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TMI Blog2022 (6) TMI 1411X X X X Extracts X X X X X X X X Extracts X X X X ..... a new disability is considered prospective unless the legislative intent is clearly to give it a retrospective effect - it is ambiguously clear that there is no requirement of separate notification for importing the beneficial treatment from the agreement. Hence, in the facts of the case and the decision referred above, we find no merit in the arguments forwarded by the ld. Departmental Representative. The conditions set out in CBDT Circular 3/2022 would not apply in the impugned assessment year. Consequently, ground No.1 of the appeal is allowed. Taxability of SAP Licence charges as royalty - HELD THAT:- We find that this issue is recurring. On identical set of facts, the Tribunal deleted the addition in preceding assessment years. The Tribunal in assessment year 2016-17 following the order in assessee s own case in [ 2021 (1) TMI 323 - ITAT MUMBAI ] deleted the addition as held receipt of software licence fees by the assessee, from its Indian subsidiary, is reimbursement of software licence fees paid by the assessee to a third party, and, therefore, it cannot constitute income taxable in the hands of the assessee. Decided in favour of assessee. Taxability of IT Support Services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iv) Reimbursement of Expenses Rs. 5,74,634/- Total Rs. 3,46,04,860/- The assessee did not offer any of the aforesaid receipts to tax. The Assessing Officer while passing draft assessment order dated 29/11/2019 held that the aforesaid receipts are liable to be taxed under India Sweden DTAA @10% as FTS/Royalty. The assessee filed objections before Dispute Resolution Panel (DRP). The DRP vide directions dated 24/02/2021 rejected the objections raised by the assessee. The Assessing Officer consequently passed the final assessment order passed on the directions of the DRP and made aforesaid additions. 3.1 The ld.Authorized Representative for the assessee submitted that the assessee is providing consultancy services to its Indian AE for setting up of manufacturing plant at Pune. The services include managerial services, such as administrating and execution of manufacturing facility, co-ordinating with various vendors for timely installation of machinery, etc. The assessee has merely reimbursed actual cost it had incurred for providing managerial services. The Assessing Officer had erred in holding receipts in respect of providing consultancy services as Fee for Technical Services (FTS) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied in para - 5(i) to 5(iv) are specified then only benefit of lower rate has specified in the treaty shall be given. In the instant case the condition as set out in para 5(iv) i.e.: (iv) A separate notification has been issued by India, importing the benefits of the second treaty into the treaty with the first State, as required by the provisions of subsection (1) of Section 90 of the Income Tax Act, 1961. is not satisfied, therefore, the findings given by the Tribunal in assessment year 2016-17 would not apply. In so far as other grounds, the ld. Departmental Representative fairly admitted that the issue raised in ground No.2 and 3 has already been considered by the Tribunal in assessee s own case in preceding assessment years. In so far as ground No.4 the ld.Departmental Representative submitted that the same can be restored back to the Assessing Officer /DRP for fresh adjudication . 5. The ld.Authorized Representative for the assessee rebutting the submissions advanced on behalf of the Department asserted that the Tribunal in assessee s own case for assessment year 2015-16 has considered the impact of MFN clause in the Indo-Swedish tax treaty and thereafter, has granted relief ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll concerned with the project progress. Just because the assessee renders these services does not mean, and by no stretch can imply, that the recipient can next time do all this work without recourse to the assessee. As regards learned DRP's observations that the project leading work will include scheduling charts, timelines, bar charts which are contemplated in the case of the assessee under Project Administration .project and financing controls including necessary charts and controls for implementation of the project , that the assessee is not executing the project but is rendering consultancy service to the AE , and that when project implementation tools are provided to the employees of the AE, they are enabled to employ these tools in implementing their own project, these observations are factually incorrect inasmuch as the assessee's representative is executing the work and is the key person at the factory site who is doing all the needful and inasmuch as there is no mention anywhere of developing these tools and handing over the same to the recipient of services. In any case, just because the Indian entity is interacting with the project leader and getting inputs from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith it; (iii) India limits its taxing rights in the second treaty in relation to rate or scope of taxation in respect of the relevant items of income; and (iv) A separate notification has been issued by India, importing the benefits of the second treaty into the treaty with the first State, as required by the provisions of subsection (1) of Section 90 of the Income Tax Act, 1961. If all the conditions enumerated in Paragraph 5(i) to (iv) are satisfied, then the lower rate or restricted scope in the treaty with the third State is imported into the treaty with an OECD State having MFN clause from the date as per the provisions of the MFN clause in the DTAA, after following the due procedure under the Indian tax law. 11. A look at the above para deciphers that the benefit of a lower rate of taxation or restricted scope of source taxation rights, as contained in the MFN clause with reference to royalty and fees for technical services etc. provided in the India s DTAAs with second State, can be availed under the DTAA with the first State only when the four conditions are fulfilled. There is no dispute that conditions enshrined under points (i) to (iii) are fulfilled in the instant case. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Cycles Pvt. Ltd. (1997) 228 ITR 463 (SC) as reiterated in CCE Vs. M/s. Ratan Melting and Wire Industries (2008) 220 CTR 98 (SC). Ex consequenti, the Circular transgressing the boundaries of section 90(1) of the Act, cannot bind the Tribunal. 13. Notwithstanding the above, it can be seen that the CBDT has panned out a fresh requirement of separate notification to be issued for India importing the benefits of the DTAA from second State to the DTAA with the first State by virtue of its Circular, relying on such requirement as supposedly contained in section 90(1) of the Act. In our considered opinion, the requirement contained in the CBDT circular No.03/2022 cannot primarily be applied to the period anterior to the date of its issuance as it is in the nature of an additional detrimental stipulation mandated for taking benefit conferred by the DTAA. It is a settled legal position that a piece of legislation which imposes a new obligation or attaches a new disability is considered prospective unless the legislative intent is clearly to give it a retrospective effect. We are confronted with a circular, much less an amendment to the enactment, which attaches a new disability of a separa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its being a cost to cost reimbursement received by the assessee. What learned Departmental Representative contends is that if the Indian entity was to be directly supplied this licence by the actual product vendor supplying it to the assessee, the tax withholding by Indian entity would have come into play, and that tax withholding has been avoided by routing the purchase through the assessee. That issue, whether right or not, has no bearing on taxability of an income in the hands of the assessee. We reject this argument. As regards learned DRP's reliance on a decision of the coordinate bench in the case of AMD Research and Development Centre India Pvt Ltd (supra), we can only say that it was a case in which the coordinate bench came to the conclusion that the payment for a software licence to the group company was not on cost to cost basis , as evident from the coordinate bench observations to the effect that In the absence of these details as well as the basis of allocation of cost of software applications/licences, we find it difficult to accept the contention of the assessee that the amount in question paid by it to ATI Technologies, Canada towards its share of software app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the subsidiaries as well as the head office organisation would not be income which would be assessable to tax. A similar view was taken in Stewarts Lloyds of India Ltd.'s case (supra). We are in respectful agreement with the view expressed by the Delhi and Calcutta High Courts. 7. In view of the above discussions, as also bearing in mind entirety of the case, we hold that the receipt of software licence fees by the assessee, from its Indian subsidiary, is reimbursement of software licence fees paid by the assessee to a third party, and, therefore, it cannot constitute income taxable in the hands of the assessee. As this income is not taxable under the domestic law provisions in India, we see no need to deal with the other aspects of the matter with respect to non-taxation of this income under the provisions of the Indo Swedish tax treaty. We leave it at that. The Revenue has not brought before us any material to show that the facts in the impugned assessment year are in any manner at variance. Hence, respectfully following the order of Co-ordinate Bench ground No.2 of the appeal is allowed for parity of reasons. 11. In ground No.3 of the appeal, the assessee has assailed taxab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atisfied. The concept of enduring benefit, increase in efficiency, improvement in income generating capacity and incidental skill development is wholly irrelevant for this purpose. The authorities below have been thus swayed by considerations not germane in this context. So far as these services being incidental to SAP system being the reason for taxation under article 12(4)(a) is concerned, we have noted that providing support services for SAP implementation is a small part of the services and in any case what article 12(4)(a) covers is the services which are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received and the information technology services, as set out in Annexure B to the agreement, cannot be described as ancillary and subsidiary to the SAP system. At best, a small part of these services could fall in that category, but that payment is not even separately identified. These things apart, 12(4)(a) would come into play when the assessee receives a payment in the nature of royalties under article 12(3) and the services ancillary and subsidiary to the application or enjoyment o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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