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Income Tax Appellate Tribunal, ‘C’ BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER WASEEM AHMED, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the order passed by the DCIT – Intl. Taxation, Circle-1(1), Bangalore dated 22/09/2023 in for the assessment year 2021-22.
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The only effective issue raised by the assessee is that the learned AO erred in confirming the addition of Rs. 38,93,27,712/- by treating the reimbursement of GIS Charges as FTS.
The facts in brief are that the assessee is a foreign company based in United Kingdom. The assessee has two AEs in India namely M/s W S Atkins India Pvt Ltd and M/s Confluence Project Management Pvt Ltd. During the year under consideration, the assessee received payment on different account from the said two Indian companies which are detailed as under:
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Indian companies/ AEs, on the above payments to the assessee company deducted withholding tax. The assessee in the return filed offered income on account of the above receipts except the receipt of GIS Charges (Software License Payment).
The assessee contended that it purchases various types of software products like Civil-3D, Navisworks, Microsoft office products etc. from third party venders for the usage of group companies globally. The cost of purchases of such software and their maintenance charges were reimbursed by the group entities on cost-to-cost basis without any .
IT(IT)A No.907/Bang/2023 Page 4 of 12 element of profit and the same accounted as GIS Charges. The assessee accordingly claimed that such receipt is not chargeable to tax.
The AO during the assessment proceeding found that the assessee's claim of cost allocation on a pure cost-to-cost basis lacked supporting evidence and a clear formula for allocation. The assessee asserted that costs were allocated based on software usage by employees, but no verifiable details, such as a proper break-up of expenses or internal records, were provided. The AO noted that while debit notes were submitted, there was no clarification on how the usage parameters influenced these debit notes or whether they were revised accordingly. Additionally, the assessee did not maintain books of accounts in India and did not offer independent verification of the claims, making the cost allocations unverifiable.
6.1 The AO also highlighted that the software licenses were purchased based on projections and then allocated internally without a direct correlation to actual usage or billing cycles. It was observed that the assessee maintained a steady 17% margin on costs, which contradicted the claim of pure cost reimbursement. The cost allocation matrix and reimbursement calculations were deemed self-serving and lacked external validation. The AO cited legal precedents are indicating that transactions between related parties, even if structured as reimbursements, should be scrutinized for potential withholding tax liabilities.
6.2 Furthermore, the AO noted that the mere labeling of payments as reimbursements does not exempt assessee from tax liability. The .
IT(IT)A No.907/Bang/2023 Page 5 of 12 absence of a mark-up does not alter the nature of the services, and payments routed through a foreign group entity may still attract withholding tax. The AO concluded that the assessee failed to establish a case for pure cost-to-cost reimbursement due to a lack of documentary evidence, independent verification, and a clear allocation methodology.
6.3 The AO further found inconsistencies in the assessee's classification of receipts, where some receipts were treated as FTS while receipt of GIS charges was claimed as pure reimbursement cost. The AO held that the assessee did not provide sufficient evidence to justify the cost-to-cost allocation and that the payments for software procurement, provision, and support services not involved managerial and technical expertise.
6.4 The AO noted that Indian entities deducted TDS on the payment of GIS Charges at beneficial DTAA rates, indicating that they considered these payments as technical services. Further, the functions performed by the assessee, such as vendor selection, price negotiation, payment management, and software inventory control, were crucial for business operations and involved a level of technical skill. Citing relevant case laws, the AO emphasized that even if payments were structured as reimbursements, they could still be categorized as fees for services.
6.5 Furthermore, the AO rejected the assessee’s argument that the services did not involve a "make available" clause, as the expertise and processes were effectively imparted to Indian entities for achieving efficiency. Consequently, the AO concluded that the payments made towards software charges amounting to ₹38,93,27,712/- were to be .
IT(IT)A No.907/Bang/2023 Page 6 of 12 taxed as FTS at a 10% rate. The draft assessment order was passed under Section 144C of the Act, allowing the assessee to file objections with the Dispute Resolution Panel if desired.
The assessee preferred to file objection before the learned DRP. The assessee argued before the learned DRP that the GIS charges levied on Atkins India and Confluence Project Management Private Ltd. (CPMPL) were on a cost-to-cost basis without any profit element and, therefore, not taxable. It contended that no services were rendered in connection with the reimbursement of software license costs and that no training services were provided by Atkins UK to the Indian entities concerning the software cost recharge.
7.1 Further, the assessee claimed that since the term "managerial services" is not included in the definition of Fees for Technical Services (FTS) under the India-UK Tax Treaty, the payments should not be classified as FTS. It also argued that the payments did not constitute technical services, nor did they involve the "make available" clause, meaning thereby no technical knowledge, experience, skill, or know-how was imparted to the Indian entities. As a result, the payments should not be taxed under Article 13(4) of the India-UK Tax Treaty.
7.2 Additionally, the assessee pointed out that the term "reimbursement" is not defined in the Income Tax Act but is generally understood as the repayment of expenses already incurred. The assessee relied on the Hon’ble Supreme Court's decision in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT [Civil Appeal Nos. 8733-8734 of 2018] to support its claim that reimbursements for .
IT(IT)A No.907/Bang/2023 Page 7 of 12 software licenses should not be treated as "royalty." Based on these arguments, the assessee sought relief from taxation on the GIS charges.
However, the learned DRP, after considering the submissions, upheld the findings of the AO. The Panel observed that the reimbursement of costs claimed by the assessee on which TDS had been deducted by the payer Indian AEs and the assessee had also paid GST on these transactions under the reverse charge mechanism.
8.1 The ld. DRP found that the assessee failed to provide a clear basis for the allocation of costs, even during the proceedings. No verifiable evidence was submitted to substantiate the claim that the payments were made purely on a cost-to-cost basis. The cost allocation appeared to be an internal arrangement between the assessee and its Indian entities, with no independent verification. Moreover, the assessee had not maintained books of accounts in India, further weakening its claim. It was also noted that software purchases were made based on requirements and were subsequently sub-leased or rented out, indicating a structured allocation rather than direct reimbursements.
8.2 The DRP agreed with the AO’s observation that the assessee maintained a steady margin of 17% on costs, irrespective of actual expenses. This suggested the possibility that the cost allocation for reimbursements could include a margin, potentially adjusting the formula to recover costs through debit notes. The assessee did not refute these findings with any supporting evidence.
IT(IT)A No.907/Bang/2023 Page 8 of 12 8.3 Furthermore, the ld. DRP determined that the services provided by the assessee involved both technical and managerial skills. The Panel concurred with the AO’s view that the "make available" clause was satisfied, as the services rendered resulted in the transfer of technical knowledge, experience, skill, and processes to Indian entities. In conclusion, the DRP confirmed the decision of the AO, holding that the payments were taxable as FTS. Consequently, the assessee's objections were dismissed.
Being aggrieved by the order of ld. DCIT/ DRP, the assessee is in appeal before us.
The learned AR before us filed a paper book running from pages 1 to 294 and case law compilation having pages from 295 to 567 and contended that the agreement between the assessee and its subsidiaries was made for indefinite period of time, placed on pages 188 to 198 of the paper book, which evidences that there was no transfer of technology by the assessee to its associated companies. The assessee has been receiving the payment in dispute from the associated enterprises in the earlier and later years which was also accepted by the revenue.
10.1 The learned AR further submitted that it has received the payment against the supply of the software, the list of which is placed on page 208 of the paper book. The Ld. AR in support of his contention has made reference to various case laws at the time of hearing.
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On the other hand, the learned DR submitted that the basis of allocation of the cost has not been provided by the assessee. As per the Ld. DR the services as reflecting in the agreement evidences that the assessee was in receipt of service charges from the associated enterprises for transferring the technology to the associated enterprises. The learned DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly, the lower authorities have treated the reimbursement of GIS Charges as FTS. The primary contention of the assessee is that such receipts represent mere reimbursements and do not qualify as taxable income. We note the assessee has two AEs in India from whom assessee received payments under various heads, including GIS Charges (Software License Payment). While offering income from other receipts to tax, the assessee claimed that GIS Charges were pure reimbursements and hence not chargeable to tax. After considering the submissions made by both parties and the evidence on record, we hold that the primary issue to be determined is whether the receipts towards GIS Charges qualify as Fees for Technical Services (FTS) under the India-UK DTAA. It is evident that the payments made by the Indian AEs were for the reimbursement of costs incurred by the assessee in procuring software licenses for group companies. The mere subletting of software licenses does not involve any transfer of technical knowledge, experience, or skill from the assessee to the Indian AEs. The assessee has not provided any additional services such as training, customization, or technical support to Indian entities. Consequently, the receipts do not fall within the ambit of FTS. Even .
IT(IT)A No.907/Bang/2023 Page 10 of 12 assuming that the assessee has sublet the software licenses and earned a markup, such activity does not involve any managerial, technical, or consultancy services. The procurement and allocation of software licenses do not require specialized expertise or skill but are mere administrative functions. The AO's reliance on the "make available" clause is misplaced, as no technical knowledge or know-how has been imparted to the Indian entities.
12.1 We are further of the opinion that the deduction of TDS by the Indian AEs at DTAA rates does not automatically classify the payments as FTS. TDS deduction is a procedural compliance, and the underlying nature of the transaction must be examined to determine taxability. In the present case, there is no element of technical or managerial service in the reimbursement of software license costs.
12.2 We also note that the payments in question were for software licenses procured for group use, and even if a markup was applied, the nature of the receipts remains that of a business transaction rather than FTS. The assessee has not provided any specialized services beyond cost allocation. Therefore, the taxation of such receipts should be examined under business income principles rather than FTS. The Hon’ble Supreme Court ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT in Civil appeal no. 8734 of 2018 clarifies that payments for software licenses should not be treated as royalty. Similarly, we find that the reimbursement of software license costs does not constitute FTS, as no technical services were rendered. The AO and DRP have erred in mischaracterizing these receipts as FTS without sufficient basis.
IT(IT)A No.907/Bang/2023 Page 11 of 12 12.3 We are of the considered opinion that the characterization of a transaction must be based on its substance rather than its label. In this case, the absence of technical involvement by the assessee in providing the software licenses demonstrates that the payments are in the nature of cost reimbursements or business transactions and not technical services. Hence the AO’s conclusions are based on assumptions rather than verifiable evidence. In light of the foregoing discussion, we hold that the GIS Charges received by the assessee do not qualify as Fees for Technical Services under the India-UK DTAA. The subletting of software licenses does not involve the transfer of technical knowledge, expertise, or skill, and therefore, the payments cannot be taxed as FTS. Furthermore, the reliance placed by the AO and DRP on the "make available" clause is unfounded, as no technical knowledge was transferred. Accordingly, the addition made by the AO and upheld by the learned DRP is deleted. Hence the ground of appeal of the assessee is hereby allowed.
13. The issue raised by the assessee in ground No. 3 is that the ld. AO/DRP erred in levying higher fees of ₹ 10,000 under the provisions of section 234F of the Act instead of ₹ 5000 only. 13.1 At the time of hearing, the learned counsel for the assessee prayed to give a direction to the AO for Levying the fee under the provisions of section 234F of the Act as per the provisions of law. According to the Ld. AR, the fee under section 234F of the Act as applicable for the year in dispute stands at ₹ 5000 only. On the contrary, the learned DR did not raise any objection if the issue is set aside to the file of the AO to levy the fees under section 234F of the Act in accordance to the provisions of law. In view of the above, we are .
IT(IT)A No.907/Bang/2023 Page 12 of 12 inclined to set aside the issue to the file of the AO to levy the fee under the provisions of section 234F of the Act as applicable for the year under dispute. Hence, the ground of appeal of the assessee is hereby allowed for statistical purposes.
14. The issues raised by the assessee in ground numbers 1, 4 to 6 are either general or consequential in nature and therefore, we hold that these grounds do not require any separate adjudication. Accordingly, these grounds are dismissed as infructuous.
In the result, the appeal of the assessee is hereby partly allowed for statistical purposes.