act, 1961. (c) As seen from the Ledger Copies produced during the course of proceedings u/s. 201(1) of the Act it is noticed that the entire "reimbursement" was made during the financial years 2009-10 & 2010-11 ....
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....s, the Assessing Officer came to the conclusion that the remittances made by the assessee to ATI Technologies, Canada in the guise of reimbursement of engineering and software expense actually represented fresh cash/income paid to the said non-resident company and the same, therefore, the amount so remitted was chargeable to tax in the hands of the ATI Technologies, Canada in India under the head 'income from other sources' as per Income Tax Act,1961 . For this conclusion, he also relied on Article 21(3) of India Canada DTAA, which provides that the income arising to the non-residents in India from other sources shall be taxable in India. 8. The Assessing Officer accordingly held that the remittance made by the assessee to ATI Technologies, Canada constituting income from other sources was chargeable to tax in the hands of the said foreign company at the rate of 40% with surcharge and education cess as applicable and the assessee was liable to be treated as in default to the extent of such tax liability under S.201(1) of the Act, having failed to deduct tax at source as per the provisions of S.195 of the Act. He accordingly quantified the amount payable by the assessee under S.2....
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....cross-examination of the concerned witnesses, the Assessing Officer did not find the same to be acceptable. According to him, the statements recorded during the course of cross-examination failed to bring out any contradiction in the statements recorded earlier and there was nothing brought out in the said cross examination to show that the real beneficiary of the services rendered by Soctronics Technologies P. Ltd. was actually the assessee company and not the ATI Technologies, Canada. He held that the services rendered by Soctronics Technologies P. Ltd. as main contractor were for the benefit of ATI Technologies, Canada alone and even the access credential, such as log-in-id and password to the repository in which the deliverables were provided by Soctronics Technologies P. Ltd. were provided only to ATI Technologies, Canada. 10. Before the Assessing Officer, an order of Commissioner of Service Tax, Hyderabad was also filed by the assessee, wherein it was held that technical services were availed by the assessee company from ATI Technologies, Canada through Soctronics Technologies P. Ltd. The said order passed by the Commissioner of Service Tax was relied upon by the assessee ....
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....Article of the DTAA that imposed a lower tax liability on dividend income in the hands of the foreign company. 12. The Assessing Officer thus did not accept any of the contentions raised by the assessee company and rejecting the same, he summarized his conclusions on all the relevant aspects of the issue of the taxability of the amount in question remitted by the assessee company to ATI Technologies, Canada as under- "Conclusion: (a) It is noteworthy that the place of rendering the service is immaterial, for ease of communication, collaboration, if the engineers of M/s. Scotroncis perform their contractual obligation in the premises of AMD India, under the supervision of their manager, it does not mean that the entire work is being done wholly and solely for the benefit of M/s. AMD India(assessee) alone. (b) It is also not the case that, AMD India has provided any evidence that all the manpower employed by M/s. Soctronics for executing the contract with ATI Canada, was only for the support services to AMD India. It has been stated that both the officials of Soctroncis that the engineers of Soctronics interact with global teams and even visited the premises of ATI Techno....
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....to say that, in the absence of the accounts of M/s. ATI Canada duly audited by the Canadian Revenue authorities, it is difficult to conclude whether there has been a double debit of expense, one on account of the payments made by it to M/s. Soctroncis against the invoices raised on it, and another on the payment made to the assessee alognwith a mark up on the so-called reimbursement. Moreover it is noteworthy that the payments to M/s. Scotroncis have also not been subjected to any TDS u/s. 194C by virtue of this arrangement. (h) As regards the reimbursement for 'Software Expenses', it has been mentioned in the show cause dtd 19/10/2012 and also in this order vide para 4 that there was no evidence provided by the assessee as to what were the licenses that were provided to the assessee by the parent company, how were the licences were used by the assessee company, what were the metrics that were used to measure the cost that has to be shared by the assessee company. (i) The assessee in its reply to the show cause notice has contended that the definition in the India-Canada DTAA has not been amended and accordingly the payments for licence fee are not covered under the definitio....
