2014 (3) TMI 726 - AT - Income Tax

Treatment of data processing cost as Royalty Obligation to deduct TDS u/s 40(a)(i) of the Act - Whether the reimbursement of data processing cost amounts to royalty or not Held that - The payment by the Branch for use of computer software is not the right in the copy right but only for doing the work from the said software which subsist in the copy right of the software - The branch is using the computer software and the I.T. resources installed at Belgium for which the payment is made by the Head Office towards the use of such software license - The character of payment towards royalty depends upon the independent use or the right to use of the computer software, which is a kind of copy right. In the present case, the payment made by the Branch is not for use of or right to use of software which is being exclusively done by the Head Office only, installed in Belgium - The payment made by the Branch to the H.O. towards reimbursement of cost of data processing cannot be held to be covered within the scope of expression royalty under Article 12(3)(a) of the India Belgium DTAA - thus, the data processing cost paid by the assessee does not amount to royalty, consequently, there is no requirement for deducting tax at source on such payment thus, the provisions of section 40(a)(i) will not apply the order of the CIT(A) upheld Decided against Revenue. Scope of Article 12(3)(a) of DTAA between India and Belguim Held that - It covers only a payment for the use of, or the right to use of, any copyright, patent, design or model, plan, secret formula or process, trademark, or other like property or right - the payment made by the Indian company is not for the use of, or right to use of, software, the payment is for data processing - Be that as it may, even if stand of the revenue is to be upheld and it is to be concluded that the payment is made for software per se, that does not lead to taxability of receipt in the hands of the Australian company either - the payment for software is for a copyrighted article and not copyright per se is not covered by the scope of payment for copyright Relying upon Motorola Inc. v. Dy. CIT 2005 (6) TMI 226 - ITAT DELHI-A - It is not every property or right which can be covered by these expressions appearing in the end of article 12(3)(a), because, following the principles of ejusdem generis meaning of the general words following the specific words have to take colour from the specific words preceding it. When that property or right, even if it so exists, is not of the nature of any of the specific categories set out in article 12(3)(a), it cannot be covered by the general words following those categories either thus, the provisions of article 12(3)(a) cannot be invoked. Head office expenditure - Clubbing of data processing expenses with genera administrative expenses u/s 44C(iv) of the Act Held that - Relying upon Inspecting Assistant Commissioner Versus Goodricke Group Limited 1985 (2) TMI 81 - ITAT CALCUTTA-E - the Head Office expenses are restricted to executive and general administrative expenses only, as defined in Explanation (iv) to section 44C and it does not apply in respect of each and every expenses incurred by the H.O - The data processing cost pertains to allocation of expenses incurred by the Head Office on prorata basis for the banking application software acquired by the Head Office - expenditure does not fall within the meaning of Head Office Expenses as provided in section 44C - The nature of expenses as given in section 44C, has to be necessarily in the nature of executive and general administrative expenses only the order of the CIT(A) upheld Decided against Revenue. Disallowance of Interest Held that - As decided in assessee s own case for the previous year, it has been held that, CIT(A) has deleted the disallowance on merit but has also held that the amount has already been disallowed by the assessee on account of failure to deduct the tax at source the assessee had itself disallowed the said amount on account of failure to deduct the tax at source and further disallowance will lead to double disallowance - There was no merit in the grounds raised by the Revenue Decided against Revenue.

Issues Involved:

1. Whether the data processing cost paid by the assessee amounts to 'Royalty.'
2. Whether the Indian branch of the assessee was obliged to deduct tax at source on the data processing cost paid to the Head Office.
3. Whether the data processing expenses should be clubbed with general administrative expenses.
4. Whether the disallowance of interest to the extent of Rs. 58,20,110/- amounts to double addition.

Issue-Wise Detailed Analysis:

1. Data Processing Cost as 'Royalty':

The Revenue challenged the Commissioner (Appeals)'s decision that the data processing cost paid by the assessee does not amount to 'Royalty' and is only business income of the Head Office. The assessee, Antwerp Diamond Bank N.V., argued that the data processing cost was for the use of the software "Flexcube," which was acquired by the Head Office from an Indian software company and used by the Indian branch through a server located in Belgium. The payment was a reimbursement of expenses incurred by the Head Office on a prorata basis for the use of the said resources. The Commissioner (Appeals) agreed with the assessee, holding that the payment was not for the use of or the right to use any copyright but was merely for processing the data. This was supported by the decision in Kotak Mahindra Primus Ltd. v/s DDIT, where similar payments were not considered 'royalty' under the Indo-Australian DTAA. The Tribunal upheld this view, stating that the payment did not fall within the ambit of 'royalty' under Article 12(3)(a) of the Indo-Belgium DTAA, as the branch did not have exclusive and independent use or control over the software.

2. Obligation to Deduct Tax at Source:

The Revenue contended that the Indian branch was required to deduct tax at source on the data processing cost paid to the Head Office under section 195 of the Income Tax Act, 1961. The Tribunal, however, held that since the data processing cost did not amount to 'royalty,' there was no liability to deduct tax at source. Consequently, the provisions of section 40(a)(i) were not applicable, and the issue was dismissed.

3. Data Processing Expenses and General Administrative Expenses:

The Revenue argued that the data processing expenses should be clubbed with general administrative expenses and subjected to the restrictive limit under section 44C. The Tribunal, however, agreed with the Commissioner (Appeals) that data processing expenses were directly related to the banking business and did not fall within the purview of general administrative expenses under section 44C. The Tribunal upheld the decision that such expenses should be allowed as business expenses and not clubbed with general administrative expenses.

4. Disallowance of Interest:

The Revenue challenged the deletion of the disallowance of interest to the extent of Rs. 58,20,110/-. The Commissioner (Appeals) observed that the assessee had already disallowed this amount on account of failure to deduct tax at source, and further disallowance would lead to double addition. The Tribunal upheld this view, noting that the issue was covered by the decision of the Special Bench in Sumitomo Mitsui Banking Corporation v/s DDIT and the Tribunal's decision in the assessee's own case for the assessment year 2005-06. The ground was dismissed.

Conclusion:

The Tribunal dismissed the Revenue's appeal, affirming the Commissioner (Appeals)'s findings that the data processing cost did not amount to 'royalty,' there was no obligation to deduct tax at source, the data processing expenses should not be clubbed with general administrative expenses, and the disallowance of interest would result in double addition.

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