TaxTMI 
TaxTMI 
2017 (3) TMI 1379
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....PUN/2015, wherein the assessee has raised the following grounds of appeal:- 1. Ground 1 : Royalty received under the Royalty Agreement should not be taxed @ 20% - Rs. 37,80,66,508 1.1. Applicability of tax rate a) Erred in facts and in law in holding that the Royalty Agreement dated 1 April 2008 is not a new agreement and hence, in considering the Royalty Agreement as an extension of the License and Technical Assistance Agreement dated 27 March 1998 and to apply tax rate of 20% under the India-Italy DTAA instead of 10.56% under section 115A of the Act. b) Erred in facts and in law in holding that there are no changes in the Royalty Agreement dated 1 April 2008 and the License and Technical Assistance Agreement dated 27 March 1998 and hence, in considering the Royalty Agreement as an extension of the License and Technical Assistance Agreement and to apply tax rate of 20% under the India- Italy DTAA instead of 10.56% under section 115A of the Act. 2. Ground 2: Amount received for recharge of supply of SAP Software - Rs. 9,30,58,722 2.1. Reimbursement not taxable Erred in facts to appreciate that the amount received toward....
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....lement of income in the hands of the Appellant, and hence are not chargeable to tax. a) Re-work charges - Rs. 314,573 b) Insurance cost - Rs. 3,218,800 b) Further, erred in facts and in law in enhancing the income of the Appellant by the said amounts 5.2 Not in the nature of royalty Erred in facts and in law in holding that the above receipts are in connection with implementation of SAP software, and hence, are in the nature of royalty which are chargeable to tax under the provisions of the Act as well as under the India-Italy tax treaty. 5.3 Applicability of tax rate Erred in facts and in law in holding that the amount received for providing services in connection with implementation of SAP software is not eligible for the rate of 10.5575% as per the provisions of section 115A(1)(b)(BB) of the Act. 6. Ground 6 : Amount recovered towards reimbursement of consultancy fees- Rs. 2,655,812 6.1. Reimbursement not taxable a) Erred in facts in not appreciating that the recharge of professional fees is towards reimbursement and does not have any element of income in the hands of the Appellant, and hen....
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....ommercial Vehicle business. The core Company of the Piaggio group is Piaggio & C.S.p.A. located in Pontedera (Pisa, Itly). The Company was primarily into "light wheeled transport" sector, which comprises 2, 3 and 4 wheeled vehicles. The assessee Company received royalty income and technical fees for the services rendered for SAP implementation and fees for TP consultancy rendered in India to its associate enterprises namely Piaggio Vehicles Pvt. Ltd., Baramati, India and the same was offered to tax as detailed below:- Sr No Nature of receipt Amount Offered for tax @ Remarks 1 Royalty on 3 wheeler 37,80,66,508 10.5575% U/s 115A rws 195A As per agreement dated 01/08/2008 2 Royalty on 3 wheeler- CNG/LPG 1,51,80,804 20% as per DTAA As per agreement dated 30/10/2003 3 Royalty on 4 wheeler 8,36,43,207 20% as per DTAA As per agreement dated 03/03/2004 4 Technical fees services rendered for 57,35,11,559 10.5575% U/s 115A rws 195A As per agreement dated 25/02/2008 5 Fees for implementation SAP....
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....ial No.1 dated 30.10.2003, therefore, show cause notice was issued to the assessee proposing to tax the royalty received as per the said agreement @ 20%. 7. Another issue which was raised by the Assessing Officer was that the assessee during the year had received fees for technical services from PVPL, India, which was offered to tax under section 115A of the Act as detailed hereunder:- Sr No Nature of services Agreement details Amount received Rate at which offered for taxation 1 Service fees for engine manufacture between P&C and PVPL for engineering, designing and developing new diesel engines 25/2/2008 - for cost plus 5.3% mark up - fees for technical services i.e. ongoing support services, technical services 573511559 10.5575% + SC+EC u/s 115A 8. The Assessing Officer further noted that the agreement dated 25.02.2008 was not approved by the Government of India and the Assessing Officer was of the view that the provisions of section 115A of the A ct were not applicable to this income and hence, the same were also taxable in India @ 20% as per DTAA provisions between India and Italy. Accordingly, show cause notice in this regard was a....
