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Income Tax Appellate Tribunal, “C” BENCH, PUNE
Before: SHRI S.S. VISWANETHRA RAVI & SHRI G.D. PADMAHSHALI
आदेश / ORDER
PER S.S. VISWANETHRA RAVI, JM :
This appeal by the assessee against the order dated 13-12-2022 passed by the ACIT (IT) Circle-1, Pune u/s. 143(3) r.w.s. 254 of the Act for assessment year 2016-17.
Ground No. 1 is general in nature, hence, requires no adjudication.
The ld. AR submits that the assessee is not interested to prosecute ground Nos. 2, 2.1 and 2.2, hence the same are dismissed as not pressed.
The ld. AR submits that ground Nos. 3 consisting of 3.1 to 3.6 and 4 consisting of 4.1 to 4.8 are relating to only one issue concerning rendering of technical services under India-Singapore tax treaty being reimbursement of cost without any mark-up consequently not warranting any disallowance on account of non-deduction of tax at source.
We find, that the present dispute concerning ground Nos. 3 and 4 is in second round of litigation before this Tribunal. The assessee placed on record order dated 24-03-2021 passed in first round of litigation by the Tribunal in assessee’s own case in for A.Y. 2016- 17, wherein, the Tribunal remanded the issue of IT expenses to the file of AO for examination of true nature of transactions under which the assessee paid IT expenses of Rs.36,44,508/- on monthly basis, further to determine whether or not tax is deductible at source u/s. 195 of the Act leading to disallowance u/s. 40(a)(i) of the Act. The relevant part of the said order is reproduced as under for ready reference : “14. The fifth item in the tally of expenses disallowed by the AO is `IT Expenses’ amounting to Rs.36,44,508/-. This expenditure stands on a little different footing vis-à-vis the other expenses as discussed supra. Break-up of this amount has been given at page 69 of the paper book, which shows that there are twelve transactions, all taking place on the first day of every month. On enquiry from the ld. AR, it turned out to be monthly payments by the Indian BO to the Singapore HO. The assessee’s stand on this expenditure before the DRP, as reproduced on page 5 of the Direction, was that: “BYK, Germany develops/purchase and maintains common applications, software and other IT Infrastructure for the BYK Group. The total cost of such IT Support services is recharged to BYK Group entities including BYK, Asia Pacific Pte Ltd., i.e. head office based on numbers of users etc. Thereafter, the head office apportions the corresponding cost to the assessee in relation to the usage of IT Support services for the India activities”. Page 131 of the paper book is a copy of the invoice raised by BYK Germany on the Singapore HO having value of Euro 14857. Under the Remarks column, it has been mentioned as “Monthly recurring amount regarding expenses for IT-Services (Ref. IT-Services Agreement)”. The agreement referred to herein is the same agreement as pointed out by the assessee before the DRP on page 16 of the Direction, namely, IT-Service agreement dated 01.01.2007. As against the invoice value of 14857 Euros, the assessee has been charged 6826 Euros by invoice dated 01-02-2016. Thus, it is clear that BYK Germany rendered IT Services, inter alia, to the Indian BO on a regular basis and a monthly charge was raised there against.
