Infotech Enterprises Limited v Additional Commissioner of
Income Tax, 03 February 2014
In favour of: The assessee; Royalty —
Software — India–Netherlands DTAA — Article 12 — Assessee purchased software
from Dutch company and bundled it with its own software to be sold to its own
customers, both in India and abroad — As payment is made to a non-resident
company, AO held that payment represented royalty to Dutch company and not
purchase price — AO noticed that tax was not deducted at source u/s 195(1), and
thus disallowed expenditure u/s 40(a)(i) — DRP upheld order of AO — Held, amount
in question is not taxable u/s 9(1)(i) — Even if it is assumed that there is a
business connection between assessee and foreign software supplier, there are no
operations in India of foreign company to which income may be reasonably
attributed — Assessee cannot meddle with copies of software in process of its
customisation — Thus, payments made by assessee to Netherlands company will not
fall under ambit of Royalty as per Art 12 of India–Netherlands DTAA — Hence,
there is no question of tax withholding required by assessee and hence s
40(a)(i) disallowance is erroneous.
ITA No 115/Hyd/2011 and 2184/Hyd/2011,
Assessment Years: 2006–2007 and
2007–2008,
B Ramakotaiah, AM and Asha Vijayaraghavan,
JM,
Decided on: 16 January 2014.
Held:
The decision in the case of GE India
Technology Centre Pvt Ltd v CIT 327 ITR 456 has clearly stated that the
obligation to deduct tax at source is however limited to appropriate proportion
of income chargeable under the Act forming part of the gross sum of money
payable to the non-resident. In other words, if the tax is not so assessable,
there is no question of tax at source being deducted. Hence, the short point is
that one has to see whether the amount of ₨ 52,55,881 represents amount
chargeable to tax in the hands of the non-resident both in terms of s 9(1)(i)
and 9(1)(vi) of the IT Act and also DTAA between India and Netherlands. (Para
24)
The amount in question is not taxable u/s
9(1)(i) because even assuming for a moment there is a business connection
between the assessee and the foreign software supplier there are no operations
in India of the foreign company to which income may be reasonably attributed to
as required under Explanation 1(a) to s 9(1)(i). Hence there is no applicability
of s 9(1)(i) in the instant case. (Para 25)
ITAT was of the opinion that they are simply
purchase cost of trading goods especially when the licence in respect of
software is not obtained by the assessee and the perpetual licence is given
directly to the end customer by the vendor company. Copies of the invoice raised
by Net Work Solutions on the assessee support the view of the assessee where the
invoice mentioning name of the end customer supports. Hence, when there is no
transfer of even the license to the assessee even though it is the purchaser, it
cannot be said that there is any royalty payment by the assessee to the vendor
company. The amount of ₨ 52,55,81 is simply the cost of imported trading goods
and not royalty payment. (Para 26)
It is therefore clear that the payments made by
assessee to the Netherlands company will not fall under the ambit of Royalty as
per Art 12 of the India–Netherlands DTAA. Hence there is no question of tax
withholding required by the assessee and hence s 40(a)(i) disallowance is
erroneous. (Para 27)
Ratio decidendi:
When the assessee purchased the software from
the foreign company and bundled it with its own software without customising it
to sell it to its own customers, the purchase consideration cannot be treated as
Royalty u/s 9(1)(vi).
In favour of: The assessee;
Non-Resident — Business Connection — Fee for technical services — Assessee
entered into agreements with foreign AEs for supply and services of computer
software — Assessee incurred expenditure towards technical consultancy charges
paid in foreign exchange to AEs outside India — AO held that assessee had
habitually engaged its subsidiaries to render software services and consultancy
services to foreign parties abroad and that foreign subsidiaries were paid
periodically by taxpayer for services rendered — AO thus held income of
subsidiaries as deemed to have been accrued or arisen in India during year and
applied provisions of s 9(1)(i) and accordingly, non-resident companies had
business connection with taxpayer — While dealing with communication expenses,
AO opined that payments made by taxpayer are in nature of fees for technical
services and consequently, provisions of s 195 are applicable and disallowed
amount for non-deduction of tax at source — DRP upheld action of AO — Held,
assessee has not canvassed/secured any orders for its non-resident subsidiaries,
hence, s 9(1)(i) cannot be invoked — Under Act, payments made to subsidiaries
may be construed as Fees for Technical Services, however this is only due to
fact of retrospective amendment by Finance Act 2010 — At time of payment, case
of Ishikawajima-Harima was law of land and twin condition laid down of rendering
and utilising technical service in India was not satisfied in assessee’s case as
foreign subsidiaries rendered service which was utilised by clients — Thus,
assessee could have been of bonafide belief that TDS was not necessary on
payments to foreign subsidiaries — Furthermore, assessee could not have been
expected to know that TDS should have been deducted in accordance with a law
that was to be brought in subsequently — Hence any disallowance u/s 40(a)(i)
based on application of a retrospective amendment which assessee could not have
foreseen is erroneous — Hence disallowance u/s 40(a)(i) cannot be upheld.
