Amounts receivable by a British company is not liable to be taxed under the Income Tax Act as fee for `included services'

Indo-UK Treaty : Amounts receivable by a British company (EMEIA) from the applicant under the Area Services & Market Development Agreement are not liable to be taxed under the Income Tax Act as fee for `included services' or as business profits, having regard to the provisions of DTAA between India and UK.

Dissemination of informations, furnishing guidelines and suggesting plans of action aimed at uniformity and seamless quality in business dealings of participating group entities do not per se amount to making available to them technical knowledge and experience possessed by EMEIA to a substantial extent; There is no transfer of technical know-how in that process nor can it be said that the recipient of these coordinated/centralized services has been enabled to apply the technology which EMEIA is possessed of.

AUTHORITY FOR ADVANCE RULINGS (INCOME-TAX) NEW DELHI

Ernst & Young (P.) Ltd., In re

AAR No. 820 of 2009
March 19, 2010

R U L I N G

(By Hon'ble Chairman)

1. The applicant, Ernst & Young Private Ltd. (EYPL) is a company incorporated in India and is engaged in providing consultancy services (such as chartered accountancy and management studies). The applicant is one of the member entities of Ernst & Young Global (EYG). EYG has such member entities in various countries. All member entities (including EYPL) use the brand `Ernst & young' (EY) and adopt the international practices followed by the EY organization worldwide for providing consultancy services to their clients. Such membership enables the member companies to co-operate, collaborate and work closely 1.together to achieve the provision of seamless, consistent, high-quality client service within the Area.

1.1. Ernst & Young (EMEIA) Services Limited is a limited liability company incorporated under the laws of England and Wales. This Company has been formed specifically to facilitate the objective of providing support in various fields such as Area, Global and Market Development etc. to all the member entities of the EY organization so that they may gain access to standardized human, financial and other resources to ensure that consistent, high quality professional services are provided to the client base of all members of the EY organization. EMEIA, inter alia, provides Area Services, Market Development Support Services and Global Services as detailed in the Schedule to the Area Services and Market Development Agreement. Such support is provided from UK and it does not have any Permanent Establishment or fixed base in India. The terms and conditions under which all EY member entities would get such support from EMEIA are documented in the form of the Area Services and Market Development Agreement (for short, `the Agreement') which has been filed. Under the Agreement, costs incurred for providing the services are allocated to EY member entities and they reimburse such costs to EMEIA, UK.

1.2. It is submitted that EMEIA does not earn any income from providing access to centralized Ernst & Young resources, facilities and services. The cost allocation is done in accordance with agreed formula. The applicant states that the payment is made by way of reimbursement of the cost incurred on behalf of the applicant company by EMEIA.

2. The following questions (as revised) are raised by the applicant for the purpose of advance ruling:

(1) Whether the amount payable by the applicant in accordance with the agreement entered into with Ernst & Young (EMEIA) Services Limited is chargeable to tax in India under the provisions of the Income-tax Act, 1961 (`the Act') and Double Taxation Avoidance Agreement between India and UK?

(2) Whether the amount receivable by Ernst & Young (EMEIA) Services Limited from Ernst & Young (P) Ltd., inter alia, on account of Area Services, Market Development Support Services and Global Services as detailed in the Schedule to the Area Services and Market Development Agreement

is chargeable to tax in India as "fees for technical services"

under section 9(1)(vii) of the Income-tax Act, 1961.

3. The applicant contends that the amount received by EMEIA for Services rendered in terms of the Agreement dated 5 th May, 2009 with the applicant company is not `fees for technical services' as per Article 13 of the DTAA (Tax Treaty) between India and U.K. Though it gives rise to business profit for the reason that EMEIA is in the business of providing access to central resources and services to various member entities, in the absence of permanent establishment of EMEIA in India, the receipt is not taxable in India by virtue of the provisions in Article 7 of the DTAA.