15. It goes without saying that the burden to prove a particular expenditure as `reimbursement’ is always on the assessee. We have discussed above the twin conditions for getting covered within the ambit of `reimbursement’. On a consideration of the entire conspectus, there remains no doubt that IT expenses are payment for receipt of intra-group services. As regards the second condition of `reimbursement’ requiring no profit element in the payment, unlike the other expenses as discussed above, the ld. AR could not lead any evidence to demonstrate that the allocation of IT expenses to the Indian BO was without any markup in the given facts. In Sedco Forex International Inc VS. CIT (2017) 399 ITR 1 (SC), the assessee entered into contract with ONGC for hire of their rig for carrying out oil exploration activities in India, for which it was paid mobilization fee. The AO included such amount for computation of deemed profits u/s 44BB. The assessee, inter alia, contended before the Hon’ble Supreme Court that the receipt was in the nature of reimbursement of expenses and hence should be excluded. Rejecting such a contention, it was held where a `fixed amount’ is paid as mobilization fee, which may be more or less than the actual expenses, it cannot be treated as `Reimbursement’ 16. An attempt was made by the Bench to ascertain the exact nature of IT expenses and its relation with the carrying on of the income generating activity of the Indian BO as the AO has treated it as a payment in the nature of fees for technical services. At this stage, it would be relevant to note that the AO analysed the nature of work done by the assessee which is undisputedly of providing technical support services in the Asia Pacific region to the customers of BYK Germany. The assessee allows the customers of BYK Germany to test the effect of the formulations on the customers’ products at its testing facilities. It provides the customers with the basic guidelines as to how to use the formulations on BYK Germany and provide technical support to the customers. Thus, the nature of work done by the assessee is that of providing technical analysis and testing of its parent company’s additives used by Indian customers in their products. In order to find out a link, if any, between the payment of IT expenses by the assessee on one hand and the rendering of technical support services to the customers of BYK Germany on the other hand, by testing the effect of formulations at its testing facilities, the ld. AR was required to submit a copy of the IT Support services Agreement dated 01-01-2007 under which the payment in question was made. The ld. AR expressed his inability to produce the same. Such an Agreement has also not been considered by the authorities below. In our considered opinion, the question as to whether or not TDS was required in the instant case on this payment cannot be decided without examining the nature of IT expense and its correlation with the income earning activity of the assessee. In case, the IT expenses paid are for availing IT services to be utilized in its activity of rendering technical services to the customers in Asia Pacific region, then the matter would come to stage two requiring further analysis for examining if the payment falls in the category of `fees for technical services’. On the other hand, if the IT services are utilised by the Indian BO towards business process outsourcing, payment for the same cannot be treated as fees for technical services. Again, it is relevant to note that deduction of tax at source u/s 195 is warranted not only if the payment is towards fees for technical services. In case the amount is chargeable to tax in the hands of non-resident in any other manner, deduction of tax at source
is warranted and non-deduction would lead to the consequential effect of disallowance. In the given circumstances, when we do not have the benefit of the relevant Agreement and other attending details, we consider it expedient to set aside the impugned order pro tanto and send this issue back to the file of AO for examining the true nature of transaction under which the assessee paid IT expenses of Rs.36,44,508/- on monthly basis and thereafter determine whether or not tax is deductible at source u/s. 195 of the Act and consequential disallowance u/s.40(a)(i), if any. Needless to say, the assessee will be allowed reasonable opportunity of being heard in such fresh proceedings.”
On careful reading of the reproduced portion above, we note that the Tribunal discussed the issue in detail but for having no benefit of examining the relevant agreement and other attending details remanded the issue to the file of AO for examination of true nature of IT expenses. Further, we find the Tribunal observed by examination of break-up of IT expenses that there are 12 transactions taking place on the first day of every month and the said monthly payments made by the Indian BO to the Singapore HO. By referring to invoice value of 14857 Euros, the Tribunal found the assessee has been charged 6826 Euros by invoice dated 01-02- 2016 making it clear that BYK Germany rendered IT Services to the Indian BO on a regular basis and a monthly charge was raised there against.
