HOME CREDIT INTERNATIONAL A.S.,CZECH REPUBLIC vs. ASSISTANT. DEPUTY COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION, GURGAON

PER SAKTIJIT DEY, VICE-PRESIDENT

Captioned appeal by the assessee arises out of the final

assessment order dated 30.05.2023 passed under section 143(3)

read with section 144C(13) of the Income-tax Act, 1961 (in short

‘the Act’) pertaining to assessment year 2020-21, in pursuance to

the directions of learned Dispute Resolution Panel (DRP).

ITA No.2068/Del/2023 AY: 2020-21

at the outset, the assessee has raised a pertinent issue

questioning the validity of the final assessment order due to non-

implementation of the directions of learned DRP.

non-resident corporate entity incorporated in Czech Republic and

a tax resident of that country. As stated by the Assessing Officer,

the assessee is engaged in the business of data processing,

databank services, administration of networks, provision of

software and consulting in the area of hardware and software. He

has further stated, the assessee provides business support

services for Information System (IS)/Information Technology (IT)

system infrastructure and as a part of its IT related support

services. It also acts as a central procurer of certain off-the-shelf

software licenses and related maintenance services on behalf of

its group companies. In the previous year relevant to the

assessment year under dispute, the assessee received revenue

from various activities/services performed in India. In the return

of income filed for the assessment year under dispute, the

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assessee offered income of Rs.101,75,08,330/-, the details of

revenue offered to tax are as under:

offered to tax, either claiming benefit under India - Czech Double

Taxation Avoidance Agreement (DTAA) or claiming that they are in

the nature of reimbursement without any markup. The details of

such income are, as under:

statements, the Assessing Officer called upon the assessee to

explain the reason for not offering these incomes to tax. In

response, the assessee reiterated its stand that such incomes are

not taxable in India. It was further stated that in view of the

decision of the Hon’ble Supreme Court in case of Engineering 3 | P a g e

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Analysis Centre of Excellence Pvt. Ltd. Vs. CIT, [2021] 432 ITR

471 (SC), the receipts cannot be taxed as royalty. The Assessing

Officer, however, was not convinced with the submissions of the

assessee. While framing the draft assessment order, he was of the

view that in terms with the agreement, assessee’s group entity in

India has not merely acquired software licences, but has acquired

right to use the IT infrastructure maintained by the assessee, on

which, the software is hosted. Thus, he held that the assessee has

provided services to the Indian entity to use or right to use of its

IT infrastructure, which is nothing less than equipment. Thus,

referring to clause (iva) of Explanation 2 to section 9(1)(vi) and

Article 12 of India - Czech DTAA, the Assessing Officer held that

the receipts are to be treated as royalty. Accordingly, he brought

to tax the amount of Rs. 28,79,76,683/-. Against the draft

assessment order, the assessee raised objections before learned

DRP. While disposing of the objections, learned DRP observed

that the Assessing Officer has not illustrated, how the IT

infrastructure is maintained and is beneficial to the Indian group

entities in terms of acquiring the right to use the same. Thus,

ultimately, learned DRP directed the Assessing Officer to consider

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assessee’s argument and complete the assessment through a

speaking and reasoned order. While issuing such direction,

learned DRP also made it clear that the Assessing Officer shall

not conduct any fresh inquiry, but shall decide the issue based on

documents/submissions available in the assessment record. After

receiving the directions of learned DRP, the Assessing Officer,

however, passed the final assessment order, more or less, in tune

with the draft assessment order holding that the receipts are

towards equipment royalty.

submitted that before the Assessing Officer as well as before

learned DRP, the specific case of the assessee was that the

receipts are on account of sale of off-the-shelf software and

reimbursement of cost without any markup. He further submitted

that the assessee has asserted before the departmental

authorities that the receipts are not for use or right to use of any

equipment either in the nature of IT infrastructure or anything

else, so as to treat them as equipment royalty under section

9(1)(vi) read with Explanation 2 clause (iva) and Article 12 of India

– Czech DTAA. He submitted, though, learned DRP issued a

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specific direction to the Assessing Officer to specify through a

speaking and reasoned order, how the receipts constitute

equipment royalty and what are the hardware devices and

software applications provided to the Indian entities for use or

right to use, however, the Assessing Officer has failed to carry out

such directions.

counsel submitted, nowhere in the assessment order, the

Assessing Officer has specified the details of IT infrastructure

comprising of hardware devices and software applications given to

the Indian entity for use or right to use. Thus, he submitted, due

to non-implementation of the directions of learned DRP,

assessment order deserves to be declared invalid. For such

proposition, he relied upon a decision of the Coordinate Bench in

case of Bechtel Limited Vs. ACIT & Ors, ITA No. 8904/Del/2019

and Ors., dated 31.01.2024.

