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2016 (10) TMI 1218 - AT - Income TaxRoyalty - data processing cost paid by the assessee - TDS liability on data processing cost paid by the assessee to the head office - Existence of Permanent Establishment (PE) of the foreign bank - Scope of amendment to ection 9(2) - DTAA between India and Germany - Held that - the impugned 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 - Decided in favor of assessee.
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 payments made to the Head Office for data processing costs. 3. Applicability of the definition of 'Royalty' under the Income Tax Act vis-à-vis the definition under the DTAA. 4. Deductibility of interest payable by the Indian Permanent Establishment to its Head Office. 5. Taxability of interest income payable by the Indian PE to its Head Office and branch offices abroad. 6. Requirement of TDS on the amount of interest paid to the Head Office by the Branch Office. Detailed Analysis: Issue 1: Data Processing Cost as 'Royalty' The Tribunal observed that the assessee, engaged in banking, used a software named "Flexcube" acquired by its Head Office, which was used globally. The Mumbai Branch used this software via servers in Belgium. The Tribunal noted that the Head Office had non-exclusive, non-transferable rights to the software, and the Branch merely reimbursed the Head Office for data processing costs. The Tribunal concluded that such reimbursement did not constitute 'Royalty' under Article 12(3)(a) of the India-Belgium DTAA, as the Branch did not have independent rights to use the software. The Tribunal's decision was consistent with earlier years and similar cases, including the decision in Kotak Mahindra Primus Ltd. Issue 2: TDS on Data Processing Cost Since the Tribunal held that the data processing cost did not amount to 'Royalty', it followed that there was no requirement for the Branch to deduct tax at source on such payments. Consequently, the provisions of section 40(a)(i) of the Income Tax Act were not applicable. Issue 3: Definition of 'Royalty' under Income Tax Act vs. DTAA The Tribunal reiterated that when the assessee opts for the benefit of the DTAA, the definition of 'Royalty' under the DTAA prevails over the definition in the Income Tax Act. The Tribunal referenced the Bombay High Court's decision in Siemens Aktiongesellschaft and the Delhi High Court's decisions in Nokia Network and Ericson AB, which supported this interpretation. The amendments to section 9(1)(vi) by the Finance Act, 2012, were not applicable to the DTAA. Issue 4: Deductibility of Interest Payable to Head Office The Tribunal noted that the issue of interest paid by the Indian PE to the Head Office had been consistently decided in favor of the assessee in earlier years. The Special Bench in Sumitomo Mitsui Banking Corpn., where the assessee was a party, had also ruled in favor of the assessee. Therefore, the Tribunal upheld the CIT(A)'s decision allowing the deduction of such interest. Issue 5: Taxability of Interest Income Payable to Head Office The Tribunal followed the consistent judicial precedence that the interest income payable by the Indian PE to its Head Office and branch offices abroad could not be taxed in India. This was in line with the earlier decisions in the assessee's own case and the Special Bench's ruling in Sumitomo Mitsui Banking Corpn. Issue 6: TDS on Interest Paid to Head Office Given that the interest paid by the Branch to the Head Office was not taxable in India, the Tribunal held that there was no requirement for TDS on such payments. This decision was consistent with the earlier rulings in the assessee's case. Alternative Plea: Disallowance under Section 14A The Tribunal dismissed the additional plea raised by the Department for disallowance under section 14A on the interest expenditure. The Tribunal noted that this issue was neither raised by the Assessing Officer nor discussed by the CIT(A), and thus could not be introduced at this stage without foundational facts. Conclusion: The Tribunal dismissed the Department's appeal and upheld the CIT(A)'s order, following consistent judicial precedence in the assessee's favor for earlier years. The Tribunal's decision was pronounced in the open court on 26th October, 2016.
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