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Income Tax Appellate Tribunal, DELHI BENCH G: NEW DELHI
Before: SHRI i-I.S.SIDHU & SHRI PRASt{ANT MAHARISHI
ORDER PER PRASHANT MAHARISUIL-A.M.
All these appeals for AY ] 999-2000 to 2006-07 have been filed by the assessee against the order cf the ld CIT (A) passed on 28.02.2014 upholding the action of the ld Assessing Officer in passing order ujs 201 and 201(lA) of the Income Tax Aci, ll)b I dated 28.09.2006 holding that the tax should have been deducted on remittance made by the assessee to SMS Mjs. Demag AG, Germany I deducting tax at source uj s 195 of the Act. wit.hou 2. The assessee has raised the following grounds of appeal in all these appeals as under:-
1. That the order DC the lei Commissioner of Income-tax(Appeals) (CIT(A) is bad, both in law ;P'c! on facts of the else.
SMS Iron Technoiogy Pvt Ltd V ITa TDS Ward -2 International Taxation New Delhi to 4486/ Del/2014 Financial Year 1999-2000 to 2005-06 2. That the ld CIT(A) has erred in upholding the tax demand of Rs. 8774548/ - including interest of Rs. 3065522/-.
3. That the ld CIT(A) has erred in upholding the decision of the ld Assessing Officer treating the appellant as assesse in default ix] s 201(1) Income Tax Act, 1961.
That the ld CIT(A) has erred in upholding the decision of the ld Assessing Officer that the appellant has failed to comply with the provisions of Section 195 of the Act without appreciating the facts of the case.
5. That the ld CIT(A)has erroneously upheld that the payment as made by the appellant to the German Enterprise towards reimbursement of costs for intranet, SAP charges, represented income of the nature of Royalty and were changeable to tax @10(%on the gross amount.
6. That the ld CIT(A)has erred in rejecting the various contentions of the assessee in respect of non taxability of the relevant amounts in terms of provisions of agreement for avoidance of Double Taxation (ADDDT) and provisions of the Act.
7. That the ld CIT(A) has erred in not following the decision of the Hon'ble Income Tax Appellate tribunal New Delhi on same issue in appellant's own case for AY2000-01, and in various decisions of High Courts and other courts cited by the appellant.
8. That the appeal is within the time as order of the ld CIT(A)was received on 19th June 2014.
The brief facts of the case is that the assessee is a subsidiary of a German company, engaged in the business of supply of assemblies / sub assemblies of metallurgical equipment, provisions of consultancy and technical services in design and engineering to ferrous and non-ferrous sectors. On the basis of certification of Chartered Accountant with the authorized dealers I.e. Bankers for foreign remittances, it was noticed that for FY. 2004-05 the assessee has remitted money to its parent company SMS Demag AG, Mis Germany without deduction of tax at source vs ] s 195 of the act and therefore, enquiry was made. It was found that certain payments were made on which tax are not deducted at source ii] s 195 of the Act. Such payments are pertaining to iruranct charges, payment of SAP software. The ld Assessing Officer held that above services constitute royalty u/s 9(1)(vi) of the Act and it has deemed to accrue or arise in India hence, chargeable to tax ii] s 5(2) of the Act in the hands of the non-re sident recipient. Therefore, 21P
SMS Iron Technology Pvt Ltd V ITa TDS Ward -2 International Taxation New Delhi to 4486/ Del/2014 Financial Year 1999-2000 to 2005-06 u/s 195 of the Act tax should have been deducted thereon. With respect to the applicability of dou blc laxation avoidance agreement it was held by him that same is also chargeable to tax as 'Royalty' under Article 12(3) of the Double Taxation Avoidance Agreement between India and Germany. Hence, according to him the tax was also required to be deducted as per DTAA. Therefore, the ld Assessing Officer held that assessee has paid following sums for intra net charges and SAP software for respective financial years as under:-
-- i -SAP~=l - Intr~net expenses FY I maintenance ! Booked/ debited , I Exp I -- I o __ . -- ;18248673 1999-200 i 2503235 ! 2000-01 -- --~~~~- 9847197 : 6837057 2001-02 i 3613633 2002-03 ~---- - - ,--- ~~~~~----1 ; 1507672 2003-04 ! --~-------I -----~---~ 5i65815 2004-05 - -. - ------------ 1491658 : * 7864822 2005-06 I 1------------ --- 13-5453787 21625975 - ------~-----' --- -------------- - *Exchange fluctuation difference 4. Based on this the ld Assessing Officer was of the view that tax chargeable on the royalty income ac.ordmg to DTAAis 10';'-;)and therefore, short deduction of tax was worked aLL thereon. Consequently, tax liability u/s 201(1) was worked out for all the years together at Rs. 5708206/-_ Consequently, the interest was also worked (Jut u/s 201(lA) of the Act amounting to Rs. 3066522/-. The order u/ s 201 and 201 (1A) of the Act was passed on 29.09.2006.