4. The term `fees for technical services' is defined in para 4 of Article 13 to mean "payment of any kind in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which :

……………….. (c) make available technical knowledge, experience, skills, know-how or processes or consist of the development and transfer of a technical plan or technical design". The definition of "fees for included services" in the India-USA Treaty bears the same wordings. In the MOU reached between the Governments of India and USA concerning "fees for included services" (Article 12), the import and connotation of the first part of definition in clause (b) of para 4 i.e. "make available" technical knowledge, experience etc. has been explained. The MOU clarifies that technology will be considered `made available' when the person acquiring the service is enabled to apply the technology. The MOU further clarifies that the fact that the provision of the service may require technical input

by the person providing the service does not per se mean that technical knowledge, skills, etc. are made available to the person paying for the service.

5. It is the contention of the applicant that the services rendered to the applicant by EMEIA does not satisfy the test of `make available' under Article 13 of the DTAA as they do not result in transfer of any technical know-how, technical plan/design, though some of the services broadly answer the description of consultancy or technical services. The applicant submits that the work of EMEIA is confined to providing support and access to central resources for developing business strategies and plans at Area level, providing support in implementation of Priority Account Strategies and Industry Sector Strategies, knowledge Management and Sharing, Market Development Support, Assistance in the implementation and monitoring of common standards, policies and tools, Assistance in Recruitment and training and retention of operating Global methodologies and applications and procuring on a centralized basis goods and services.

5.1 In the course of arguments, the learned counsel for the applicant while reiterating the above contentions of the applicant, submitted that EMEIA does not create any system or technology nor does it make its contribution by refining or improving on it. It merely gathers and collates the information from the systems already available and place them before the members entities who have entered into agreement for their guidance and implementation. The idea is to maintain uniformity in practices and approaches in business among the E&Y Group entities by providing the requisite templates, power points, accounting practices etc. EMEIA serves as a common platform for globalizing the standards and ensuring uniformity in practices and systems. The total expenditure will be shared by all the entities. The nature of services listed in the Agreement would clearly indicate that no technical knowledge, experience, skills or know-how is being made available by EMEIA to the member entities.

5.2 The learned counsel has drawn our attention to the passages in the recent ruling of this Authority in Intertek Testing 1 , which are extracted below:

"Rendering technical or consultancy service is followed by a relative pronoun "which" and it has the effect of qualifying the services. That means, the technical or consultancy service rendered should be of such a nature that "makes available" to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting the technical knowledge, etc., so that the payer of service could derive an enduring benefit and utilize the knowledge or know-how in future on his own without the aid of the service provider. By making available the technical skills or know-how, the recipient of the service will get equipped with that knowledge or expertise and be able to make use of it in future, independent of the service provider. In other words, to fit into the terminology "make available", the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. The services offered may be the product of intense technological effort and a lot of technical knowledge and

experience of the service provider would have gone into it. But that is not enough to fall within the description of services which make available the technical knowledge, etc. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in future without depending on the provider."

In the case of Anapharm Inc. in re 2 , this Authority observed: It is, thus, fairly clear that mere provision of technical services is not enough to attract article 12(4)(b). It additionally requires that the service provider should also make his technical knowledge, experience, skill, know-how, etc. known to the recipient of the service so as to equip him to independently perform the technical function himself in future, without the help of the service provider. In other words, payment of consideration would be regarded as

"fee for technical/included services" only if the twin tests of rendering services and making technical knowledge available at the same time is satisfied."

6. Looking at the list of services enumerated in the Agreement, it appears to us that the criterion laid down in para 4(c) of Article 13 (of UK Treaty) is not satisfied. The Agreement contains an elaborate preamble explaining the underlying objective of the Agreement. There are two types of services categorized in the schedule; they are area services and global services. Both of them almost overlap. Global services are more relevant for the purposes of this case. The applicant's counsel has taken us through the global services and broadly explained the scope of each service. The learned counsel at the outset pointed out some inaccuracy in the definition of `global services' because it refers to the services set out in the EYGSLLP Management Services Agreement. The learned counsel has stated that the global services are enumerated in a self-contained Schedule to the relevant agreement i.e. Area Services and Market Development Agreement and, therefore, the reference to some other earlier agreement is not appropriate. In any case, the learned counsel has clarified that practically, there is no difference between the services mentioned in both these agreements and if at all the enumeration in the present agreement is more comprehensive. A chart containing comparative analysis of these two agreements has been furnished to clarify this point.

