TMI Blog2014 (3) TMI 726X X X X Extracts X X X X X X X X Extracts X X X X ..... 3)(a) of the India Belgium DTAA - thus, the data processing cost paid by the assessee does not amount to royalty, consequently, there is no requirement for deducting tax at source on such payment – thus, the provisions of section 40(a)(i) will not apply – the order of the CIT(A) upheld – Decided against Revenue. Scope of Article 12(3)(a) of DTAA between India and Belguim – Held that:- It covers only a payment for the use of, or the right to use of, any copyright, patent, design or model, plan, secret formula or process, trademark, or other like property or right - the payment made by the Indian company is not for the use of, or right to use of, software, the payment is for data processing - Be that as it may, even if stand of the revenue is to be upheld and it is to be concluded that the payment is made for software per se, that does not lead to taxability of receipt in the hands of the Australian company either - the payment for software is for a copyrighted article and not copyright per se is not covered by the scope of payment for copyright – Relying upon Motorola Inc. v. Dy. CIT [2005 (6) TMI 226 - ITAT DELHI-A ] - It is not every property or right which can be covered by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment passed under section 143(3) of the Income Tax Act, 1961 (for short the Act ), for the assessment year 2004 05, on the following grounds: 1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in holding that the data processing cost paid by the assessee does not amount to 'Royalty' and is only business income of the Head Office. 2. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in holding that Indian branch of the assessee was not obliged to deduct tax at source while making payment of data processing cost of Rs.34,03,734/- to the Head Office and that section 40(a)(i) of the Act is not applicable to this payment. 3. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in holding that the data processing expenses cannot be clubbed with general administrative expenses and that the deduction has to be allowed for the entire expenditure pertaining to the Indian branch. 4. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of interest to the extent of Rs.58,20,110/- on the ground the same amounts to double ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of computer software is not the right in the copyright but only for the work which subsists in the copyright. Thereafter, the assessee referred to the meaning of copyright as given in section 14 of the Copy Right Act, 1957 and also relied upon the decision of Delhi Special Bench of the Tribunal in Motorola Inc. v/s DCIT, [2005] 95 ITD 269 (SB), to contend that insofar as the Branch is concerned, the payment of cost or prorata basis does not amount to payment made for use or for right to use of any copy right of various nature. Reliance was also placed on the definition of royalty given in Article 12(3) of Indo Belgium treaty to contend that within the said definition, such a reimbursement of cost paid to the Head Office cannot be treated as payment towards royalty. 4. The Assessing Officer required the assessee to furnish various details including the books of account of the Head Office, where such expenses have been incurred and also original vouchers in support of the expenses, however, the assessee could not produce the books of account pertaining to the Head Office. The Assessing Officer, after relying upon the following decisions, held that in such a situation, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such expenses can be related to their business or profession in India. The assessee contended that the audit was done by the Ernst Young and also a certificate from them certifying the expenses incurred by the Head Office which was attributable to the Indian Branch was submitted before the Assessing Officer. Insofar as general and administrative expenses are concerned, the assessee submitted that the payment was made purely on cost as incurred basis and, therefore, the same cannot be considered as income under section 9 of the Act. Further, once the assessee itself has disallowed the Head Office expenses of Rs. 98,63,746 under section 44C, the entire amount of Rs. 1,24,13,827 cannot be added, as it will result into double disallowance. 7. The learned Commissioner (Appeals), however, agreed to the aforesaid contention of the assessee and directed the Assessing Officer to modify the assessment and delete the double disallowance after observing and holding as under: 3.10 I have considered the arguments of the AR. Perusal of the assessment order clearly reveals that the A.O. has made disallowance of Rs. 98,63,746 in the computation of income and subsequently has again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... branch to use such software. Thus, the payment was made by the assessee for the right / license to use application software and software tools provided by the Indian company for efficient running of its business. She further argued that even if the server was at Belgium and there was no direct possession of any technology or equipment or transfer of any right, then also by virtue of Explanation 4, 5 and 6 to section 9(1)(vi) introduced by the Finance Act, 2012, with retrospective effect from 1st June 1976 such a payment will fall under the ambit of royalty or fee for technical services . She also referred to the decision of the Madras High Court in Poomphor Shipping Corporation, order dated 9th October 2013, in TC(A) no.2206 to 2208/2006, wherein the High Court held that under clause (iva) to Explanation 2 to section 9(1)(vi), the royalty amounts to consideration paid for use or right to use, irrespective of the fact that there was any transfer or not. The same result or interpretation of Explanation 5 inserted by the Finance Act, 2012 will apply under Article 12 of DTAA also, because even if the possession of software is with the owner and he has parted with the right to use, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re. The fact of non production of books of account has also been dealt by the learned Commissioner (Appeals) and why the provisions of section 44C will apply, has also been clearly adjudicated and, therefore, no objection can be raised by the learned Departmental Representative without raising any specific ground. The only issue involved in ground no.1, 2 and 3, is whether the data processing cost paid by the assessee to the Head Office as reimbursement on prorata basis, amounts to royalty or not and consequently, whether such a data processing expenses can be clubbed with general administrative expenses. Explaining upon the issue raised in the grounds of appeal, he submitted that the Head Office has acquired the software from an Indian company for its usage in the banking business. Such a usage of software has also been allowed to the branch and whatever cost is incurred by the Head Office for the payment of such software, the same is allocated to the various branches on prorata basis. There is no scientific knowledge or knowhow provided by the Head Office to the Branch. The decision of the co ordinate bench of the Mumbai Tribunal in Kotak Mahindra Primus Ltd. (supra) as referre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. With regard to ground no.3, he submitted that the data processing is a specific task, wherein the data is sent by the branch to the Head Office for getting it processed. The general administrative expenses as stipulated in clause (iv) of section 44C, only refers to executive and general administrative expenses wherein, inclusive definition has been given. What is meant by executive and general administrative expenses, has been elaborately dealt upon the decision of the Special Bench of the Tribunal in IAC v/s Goodricke Group Ltd., [1985] 12 ITD 1 and the DDIT (IT) v/s Stock Engineer and Contractors B.V., [2009] 27 SOT 452 (Mum.). In these decisions, a clear cut demarcation has been made with regard to the general administrative expenses and the specific expenses. 