SCA Hygiene Products AB (Essity Hygiene And Health AB) Vs DCIT (ITAT Mumbai)
In order to decide whether or not the services rendered by the assessee fit the definition of ‘fees for technical services’, as applicable under the Indo Swedish tax treaty, the question that we must ask ourselves is not only whether the technical services are performed on the facts of this case, but whether ‘the technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider.‘ In this light when we analyze the nature of services, which are set out in detail earlier in this order, we find that in none of the cases, these services enable the recipient of these services to perform the same services, in the future, without recourse to the assessee. The consultancy services are in the nature of leading the setting up of factory, including planning and steering execution of work, being responsible for managing project within budget constraints, leading the project team from different locations, coordination and follow up with the contractors, securing communication and good flow of information between those directly or indirectly involved with the project, preparing project progress report and updating all concerned with the project progress. Just because the assessee renders these services does not mean, and by no stretch can imply, that the recipient can next time do all this work without recourse to the assessee. As regards learned DRP’s observations that the project leading work “will include scheduling charts, timelines, bar charts which are contemplated in the case of the assessee under Project Administration….project and financing controls including necessary charts and controls for implementation of the project”, that “the assessee is not executing the project but is rendering consultancy service to the AE”, and that “when project implementation tools are provided to the employees of the AE, they are enabled to employ these tools in implementing their own project,” these observations are factually incorrect inasmuch as the assessee’s representative is executing the work and is the key person at the factory site who is doing all the needful and inasmuch as there is no mention anywhere of developing these tools and handing over the same to the recipient of services. In any case, just because the Indian entity is interacting with the project leader and getting inputs from him does not mean that the Indian entity is transferred the technology of being a project leader of this type and next time Indian entity can perform similar services without recourse to the same- which is the core test for the fulfilment of ‘make available’ clause. We are unable to approve the stand of the authorities below on this point. In our considered view, in the light of the discussions above, the make available clause is not satisfied, in the course of rendition of services by the assessee, and, as such, the consultancy fees of Rs 1,97,94,209 cannot be brought to tax, in the hands of the assessee, under article 12 of Indo Swedish tax treaty.
25. That leaves us with the taxability of Rs 57,47,684 on account of Information Technology Services. The main reason for its taxability by the DRP is stated to be that “the services is found to be intrinsically linked with enjoyment of the SAP system and hence, would fall within the ambit of Article 12(4)(a)”. In the assessment order, there is also mention about “resulting in overall improvement in business and the income generating capacity of SCA India, which is a clear enduring benefit” and about the stand that the rendition of these services are “also providing a skill level and relevant training which will be readily available to personnel of SCA India and thereby a clear enduring benefit is provided“. It is also mentioned that “specific support in the form of implementation of SAP project amd Project Vinadalloin the form of pre-implementation, testing, post-implementation is also provided which is clearly technical in nature and intended to increase the efficiency and improve the functioning of SCA India“. It is to be noted that so far as the enduring benefit and increase of efficiency in the recipient entity is concerned, that has nothing to do with the satisfaction of “make available” clause. As we have seen in our analysis earlier, what is important is transfer of technology and not the incidental benefit. Unless the recipient of a service is not enabled to perform that service on his own, without recourse to the service provider, the requirements of the make available clause are not satisfied. The concept of enduring benefit, increase in efficiency, improvement in income-generating capacity and incidental skill development is wholly irrelevant for this purpose. The authorities below have been thus swayed by considerations not germane in this context. So far as these services being incidental to SAP system being the reason for taxation under article 12(4)(a) is concerned, we have noted that providing support services for SAP implementation is a small part of the services and in any case what article 12(4)(a) covers is the services which “are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received” and the information technology services, as set out in Annexure B to the agreement, cannot be described as ancillary and subsidiary to the SAP system. At best, a small part of these services could fall in that category, but that payment is not even separately identified. These things apart, 12(4)(a) would come into play when the assessee receives a payment in the nature of royalties under article 12(3) and the services ancillary and subsidiary to the application or enjoyment of that right, payment for which is described in article 12(3). In other words, the person receiving the money as royalty, such as the actual seller of the software in this case, and the person providing service ancillary or subsidiary to the enjoyment of that right, must be the same. That’s not the case here. In the present case, the payment received by the assessee has been held to be in the nature of reimbursement, which is outside the ambit of taxation. The person selling the SAP software is Be One Solution, Switzerland, whereas the person providing the services in question is the assessee. Article 12(4)(a) will not, therefore, come into play at all. In our considered view, therefore, the taxation under article 12 in the present case can come into play only when the “make available” clause is satisfied, but then the Assessing Officer’s justification for the satisfaction of ‘make available’ clause, for the detailed reasons set out earlier in this paragraph, does not meet our judicial approval. In view of these discussions, as also bearing in mind the entirety of the case, we uphold the plea of the assessee on this point as well. Accordingly, we hold that the income of Rs 57,47,684 on account of Information Technology Services is also not taxable under article 12.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. This appeal, filed by the assessee, calls into question the correctness of the order dated 11th October 2018 passed by the Assessing Officer under section 143(3) r.w.s. 144C (13) of the Income Tax Act, 1961, for the assessment year 2015-16.