It is clear from para 15 of the reproduced portion above that the Tribunal held that AR could not lead any evidence to demonstrate that the allocation of IT expenses to the Indian BO was without any markup in the given facts and held that the burden lies on the assessee to prove a particular expenditure as reimbursement. Having held so, the AO conducted giving effect proceedings in pursuance of the direction given by the Tribunal vide order dated 24-03-2021. The AO requested the assessee to furnish supporting cogent evidence such as copies of invoice, agreement dated 01-01-2007 and nature of services rendered by the BYK Germany on account of IT services. In response to which the assessee made submissions which are reproduced from pages 3 to 6 of the draft assessment order dated 17-02-2022. After appreciating the submissions of the assessee, the AO issued show cause notice seeking explanation as to why the IT expenses should not be treated as taxable u/s. 9(1)(vi)/9(1)(vii) of the Act read with Article 12 of the DTAA with Germany. The assessee filed reply to such show cause notice which are reproduced from pages 6 to 15 of the draft assessment order. On an examination of such submissions, the AO held the services rendered by the BYK Germany constitutes fees for technical service within the meaning of section 9(1)(vii) of the Act read with explanation inserted below sub-section (2) of section 9 of the Act and also in terms of Article 12 of the DTAA with the Germany. The relevant part is reproduced as under for ready reference : “5.0 Decision of AO : 5.1 Facts of the case and the submission of the assessee have been gone through. It has been observed that the assessee has been made the following grounds to justify the non-deduction of tax at source u/s. 195 of the Act : (a) Services rendered by the BYK Germany are in the nature BPO and, thus, the same are not FTS within the meaning of Sec. 9(1)(vii) RW Article 12 of the DTAA. (b) The payment has been made to BYK Singapore HO and, thus, correct DTAA applicable is that of "Singapore" and, thus services rendered does not make available technical knowledge, experience, skill, know-how or processes etc and, thus not taxable. (c) Payment made to BYK Singapore is in the nature of "Reimbursement" of actual expenses and thus, the same is not taxable as no income element is embedded in it. d) Payment on a/c of software licenses is not royalty u/s 9(1)(vi) of the Act. 5.1.1 It has thus been argued that disallowance made u/s 40(a)(i) of the Act, be deleted in the set-aside proceedings. The arguments put-forth by the assessee are being dealt with and adjudicated as under: 6.0. BPO services and thus, not FTS: 6.1 In normal parlance, the BPO services means business process outsourcing, which refers to when companies outsource business processes to a third-party (external) company. The primary goal is to cut costs, free up time, and focus on core aspects of the business. The two types of BPO are front office and back office. Back-office BPO entails the internal aspects of a business, such as payroll, inventory purchasing, and billing. Front-office BPO
focuses on activities external to the company, such as marketing and customer service. 6.2 With reference to the aforesaid meaning of the BPO services, it has been observed that "Information Technology service agreement" was executed BYK Germany and BYK Singapore on 1st Day of January 2007. a. The Background of such agreement is as under: "BYK and Customer are members of the ALTANA Chemie qroup. The ALTANA Chemie group recently reorganized the worldwide supply of services by members of the AL TANA Chemie group to other members of the ALTANA Chemie group. Due to this reorganization, BYK will provide worldwide information technology services to the other members of the AL TANA Chemie group. Therefore Customer desires to obtain from BYK, and BYK desires to provide to Customer certain information technology services during the term of, and subject to the terms and conditions of this Agreement." b. The schedule 1 of the agreement has provided that such IT information services constitutes BYK CRM, Archiving OMS TP3 Email, SAP User BW incl. 3rd Level Support, SAP License starting 2012 AFA, Website Monitoring, Asset Management, Basic Operation, notebook encryption, Authorization management/others, Authorization management SAP, ALTANA MOM, WAN connection and support. c. Access to facilities clause: It has been provided that the customer will provide access to the facilities determined necessary by the BYK( Germany) for implementation of IT services. d. In the clause "customer's obligations", it has been provided that the customer shall provide information, technical consultation etc. e. Vide clause 11 of the agreement, the access to the computer system is provided by the either party to access any equipment, computer software, network electronic files or electronic data storage system owned or controlled by other party. 6.3 Thus, it is clearly seen that the aforesaid services are not BPO services but highly technical services rendered with reference to high-end software's and an IT infrastructure created by the BYK Germany. BPO services are generally obtained from the country where cost of professionals is lower and not from the country where the cost of professional is much higher whereas, in this case, the assessee is claiming that the BPO services have been rendered by the BYK Germany to BYK India branch which doesn't seems to be a correct proposition. It is seen that the BYK Germany has created an IT infrastructure for the entire ALTANA group as per the business requirement of the group as such and the access to such infrastructure has been provided by virtue of information technology services agreement as referred supra. The assessee in its submission dated 29/09/2021 and 28/01/2022 has itself mentioned various services rendered by the BYK Germany in terms of the agreement which also clearly establishes that the services rendered are in the nature of "Fees for technical services". The primary purpose of setting up of BYK India was to assist BYK Germany to offer a complete solution package to its customers in India. BYK India is primarily engaged in providing services in the field of testing of BYK group's additives used by Indian customers in their cause. BYK India allows the customers of BYK Germany to test the effect of formulations on the customer's products at its testing facilities and provides the customers with basic guidelines on how to use the formulations of BYK Germany and also provide technical support to the customers. Further, it provides training to the customers explaining the manner of usage of the products so as to achieve optimum results. Thus, it has been observed that the BYK group as such is engaged in highly technical field of additives, formulations, etc. Thus, in such type of business, a service like BPO we generally refers to data-entry is ruled out. 6.4 Thus, in the background of the facts and circumstances and on the basis of material available on record, it is held that the services rendered by the BYK Germany are not in the nature of mere BPO but the same constitutes "FEES FOR TECHNICAL SERVICES" within the meaning of section 9(1 )(vii) r.w. explanation inserted below subsection 2 of section 9 and also in terms of article 12 of the DTAA with the Germany.”
