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TMI Blog2021 (12) TMI 783X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational transactions declared by the assessee was Reimbursement of SAP software cost to its Associated enterprise (AE), viz., N.V. Bekaert SA. - What for the payment was made? - HELD THAT:- AR tried to make out a case that the assessee did not use any IT infrastructure equipment but availed only IT services for which the payment was made. This contention runs contrary to the stand taken by the assessee before the authorities below as has been discussed above threadbare, which ardently proves that the assessee paid for the use of the IT Infrastructure facility set up by its AE and not for availing any separate IT services. Still, in order to provide an opportunity to substantiate his stand that the assessee paid for the IT services, the Bench directed the ld. AR to file details of the total costs incurred by NV Bekaert SA during the year on the IT Infrastructure facility and then the basis of charge to the assessee. Since such details were not readily available with him, the matter was adjourned for a later date. On the next date of hearing, again, the ld. AR failed to file any such details. In fact, our attention has not been drawn towards any specific IT service provided to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PUNE] insofar as the taxability of the amount received by foreign entity from the Indian entity for allowing access to its IT Infrastructure facility, is concerned. DRP was not justified in compartmentalizing the payment made by the assessee into three broad categories and then allowing the assessee's claim in respect of the (c) category, being consideration for other support services, while rejecting for (a) and (b) categories of sub-licensing/licensing of software and its support and maintenance services. Legally speaking, the amount paid by the assessee on this count is chargeable to tax in entirety in the hands of the non-resident. Failure of the assessee to deduct tax at source should have met its logical consequences. Since the part of the direction of the DRP, providing relief under category (c) has not been challenged by the Revenue, the same will remain intact and the consequences of non-deduction of tax at source would visit only the payment for categories (a) and (b), for which the disallowance has been made - We accord our imprimatur to the impugned order to this extent. Scope of powers of Tribunal in appeal - Tribunal can disallow a claim on a ground diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l sets of international transactions covered under Purchase of Finished goods/raw materials/consumables/dies etc.; Sale of finished goods/spares/packing material; Payment/reimbursement/Allocation of expenses; Providing various services/commission; ECB loans; and Purchase of machinery. Different methods were deployed by the assessee for benchmarking the international transactions even under the single set of transaction. For example, in respect of the first set of international transactions of Purchase of finished goods/raw material/spares/consumables/Dies etc., the assessee applied the Transactional Net Marginal Method (TNMM) for the first transaction; the Cost Plus Method for the second transaction and the Other method for the fifth transaction. Similar position was observed by the TPO for other sets of international transactions. In order to demonstrate that the individual transactions of Purchase of finished goods etc. were at ALP, the assessee treated Foreign/Associated Enterprise as tested party. The TPO rejected this approach and required the assessee to aggregate the transactions in certain convenient segments. The assessee aggregated the transactions into four major segment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition only qua the international transactions under the Manufacturing segment and not the entity level transactions of the segment. 4. The next issue raised in this appeal is against the disallowance of IT Support Service fee amounting to ₹ 1,71,53,803/- paid to N.V. Bekaert SA u/s. 40(a)(ia) of the Act for failure of the assessee to deduct tax at source. The factual matrix of this ground is that one of the international transactions declared by the assessee was Reimbursement of SAP software cost to its Associated enterprise (AE), viz., N.V. Bekaert SA. The TPO observed that the assessee paid its share in allocation of costs at ₹ 15,79,70,945/-. He took up for consideration a sum of ₹ 9,65,83,544/- paid for availing certain services from its AEs. Adopting Direct Charge method under Rule 10AB of the Income-tax Rules, 1962, he determined the ALP at ₹ 3,93,42,668/- and proposed transfer pricing adjustment for the remaining sum of ₹ 5,72,40,876/-. The AO, during the course of draft proceedings, noticed that a sum of ₹ 4,96,94,258/- was paid by the assessee towards Software Maintenance Support/IT Infrastructure charges. On being called upon to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilities management, asset management, disaster recovery, full service desk, remote service desk, WAN services, Global Mobile computing, Internet VPN tunnel etc. 5. The DRP held that payment for the above (a) and (b) categories was in the nature of royalty and fees for technical services respectively in the hands of the non-resident entity, N.V. Bekaert SA and hence the assessee was liable to deduct tax at source thereon before making such payments. As regards the above category (c), it was opined that the same was not chargeable to tax in the hands of non-resident and hence there was neither any failure on the part of the assessee to deduct tax at source, nor did it call for disallowance u/s. 40(a)(ia) of the Act. The relief allowed by the DRP under category (c) translated into payment of ₹ 3.25 crore not requiring any deduction of tax at source. As against that, the payment for the first two categories of (a) and (b) totalling to ₹ 1,71,53,803/- went under hammer for disallowance u/s. 40(a)(ia) of the Act, against which the assessee has come up in appeal before the Tribunal. 6. We have heard both the sides and scanned through the relevant material on record. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cy LAN/VAN services LAN rent/lease/facilities management Excl. Business Applications maintenance Excl. Business Applications facilities management Maintenance/support office Rent/lease/facilities management office 8.2. The assessee explained the rationale of payment for SAP support cost to the TPO, as has been incorporated on page 22 of his order, that: 'the Bekaert group has chosen for a high degree of outsourcing of software and hardware. The IT department for whole Bekaert group is managed by the Chief Information Technology Officer ('CIO') employed by N.V Bekaert SA. Therefore, the CIO and his corporate team negotiate global framework contracts with key service providers.' It further gave to the TPO in writing that: 'The major components included in the IT support services are: an integrated ERP system (SAP), development of SAP platforms, office environment (e.g. hardware, software, etc), servers (e.g. office servers, application servers, etc.) and connectivity (e.g. Communication network LAN and WAN, domain structures, security, etc).' This clearly shows that NV Bekaert SA created a full-fledged IT Infrastru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services; Implementation related services). Thereafter, the assessee explained the Pricing