2023 (11) TMI 1102 - AT - Income Tax

Income taxable in India - reimbursement of expenses from the India subsidiaries - Royalty receipts - benefit of DTAA - assessee is a non-resident corporate entity incorporated in United States of America ( USA ) - Claiming that cost-to- cost reimbursement of software license expenses is not taxable in India under the provisions of India USA DTAA the assessee did not offer it to tax - HELD THAT - Assessee has entered into a separate agreement with Indian subsidiary, in terms of which, the Indian subsidiary provides certain back office support services to the assessee and gets remunerated at cost plus 15% mark-up. A reading of the draft assessment order certainly gives an impression that the AO has mixed up both the transactions and under a misconceived notation that the assessee has received markup over the cost of software, has proceeded to treat the receipts as royalty. Neither the Departmental Authorities have brought on record any material to establish that the reimbursement of cost to the assessee is inclusive of markup, nor at the time of hearing before us ,DR could place any evidence on record to demonstrate that the reimbursement of cost includes element of markup. Therefore, in our view, the cost-to-cost reimbursement of price paid towards software cannot be treated as royalty. Also the assessee has brought shrink-wrapped softwares, such as, Microsoft Windows, MS Officer etc. from third party vendors and distributed amongst other group entities located in various countries. Thus, the aforesaid fact itself demonstrates that the third party vendors are the real owners of the software having ownership over the IPR. The assessee has simply bought the softwares, which are copyrighted articles without having any right over the copyright. Therefore, when the assessee itself does not have any ownership over the copyright engrained in the software, there is no question of assessee transferring such right or right to use the copyright to the group entity. Thus, what the assessee has sold to the group entities are copyrighted articles and not right to use copyright, Therefore, assessee s case is clearly covered by the ratio laid down in case of Engineering Analysis Centre of Excellence Pvt. Ltd. (supra). 2021 (3) TMI 138 - SUPREME COURT Thus we hold that the amount received by the assessee towards reimbursement of cost of software is not taxable as royalty income under the treaty provisions. Accordingly, we direct the AO to delete the addition. Decided in favour of assessee.

Summary

Issues involved:
The judgment involves a dispute regarding the addition of reimbursement of expenses from Indian subsidiaries as royalty.

Details of the judgment:

1. Background and Dispute: The appellant, a non-resident corporate entity from the USA, challenged the final assessment order concerning the addition of reimbursement of expenses from Indian subsidiaries as royalty.

2. Facts and Assessment: The appellant procured software licenses from third-party vendors and received reimbursement from Indian subsidiaries. The Assessing Officer treated the receipts as royalty income due to a perceived markup, leading to the draft assessment order.

3. Appeal and Arguments: The appellant contended that the reimbursements were on a cost-to-cost basis without any markup. They emphasized the lack of ownership of copyright in the software, thus disputing the royalty classification.

4. Decision and Analysis: The tribunal observed that the reimbursements were indeed on a cost-to-cost basis, supported by invoices from third-party vendors. The Assessing Officer's confusion between software transactions and back-office support services led to the incorrect royalty classification.

5. Legal Precedent: Citing the Supreme Court case of Engineering Analysis Centre of Excellence Pvt. Ltd., the tribunal concluded that the reimbursements for software costs did not constitute royalty income under treaty provisions.

6. Final Verdict: The tribunal directed the Assessing Officer to delete the addition, ruling in favor of the appellant. The appeal was allowed, and the judgment was pronounced on 20th September 2023.