TaxTMI 
TaxTMI 
2022 (2) TMI 576
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....sum of Rs. 53,53,204/- to VIBV, its Netherlands based holding company, which was claimed as reimbursement on account of IT Support Services. No deduction of tax at source was made. On being called upon to explain the reasons for nonwithholding of tax, the assessee submitted that the amount paid to VIBV was in the nature of reimbursement of IT Support Services cost and hence did not require any tax deduction. The assessee further stated that VIBV entered into arrangements in Netherlands for various facilities and services which were to be used by Vanderlande and its group companies located in different countries, including India. The payment made was reimbursement for Desktop services, like storage of data or backup and restore etc.; Communication services like Instant Messaging, remote VPN Access etc.; and Application services like Solidworks, SugarCRM, Primavera, JD Edwards Enterprise, E-mail & Calendering etc. The assessee made out a further claim before the AO that the payment made by the assessee to VIBV was in the nature of `fees for technical services'. Relying on Article 12 of the Double Taxation Avoidance Agreement between India and Netherlands (hereinafter also called `the....
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.... UMTS and GPRS cards etc. - Corporate Applications such as JDE One, JDE World, Primavera, CAP, CAPE, VILA, SolidWorks, E-mail & calendaring, SugarCRM, Synergy (SCM & Change), Doors, HP Quality Center, SmarTeam, CCDraft, Intranet, Lotus Notes Apps, Genesis, Lasernet, Insight, WIFA, ESOT and certain hosted applications such as Vision, Pview, etc. - ICT-Management, Process Information Experts, Infrastructure, Wide Area Network ("WAN")/Local Area Network ("LAN"). - Usage of the Information Technology: Office Systems, ERP Systems, Engineering Automation and Networks and telecommunication; - Development and support of new software releases and software updates to provide the users with new applications and new releases. 6. Article 2 of the Agreement deals with payment of Fees. Anent to the `Information, Communication Technologies and Quality Management' Services, this Article provides for charging by the Netherlands company: "on the basis of Cost Plus arm's length markup". The term `Cost', as used in this Article, has been defined in Article 2.2.1 to: "include both direct cost and indirect cost". The term `direct cost' has been defined to: "mean allocable and other reasonab....
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....work, ERP Systems etc. for setting up its overall ICT Infrastructure. b. All the group entities were allowed access to the ICT Infrastructure. c. All the direct and indirect costs incurred in setting up, updating and maintaining the ICT Infrastructure were aggregated by the Netherlands entity. d. Such costs were increased by an arm's length mark-up and then allocated to the world-wide group entities e. It is a case of cost allocation by the Netherlands entity to various group companies depending upon their extent of user. 9. From the above discussion, it becomes overwhelmingly pellucid that:- (i) It is not a case of reimbursement of expenses, as was made out by the assessee before the authorities below. The raison d'etre is the loading of the costs incurred by the Netherlands entity with the arm's length mark-up. Once a mark-up is added, the case goes outside the ambit of reimbursement. (ii) The ld. AR claimed that ICT charges were a composite payment made by the assessee towards royalty for purchase of software and fees for technical services and both were not chargeable to tax in the hands of VIBV. Qua the royalty part, we are not on the same page with the ld. AR. It i....
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....services to the assessee. The services derived or availed by the assessee are the result of the use of the overall ICT Infrastructure. In that view of the matter, the contention of the ld. AR about the bifurcation of ICT costs into two parts, viz., royalty and fees for technical services and, ex consequenti, both going outside the tax-net, is preposterous, artificial and unsubstantiated. We want to accentuate that there is a marked difference between, por una parte, one person deriving some service by use of a facility provided by the other, and, por otra parte, the other party providing the service. Instantly, we are dealing with a case of the first category. (iv) The assessee, in fact, paid a monthly sum to its Netherlands entity depending upon the extent of user of the overall ICT Infrastructure set up by the latter. 10. This brings us to the question of determination as to whether the payment made by the assessee for the use of overall ICT Infrastructure as per point (iv) above is chargeable to tax in the hands of Netherlands entity. In our considered opinion, such a payment is covered by the definition of 'Royalty' as given in Explanation 2 read with Explanations 4 & 5 to s....
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....on film or video tape for use in connection with television, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. ' 13. At this juncture, it would be apt to note that the contents of para 4 of the Article 12 are equivalent of the contents of clauses (v) and clauses (i) to (iii) of Explanation 2 to section 9(1)(vi), which are largely in the nature of copyright royalty. Clause (iva) of Explanation 2 to section 9(1)(vi) talks about the industrial royalty, being, the consideration for `the use or right to use any industrial, commercial or scientific equipment...'. The extant case is of consideration paid by the Indian assessee for the use or right to use of the overall ICT Infrastructure of the Netherlands holding company. This being a case of industrial royalty, is not covered within the ambit of the above para 4 of Article 12 of the DTAA dated 27th March 1989. 14. However, it is crucial to take note of an amendment carried out to the DTAA vide Notification No.11050 dated 30-08-1999 by providing that with effect from 01-04-1997, the existing Article 12 would be substituted with a new....