Mechanism to the TPO by stating that: 'The cost incurred mainly consists of people costs, costs for internal (i.e. SAP competence centre) and external (IT partners) consulting and some support costs like travel costs'. A break-up of the costs, which have been allocated to the group companies, reaffirms that these pertain to setting up, improving and maintaining the equipment of IT Infrastructure set up by N.V. Bekaert SA. 8.5. The assessee also submitted the pricing mechanism or the basis of cost allocation to various group entities as follows: Sr. No. Service Basis of cost allocation 1 Cost to run SAP The costs are allocated based on the number of users and the user class. On a yearly basis, during the budgeting process, the tariffs per user class are determined 2 Cost to support SAP The costs are allocated based on the system load and modules in use 3 SAP projec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m its AE. Using a facility as one unit is different from using individual components of the facility, such as, software, hardware or networking etc. The IT Infrastructure setup of NV Bekaert SA is the equipment developed and maintained by it and the assessee paid for using the same for its business purpose. It is in lieu of the access to the IT Equipment provided by NV Bekaert SA that the assessee paid its proportionate share in the costs incurred. Further, if the extent of user is more, the payment would be more and vice versa. The assessee has also described the payment as 'Allocation of IT Infrastructure expenses' in its Transfer Pricing study report, as is divulged from the Table given on page 21 of the TPO's order. The very fact that the costs incurred by the AE have been allocated to the group entities in proportion to their user by the respective entities and there is no charge for any specific IT service, it gets established that the assessee used and paid for the use of the IT Infrastructure facility. 8.9. The ld. AR tried to make out a case that the assessee did not use any IT infrastructure equipment but availed only IT services for which the payment was m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for all Group companies and allocation of cost is in accordance with reasonable allocation keys that commensurate with the usage/benefit to the beneficiary group entities (including BIPL). Certain IT support services are charged to Group entities at cost plus 5% mark-up basis. However, while charging for the said services to BIPL, AE has merely recovered the proportionate costs from BIPL and has not charged any mark-up on the costs'. Albeit, it has been stated that the AE did not recover any mark-up from the assessee, but no evidence was placed on record to substantiate this argument before the TPO as well as the DRP. Position continues to remain the same before the Tribunal as well. In the absence of any evidence to controvert the finding of the authorities below in this regard, the ld. AR rightly did not press this argument before the Tribunal. III. Is the payment Royalty or Fees for technical services? 10.1. Having found out the true nature of transaction as that of the assessee paying for using the IT infrastructure facility set up by to NV Bekaert SA and not for availing any IT Service, we need to find out if the receipt is taxable in India in the hands of the no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion to Explanation 5 to section 9(1)(vi) of the Act, it becomes graphically palpable that the payment made by the assessee to NV Bekaert SA for the use of the IT infrastructure facility set up by the latter is Royalty in terms of section 9(1)(vi) of the Act. 10.3. Now we advert to evaluating the position under the DTAA in terms of section 90(2) of the Act. Article 12 of the DTAA deals with Royalties and Fees for Technical services. Para 2 states that such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State. Para 3(a) defines the term 'Royalties' to mean: 'payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience.' 10.4. Ostensibly, there is no material differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lectronics Company Ltd. 345 ITR 494 (Kar.) and CIT Vs. Synopsis International old Ltd.(supra). Overturning the decision in Samsung Electronics Company Ltd., the Hon'ble Supreme court in Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (2021) 432 ITR 472 (SC) has 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. 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 copyright is parted with. When we view the transaction of the assessee group under consideration in totality, it transpires that it has two components, viz., first, NV Bekaert SA paying for purchasing SAP software and installing them in its IT Infrastructure facility; and, second, various group companies paying to NV Bekaert SA for using the IT Infrastructure facility created by it. Whereas the first is a case of copyright royalty, the second is a case of industrial royalty. The ratio of the decision in Engineering Analysis Centre of Excellence (supra) has application on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Vide its order dated 21.10.2021, which was duly confronted to both the sides during the course of hearing of the extant appeal, the Tribunal held ₹ 3.88 crore was not different from ₹ 20.04 crore and was hence chargeable to tax in India in the hands of the non-resident assessee. The facts of the instant case are on all fours with Rieter Machine Works Ltd. (supra) insofar as the taxability of the amount received by foreign entity from the Indian entity for allowing access to its IT Infrastructure facility, is concerned. 10.9. The upshot of the above discussion is that the DRP was not justified in compartmentalizing the payment made by the assessee into three broad categories and then allowing the assessee's claim in respect of the (c) category, being consideration for other support services, while rejecting for (a) and (b) categories of sub-licensing/licensing of software and its support and maintenance services. Legally speaking, the amount paid by the assessee on this count is chargeable to tax in entirety in the hands of the non-resident. Failure of the assessee to deduct tax at source should have met its logical consequences. Since the part of the direction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter in appeal from another point of view by applying another provision to the same issue, that was not applied by the AO. This view also gets fortified on reading the exception clause contained in rule 11 of the Income-tax Appellate Tribunal Rules, 1963, which states that: '... the Tribunal, in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule' followed by principle of natural justice. Albeit the Tribunal has sweeping powers of passing any order as it thinks fit, but the essential condition is that some material - factual or legal - must exist or should be there to support the view sought to be canvassed by it on the subject matter, which is different from that of the AO. It can be seen from the discussion supra that the Tribunal did not decide the issue of royalty from a different standpoint on any non-existing legal or factual position but took cognizance of the correct legal position and the material already available on record from the orders of the authorities below qua the transaction under consideration. It is only on consideration of such material that the subject mat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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