The assessee has acquired a readymade off – the shelf computer programme to be used in their business and no right was granted to the assessee to utilize the copy right of the programme and, therefore, consideration cannot be treated as royalty. As held by the CIT(A), the payments made by the assessee company cannot be held as ‘royalties’ coming into the ambit of Article 12 of DTAA or ‘fee for technical services’ u/s 9(1 )(vii) of the IT Act and accordingly no tax need to be deducted u/s 195 of the IT Act. We, therefore, uphold the order of the CIT(A) on this count and dismiss the grounds raised by the revenue in this regard.”
IN THE ITAT CHENNAI BENCH ‘D’
Deputy Commissioner of Income-tax, Company Circle 1(1), Chennai
Atmel R & D India (P.) Ltd
AND CHANDRA POOJARI, ACCOUNTANT MEMBER
IT APPEAL NO. 812 (MDS.) OF 2015
C.O. NO. 59 (MDS.) OF 2015
[ASSESSMENT YEAR 2010-11]
AUGUST 18, 2016
Raghunathan Sampath, Advocate and K. Para Shivaiah, CIT, D.R. for the Respondent.
Chandra Poojari, Accountant Member – These are Cross appeals and Cross objection filed by the assessee. The assessee’s appeal is directed against the order of the Assessing Officer dated 08.02.2015 passed u/s.143(3) r.w.s.144C of the Act, which is emanated from direction of the Dispute Resolution Panel (DRP), Chennai dated 23.12.2014 u/s.144C of the Act pertaining to assessment year 2010-11.
1.1 The Revenue’s appeal is directed against the order of DRP passed u/s.144C of the Act dated 23.12.2014 and correspondingly, the assessee fled a Cross Objection in C.O.No.59/Mds./2015 in support of direction of DRP.
First we take up Revenue’s appeal in ITA No.812/Mds./15 & CO by assessee in CO No.59/Mds./2015
2. The main grievance of the Revenue in this appeal is that the Ld.DRP has erred in directing the TPO to consider both the BPO and ERP segment relating to the comparable M/s. Jeevan Scientific Technology Ltd., for the purpose of margin computation, ignoring the fact that the ERP segment is totally different from the BPO segment and also without stating reasons for the same.
3. The facts of the issue are that the TPO considered ITES segment of M/s. Jeevan Scientific Technology Ltd. is comparable without including Enterprise Resource Planning (ERP) Division, which is part of ITES segment as mentioned in the company’s financial statement. The Dispute Resolution Panel, (DRP) Chennai, has given a direction that income of the M/s. Jeevan Scientific Technology Ltd. includes in ITES segment. The DRP of the opinion that since the business enterprise itself has clubbed ITES and ERP in one segment, and ITES itself is not one homogeneous sector. It appears to be a generic name for all those activities in which information technology plays a dominant role. Hence, DRP directed the TPO to include ERP in ITES segment and computed the profit margin of the company accordingly. Against this, the Revenue is in appeal before us.
4. We have heard both the parties and perused the material on record. We have gone through the financials of M/s. Jeevan Scientific Technology Ltd. for the year ended on 31.03.2010. The income from ITES segment included at Rs. 17,443,276/- and bifurcation As per Schedule-7 is as follows:-
In our opinion, nature of work carried on by M/s. Jeevan Scientific Technology Ltd. is IT Enabled Services, though it was called by different name. The nature of service performed by M/s. Jeevan Scientific Technology Ltd. is IT Enabled Services and when assessee itself included ERP in IT segment, TPO cannot be re-characterised without making any enquiry u/s.133(6) of the Act. In our opinion, the direction given by the DRP that ERP is nothing but ITES and to include the ERP in ITES segment so as to compute the profit margins is justified. The Direction of the DRP is upheld. This ground of the Revenue is dismissed. The Cross Objections by the assessee is supportive of the DRP, is also dismissed.