2. In the first ground of appeal, the assessee has raised the following grievance:
Ground No. I – Taxability of SAP License Charges as Royalty
1.1. On the facts and in the circumstances of the case and in law, the learned DCIT and Dispute Resolution Panel (‘DRP’) has erred in not considering the fact that Appellant has only recharged actual cost it incurred for acquiring SAP licenses from third party and since there is no profit element the same is not taxable in India.
1.2. Without prejudice to the ground no. 1.1 above, on the facts and in the circumstances of the case and in law, the learned DCIT and DRP has erred in holding that the amount received by the Appellant from SCA Hygiene Products India Private Limited (‘SCA India’) in respect of SAP license charges amounting to INR 1,30,04,613 is taxable as Royalty under Article 12(2) of the India -Sweden Double Taxation Avoidance Agreement (‘DTAA’).
3. To adjudicate on this issue, only a few material facts need to be taken note of. The assessee before us is a company incorporated, and fiscally domiciled, in Sweden. It has a subsidiary in India by the name of SCA Hygiene Products India Pvt Ltd (SCA-India, in short). Under a service agreement dated 29th September 2014, a copy of which was placed before us at pages 7 to 16 of the paper-book, the assessee was under an obligation to render services, which included “providing hardware and software for various ERP systems, CRM Systems and other business system” (Annexure B: IT Services, at page 14 of the paper-book) to its India subsidiary “at cost”. It was under this arrangement that the assessee provided SAP software and licence to the SCA-India, on a “cost to cost basis without any markup being charged on the same”, and received an amount equivalent to Rs 1,30,04,613. During the course of scrutiny assessment proceedings, the Assessing Officer noticed these facts and required the assessee to show cause as to why the SAP software licence charges not be brought to tax under article 12(3)(a) of India Sweden Double Taxation Avoidance Agreement [(1998) 229 ITR (Statutes) 11; Indo Swedish tax treaty, in short]. It was, inter alia, explained by the assessee that this receipt of Rs 1,30,04,613 reflects a reimbursement simpliciter, that the SAP licences were acquired from a rank outsider, that as it is pure reimbursement without any markup, there is no income element embedded therein. The assessee also advanced certain arguments on other facets regarding the inapplicability of article 12(3)(a) to the facts of this case. However, since the issue in the appeal can be decided on the short ground of its being pure reimbursement in nature, we see no need to deal with those aspects of the matter. The Assessing Officer was not convinced by these submissions. The Assessing Officer noted that there was no evidence on record that the market value of services to various group entities is not equivalent to the payments received by the assessee from group entities. He was further of the view that “once a right has been provided for a cost, then the fact that there is no markup or any profit would not take the receipt out of income nature.” He referred to certain decisions of the coordinate benches, as also the Authority for Advance Ruling, in support of the proposition that absence of markup, by itself, would not take the receipt outside the ambit of income. Aggrieved by the stand so taken by the Assessing Officer in the draft assessment order, the assessee raised a grievance before the Dispute Resolution Panel, but without any success. Rejecting this line of argument, the Dispute Resolution Panel observed as follows:
The DRP is not convinced by this argument. Typically, a reimbursement of expenditure would be an expenditure incurred by the non-resident which was responsibility of the appellant. An instance of such reimbursement can be expenditure incurred on employees of Indian company visiting the AE for bearing their hotel expenses. However, it is also equally accepted that a transaction of the Indian party with a third party cannot be given a cover of reimbursement by routing this transaction with the AE. In the present case, the AE has purchased licence on behalf of the assessee and then charged the assessee for these amounts. In such a scenario, the amount cannot be treated as reimbursement. This is a case of routing SCA India’s expenses the AE and is not cost reimbursement but cost allocation (AMD Research and Development Centre India Pvt Ltd [(2015) 53 taxmann.com 300 (Hyd-Trib)].