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....opyrighted software in the computer owned by the user OR in the server owned by the vendor. * Finally, when the licence is found to be valid, a copy of the copyrighted software is loaded into the primary memory of the computer of the user from the server of the vendor or from the secondary memory (hard drive) of the user or from a CD given by the vendor * The aforementioned steps are executed each time the user uses the copyrighted software. (iii) Thus, in each time there is a use of the Copy Righted software, as in steps laid out above, there is a use of copyright in terms of making a single copy (of the copyrighted software) available for the user. (iv) It is important to note that DTAA does not specify that user of copyright forming a copy for one's own use as NOT being covered under Royalty. (v) Alternatively, if the contentions is that there is no commercial application/exploitation of the copyright, the following needs to be analysed * The usage of a copyrighted software is akin to the usage of a patented technology as an input/enabler in the commercial application of the user. * The element of commercial exploitation comes in because the user of the lice....
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....he learned CIT(A), such as few e-mails, invoices raised by Soctronics Technologies P. Ltd., duly approved by the employees of the assessee company by putting its signature, invoices for purchase of software licences by ATI Technologies, Canada, internal correspondence for cross charges, etc. The same were forwarded by the learned CIT(A) to the Assessing Officer alongwith the additional evidence filed by the assessee in support for verification and comments. In the remand report submitted vide letter dated 30.12.2013 to the learned CIT(A), the Assessing Officer offered his comments, as extracted from the impugned order of the CIT(A), as under- 2.1 As per the above referred directions, the office of the undersigned has called for a personal hearing of the appellant on 12/09/2013. The officials from the appellant-company attended and provided a copy of the master services agreement with ATI, Canada, computations of the income offered for tax by the appellant for AYs 2007-08 to 2010-11 and certain e-mails and invoices in support of the debit notes raised for the claimed-to -be software license expenditure which was reimbursed by the appellant to its parent ATI, Canada in partial sub....
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....nation for such approval. However, It was clearly discussed in the order u/s 201(1)(1A) as to how the appellant failed to provide any reason or evidence and thus failed to controvert the categorical assertions by Sri P Raghavendra sarma, Sri Dasaradh Gude and Sri P Krishna Prasad in their original statements given to the undersigned as well as during the statements recorded in cross-examination by the appellant that : 3.2.1 The ultimate beneficiary of the services rendered by the engineers of M/s Soctrnoics, either from the commercial space of appellant, (sometimes under the supervision of the managers of the appellant as shown by the appellant in the case of Mr K Balaji), or from its own office (office space of M/s Soctronics, Hyderabad) or other global locations including ATI, Canada was always ATI, Canada only and not the appellant. 3.2.2 As per guidance of the corporate finance, Sri Dasaradh Gude has signed the finacials approving the cross-charge of expenses incurred by ATI, Canada. 3.2.3 As per clause 5 of Master Service Agreement submitted by the appellant, the appellant does not have any ownership in any technology/know-how/output created by the appellant. Th....
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.... basis. Despite repeated opportunities, the appellant has falled to produce any evidence with respect to the number of licenses allocated to India, the number of engineers in various projects, who used it, to justify the cross charge to the appellant, by its parent, accordingly in view of the fresh evidences provided by the appellant, the genuineness of the expenses for software licenses by the AMDIATI group is found to be acceptable, however the extent of cross-charge to appellant remains un-substantlated. Therefore, in the absence of any supporting evidence provided by the appellant, it is proposed to accord a 50% recognition to the cross-chage on software license expenses to the appellant, which as discussed in para 11.13(j) of the order u/s 201(1)(1A) the relmbursements for these cross-charges were to be protectively treated as Royalty payments for the use of copyrighted software by the appellant through licenses procured by ATI, Canada, in case the reimbursements were found to be for genuine purposes. The remaining 50% is to be treated as "Income from other sources" as in the original order u/s 201(1)(1A). 4.3 Conclusion : In view of the aforementioned discussion, 50% of th....
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.... Therefore there is no need for advertence to any extravagant concepts like GAAR in the instant case in hand, however, even for academic purposes, when it is factually proved beyond dout that, the real beneficiary of the services by M/s Soctronics is the parent of the aggellant, M/s ATI Canada, and not the appellant, thereby rendering the so called reimbursements and the receipt of such monies with mark-up as gratuitous, in the least, if not a means to reduce tax liability in Canada and generating higher amounts of tax-exempt mones/cash in the group at large, the test of tax benefit to the group as per GAAR results in a conclusion against the appellant. 15. A copy of the remand report submitted by the Assessing Officer was provided by the learned CIT(A) to the assessee for the latter's counter-comments. Accordingly, the assessee filed written submissions offering its counter comments, as extracted from the impugned order of the CIT(A), as under- 16. After considering the submissions made by the assessee and the material available on record including the remand report filed by the Assessing Officer and the counter comments offered by the assessee thereon, the learned CIT(A) pr....