Assessee’s appeal in ITA No.1086/Mds./15
5. The first ground in assessee’s appeal is that the ld. Assessing Officer erred in disallowing software expenses of INR 9,362,867 representing reimbursement of software cost to its parent company, viz. Atmel Corporation, USA(Atmel, US) for non-deduction of tax at source u/s.195 of the Act without appreciating that mere reimbursement of expenses on cost to cost basis without any mark-up does not attract TDS u/s.195 of the Act.
5.1. The facts of the issue are that the assessee company has claimed Rs. 93,62,867/- towards Software expenses paid to the parent company, Atmel Corporation, USA. The TDS deduction details were called for along with the show cause for disallowance of the expenses, if TDS not deducted. The assessee company stated that TDS was not made as it is the cost of the software ‘Cadence’ and ‘Synopsis’ paid to the Atmel Corporation USA at a cost without any markup. The cost reimbursement without markup will not attract TDS was the explanation offered by the assessee. The assessee’s explanation was considered and it was found not be correct for the reason that the software expenses are in the nature of Royalty as provisions of the section 9(1)(vi) of the Act. The concept of reimbursement without mark-up is the arrangement within the Associated Enterprises (AE). That has no bearing on the applicability of the provisions of the section 9(1)(vi) of the Act and the software was used in India for the purpose of business and profession carried on by the assessee in India. Therefore, the Royalty expenses are taxable in India and upon which TDS liability attracts as per the provisions of the section 195 of the Act. As the assessee has not deducted TDS, the expenses towards Software Reimbursement is disallowed u/s.40(a)(i) and added back to total income of assessee under the head ‘income from business or profession’.
5.2 The DRP observed that the reimbursement of software expenses on a cost to cost basis without any mark-up would not constitute income chargeable to tax in India in the hands of Atmel US. Accordingly, assessee shall not be liable to withhold any tax under the provisions of the section 195 of the Act on such reimbursement. Accordingly, the ld. Assessing Officer made addition of Rs. 93,62,867/-. Hence, the assessee is in appeal before us.
6. According to ld.A.R, provisions of the section 195 of the Act cannot be applied as the payment made to non-resident is not chargeable to tax under the Act and there is no question of withholding any tax. He relied on the judgement of Supreme Court in the case of GE India Technology Centre (P.) Ltd. v. CIT  327 ITR 456wherein held that tax is liable to be deducted on payment to a non-resident only if the payment is liable to tax in India.
He also relied on the judgement of Special Bench of Chennai in the case of ITAT in the case of ITO, International Taxationv. Prasad Production Ltd.  125 ITD 263 held that any payment made to a non- resident would be subject to withholding tax, only if such payment constituted income chargeable to tax India. For the same proposition, he relied on the judgemen of Delhi High Court in the case of Van Oord ACZ India (P.) Ltd. v. CIT  323 ITR 130 . According to him, the payments made by the assessee to Atmel US towards software cost represents pure cost to cost reimbursement without any mark-up and therefore, such reimbursement would not constitute income chargeable to tax in India in the hands of Atmel US.
He also relied on the following judgements.
|(i)||Asstt. DIT v. Antwerp Diamond Bank NV Engg. Centre 153 ITD 391 (Mum. – Trib.)|
|(ii)||Asstt. DIT (International Taxation) v. Bartronics India Ltd. 62 SOT 141 (Hyd. – Trib.)(URO)|
