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TMI Blog2021 (10) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... Engineering Analysis Centre of Excellence Pvt. Ltd. [ 2021 (3) TMI 138 - SUPREME COURT] we hold that the authorities below were not justified in including the amount in question in the total income of the assessee as Royalty as relying on SAMSUNG ELECTRONICS CO. LTD. [ 2009 (9) TMI 526 - KARNATAKA HIGH COURT] which is no more a good law after the advent of the Engineering Analysis (SC)(supra). Resultantly, the receipt is held to be not taxable notwithstanding the rejection of the contention of Reimbursement. If the receipt from the Indian entity is not Royalty, can it be charged to tax as regular business income? - Absent any permanent establishment of an assessee in India, the receipt cannot be included in the total income on that score. The assessee made sale of finished goods in India including the first transaction of ₹ 7.21 crore and odd as taken note by the AO on page 7 of the draft order. DRP excluded it from the total income after receiving remand report from the AO accepting that the assessee did not have any permanent establishment in India. The same raison d'etre applies here also and hence the amount of ₹ 86,55,225 cannot be charged as Busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that the assessee paid the amount in question to Verizon for internet access and then recovered it from the Indian entity as such without any mark up. As it is also a case of reimbursement, there cannot be any question of including it in the total income of the assessee. We, therefore, order to exclude Reimbursement of Internet charges from the Indian entity from the total income of the assessee on this score. The assessee succeeds. Rate of tax at which the income declared by the assessee has been charged - HELD THAT:- The purpose of an assessment is to determine the correct amount of income and tax payable thereon. If the Act provides for soft-peddling, then that cannot be whisked away by the Officers. As it is a matter of exercising the option and the assessee did it in a particular way which was more beneficial to it albeit during the course of the assessment proceedings itself, the claim ought not to have been denied. Be that as it may, even though the judgment in Goetze (supra) provides that the AO has no power to entertain claim made otherwise than by way of a revised return, it unequivocally provides: 'that the issue in this case is limited to the power of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dded it to the total income. The assessee approached the Dispute Resolution Panel (DRP) which allowed relief in respect of some of the items of revenue. For the remaining items of the revenue, the assessee has come up in appeal before the Tribunal. 3. We have heard the rival submissions and gone through the relevant material on record. The four items of revenue included by the AO in the total income which have been assailed in the extant appeal are as under: i. Capital goods sales - ₹ 96,58,128/- ii. Reimbursement of travelling, freight and other - ₹ 12,68,764/- iii. Reimbursement of internet charges (received)- ₹ 30,31,448/- iv. Allocation of insurance charges (received) - ₹ 1,62,666/- 4. We espouse the above items ad seriatim for consideration and decision. The first item of sale of capital goods amounting to ₹ 96,58,128/- has two components, namely, revenue from software licenses amounting to ₹ 86,55,225/-; and revenue from sale of other capital goods amounting to ₹ 10,02,903/-. Insofar as the revenue from software licenses is concerned, the assessee claimed before the DRP that it centrally negotiated and procur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 55037934 384987 11,750 ITAT-1931 13-Nov-14 CDW Computer Centers Inc. 55037936 384995 1,186 ITAT-1936 13-Nov-14 CDW Computer Centers Inc. 55037936 384995 784 13-Nov-14 CDW Computer Centers Inc. 55037936 384995 795 13-Nov-14 CDW Computer Centers Inc. 55037936 384995 144 12-Sep-14 Product Space Solutions Inc., 55038026 385037 11,750 ITAT-1932 2-March-15 Product Space Solutions Inc., 55038354 385110 11,750 ITAT-1933 20-Mar-15 Product S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C Inc. raised this invoice on the assessee in the USA. Under the 'Invoice Description' column, the details have been given about the nature and quantity of each software product licensed to the assessee. For example, item at Sl. No. 1 is PKG-3504G-F: Creo Engineer II with Advanced Assembly Global and number of licenses sold to the assessee are nine. Next item is MNT-3504GF-T2: Support For: Creo Engineer II with Advanced Assembly Global and number of licenses sold is again nine. There is another item with sale of sixty licenses given at Sl. No. 8 as MNT-CPE5065F- T2: Support for: PTC PLM View and Print Only License. The last item in the invoice is one hundred twenty licenses of MNT-CPE5049F-T2: Support for: Windchill PDM Link-Heavy User License. Pages 25 to 29 contain terms of 'PTC Software Product Licensing Basis'. The term Concurrent User (CU) has been defined to mean Each Concurrent User product license may be used by one individual person at any given time . The clause with the heading 'Global License' states: A 'Global License' allows the Customer to install, operate and use such Licensed Product at any of the Customer's site(s) throughou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmissions before the Tribunal as extracted supra narrates a different story. It demonstrates that the costs incurred by the assessee on all the software products purchased from PTC Inc. and two other vendors were aggregated and such total invoice value was allocated between five entities including the assessee itself on