9911796707
TMI Blog2017 (3) TMI 1379X X X X Extracts X X X X X X X X Extracts X X X X ..... the terms of new agreement shall now govern the rights and obligations of the parties, then we hold that the said agreement between the parties is a new royalty agreement and not an extension of old agreement. Under section 115A of the Act, it is provided that in case any new royalty agreement is entered into after first day of June, 2005, the applicable tax rates on the royalty income would be 10% plus surcharge and education cess. - Decided in favour of assessee Tax rate to be applied on the amount recovered by the assessee for recharge of supply of SAP software - case of the Revenue was that the same is to be taxed @ 20% in view of DTAA between India and Italy, whereas the case of assessee was that the provisions of section 115A of the Act were to be applied and the same is to be taxed @ 10% plus surcharge plus education cess - Held that:- In the succeeding year, the assessee had entered into an agreement with recipient company. The DRP while passing the order relating to assessment year 2011-12 had held the receipts to be royalty but by an order of rectification under section 154 of the Act, the same is held to be taxable @ 10% plus surcharge plus education cess. Even in as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2011-12 passed under section 143(3) r.w.s. 144C(5) and 144C(13) r.w.s. 143(3) of the Income Tax Act, 1961 (in short the Act ). 2. Both the appeals relating to the same assessee were heard together and are being disposed of by this consolidated order for the sake of convenience. However, reference is being made to the facts and issue in ITA No.309/PUN/2015 to adjudicate the issue. 3. First, we shall take up the appeal filed by the assessee in ITA No.309/PUN/2015, wherein the assessee has raised the following grounds of appeal:- 1. Ground 1 : Royalty received under the Royalty Agreement should not be taxed @ 20% - ₹ 37,80,66,508 1.1. Applicability of tax rate a) Erred in facts and in law in holding that the Royalty Agreement dated 1 April 2008 is not a new agreement and hence, in considering the Royalty Agreement as an extension of the License and Technical Assistance Agreement dated 27 March 1998 and to apply tax rate of 20% under the India-Italy DTAA instead of 10.56% under section 115A of the Act. b) Erred in facts and in law in holding that there are no changes in the Royalty Agreement dated 1 April 2008 and the License and Technical Assistance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion with implementation of SAP software is not eligible for the rate of 10.5575% as per the provisions of section 115A(1)(b)(BB) of the Act. 5. Ground 5 : Amount recovered towards reimbursement of expenditure- ₹ 35,33,373 5.1 Reimbursement not taxable a) Erred in facts in not appreciating that the following receipts are towards reimbursement and do not have any element of income in the hands of the Appellant, and hence are not chargeable to tax. a) Re-work charges - ₹ 314,573 b) Insurance cost - ₹ 3,218,800 b) Further, erred in facts and in law in enhancing the income of the Appellant by the said amounts 5.2 Not in the nature of royalty Erred in facts and in law in holding that the above receipts are in connection with implementation of SAP software, and hence, are in the nature of royalty which are chargeable to tax under the provisions of the Act as well as under the India-Italy tax treaty. 5.3 Applicability of tax rate Erred in facts and in law in holding that the amount received for providing services in connection with implementation of SAP software is not eligible for the rate of 10.5575% as per the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ranges of three and four-wheeled light goods transport vehicles. The Piaggio Group has factories in Italy, Spain, India and the Peoples Republic of China and sales network in 55 countries in every continent. In 2009, the Piaggio Group sold 607,700 vehicles in the world, 410,300 of which in the 2-wheeler business and 197,400 in Commercial Vehicle business. The core Company of the Piaggio group is Piaggio C.S.p.A. located in Pontedera (Pisa, Itly). The Company was primarily into light wheeled transport sector, which comprises 2, 3 and 4 wheeled vehicles. The assessee Company received royalty income and technical fees for the services rendered for SAP implementation and fees for TP consultancy rendered in India to its associate enterprises namely Piaggio Vehicles Pvt. Ltd., Baramati, India and the same was offered to tax as detailed below:- Sr No Nature of receipt Amount Offered for tax @ Remarks 1 Royalty on 3 wheeler 37,80,66,508 10.5575% U/s 115A rws 195A As per agreement dated 01/08/2008 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee) and PVPL 30/10/2003-for 10 years for use of trade mark, production, distribution, sell and service of the licensed products- royalty @5% of net ex-factory sale 15180804 20% as per DTAA between India and Italy 2 License to use trademarks and patent and know how to produce and sell the three Wheeled vehicles between P C and PVPL 01/04/2008 for 10 years 2.5% royalty on net ex-factory turnover. 378066508 10.5575% + SC+EC u/s 115A 3 Technology license agreement for manufacture of four wheeled vehicles for goods transportation between P C and PVOL 03/03/2004 for 10 years royalty @ 5% on net ex-factory turnover 83643207 20% as per DTAA between India and Italy TOTAL 47,68,90,519 6. The Assessing Officer further noted that the Agreement mentioned at serial No.2 dated 01.04.2008 was extension of agreement referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10.5575% + SC+EC u/s. 115A (iv) Fees for third party services and employee cost No Agreement 44545981 10.5575% + SC+EC u/s. 115A (v) Fees relating to transfer pricing consultancy No Agreement 2655812 10.5575% + SC+EC u/s. 115A Total 14,36,49,682 10. The Assessing Officer noted that there was no agreement for providing above mentioned technical services, therefore, the provisions of section 115A of the Act were not applicable to the said transaction. The Assessing Officer was of the view that the fees for technical services were to be taxed in India @ 20% as per DTAA provision between India and Italy. Accordingly, show cause notice in this regard was also issued to the assessee. 