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....ment was governed by agreement dated 01.04.2008. However, the Assessing Officer was of the view that there was no material difference between earlier agreement dated 26.03.1998 and agreement dated 01.08.2008. The Assessing Officer made reference to various clauses of the agreement dated 26.03.1998 at pages 16 and 17 of the assessment order and the nature of services involved in agreement dated 01.04.2008 which are incorporated at page 18 of the assessment order and concluded as under:- "On comparison of both agreements above, it is noticed that there is no change as far as the purpose of agreements and the services involved therein are concerned. As clearly mentioned in the agreement dated 01/08/2008, the PVPL (the assessee) intends to continue to obtain from piaggio expert technical assistance for technological up gradation of its vehicles and that PVPL needs to use the Piaggio Trademarks and the patents and know-how for a further period of 10 years from the date of this agreement." 12. The Assessing Officer was of the view that the second agreement was renewal of earlier agreement dated 26.03.1998 since the time limit of 10 years had expired. Therefore, the second agr....
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....payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment. The Assessing Officer thus, held that the literary or scientific work obviously includes the software and there is no requirement of transfer of copyright for treating the payment as royalty under DTAA. Another point noted by the Assessing Officer was that the property which has been transferred by the assessee to its affiliates in India is the license and sub-licenses in respect of certain softwares. And it is further charging these affiliates based on the actual usage per annum. The Assessing Officer further observed that as the source code or the object code of these softwares has been protected under the copyright act, these softwares can even qualify as secret formula or secret process. Even by this meaning also, the payment received for granting the software licenses comes under the heading of "royalty". Hence, it was held that the character of payments received for right to use software and for support services was clearly royalty as defined in Article 13 of the DTAA as well as Explanation (2) to section 9(1)(vi) of the Act. The Assessing Of....
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.... transferred was not the copyright but the copyrighted article or programme copy. The Assessing Of ficer made reference to the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. Boots Co. (I) Ltd. (1995) 214 ITR 175 (Bom), wherein reference was made to the word similar, which as per the Hon'ble High Court connotes that the payment made to the assessee need not to be in the nature of royalty, commission or fees only; it could be any payment of like nature i.e. made in consideration of use or supply of such asset, knowledge or services in some manner as royalty fees for technical services, etc. Then the Hon'ble High Court considered the issue of copyright and copyrighted article or programme copy and held that the transfer of right in the property and transfer of right in respect of property were two distinct transfers and had different legal affairs. In first section, rights were purchased, which enable use of those rights while in the other, no purchase is involved, only right to use is granted. The Assessing Officer thus, concluded by holding that the payments received by the assessee were right to use software and for support services constituted royalty under DTAA as we....
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....ty received under the Royalty Agreement dated 01.04.2008. The learned Authorized Representative for the assessee pointed out that as per Royalty Agreement entered into between the parties which is dated 01.04.2008, the assessee had claimed benefit under section 115A of the Act that the receipts received from the Indian entity is to be taxed @ 10% as against the rate prescribed in the treaty between India and Italy @ 20%. He further pointed out that the Assessing Officer had denied the benefit to the assessee on the surmise that the new agreement between the parties was renewal of old agreement. Our attention was drawn to the agreement dated 26.03.1998 which is placed at pages 41 onwards and the learned Authorized Representative for the assessee stressed that the said agreement was between two different parties i.e. the subsidiary of the assessee and JV between Piaggio and Piaggio Greaves Vehicles Pvt. Ltd. The said agreement had to be approved by RBI after which the supplementary agreement was executed, under which acknowledgement was given to manufacturing of Ape MP 501 and Ape MP 601. Our attention was drawn to different clauses of agreement, under which reimbursement fees was re....
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....s held to be separate agreement. 21. The learned Departmental Representative for the Revenue on the other hand, pointed out that in the earlier agreement, the term of 10 years was fixed but there was option of extension of period available between the parties. He admitted that there was no lump sum payment of any fees but royalty was paid and only on this basis, it cannot be said that it was a new agreement between the parties. Referring to the decision of Hon'ble High Court of Calcutta in CIT Vs. Borhat Tea Co. Ltd. (supra) , the learned Departmental Representative for the Revenue pointed out that procedure was to execute a new agreement but in the present case there was no new agreement but extension of old agreement. Referring to the ratio laid down by the Hon'ble High Court of Calcutta in Chloride Group PLC. Vs. CIT (supra), the learned Departmental Representative for the Revenue pointed out that the terms agreed upon between the parties were different in the new agreement and also the rate of royalty fixed between the parties was different. 22. We have heard the rival contentions and perused the record. The first issue which arises in the present case is the rate of tax ....