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.... nature of fee for 'included services' and there was a statutory obligation on the assessee to deduct tax at source from such payments as per S.195 of the Act. He held that the claim of the assessee that it was the actual beneficiary of the services provided by the Soctronics Technologies P. Ltd., in any case, was untenable as established by the Assessing Officer by making extensive investigations, which revealed that the assessee company was never in control of the deliverables provided by Soctronics Technologies P. Ltd. and Soctronics Technologies P. Ltd. was always guided by the terms of works issued by the ATI Technologies, Canada, as clearly observed even by the Commissioner of Service Tax in para 6.2 of his order. He therefore, agreed with the conclusion of the Assessing Officer that the amounts claimed to be remitted by the assessee company to ATI Technologies, Canada as reimbursement of expenditure incurred for the services received from Soctronics Technologies P. Ltd. was in the nature of fresh cash/income received by ATI Technologies, Canada and the same was chargeable to tax in India in the hands of ATI Technologies, Canada as 'income from other sources' arising in India....
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....Canada DTAA at the rate of 10%. 19. As regards the balance amount of 50%, he held hat it was the excess payment made by the assessee company to its parent company and the same, therefore, was chargeable to tax in India in the hands of ATI Technologies, Canada as per Article 12(8) of India Canada DTAA as rightly held by the Assessing Officer . 20. Aggrieved by the order of the learned CIT(A), the assessee has preferred these appeals before the Tribunal on the following grounds- "1. That on the facts and in the circumstances of the case and in law, the order of the Hon'ble Commissioner of Incometax( Appeals) V (hereinafter referred to as 'CIT(A)' ) dated 31 January 2014 under seciton250 of the Income Tax Act,1961 ('the act) is bad in law and is in violation of the principles of natural justice. 2. That on the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the order of learned Assistant Director of Income-tax (International Taxation)-I, Hyderabad.(hereinafter referred to as 'Ld. ADIT') treating the Appellant Company as an 'assessee in default' under section 201(1)/201(1A) of the Act for non-deduction of tax at source i....
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....ot appreciating the fact that the statements made by the officials of Scotronics based on which the impugned order under section 201(1)/(1A) of the Act was passed, were in fact interested parties to the outcome of the said order and hence their statements could not be relied upon. 8. That on the facts and in the circumstances of the case, the Ld. ADIT erred and the Hon'ble CIT(A) further erred in not taking full cognizance of the additonal evidence produced by the Appellant Company during the remand proceedings which clearly established the contradictions in the statements made by the directors/employees of Soctronics. 9. That on the facts and in the circumstances of the case, the Ld. ADIT erred and the Hon'ble CIT(A) further erred in not appreciating the fact that appreciating the fact that the reimbursement of Engineering service expenses was on cost to cost basis and as per the settled judicial precedents, in case of cost to cost reimbursement, there is no obligation to deduct tax at source under section 195 of the Act. 10. Without prejudice to grounds 3 to 9 above, that on the facts and in the circumstances of the case, the Ld. ADIT erred and the Hon'ble CI....
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...." 21. As regards Grounds No.1 and 2, the learned counsel for the assessee submitted that they are general in nature, requiring no specific adjudication. 22. The common issue involved in grounds No.3 to 9 relates to the determination of the exact nature of the amount claimed to be remitted by the assessee to ATI Technologies, Canada on account of reimbursement of engineering expenses incurred on services rendered by Soctronics Technologies P. Ltd. and the obligation of the assessee to deduct tax at source form the said remittance, depending upon the chargeability of the said amount in the hands of the ATI Technologies, Canada in India. 23. The learned counsel for the assessee submitted that while rejecting the claim of the assessee that the amount in question was actually paid to parent company towards reimbursement of expenses incurred on services availed from Soctronics Technologies P. Ltd. and holding the same to be extra profit or cash paid gratuitously by the assessee to its parent company without there being any services availed by it, the Assessing Officer as well as the CIT(A) completely ignored the business model of the assessee company. He explained that the asses....