Assessee aggrievcd wn.h the order of the ld Assessing Officer preferred an appeal before the ld elT(A) who vide order dated 28.02.2014 confirmed the 3 I F
- --- - -------------~---- Pvt Ltd VITO SMS Iron Technoogv TDS Ward -2 International Taxation New Delhi to 4486/ Del/2014 Financial Year 1999-2000 to 2005-06 finding of the ld Assessing Officer by the consolidated order. Therefore, the assessee is in appeal before us.
The ld AR submitted that the issue squarely covered in favour of the IS assessee as in the case of the recipient of the income i.e. SMS Demag AG for AY2012-13 the ld DR!> has held that above sum received by the assessee in relation to SAP and intra net charges are not fees for technical charges as well as the royalty as per DTAA.He therefore, submitted that according to the directions of the Id DI~Pin the case of the recipient when such sum is not chargeable to tax in India there cannot be any withholding tax liability on the assessee. He Iurt.hcr submitted that the coordinate bench in case of the assessee for AY 2000-01 in ITA No. 3636jDelj2008 has held that disallowance uj s 40(a)(i) cannot be made in the hands of the assessee for non deduction of tax at source on these payments. Therefore, he submitted that assessee cannot be asked to deduct tax at source. He further submitted that actually the amount is payable as reimbursement of the expenditure to the holding company and therefore, no tax is required to be deducted. For this he relied upon thc decision of Horr'blc Supreme Court in Case of DIT Vs. AP Moller Maersk AS 78 Taxmann.com 287 (S.C). He further relied upon the decision of Hori'blc Aridhr a Pradesh High Court in Sriram Refregeration Industries Vs. ITO 49 Ta...xrriann.com 131 (AP).He further submitted that as payment is made to the group concern and is in nature of reimbursement the concept of mutuality applies and therefore, no tax is required to be deducted on such sum. For this he relied on the decision of ITATMumbai Bench in case of DClT Vs. KPMG 81 Taxmann.com 118. In the end he raised an additional argument that the proceedings are initiated on 01.03.2006 for all the financial year concerned above and therefore, in view of the decision of the Honble Delhi High Court in case of NHK Japan Broadcasting Corpora LionVs. ClT 305 ITR ITI the notices cannot be issued beyond 4 years and hence, the notices are time barred and accordingly the orders too.
The ld DR vehemently relied on the orders of lower authorities and submitted that tax IS rcqu m-d to be deducted on both the above sum as 41 p SMS IronTechnologv Pvt Ltd VITO TDSWard-2 InternationalTaxationNewDelhi ITANo4480to 4486/Del/2014 FinancialYear1999-2000to 2005-06 they are neither reimbursement nor mutual concerns. He further submitted that there is no time limit prescribed for respective years u/s 201(1) of the Act for those years. He further submitted that the ld DRP has decided the issue on the basis of the order of the coordinate bench which has not considered the retrospective amendment to section 9 of the act. Therefore, the DRP orders do not decide the issue correctly. He further submitted that the ld DRP has accepted the claim of the assessee that it is reimbursement without any basis.
We have carefully considered the rival contentions. The Assessing Officer has issued the show cause notice on 01. 03.2006 to the assessee for FY 1999-2000 to 2005-06. The Hori'ble Delhi High Court in CIT Vs. NHKJapan Broadcasting Corporation in 305 ITR 137 in para No. 21 has held that where no limitation is prescribed as in section 201 of the Act then action must be initiated within the period of 4 years. Accordingly, the notice issued on 01.03.2006 can cover only the period of four years preceding that year. In the present case the financial year arc 1999-2000 to 2005-06, FY therefore, the ld Assessing Officer cannot assume jurisdiction for FY 1999- 2000 and 2000-01 accordingly', the ld AO cannot work out short deduction of tax on SAP Maintenance expenses of Rs. 18248673/- and Rs. 2503235/- for FY 2000-01 respectively. Accordingly, respectfully following the decision of the Hon'ble Delhi High Court we direct the ld Assessing Officer to not to treat the assessee in default u/s 201(1) as well as not to charge interest consequently, u/s 201(lA) of the Act for these two financial years. u/ s 201 (1) I 201 (1A) for Accordingly, the orders passed F Y 1999-2000 and 2000-01 , consequent tax and interest thereon covered in the order for these two years are cancelled.
