TMI Blog2014 (11) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... he ATI Technologies, Canada on cost basis without any profit element involved therein as claimed by the assessee. The amount in question was remitted by the assessee company to ATI Technologies, Canada for certain benefits received by it in the form of services procured by ATI Technologies, Canada from Soctronics India Private Limited and provided to the assessee company, and it was not a case of either gratuitous payment made by the assessee or mere reimbursement of expenditure incurred by the ATI Technologies, Canada, the question that now arises for our consideration is what exactly is the nature of this payment. Almost similar view, as taken by us on this issue, has been taken by the Commissioner of Service Tax vide his order dated 23.7.2012. In their respective orders, the Assessing Officer as well as the learned CIT(A) have observed that if one were to go by the conclusion of the Commissioner of Service Tax, the amount in question paid by the assessee to ATI Technologies, Canada for services procured from Soctronics India Private Limited and made available to the assessee company will be in the nature of ‘fee for included services’ which is chargeable to tax in the han ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. - ITA No.692/Hyd/14, ITA No.693/Hyd/14, ITA No.694/Hyd/14ITA No.695/Hyd/14, ITA No.693/Hyd/14, ITA No.694/Hyd/14, ITA No.695/Hyd/14 - - - Dated:- 22-10-2014 - SHRI P.M.JAGTAP AND SHRI SAKTIJIT DEY, JJ. For The Appellant : Shri S.Raghunathan S. For The Respondent : Shri P.Soma Sekhar Reddy DR ORDER Per P.M.Jagtap, Accountant Member : These four appeals filed by the assessee are directed against a common order of the learned Commissioner of Incometax( Appeals) V, Hyderabad dated 31.1.2014, whereby he disposed off the appeals filed by the assessee against a common order of the Asst. Commissioner of Income-tax (International Taxation)-I, Hyderabad (Assessing Officer), dated 28.1.2013 passed under S.201(1)/S.201(1A) of the Act, treating the assessee as in default for non-deduction of tax at source for the assessment years 2007- 08 to 2010-11. 2. The assessee in the present case is a company, which was a subsidiary of ATI Technologies, Canada during the years under consideration. It is basically set up as a R D and Design Centre for providing captive services to its parent company in Canada. The services rendered by it mainly include development of softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee company and there being no element of profit involved in the said payment, there was no requirement of deduction of tax at source. 4. The above contention of the assessee was not found acceptable by the Assessing Officer in the absence of any agreement between the assessee and the ATI Technologies, Canada or between the assessee and Soctronics India Private Limited produced for his verification. The only evidence produced by the assessee in the form of invoices raised by its parent company ATI Technologies, Canada was not found to be sufficient by the Assessing Officer to support the claim of the assessee. He also recorded the statement of the Chartered Accountant who had issued certificates in Form Nos.15CA/15CB for No TDS from the remittances of reimbursement by the assessee to ATI Technologies, Canada and inferred from the said statement that the certificates were issued by the said Chartered Accountant on the basis of oral explanation given by the officers of the assessee company without any specific analysis or verification. He also recorded the statements of the directors of Soctronics Technologies P. Ltd. and inferred from the said statements that the said c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S provisions. As an alternative contention, it was also submitted by the assessee company that it was granted merely the user right by ATI Technologies, Canada in the copy-righted software application and since there was no right to use the copy right, the amount paid towards software expenses was not in the nature of royalty as per Article 12(3) of India Canada DTAA, which is liable to tax in India in the hands of the ATI Technologies, Canada. It was contended that there was thus no obligation to deduct tax at source from the said payment even on this ground. 6. The explanation of the assessee on the issue of payment of software expenses was not found acceptable by the Assessing Officer. According to him, there was no evidence provided by the assessee as to what were the licences that were provided to it by the parent company, how are those licences used by the assessee company and what were the matrix that were used to measure the cost that has to be shared by the assessee company. In the absence of all these details as well as supporting documentary evidence, the Assessing Officer doubted the very genuineness of the software expenses claimed to be paid by the assessee to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the statements of the CAS also, it is abundantly clear that they have not been provided with all the relevant information and accordingly they allowed the remittance to happen without deducting any taxes under section 195 of the IT Act, 1961. (g) Therefore, the actual nature of transactions can be understood as an unsubstantiated and unacceptable cross charge of expenses incurred by the parent of the assessee M/s. ATI Technologies Inc, Canada on to its subsidiary in India, the assessee, M/.s AMD R D Center, India (P)Ltd. for the subcontracting