learned Departmental Representative submitted that though, it

may be a fact that the assessee had provided software licenses to

the Indian entity, however, such software is hosted in the IT

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infrastructure maintained by the assessee, which included server

and other systems. He submitted, the Indian entity can access

the software by accessing server and other hardware devices

connected therewith. Therefore, the receipts are to be treated as

equipment royalty.

materials on record. We have also applied our mind to the judicial

precedents cited before us. The short issue arising for

consideration is, whether the Assessing Officer, while passing the

final assessment order, was justified in holding the receipts in

dispute as equipment royalty under section 9(1)(vi) of the Act read

with Article 12 of India – Czech DTAA. Materials on record reveal

that in course of assessment proceedings, the Assessing Officer

issued a show-cause notice to the assessee to explain, as to why

the receipts in dispute should not be treated as royalty/FTS, as,

such receipts are ancillary to enjoyment of such services, for

which, royalty income has been received. In response to the show-

cause notice, assessee had furnished a detailed reply submitting

that the amount received towards licence fee cannot be treated as

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royalty, as, it was for a non-exclusive right given to the Indian

entity to use copyrighted software.

maintenance fee, the assessee had submitted that it had procured

certain licences centrally for its group companies and has cross-

charged the Indian affiliates the licence and maintenance fees in

respect of the same on a cost-to-cost basis. While framing the

draft assessment order, the Assessing Officer observed that the

assessee maintains a global IT infrastructure, which consists of

owned, leased, supported and hosted IT systems etc. According to

him, IT infrastructure made of various hardware devices and

software/applications is a scientific equipment and also in the

nature of commercial equipment. He has further observed that

the agreement between the assessee and Indian group entities

provide for use or right to use of equipment. Thus, in these

premises, he treated the receipts as royalty.

finding of the Assessing Officer, the assessee made detailed

submissions categorically denying the allegation that it had

provided use or right to use of any IT infrastructure etc. to the

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Indian group entities. The specific submissions/averments of the

assessee before learned DRP denying the allegation of the

Assessing Officer are enumerated below:

“2.The Assessee respectfully submits that the allegations of the Ld. AO that the Assessee has a huge IT infrastructure for the group companies, which consists of owned, leased, supported, and hosted IT systems, hardware devices, internet, and intranet systems and also that the Assessee has not facilitated purchase of software for Home Credit India Finance Private Limited CHCIFPL'), rather has made available complete infrastructure to all its group companies including HCIFPL, are erroneous. This is directly contrary to the submissions made by the Assessee which were discussed in detail during the course of assessment proceedings.

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or decompile or otherwise attempt to derive source code from any Licensed Software... 4. From above, it is dear that the above agreement is for the sub- license of a software by the Assessee to HCIFPL for HCIFPL's internal use, without granting any underlying rights in the copyright to EICIFP ere is no consideration for the use of any IT infrastructure under this agreement. 5.Furthermore, the Assessee also centrally procured certain off-the shelf softwares (inter-alia Genesys, IBM Qradar, Vmware, Splunk etc.) and their related maintenance services on behalf of the Home Credit Group companies. Such modus operandi enabled the group to optimize third-party costs and brought efficiency into the procurement process. Thereafter, the costs incurred by the Assessee for procuring the third-party software and services were cross charged to the group companies on a cost-to-cost basis. 6. In this background, the Assessee received reimbursement of license fee and maintenance charges of INR 8,59,39,213 and 1NR 20,07,22,157, respectively from HCIFPL. Sample agreement in respect of such reimbursements was furnished to the Ld. AO vide submission dated 2 March 2022. Relevant extracts from the said agreement are reproduced below for ready reference: (B) Initial User shall, as a service company of the Home Credit Group and Genesys' partner procure central purchases of the Licensed Software under the MSLA for the purposes and use of the Affiliates including the New User in order to achieve the best commercial conditions of such purchases. (C) Parties wish to establish a process of transfer (i.e. assignment, sublicense etc.) of the Licensed Software by the Initial User to the New User throughout the validity of this Agreement in order to facilitate process of distribution of the Licensed Software within the Home Credit Group. …….. 1.1…….. Licensed Software: means Genesys' software products Maintenance: means Genesys Care of the respective Licensed Software in the scope specified in MSLA and at ... ……. 2.1.2 The Initial User shall procure purchase of the Licensed Software for the purposes and use of the New User and place order with Genesys (Ind/ or its authorised partner for the quantity of Licenses required by the New User …… 3.3. The Parties acknowledge that the Initial User shall procure with Genesys renewals of the Maintenance in relation to the already assigned Licensed Software on behalf of the New User. Renewal of the Maintenance to the already assigned Licensed Software may be ordered by the Initial User on behalf of the New 10 | P a g e