7.7. We have looked into the global services detailed in the schedule to the Agreement with which we are concerned. We shall refer to them (14 in number) in brief one by one:

1. Strategy – Firmwide & Service Lines - Developing, leading and overseeing plans and strategies for the Member Firms of Ernst & Young Global in order to achieve seamless, consistent, high- quality services Formulating global planning processes and encouraging their adoption. Overseeing execution of plans and strategies with global consistency while differentiating the EY brand in the marketplace. Developing strategies for each Service Line, clearly defining and identifying the existing and future core global Service Lines.

Aligning the global sub-Service Lines, integrating service delivery across global Service Lines connecting and integrating Service Line, Industry and Account activities.

2. Accounts, Industry & Business Development –

Formulating Priority Accounts strategy for the Member Firms of Ernst & Young Global focused on enhancing Industry effectiveness, driving profitable revenue growth; Formulating Industry Sector Strategy for the Member Firms of Ernst & Young Global focused on enhancing Industry effectiveness, driving profitable revenue growth; Development of ASQ strategy for the Member Firms of Ernst & Young Global. Policy enshrines a common methodology and framework to measure the quality of services provided to clients.

3. Knowledge Management and Sharing

Driving the delivery of a globally consistent knowledge strategy and plan to enable "our people", Service Line, Sector, Account and Business Development priorities. Global knowledge enables the delivery of strategic analysis and research, global competitive and market intelligence analysis and reporting.

4. Marketing

Supporting the Market Leadership strategy for the Member Firms of Ernst & Young Global by enhancing EY's reputation among key stakeholders.

5. Internal Communications

Delivering a global internal communications program that connects and engages the partners and people of the Member Firms of Ernst & Young Global around their shared cultural, strategic and organizational priorities. Provision of appropriate internal communications programs and materials to support EY people in their client-facing activities.

8.6. Public Relations

Protecting and enhancing brand and reputation of the Member Firms of Ernst & Young Global in collaboration with EYG leaders, Global Industry and Service Line Leaders and with execution through and by Area/country PR teams. Managing communication around sensitive media issues, including developing messages etc.

7. Public Policy

Working with regulators across multiple jurisdiction to ensure the EY network is able to contribute to important decisions affecting the way the profession is governed.

8. Quality and Risk Management

Development and supervision of common standards and policies for the EY network, including strategies and programmes to embed quality and risk management throughout the EY Global network, such as independence infrastructure, quality review programmes and client and engagement acceptance and continuance policies and tools. Providing practice manuals and other reference materials and otherwise assisting in the adoption and consistent application of common standards and policies.

9. People

Developing and overseeing common programmes and policies for Resourcing (Recruiting and Mobility), Learning and Development and People Infrastructure. This includes global people surveys, strategic resourcing and recruiting, globally aligned Performance Management and Development processes, partner development, etc.

10. Core Business Services

Provision of services in relation to Human Resources, Events Planning, Facilities Management, IT Support, Information Distribution and Graphics Support.

11. Legal

Advice and strategic input on a wide range of competencies to support the EYG functions, including regulatory, risk and crisis management; dispute resolution; project management; regulatory matters; company and partnership law; financial and treasury advice; and commercial and IP law.

12. Finance

Developing and overseeing common financial treasury, budgeting and accounting systems, practices and policies, and providing advice and assistance in connection with such systems, practices and policies. Providing value-added financial information and support to Global, Area and country leaders, including in relation to supporting technology. Creating policies for, and implementing, a common client invoicing and settlement procedure by Member Firms.

13. Technology and Infrastructure

Providing wide range of technology applications and support services to the Member Firms, including global data center support services.

9. Centralized procurement of software licenses from third party vendors, such as e-mail systems, computer security systems, voice mail connectivity and internet services. Development and deployment of Global applications and methodologies, including Global Financial Information System.

