TaxTMI 
TaxTMI 
2021 (11) TMI 37
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.... of certain international transactions declared 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....
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.... or minus to that. If the costs incurred go in a common pool which are then shared 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 @....
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....ng and Technology Users Global (BASMT); Business Applications for Parts and Service Users Global (BAPS); Business Applications for Operations Users Global (BAOP); Business Applications for Finance and Controlling Users (BAFC); Business Applications for 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, ....
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....C') 168 40 23.81% 0.05% 1.19% Business Applications for Human Resources Users ('BAHR') 40 3 7.50% 0.05% 0.38% Technology Information System (TIS) 137 17 12.41% 0.02 0.25% Business Applications for Others/Basis Users ('BAOTHERS') 363 42 11.57% 0.05 0.58% Key for common 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....
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....ding RIPL, but to be merged with its own software infrastructure so as to constitute one integrated Centralized IT infrastructure for rendering the IT support services of CBS, BACAX, BASMT, BAPS and BAOP etc. to all the group entities including RIPL under the Master Agreement. Thus it is severely plain that the first condition of Reimbursement as discussed above, being, the passing of the unfiltered benefit of the expenditure 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 o....
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....her entities situated in different countries for which the codes have been given. For example, Bracker France has been named as ABRAF, Rieter (China) Textile Instruments has been referred to as ACHA. These 19 columns contain details of the number of users from each of the 19 entities with the last column of Total users. It is on the basis of the number of users that the allocation keys have been devised and the assessee has bifurcated the costs under different heads. For example, for the CBS service, the assessee has claimed that there were in all 3195 users, including 608 from RIPL, giving the allocation key with the share of RIPL at 19.03% in the first table on Page 489. How and wherefrom the magical figures of 608 and 3195 users have descended is best known only to the assessee, which is not corroborated by any evidence. The ld. AR fairly admitted that there was no direct evidence to 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 entit....
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....sessee recover the amount as it is from RIPL. We are ergo disinclined to countenance the contention of 'Reimbursement', which is hereby jettisoned. II. IS THE RECEIPT A SOFTWARE ROYALTY? 16. The next contention put forth on behalf of the assessee is that the amount received from RIPL was in the nature of software royalty because it purchased certain software and transferred the same to it. In support of the contention that the receipt from RIPL is not royalty, the ld. AR relied on Engineering Analysis (supra). A proposition was bolstered that RIPL got copyrighted article from the assessee, which was different from the copyright in the software purchased. 17. Insofar as the ratio in the case of Engineering Analysis (supra) is concerned, there is no dispute that it has been held by the Hon'ble Summit Court that ownership of copyright in a work is different from the ownership of 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 u....
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....e. First table on page 489 of the paper book has last two columns with captions 'Weights for IT infrastructure cost allocation' and 'Weighted average allocation'. On a specific query, the ld. AR submitted that the assessee company spent certain amount on IT infrastructure, independent of the software cost, which was allocated between all the 19 entities and the RIPL's share in it was determined at 17.09%. This shows that apart from purchasing the software for the centralized IT infrastructure Centre, the assessee also incurred certain IT infrastructure costs for integrating them into its centralized system so as to render services to the worldwide entities, which was charged to RIPL at 17.09%. This plentifully proves that the amount recovered by the assessee from RIPL is not towards transfer of any software so as to constitute software royalty. The contention of the ld. AR in this 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 rendere....