Now coming to the next COli tentions raised by the assessee that it is a reimbursement of expenses arid therefore, no tax is required to be deducted thereon. It was further pleaded by the assessee that the issue is squarely covered in favour of the assessee by the order of the coordinate bench in assessee's own case for assessment year 2000 - 01 m dell 2008, dated 29I 01 /2010 as well as by the order of the Ld. DRP in ,~\\ 5 I P ,~ .\ \\ 't.
SMS Iron Technology Pvt Ltd VITO TDS Ward -2 International Taxation New Delhi to 4486/ Del/2014 Financial Year 1999-2000 to 2005-06 case of the recipient of the income. We have carefully perused the above argument. It was also raised before the Ld. ClT (A)which was rejected by him. The Ld. CIT (A)asked the appellant to file the copies of all agreement, in contracts in pursuance to which payments for SAP and intranet charges were made so that the nature of the contracts in transactions could be examined in detail, particularly with reference to the provisions of the act and the provisions of the India Germany double taxation avoidance agreement. Only from those agreements it could have been determined that whether the amount paid by the assessee is reimbursement of expenditure or not. The above agreements despite repeated query were not filed by the before the Ld. crr (A). It was stated assessee by the appellant that the agreements are not located at present and further they were not relevant for deciding the case according to the assessee. Unless the assessee produces the agreement before the authorities it is not possible to accept that the above payments are merely reimbursement of the expenditure. The assessee has also not produced any debit notes or working of such reimbursement before us also. In absence of basic details that the amount of expenditure paid by the assessee to its associated enterprises is only reimbursement of expenditure, arguments of the assessee cannot be accepted. If assessee would like to have the benefit of various decisions cited before us it is the duty of the assessee to make proper claim thereof by producing what was the original cost incurred by the recipient of the income globally and how the expenses have been allocated to the assessee substantiated by agreements. If the expenditure are incurred by the assessee and same were paid by the associated enterprise on the basis of the actual charges pertaining to the assessee, then only it can qualify as a reimbursement of expenditure. When Indian subsidiary company incurs expenses or avails any service from some third party abroad and payment to such third party is routed through its holding or related company abroad, provision for deduction of tax at source apply as if assessee has made payment to such independent party de hors routing of payment through holding company. The remission of amount to the holding or related company for finally 6IP;' c-. \ r; .:-. \\ .J
SMS Iron Technology Pvt Ltd V ITa TDS Ward -2 International Taxation New Delhi to 4486/ Del/2014 Financial Year 1999-2000 to 2005-06 making payment to the third person will be considered as payment to third party. It cannot be termed as reimbursement of expenses to the holding company. If the contention of the assessee is accepted and the payment to third party, routed through its holding co. is considered as reimbursement of expenses to the related party, then probably all the relevant provisions in this regard will become redundant. Hence, we reject the argument of the Ld. authorised representative that it is merely an reimbursement of expenditure. The next argument was that coordinate bench has decided this issue in favour of the assessee in assessment year 2000 - Olin ITA No. 3636/del/2008 is also not sustainable. The Ld. eIT appeal has given detailed reasons that coordinate bench concluded on the basis of the findings that the assessing officer would not be justified in disallowing 50% of depreciation on the ground that provisions of section 40 (a) (i) were applicable. He further held that that coordinate bench was not on the issue whether the tax is required to be deducted or not. But was on the issue of whether the depreciation disallowance made by the Ld. assessing officer by applying the provisions of section 40 (a) (i) is proper or not. The coordinate bench has also not given any finding about the deductibility of tax at source on the payment of SAP charges and intra net charges. In view of this, reliance upon the decision of the coordinate bench in assessee's own case for assessment year 2000 .. 01 is not proper, hence, rejected. Further regarding the reliance placed by the assessee on the decision of the Ld. dispute resolution panel in case of the recipient of the assessee is also not correct in view of the fact that Ld. DRP has relied upon the order of the coordinate bench in aSSeSSel?'Sown ease for assessment year 2000 - 01, while deciding that that royalty is not chargeable to tax in India. Further, the Ld. DRP has also not examined whether the agreement pertaining to the payment of these charges by the assessee to the recipient's on basis of the actual cost incurred by the assessee or merely crossed charged facilities. Further more for the reasons best known to t he assessee agreement of such payment have never been produced before the lower authorities as well as before us. In view of this the reliance on tile direction of the Ld. dispute \ 7 I a g ~\ \\ \~~
