TMI Blog2021 (11) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... ering IT Services in a peculiar manner, the modus operandi of which is not open for verification to the tax authorities. Clause (4) of the Agreement defines Consideration , which has been elaborated in Appendix-II. Relevant part of it states that: 'The basis for the calculation of the service fees shall include the direct as well as the indirect costs incurred. Generally for the following cost items a mark-up of 5% shall be added: Software and license fees - Charges/cost reimbursements from other related parties' - It shows that the Agreement firstly, talks of incurring software and license fee in rendering the services and then, of loading software and license fee cost with mark-up of 5%. This runs contrary to the assessee's stand that firstly, it did not use third party software for rendering IT services under the Agreement and secondly, that the software costs were recharged on cost to cost basis. This brings us to the inevitable conclusion that the second constituent of Reimbursement, being, recovery of the amount incurred as it is from the other without any plus or minus, also falls on the ground thereby jeopardizing the concept of Reimbursement. Cumulative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount received by the assessee from RIPL for rendering such services cannot have two different characters viz., one part as taxable and the other as not taxable. On a pertinent query as to whether revenue of ₹ 20.04 crore received by the assessee from RIPL towards I.T. Services was offered and taxed as Royalty or Fees for technical services, as the same treatment would be given to ₹ 3.84 crore as well, the ld. AR submitted the it did not make any difference as both the royalty/FTS are taxable at the rate of 10% under the DTAA. We, therefore, hold that the authorities below were fully justified in including ₹ 3,88,94,824/- in the total income of the assessee and charging it to tax at 10% in parity with the assessee suo motu offering ₹ 20.04 crore to tax at that rate. - ITA No. 19/PUN/2021 - - - Dated:- 21-10-2021 - R.S. Syal, Vice President And Partha Sarathi Chaudhury, Member (J) For the Appellant : M.P. Lohia and Nikhil Mutha For the Respondents : Shekhar L. Gajbhiye ORDER Per R. S. Syal , VP This appeal by the assessee is directed against the final assessment order dated 09.12.2020 passed by the Assessing Officer (AO) u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... geable to tax in India as Fees for Technical Services/Royalty and also under Article 12 of the DTAA. The Dispute Resolution Panel (DRP) did not provide any succor to the assessee. This is how, the assessee has come up in appeal before the Tribunal. 4. We have heard both the sides and gone through the relevant material on record. The main plank of the ld. AR for claiming the amount in question as not chargeable to tax, is that the receipt was in the nature of reimbursement of IT service cost from RIPL and, in the alternative, it was a receipt of software royalty not chargeable to tax in the hue of the judgment of Hon'ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (2021) 432 ITR 472 (SC). Thus, we need answer to the following questions to resolve the controversy. I. Is the receipt a reimbursement? II. Is the receipt a software royalty? and if none of the two, then III. What is true nature of the receipt? We will deal with these issues ad addendum. I. IS THE RECEIPT A REIMBURSEMENT? 5. The assessee has claimed the receipt to be in the nature of reimbursement of software costs from RIPL. In principle, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lobal OP-CBS-AMFR CE71 Client Basic Services AMFR SLA Business Applications Service Cat Description OP-BACAX-GLOBAL CE72 Business Applications for PDE/PLM Users Global OP-BACAX-AMFR CE73 Business Applications for PDE/PLM Users Winterthur OP-BASMT-GLOBAL CE74 Business Applications for Sales, Marketing and Technology Users Global OP-BASMT-AMFR CE75 Business Applications for Sales, Marketing and Technology Users Winterthur OP-BAPS-GLOBAL CE76 Business Applications for Parts and Service Users Global OP-BAPS-AMFR CE77 Business Applications for Parts and Service Users Winterthur OP-BAOP-GLOBAL CE78 Business Applications for Operations Users Global ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovides IT support to all its group companies enabling group companies to have access to highly developed and efficient IT infrastructure. The development of the IT infrastructure including the purchase of external consulting services and software/License is performed centrally by AMFR. Furthermore, AMFR is responsible for the enhancement and maintenance of the IT infrastructure. Rieter India had during the year reimbursed IT license usage costs to its AE (AMFR). These costs are related to the software license usage purchased centrally by the AE. These costs are recharged on the basis of the actual number of users using these software licenses across its associated entities. It can be seen that the assessee stated before the AO that third party software were centrally purchased by it and IT support services were provided to all its group entities by allowing access to its IT infrastructure. This shows variance between the version espoused before the Tribunal to the effect that the software centrally purchased were allotted to the RIPL for which reimbursement was made as such, and that put up before the AO that it purchased software from third parties and provided IT support to all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.05% 0.38% Technology Information System (TIS) 137 17 12.41% 0.02 0.25% Business Applications for Others/Basis Users ( BAOTHERS ) 363 42 