Rieter Machine Works Limited Vs ACIT (ITAT Pune)
Facts- The assessee rendered IT services of INR 20.04 Crores to group company and tax of 10% was paid pursuant to Master Services Agreement with RIPL. The assessee claimed an amount of INR 3,88,94,824 as reimbursement of IT licence cost incurred towards centrally purchasing software licenses on which no tax was paid.
Conclusion- To categorize a particular amount as reimbursement, it is sine-qua-non that the expenditure should be incurred for and on behalf of the other. It envisages two cumulative conditions, viz., first that undiluted benefit flowing from the incurring of the expenditure is passed on, as such, to the other and the second, that the amount incurred is recovered as it is from the other without any plus or minus to that.
If one of the condition is not satisfied, the test of reimbursement fails. In the present case, neither the undiluted benefit of the software cost was passed on to RIPL nor did the assessee recover the amount as it is from RIPL.
FULL TEXT OF THE ORDER OF ITAT PUNE
This appeal by the assessee is directed against the final assessment order dated 09.12.2020 passed by the Assessing Officer (AO) u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation to the assessment year 2016-17.
2. The only issue raised in this appeal is against the taxability of Rs.3,88,94,824/- received by the assessee, a Switzerland based nonresident, from its Indian affiliate, namely, Rieter India Private Limited (RIPL).
3. Succinctly, the facts of the case are that the assessee filed its return with total income of Rs.22,30,38,350/-. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the arm’s length price of certain international transactions declared by the assessee. The TPO, vide his order dated 10-06-2019 passed u/s.92CA(3), did not propose any transfer pricing adjustment. The AO observed that the assessee had included a sum of Rs.20,04, 14,231/- in its total income, being, IT service charges received through RIPL and offered it for tax at 10% in terms of the Double Taxation Avoidance Agreement between India and Switzerland (DTAA). However, another receipt of Rs.4,05,96,997/- from RIPL was not offered for taxation. On being called upon to explain the reasons, the assessee submitted that a sum of Rs. 17,02,173/- was in the nature of reimbursement of expenses received from RIPL, representing supply of clothes required for Rieter India employees, Promotional gifts for exhibitions and expenses incurred by employees towards their accommodation, laundry, transport, good etc, which was charged back without any mark-up. The AO accepted the transaction as not chargeable to tax. The remaining amount of Rs.3,88,94,824/-, which is the core of controversy in the instant appeal, was claimed as reimbursement of IT license costs incurred towards centrally purchasing software licenses and use by RIPL. The AO analyzed the Master Services Agreement (Agreement) under which the assessee provided IT services to RIPL and offered the amount relatable to such services as taxable. The AO deduced the precise nature of services rendered. He noticed that the assessee could not explain as to how the receipt of Rs.3.88 crore claimed as reimbursement, was different from the receipt of Rs.20.04 crore from the IT services rendered under the Agreement, which was offered to tax. After considering the assessee’s reply, the AO held that the amount of Rs.3.88 crore was chargeable to tax in India as Fees for Technical Services/Royalty and also under Article 12 of the DTAA. The Dispute Resolution Panel (DRP) did not provide any succor to the assessee. This is how, the assessee has come up in appeal before the Tribunal.
4. We have heard both the sides and gone through the relevant material on record. The main plank of the ld. AR for claiming the amount in question as not chargeable to tax, is that the receipt was in the nature of reimbursement of IT service cost from RIPL and, in the alternative, it was a receipt of software royalty not chargeable to tax in the hue of the judgment of Hon’ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT(2021) 432 ITR 472 (SC). Thus, we need answer to the following questions to resolve the controversy.
I. Is the receipt a reimbursement?
II. Is the receipt a software royalty?
and if none of the two, then
III. What is true nature of the receipt?
We will deal with these issues ad addendum.
I. IS THE RECEIPT A REIMBURSEMENT?
5. The assessee has claimed the receipt to be in the nature of reimbursement of software costs from RIPL. In principle, chargeability is attracted on the income element embedded in a revenue receipt. A receipt de hors profit element, which is only a Reimbursement, is not taxable. However, to categorize a particular amount as reimbursement, it is sine-qua-non that the expenditure should be incurred for and on behalf of the other. It envisages two cumulative conditions, viz., first that undiluted benefit flowing from the incurring of the expenditure is passed on, as such, to the other and the second, that the amount incurred is recovered as it is from the other without any plus or minus to that. If the costs incurred go in a common pool which are then shared by several persons on certain allocation keys, even if the amount so allocated and recovered may be without any mark up, but it may not necessarily constitute reimbursement in the strict sense qua each participant independently.
6. The Indian exchequer is concerned only with the income earned by a non-resident from India and not from the other tax If the non-resident charges Indian entity higher or lower than what is actually due from it, with the corresponding northward or southward adjustment in the share of allocation to the entities situated in other foreign destinations, the dented share of revenue magnetizing the Indian income tax, will affect its coffers notwithstanding the fact that the overall cost recharge by the nonresident remains without any mark-up.
7. In order to evaluate the contention of Reimbursement raised on behalf of the assessee, it is sine-qua-non to first understand precisely the nature of transaction. The assessee rendered I.T. services to its group entities across the globe and received Rs.20.04 crore from RIPL, which was suo motu offered for taxation @10%. This amount was received pursuant to the Master Services Agreement with RIPL, a copy of which is available at page 123 onwards of the paper book. We have gone through the Agreement, the preamble of which states that the assessee will provide certain IT services to RIPL. Clause (2) of the Agreement describes the nature of Services as provided in the Appendix-I. The Appendix, in turn, gives the nature of services as follows:
SLA Client Basic Services