14. Centralized Procurement Services

Procuring on a global basis goods and services that can be advantageously so procured, including credit facilities, health benefits, and other financial services required by Member Firms or their employees.

7.1 In the course of hearing we have asked the learned counsel for the applicant to explain various items in the form of a note and supporting documents to illustrate the contents of each service. The learned counsel has accordingly filed a Paper Book containing 89 pages. We shall refer to the clarifications given by the applicant with reference to some of the services.

2. Accounts, Industry and Business Development. Re: Priority accounts: para 2.1

• An overall key account framework and plan from EY Global,

• Visits by Global account leaders to India subsidiaries and affiliates,

• Templates/frameworks on accounts planning and

development. Best practices in approaching these large MNCs as a Global firm.

Re: Industries and Business Development: Para 2.2

Global formulates plans for achieving higher profitability and thought leadership, while Area works in liaison with the member firm to get the plans implemented. The various services rendered are as under:

• Relationship, knowledge and Credentials support in

pursuits/proposals to large clients,

• Service frameworks pertaining to the focus sectors.

Re: Assessment of Service Quality (ASQ) – para 2.3

This contemplates provision of common methodologies and framework for quality services to be provided to the clients and Area, in liaison with

the member firms. The same gets implemented at Area level.

Written questionnaires and interviews are used for this exercise. The support received from Global is in terms of a Global policy that drives the survey process including questionnaires, assessment templates to be used.

ASQ is a Global framework and is used to determine the level of satisfaction of services provided by EY to its clients.

13. Technology and Infrastructure

13.1 Providing wide range of technology applications and support services to the Member Firms, including global data center support services.

13.2 Centralised procurement of software licences from third party vendors, such as email systems, computer security systems, voice mail connectivity and internet services.

13.3 Development and deployment of Global applications and methodologies, including Global Financial Information System.

13.4 Maintaining Global datacenters.

Under this clause, various types of software, e.g., centrally hosted application service (CHAS), Global Mail Template, Global Systems Management Server, Internet mail service, Global corporate data base, Service Offering Reference Tool (SORT), Global TAS Templates etc. are provided to the member entities. It is stated that the service provider, namely, EMEIA sources common technology and application systems referred to above and allow all the member firms including the Applicant to use the same. No technology is made available. All member firms are allowed to use it in a uniform manner. Sample screen shorts of the various applications and support services received from time to time are placed on record.

3. Knowledge Management and Sharing

The various services rendered are : Analysis on focus markets, competitive intelligence within a particular sector /country.

The purpose of above services is stated to be to respond better to moves from competitors and stay better informed on the sectors and to provide higher quality service to clients.

8. First of all, some of the services enumerated above have the flavour of management services. Services of managerial nature are not included within Article 13 unlike many other treaties. Only technical and consultancy services are included. Many of them do answer that description. However, the more important question is whether EMEIA, U.K. has made available to the applicant any technical knowledge, experience, skills or know-how by providing the `support services' noted above. In our view, that question admits only of an answer in the negative. What all is provided by EMEIA is informations on various business and commercial matters, guidelines, templates, best practices and strategies that could be adopted in various spheres of their business which ultimately lead to protection of EY image and client relations. Dissemination of informations, furnishing guidelines and suggesting plans of action aimed at uniformity and seamless quality in business dealings of participating group entities do not per se amount to making available to them technical knowledge and experience possessed by EMEIA to a substantial extent. There is no transfer of technical know-how in that process nor can it be said that the recipient of these coordinated/centralized services has been enabled to apply the technology which EMEIA is possessed of. In fact, EMEIA has not developed any technology of its own nor does it innovate anything.

9. In the light of above discussion, the questions are answered as follows:

Both the questions are answered in the negative and it is ruled that the amounts receivable by Ernst and Young EMEIA Services Ltd. from the applicant under the Agreement are not liable to be taxed under the Income Tax Act as fee for `included services' or as business profits, having regard to the provisions of DTAA between India and UK. However, the Income-tax authorities are not precluded from making inquiry into the question whether the cost contribution is fixed on arm's length basis and such determination can be made in the assessment proceeding of the applicant.

