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TMI Blog2017 (3) TMI 1379X X X X Extracts X X X X X X X X Extracts X X X X ..... following grounds of appeal:- 1. Ground 1 : Royalty received under the Royalty Agreement should not be taxed @ 20% - Rs. 37,80,66,508 1.1. Applicability of tax rate a) Erred in facts and in law in holding that the Royalty Agreement dated 1 April 2008 is not a new agreement and hence, in considering the Royalty Agreement as an extension of the License and Technical Assistance Agreement dated 27 March 1998 and to apply tax rate of 20% under the India-Italy DTAA instead of 10.56% under section 115A of the Act. b) Erred in facts and in law in holding that there are no changes in the Royalty Agreement dated 1 April 2008 and the License and Technical Assistance Agreement dated 27 March 1998 and hence, in considering the Royalty Agreement as an extension of the License and Technical Assistance Agreement and to apply tax rate of 20% under the India- Italy DTAA instead of 10.56% under section 115A of the Act. 2. Ground 2: Amount received for recharge of supply of SAP Software - Rs. 9,30,58,722 2.1. Reimbursement not taxable Erred in facts to appreciate that the amount received towards recharge of supply of SAP software is a reimbursement and does not have any element of income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Appellant by the said amounts 5.2 Not in the nature of royalty Erred in facts and in law in holding that the above receipts are in connection with implementation of SAP software, and hence, are in the nature of royalty which are chargeable to tax under the provisions of the Act as well as under the India-Italy tax treaty. 5.3 Applicability of tax rate Erred in facts and in law in holding that the amount received for providing services in connection with implementation of SAP software is not eligible for the rate of 10.5575% as per the provisions of section 115A(1)(b)(BB) of the Act. 6. Ground 6 : Amount recovered towards reimbursement of consultancy fees- Rs. 2,655,812 6.1. Reimbursement not taxable a) Erred in facts in not appreciating that the recharge of professional fees is towards reimbursement and does not have any element of income in the hands of the Appellant, and hence is not chargeable to tax. b) Further, erred in facts in not reducing the said amount from the gross total income of the Appellant. 6.2. Not in the nature of royalty Erred in facts and in law in holding that the reimbursement of professional fee is in connection with implementation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fees for TP consultancy rendered in India to its associate enterprises namely Piaggio Vehicles Pvt. Ltd., Baramati, India and the same was offered to tax as detailed below:- Sr No Nature of receipt Amount Offered for tax @ Remarks 1 Royalty on 3 wheeler 37,80,66,508 10.5575% U/s 115A rws 195A As per agreement dated 01/08/2008 2 Royalty on 3 wheeler- CNG/LPG 1,51,80,804 20% as per DTAA As per agreement dated 30/10/2003 3 Royalty on 4 wheeler 8,36,43,207 20% as per DTAA As per agreement dated 03/03/2004 4 Technical fees services rendered for 57,35,11,559 10.5575% U/s 115A rws 195A As per agreement dated 25/02/2008 5 Fees for implementation SAP 14,09,93,879 10.5575% U/s 115A rws 195A on conservative basis No agreement. The assessee has reserved right to contest the non- taxability of this income 6 Fees relating transfer pricing to 26,55,812 10.5575% 115A rws U/s 195A No agreement. The assessee has on conservative basis reserved right to contest the non- taxability of this income Total 119,40,51,759 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces, technical services 573511559 10.5575% + SC+EC u/s 115A 8. The Assessing Officer further noted that the agreement dated 25.02.2008 was not approved by the Government of India and the Assessing Officer was of the view that the provisions of section 115A of the A ct were not applicable to this income and hence, the same were also taxable in India @ 20% as per DTAA provisions between India and Italy. Accordingly, show cause notice in this regard was also issued to the assessee. 9. Another item noted by the Assessing Officer was that the assessee had received fees for providing assistance in implementation of SAP from PVPL, India which was offered to tax under section 115A of the Act as under: - S. No. Nature of services Agreement details Amount received Rate at which offered for taxation (i) Third party service provider fees including purchase of software of Rs. 7,42,40,862 No Agreement 74240862 10.5575% + SC+EC u/s. 115A (ii) SAP License purchase No Agreement 18817860 10.5575% + SC+EC u/s. 115A (iii) Reimbursement of employee travel costs from PVPL No Agreement 3389167 10.5575% + SC+EC u/s. 115A (iv) Fees for third party services and empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vehicles and that PVPL needs to use the Piaggio Trademarks and the patents and know-how for a further period of 10 years from the date of this agreement." 12. The Assessing Officer was of the view that the second agreement was renewal of earlier agreement dated 26.03.1998 since the time limit of 10 years had expired. Therefore, the second agreement was held to be only an extension of earlier agreement for further 10 years by the Assessing Officer. The Assessing Officer thus, held that the royalty received as per second agreement was taxable in India @ 20% as per DTAA provisions between India and Italy. Thus, the Assessing Officer made proposal to tax the royalty income of Rs. 37,80,66,508/- @ 20% as per DTAA between India and Italy. 