expenses of the software services received from M/s. SoCtronics incurred by M/s. ATI Technologies Inc. Canada. The provision of services by M/s. Soctronics and the so-called reimbursements by the assessee are totally unrelated since the real beneficiary of the services by M/s. Soctronics is M/s. ATI Canada only. (h) Thus these expenses by M/s. AMD R D (P) Ltd., are the expenses not for the purpose of business, as laid out in the scope of section 37 of the IT Act, 1961 and accordingly the payments in the guise of reimbursement are not to make good any business expenses of the assessee, that are originally paid by its parent, instead th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,33,89,940 1,83,23,572 TOTAL 15,48,387 6,93,11,291 44,68,481 20,55,53,441 11,60,75,379 9. Before treating the assessee company as an assessee in default under S.201(1) for its failure to deduct tax at source from the payments made to the parent company ATI Technologies, Canada as above, one final opportunity was given by the Assessing Officer to the assessee to offer its explanation in the matter. Availing the said opportunity, it was pointed out by the assessee that the reimbursement of software and engineering expenses was recorded in its books of account at cost on accrual basis, as per the debit invoices received from the ATI Technologies, Canada, and the same was subsequently recovered with mark up from ATI Technologies, Canada by raising the service invoices. It was contended that the ATI Technologies, Canada thus, did not derive any benefit from these transactions as alleged by the Assessing Officer, and it was not a case of diversion or transfer of profit by the assessee company to ATI Technologies, Canada. The assessee company also sought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investigations made by him thereafter had clearly revealed that the real beneficiary of the services rendered by Soctronics Technologies P. Ltd. was ATI Technologies, Canada and not the assessee company. The Assessing Officer also held that the order of the Commissioner of Service Tax, in any case, did not provide any evidence to reach the conclusion that the services provided by Soctronics Technologies P. Ltd. were for the benefit of the assessee company alone. According to him, if one were to go by the order of the Commissioner of Service Tax, the payment/reimbursement made by the assessee company to ATI Technologies, Canada clearly represented fee for technical services and the same were liable for tax in India in the hands of the ATI Technologies, Canada as fees for included services as per India Canada DTAA. He also observed that the order of the Commissioner of Service Tax passed on 23.7.2012 was deliberately produced by the assessee only on 31.12.2012, by which time strong evidence was collected which proved beyond doubt that the services of Soctronics Technologies P. Ltd. were for the benefit of ATI Technologies, Canada and therefore, reimbursement claimed by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ada and Ms. Soctronics have originated from M/s. ATI Canada only (Exhibits 7 to 10) (e) It is also note worthy that the assessee has not provided any positive evidence to show that every payment by M/s. ATI Canada to M/s. Soctronics was preceded by any verification, approval from the assessee s management, neither have the payments been routed through the bank of the assessee. Since this kind of practice does not obtain in an arms/length business situation, it is impossible to accept the claim of the assessee that the parent company had made its payments to M/s. Soctroncis which are to accepted by M/s. AMD R D India, without any negotiation/veri- fication when it is M/s. AMD R D India, which is as claimed, the actual recipient of services form M/s. Soctronics. It is also noteworthy that, it is not the case that the assessee is not capable of entering into any of its contracts on its own, as it has been evidenced in a separate agreement with M/s. Scotroncis itself, from the AY 2009 onwards. Moreover, it is not the case that M/s.Scotronics is a service provider to M/s. ATI Canada and many other subsidiaries of M/s. ATI Canada, which can be a basis for M/s. ATI Canada to enter into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies with retrospective effect from 1976, vide the Explanation 4 to section 9(1)(vi) of the IT Act, 1961. In this regard the following analysis clearly shows that the licence fees are indeed covered under the definition of Royalty as per Article 12 of the DTAA: (i) The term royalty as used in this Article means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived form the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of reimbursements for licence fee, without any positive evidence on the specific product used, metrics of usage by the assessee and the basis for reimbursement, it only represents a fresh/cash income to M/s. ATI Canada. Thus these payments represent fresh cash/income to M/s. ATI Canada chargeable to tax as Income from other sources as per IT Act, 1961 and under the head Other sources as per Article 21 (3) of the India-Canada DTAA. 13. The Assessing Officer finally held that the entire amount claimed to be remitted by the assessee to ATI Technologies, Canada on account of reimbursement of software expense and engineering expense represented fresh income/cash in the hands of ATI Technologies, Canada, which was chargeable to tax in India as income from other sources as per Income tax Act, 1961 as well as Article 21(3) of the India Canada DTAA. He also held that the assessee thus was liable to deduct tax at source aggregating to ₹ 11,60,75,379 from the total amount remitted to the ATI Technologies, Canada during all the four years under consideration as per the provisions of S.195 of the Act, and having failed to do so, it was liable to be treated as assessee in defau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant that it is the beneficiary of the services of M/s Soctronics, another independent contractor of its parent M/s ATI Canada. Is found to be false and liable for summary rejection, thereby necessitating the upholding of the order u/s 201(1)(1A) in the appeal proceedings before your honor. 