ITAT Pune explains basic conditions for Satisfaction of reimbursement Claim
Fact and Issue of the case
This appeal by the assessee is directed against the final assessment order dated 09.12.2020 passed by the Assessing Officer (AO) u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation to the assessment year 2016-17. Succinctly, the facts of the case are that the assessee filed its return with total income of Rs.22,30,38,350/-. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the arm’s length price of certain international transactions declared by the assessee. The TPO, vide his order dated 10-06-2019 passed u/s.92CA(3), did not propose any transfer pricing adjustment. The AO observed that the assessee had included a sum of Rs.20,04, 14,231/- in its total income, being, IT service charges received through RIPL and offered it for tax at 10% in terms of the Double Taxation Avoidance Agreement between India and Switzerland (DTAA). However, another receipt of Rs.4,05,96,997/- from RIPL was not offered for taxation. On being called upon to explain the reasons, the assessee submitted that a sum of Rs. 17,02,173/- was in the nature of reimbursement of expenses received from RIPL, representing supply of clothes required for Rieter India employees, Promotional gifts for exhibitions and expenses incurred by employees towards their accommodation, laundry, transport, good etc, which was charged back without any mark-up. The AO accepted the transaction as not chargeable to tax. The remaining amount of Rs.3,88,94,824/-, which is the core of controversy in the instant appeal, was claimed as reimbursement of IT license costs incurred towards centrally purchasing software licenses and use by RIPL. The AO analyzed the Master Services Agreement (Agreement) under which the assessee provided IT services to RIPL and offered the amount relatable to such services as taxable. The AO deduced the precise nature of services rendered. He noticed that the assessee could not explain as to how the receipt of Rs.3.88 crore claimed as reimbursement, was different from the receipt of Rs.20.04 crore from the IT services rendered under the Agreement, which was offered to tax. After considering the assessee’s reply, the AO held that the amount of Rs.3.88 crore was chargeable 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.
Observation of the court
The Court has 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).
The assessee has claimed the receipt to be in the nature of reimbursement of software costs from RIPL. In principle, chargeability is attracted on the income element embedded in a revenue receipt. A receipt de hors profit element, which is only a Reimbursement, is not taxable. However, to categorize a particular amount as reimbursement, it is sine-qua-non that the expenditure should be incurred for and on behalf of the other. It envisages two cumulative conditions, viz., first that undiluted benefit flowing from the incurring of the expenditure is passed on, as such, to the other and the second, that the amount incurred is recovered as it is from the other without any plus or minus to that. If the costs incurred go in a common pool which are then shared by several persons on certain allocation keys, even if the amount so allocated and recovered may be without any mark up, but it may not necessarily constitute reimbursement in the strict sense qua each participant independently.
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.
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 core of a transaction is to authorize the end-user to have access to and make use of the “licensed” computer software product, over which the licensee has no exclusive rights, no copyright is parted with. However, the facts of the instant case are entirely different. On a specific query, the ld. AR failed to point out as to the specific number of licenses purchased by the assessee from third party vendors and those transferred to RIPL. Rather it was fairly conceded during the course of proceedings and has been established by us above that there was no direct transfer of software licenses to RIPL but it was a case of allowing user to RIPL from the centralized IT infrastructure maintained by the assessee in Switzerland. What is relevant for our purpose is the amount of receipt by the assessee for rendering services and not the costs incurred in the purchase of software facilitating the provision of services. We are not confronted with a situation in which the assessee purchased software from third party vendors and then licensed the same to RIPL for use. Rather all the software purchased by it were integrated by the assessee into its own centralized IT infrastructure for facilitating the provision of the IT services enlisted above to its group entities and RIPL is one of such beneficiary of the services. It is rather a case of the assessee only purchasing the software from third party vendors and the transactions qua such individual software coming to an end there itself. The ratio of Engineering Analysis (supra) can apply where the vendors demonstrate that what they transferred to the assessee was copyrighted article and not copyright. On the contrary, we are concerned with the second stage in which the software licenses, being in the nature of copyrighted article, were purchased by the assessee and then used in the providing various services, such as, Client Based Services (CBS), Business Applications for Sales, Marketing and Technology Users (BASMT), Business Applications for Parts and Service Users (BAPS), Business Applications for Operations Users (BAOP), Business Applications for Finance and Controlling Users (BAFC) etc.
The fact that the assessee utilized the software purchased from third party vendors for integrating them with its own software for making a common centralized integrated IT infrastructure so as to render the IT services is further fortified 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.
Having held that the receipt of Rs.3.84 crore is neither reimbursement nor royalty for software, the next question is to find out true nature of the receipt. It has been noticed above that the assessee rendered I.T. services to its group companies including RIPL and offered a sum of Rs.20.04 crore to tax as royalty/fees for technical services. We have further found that the nature of services provided under the Master Agreement for which Rs.20.04 crore has been offered to tax is exactly similar to that claimed to be reimbursement for which Rs.3.84 crore has been received. In fact, there is only one Master agreement with RIPL under which the composite I.T. services were rendered to the group companies including RIPL – whether with the help of own software or those purchased from third party vendors. Whereas the assessee offered revenue to tax insofar the consideration for the I.T. services rendered from its own developed software is concerned, but claimed the corresponding revenue to the extent of cost incurred in purchasing software from third party vendors and the cost incurred in setting up the matching infrastructure, as reimbursement and hence not exigible to tax. But for that, the nature of service is same. This shows that the assessee received Rs.23.92 crore (Rs.20.04 crore and Rs.3.88 crore), except the reimbursement accepted by the AO, from RIPL on account of IT services, out of which one part consisting of Rs.3.88 crore (being share allocated to RIPL towards license and IT infrastructure cost) was claimed as reimbursement and the second part consisting of Rs.20.04 crore was offered for taxation. Thus, there is no inherent difference in the composition of receipt by the assessee from RIPL, which has been bifurcated into two parts by showing Rs.20.04 crore as taxable and Rs.3.88 crore as not taxable. Since the nature of services rendered by incurring costs – on maintaining owned software and those purchased from third party vendors – is similar, 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 Rs.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 Rs.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 Rs.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 Rs.20.04 crore to tax at that rate.
In the result the tribunal allowed the petition and ruled in favour of the assessee