13. Regarding technical services provided, the assessee furnished the reply and explanation of assessee was accepted and the fees for technical services received by the assessee as per agreement dated 25.02.2008 was taxed @ 10.55%. 14. The Assessing Officer further considered the submissions of the assessee regarding fees for SAP implementation and fees relating to transfer pricing consultancy, wherein the reply of assessee is reproduced at pages 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso, the payment received for granting the software licenses comes under the heading of "royalty". Hence, it was held that the character of payments received for right to use software and for support services was clearly royalty as defined in Article 13 of the DTAA as well as Explanation (2) to section 9(1)(vi) of the Act. The Assessing Officer concluded by holding that the receipts on account of right to use software (license fees) and support services were in the nature of royalty under the Act as well as DTAA between India and Italy. 15. Reliance was placed on series of decisions in this regard by the Assessing Officer and it was held that the payments received by the foreign company for supply of software and support services constitute royalty under the DTAA as well as under the Act. The Assessing Officer further observed that in CIT Vs. S amsung Electronics Co. Ltd. in ITA No.2808/2005 , judgment dated 15.10.2011, the Hon'ble High Court of Karnataka had not accepted the arguments that it would be only a sale of copy of copyrights software. The Hon'ble High Court held that it was payment towards price of CD, the software and the license to use granted and the payment wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... affairs. In first section, rights were purchased, which enable use of those rights while in the other, no purchase is involved, only right to use is granted. The Assessing Officer thus, concluded by holding that the payments received by the assessee were right to use software and for support services constituted royalty under DTAA as well as the Act. 16. The next contention made by the assessee was that where no copyright was transferred to PVPL, India and where the PVPL, India could not make copies of software for public distribution or exploit the copyright commercially in any manner but could use the same for internal purposes; thus, the amount received for sale of software was not taxable in India. The Assessing Officer was of the view that where it was not the sale of software but only the license to use software, payments received by the assessee on the basis of actual usage of software partake the nature of royalty and nothing else. Therefore, the fees for sale of software license and related expenses amounting to Rs. 14.36 crores was taxed @ 20% as per DTAA between India and Italy. 17. The last item of income was reimbursement of expenses of Euro 53,439 i.e. INR of 33,89 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Piaggio and Piaggio Greaves Vehicles Pvt. Ltd. The said agreement had to be approved by RBI after which the supplementary agreement was executed, under which acknowledgement was given to manufacturing of Ape MP 501 and Ape MP 601. Our attention was drawn to different clauses of agreement, under which reimbursement fees was received and also royalty was received @ 2.5% of the total turnover. The said agreement admittedly, was for a term of 10 years with clause that the same could further be extended with mutual consent of the parties. The learned Authorized Representative for the assessee pointed out that in 1999, subsidiary company merged with the parent company, so the parent company thereafter, entered into new agreement and also M/s. Greaves exited the JV and the said concern became Piaggio Vehicle in 2000. He further referred to the agreement executed on 01.04.2008 and pointed out that as per clause 3 of the agreement, the technology was given for manufacture of not only Ape 501 and Apt 601 but all variants developed by the assessee for period of 10 years. He stressed that as part of the new agreement, entity in India could use the upgraded technology of assessee and also tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esentative for the Revenue pointed out that the terms agreed upon between the parties were different in the new agreement and also the rate of royalty fixed between the parties was different. 22. We have heard the rival contentions and perused the record. The first issue which arises in the present case is the rate of tax to be applied on the royalty income received by the assessee under the Royalty Agreement dated 01.04.2008. The assessee was a public limited company and qualified as tax resident of Italy. For the year under consideration, the assessee was engaged in the manufacture of motorized two wheelers. The assessee group was involved in production of scooters, motorcycles and mopeds in displacement from 50CC to 1200CC under the Piaggio, Vespa, Gilera, Derbi, Aprilia, Moto Guzzi and Scarabeo brands. The group also manufactured the Ape, Porter and Quargo ranges of three and four- wheeled light goods transport vehicles. The manufacturing units of the assessee were established in Italy, Spain, India and China with sales spread over in several countries. The assessee had entered into an agreement with PVPL, India, under which it received royalty. The first agreement was entered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms of old and new royalty agreement which is being referred to by the authorities below. The learned Authorized Representative for the assessee had tabulated the points of difference between old agreement and new royalty agreement by referring to the clauses of agreement and has elaborately referred to the agreements as such. While entering into earlier agreement, the requirement was to receive the approval from RBI and thereafter, execute the agreement. The first point of difference which has been pointed out by the learned Authorized Representative for the assessee is the parties to the agreement i.e. in the old agreement, the subsidiary of the present company i.e. the assessee before us had entered into an agreement with JV which was between the subsidiary of assessee company and JV between the assessee and Greave Ltd. However, the parties to the new royalty agreement are the assessee itself and Piaggio, India which is wholly owned subsidiary of the assessee. Coming to the scope and object of first agreement as per Article 2.1, the JV vehicles would be 3-whellers having commercial denomination of Ape MP 501 and Ape MP 601 . As per the said clause, JV vehicles shall utilize Grea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any design change made to the JV vehicles and any other vehicle or technological improvements developed by the Licensor. The Licensee had to implement the said modifications or improvements in its production process within reasonable time. As per Article 10, the Licensor was to provide technical assistance in India and training to the Licensee personnel in India and in Italy for facilitating the transfer of technology and know-how for supporting the reorganization of plant, for supporting the production preparation of JV vehicles, all the local parts and all the substitute parts and for start up of their local production. The cost of personnel giving technical assistance in India to the Licensee was to be borne by the Licensor. The Licensor was to bear the cost of lunch of the Licensor's personnel during working days at the plant canteen. In case any technical assistance, training in India was requested by the Licensee then the cost of the same shall be charged to the Licensee's account. As per Article 11, Licensee was authorized to use the licensed information in connection with improvement of the manufacture, quality, reliability and performance of the Greaves Garuda vehicles. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pending confirmation orders received by the Licensee. As per Annexure, dimension and weight Table of Ape 501 and Ape 601 are annexed along with modification and design changes for all of the versions of JV vehicles, as per Annexure A2 and A3 . As per Annexure B, Piaggio trademarks are enlisted. 24. Now, coming to the terms of royalty agreement between the assessee and PVPL, India which was executed on 01.04.2008. The parties to the agreement were not the subsidiary of the assessee but the assessee himself with PVPL as Licensee which was wholly owned subsidiary of the assessee and not the JV between any two parties. It may be clarified here itself that Greaves which was JV with the assessee in the original agreement had exited the said agreement and the old agreement continued for the balance term of agreement. As per the Preamble to the agreement dated 01.04.2008, it was recognized that the licensor was world leader in design, manufacture and sale of various vehicles including in particular three wheelers marketed under the trademark Ape(r), for which it had developed techniques of manufacture, methods of quality control and other information relating to production, distribution, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y time by mutual consent in writing. 25. The issue which arises before us is whether the said agreement executed on 01.04.2008 is an extension of earlier agreement dated 08.01.1998. The first point of distinction pointed out by the learned Authorized Representative for the assessee is the parties to the agreement. Admittedly, o n the date of execution of agreement i.e. 08.01.1998, the parties were different. Over a period of ten years, there was amalgamation and taking over and the current parties who are executing the agreement dated 01.04.2008 were the parties who were executing the agreement eventually. As per Article 2.1, the JV vehicles have been defined to be Ape 501 and Ape 601. The learned Authorized Representative for the assessee before us pointed out that there is material difference in the scope of the agreement, wherein as per old agreement, licensee had right to use the licensed information as well as get technical assistance and training along with right to use patents, trademarks and trade names, whereas under the new royalty agreement, the licensee had a right to use patents, knowhow, trade names and trademarks. The next point of distinction was made by the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On comparison of the terms agreed upon between the parties in the old agreement and the new royalty agreement and after going through the scope and object of the agreement and various terms, we find one main material difference i.e. in the earlier agreement, the assessee had given license to produce Piaggio branded three wheelers having commercial denominations of Ape MP 501 and Ape MP 601. It is so provided in Article 2.1. The Article 2.2 of the new agreement dated 01.04.2008, however, refers to the vehicles which are presently produced by the licensee under