Accordingly, ruling is given and pronounced on this the 19th day of March, 2010.

Payment for Software--Cannot be Royalty or FTS

Important outcome of the ITAT Judgement in case of SMS DEMAG PVT LTD Vs Dy COMMISSIONER OF INCOME TAX, New Delhi(ITA No.3636 /Del/2008) is:

Payment made for purchase of software cannot be treated either as royalty or even for technical services. Therefore, the payment for software cannot be charged to tax in India as interest or royalty or fee for technical services.

Depreciation cannot be disallowed on the ground that at the time of remittance no tax was deducted at source. Provisions of section 40(a)(i) are not applicable for claim for deduction u/s 32 of the Act.

Considering the fact that the decision in Samsung Case is still pending at SC, this is a welcome judgement. Hope same view prevails at SC as well. Hope the best!!


Cases relied upon:

Herbal Life International India Pvt. Ltd. v. ACIT

Millennium Infocom Tech. Ltd. v. ACIT

Transmission Corporation of A.P. Ltd. v. CIT

HNS India v. DCIT

Credit Llyonnais v. DCIT

ORDER

Per: K D Ranjan:

This appeal by the assessee for Assessment Year 2000-01 arises out of order of ld.CIT(A)-XII, New Delhi.

2. The first issue for consideration relates to assumption of jurisdiction u/s 147. During the course of hearing, the assessee did not press this ground of appeal, hence, the same is dismissed as not pressed.

3. The next issue for consideration relates to upholding the disallowance of depreciation amounting to Rs.54,74,602/-. The facts of the case stated in brief are that the assessee M/s SMS Demag Pvt. Ltd. is a subsidiary of M/s SMA, Demag AG Germany. M/s SMS Demag India Pvt.Ltd. is engaged in the business of supply as assemblies/subassemblies of metallurgical equipment, profession of consultation and technical service in design and engineering to ferrous and non-ferrous sectors. During the course of assessment proceedings, the Assessing Officer noted that an information was received from Additional DIT International Taxation Range-2 that assessee company had made payment of royalty. As per the order u/s 201/201(1A) of the Act passed by the Incometax Officer TDS 1(2) (International Taxation), the assessee made SAP maintenance expenses of Rs. 1,82,48,673/- to the parent company M/s SMA Demag AG Germany without deducting tax in India during the financial year 1999-2000 relevant to Assessment Year 2000-01. The Assessing Officer issued show cause notice as to why the payment of Rs.1,82,48,673/- should not be disallowed u/s 40(a)(i). It was submitted by the assessee that the amount of Rs. 1,82,48,673/- was not charged to profit and loss account relevant to Assessment Year. The amount represented the charges payable to SAP installation charges which were capitalized in the books of account under the head “computer” in the relevant Assessment Year. The amount referred to in the notice formed part of the total addition under the head “computer”. The assessee filed the copy of audited accounts showing the additions to the computer amounting to Rs.4,32,23,878/- which included the amount of Rs.1,82,48,673/-. Since the amount was not charged to profit and loss account, the provisions of sec. 40(a)(i) have no applicability. However, this contention of the assessee was rejected by the Assessing Officer relying on provisions of sec. 40(a)(i) under which deduction will not be allowable unless tax is deducted at source. The Assessing Officer also noted that assessee company had charged depreciation @ 60% u/s 32 of the Act on amount of Rs.1,82,48,673/- which was paid to its parent company. The Assessing Officer restricted the allowance of deduction to the extent of 50% allowable on computers which resulted in addition of Rs.54,74,602/-.