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....de India was totally unfounded. 25. The learned counsel for the assessee invited our attention to the copy of the order passed by the Commissioner of Service Tax wherein service tax liability was levied after having found that the assessee company was the beneficiary of the engineering services provided by Soctronics Technologies P. Ltd.. He submitted that this finding of the Commissioner of Service Tax has not been rebutted even by the Assessing Officer and the CIT(A) and on the other hand, they have observed in their respective orders that going by the order of the Commissioner of Service Tax, the payment/ reimbursement by the assessee company to ATI Technologies, Canada clearly represented 'fees for included services' . He reiterated that the Assessing Officer and the learned CIT(A) have also failed to appreciate the fact that going by the cost plus model followed by the assessee company for raising the invoices on its parent company, there was neither any diversion of income from the assessee company nor any fresh cash/income in the hands of ATI Technologies, Canada on account of cross charges. He contended that there was in fact more income by way of cash inflow to the asse....
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.... from the assessee company to ATI Technologies, Canada, as alleged by the authorities below and there being no ulterior tax motive for the assessee company to record false cross charges, the authorities below were not justified in treating the amount of cross charges paid by the assessee to ATI Technologies, Canada as extra cash/profit, which was chargeable to tax in India, as income from other sources. He contended that all the facts of the case, evidence brought on record by the assessee and the order of the Commissioner of Service Tax are sufficient to show that the amount in question was paid by the assessee to ATI Technologies, Canada on account of services rendered by Soctronics Technologies P. Ltd. for the benefit of the assessee company and the same was not in the nature of any gratuitous payments made to its parent company, which is chargeable to tax in India as income from other sources, as held by the authorities below. 28. The learned counsel for the assessee submitted that the cross-charges made by the assessee company towards engineering services being in the nature of pure reimbursement at cost without any income element embedded in it, the same falls outside the ....
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....acts and circumstances, the stand of the assessee cannot be accepted that the entire cost of services rendered by Soctronics India Private Limited was borne by it and the same was fully reimbursed to ATI Technologies, Canada. 30. As regards the order of the Commissioner of Service Tax relied upon by the learned counsel for the assessee in support of its case, the Learned Departmental Representative submitted that the finding given therein is relevant only to the extent of services rendered by ATI Technologies, Canada to the assessee company for the purpose of levy of service tax. He contended that the finding given by the Commissioner of Service Tax that the services rendered were availed by ATI Technologies, Canada from Soctronics India Private Limited, however, was not relevant or germane to the issue involved in the context of service tax liability and the same therefore, cannot be taken cognizance of, to decide the issue involved in the present context in the income tax proceedings. He contended that the sole beneficiary of the services rendered by the Soctronics India Private Limited thus was found to be ATI Technologies, Canada by the Assessing Officer and in the absence o....
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....s behalf from Soctronics India Private Limited and the amount paid for such services to Soctronics India Private Limited by ATI Technologies, Canada was simply reimbursed by the assessee company on actual cost basis. Although this stand of the assessee was supported by the debit invoices raised on it by ATI Technologies, Canada, the Assessing Officer as well as the learned CIT(A) declined to accept the same firstly on the basis that there was no agreement either between the ATI Technologies, Canada and Soctronics India Private Limited or between ATI Technologies, Canada and the assessee company and secondly on the basis of statements given by the directors and employees of Soctronics India Private Limited, which, according to the revenue authorities, revealed that the beneficiary of the services rendered by Soctronics India Private Limited was ATI Technologies, Canada alone and not the assessee company. 33. In so far as the first objection raised by the Revenue authorities is concerned, there is no dispute that there was no agreement entered into either between the assessee company and Soctronics India Private Limited or between the ATI Technologies, Canada, and the assessee com....
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.... reveal the involvement of the assessee company and emphasised that the beneficiary of the services rendered by them was only the ATI Technologies, Canada. M/s. Soctronics India Private Limited thus was clearly an interested party and the statements made by the Board of Directors and the employees to protect their own interest and to ensure that their claim for deduction under S.10A is not adversely affected, cannot be relied upon to conclusively hold that the beneficiary of services rendered by them was ATI Technologies, Canada only. In our opinion, the claim of the assessee of having availed the benefit of services rendered by Soctronics India Private Limited to ATI Technologies, Canada needs to be considered on the basis of the other facts of the case, which are relevant in this context as well as other documentary evidence available on record. 35. As already noted above, the claim of the assessee of having remitted the amount in question to ATI Technologies, Canada for the services availed by the said company from Soctronics India Private Limited , which was duly supported by debit invoices raised by the said company, was rejected by the authorities below and it was held by ....
