2022 (2) TMI 920 - AT - Income Tax

Addition as Fees for Included Services FIS - appellant is a company incorporated under the laws of the United States of America and is engaged in the business of providing design and development services and engineering services of vehicle safety systems - HELD THAT - Technical knowledge or skills provided by the assessee should be imparted to and absorbed by the receiver Autoliv India Pvt. Ltd so that the receiver can deploy similar technology or technique in future without depending upon the assessee. Technology only will be considered as made available when the person acquiring such knowledge is possessed of the same enabling him to apply in future at his own. If the services are consumed in the provision without leaving anything tangible with the payer for use in future, then it will not be characterized as making available of the technical services notwithstanding the fact that its benefit flowed directly and solely to the payer of the service - What is necessary is that the service provider should transmit the technical knowledge to the payer so that the payer makes use such technology in future without involvement of the service provider. Considering the facts in totality in light of the relevant article of India US DTAA, we are of the considered view that the engineering fees received by the assessee are not taxable in India. Ground No. 2 with all its sub-grounds is allowed. Taxation of software reimbursements as Royalty - assessee strongly contends that reimbursements sought by the assessee represent recovery of expenses incurred by it, on behalf of Autoliv India, on an at-cost basis - HELD THAT - Reimbursement towards software charges will not qualify as royalty u/s 9(1)(vi) of the Act as well as under DTAA for the simple reason that it is not a case of the assessee possessing any right for use or right to use computer software in the first place for it to transfer such right to Autoliv. Article 12(3A) of the India USA DTAA provides royalty which means consideration received inter alia for use or right to use any copyright of a literary, artistic or scientific work. We are of the considered view that the assessee has not received consideration for granting a right to use any copyright in computer software from Autoliv. We find that the lower authorities have heavily relied upon the amendment brought in the statute in 2012. But the facts of the case in hand are squarely covered in favour of the assessee and against the Revenue by the Hon'ble Supreme Court in a land mark judgment in the case of Engineering Analysis Center of Excellence Pvt Ltd 2021 (3) TMI 138 - SUPREME COURT Since the term Royalty has been defined in the DTAA, definition of the term Royalty under the Act cannot be applied. Considering the facts of the case in totality, we hold that reimbursement towards software charges received by the assessee from Autoliv is not taxable since the same does not represent any income in the hands of the assessee and further, in light the decision of the Hon'ble Supreme Court, in the case of Engineering Analysis Centre of Excellence Pvt Ltd supra , reimbursement towards software charges are not taxable as royalty as well. We, accordingly, direct the Assessing Officer to delete the impugned addition. Ground No. 3, with all its sub grounds is allowed.

Summary

Issues Involved:
1. Addition of ?70,01,452/- as Fees for Included Services (FIS).
2. Taxation of software reimbursements of ?3,53,693/- as Royalty.
3. Non-issue of refund and interest on income tax refund under section 244A of the Income-tax Act.
4. Levy of interest under sections 234D and 234A of the Income-tax Act.

Detailed Analysis:

1. Addition of ?70,01,452/- as Fees for Included Services (FIS):
- The appellant, a US-based company, provided engineering services to Autoliv India for developing vehicle safety systems for Ford cars in India. The Assessing Officer (AO) treated the revenue from these services as Fees for Technical Services (FTS) under Article 12 of the India – US DTAA, asserting that the services made available technical knowledge and skills.
- The Tribunal found that the appellant did not transfer or make available any technology, skill, or knowledge to Autoliv India. The engineering services were rendered from the US, and no employees visited India. The services involved coordination and interaction with Ford's technical personnel and providing analysis to Autoliv India.
- The Tribunal referenced the Memorandum of Understanding (MOU) to the DTAA and the judgment of the Karnataka High Court in De Beers India Minerals Pvt Ltd, concluding that technical knowledge must be imparted and absorbed by the recipient for it to be considered "made available." Since Autoliv India could not apply the technology independently in future projects, the engineering fees were not taxable as FIS in India. The Tribunal allowed the assessee's ground, ruling that the engineering fees were not taxable in India.

2. Taxation of software reimbursements of ?3,53,693/- as Royalty:
- The appellant centrally purchased software from third-party vendors for its group companies, including Autoliv India, and claimed the reimbursements as "at-cost" without any profit element. The AO treated these reimbursements as royalty under section 9(1)(vi) of the Act and Article 12 of the DTAA.
- The Tribunal found that the reimbursements were purely for expenses incurred by the appellant on behalf of Autoliv India. The appellant did not render any services or earn any profit from these reimbursements. The Tribunal referenced the Supreme Court ruling in A P Moller Maersk AS, which held that "at-cost" reimbursements are not taxable as FTS.
- The Tribunal further noted that the appellant did not possess any right to use the software to transfer such a right to Autoliv India. The Tribunal cited the Supreme Court judgment in Engineering Analysis Center of Excellence Pvt Ltd, which clarified that payments for software licenses are not royalties if they do not grant the right to use the copyright.
- The Tribunal concluded that the software reimbursements did not represent income and were not taxable as royalty. The AO was directed to delete the addition.

3. Non-issue of refund and interest on income tax refund under section 244A of the Income-tax Act:
- The appellant contended that it had not received any refund in its bank account, and therefore, there was no question of charging interest under section 244A.
- The Tribunal directed the AO to verify the appellant's claim and decide the issue afresh.

4. Levy of interest under sections 234D and 234A of the Income-tax Act:
- The appellant raised grounds regarding the levy of interest under sections 234D and 234A.
- The Tribunal noted that these grounds were consequential in nature and directed the AO to decide the issue afresh as per the provisions of law.

Conclusion:
- The Tribunal allowed the appeal of the assessee, ruling in favor of the appellant on all substantive grounds. The engineering fees were not taxable as FIS, and the software reimbursements were not taxable as royalty. The AO was directed to verify the refund issue and decide the levy of interest afresh.