On perusal of the AO’s decision here-in-above, we note that the assessee contended that the services rendered by the BYK Germany are in the nature of BPO, therefore, does not fall under FTS. Further, the correct applicability of DTAA being Singapore, payment made to BYK Singapore is in the nature of reimbursement and payment on account of software license is not royalty. The AO answered each one of the contentions made by the assessee in giving effect proceedings and held the services rendered by the BYK Germany are not in the nature of BPO but the services are highly technical services with reference to high-end software’s and IT infrastructure created by the BYK Germany. Further, he observed that the services rendered by the BYK Germany with reference to agreement are in the nature of fees for technical services.
Before us, the ld. AR raised only contention by referring to ground Nos. 3 and 4 is that the payment made by the assessee to BYK Singapore is in the nature of reimbursement.
We find the agreement dated 01-01-2007 at page 5 of the paper book, on an examination of the same, we find the agreement entered between BYK Chemie GmbH, Germany (BYK) and BYK Chemie Asia Pacific Pte. Ltd., Singapore (Customer). We note that the description of the parties to the said agreement clearly shows, the BYK Singapore is the customer of BYK Germany. Further, in the background clause, it is noted that the BYK and Customer are members of the ALTANA Chemie group and BYK will provide worldwide information technology services to the other members of the ALTANA Chemie group. Further, if the customer desires to obtain IT services from BYK and BYK provide to Customer certain information technology services are subjected to terms and conditions of said agreement.
The definitions are provided in Point No. 1 of the said agreement. We find IT Services means the ‘base services’ and any ‘Additional Services’ at Point No. 1.5 of the said agreement. We note that the base services and additional services are provided in Schedule No. 1 to this agreement. In Point No. 3, we find the customer obligation for payment etc. The said payment mentioned in Point No. 3.1 is in accordance with section 4 of this agreement performing IT services. The payment is defined in Point No. 4.4 of the said agreement, that payment of all invoices in respect of IT services shall be made within 15 days of the invoice date, unless otherwise stipulated by the parties. Further, Point No. 4.6 explains the customer is obliged to initiate all necessary steps to avoid or to reduce the retain of withholding taxes, if any. And in Point No. 4.7 it is clear that all other taxes to be paid on the IT Services, if any, shall be borne by customer. The assessee is not the party to the said agreement. We find nowhere in the agreement in the definitions, no specific clause that the payments made by the assessee to BYK Singapore are in the nature of reimbursement. The said agreement, as discussed above entered between BYK Germany and BYK Singapore. Therefore, the said agreement does not come to the rescue of the assessee in supporting the claim of payment made to Singapore as reimbursement.
The ld. AR specifically relied on Point No. 5 where the expenses are defined. Point No. 5.1 explains the customer is responsible for paying the expenses actually incurred by BYK in connection with the delivery of the IT Services. Further, Point No. 5.3 explains expenses shall include costs of any third party software or hardware acquired for use in connection with IT Services delivered to customer. On careful reading of Point No. 5 etc., we note that the customer is responsible for paying the expenses actually incurred by BYK in connection with the delivery of the IT services relating to acquisition of third party software and hardware in connection with the IT services delivered to customer. Admittedly, the assessee is not the customer of BYK Germany and we find that the assessee’s head office i.e. BYK Singapore is the customer to BYK Germany. Therefore, we find no force in the argument of ld. AR that the assessee is responsible for paying expenses actually incurred by the BYK in connection with the delivery of IT services.