3. Examination of Fresh Evidence E-Mails Approval of invoice raised by Soctronics by employee/manager of appellant 3.1 Claim of the appellant : It is seen that the appellant has submitted certain e-maills that were exchanged while the departmental witnesses from M/s Soctronics, Sri P Raghavendra Sarma and Sri Dasaradh Gude were employed with the appellant and while Sri P Krishna Prasad clarified certain issues from the side of M/s Soctronics. As per the appellant, these emails indicate that Sri P Raghavendra Sarma and Sri Dasaradh Gude have approved the cross-charge of the costs incurred by ATI, Canada on payments made to M/s Soctronics, to be reimbursed by the appellant and Sri Krishna Prasad was also aware of the same. Also, an employee of the appellant Mr K Balaji, who was a manager, is shown to have approved the invice raised by M/s Soctronics on ATI, Canada , thus the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ultimate beneficiary of the services rendered by M/s Soctrnics is appellant only. 3.2.5 Most importantly, the factual evidences in terms of the Purchase Order raised by ATI, Canada on M/s Soctrnonics, with the place of delivery mentioned as Canada contradistinguished from the Purchase Order raised by appellant with place of delivery as Hyderabad (Exhibits 10, 11 respectively in the order u/s 201(1)(1A)), have not been controverted or explained by the appellant so far. 3.6.1 Conclusion on fresh evidence of E-Mails: in view of the aforementioned discussion, it can be seen that, the e-mails and the approval of one invoice by manager of appellant (AMD India), do not bring any new facts for examination and do not controvert the evidence on record that the cross-charge of payment by ATI, Canada to appellant was against the factual position of rendering of services by M/s Soctronics for the benefit of ATI, Canada only and not to the appellant at all. 4. Examination of Fresh Evidence invoice for software Licenses and Internal correspondence for cross-charge It is seen that, the appellant for the first-time has provided certain invoices in support of the claim for reimburs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g tax rate of 40% in view of Article 21(3) of the India-Canada DTAA. 4. Comments on appellant s claims that there is no tax benefit to the AMD/ATI group in the transaction 4.1 Claim of the appellant : The appellant has vehemently claimed that, as a group, AMD/ATI has not benefitted as a result of this relmbursement, where as the Revenue has benefitted from a higher Revenue offered for taxes. Allusion was also made to the yet to be enforceable provision s of the General Anti Avoidance Rules (GAAR), that unless the tax-benefit has not been proved, there is not question of treating any transaction as a sham transaction and as per the appellant, the entire arrangement does not provide any tax benefit to the AMD/ATI Group. 4.2 Analysis: First and foremost, it is to be seen that it is beyond the scope of section 195 to examine the mens-rea or otherwise in terms of poor tax-planning or inefficient structuring of payments by and between the appellant and its parent to determine the liablility to withhold taxes on the income of Non-Residents. Therefore. It is unnecessary to advert to any kind of avoidance discourse, let alone GAAR, In the instant case, where the mechanical applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee were sufficient to show that the real beneficiary of the services rendered by Soctronics Technologies P. Ltd. was ATI Technologies, Canada and not the assessee company. He also held that the unusual structuring of the transactions in question supported his conclusion. In this regard, he noted that there was failure on the part of the assessee to explain as to why its parent company had to enter into a contract for its benefit with Soctronics Technologies P. Ltd., which was against the norms of independent corporate functioning and the usual practice followed in the software industry. According to him, there was also a failure on the part of the assessee to establish any business purpose for the existence of contract between its parent company and Soctronics Technologies P. Ltd. without any reference to the assessee company. He noted that although the assessee company had subsequently entered into a contract directly with Soctronics Technologies P. Ltd. from assessment year 2010-11 without the involvement of its parent company ATI Technologies, Canada, no explanation was offered as to why such agreement could not have been entered into by the assessee company for earlier year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f software licences, the learned CIT(A) found that although this claim of the assessee was not accepted by the Assessing Officer in his order passed under S.201(1), in the absence of the required supporting details and