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User automatically unless the New User informs the Initial User that it does not intend to use the Licensed Software any longer and does not require the respective Maintenance renewal. 3.4. Renewal of the Maintenance in relation to the already assigned Licensed Software shall be considered as procurement of Maintenance by the Initial User on behalf of the New User, which shall be paid to Genesys by the Initial User on behalf of the New User, whereas the Initial User shall be entitled to re-invoice costs for the renewed Maintenance to the New User. 7. From above, it can be seen that under this agreement the Assessee is facilitating the procurement of a software and its related maintenance to IICIFPL. This is not a case of IT infrastructure belonging to the Assessee being used by HCIFPL under this agreement. 8. The above extracts establish that the claim of the Ld. AO that the Assessee had a large IT infrastructure which was in the nature of a scientific equipment, and which was used by HCIFPL is baseless and entirely based on surmises. The understanding captured by the Ld. AO in the draft assessment order is entirely incorrect and misplaced. 9. At this stage, without prejudice to the above, the Assessee also wishes to highlight that HCIFPL maintains, supports and develops its own elaborate IT infrastructure in India, as required for its business operations and there is a large team of local IT experts who are responsible for maintaining and running such IT infrastructure. HCIFPL doesn't use IT infrastructure located outside India for running its core business activities with respect to India regulations. It is evident from the above, that due to commercial and legal requirements, HCIFPL doesn't use Assessee's infrastructure for its core business operations and IA. AO, without appreciating the facts of case and nature of business, has erroneously assumed that the Assessee has provided some IT infrastructure to FICIFPL for running its core business. 10. At this stage, it would be relevant to examine the provisions of the law as well as various principles held by multiple judicial precedents with respect to equipment royalty (i.e., consideration for the use or right to use industrial, commercial or scientific equipment). 11. Explanation 2 to section 9(i)(vi) of the Act defines 'royalty' as follows: Explanation 2. — For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for- (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; ………. (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 4413B; …………….. (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).

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Relying on its ruling in the case of Asia Satellite Telecommunications Co. Ltd [2011] 197 Taxman 263 (Delhi HC), the Honble Delhi HC has upheld the principle that the use or right to use any industrial, commercial or scientific equipment as envisaged in clause (iva) of Explanation 2 to sec.9(1)(0) contemplates full control and possession of the user over the equipment. Extracts of the ruling are reproduced below: 58……….The following extract from Asia Satellite Telecommunications Co. Ltd's case (supra) takes note of the OECD Commentary and Klaus Vogel on Double Tax Conventions, to show that the process must in fact be secret and that specifically, income from data transmission services do not partake of the nature of royalty……………………… ………………..As regards treaties that include the leasing of industrial, commercial or scientific (ICS) equipment in the definition of royalties, the characterization of the payment will depend to a large extent on the relevant contractual arrangements. Whilst the relevant contracts often refer to the lease of a transponder, in most cases the customer does not acquire the physical possession of the transponder but simply its transmission capacity: the satellite is operated by the lessor and the lessee has no access to the transponder that has been assigned to it. In such cases, the payments made by the customers would therefore be in the nature of payments for services, to which Article 7 applies, rather than payments for the use, or right to use, ICS equipment ……………………….. 60. Consequently, since we have held that the Finance Act, 2012 will not affect Article 12 of the. MAAs, it would follow that the first determinative interpretation given to the word "royalty" in Asia Satellite, wizen the definitions were in fact pari materia (in the absence of any contouring explanations), will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement, unless the said DTAAs are amended jointly by both parties to incorporate income from data transmission services as partaking of the nature of royalty, or amend the definition in u manner so that such income automatically becomes royalty. - DDIT v. Savvis Communication Corporation 120161158 ITD 750 (Mumbai nArr) Relevant extract has been reproduced below (emphasis supplied): ....A payment cannot be said to be consideration for use of scientific equipment when person making the payment does not have an independent right to use such an equipment and physical access to it... - Channel Guide India Ltd. v. ACTT (2 012125 taxmann.00131 25 (Minn ITAT) In absence of control and possession of user over equipment, amount paid to non-resident company cannot be held to be royalty for use or right to use any industrial, commercial or scientific equipment. Relevant extract has been reproduced below (emphasis supplied) 13 | P a g e