Further, in order to verify the facts relating to the claim of reimbursement from the records of the assessee, we, during the course of hearing on 14-12-2023 directed the assessee to furnish the following documents within 22-12-2023, i.e. the accounting statements of BYK Asia pacific Pte Ltd. India branch for the year ended 31-03-2016, the ledger account of the head office in the books of the India branch and the ledger account of the India branch in the books of the head office. The ld. AR filed paper book containing the accounting statements of BYK Asia Pacific Pte Ltd. India branch for the year ended 31-03-2016, however, sought four weeks time to file ledger account of the head office in the books of India branch and ledger account of India branch in the books of the head office. Since, no such evidences filed till today i.e. 23-01-2024 which, in our opinion, are the necessary evidences for fair adjudication of the present issue, absence of which clearly establishes the same situation as it was in the first round of litigation before the Co-ordinate Bench. Having failed to bring on record the necessary evidences in support of assessee’s contention inspite of reasonable opportunity, we hold that the assessee failed to place cogent evidences for our adjudication. Therefore, we treat the same as there were no evidences. Further, we note that the significant accounting policies under revenue recognition is clearly mentioned revenue from services rendered is recognized on the basis of an agreed mark-up on net costs incurred, and in accordance with arrangements entered into with the parent company. Therefore, we find support in the arguments of ld. DR, Shri H. Ananda in bringing to our notice the finding of this Tribunal in the first round of litigation, wherein, it clearly mentioned in para 6 “that the assessee incurred total expenses at Rs.6.81 crore, debited to its Profit and loss account, which include the expenses of Rs.1.22 crore under consideration. Mark-up at 10% was charged on all the expenses including Rs.1.22 crore which is matching with the figure of transactions between related parties. There is no dispute with regard to revenue from operations at Rs.7.49 crore (i.e. all the expenses incurred plus mark-up) were credited to the Profit and loss account and resultant profit was offered for taxation. To put simply, the Indian BO was allowed mark-up on such expenses of Rs.1.22 crore, which was duly offered for taxation”. Thus, in view of the above, the contention of assessee and the arguments of ld. AR are rejected.
Since, we held the IT expenses are not reimbursement, we reiterate the reasons recorded by the ITAT in the first round of litigation in para 7, “the case of the AO is that the assessee violated the provisions of section 195 and ex consequenti exposed itself to the rigor of u/s.40(a)(i) of the Act. Relevant part of section 195(1) clearly states that: `Any person responsible for paying to a non-resident, not being a company, or to a foreign company, …. any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.’ A cursory look at the provision transpires that deduction of tax at source is warranted, inter alia, on “any other sum chargeable under the provisions of this Act.” Thus, the chargeability of amount to tax in India in the hands of recipient is sine-qua- non so as to trigger deduction of tax at source u/s.195 of the Act. Chargeability under the provisions of the Act pre-supposes some profit element involved in the receipt. If the recipient simply recovers the amount spent by it without any profit element, such a receipt, being reimbursement, cannot be characterized as any `sum chargeable under the provisions of this Act’ and hence would be immune from tax deduction at source. Two fundamental conditions must co-exist in order to fall within the domain of reimbursement. The first is that one-to-one direct correlation between the outgo of the payment and inflow of the receipt must be established; and the second is that the receipt and payment must be of identical amount. The first condition gets satisfied when there is a directly identifiable amount which is spent on behalf of another and later on it is recovered as such from the latter. It means that incurring of the expenditure, at the stage of incurring itself, is known to be for the benefit of the other and not the payer. The second condition gets satisfied when the receipt back of the amount originally spent is not laced with any mark-up inasmuch as exact amount incurred is recovered. Per contra, receipt of a fixed amount, which may be more or less than the actual outgo, cannot be designated as `reimbursement’”. Therefore, ground Nos. 3 consisting of 3.1 to 3.6 and 4 consisting of 4.1 to 4.8 raised by the assessee fails and are dismissed.
In the result, the appeal of assessee is dismissed.
Order pronounced in the open court on 23rd January, 2024.