evidence, fresh evidence filed by the assessee during the course of appellate proceedings before him in the form of e-mails, correspondence between ATI Technologies, Canada and the assessee company, copies of invoices for purchase of software licences by ATI Technologies, Canada, etc. was relevant to support the claim of the assessee. In the remand report, the Assessing Officer also accepted the genuineness of the expenditure incurred by ATI Technologies, Canada on purchase of software licences for the benefit of entire group as well as effective use of such licenses by the assessee. He however, noted that the evidence produced by the assessee on this issue was not sufficient to support and substantiate the claim of the assessee fully. The Assessing Officer accordingly proposed in his remand report that the claim of the assessee on this issue to the extent of 50% may be accepted as genuine, being cross charges paid to ATI Technologies, Canada on account of software l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services provided by M/s Soctronics India Private Limited ( Soctronics ) under the arrangement with ATI Canada and have further erred in holding that the cross charge of Engineering expenses incurred by ATI Canada on behalf of the Appellant and reimbursement of the same to the ATI Canada represents free cash/income chargeable to tax in the hands of ATI Canada in India as Others income under Article 21 of the Double Taxation Avoidance Agreement ( DTAA or the Tax Treaty ) entered into between India and Canada. 4. That on the facts and in the circumstances of the case and in law, the Ld. ADIT erred and the Hon'ble CIT(A) further erred in holding that the reimbursement of Engineering services to ATI Canada was a colourable device to repatriate cash/profits outside India without appreciating the fact that the Appellant being a captive service provider to ATI Technologies, Canada under cost plus pricing model, the reimbursement, on the contrary, resulted in net cash flow/ additional profits in the hands of the Appellant Company. 5. That on the facts and circumstances of the case and in law, the Ld. ADIT erred and the Hon ble CIT(A) further erred in not discharging the onus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;ble CIT(A) further erred in holding that 50% of the reimbursement towards software licensee by the Appellant Company to ATI Canada was taxable in the hands of ATI Canada in India as Royalty under Article 12 of the DTAA. 12. That on the facts and in the circumstances of the case, the Ld. ADIT erred and the Hon'ble CIT(A) further erred in concluding that the balance fifty percent of cross chares made towards Software licenses as not reasonable. 13. That on the facts and in the circumstances of the case, the Ld. ADIT erred and the Hon'ble CIT(A) further erred in questioning the commercial/business expediency of software expenses in proceedings under section 201(1) of the Act. 14. That on the facts and in the circumstances of the case, the Ld. ADIT erred and the Hon'ble CIT(A) further erred in holding the alleged l50% unreasonable payment towards software licenses as income chargeable to tax in India in the hands of ATI Canada as Other Income as per Article 21 of the DTAA. 15. That on the facts and in the circumstances of the case, the Ld. ADIT erred and the Hon'ble CIT(A) further erred in not appreciating the fact that the reimbursement of Software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... site portion of services on its behalf to the assessee company. He invited our attention to the tripartite agreement dated 1st April, 2005 entered into between the ATI Technologies, Canada, the assessee company and ATI Technologies, Barbodos placed at pages 1086 to 1094 of the paperbook and submitted that as per the said agreement, which was entered into in furtherance with the Master Transfer Pricing Agreement, services contracted by one party from a third party were meant for the benefit of all other members of the ATI Technologies Group. As required by the bench, he also filed a copy of the Master Transfer Pricing Agreement entered into between all ATI Technologies Group companies which was not filed before the authorities below and pointed out from the said agreement that the services contracted by one party form third party were available for the benefit of one or more members of the ATI Group. He contended that as per the arrangement between the group companies, skill resources availed from Soctronics India Private Limited were made available by its parent company to the assessee company and the parent company in turn raised debit notes on the assessee company as a back to ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned counsel for the assessee invited our attention to paragraph 6.2 of the order of the Commissioner of Service Tax at page 1112 of the paper-book, and pointed out that a clear cut finding was recorded therein that as per the agreement between the Soctronics Technologies P. Ltd. and ATI Technologies, Canada, Soctronics Technologies P. Ltd. was required to provide requisite engineers to the assessee company, so that it could accomplish the tasks of research, development, etc. to ATI Technologies, Canada as per the master service agreement. He specifically pointed out that this finding was recorded by the Commissioner of Service Tax on the basis of the due search and verification of records by the service tax authorities and the same should have been given proper and due consideration by the Assessing Officer as