the licensor's license being several versions of Piaggio branded three wheelers having commercial denominations of Ape. The annexure to the old agreement provided the trademarks to be used by the assessee were only restricted to Ape 501 and Ape 601. However, as per annexure to the new agreement, the assessee has provided the license to manufacture and sell the vehicles under the brand name Ape, which encompasses all kinds of vehicles. The assessee also pointed out that in view of extended license provided to the assessee, it launched Ape city diesel of three wheelers under Ape brand which was different from Ape 501 and Ape 601 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A of the Act is 10% plus surcharge and education cess. The Assessing Officer is directed accordingly. The ground of appeal No.1 raised by the assessee is thus, allowed. 27. The second issue raised by way of grounds of appeal No.2 to 4 is against the tax rate to be applied on the amount recovered by the assessee for recharge of supply of SAP software. 28. The learned Authorized Representative for the assessee pointed out that as per global policy, the assessee decided to supply SAP to all entities, wherein the assessee decided to implement SAP agreement with its affiliated companies. The learned Authorized Representative for the assessee pointed out that before the Assessing Officer, there were three grounds as raised by way of grounds of appeal No.2.1 to 2.3. Now, the limited question which is to be adjudicated is the rate to be applied as per section 115A of the Act. Our attention was drawn to communication between the parties which was not a formal agreement but exchange of terms between the assessee and the recipient company. In the year 2011, there was further implementation of an agreement. The learned Authorized Representative for the assessee pointed out that what is to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipts to be royalty but by an order of rectification under section 154 of the Act, the same is held to be taxable @ 10% plus surcharge plus education cess. Even in assessment year 2012-13, similar receipts have been taxed by the Assessing Officer himself @ 10% plus surcharge plus education cess. The nature of receipts in the year under consideration are admittedly, same and following the same parity of reasoning, we hold that the receipts are to be taxed under the provisions of section 115A @ 10% plus surcharge plus education cess. Accordingly, grounds of appeal No.2 to 4 are partly allowed. 31. The issue in ground of appeal No.5 raised by the assessee is against the chargeability of tax @ 20% as royalty under the Indian Italy DTAA, the amounts recovered towards reimbursement of expenses. The assessee claims that it had received reimbursement on account of re-work charges of Rs. 3,14,573/- and Insurance cost of Rs. 32,18,800/-. The assessee claimed that it had taken group insurance policy to cover the product liability risk for all the Piaggio group company across the globe and insurance cost incurred by the assessee was allocated to the companies in the group without any mark up. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said fees is taxable as technical services in view of Explanation (2) to section 9(1)(vii) of the Act which defines fees for technical services r.w.s. section 115A(1)(b)(BB) of the Act. 33. The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below. 34. As per clause (BB) to section 115A(1)(b) of the Act, it is provided as under:- "115A(1)(b)(BB) An amount of income tax calculated on the income by way of royalty, if any, included in the total income, at the rate of 10% if such royalty is received in pursuance of an agreement made on or after the 1st day of June, 2005". 35. Further, Explanation to section 9(1)(vii) of the Act defines fees for technical services as under:- "For the removal of doubts it is hereby declared that for the purposes of this section where income is deemed to accrue or arise in India under cls. (v), (vi) and (vii) of sub-s. (1) such income shall be included in the total income of the non- resident, whether or not,- (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India." 36. The conditions prescribed under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is in the nature of royalty and chargeable to tax under the provisions of the Act as well as under the India-Italy DTAA. b) Erred in facts and in law in holding that the amount received towards SAP software maintenance charges is not eligible for the rate of 10.5575% as per the provisions of section 115A of the Act. 3. The learned AO erred in levying interest under section 234B of the Act. 4. The learned AO erred in initiating penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income and for concealing the particulars of income. 39. The first issue raised by the assessee by way of ground of appeal No.1 is against the rate of tax to be applied on the royalty received under the royalty agreement. We have already decided this issue in assessment year 2010-11 and following the same ratio, we hold that the royalty agreement entered into on 01.04.2008 was a new agreement, the tax rates to be applied were as per section 115A of the Act @ 10% plus applicable surcharge and education cess. Hence the ground of appeal No.1 raised by the assessee is allowed. 40. Now, coming to the ground of appeal No.2 raised by the assessee i.e. the amount received tow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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