TaxTMI 
TaxTMI 
TaxTMI 
2021 (11) TMI 37
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.... by the assessee. The TPO, vide his order dated 10-06-2019 passed u/s. 92CA(3), did not propose any transfer pricing adjustment. The AO observed that the assessee had included a sum of Rs. 20,04,14,231/- in its total income, being, IT service charges received through RIPL and offered it for tax at 10% in terms of the Double Taxation Avoidance Agreement between India and Switzerland (DTAA). However, another receipt of Rs. 4,05,96,997/- from RIPL was not offered for taxation. On being called upon to explain the reasons, the assessee submitted that a sum of Rs. 17,02,173/- was in the nature of reimbursement of expenses received from RIPL, representing supply of clothes required for Rieter India employees, Promotional gifts for exhibitions and expenses incurred by employees towards their accommodation, laundry, transport, good etc, which was charged back without any mark-up. The AO accepted the transaction as not chargeable to tax. The remaining amount of Rs. 3,88,94,824/-, which is the core of controversy in the instant appeal, was claimed as reimbursement of IT license costs incurred towards centrally purchasing software licenses and use by RIPL. The AO analyzed the Master Services A....
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....by several persons on certain allocation keys, even if the amount so allocated and recovered may be without any mark up, but it may not necessarily constitute reimbursement in the strict sense qua each participant independently. 6. The Indian exchequer is concerned only with the income earned by a non-resident from India and not from the other tax jurisdictions. If the non-resident charges Indian entity higher or lower than what is actually due from it, with the corresponding northward or southward adjustment in the share of allocation to the entities situated in other foreign destinations, the dented share of revenue magnetizing the Indian income tax, will affect its coffers notwithstanding the fact that the overall cost recharge by the nonresident remains without any mark-up. 7. In order to evaluate the contention of Reimbursement raised on behalf of the assessee, it is sine-qua-non to first understand precisely the nature of transaction. The assessee rendered I.T. services to its group entities across the globe and received Rs. 20.04 crore from RIPL, which was suo motu offered for taxation @10%. This amount was received pursuant to the Master Services Agreement with RIPL, a co....
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....r Human Resources Users Global (BAHR); Business Applications for others (BAOTHERS). 9. The assessee set up a case before the AO that the Reimbursement of IT license cost amounting to Rs. 3.88 crore had absolutely no relation with the services provided under the Agreement, and this amount was primarily towards recovery of software licenses costs which were transferred to RIPL and recharged without any mark-up. During the course of assessment proceedings, when the AO required the assessee to clarify its stand on the amount in question, the assessee stated, as has been reproduced on pages 3 and 4 of the final assessment order, that: "AMFR provides IT support to all its group companies enabling group companies to have access to highly developed and efficient IT infrastructure. The development of the IT infrastructure including the purchase of external consulting services and software/License is performed centrally by AMFR. Furthermore, AMFR is responsible for the enhancement and maintenance of the IT infrastructure. Rieter India had during the year reimbursed IT license usage costs to its AE (AMFR). These costs are related to the software license usage purchased centrally by the AE. T....
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....costs SAP operation (Total users Excluding CBS and TIS) 2035 358 17.59% 0.10 1.76% Key for common costs IT Infrastructure (since all teams use these applications, allocation key is based on weighted average of above ratios) 17.09% 10. The first column of the Table depicts the nature of services provided by the assessee to RIPL under the 'IT costs reimbursement' working for the month of April, 2015 and all the next columns show the manner of cost allocation to RIPL. The nature of services has been given as Client Based Services Users ('CBS'); Business Applications for Product Development Engineers/Product Life Cycle Management Users Global Users ('BACAX'); Business Applications for Sales, Marketing and Technology Users ('BASMT'); Business Applications for Parts and Service Users ('BAPS'); Business Applications for Operations Users ('BAOP'); and Business Applications for Finance and Controlling Users ('BAFC') etc. 11. When we peruse the nature of services given in the above table for which a sum of Rs. 3.88 crore was received and claimed as Reimbursement and then compare them with the services rendered under the Agree....