well as the learned CIT(A), for arriving at a correct conclusion. He submitted that they, however, have relied on the statements of the promoters and employees of Soctronics Technologies P. Ltd. overlooking the fact that Soctronics Technologies P. Ltd. was an interested party, as it was claiming deduction under S.10A of the Act, claiming the services rendered to ATI Tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual expenses incurred on cost to cost basis, without there being any element of profit, the same was not chargeable to tax in India in the hands of ATI Technologies, Canada and there was no requirement of deduction of tax at source, as per the provisions of S.195. He contended that the assessee consequently cannot be treated as an assessee in default under S.201/201(1A) for non-deduction of tax at source from the said payment. 29. The Learned Departmental Representative, on the other hand, submitted that the claim of the assessee company of having availed the services of Soctronics India Private Limited through its parent company in Canada was not supported by any agreement either between the assessee company and Soctronics India Private Limited or between the assessee company and its parent company. He submitted that even the enquiries and investigations made by the Assessing Officer clearly revealed that the beneficiary of services rendered by Soctronics India Private Limited was ATI Technologies, Canada and not the assessee company. He submitted that there is no evidence whatsoever brought on record by the assessee to show that it was the beneficiary of the services render ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We have considered the rival contentions and also perused the relevant material on record. The main issue involved in these appeals is whether the assessee company can be treated as an assessee in default under S.201(1) for its failure to deduct tax at source from the amounts remitted to ATI Technologies, Canada on account of engineering services and software applications/licences. This will depend upon the taxability of the said amounts in the hands of the ATI Technologies, Canada, in India, as the obligation/liability of the assessee to deduct tax at source from these amounts will depend upon as to whether the said amounts are chargeable to tax in India in the hands of ATI Technologies, Canada as per the specific provisions contained in S.195. In order to determine the taxability of the said amount in the hands or ATI Technologies, Canada in India as per the domestic law as well as India-Canada DTAA, it is necessary to ascertain the exact nature of the amounts keeping in view the relevant facts of the case as well as material placed on record before us. The assessee in this case has raised various grounds to dispute its liability to deduct tax at source and has also raised certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnology and since the assessee company did not have the complete skill set to render such services, the ATI Technologies, Canada was to provide the requisite portion of services to the assessee through other concerns. In furtherance of the Master Service Agreement, the Master Transfer Pricing Agreement was also entered into between the assessee company and ATI Technologies, Canada which clearly provided that services contracted by one party from a third party were also meant for the benefit of other members of ATI group including the assessee company. In our opinion, these agreements are sufficient to show the business model followed by the entire group, whereby parent company, i.e. ATI Technologies, Canada was entrusting specific jobs to its subsidiaries and the services or skill set required for the execution of the said job not available with the subsidiaries were procured from the third parties and the same were made available to the subsidiary company. It therefore, cannot be said that the claim of the assessee of having availed the benefit of services rendered by Soctronics India Private Limited through ATI Technologies, Canada is not supported by any documentary evidence i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ologies, Canada for engineering services forming part of its cost was duly recovered from ATI Technologies, Canada alongwith mark up. Keeping in view this factual position, which has not been disputed by the learned Departmental Representative, we are unable to visualize as to how any benefit could accrue to ATI Technologies, Canada by payment of the amount in question, even if it is assumed for the sake of argument that it was nothing but payment of extra profit/cash by the assessee company, without there being provision of any services, as alleged by the Revenue authorities. As rightly contended by the learned counsel for the assessee, ATI Technologies, Canada was actually a loser as a result of this arrangement in as much as the amount in question received by it was not only paid back to the assessee company, but the same was paid back with mark up. 36. It is observed that the exact nature of this arrangement or transaction was also examined by the service tax authorities to ascertain the liability on account of service tax and the matter went up to the Commissioner of Service Tax, who passed an order dated 23.7.2012 deciding this issue. A copy of the said order is placed at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany. As already held by us, the main evidence collected by the Assessing Officer during the course of such investigation in the form of statements of