4. It was in this backdrop that the Assessing Officer taxed an income of Rs 1,30,04,613 under article 12(3)(a) of Indo Swedish tax treaty. The assessee is aggrieved and is in appeal before us.
5. We have heard the rival contentions, perused the material on record, and duly considered facts of the case in the light of the applicable legal position.
6. We find that it is a case in which the assessee has purchased the SAP software licence from a third party- namely “Be One Solutions, Switzerland,” and even a copy of one of the purchase invoices is placed before us at page 17 of the paper-book. The finding of the DRP to the effect that it is a case of purchase of software through an AE of the assessee is thus factually incorrect. We have also taken note of the certificate dated 18th April 2018, signed by the Finance Director of the assessee company, which states that “this is to certify that we have provided SAP/SAP B1 licences to SCA Hygiene Products India Pvt Ltd (SCA-India) during year April 2014 to March 2015” and that “we further certify that the above-mentioned licences are provided to SCA-India on cost to cost basis without any mark up being charged.” There is no, and perhaps rightly so, challenge to the factual element of its being a cost to cost reimbursement received by the assessee. What learned Departmental Representative contends is that if the Indian entity was to be directly supplied this licence by the actual product vendor supplying it to the assessee, the tax withholding by Indian entity would have come into play, and that tax withholding has been avoided by routing the purchase through the assessee. That issue, whether right or not, has no bearing on taxability of an income in the hands of the assessee. We reject this argument. As regards learned DRP’s reliance on a decision of the coordinate bench in the case of AMD Research and Development Centre India Pvt Ltd (supra), we can only say that it was a case in which the coordinate bench came to the conclusion that the payment for a software licence to the group company was not on “cost to cost basis”, as evident from the coordinate bench observations to the effect that “In the absence of these details as well as the basis of allocation of cost of software applications/licences, we find it difficult to accept the contention of the assessee that the amount in question paid by it to ATI Technologies, Canada towards its share of software applications/licences on cost to cost basis, without involvement of any element of profit, so as to say that the amount so remitted is not chargeable to tax in the hands of ATI Technologies, Canada in India, being merely in the nature of reimbursement of actual expenses incurred by the said company, without any profit element“. This decision, therefore, does not support the case of the Assessing Officer anyway inasmuch as this decision supports the proposition that when the payment for software licence fees to a group entity is a reimbursement pure and simple, it will not be taxable as income of that group entity. It is quite elementary that what can be taxed in the hands of an assessee is not a receipt, by itself, but only the income element, and, therefore, when a receipt by the assessee is bereft of income element, as a pure reimbursement inherently is, it cannot be brought to tax in the hands of that assessee. Hon’ble jurisdictional High Court, in the case of CIT Vs Siemens AG [(2009) 310 ITR 320 (Bom)], have accepted this proposition and observed as follows:
That leaves us with the last contention as to whether the amounts by way of reimbursement are liable to tax. To answer that issue, we may gainfully refer to the judgment of a Division Bench of the Delhi High Court in Industrial Engineering Projects (P.) Ltd.’s case (supra). The learned Division Bench of the Delhi High Court was pleased to hold that reimbursement of expenses can, under no circumstances, be regarded as a revenue receipt and in the present case the Tribunal had found that the assessee received no sums in excess of expenses incurred. A similar issue had also come up for consideration before the Division Bench of the Calcutta High Court in Dunlop Rubber Co. Ltd.’s case (supra). The learned Division Bench was answering the following question:
“Whether, on the facts and in the circumstances of the case, the amounts received by the assessee (English company) from M/s. Dunlop Rubber Co. (India) Ltd. (Indian company) as per agreement dated 29-1-1957 constituted income assessable to tax?”