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.... to the other, fails in this case as the assessee purchased software from the third party vendors and did not pass on the same to RIPL, but offered services with the help of such software. The benefit to RIPL got diluted. Had it been a case of the assessee purchasing a particular number of software licenses from the vendors and then transferring them at the identical price to the Indian entity, as has been tried to be projected but which is not actually the true state of affairs as has transpired from the above discussion, it would have satisfied this condition. 12. Now we move on to the second Table of the 'IT Cost Reimbursement' given on page 489 of the Paper book. This table deals with the manner in which the total costs incurred on the purchase of software from the third party vendors were allegedly reimbursed from the group entities including RIPL. The Table reads as under: Particulars ABRA ABRAF AC EET AN OVB AC HA AR TA AR CO AR EX AR IP AR IS AR MAN AV PK AR TS Rohner & Spiller AS AG AS CZ AS PI AW ST AM FR Total Users CBS 69 18 38 103 496 9 44 328 608 308 38 8 22 2 6 5 149 36 908 3,195 BACAX - - 1 4 61 - - 65 53....
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.... support the ratio for allocation of the costs except urging that the system generated the number of users. It is seen that the assessee has allocated BAOP and BAFC costs to RIPL at 23.81% each. Page 525 is a summary of allocation of total costs for all the services during the year to the group entities for the year under consideration. It can be seen that as against such total cost of 32,84,490, RIPL has been allocated 5,78,024, which is more than 17% of such total costs. Given the fact that there are 19 global entities availing IT services from the assessee, we fail to comprehend as to how only the Indian entity has been allocated more than 17% of the total costs as against each of the other 18 entities getting allocation of 4.6% on average. From the above discussion, it is manifest that there is no proper and identifiable method of allocating the costs to RIPL under different IT service heads, claimed as reimbursement, thereby throwing the one-to-one correlation between the out go and in flow of the assessee on this score from RIPL to the winds. This shows that the assessee allocated costs for rendering IT Services in a peculiar manner, the modus operandi of which is not open fo....
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.... the physical material in which the copyrighted work may happen to be embodied. Parting with copyright entails parting with the right to do any of the acts mentioned in section 14 of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the "licensed" computer software product, over which the licensee has no exclusive rights, no copyright is parted with. However, the facts of the instant case are entirely different. On a specific query, the ld. AR failed to point out as to the specific number of licenses purchased by the assessee from third party vendors and those transferred to RIPL. Rather it was fairly conceded during the course of proceedings and has been established by us above that there was no direct transfer of software licenses to RIPL but it was a case of allowing user to RIPL from the centralized IT infrastructure maintained by the assessee in Switzerland. What is relevant for our purpose is the amount of receipt by the assessee for rendering services and not the costs incurred in the purchase of software facilitating the provision of services. We are not confronted with a situation in which the assessee purchas....
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....is respect stands repelled. III. WHAT IS TRUE NATURE OF THE RECEIPT? 19. Having held that the receipt of Rs. 3.84 crore is neither reimbursement nor royalty for software, the next question is to find out true nature of the receipt. It has been noticed above that the assessee rendered I.T. services to its group companies including RIPL and offered a sum of Rs. 20.04 crore to tax as royalty/fees for technical services. We have further found that the nature of services provided under the Master Agreement for which Rs. 20.04 crore has been offered to tax is exactly similar to that claimed to be reimbursement for which Rs. 3.84 crore has been received. In fact, there is only one Master agreement with RIPL under which the composite I.T. services were rendered to the group companies including RIPL - whether with the help of own software or those purchased from third party vendors. Whereas the assessee offered revenue to tax insofar the consideration for the I.T. services rendered from its own developed software is concerned, but claimed the corresponding revenue to the extent of cost incurred in purchasing software from third party vendors and the cost incurred in setting up the matchin....