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....d number of engineers to accomplish the tasks relating to research and development to the assessee company. The tasks accomplished by the said engineers were also identified as pertaining to design, verification, model building, chip qualification debugging activities of Application Integrated Circuits, etc., for which payments were stated to be made in foreign currency by ATI Technologies, Canada. It was further observed in paragraph 6.3 by the Commissioner of Service Tax that these services rendered by the vendors and procured by ATI Technologies, Canada were provided to the assessee company for utilsing the same in rendering software development and research services. In our opinion, these clear cut findings recorded by the Commissioner of Service Tax were sufficient to show that the benefit of services rendered by Soctronics India Private Limited and procured by ATI Technologies, Canada was availed by the assessee company, and the amount in question was paid by the assessee company to ATI Technologies, Canada for such services. 37. It is observed that the Assessing Officer, however, brushed aside the findings recorded by Commissioner of Service Tax and relevant evidence in t....
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....tronics India Private Limited and procured by the ATI Technologies, Canada were meant for the benefit of the assessee company also and the amount in question was paid to ATI Technologies, Canada for such services. 39. Having held that the amount in question was paid by the assessee company to ATI Technologies, Canada for the benefit it derived in the form of services procured from Soctronics India Private Limited and provided to it by ATI Technologies, Canada, and it is not a case of any payment of extra profit/cash by the assessee company to ATI Technologies, Canada as alleged by the authorities below, the next issue that arises for our consideration is whether it was a case of a mere reimbursement of actual expenses incurred by the ATI Technologies, Canada on cost basis without any profit element involved therein as claimed by the assessee. In this regard, it is pertinent to note that the services were rendered by Soctronics India Private Limited to ATI Technologies, Canada as per the Contractor Service Agreement executed on 20th March, 2006 (a copy of the said agreement is placed at pages 1098 to 1109 of the assessee's paper book). As stipulated in the preamble of the said ag....
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.... any element of profit as claimed by the assessee. 41. Having held that the amount in question was remitted by the assessee company to ATI Technologies, Canada for certain benefits received by it in the form of services procured by ATI Technologies, Canada from Soctronics India Private Limited and provided to the assessee company, and it was not a case of either gratuitous payment made by the assessee or mere reimbursement of expenditure incurred by the ATI Technologies, Canada, the question that now arises for our consideration is what exactly is the nature of this payment. As already noted by us, almost similar view, as taken by us on this issue, has been taken by the Commissioner of Service Tax vide his order dated 23.7.2012. In their respective orders, the Assessing Officer as well as the learned CIT(A) have observed that if one were to go by the conclusion of the Commissioner of Service Tax, the amount in question paid by the assessee to ATI Technologies, Canada for services procured from Soctronics India Private Limited and made available to the assessee company will be in the nature of 'fee for included services' which is chargeable to tax in the hands of ATI Technologies....
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....by the assessee for the services availed through its parent company, and , if at all, tax is required to be deducted at source form the said payments, the same could be only under S.194J of the Act. Relying on the provisions of S.191 of the Act, he contended that the assessee company as per the said provision can be considered as in default under S.201(1) of the Act, only if the relevant taxes due on the amount in question cannot be directly recovered from the deductee, i.e. Soctronics India Private Limited. He contended that as per the information of the assessee company, the amount in question received by Soctronics India Private Limited from ATI Technologies, Canada has already been included in its income declared in the returns for the relevant years and there being no assessed taxes which are due from Soctronics India Private Limited, the assessee company cannot be considered as in default as per the provisions of S.191 of the Act. In support of this contention, he relied on the decision of the Apex Court in the case of Hindustan Coca-Cola Beverages Pvt. Ltd. V/s. CIT (293 ITR 226). 44. The learned Departmental Representative, on the other hand, relied on the orders of the ....