4. Before the ld. CIT(A) it was submitted that the expenditure of Rs.1,82,48,673/- was incurred on installation/maintenance of software and considering the nature of cost, the assessee had chosen to capitalize the said amount in the books of account. The amount was capitalized in the relevant Assessment Year. However, the remittance for the same was made only in 2006. It was also submitted that the payment was not in the nature of royalty for technical services. It was also admitted that the software was installed and used and payment for the same was made in 2006 and it was not chargeable to tax in the year under consideration. The assessee placed reliance on the decision of the I.T.A.T. in the case of Herbal Life International India Pvt. Ltd. v. ACIT 101 ITD 450. The ld. CIT(A), however, noted that nothing had been brought on record to establish that the said payment was not in the nature of interest/royalty/fee for technical services. It has been claimed by the assessee that the said amount of Rs.1,82,48,673/- was an expenditure towards installation/maintenance of software named SAP. Ld. CIT(A) relied on the decision of Hon’ble Madras High Court in the case of Corea & Brothers (CR) v. CIT 49 ITR 188 wherein it has been held that it was not largeness of the payments which were considered for capitalizing. It was the actual nature of payment which was to be examined. Since the expenditure was incurred towards installation of software, namely, SAP, the said payment was in the nature of royalty/fee for technical services/interest. This being so, there was no issue left for its being capitalized and subsequent claim of depreciation on the same. She accordingly held that the payment was in the nature of royalty/technical services for the said software. She also upheld the disallowance of depreciation claimed by the assessee.

5. Before us, the ld. A.R. of the assessee submitted that the payment made is not in the nature of royalty or fee for technical services. According to him, the expenditure was incurred towards installation of a software named SAP for which payment was made by the assessee. It was, therefore, submitted that since the payment was towards purchase of software it could not be treated as in the nature of royalty or fee for technical services. Ld.A.R. of the assessee further submitted that as per Article 24 of DTAA entered into between Republic of India and Federal Republic of Germany, the nationals of contracting state shall not be subject in other contracting state to any taxation or any requirement connected therewith which is more burdensome than the taxation and connected requirement to which nationals of other state in the same circumstances and under the same conditions are or may be subjected to. Ld. A.R. of the assessee also clarified that even if it is assumed for argument sake that the payment made to parent company was in the nature of royalty or fee for technical services, the same will not be liable for taxation under non-discriminatory clause contained in DTAA with Republic of Germany. According to him, the issue is covered by the decision of I.T.A.T. Delhi Bench in the case of HNS International India Pvt. Ltd. (supra). It was also submitted that the issue is also covered by the decision of I.T.A.T. in the case of Millennium Infocom Tech. Ltd. v. ACIT 117 ITD 114.

6. On the other hand, the ld. Sr. D.R. submitted that maintenance charges for software SAP are in the nature of royalty and, therefore, for deduction u/s 40(a)(i)) the tax at source has to be made. She placed reliance on several decisions including the decision of Hon’ble Supreme Court in the case of Transmission Corporation of A.P. Ltd. v. CIT 239 ITR 589. It was also submitted that nothing has been brought on record or submitted to establish that the said payment was not in the nature of interest/royalty/fee for technical services. She placed reliance on the decision of I.T.A.T. Delhi Bench in the case of HNS India v. DCIT 95 ITD 157(Del.) for the proposition that where assessee has not supplied relevant technical agreement before the lower authorities to state that the said payments to its parent company was outside the purview of royalty or fee for technical services. Since he assessee company has not been in a position to submit the copy of agreement between sub-contractor and has also not given the basis of amount paid to the contractor, such services were chargeable to tax in India as the amount has been paid on genuine basis and the provisions of sec. 195 were clearly attracted. It has also been submitted that assessee has made payment in the year under consideration to its parent company which is an admitted fact. Subsequent to its payment the treatment as capital expenditure has no nexus to the deduction of tax on said payments to the payee and burden to deduct TDS is not determined in the nature of outgo whether it was capital or revenue. Further, it was also submitted that the payment was royalty and, therefore, provisions of sec. 40(a) (i) were applicable. Ld. Sr. D.R. relying on the decision of I.T.A.T. in the case of Credit Llyonnais v. DCIT 2005-TIOL-102-ITAT-MUM submitted that in applying the non-discriminatory clause what is really to be seen is whether two persons were residents of the same state and were being treated differently. Hence assessee's case did not fall in the scope of non-discriminatory clause.

