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2018 (1) TMI 983 - AT - Income TaxPayment received on providing corporate IT services etc. to group entities - receipts claimed by the assessee as reimbursement on cost basis - receipts liable to be taxable in the hands of the assessee either as royalty or fee for included services under the relevant articles of the DTAA between India and USA - PE in India - Held that - The appellant, being the ultimate holding company, maintains a centralized IT centre for its group companies across the globe. Such a system enables the appellant to achieve uniformity, confidentiality and economies of scale. For providing such services, the Appellant has entered into an Agreement dated 1 June 2001 with various group companies. The terms of the Agreement (Clause 1.2 and 2.4) clearly provide that all direct and indirect costs for providing Corporate IT services would be charged from the group companies. Further, the Agreement provides for allocation key by which the total cost (direct and indirect) would be recovered from the group companies. Accordingly, the Agreement itself substantiates that only cost of providing Corporate IT services is recovered from the Indian group companies. From the invoice it is seen wherever there is extra charge on the basis of allocation key, the same is adjusted by way of reversal in the invoice to ensure the recovery is made only for actual cost. The appellant company itself is not having its core activity in the nature of providing corporate IT services. The entire Cargill group is engaged in the business of International marketer, processor and distributor of agricultural food and industrial products. The company does not have its core strength in providing corporate IT related services, which is evident by the fact that no such corporate IT services have been provided to any outside entities. Thus, neither the company has the core strength nor is in possession of any secret processes or commercial and industrial information, which it could be held to be passing on to its group entities in India and worldwide. The group has decided to have a centralized corporate IT system to facilitate globalization, for cost effectiveness and synergy in the working of various group entities of the appellant company across the world. AO could not bring out any adverse evidence on record that may suggest that the appellant had passed on any commercial or industrial information or secret processes to the Indian group companies that may be treated as royalty. The appellant company s globalised corporate IT system facility is also developed by its vendors and in fact it is the appellant, which has received the services for setting up the globalised corporate IT system. Qua its group companies, the appellant has only facilitated use of the common facility in its own business interest, for which the proportionate direct and indirect cost have been recovered. The appellant is merely arranging Corporate IT services. The payments are received for such services and not for the right to use of equipment (hardware or software). The payer is using their services through leased line/internet/internet services providers. The appellant had categorically stated that no amount of profit was embedded in such payments. AO has not brought out any evidence on record that may question this averment of the appellant. Under the circumstances, the very basis of the Ld. AO of treating such payment as royalty in nature is held as misplaced. Such payments were not in the nature of royalty or FIS, the natural corollary of the this observation is that such payment was in the nature of reimbursement of actual direct and indirect costs recovered by the appellant company from its group companies, which does not have any element of profit embedded therein. Also following decision of Delhi High Court in the case of CIT vs Industrial Engineering Projects Pvt. Ltd. 1992 (7) TMI 38 - DELHI High Court such payment cannot be held as taxable under the domestic law as well - Decided in favour of assessee.
Issues Involved:
1. Initiation of reassessment proceedings under section 147. 2. Addition of reimbursements as Royalty under Article 12 of the DTAA. 3. Application of the correct tax rate on royalty. 4. Non-allowance of credit for tax deducted at source. 5. Levying of interest under sections 234D and 244A. 6. Initiation of penalty proceedings under sections 271(1)(c), 271AA, and 271BA. Detailed Analysis: 1. Initiation of Reassessment Proceedings under Section 147: The appellant contended that the initiation of reassessment proceedings for the years 2002-03 to 2004-05 was based on a mere change of opinion without any new material facts, rendering the proceedings void ab initio. However, this issue was not pressed before the Tribunal, and thus, the grounds challenging the reassessment proceedings were dismissed as infructuous. 2. Addition of Reimbursements as Royalty under Article 12 of the DTAA: The primary issue was whether the reimbursements received by the assessee for providing IT-related services to its Indian group entities should be treated as Royalty or Fees for Included Services (FIS) under Article 12 of the DTAA between India and the USA. The Tribunal noted that the same issue had been decided in favor of the assessee by the CIT(A) for subsequent assessment years 2009-10 to 2014-15, where the payments were considered mere reimbursements without any profit element and not taxable as royalty or FIS. The Tribunal applied the Rule of Consistency, as held in Radhasoami Satsang vs. CIT, and allowed the grounds in favor of the assessee, rejecting the Revenue's objections. 3. Application of the Correct Tax Rate on Royalty: The appellant argued that even if the payments were considered royalty, the correct tax rate of 10% as prescribed in Article 12(2)(b) of the DTAA should be applied. Given the Tribunal's decision that the payments were not taxable as royalty or FIS, this ground was rendered moot. 4. Non-allowance of Credit for Tax Deducted at Source: The appellant contended that the Assessing Officer (AO) erred in not allowing the credit for tax deducted at source. The Tribunal restored this issue to the AO for verification, instructing the assessee to produce necessary evidence supporting its claim. The AO was directed to decide the issue after verification in accordance with the law. 5. Levying of Interest under Sections 234D and 244A: The appellant argued against the levy of interest under sections 234D and 244A in the absence of any refund granted. However, this issue was not pressed before the Tribunal, and thus, the grounds related to interest were dismissed as infructuous. 6. Initiation of Penalty Proceedings under Sections 271(1)(c), 271AA, and 271BA: The appellant challenged the initiation of penalty proceedings for concealing particulars of income or furnishing inaccurate particulars and for non-compliance with various provisions of Chapter X related to international transactions. These grounds were not pressed before the Tribunal, and thus, they were dismissed as infructuous. Conclusion: The Tribunal allowed the appeals partly for statistical purposes, primarily in favor of the assessee on the issue of treating reimbursements as non-taxable and restoring the issue of tax credit verification to the AO. All other grounds were dismissed as infructuous. The decision was pronounced on January 19, 2018.
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