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.... of software licences by the assessee company to ATI Technologies, Canada were on cost to cost basis and there being no income element embedded therein, the same cannot constitute income in the hands of the ATI Technologies, Canada. Without prejudice to this contention and as an alternative, he contended that the payments made by the assessee to ATI Technologies, Canada for software licences were only towards right to use copy righted article. He explained that ATI Technologies, Canada only procured software licences from third parties for the group as a whole and later cross charged the same to different groups and entities including the assessee company for such usage of licences by each of the group entities. He contended that ATI Technologies, Canada thus did not have any copy right to such licences and it, therefore, was not in a position to charge for the use of copy right. He contended that the payment made by the assessee company to ATI Technologies, Canada towards cross charges for software licences thus cannot be considered as royalty both under the provisions of the Act as well as India Canada DTAA. He invited our attention to the definition of the term 'royalty' as give....
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....ndia, the learned counsel for the assessee invited our attention to the year-wise details of software licences procured and cross charges made to ATI Technologies, Canada placed at pages 875 to 925 of the paperbook. He contended that these details alognwith sample copies of the software licence agreements entered into by ATI Technologies, Canada on its behalf and on behalf of the entire group as a whole were sufficient to establish the genuineness of the cross charges paid by the assessee towards software license. He contended that relying on the details and documents filed by the assessee as additional evidence before the learned CIT(A), the Assessing Officer also accepted in the remand report that the cross charges for the software licence made by the parent company to the assessee company were justified and even the learned CIT(A) concurred with the said finding. He contended that when the genuineness of the cross chares paid by the assessee to its parent company on account of software licences was accepted by the Assessing Officer as well as the learned CIT(A), there was no justification to still hold 50% of such charges as unreasonable and excessive, especially during the cour....
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....ghtly doubted by the Assessing Officer as well as the learned CIT(A) to the extent of 50%. He also contended that the nature of software provided by ATI Technologies, Canada and the scope of use of such software by the assessee company cannot be ascertained in the absence of any agreement between the assessee and the ATI Technologies, Canada which is necessary to evaluate the argument of the learned counsel for the assessee that it was a case of use or right to use of copy righted article and not of the copy right as such. He contended that if it is a case of cost initially paid by the ATI Technologies, Canada for purchase software and reimbursement of the same subsequently by the assessee company as claimed, it clearly amounts to purchase of the software by the assessee company, which generally involves use or right to use the copy right as well. 52. As regards the contention of the learned counsel for the assessee that there is no justification in the action of the authorities below in accepting its claim for software expenses only to the extent of 50% and treating the balance 50% as extra payment chargeable to tax as income from other sources and that such recharacterisation ....
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....ept the contention of the assessee that the amount in question paid by it to ATI Technologies, Canada towards its share of software applications/licences on cost to cost basis, without involvement of any element of profit, so as to say that the amount so remitted is not chargeable to tax in the hands of ATI Technologies, Canada in India, being merely in the nature of reimbursement of actual expenses incurred by the said company, without any profit element. We therefore, dismiss ground no.15 of the assessee's appeal. 55. As regards the issue involved in ground Nos.12 to14 relating to the action of the authorities below in treating only 50% of the amount claimed to be remitted by the assessee to ATI Technologies, Canada on account of cost of software licences/applications as reasonable, it is observed that the entire claim of the assessee on this issue was initially disallowed by the Assessing Officer in the order passed under S.201(1)/201(1A) and the full amount was treated by him as extra profit or cash paid by the assessee to ATI Technologies, Canada in the absence of relevant details and documents filed by the assessee. During the course of appellate proceedings before the lea....
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....e's appeal are accordingly allowed. 57. Having held that the amount in question paid by the assessee to ATI Technologies, Canada was not merely reimbursement of software licence expenses allocated by the ATI Technologies, Canada on cost to cost basis and that the same entirely represented the amount remitted by the assessee to ATI Technologies, Canada for use of software license/application, the next issue that arises for consideration, as raised by the assessee in ground no.11, is whether the amount is in the nature of royalty chargeable to tax in the hands of ATI Technologies, Canada in India. In this regard, the learned counsel for the assessee has raised a contention before us that the amount in question having been paid by the assessee to ATI Technologies, Canada for use or right to use a copy righted article and not the use or right to use the copy right in the relevant software, the same is not in the nature of royalty as per Article 12 of the India-Canada DTAA. In this regard, it is observed that the amount in question was paid by theassessee to the ATI Technologies, Canada during the previous years relevant to assessment years 2007-08 and 2008-09 for use of total 16 sof....