7. We have heard both the parties and gone through the material available from record. From the facts stated above, it is clear that the assessee had made payment for the purchase of software named as SAP. The assessee had capitalized the cost of installation of SAP in the books of account and has claimed depreciation as applicable to computers. The assessee while making payment in 2006 to the parent company has not deducted tax at source. The Assessing Officer had disallowed the claim of the assessee for depreciation on the ground that tax was not deducted u/s 40(a) (i)). U/s 40(a)(i) any interest (not being interest on loan issued for public before 1st April, 1938), royalty fee for technical services or sum chargeable under this Act, which is payable outside India or inside India to a non-resident not being a company or to a foreign company on which tax is deductible at source and such tax has not been deducted or, after deduction, has not been paid during the previous year or in the subsequent before the expiry of time prescribed under sub-sec. (1) of sec. 200 shall not be allowed as deduction while computing the income chargeable under the head "profits and gains of business or profession". From the language of sec. 40(a)(i), it is clear that payment made outside India should be in the nature of interest, royalty, fee for technical services or other sum chargeable under the Act. The Assessing Officer has simply reopened the assessment on the basis of information received from Additional DIT (International Taxation Range-2, New Delhi) and disallowed depreciation on assets capitalized in the books of account. The ld. CIT(A) has also not examined the nature of the expenditure incurred towards installation of software named SAP. She has treated the payment without any discussion in the nature of royalty/fee for technical services or interest. According to her, the payment made may fall in any of the categories. Apparently, the payment made towards installation of software is not in the nature of interest. The assessee had made payment to parent company for the purpose of software. The payment made for purchase of software cannot be treated either as royalty or even for technical services. Therefore, the payment for SAP software cannot be charged to tax in India as interest or royalty or fee for technical services. The ld. A.R. of the assessee has also contended that even if the income is chargeable to tax in India because of non-discrimination clause 24(1) of DTAA between Republic of India and Federal Republic of Germany, the nationals of a contracting state shall not be subjected in other contracting state to any taxation or any requirement connected therewith which is more burdensome than the taxation and connected requirement to which nationals of that other state in the same circumstances and under the same conditions are/or may be subjected. This provision shall, notwithstanding the provisions of Article 1, also apply to the persons who are the residents of one or of both the contracting states. In our considered opinion the payment made for acquisition of an asset whether it is a revenue expenditure or capital, provisions of section 40(a)(i) of the Act will not be applicable in case of resident assessee for assessment year 2000-01. Therefore, as per decision of ITAT in the case of Millennium Infocom Tech Ltd. (supra) and also in the case of Herbal Life International India Pvt. Ltd. v. ACIT (supra) because of non-discriminatory clause 24(1) of DTAA with India and Germany the foreign national cannot be subjected to provisions of section 40(a)(i) of the Act. Therefore, the ld. CIT (A) was not justified in holding that the amount paid by the assessee for acquisition of computers was chargeable to tax in India. Accordingly, this ground of appeal is decided in favour of the assessee.

8. As regards the claim of assessee for depreciation on assets capitalized, depreciation cannot be disallowed on the ground that at the time of remittance no tax was deducted at source. Provisions of section 40(a)(i) are not applicable for claim for deduction u/s 32 of the Act. Accordingly, in our considered opinion, the assessing officer was not justified in disallowing 50% of depreciation on the ground that provisions of section 40(a)(i) were applicable. However, the assessing officer will verify the fact whether the assets in respect of which expenditure has been capitalized have been used in business for period more than 180 days. If the assets have been used for more than 180 days, the assessing officer will allow full depreciation, as claimed by the assessee. The assessing officer is directed accordingly.

9. The next issue for consideration relates to not dealing with ground No. 6 for allowing the claim for depreciation in the subsequent year in which tax was paid. In view of the aforesaid discussion, this ground of appeal becomes in fructuous and dismissed as such.

10. The next issue for consideration relates to charging of interest under section 234- B and C of the Act. Since charging of interest under sections 234-B and C are consequential to the additions made, this ground of appeal being consequential in nature, requires no discussion.