SMS Iron Technology Pvt Ltd V ITa TDS Ward -2 International Taxation New Delhi to 4486/ Del/2014 Financial Year 1999-2000 to 2005-06 resolution panel in case of the recipient of the income does not serve any purpose. Consequently, the decisions placed before us do not apply to the facts of the case before us in absence of any document produced by the assessee showing the agreement and the terms of such expenditure as well as the details of reimbursement of the expenditure made by the assessee as claimed. The Ld. authorised representative has further relied on the decision of the coordinate bench in 81 Taxmann.com 118 in case of DCIT versus KPMG wherein it is been held that Where amount remitted by assessee company to its member concerns, in nature of reimbursement of cost, was made to enable them in discharging its function within terms of membership agreement between assessee and its member concerns, same would not be subjected to TDS on basis of doctrine of mutuality. In that particular case in para No. 10 the coordinate bench has discussed the copies of the membership agreement entered into by that assessee with its member firms and after that they have reached at the conclusion. In the present case, in absence of any such agreement produced before the lower authorities or before us the benefit of above decisions cannot be given to the assessee. In view of this the reliance placed by the assessee on that decision . . is rejected. Further more, the assessee has also stated that issue IS squarely covered in favour of the assessee by the decision of the Hon'ble Delhi High Court in case of err versus infra soft Lid 220 Taxmann 273. On examination of the arguments of the assessee it is noted that in that particular case the issue before the Honb!c high court was that whether amount received by assessee, a non-resident company, for granting license to use its copyrighted software for Iicencces own business purpose only, could not be brought to tax as 'royalty' under article 12(3) of India-US DTAA.In the present case, license of the cc.pvrightcd software of the parent of the assessee is not given to the asse ssc. for use of its own business. In the present case before us it is an payment made by the assessee for use of SAP software which was cu siornised for the group concern, further more intranet charges paid are also not copyrigbted article. Furthermore, the assessee has also not given any agrccrncrn that what kind of software
SMS Iron Technology Pvt 'd VITO TDS W"r;, 2 International Taxation New Delhi 11/\ No 4480 to 4486/ Del/2014 finanual Year 1999-2000 to 2005-06 assessee was using, hence, brncfit of the above dcci sion s cannot be given to the assessee. In view of this the reliance placed by the assessee on that decisron is distinguishable II facts. To payment made by the Ulc L'.~oL assessee for SAP charges it IS impor tan: ;() note that payment of such charges are made for use of ).ccn sed software- on the Internet/ intranet and payment is also contingent the basis of n urn bcr of the user license or C;r:J number of sessions for whicn the software 1S used. in the present case the technical support would also be provided by SAP, a German company and not by the recipient of the expenditure. In view of this, the above software receipt is scientific equipment under the Act and India Germany Tax Treaty. Hence, such payment is correctly regarded as royalty by the lower authorities according to article 12 of the UTAA. In view of this, the above payment made by the assessee to its holding company is chargeable to tax as royalty according to the income tax act as well as according to the double taxation avoidance agreement. Therefore, on such payment assessee should have deducted tax at source under the provisions of section 195 of the income tax act at the beneficial rate of ] U'!,) provided under the double taxation avoidance agreement. In view of this, the order passed by the Ld. assessing officer under section 201/201 (IA) for financial year 2001 - 2002 to 2005 - 2006 are correctly confirmed by the Ld. CIT (A). Hence, appeal of the assessee with respect to the financial }Ta!S 2U()I - 2002 to 2005 - 2006 are dismissed.
In the result appeal of the a ssc ssee for financial year 1999-2000 and 2000- 2001 are allowed Whereas appeals for I, .WO 1 02 to 2005 - 06 are dismissed. 1\ ! \ in the open court on25j ]0/201'/. Order pronounced 0 I