|(iii)||DIT v. Infrasoft Ltd.  220 Taxman 273 (Delhi)|
|(iv)||Motorola Inc. v. Dy. CIT  95 ITD 269 (Delhi) (SB)|
|(v)||Lucent Technologies International Inc. v. Dy. CIT  28 SOT 98 (Delhi)|
7. On the other hand, ld.D.R argued in support of orders of lower authorities.
8. We have heard both the parties and perused the material on record. The main contention of the assessee’s counsel that the payment was made towards cost of the software namely ‘Cadence’ and ‘Synopsis’ paid to the Atmel Corporation USA at a cost without any mark-up and it does not include any profit element. However, the AO is of the opinion that it is payment in the nature of Royalty as per provisions of the section 9(1)(vi) of the Act. Since the software is used in India for the purpose of business or profession carried on by the assessee in India, he invoked the provisions 195 of the Act and disallowed the expenditure since there was no deduction of TDS u/s.40(a)(i) of the Act. Now the contention of the ld.A.R is that it is only purchase of software to use in assessee’s business and the assessee has not acquired the copyright of the programme. The ld.D.R is not able to show that the assessee has got any right to use the copyright as software programme. In other words, if the assessee acquires only right to use software and not copyright of the software, then in our opinion the order of Tribunal in the case of Bartronics India Ltd., (supra) is squarely applicable to the facts of the case wherein held as follows:—
“39. In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. Distinction has to be made between the acquisition of a “copyright right” and a “copyrighted article”. Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. Just because one has the copyrighted article, it does not follow that one has also the copyright in it. It does not amount to transfer of all or any right including licence in respect of copyright. Copyright or even right to use copyright is distinguishable from sale consideration paid for “copyrighted” article. This sale consideration is for purchase of goods and is not royalty.
40. The license granted by the Assessee is limited to those necessary to enable the licensee to operate the program. The rights transferred are specific to the nature of computer programs. Copying the program onto the computer’s hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7.
41. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non-exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/transferor who divests himself of the rights he possesses in his favour.
42. The license granted to the licensee permitting him to use the programme for its business purpose is only incidental to the facility extended to the licensee to make use of the copyrighted product for its internal business purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do.
43. There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Income Tax Act or under the DTAA.
44. The licensees are not allowed to exploit the computer software commercially, they have acquired under licence agreement, only the copy righted software which by itself is an article and they have not acquired any copyright in the software. In the case of the Assessee company, the licensee to whom the Assessee company has sold/licensed the software were allowed to make only one copy of the software and associated support information for backup purposes with a condition that such copyright shall include Intra Asia Trading (P) Ltd. copyright and all copies of the software shall be exclusive properties of Intra Asia Trading (P) Ltd. Licensee was allowed to use the software only for its own business as specifically identified and was not permitted to loan/rent/sale/sub-licence or transfer the copy of software to any third party without the consent of Intra Asia Trading (P) Ltd.
45. The licensee has been prohibited from copying, de- compiling, de-assembling, or reverse engineering the software without the written consent of lntra Asia Trading (P) Ltd. The licence agreement between the Assessee company and its customers stipulates that all copyrights and intellectual property rights in the software and copies made by the licensee were owned by Intra Asia Trading (P) Ltd. and only Intra Asia Trading (P) Ltd. has the power to grant licence rights for use of the software. The licence agreement stipulates that upon termination of the agreement for any reason, the licencee shall return the software including supporting information and licence authorization device to lntra Asia Trading (P) Ltd..
46. The incorporeal right to the software i.e. copyright remains with the owner and the same was not transferred by the Assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. What the licensee has acquired is only a copy of the copyright article whereas the copyright remains with the owner and the Licensees have acquired a computer programme for being used in their business and no right is granted to them to utilize the copyright of a computer programme and thus the payment for the same is not in the nature of royalty.
47. We have not examined the effect of the subsequent amendment to section 9 (1)(vi) of the Act and also whether the amount received for use of software would be royalty in terms thereof for the reason that the Assessee is covered by the DTAA, the provisions to which are more beneficial. The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA.
48. What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be business income.
49. In view of elaborate discussion and in the light of the judgment of the Hon’ble Delhi High court in the case of DITv. Infrasoft Ltd. (supra), on which reliance placed by the learned AR, in the present case, the assessee has acquired a readymade off – the shelf computer programme to be used in their business and no right was granted to the assessee to utilize the copy right of the programme and, therefore, consideration cannot be treated as royalty. As held by the CIT(A), the payments made by the assessee company cannot be held as ‘royalties’ coming into the ambit of Article 12 of DTAA or ‘fee for technical services’ u/s 9(1 )(vii) of the IT Act and accordingly no tax need to be deducted u/s 195 of the IT Act. We, therefore, uphold the order of the CIT(A) on this count and dismiss the grounds raised by the revenue in this regard.”