11. In the result, the appeal filed by the assessee is partly allowed.

Hypo Tax--Is not income of assessee & no tax thereon

ITA NO. 1308/2008
COMMISSIONER OF INCOME TAX
Vs
Dr PERCY BATLIVALA

>1.The assessees in all these appeals are foreign nationals who came to India for specific purpose where they served as employees of the foreign companies. They are in fact employees of those foreign employers who were deputed to India during the relevant period. For the income in the nature of salaries earned by them, they filed their returns and paid taxes thereon as well. Dispute has arisen in respect of 'hypothetical tax', which term is used by the employer while fixing the salary of these assessees during their tenure in India. To demonstrate this, we take note of the nature in which salary of the assessee in ITA No.1308/2008 was fixed by his employer.

>2. The assessee Dr. Percy Batlivala is employed in the United States getting particular amount of salary from his employer. When he was to come to India on an arrangement with Indian company by his employer in US and the question of fixation of salary during the period of stay in India was discussed between the employer and employee, the employer assured that the net amount of salary to be received by the assessee, after payment of taxes, would be the same which the assessee was received in the US. The assessee was paying certain amount of tax in US on the salary earned by him there. The employer, after deducting that tax, calculated the net amount receivable by the assessee. Thereafter, it considered as to how much tax would be payable by the assessee on the income earned by him while his stay in India. Since the tax payable in India was lesser, difference in tax was assigned the terminology of 'hypothetical tax' and that amount was not given to the assessee thereby assuring the net amount which the assessee was supposed to receive in US.

>3. This can be demonstrated by the following example: Suppose in US, gross salary is Rs.100/-, of which Rs.25/- payable as tax, net amount receivable by the assessee in US would be Rs.75/-. Likewise, suppose in India tax payable is Rs.15/-. Since, the assessee is assured net amount receivable in US, he would get Rs.75/- and the difference of Rs.10/- is treated as 'hypothetical tax'.

>4. The assessee claimed the deduction of this hypothetical tax, which was rejected by the Assessing Officer (AO). The ITAT has, however, allowed the same. From the example which we have given above, it is clear that insofar as the assessee is concerned, he had received only Rs.90/- (that is Rs.75/- + Rs.15/-; Rs.10/- was not received at all in view of the nature of arrangement between the employer and the employee). Therefore, there was no question of addition of this hypothetical tax to the income of the assessee and asking the assessee to pay tax thereupon. There is no dispute that the assessee has paid tax on the actual salary received by him in India. Thus, even on the application of first principle and adopting commonsense approach, it is clear that the addition made by the AO on account of so-called hypothetical tax was unsustainable and the ITAT rightly deleted the said addition observing as under :-
"Tax equalization policy framed by the company provides that the company shall bear assessee's tax liability arising out of his foreign assignment. But company's liability will be restricted only to the extent of additional liability over and above that would have arisen had the assessee been in USA. Thus, if the assessee had no foreign assignment in India, for which he is to be compensated by net of tax salary. Total tax on salary comes to pay Rs.1500/- then as per Tax equalization Policy, company would compensate the assessee for his tax liability in India not Rs.1500/- but Rs.1000/- (Rs.1500-500/-)_. It is this amount of Rs.500/- which is subtracted as hypothetical tax in order to determine the total emoluments of the assessee. Total emoluments of the assessee are his actual salaries plus tax burden of Rs.1000/- reimbursed by the company. It is not proper to pay that Rs.1500/- as tax but only Rs.1000/- has accrued to the assessee as salary. Hence it was perfectly justifiable to remove the element of Rs.500/- from the total income as it never accrued to the assessee. We are not concerned as to what the assessee does in the US according to tax laws there. Whether he takes the credit of Indian taxes there or not, as was suggested by the Ld. DR. is not really our concern,. Our concern is whether he is paying the tax on income accruing and arising in India or not. In our opinion, the income arising in India in the present case is actual salary plus the incremental tax liability arising on account of Indian assignment. The question whether it is an application of income in quite redundant because Rs.500/- in the illustration above never accrued to the assessee. Thus in our considered opinion, assessee was justified in removing the element of hypothetical tax amounting to Rs.14,94,047/-."

>5. No question of law, therefore, arises. We accordingly dismiss all these appeals.