Directors and employees of Soctronics India Private Limited, was not a reliable evidence to conclusively establish the case of the Assessing Officer. Moreover, the findings recorded by the commissioner of Service Tax were not specifically disputed either by the Assessing Officer or the learned CIT(A). On the other hand, they observed in their respective orders that going by the findings given by the Commissioner of Service Tax in his order, the services availed by the assessee company from ATI Technologies, Canada through Soctronics India Private Limited were in the nature of technical services and accordingly, the amount paid for such services by the assessee company was chargeable to tax in the hands of ATI Technologies, Canada in India as fees for included services as per domestic law as well as India Canada DATA. 38. There is one more interesting aspect relating to this issue. As submitted by the learned counsel for the assessee, Soctronics India Private Limited has entered into a direct agreement with the assessee company f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in sub-clause (b) of clause 2.1 that the contractor, i.e. Soctronics India Private Limited agrees that all innovations and contract work product resulting from the provision of such services will be the sole and exclusive property of ATI Technologies, Canada and the contractor assigns to ATI Technologies, Canada all the rights in innovations and such work products and in all related patents, patent applications, copy rights mask work rights , trade arks, trade secrets, rights of priority and other proprietary rights. 40. It may also be relevant to note here that even as per the Master Transfer Pricing Agreement executed among the ATI group companies, service contracted from third parties procured by ATI Technologies, Canada were available for the benefit of other group companies, including the assessee company. Having regard to all these facts of the case including especially the fact that the proprietary right of any of the inventions, and contract work products resulting from the provision of services by Soctronics India Private Limited were retained by ATI Technologies, Canada, we are unable to accept the stand of the assessee that it was the only beneficiary of the services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for included services , which is chargeable to tax in India in the hands of ATI Technologies, Canada as per the domestic law and India Canada DTAA. It accordingly follows that the assessee company was liable to deduct tax at source from this amount as per the provisions of S.195, and having failed do so, it has to be treated as an assessee in default under S201(1) to the extent of tax payable by ATI Technologies, Canada in India on the mount in question which is in the nature of fee for included services . We accordingly modify the order of the learned CIT(A) on this issue and sustain the order of the Assessing Officer in treating the assessee as in default under S201(1) to the extent of tax payable by ATI Technologies, Canada in India on the amount in question which is chargeable as fee for included services alongwith interest payable thereon under S.201(1A). Grounds No.3 to 9 of the assessee s appeals are accordingly disposed of. 42. The issue raised in ground No.10 relates to the assessee s claim for the applicability of the provisions of S.194J of the Act to the amount claimed to be paid to Soctronics India Private Limited for the services availed through its parent compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivate Limited and provided to the assessee for which the assessee company was charged with profit. Keeping in view this finding recorded by us, we do not find merit in the issue raised by the assessee in ground No.10 and accordingly dismiss the same. 46. Insofar as the amount claimed to be remitted by the assessee to ATI Technologies, Canada on account of its share of cost of software licences/applications is concerned, the assessee has raised mainly three issues. The first issue as raised in ground No.11 is that the amount paid to ATI Technologies, Canada for software licences/applications is not in the nature of royalty as what the assessee got was only the use or right to use copy righted article and not the use or right to use the copy right. The second issue as raised by the assessee in ground Nos.12 to 14 is that the authorities below are not justified in treating only 50% of the amount remitted to ATI Technologies, Canada towards software licenses applications as reasonable and treating the balance 50% as excessive or unreasonable, which is chargeable to tax in the hands of ATI Technologies, Canada as other income. The third issue that is raised by the assessee in ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he right of use of copy right. Relying on the decision of the coordinate bench of this Tribunal in the case of ADIT(International Taxation) V/s. M/s. Batronics India Ltd. (ITA No.918/Hyd/2010), he contended that payment in respect of rights which enable the effective operation of the programme by the user, should be dealt with as business income in accordance with Article 7 of the DTAA. He contended that the payments made by the assessee, even if the same are sought to be for use of a copy righted software, cannot be considered as royalty under India Canada DATAA and the same will constitute business profit of ATI Technologies, Canada as per Article 7 of the DTAA He contended that since there was no permanent establishment of