13. As regards learned Departmental Representative s reliance on the Tribunal order for the assessment year 2005 06, he submitted that the issue of data processing was not before the Tribunal and in fact the learned Commissioner (Appeals) in that year vide Para 5 and 6, has decided this issue in favour of the assessee and the Revenue has not preferred any appeal before the Tribunal. Thus, this issue also stands concl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es has been done on the basis of audit conducted by the Ernst Young, which had issued a certificate certifying the quantum and also the basis of the allocation of expenses on in which the learned Commissioner (Appeals) has given a very categorical finding, which has not been challenged by the Revenue in its grounds of appeal. Hence, such an objection as raised by the learned Departmental Representative is not tenable and is, accordingly, rejected. 15. Now, coming to the main issue i.e., whether the reimbursement of data processing cost of Rs. 34,03,734, amounts to royalty or not, we find from the record that the assessee is engaged in the banking business and operates in India through branch in Mumbai. It has acquired a banking application software named as Flexcube from an Indian software company which is exclusively used for the banking purpose by the assessee all over the world. When the Mumbai Branch was set up, the Branch was allowed to use the said software by making it assessable through servers located at Belgium. The Branch sends its data to the Belgium server from where the data gets processed as per the requirement of the banking operations. As per the terms of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d into or looked upon. The character of payment towards royalty depends upon the independent use or the right to use of the computer software, which is a kind of copy right. In the present case, the payment made by the Branch is not for use of or right to use of software which is being exclusively done by the Head Office only, installed in Belgium. The Branch does not have any independent right to use or control over such main frame of the computer software installed in Belgium, but it simply sends the data to the Head Office for getting it processed. Insofar as the Branch is concerned, it is only reimbursing the cost of processing of such data to the Head Office, which has been allocated on prorata basis. Such reimbursement of payment does not fall within the ambit of definition of royalty within the Article 12(3)(a). To fall within its ambit, the Branch should have exclusive and independent use or right to use the software and for such usage, payment has to be made in consideration thereof. It is not the case of the Revenue that the Head Office has provided any copy right of software or any copyrighted article developed by the Head Office for the exclusive use of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and the right is to get the output processed data back. The actual processing of data is the exclusive control of the Australian company and it is for this work that the Australian company gets paid. In our considered view, therefore, in essence the impugned payment is made to the Australian company in consideration of its processing of data belonging to the Indian company. 14. As far as the scope of article 12(3)(a) is concerned, we find that it covers only a payment for the use of, or the right to use of, any copyright, patent, design or model, plan, secret formula or process, trademark, or other like property or right. The case of the revenue is that the payment is made for the use of specialized software with the help of which data is processed. We are not persuaded. As we have concluded earlier in this order, on the facts of this case, the payment made by the Indian company is not for the use of, or right to use of, software, the payment is for data processing. Be that as it may, even if stand of the revenue is to be upheld and it is to be concluded that the payment is made for software per se, that does not lead to taxability of receipt in the .hands of the Australian co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrol over, or physical access to, the mainframe computer in Australia. There cannot, therefore, be any question of payment for use of the mainframe computer. It is indeed true that the use of mainframe computer is integral to the data processing but what is important to bear in mind is the fact that the payment is not for the use of mainframe computer per se, that the Indian company does not have any control over the mainframe computer or physical access to the mainframe computer, and that the payment is for act of specialized data processing by the Australian company. Use of mainframe computer in the course of processing of data is one of the important aspects of the whole activity but that is not the purpose of, and consideration for, the impugned payment being made to Australian company. The payment, as we have observed earlier, is for the activity of specialized data processing. It is neither practicable, nor permissible, to assign monetary value to each of the segment of this economic activity and consider that amount in isolation, for the purpose of deciding character of that amount. Therefore, neither the impugned payment can be said to be towards use of, or right to use o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the purview of executive and general administrative expenses as enumerated in clause (iv) of Explanation to section 44C. 23. Before us, the learned Senior Counsel has relied upon the Special Bench decision of the Tribunal in Goodricke (supra) and the decision of the co ordinate bench of the Tribunal in Stock Engineer and Contractors B.V. (supra). We find that in the said decision, the Tribunal had held that the Head Office expenses are restricted to executive and general administrative expenses only, as defined in Explanation (iv) to section 44C and it does not apply in respect of each and every expenses incurred by the H.O. The data processing cost, as have been discussed in the forgoing paragraphs, pertains to allocation of expenses incurred by the Head Office on prorata basis for the banking application software acquired by the Head Office. Such expenditure does not fall within the meaning of Head Office Expenses as provided in section 44C. The nature of expenses as given in section 44C, has to be necessarily in the nature of executive and general administrative expenses only. The conclusion drawn by the learned Commissioner (Appeals) that such expenditure does not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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