2012 (4) TMI 189 - AT - Income Tax

Method of accounting or royalty and assessment of reimbursement of expenses by the AO - Singapore based company - licensing of software to one of the customers which is its hundred per cent subsidiary - Held that - even if there is force in the argument that the interpretation may lead to delay in payment of tax, it will be useful only in such cases where the AO makes out a case that the delay was with a view to defer the payment of tax. In absence of such a finding by the AO, it is held that the argument is not applicable to the facts of this case. Accordingly, it is held that royalty and FTS are taxable on payment basis and not on accrual basis. Taxability of reimbursement of expenses - held that - royalties and FTS are taxable on payment basis, and reimbursement of traveling expenses will have to be included in the gross receipts for the purpose of taxation. Whether, the assessee is liable to pay surcharge?- held that - circular no. 734 does not mention anything about surcharge for the purpose of deduction of tax at source from payments by way of dividends, interest and royalties. What is good for the TDS is also good for the taxation. Therefore, it is held that the assessee is not liable to pay surcharge.

Issues Involved:
1. System of accounting and assessment of reimbursement of expenses.
2. Taxation of royalty/Fees for Technical Services (FTS) on gross amount.
3. Inclusion of reimbursement of certain expenses in receipts for tax purposes.
4. Chargeability of interest under section 234B.
5. Liability to pay surcharge.
6. Reconciliation of the receipts.

Detailed Analysis:

1. System of Accounting and Assessment of Reimbursement of Expenses:
The assessee, a Singapore-based company with no presence in India, licenses software to four customers in India, including its wholly-owned subsidiary CSC India Pvt. Ltd. The main issues are whether royalty/FTS should be taxed on a gross basis and whether reimbursements should be included in receipts for tax purposes. The assessee argued that reimbursements for SAP software, remote access facilities, and travel expenses should not be included in receipts as they are cost-to-cost reimbursements with no profit element. The Tribunal held that reimbursements for SAP licenses and RAS charges are not taxable in India as they are for third-party services, and any income would be business income, not taxable without a PE in India. However, travel expense reimbursements are taxable as they are incurred for earning royalty/FTS, which are taxed on a gross basis under Article 12 of the DTAA.

2. Taxation of Royalty/FTS on Gross Amount:
The Tribunal considered whether royalty/FTS should be taxed on an accrual or receipt basis. The assessee argued for taxation on a receipt basis as per the DTAA between India and Singapore. The Tribunal agreed, citing precedence that in case of conflict between DTAA and domestic law, DTAA prevails. Thus, royalty/FTS are taxable on a receipt basis, not accrual.

3. Inclusion of Reimbursement of Certain Expenses in Receipts for Tax Purposes:
The Tribunal analyzed whether reimbursements for SAP licenses, RAS charges, and travel expenses should be included in taxable receipts. It concluded that SAP and RAS reimbursements are not taxable as they are for third-party services. However, travel reimbursements are taxable as they relate to earning royalty/FTS, which are taxed on a gross basis under the DTAA.

4. Chargeability of Interest Under Section 234B:
The Tribunal examined whether the assessee is liable for interest under section 234B for non-payment of advance tax. The assessee argued that all its receipts are subject to TDS under section 195, hence not liable for advance tax. The Tribunal agreed, citing Delhi High Court judgments in Ericsson A.B. and Jacabs Civil Incorporated/Mitsubishi Corporation, holding that the assessee is not liable for interest under section 234B.

5. Liability to Pay Surcharge:
The Tribunal considered whether the assessee is liable to pay surcharge. The assessee argued that under the DTAA, only the tax rate is applicable without surcharge. The Tribunal agreed, noting that the CBDT Circular No. 734 does not mention surcharge for TDS on dividends, interest, and royalties. Therefore, the assessee is not liable to pay surcharge.

6. Reconciliation of the Receipts:
The Tribunal addressed a discrepancy of Rs. 41,369 in the reconciliation of receipts, attributed by the assessee to foreign exchange fluctuations. Both parties agreed to restore this matter to the AO for verification. The Tribunal directed the AO to reconcile the amount and decide the gross amount of royalty/FTS liable for taxation on a payment basis.

Conclusion:
The appeal was partly allowed, with the Tribunal holding that royalty/FTS are taxable on a receipt basis, reimbursements for SAP licenses and RAS charges are not taxable, travel reimbursements are taxable, the assessee is not liable for interest under section 234B, and not liable to pay surcharge. The matter of reconciliation of receipts was remanded to the AO for verification.

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