On considering the issue the learned Bench noted that the Tribunal was of the view that what was recouped by the English company was part of the expenses incurred by it. The learned Court upheld the said finding. The learned Bench was pleased to hold that sharing of expenses of the research utilised by the subsidiaries as well as the head office organisation would not be income which would be assessable to tax. A similar view was taken in Stewarts & Lloyds of India Ltd.’s case (supra).
We are in respectful agreement with the view expressed by the Delhi and Calcutta High Courts.
7. In view of the above discussions, as also bearing in mind entirety of the case, we hold that the receipt of software licence fees by the assessee, from its Indian subsidiary, is reimbursement of software licence fees paid by the assessee to a third party, and, therefore, it cannot constitute income taxable in the hands of the assessee. As this income is not taxable under the domestic law provisions in India, we see no need to deal with the other aspects of the matter with respect to non-taxation of this income under the provisions of the Indo-Swedish tax treaty. We leave it at that.
8. Ground no. 1 is thus allowed in the terms indicated above.
9. In ground no. 2 and 3, which we will take up together, the assessee has raised the following grievances:
Ground No. II- Taxability of consultancy services as FTS
2.1 On the facts and in the circumstances of the case and in law, the learned DCIT and DRP has erred in not considering the fact that Appellant has only recharged the actual cost it incurred for providing the project consultancy services and since there is no profit element the same is not taxable in India.
2.2 Without prejudice to ground number 2.1 above, on the facts and in the circumstances of the case and in law, the learned DCIT / DRP has erred in holding that the amount received by the Appellant Company for consulting services amounting to INR 1,97,94,209 from SCA India would be taxable as FTS under DTAA in spite of the fact that such services do not make available technical knowledge, experience, skill, know-how or processes or consists of the development and transfer of technical plan or technical design.
On the facts and in the circumstances of the case and in law, the learned DCIT/DRP has erred in holding that the protocol granting. Most favored Nation benefit available in India – Sweden DTAA can be granted only through Government notification disregarding the fact that no such notification is required as per DTAA.
Ground No. III- Taxability of IT Support services as Fees for Technical Services (FTS)/ Royalty
3.1 On the facts and in the circumstances of the case and in law, the learned DCIT/DRP has erred in not considering the fact that Appellant has only recharged the actual cost it incurred for providing the IT Support services and since there is no profit element the same is not taxable in India.
3.2 Without Prejudice to the ground no. 3.1, on the facts and in the circumstances of the case and in law, the learned DCIT/DRP has erred in holding that the amount received by the Appellant for IT Support services amounting to INR 57,47,684 from SCA India would be taxable as FTS and Royalty under India – Sweden Double Taxation Avoidance Agreement (DTAA) in spite of the fact that such services do not make available technical knowledge, experience, skill, know-how or processes or consists of the development and transfer of technical plan or technical design.
3.3 In addition to the above, DCIT/DRP has erred in considering a part of IT Support services are bundled with software supplied and hence the services are ancillary and subsidiary to enjoyment of such software and accordingly the same is taxable under Article 12(4)(a) of India-Portuguese Republic DTAA as technical services.
10. So far as these two grounds of appeal are concerned, briefly the material facts of the case are as follows. The assessee has under the same agreement, as is referred to in paragraph 3 above in connection with the first ground of appeal, rendered services for “leading the work during 2014 and 2015 of building up the new factory site at Ranjangaon, near Pune”. This work was to be done, for consideration of “approximate actual cost based charges: 16,000 EUR per month + expenses (mainly travelling costs) during 2014 until the end of the project” by one Nazir Alibay. The total amount received by the assessee under this arrangement was Rs 1,97,94,209. The nature of services included the follows:
Factory project leader: Nazir Alibay
Description of services: Leading the work during 2014 and 2015 of building up the new factory site at Ranjangaon near Pune: Full time assignment.
As Factory project leader, following shall be the services rendered:
