M/S PEPPERL & FUCHS (INDIA) PRIVATE LIMITED,BANGALORE vs. INCOME TAX OFFICER WARD-5(1)(3), BANGALORE

Per Jason P Boaz, Accountant Member

2.1 The assessee, a company, engaged in the business of manufacture and sale of Industrial Automation Components, filed its return of income for Assessment Year 2015-16 on 30.11.2015 declaring Nil income after set off of brought forward losses amounting to Rs.8,62,64,627/-. The case was selected for scrutiny for this year and Page 2 of 5 the assessment was concluded u/s 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) vide order dated 22.12.2017 wherein the assessee’s income was determined at Rs.53,71,144/-. This was on account of a disallowance of Rs.53,71,144/- made by the Assessing Officer (‘AO’) u/s 40(a)(ia) of the Act for failure on the part of the assessee to deduct tax at source on payments it made for the right use of licence of softwares as required u/s 195 of the Act. On appeal, the CIT(A)-5, Bangalore, dismissed the assessee’s appeal on this issue vide order dated 01.05.2018.

3.1 Aggrieved by the order of CIT(A)-5, Bangalore, dated 01.05.2018 for Assessment Year 2015-16, the assessee has preferred this appeal before the Tribunal, wherein it has raised the following grounds:

1. Opportunity of being heard not provided to the Appellant 1.1 The Commissioner of Income-tax (Appeals) - 5, Bengaluru [hereinafter referred to as "the learned CIT (A)"] has erred in not giving an opportunity of being heard to the appellant and no submission or details have taken on records. 1.2 The learned AO has erred in violating the principles of natural justice by not providing an opportunity of being heard. 1.3 The learned CIT (A) has erred in stating in his order that "during the appellate proceedings the appellant submitted the copy of agreement of avoidance of double taxation and prevention of fiscal evasion with Singapore and the framework agreement on management and IT support for companies belonging to the P+F Group along with the extracts of ledger account of appellant in the books of Pepperl + Fuchs Pvt. Ltd. for the year 2009-10..." 1.4 The appellant had filed additional evidences to substantiate that the amount paid to associated enterprise is in the nature of reimbursement, however, the learned CIT(A) has erred in passing an order without taking such evidences into consideration. Amount paid represents reimbursement of expenses 2. 2.1 The learned CIT(A) has erred in confirming the disallowance of reimbursement of software licenses, hardware maintenance costs and VPN support fees amounting to Rs.1,79,03,814 under section 40(a)(ia) of the Act. The break-up of the expenditure is provided below:-

Sl. Particulars Amount No. (INR) 1. Allocated costs reimbursed to Pepperl + Fuchs Pte 1,67,01,118 Ltd., 2 Allocated costs reimbursed to Pepperl + Fuchs, 10,32,410 Germany 3 Other domestic purchases 1,70,286 Total 1,79,03,814 2.2 The learned AO has erred in disallowing Rs. 1,79,03,814 (inadvertently including INR 1,70,286 pertaining to domestic purchases) as payment made towards reimbursement of software licenses due to non-deduction of tax at source under section 40(a)(i) (inadvertently mentioned as under section 40(a)(ia) of the Act in the assessment order). 2.3 The learned AO has erred in not appreciating the fact and separately adjudicating the sums reimbursed to Pepperl + Fuchs GmbH, Germany amounting to Rs.10,32,410 and amount paid to domestic vendors amounting to INR 1,70,286. 2.4 The learned CIT(A) ought to have appreciated that the evidences submitted before the learned CIT(A)'s office on 15 May 2018 clearly substantiates that payments made are pure reimbursements. 2.5 The learned CIT(A) has erred in not taking into consideration the additional evidences submitted to his office and instead stating that payments made to P+F Singapore are not proved to be reimbursement of expenses and are found to be direct payments to P+F Singapore for services rendered. Reimbursed amount is not taxable as 'royalty' under Section 9(1)(vi) of 3. the Act: 3.1 Notwithstanding and without prejudice to the above, the learned CIT(A) ought to have appreciated that the payment for software licenses, hardware maintenance costs and VPN charges are not in the nature of 'royalty' as the same is for usage of a 'copyrighted article' and not for usage of 'copyright'. 3.2 The learned CIT(A) has erred in stating that amount re-imbursed towards software license/ services such as Movex workplace (license and maintenance), Blackberry tool, client service software etc., ensures the effective management and quality of services through standardization and reduces the overall cost and accordingly cannot be considered as 'copyrighted article'. Notwithstanding and without prejudice to the above, the learned CIT(A)/ 4. Assessing Officer ("AO') has disallowed payments for software without deduction of taxes at source under section 40a(ia) as against 40(a)(i) of the Act as the payee is a non-resident. Interest under Section 234A — INR 1,30,389 5. 5.1 The learned CIT(A) has erred in upholding the levy of interest by the learned assessing officer under section 234A which is applicable only on defaults in furnishing return of income before the prescribed due date and the appellant has filed the return of income before the applicable due date.

3.2.1 The only issue for consideration and adjudication before us is the disallowance of Rs.53,71,144/- u/s 40(a)(ia) of the Act for failure to deduct tax at source u/s 195 of the Act in respect of payments made by the assessee for the right to use software licence. The learned AR for the assessee fairly conceded before the Bench that this very issue is squarely covered against the assessee by the decision of a co-ordinate bench of this Tribunal in the assessee’s own case for Assessment Year 2009-10 in IT(TP) A No. 227/Bang/2014 dated 14.09.2018. On a perusal thereof, we find that the co-ordinate bench in the aforesaid order in the assessee’s own case for Assessment Year 2009-10 (supra) at paras 29 and 30 of its order has decided this issue against the assessee, following the decision of the Hon’ble Karnataka High Court in the case of Samsung Electronics Co. Ltd., (2011) 16 taxmann.com 141 (Kar); holding as under:

“29. We have heard the rival submissions. It is seen that the case of the 'assessee is that the payment was made for right to use the software and such payment was not in the nature of royalty within the meaning of Explanation (2) to section 9(1)(vi) of the Act. Further, the plea of the assessee was that the parent company incurred expenditure for purchasing software and the same was reimbursed by the assessee. The contention of the assessee was that reimbursement was not subject to TDS u/s. 195 of the Act. We are of the view that the payment though was made as reimbursement, was in fact a payment for purchase of software. The fact that the parent company made the payments to the licensor which was reimbursed by the assessee to the parent company will not make the payment in question as reimbursement. In other words, it was a payment by the assessee to the licensor of the software through the parent company. Therefore the provisions of section 195 will stand attracted.

3.2.2 Respectfully following the decision of the Hon’ble Karnataka High Court in the case of Samsung Electronics Co. Ltd., (supra) and the decision of the co-ordinate bench in the assesssee’s own case for Assessment Year 2009-10 in IT(TP)A No. 227/Bang/2014 dated 14.09.2018, we find no reason to interfere with the decision of the CIT(A) in holding that the payment in question being for right to use the software was in the nature of royalty and therefore the assessee was liable to deduct tax at source on such payments u/s 195 of the Act and for failure on its part to do so, the AO had correctly invoked the provisions of section 40(a)(ia) of the Act. Consequently, the grounds raised by the assessee (supra) are dismissed.

Order pronounced in the open court on this 5th day of December, 2018.