2015 (4) TMI 1343 - AT - Income Tax

Addition made on account of data processing cost - addition u/s 40(a)(ia) on interest to head office - HELD THAT - Issue decided in favour of assessee as relying on own case 2014 (3) TMI 726 - ITAT MUMBAI 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. Accordingly the conclusion drawn by the learned Commissioner (Appeals) is affirmed. Since we have already held that 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. Therefore the provisions of section 40(a)(i) will not apply. Deduction u/s 44C - 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. Such 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 conclusion drawn by the learned Commissioner (Appeals) that such expenditure does not fall within the purview of section 44C. Thus as 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. Thus the ground no.4 is also dismissed

Summary

Issues involved:
1. Addition made on account of data processing cost.
2. Deduction under Section 44C of the Income Tax Act.
3. Interest paid to the head office.

Detailed Analysis:

1. Addition made on account of data processing cost:

The primary issue was whether the reimbursement of data processing cost amounted to "royalty." The Tribunal observed that the assessee, engaged in banking, used a software named "Flexcube" acquired by the head office and located in Belgium. The Mumbai branch used this software for data processing and reimbursed the head office on a prorata basis for the cost incurred. The Tribunal noted that the payment was for the processing of data and not for the use or right to use the software, which is a requirement to classify a payment as "royalty" under Article 12(3)(a) of the India-Belgium DTAA. The Tribunal concluded that since the branch did not have independent rights to use the software, the reimbursement did not constitute "royalty." Consequently, there was no requirement to deduct tax at source under Section 40(a)(i).

2. Deduction under Section 44C of the Income Tax Act:

The issue pertained to whether the data processing cost could be considered as "Head Office Expenses" under Section 44C. The Tribunal referred to the Special Bench decision in Goodricke and other cases, which clarified that head office expenses are restricted to executive and general administrative expenses. The Tribunal held that the data processing cost, being an allocation of expenses for banking software, did not fall within the definition of "Head Office Expenses" under Section 44C. Thus, the Tribunal upheld the decision that such expenditure was not covered under Section 44C.

3. Interest paid to the head office:

The Tribunal addressed the issue of disallowance of interest paid by the Indian branch to the overseas head office. It was noted that the assessee had already disallowed the amount for failure to deduct tax at source. The Tribunal referred to the Special Bench decision in ABN Amro Bank N.V. and Sumitomo Mitsui Banking Corporation, which established that transactions between a branch and its head office do not result in income as they are the same legal entity. Therefore, the interest payment could not be considered as income. The Tribunal affirmed that any further disallowance would lead to double addition, which was not permissible.

Conclusion:

The Tribunal, following its earlier decisions in the assessee's own case and other relevant case laws, allowed all three grounds in favor of the assessee. The reimbursement of data processing cost was not classified as "royalty," the data processing cost did not fall under "Head Office Expenses" as per Section 44C, and the interest paid to the head office was not disallowed beyond the amount already disallowed by the assessee. The appeal of the assessee was thus allowed.