11. Another item of receipt in the hands of assessee was on account of recovery of expenses of ₹ 53,439/- which was related to with the services provided by the assessee to its associate enterp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was accepted and the fees for technical services received by the assessee as per agreement dated 25.02.2008 was taxed @ 10.55%. 14. The Assessing Officer further considered the submissions of the assessee regarding fees for SAP implementation and fees relating to transfer pricing consultancy, wherein the reply of assessee is reproduced at pages 20 and 21 of the assessment order. The first aspect which was decided by the Assessing Officer was whether the license fees received by the assessee is chargeable to tax in India under the Act. The Assessing Officer took note of relevant provisions of royalty as per section 9(1)(vi) of the Act and considered the nature of payment and the definition of computer software as provided in Explanation (3) under section 9(1)(vi) of the Act. The Assessing Officer was of the view that the payment for right to use software was in the nature of royalty and taxable as per clause (v) of Explanation (2) of section 9(1)(vi) of the Act. Reference was also made to the Finance Act, 2012, wherein it has been clarified that the right to use computer software, including granting of license, is royalty as per Explanation (4). In view thereof, the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in CIT Vs. S amsung Electronics Co. Ltd. in ITA No.2808/2005 , judgment dated 15.10.2011, the Hon ble High Court of Karnataka had not accepted the arguments that it would be only a sale of copy of copyrights software. The Hon ble High Court held that it was payment towards price of CD, the software and the license to use granted and the payment was held as royalty, as defined in Income Tax Act and DTAA involved therein. Further, reliance was placed on another decision of Hon ble High Court of Karnataka in CIT Vs. M/s. Synopsis International Old Ltd. in ITA Nos.11 to 15/2008 and 17/2008, judgment dated 03.08.2008, wherein it was held that the legal permission granted by software license under the terms of agreement was right to use the confidential information embedded in the software, involved the transfer of certain rights, which the owner of copyright possessed in the computer software even though it was not transfer of exclusive right in the copyright. The Hon ble High Court held that under the DTAA, the consideration paid for the use of confidential information in the form of computer programme software itself constituted royalty and attracts the tax. It was further held tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived by the assessee on the basis of actual usage of software partake the nature of royalty and nothing else. Therefore, the fees for sale of software license and related expenses amounting to ₹ 14.36 crores was taxed @ 20% as per DTAA between India and Italy. 17. The last item of income was reimbursement of expenses of Euro 53,439 i.e. INR of 33,89,167/-. Since the assessee had not explained the nature of reimbursement transaction services, the same was treated as part of expenditure incurred for the employees debited for implementation of SAP software and the same were considered as part of royalty for SAP software and taxed under section 9(1)(vi) of the Act. The assessee had not provided the amount in Indian currency and the Assessing Officer worked out the same at ₹ 35,33,386/- and taxed the same @ 20%. The Assessing Officer also noted that where the international transaction of the assessee was above ₹ 15 crores, reference was made to the Transfer Pricing Officer (in short the TPO ), which in turn, was assigned to Addl. CIT (TP) but no adjustment was made to the value of international transaction by the said TPO and hence, no adjustment was made to the va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2000. He further referred to the agreement executed on 01.04.2008 and pointed out that as per clause 3 of the agreement, the technology was given for manufacture of not only Ape 501 and Apt 601 but all variants developed by the assessee for period of 10 years. He stressed that as part of the new agreement, entity in India could use the upgraded technology of assessee and also technology for new products, under which royalty was given on recurring basis and no reimbursement was given. He stressed that the new agreement entered into between the parties is legally enforceable agreement and the same had to be read separately from earlier agreement. In this regard, he placed reliance on the ratio laid down by the Hon ble High Court of Calcutta in CIT Vs. Borhat Tea Co. Ltd. (1993) 203 ITR 987 (Cal), under which it was held that renewal of FDR was a fresh contract because of varying rates and terms, etc. and could not be said to be renewal of earlier one. Further, reference was made to Special Bench decision of Kolkata in ITO Vs. Chloride India Ltd. (2000) 75 ITD 69 (Kol), wherein the facts were identical to the facts before us, under which it was held that once the earlier agreement had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds. The group also manufactured the Ape, Porter and Quargo ranges of three and four- wheeled light goods transport vehicles. The manufacturing units of the assessee were established in Italy, Spain, India and China with sales spread over in several countries. The assessee had entered into an agreement with PVPL, India, under which it received royalty. The first agreement was entered into with