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....o ATI Technologies, Canada on account of software license, held as unreasonable and excessive, to be dividend income under S.2(22)(a) of the Act, the learned counsel for the assessee submitted that even if such alleged unreasonable or excessive payment is considered to constitute fresh cash or income paid by the assessee company to ATI Technologies, Canada, the same may be treated as dividend paid to ATI Technologies, Canada, which is the 100% share holder of the assessee company. He invited our attention to S.2(22)(a) of the Act and contended that there being sufficient accumulated profit available with the assessee company at the relevant points of time, the release of the fresh cash by the assessee company to ATI Technologies, Canada as alleged by the learned CIT(A) may be classified as dividend under S.2(22)(a) of the Act. 60. The learned Departmental Representative, on the other hand, supported the orders of the Revenue authorities on this issue. 61. We have heard the arguments of both the sides and also perused the relevant material on record. In view of our decision rendered on grounds no.12 to 14 treating the entire amount paid by the assessee on account of software l....
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.... Document 2 - Software Engineering expenses As discussed above in this report, given the fact that the real beneficiary of the services of M/s Soctronics is the NR parent of appellant, M/s ATI Canada, and not the appellant, rendering the reimbursements to be mere fresh cash/income in the hands of M/s ATI Canada, Hlable for TDS 40% u/s 195, as held in the order us 201(1)(IA) and as upheld by the Hon'ble DRP, Hyderabad. Therefore this ground of the appellant is liable for summary rejection. D) Ground 4: The order u/s 201(1)(1A) failed to appreciate that (i) in view of the accounting of the cross-charges as costs of the appellant, and claiming a mark-up on the same from its parent, there was actual inflow of profits, as against the claim that there's an outflow of cash/profits in the order (ii) the statements of the officials of Soctronics can't be relied upon, as they are an interested party to the order u/s 201(1)(1A). Rebuttal: As discussed in paragraph 5 of this report, for the purposes of section 195, the simple question that needs to be answered is, if there are any services received in respect of the reimbursements bein....
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....ant M/s AMD India, as upheld by the order of Hon'ble DRP also. Therefore the reimbursements by appellant represented fresh cash/income in the hands of M/s ATI Canada which were liable for TDS u/s 195. Accordingly, this ground of the appellant is also liable for summary rejection. G) Ground 7: The reimbursements by appellant to its parent M/s ATI Canada, represent 'deemed dividend' payments to its parent, as per the provisions of Section 2(22)(e) of the IT Act, 1961 and hence not subject to TDS u/s 195 in the hands of the appellant. Rebuttal: It is to be seen that as per the provisions of the Section 2(22)(e), the payments by a subsidiary to its parent can be treated as deemed dividend only if an 'advance or loan is credited/paid to the shareholder. As can be seen in this case, there is no question of any advance/loan being given to ATI, Canada. Instead the instant transaction is one which has passed through the P & L of the appellant and interestingly, the appellant is in receipt of the funds with certain markup as well. Thus, the basic tests that are needed to characterize the reimbursements as deemed dividends are clearly f....
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.... its parent. Similarly, all the payments to M/s Soctronics would have come from the appellant and not from its parent M/s ATI Canada as Foreign Inward Remittances. As discussed above, the appellant does not even have the true and fair recording of accounts to support its claim: There is no ledger maintained by the appellant in the name of M/s Soctronics, who it claims to be its sub- contractor. The accounts of the appellant thus fall seriously short of the disclosure norms and purposes of accounting. On this ground also, the claims of the appellant are exposed to be hollow and baseless and liable for summary rejection. 7. Order of the Hon'ble DRP, Hyderabad in the case of appellant for AY 2010-11 upholding the findings of the order u/s 201(1)(IA) It is noteworthy that the Hon'ble ORP, Hyderabad has in its order dtd. 26/11/2013 ( enclosed as Annexure - 1 for your kind perusal) adjudicating the order of the Tranfer Pricing officer, Hyderabad treating the ALP (Arm's Length Price) of the reimbursement of Rs.17,88,20,166/- as NIL, (based on the Investigations and order u/s 201(1)(1A) passed by the und....