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....also, PVPL, India intended to obtain from the assessee expert technical assistance for technology upgradation of its vehicles and since PVPL needed to use the trademark and know-how for further period of 10 years, the said agreement was executed, which was nothing else but an extension of earlier agreement. Hence the royalty received as per second agreement was taxed @ 20% as per DTAA provision between India and Italy. The Assessing Officer also pointed out that even if the tax liability was worked out as per section 115A of the Ac t, it comes to 20% plus surcharge and education cess, whereas tax rate applicable as per DTAA was only 20% which was beneficial to the assessee and hence, the royalty was taxed @ 20%. The DRP upheld the order of Assessing Officer and the assessee is in appeal before us. 23. In order to adjudicate the issue, we need to look into the terms of old and new royalty agreement which is being referred to by the authorities below. The learned Authorized Representative for the assessee had tabulated the points of difference between old agreement and new royalty agreement by referring to the clauses of agreement and has elaborately referred to the agreements as ....
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...., the Licensor was responsible for providing the design within the licensed information relating to JV vehicles as well as for the design correctness of all modifications and / or improvement thereto recommended by the Licensor. The Licensor shall transfer to the Licensee the licensed information which was necessary, comprehensive and reasonably necessary for the production, distribution, sale and servicing of JV vehicles under JV license. This is as per Article 4.1 of old agreement and it was further agreed that the licensed information shall include information relating to APE 601 chassis. The other terms agreed upon between the parties were technical information and documentation in this regard and terms relating to production of JV vehicles. As per Article 6, it was further agreed upon between the parties that the Licensor was to make available to the Licensee any design change made to the JV vehicles and any other vehicle or technological improvements developed by the Licensor. The Licensee had to implement the said modifications or improvements in its production process within reasonable time. As per Article 10, the Licensor was to provide technical assistance in India and tr....
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....e agreement at any time with mutual consent in writing. As per Article 18.3, in addition to other rights and remedies either party has right to terminate the agreement in the event of breach of any substantive and significant material provision of the agreement by other party; and merger, consolidation or reorganization of the other party which results in the change in the control or management of the other party. For removal of doubts, it was also provided that in case of merger of Licensor into its current 100% parent company, its registered office in Italy is permitted, then successor shall automatically succeed to all rights and obligations of the Licensor. As per agreement, the parties also agreed that if for some reason, the agreement could not be proceeded with, then what were the rights and liabilities of each of the parties and what happened to disposal of pending confirmation orders received by the Licensee. As per Annexure, dimension and weight Table of Ape 501 and Ape 601 are annexed along with modification and design changes for all of the versions of JV vehicles, as per Annexure A2 and A3 . As per Annexure B, Piaggio trademarks are enlisted. 24. Now, coming to the ....
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....he licensor. In consideration of the license granted by the licensor to use the trademark to produce, sub-contract, distribute and sell the vehicles and parts thereof, including the use of only property rights, the licensee agreed to pay the licensor royalty @ 2.5% of the total net ex-factory turnover of the licensee. The royalty was payable on quarterly basis. These were the terms as per Article 4 of the agreement. Various other terms were ag reed upon between the parties in respect of trademarks, protection of patents and knowhow and trademarks, representations and warranties and confidentiality of information. The term of the agreement was fixed for ten years unless terminated earlier. It was also provided that the agreement after natural expiry could be extended by mutual consent by the parties. The parties also agreed that the agreement could be terminated at any time by mutual consent in writing. 25. The issue which arises before us is whether the said agreement executed on 01.04.2008 is an extension of earlier agreement dated 08.01.1998. The first point of distinction pointed out by the learned Authorized Representative for the assessee is the parties to the agreement. Ad....
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....of the licensee was to be paid along with charges for technical assistance. However, under the new royalty agreement, the payment is only of royalty @ 2.5% of the total net ex-factory turnover of the licensee. The periodicity of payment of royalty was also changed from semi-annual basis to quarterly basis. The next point of difference i.e. territory to which license extended i.e. the earlier territory was only to the territory of India and as per new agreement, the territory was not only the territory of India but also export to any other country as may be mutually agreed. Further, non-competition clause as provided in the old agreement is absent in the new royalty agreement. Further, the old agreement was governed by the law of the Great Britain, whereas as per Article 14 of the new agreement, the parties would be governed by the jurisdiction of Courts of India. 26. On comparison of the terms agreed upon between the parties in the old agreement and the new royalty agreement and after going through the scope and object of the agreement and various terms, we find one main material difference i.e. in the earlier agreement, the assessee had given license to produce Piaggio branded ....