Piaggio Veicoli Europei S.p.A. The said subsidiary had entered into license and technical assistance agreement with Piaggio Greaves Vehicles Pvt. Ltd., which was joint venture of assessee and Greaves Ltd. The said concern is now known as Piaggio Vehicles Pvt. Ltd. The earlier agreement is dated 26.03.1998, under which right and license to use the technical information, drawings and know-how and all additional technical information as well as trade mark related to diesel engine versions of Piaggio branded 3-wheelers having the commercial denomination of Ape MP 501 and Ape MP 601 was agreed for a period of 10 years from the effective date. The copy of the said agreement is placed at pages 41 to 104 of the Paper Book. Ape MP 501 and Ape MP 601 are the platforms based o n which vehicles are produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and Greave Ltd. However, the parties to the new royalty agreement are the assessee itself and Piaggio, India which is wholly owned subsidiary of the assessee. Coming to the scope and object of first agreement as per Article 2.1, the JV vehicles would be 3-whellers having commercial denomination of Ape MP 501 and Ape MP 601 . As per the said clause, JV vehicles shall utilize Greaves as the source for all engines. It was also provided the right to use license, information to use the licensed information to produce JV vehicles in the territory and to distribute and sell the JV vehicles in the territory. It was also given exclusive right and license, which was non-transferable right and license, to use Piaggio trademarks in connection with distribution, sale and servicing of JV vehicles in the territory and non-exclusive right and license outside the territory. As per Arti cle 3.1, it was further agreed upon between the parties that the Licensor shall let the Licensee access to the technology and know- how necessary for the manufacture of components and parts of JV vehicles which are available or not available with it. It was agreed between the parties that the right or license ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing working days at the plant canteen. In case any technical assistance, training in India was requested by the Licensee then the cost of the same shall be charged to the Licensee s account. As per Article 11, Licensee was authorized to use the licensed information in connection with improvement of the manufacture, quality, reliability and performance of the Greaves Garuda vehicles. As per Article 13, the parties agreed upon the consideration to be paid to the Licensor by the Licensee, wherein license was granted to the Licensee to produce, sub-contract and sell the vehicles and parts thereof through licensed information, training and technical assistance including the usage of intellectual property rights included in the know-how package, improvements of the Greaves Garuda Vehicles and of the plant, under which the Licensee agreed to pay lump sum fees of Indian Rupees Sixty Million in three installments to the Licensor. Further, royalty @ 2.5% of the total net ex-factory turnover of the Licensee was to the paid on semi-annual basis to the Licensor. As per Article 14, it was agreed that the Lice nsor and the Licensee may from time to time agree to incorporate into and make subject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of agreement. As per the Preamble to the agreement dated 01.04.2008, it was recognized that the licensor was world leader in design, manufacture and sale of various vehicles including in particular three wheelers marketed under the trademark Ape , for which it had developed techniques of manufacture, methods of quality control and other information relating to production, distribution, sale and servicing. It was further acknowledged that PVPL intended to continue to obtain from Piaggio expert, technical assistance for technological upgradation of its vehicles, as hereinafter defined, facelift to the existing products, compliance with CMVR regulations in India and facilitation to develop new variants / applications of the vehicles. The licensor thereby grant and provide to the licensee, the licenses and the rights to use certain patents and knowhow, trade names and trademarks in connection thereto. It was further provided that and whereas PVPL needs to use the Piaggio trademarks and the patents and knowhow for further period of ten years from the date of this agreement. As per Article 1 Interpretation, the word vehicles shall mean three wheelers and variants thereto manufactured ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e scope of the agreement, wherein as per old agreement, licensee had right to use the licensed information as well as get technical assistance and training along with right to use patents, trademarks and trade names, whereas under the new royalty agreement, the licensee had a right to use patents, knowhow, trade names and trademarks. The next point of distinction was made by the learned Authorized Representative for the assessee was the technical assistance and training provided under the old agreement and not so being provided under the new agreement. The next point of difference was the technology to be provided under the old agreement for licensed vehicles i.e. JV vehicles and Greaves Garuda vehicles. In other words, vehicles were only Ape MP 501 and Ape 601 and their versions. However, under the new royalty agreement, Piaggio licensed vehicles were all the versions of Piaggio branded three wheelers having commercial denomination of Ape . Our attention was drawn to the Annexure 5 of the old agreement, wherein the licensed trademark was available only for class 12 vehicles. However, under the Annexure-1 to the second agreement, there were no restrictions and the licensor licensed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pe 601. However, as per annexure to the new agreement, the assessee has provided the license to manufacture and sell the vehicles under the brand name Ape, which encompasses all kinds of vehicles. The assessee also pointed out that in view of extended license provided to the assessee, it launched Ape city diesel of three wheelers under Ape brand which was different from Ape 501 and Ape 601 brands, which was possible since it was governed by the terms of new royalty agreement. The second main difference in the agreement is the territory to which the license extends. Under the old agreement, the license was given to produce, distribute and sell the licensed vehicles in India only, whereas under the new royalty agreement, the distribution and selling of licensed vehicles is not restricted to India only but export can be made to any other country, which shall be mutually agreed between the parties. There are other variants in the terms of agreement vis- -vis purchases to be made, the periodicity of payment of consideration, non-compete clause, etc. Accordingly, we hold that new royalty agreement is not an extension of old agreement but an independent legally enforceable agreement. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be adjudicated is the rate to be applied as per section 115A of the Act. Our attention was drawn to communication between the parties which was not a formal agreement but exchange of terms between the assessee and the recipient company. In the year 2011, there was further implementation of an agreement. The learned Authorized Representative for the assessee pointed out that what is to be considered is whether for services rendered, it is to be taxed @ 10% in the absence of any formal agreement or 20% as per DTTA. He fairly pointed out that in the next year for upgradation, an agreement was entered which refers to the license given in assessment year 2010-11. Reference was made to the agreement placed at pages 137 onwards of the Paper Book. He pointed out that ground of appeal No.2 raised by the assessee was against the amount recovered for recharge of supply of SAP software and ground of appeal No.3 was against the amount recovered of recharge of third party service provider fees in connection with SAP implementation and ground of appeal No.4 was the consideration for providing services in connection with implementation of SAP software. 29. The learned Departmental Representati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee claims that it had received reimbursement on account of re-work charges of ₹ 3,14,573/- and Insurance cost of ₹ 32,18,800/-. The assessee claimed that it had taken group insurance policy to cover the product liability risk for all the Piaggio group company across the globe and insurance cost incurred by the assessee was allocated to the companies in the group without any mark up. The re-work charges were charged by the assessee in respect of expenses incurred by the assessee to rectify the defect / default in vehicles purchased from Piaggio, India. The claim of assessee was that where initially, expenses had been incurred by it and later on recovered as reimbursement on cost to cost basis without any mark up and in the absence of any element of mark up, there was no merit that no income was offered to tax. However, the Assessing Officer on erroneous presumption had treated the same to be incurred in connection with SAP implementation project and taxed receipts as software royalty @ 20% under India Italy DTAA. The learned Authorized Representative for the assessee in this regard referred to the details along with copy of invoices placed at pages 159 to 164 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eclared that for the purposes of this section where income is deemed to accrue or arise in India under cls. (v), (vi) and (vii) of sub-s. (1) such income shall be included in the total income of the non- resident, whether or not,- (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India. 36. The conditions prescribed under section 115A r.w.s. 9(1)(vii) of the Act are wide enough to include reimbursement of consultancy fees as fees for technical services in the hands of assessee. Accordingly, we hold that the amount of ₹ 26,55,812/- is to be taxed @ 10% plus applicable surcharge and education cess. 37. The ground of appeal No.7 raised by the assessee is against charging of interest under section 234B of the Act. The learned Authorized Representative for the assessee pointed out that the said section 234B is not applicable to parent company where the entire income was subject to withholding tax in India. It was pointed out that the Assessing Officer had levied the said interest pursuant to variations made in the final assessment order and hence, the same needs to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the royalty agreement. We have already decided this issue in assessment year 2010-11 and following the same ratio, we hold that the royalty agreement entered into on 01.04.2008 was a new agreement, the tax rates to be applied were as per section 115A of the Act @ 10% plus applicable surcharge and education cess. Hence the ground of appeal No.1 raised by the assessee is allowed. 40. Now, coming to the ground of appeal No.2 raised by the assessee i.e. the amount received towards SAP software maintenance charges at ₹ 3,10,12,563/-. The learned Authorized Representative for the assessee has not pressed the said ground of appeal. The learned Authorized Representative for the assessee has not pressed the said ground of appeal as the DRP vide order passed under section 154 of the Act has directed that the said receipts are to be taxed under section 115A of the Act @ 10% plus surcharge plus education cess. H ence, the same is dismissed as not pressed. 41. The issue in ground of appeal No.3 raised by the assessee is against the charging of interest under section 234B of the Act and it is claimed that in case the addition made in the hands of assessee is deleted, then no fu ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