Held:
With respect to IEAI USA, factually the assessee
has secured the orders from PRATT (PWC) for its own benefit and it only parceled
out a portion of the work entrusted to it by PRATT & WHITNEY to IEAI USA.
The said Explanation to s 9(1)(i) can be invoked only when the Indian company
secures orders for the benefit of non-resident. In the present case, the
assessee has not canvassed/secured any orders for its non-resident subsidiaries.
Hence, s 9(1)(i) cannot be invoked. (Para 36)
Assessee obtained orders on its own behalf and
it has only parcelled out a portion of its work to its foreign subsidiaries. As
per the terms of the agreement, the assessee “shall release the work order”
before the commencement of the work by IEAI USA and each work order shall be
supported by end customers order copy. (Para 37)
Operation transactions were effected at arms
length price. Foreign subsidiaries do not work exclusively for the assessee and
they obtain orders on their own from other foreign parties and also sub contract
the work to the assessee depending on exigencies. (Para 38)
No operations have been undertaken by foreign
subsidiaries in India and no engineers have been deputed by them to India and
even they do not have permanent establishment in India. In terms of the
respective DTAA, no income of the foreign subsidiary is taxable in India in
terms of either s 9(1)(i) or the concerned Articles relating to business profits
(Art 7 rw Art 5) in the respective DTAAs. As submitted by the assessee, the
Board Circular No 29 dated 27 March 1969 is inapplicable to the present case as
the example given by the Board, the non-resident is the parent company whereas,
in the present case, the Indian Company is the parent company and the assessee
has not sold the products of its US subsidiaries or any other foreign
subsidiaries. The contention of the assessee that the rate of tax in India is
lesser than the rates in USA is also well taken. Hence there is no income
taxable in India u/s 9(1)(i) and hence no requirement for TDS and there can be
no application of s 40(a)(i). (Para 39)
DRP in its order seem to have held that the
entire amount paid by assessee to its foreign companies may be regarded as Fees
for Technical Services u/s 9(1)(vii). Firstly, under the Act, the payments made
to the subsidiaries may indeed be construed as Fees for Technical Services.
However this is only due to the fact of the retrospective amendment by Finance
Act 2010. (Para 41)
At the time of the payment in the instant case
Ishikawajima-Harima was the law of the land and the twin condition laid down of
rendering and utilising the technical service in India was clearly not satisfied
in the assessee’s case as the foreign subsidiaries rendered the service which
was utilised by the clients (such as PWC). Thus the assessee could have been of
the bonafide belief that TDS was not necessary on payments to the foreign
subsidiaries. Furthermore, the assessee could not have been expected to know
that TDS should have been deducted in accordance with a law that was to be
brought in subsequently. Hence any disallowance u/s 40(a)(i) based on the
application of a retrospective amendment which the assessee could not have
foreseen is wholly erroneous. Hence under the Act the disallowance u/s 40(a)(i)
for FTS payments cannot be upheld. (Para 42)
Even under the India–USA and India–UK treaties
(not the India–Germany treaty though) due to the presence of the “make
available” clause in these two Treaties the payments made by the assessee will
not fall under FTS. This is because no technical knowledge has been made
available by the non-resident to the assessee. Further, no technical plan or
technical design placement has been transferred by US subsidiary to the
assessee. What IEAI did was only in fulfilment of contractual requirement with
PRATT & WHITNEY and not for the benefit of the assessee. The non-resident
has simply executed the portion of work parcelled out to it by the assessee.
(Para 43)
In the instant case, the UK and USA subsidiaries
did only contractual work parcelled out to it whose results were given to
clients directly and no technical knowledge was made available to assessee.
Hence, even under the respective DTAA, the payments made to UK and US
subsidiaries/companies would not fall under the ambit of FTS. (Para 44)
In any case, as we have shown above, under the
IT Act, none of the payments made by the assessee can be disallowed u/s 40(a)(i)
based on effect of retrospective amendment of Explanation to s 9(1). (Para
47)
Ratio decidendi:
Disallowance u/s 40(a)(i) cannot be made based
on the application of a retrospective amendment which the assessee could not
have foreseen.
