GUNNEBO,MUMBAI vs. ACIT (INTERNATIONAL TAXATION),CIRCLE-2 (3)(2), MUMBAI

This appeal has been preferred by the assessee company against the order of the Assistant Commissioner of Income-tax (Intl. Taxation), Circle 2(3)(2), Mumbai [in short ‘AO’] dated 20.04.2021 passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter “the Act”) pursuant to the Ld. DRP direction dated 15.03.2021.

The material issue involved in this appeal is regarding the taxability of Microsoft License Fees, Data Centre Charges & Training, Telecom & Recruitment Charges aggregating to Rs.1,05,93,812/-. Briefly stated the facts of the case are that, the assessee is a foreign

Assailing the action of lower authorities, the Ld. AR for the assessee made multi-fold submissions before us. Firstly, he claimed that the transaction involving receipt of Microsoft License Fees, Data Centre Charges & Training, Telecom & Recruitment Charges aggregating to Rs.1,05,93,812/- was in the nature of recovery of expenses on cost-to-cost basis and therefore in absence of any income element therein, no portion thereof was liable to tax in India. In Gunnebo AB support of the same, the Ld. AR invited our attention to Form 3CEB issued by the transfer pricing auditor wherein these transactions were reported as reimbursements. He further brought to our notice that these transactions had been inter alia referred for transfer pricing scrutiny and the Ld. TPO in the order dated 27.06.2019 passed u/s.92CA(3) of the Act accepted the reimbursement of expenses and no adjustment was made in relation thereto. This according to AO established beyond doubt that the recovery of expenses were on cost-to-cost basis and therefore the impugned sum was not liable to tax in India.

In his next line of argument, the Ld. AR contended that the Microsoft License Fees & Data Centre Charges was paid for acquiring right to use copyrighted product and the assessee did not get any exclusive right in the same in terms of Section 14 of the Copyright Act. Relying upon the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt Ltd Vs CIT (125 taxmann.com 42), the Ld. AR submitted that identical payments had been impugned before the Hon’ble Supreme Court, wherein it was held that these payments to Microsoft towards their copyrighted product did not qualify as ‘royalty’ within the meaning of Article 12 of the DTAA and therefore not liable to be taxed in India. In respect of Training, Telecom & Recruitment Charges, the Ld. AR submitted that these payments did not qualify as ‘fees for technical services’ [in short ‘FTS’] under the DTAA and was therefore not liable to be taxed in India. Inviting our attention to the Protocol to Article 12 of the Indo-

We have heard both the parties and perused the material placed before us. As noted earlier, the issue-in-dispute before us is the taxability of Microsoft License Fees, Data Centre Charges & Training, Telecom & Recruitment Charges aggregating to Rs.1,05,93,812/-. It is noted that the receipts towards Microsoft License Fees & Data Centre Charges amounting to Rs.1,01,67,265/- were originally offered to tax by the assessee in the return of income and later on in the course of assessment, the same was claimed to be not liable to tax. It is noted that, the AO had rejected the said claim by relying on the decision of Gunnebo AB the Hon'ble Supreme Court in Goetze (India) Ltd (284 ITR 223) observing that the same was not made by way of revised return of income. We however note that the Hon'ble Supreme Court had held that where claim of deduction was not made in the ROI or by filing a revised ROI, the same cannot be made before the AO, but it was clarified by the Hon'ble Apex Court that there is no bar in making a fresh claim before the appellate authorities. We further note that the Hon'ble Gujrat High Court in the case of CIT v. Mitesh Impex (367 ITR 85) after considering the decisions rendered by the Hon'ble Apex Court in the case of National Thermal Power Co. Ltd. v. CIT (229 ITR 383) and Goetze (India) Ltd. (supra) has held that that, if a claim which is available in law is not raised either inadvertently or an account of erroneous plea of complex legal position, in the return of income such a relief cannot be shut up for all the times to come merely because it is raised for the first time in appellate proceedings in absence of a revised return filed before the Assessing Officer. For the aforementioned reasons, the preliminary reason cited by the lower authorities rejecting the claim of the assessee viz., non-filing of such claim by way of revised return of income, is hereby rejected.

Now coming to the facts of the case, it is noted that, the assessee under the cover of letter dated 10.12.2019 had furnished complete details of the recovery of expenses towards Microsoft License Fees, Data Entry Charges and Training, Telecom & Recruitment Charges along with the back-to-back invoices before the AO. Perusal of the Gunnebo AB same, which was placed before us at Pages 133 to 153 of Paper Book, reveals that the reimbursements were made on cost-to-cost basis. We however note that the AO had arbitrarily rejected these details by stating that the same was not properly evidenced by the assessee. Surprisingly no specific infirmity or defect was pointed out in the documentation furnished by the assessee. We further find that these facts were also brought to the notice of the Ld. DRP. The Ld. DRP is noted to have not disputed that the reimbursements were made on cost- to-cost basis, but they rejected the plea of the assessee regarding non- taxability of reimbursements by observing that Section 28 of the Act charges tax on ‘gross receipts’ and not ‘net income’. In our considered view this particular proposition laid down by the Ld. DRP was erroneous and unjustified. It is by now well settled in law that, it is the ‘income’ element embedded in the ‘receipt’ and not the ‘receipt’ itself which is liable to be taxed under Section 4 & 5 of the Act.

We further find merit in the Ld. AR’s contention that, when the TPO in his order u/s.92CA(3) did not dispute that the transactions involving recovery of Microsoft License Fees, Data Entry Charges and Training, Telecom & Recruitment Charges reported to be in the nature of reimbursements in Form 3CEB, then the lower authorities had erred in ignoring this factual position. In light of the aforesaid facts noted by us, as the receipts in question did not have any profit element embedded therein, the same was not liable to tax in India. We find that the issue-in-dispute before us is squarely covered by the decision of Gunnebo AB the Hon’ble Supreme Court in the case of DIT (International Taxation) v. A.P. Moller Maersk AS (392 ITR 186), wherein, the Hon'ble Supreme Court has observed that once the character of the payment is found to be in the nature of reimbursement of expenses without having any profit element embedded therein, it cannot be held to be chargeable to tax. The findings of the Hon’ble Supreme Court which are relevant to the present case are set out below:-

Identical view is noted to have been expressed by the coordinate Benches of this Tribunal at Mumbai in the following decisions:

Respectfully following the ratio laid down in the aforesaid decisions (supra), and having regard to the fact that the assessee has demonstrated that recovery of expenses aggregating to Rs.1,05,93,812/- was on cost-to-cost basis, the impugned sum cannot

As Ground No. 1 of the appeal challenging the taxability of Rs.1,05,93,812/- has been allowed, all other grounds taken in the appeal have been rendered academic and is therefore not being adjudicated upon.

In the result, the appeal of the assessee is allowed.