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....et of services, ATI Canada engaged M/s Soctronics to provide the requisite portion of service, on behalf of the Appellant Company; (d) As per the engagement between the M/s Soctronics and the ATI Canada, M/s Soctronics supplied skilled resources to the Appellant Company to provide requisite service: (e) 0 The services of the skilled resources supplied by M/s Soctronics got subsumed in the development services undertaken by the Appellant Company; The entire full set of agreed software development services were delivered by the Appellant Company to the ATI Canada; (g) As the agreement to supply the resources was entered into between M/s Soctronics and ATI Canada, ATI Canada accordingly paid M/s Soctronics for the said services and later cross charged the same to the Appellant Company, being the ultimate beneficiary of such services. (H) The above fact is dearly supported by the order of the Commissioner of Customs. Central Excise and Service Tax (hereinafter referred to as the Service Tax Order), an authority which is also part of the Department of Revenue, Ministry of Finance, Government of India, copy of which has already ....
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....DIT has not refuted the findings in the Service Tax Order. In fact the Ld. ADIT mentioned that if the order of the service tax authority is to be relied upon. then the payments should be liable to tax as Fees for technical services (Please refer para 6E gage 10 of Remand report), In this regard, the Appellant Company would like to submit that it had made a detailed submission as to why the said reimbursement cannot be taxes under "Fees for technical services" vide its submission dated 18 June 2012 made before Ld ADIT. (iv) The Ld. ADIT while coming to conclusion that the Appellant Company was not the beneficiary of the services provided by M/s Soctronics, completely relied on the statements made by the officials of M/s Soctronics. The Appellant Company wishes to submit that the Ld. ADIT erred in ignoring the findings of the Service Tax authority. (an independent revenue authority) and instead completely relied on the statement of the officials of Soctronics knowing very well that they were interested parties to the outcome of the findings of this case. As per the settled judicial principles, statements of interested parties cannot be con....
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....114 (i.e. with Mark-up) AMD India {100% Subsidiary} Overseas India (c) A detailed submission in this regard was made by the Appellant Company vide its submission dated 15 May 2012 before the Ld ADIT and reiterated the same in ali subsequent submissions. The Ld. ADIT did not bring on record anything to the contrary to the above facts but simply continued to conclude without any concrete basis whatsoever that there was diversion of cash/income by Appellant Company in favour of ATI Canada. (d) The Ld. ADIT failed to appreciate that the AMD group would have been overall better off from a tax perspective had there been no cross-charges by ATI Canada to the Appellant Company. If there would have been no cross charges, there would have been a lower cost base for the Appellant Company and thus there would have been lower service income in the books of the Appellant Company and on a net basis there would have been lower income in the books of the Appellant Company to the extent of mark-up. The Ld. ADIT failed to appreciate that if there was no tax advantage to the Appellant Company because of the cross-charge, rather a tax disad....
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.... In view of above, the Appellant Company submits that there was no ulterior motive for the Appellant Company to record a false cross-charge and the Ld. ADIT failed to bring on record anything to the contrary. (x) Further, the Appellant Company wishes to submit that since the said reimbursements were on cost to cost basis, without any income in the hands of ATI Canada, the same is not liable to tax in India under section 195 of the Act and hence the Appellant Company cannot be considered to be an assessee in default for not deducting TDS on such reimbursements. 1. Reimbursement of software licenses: () The Ld. ADIT in its Remand Report dated 30 December 2013 has accepted the genuineness of the cross-charge towards software licenses however has stated that only 50% of the said cross-charge is appropriate. Once the genuineness of the cross-charge is accepted, the Ld. ADIT has no jurisdiction under section 201(1) of the Act to question the quantum/appropriateness of the cross-charge. Once the cross-charges are held as genuine L.e. once it is established that the Appellant Company has received software licenses (or services) from ATI Ca....
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.... Company indeed received software licenses from ATI Canada) and has only questioned the reasonability of such payments. Once it is established that the payments were for software licenses, the same cannot be brought to tax under Article 21(3) of the India-Canada treaty. Whether, the recipient of services should have incurred or not incurred a particular expense (i.e. availed or not availed a particular service), the same cannot be a determining factor for classifying the nature of income in the hands of recipient. Our submissions against Ground No. 7: () The Ld. ADIT in his Order has alleged that the entire arrangement of the Appellant Company with ATI Canada was with a motive to divert cash/income from the Appellant Company to ATI Canada in the disguise of cross- charge/reimbursements and there was no actual services/software received by the Appellant Company towards the cross-charge i.e. in other words a colorable device in the form of a cross charge to remit cash/income to ATI Canada. The Ld. ADIT in his Order stated that since the Appellant did not convene any Board Meeting to declare dividend and since there was no approval ta....