11.57% 0.05 0.58% Key for common costs SAP operation (Total users Excluding CBS and TIS) 2035 358 17.59% 0.10 1.76% Key for common costs IT Infrastructure (since all teams use these applications, allocation key is based on weighted average of above ratios) 17.09% 10. The first column of the Table depicts the nature of services provided by the assessee to RIPL under the 'IT costs reimbursement' working for the month of April, 2015 and all the next columns show the manner of cost allocation to RIPL. The nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e software. Such software and licenses are used by all the group entities of the Rieter Group.' The correct position which, therefore, follows is that the assessee purchased certain software from third party vendors which were not meant to be transferred to global entities including RIPL, but to be merged with its own software infrastructure so as to constitute one integrated Centralized IT infrastructure for rendering the IT support services of CBS, BACAX, BASMT, BAPS and BAOP etc. to all the group entities including RIPL under the Master Agreement. Thus it is severely plain that the first condition of Reimbursement as discussed above, being, the passing of the unfiltered benefit of the expenditure to the other, fails in this case as the assessee purchased software from the third party vendors and did not pass on the same to RIPL, but offered services with the help of such software. The benefit to RIPL got diluted. Had it been a case of the assessee purchasing a particular number of software licenses from the vendors and then transferring them at the identical price to the Indian entity, as has been tried to be projected but which is not actually the true state of affairs as h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35 54 - - 3 - - - - - 93 237 BAOP - - 12 32 130 - - 57 155 79 - - - - 1 - 33 - 152 651 BAFC - - 3 6 24 1 3 19 40 14 15 - - - 1 1 8 1 32 168 BAHR - - - - 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... availing IT services including the Indian entity (RIPL). There are 18 other entities situated in different countries for which the codes have been given. For example, Bracker France has been named as ABRAF, Rieter (China) Textile Instruments has been referred to as ACHA. These 19 columns contain details of the number of users from each of the 19 entities with the last column of Total users. It is on the basis of the number of users that the allocation keys have been devised and the assessee has bifurcated the costs under different heads. For example, for the CBS service, the assessee has claimed that there were in all 3195 users, including 608 from RIPL, giving the allocation key with the share of RIPL at 19.03% in the first table on Page 489. How and wherefrom the magical figures of 608 and 3195 users have descended is best known only to the assessee, which is not corroborated by any evidence. The ld. AR fairly admitted that there was no direct evidence to support the ratio for allocation of the costs except urging that the system generated the number of users. It is seen that the assessee has allocated BAOP and BAFC costs to RIPL at 23.81% each. Page 525 is a summary of allocati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diluted benefit of the software cost was passed on to RIPL nor did the assessee recover the amount as it is from RIPL. We are ergo disinclined to countenance the contention of 'Reimbursement', which is hereby jettisoned. II. IS THE RECEIPT A SOFTWARE ROYALTY? 16. The next contention put forth on behalf of the assessee is that the amount received from RIPL was in the nature of software royalty because it purchased certain software and transferred the same to it. In support of the contention that the receipt from RIPL is not royalty, the ld. AR relied on Engineering Analysis (supra). A proposition was bolstered that RIPL got copyrighted article from the assessee, which was different from the copyright in the software purchased. 17. Insofar as the ratio in the case of Engineering Analysis (supra) is concerned, there is no dispute that it has been held by the Hon'ble Summit Court that ownership of copyright in a work is different from the ownership of the physical material in which the copyrighted work may happen to be embodied. Parting with copyright entails parting with the right to do any of the acts mentioned in section 14 of the Copyright Act. Where the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortified by the details of the alleged reimbursement submitted by the assessee. First table on page 489 of the paper book has last two columns with captions 'Weights for IT infrastructure cost allocation' and 'Weighted average allocation'. On a specific query, the ld. AR submitted that the assessee company spent certain amount on IT infrastructure, independent of the software cost, which was allocated between all the 19 entities and the RIPL's share in it was determined at 17.09%. This shows that apart from purchasing the software for the centralized IT infrastructure Centre, the assessee also incurred certain IT infrastructure costs for integrating them into its centralized system so as to render services to the worldwide entities, which was charged to RIPL at 17.09%. This plentifully proves that the amount recovered by the assessee from RIPL is not towards transfer of any software so as to constitute software royalty. The contention of the ld. AR in this respect stands repelled. III. WHAT IS TRUE NATURE OF THE RECEIPT? 19. Having held that the receipt of ₹ 3.84 crore is neither reimbursement nor royalty for software, the next question is to fin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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