ATI Technologies, Canada in India during the relevant years, the business profit was not taxable in the hands of the said company in India, and consequently, there was no obligation on the assessee company to deduct tax at source from the payments made to the said company, which constituted its business income. He clarified that although the definition of the term royalty under the domestic Act has been enlarged by the retrospective amendment, the said amend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... motive for ATI Technologies, Canada to cross charge more than the reasonable amount towards software licences. He contended that even the reliance placed by the learned CIT(A) on Article 12(8) of India Canada DTAA to hold the alleged excess payment of royalty as income from other sources is misplaced, as the OECD Commentary on model tax convention has clearly clarified that Article 12(8) permits only the adjustment of the amount of royalty and not the reclassification of royalty in such a manner as to give it a different character. He contended that the alleged excess amount of royalty therefore, cannot be recharacterised as income from other sources and at best it can only be subjected to withholding tax as royalty as per the domestic law in terms of S.115A of the Act at the rate of 10%. 50. As regards the issue raised in ground No.15 relating to the assessee s claim that the reimbursement of software licence expenses being on cost to cost basis, without any element of profit and consequently there being no income chargeable to tax in the hands of ATI Technologies, Canada in India, there can be no question of deduction of tax at source under S.195, the learned counsel for the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assification of income, as alleged by the learned counsel for the assessee. 53. As regards the contention of the learned counsel for the assessee that the entire amount in question paid to ATI Technologies, Canada having been included in the cost and the same having been recovered subsequently from ATI Technologies, Canada alongwith mark up, there is no case of any tax planning or tax avoidance as alleged by the authorities below, the Learned Departmental Representative submitted that by making this entire arrangement, Soctronics India Private Limited got full benefit of deduction available under S.10A and this vital aspect needs to be taken into consideration while deciding the aspect of the tax benefit or tax avoidance managed by the entire group as a whole. 54. We have heard the arguments of both the sides and also perused the relevant material on record. As regards the claim of the assessee that the amount in question is cross charged by ATI Technologies, Canada on account of software applications/licences on cost to cost basis, we find from the details and documents submitted by the assessee that there is nothing to support and substantiate the stand of the assessee. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e showing the amounts paid to ATI Technologies, Canada for use of specific software licences and some of the software licence agreements were also filed by the assessee showing the purchase of software licenses by ATI Technologies, Canada, as sample copies, there was no reason for the authorities below to accept only 50% of the claim of the assessee of having paid the amount in question for use of software licenses as reasonable and treating the balance 50% as payment of extra profit or cash by the assessee company to ATI Technologies, Canada. As rightly submitted by the learned counsel for the assessee, when the genuineness of the assessee s claim of having paid the amount in question to ATI Technologies, Canada for use of software licenses was accepted by the Assessing Officer as well as the learned CIT(A), there was no reason for them to accept only 50% of the amount paid as reasonable and treating the balance amount as unreasonable or excessive and that too without giving any basis to do so. 56. As already noted by us, the entire amount in question claimed to be paid by the assessee to ATI Technologies, Canada for use of software licences was included in its cost and the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... report of the Assessing Officer or in the impugned order of the learned CIT(A) to show that the terms of the two agreements filed, have been examined by them to find out the exact rights acquired by the ATI Technologies, Canada, in the case those two software licenses. It is also not clear from the details and documents placed on record by the assessee as to what are the rights in the software licences that have been transferred by ATI Technologies, Canada to the assessee company. In the absence of these details and due to lack of proper examination/verification by the authorities below, we are of the view that it is not possible to ascertain the claim of the assessee that the amount in question was paid by it to ATI Technologies, Canada only for use or right to use a copy righted article, i.e. software and not for the use or right to use the copy right in the said software, and it was thus not in the nature of royalty within the meaning of Article 12 of the India-Canada DTAA. In this view of the matter, we consider it just and proper to restore this issue to the file of the Assessing Officer for deciding the same afresh after verifying/examining all the relevant agreements and ot ..... X X X X Extracts X X X X X X X X Extracts X X X X
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