the basis of number of employees of each entity. A fortiori, it is a case of 'allocation' of the aggregated costs on the basis of number of employees and not 'reimbursement'. The patent reason is the missing of one-to-one link between the cost of purchase of the software for the Indian entity and its, as such, recovery, which is a condition precedent for 'reimbursement'. Had it been a case of the assessee purchasing a particular number of software licenses from the vendors and then transferring them at the identical price to the Indian entity, it would have amounted to reimbursement. The manner of charging done by the assessee runs contrary to the concept of reimbursement. The contention of the assessee that it cross-charged all the entities without any mark-up does not advance the case any further. Insofar as the Indian taxability of a non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 'Royalty' by relying on the Samsung Electronics (Karn). Thus it is established that the authorities below have treated the amount charged from the Indian entity as royalty in the hands of the assessee on account of transfer of software licenses to the former. For doing this, they relied on the judgments, inter alia, Samsung (Karn)(supra). The question whether the transfer of computer software partakes of the character of Royalties recently came up for consideration before the Hon'ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (2021) 432 ITR 472(SC). After analyzing the identical issue in the backdrop of similar expression as used in Article 12(3) of the DTAA, it has been held that ownership of copyright in a work is different from the ownership of the physical material in which the copyrighted work may happen to be embodied. Parting with copyright entails parting with the right to do any of the acts mentioned in section 14 of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the licensed computer software product over which the licensee has no exclusive rights, no copyr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 55,225 cannot be charged as Business profits as well under the DTAA. In the final analysis, the receipt of ₹ 86,55,225 is not chargeable to tax. 13. The second component of this receipt is revenue from other capital goods amounting to ₹ 10,02,903/-. The AO included this amount in the total income of the assessee. The DRP allowed relief to the extent of ₹ 4,31,870/-. The assessee is in appeal against the confirmation of disallowance of ₹ 5,71,033/- towards procurement and supply of capital goods. Ground no. 8 raised in this regard was not pressed by the ld. AR. The same is, therefore, dismissed as not pressed. 14. The next issue raised in this appeal is against the taxability of Reimbursement of Travelling, Freight and other charges amounting to ₹ 12,68,764/-. The assessee contended before the DRP that it was a mere case of reimbursement of Travelling and related expenses incurred on behalf of its Indian entity without any mark up and hence the same did not constitute its income. The DRP did not accept the assessee's version on the ground that there was no evidence of reimbursement. 15. We have gone through the details of Travelling and Fre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s contention by observing that no evidence was furnished. 17. We have gone through the material on record. The assessee has placed a tabulation of sample invoices of Internet charges allocated by it to the Indian entity on page 44 of the written submissions. A vendor called Verizon raised invoices on the assessee, sample of which have been placed at page 2008 to 2022 of the paper book. These invoices distinctly point out 'Location/Service Index', namely, the user. Indian address with the exact amount of charge has been mentioned, which has been recovered. Thus it is evident that it is not a case of cost sharing of total costs between all the entities on some allocation key but charging the exact amount paid for the Indian entity. This indicates that the assessee paid the amount in question to Verizon for internet access and then recovered it from the Indian entity as such without any mark up. As it is also a case of reimbursement, there cannot be any question of including it in the total income of the assessee. We, therefore, order to exclude ₹ 30,31,448/- from the total income of the assessee on this score. The assessee succeeds. 18. Another issue raised in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke was realized and the claim was lodged, which came to be repelled. Nature of income under consideration as Royalty/Fees for technical services is not disputed. The rate of tax under the Act on such income for the year got slashed to 10%. Section 90(2) of the Act clearly enunciates that where the Central Government has entered into a DTAA then the provisions of this Act shall apply to this extent they are more beneficial to the assessee. It means that if the provisions of the Act favour the assessee over those of the DTAA, it can opt for the former. No exception can be taken to the assessee exercising the option of being governed by the rate of tax under the Act. The authorities below have rejected the assessee's claim on the ground that it was not made in the income tax return. In our opinion, there can be no estoppel against the provisions of the Act. The purpose of an assessment is to determine the correct amount of income and tax payable thereon. If the Act provides for soft-peddling, then that cannot be whisked away by the Officers. As it is a matter of exercising the option and the assessee did it in a particular way which was more beneficial to it albeit during the co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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