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....ment. Where the terms of new agreement shall now govern the rights and obligations of the parties, then we hold that the said agreement between the parties is a new royalty agreement and not an extension of old agreement. Under section 115A of the Act, it is provided that in case any new royalty agreement is entered into after first day of June, 2005, the applicable tax rates on the royalty income would be 10% plus surcharge and education cess. We find support from the ratio laid down by the Hon'ble High Court of Calcutta in CIT Vs. Borhat Tea Co. Ltd. (1993) 203 ITR 987 (Cal) and also the ratio laid down by the Special Bench of Kolkata Tribunal in ITO Vs. Chloride India Ltd. (supra) which has been approved by the Hon'ble High Court of Calcutta in Chloride Group PLC. Vs. CIT (supra). Accordingly, we hold that the applicable tax rate on the royalty income as per section 115A of the Act is 10% plus surcharge and education cess. The Assessing Officer is directed accordingly. The ground of appeal No.1 raised by the assessee is thus, allowed. 27. The second issue raised by way of grounds of appeal No.2 to 4 is against the tax rate to be applied on the amount recovered by the assessee....
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....ities below, the dispute was whether the same was in the nature of royalty or not. The learned Authorized Representative for the assessee has pointed out that the said issue is not in dispute and the only dispute which arises is the rate of tax to be applied. The case of the Revenue was that the same is to be taxed @ 20% in view of DTAA between India and Italy, whereas the case of assessee was that the provisions of section 115A of the Act were to be applied and the same is to be taxed @ 10% plus surcharge plus education cess. In this connection, it may be pointed out that for the year under consideration the assessee had entered into exchange terms of agreement and no formal agreement was entered. However, in the succeeding year, the assessee had entered into an agreement with recipient company. The DRP while passing the order relating to assessment year 2011-12 had held the receipts to be royalty but by an order of rectification under section 154 of the Act, the same is held to be taxable @ 10% plus surcharge plus education cess. Even in assessment year 2012-13, similar receipts have been taxed by the Assessing Officer himself @ 10% plus surcharge plus education cess. The nature ....
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.... to the entities. Such reimbursement of expenses without any mark up does not justify its taxability in the hands of assessee being royalty @ 20%. We reverse the order of Assessing Officer in this regard and allow the ground of appeal No.5 raised by the assessee. 32. Now, coming to the ground of appeal No.6 raised by the assessee which is against the amount received towards consultancy fees charged by the Assessing Officer to tax @ 20% under India Italy DTAA as against 10.55% offered by the assessee. The assessee had recovered sum of Rs. 26,55,812/- from PVPL, India towards reimbursement of consultancy fees paid by it to third party service provider. The assessee had claimed the said to be in the nature of fees for technical services and chargeable to tax as per section 115A(1)(b)(BB) of the Act @ 10% plus applicable surcharge and education cess. The claim of assessee was that the said fees is taxable as technical services in view of Explanation (2) to section 9(1)(vii) of the Act which defines fees for technical services r.w.s. section 115A(1)(b)(BB) of the Act. 33. The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below. ....
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....in law in holding that the Royalty Agreement dated 1 April 2008 is not a new agreement and hence, in considering the Royalty Agreement as an extension of the License and Tech nical Assistance Agreement dated 27 March 1998 and to apply tax rate of 20% under the India-Italy DTAA instead of 10.5575% under section 115A of the Act. b) Erred in facts and in law in holding that there are no changes in the Royalty Agreement dated 1 April 2008 and the License and Technical Assistance Agreement dated 27 March 1998 and hence, in considering the Royalty Agreement as an extension of the License and Technical Assistance Agreement and to apply tax rate of 20% under the India- Italy DTAA instead of 10.5575% under section 115A of the Act. 2. Ground 2 : Amount received towards SAP software maintenance charges - Rs. 3,10,12,563 2.1 Applicability of tax rate a) Erred in facts and in law in holding that the amount received towards SAP software maintenance charges is in the nature of royalty and chargeable to tax under the provisions of the Act as well as under the India-Italy DTAA. b) Erred in facts and in law in holding that the amount received towards SAP ....