In view of the above, we are inclined to allow the ground taken by the assessee. This ground is allowed.
9. The next ground in assessee’s appeal is that the ld. Assessing Officer/TPO erred on facts and in law in treating provision for bad and doubtful debts as a non-operating expenses in computation of margins of comparables and the DRP erred in confirming the same.
9.1 The facts of the issue are that TPO treated the provision for bad and doubtful debts as a non-operating expense in the case of Nittany Outsourcing Services Pvt Ltd. for computation of the net margins. The DRP endorsed the view of TPO and holds that bad and doubtful debt though operating in nature, but it does not pertain to the operating revenues for the relevant financial year. Therefore, if it is allowed as deduction, it will amount to expenditure of earlier years has been debited in P&L account. However, the DRP considers exclusion of provision for bad and doubtful debt from the financial of the assessee and the comparables more important than allowing deduction for bad and doubtful debt. Therefore, the DRP observed that if bad and doubtful debt has not been allowed as deduction in the case of Nittany Outsourcing Services Pvt Ltd., then TPO is directed to exclude it in the case of other comparables as well in the case of assessee company. The AO passed order as per directions of the DRP. Against this, the assessee is in appeal before us.
9.2 Before us, ld.A.R submitted that AO/TPO had erred in computing the margin of comparable companies by considering provision for bad and doubtful debts as non-operating expenses. He placed reliance on the order of Hyderabad Tribunal in the case of Kenexa Technologies (P.) Ltd. v. Dy. CIT  67 SOT 195 (Hyd. – Trib.)(URO)wherein held that:—
“41. We place reliance on the decision of ITAT Delhi Bench in the case of Sony India Pvt. Ltd. v. DCIT, ITA No 1189/Del/2005, 819IDel/2007 and 820/Del/2007. The relevant portion is extracted below:
106.2 Thus, creation of unpaid liability and its write back is a normal incident of a business operation which is carried everywhere in accounts to have true picture of profits of the relevant period
Having regard to statutory provisions, it cannot be said that provisions or writing both of liability is not port of operating profit or would not be taken into consideration for computing the same. We can therefore make a general observation that all business enterprises are making and writing back liabilities as a normal incident of operating business. Therefore on facts do not see any justification for excluding provisions written both in the profit and loss account as not forming port of the operating profit of the taxpayer. Accordingly claim of the taxpayer is accepted
107. The next item relates to balances written back. In our considered opinion, finding given in respect of provisions written back is equally applicable to balances written both more particularly when Id CIT(A) has not given any separate finding and the Transfer Pricing Officer has said nothing specifically, on this item The balances written both should also be treated as part of operating profit. We direct accordingly.”
42. We are of the view that in the instant case bad debts and provision for bad and doubtful debts are part of the operating expenses and we direct the TPO to re-compute the margins of comparable companies by including bad debts and provision for bad and doubtful debts as operating expenses for the purpose of computing profit and loss of comparable companies.”
9.3 On the other hand, ld.D.R relied on the orders of AO and TPO.
10. We have heard both the parties and perused the material on record. In our opinion, if the provision for doubtful debts is the current operating expenses associated with the losses from normal credit sales, it will be treated as operating expenses and usually as a part of selling, general and administrative expenses. If the expense is associated with the extending credit outside of a company’s main selling activities, the loss will be non-operating expenses. With this observation, we remit the issue to the file of AO for fresh consideration after giving opportunity of being heard to the assessee.
11. No other grounds pressed before us by the ld.A.R. Hence, other grounds raised by the assessee are not considered for adjudication. The assessee’s appeal in ITA NO.1086/Mds./15 is partly allowed for statistical purposes.
12. In the result, the appeal of the Revenue in ITA No.812/Mds./15 and Cross Objections raised by the assessee are dismissed and the assessee’s appeal in ITA No.1086/Mds./15 is partly allowed for statistical purposes.