Amec Foster Wheeler India Pvt. Ltd. Vs ACIT (OSD) (ITAT Chennai)
ITAT Chennai held that the expenditure incurred towards the purchase of the off-the-shelf software products is not in the nature of “Royalty” for use of copyright in the software and thus not liable for withholding of tax u/s.195 of the Act.
Facts-
The appellant challenges the order of CIT(A) confirming the action of AO in making disallowance of cost incurred in connection with off the shelf software products treating the same as royalty under the provisions of the Act read with relevant treaties.
Further, the appellant also challenges the order of CIT(A) confirming the action of AO in disallowing charges paid in respect of Employees Stock Option Plan (ESOP).
Conclusion-
Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Ltd., vs. CIT has held that the expenditure incurred towards the purchase of the off-the-shelf software products is not in the nature of “Royalty” for use of copyright in the software and thus not liable for withholding of tax u/s.195 of the Act.
We noted that the expenses incurred by assessee by way of payment to its parent company, which has in turn issued shares to the employees of the assessee, the expenditure seems towards disbursing compensation to the employees for their services and hence, the same is to be treated as revenue in nature as held by the Tribunal in the case of Caterpillar India Pvt. Ltd., supra as well as TE Connectivity Services India Pvt. Ltd.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
Chennai for the assessment year 2014-15, u/s.143(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’), vide order dated 29.12.2016.
2. The first issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of AO in making disallowance of cost incurred in connection with off the shelf software products treating the same as royalty under the provisions of the Act read with relevant treaties. For this, assessee raised ground Nos. 2 to 4 but the relevant ground is ground No.2, which reads as under:-
“2. The Ld. CIT(A) and Ld. AO erred in non-consideration of the fact that the said expenditure merely represents cost to cost reimbursement of expenditure incurred on behalf of the Appellant by AFWG overseas entities and therefore, no income arises in the hands of AFWG entities necessitating the obligation to withhold taxes on the part of the Appellant under the provisions of the Act.”
3. Briefly stated facts are that during the financial year 2013-14 relevant to this assessment year 2014-15, the assessee incurred expenditure amounting to Rs.5,52,97,013/- on account of costs in connection with the shelf software products utilized for its day to day business. According to assessee, such costs are paid by the Amec Foster Wheeler Group entities to the vendors and subsequently recharged to the assessee on cost to cost basis without any margin. The AO during the course of assessment proceedings noted that the assessee company has debited amount of Rs.4,67,49,942/- onaccount of software expenditure / purchases, which has been paid to the group companies without deduction of TDS. The AO required the assessee as to why said amount should not be disallowed. The assessee filed various explanations and stated vide letter dated 23.12.2016 that assessee incurs various cost in connection with off the shelf software products utilized by it in its day to day business amounting to Rs.5,52,97,013/- for the relevant assessment year. The agreement with providers of such off the shelf software products has been entered into by overseas Amec Foster Wheeler Group entities on behalf of all the group entities due to administrative convenience and to minimize the overall costs. The costs pertaining to software products utilized by assessee are recharged by the contracting Amec Foster Wheeler Group entity by raising a debit note. Given that the software costs have been recharged by Amec Foster Wheeler Group entities to assessee on a cost to cost basis without any mark up, the assessee has not withheld any tax on such reimbursements which has no income element in it. There is no income arising in the hands of the Amec Foster Wheeler Group overseas entities with respect to such cost to cost reimbursement and hence the question of withholding tax does not arise. The AO treated the transaction as royalty by holding that as per the provisions of section 9(1)(vi)(b) of the Act, the income by way of royalty payable by a person who is the resident, except where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India or, the same should be brought to tax. The AO relied on the retrospective amendment brought in by the Finance Act, 2007 including an Explanation to section 9(1)(vii)(b) of the Act, thereby invoking the provisions of section 40(a)(i) of the Act disallowed the above amount and added back to the total income of the assessee. Aggrieved, assessee came in appeal before the CIT(A).
4. The CIT(A) noted that the assessee has purchased license, whereby, an alphanumeric key is provided with the compact disc (CD) used as an activation key. According to him, if it is a product, then compact disk gets corrupted and then it becomes useless and the product gets damaged. He noted that this is not the case here because what is purchased by assessee is license and not the product in the CD. Therefore, once the assessee has purchased software which is not ‘copyrighted article’ but the same falls under the domain of copyright. Therefore, according to him payments made there on to purchase of software constitute royalty within the meaning of Article 12(3) of the DTAA and even as per the provisions of 9(1)(vi) than the definition of ‘royalty’ under the DTAA As the right that is transferred in the present case is the transfer of copyright including the right to make copy of software for internal business, and the payment made in that regard would constitute ‘royalty’ for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as per clause (iv) of Explanation 2 to Sec.9(1)(vi) of the Act. Therefore, according to him, the assessee is liable to deduct TDS u/s.195 of the Act in respect of payments made to non-resident AE’s towards purchase of software and therefore in case of failure will attract disallowance u/s.40(a)(i) of the Act. Hence, he confirm the action of the AO in bringing the amount of Rs.4,67,49,942/- under the tax net by invoking the provisions of section 40(a)(i) of the Act. Aggrieved, assessee is in appeal before Tribunal.
5. At the outset, the ld.AR for the assessee stated that this issue is covered in favour of assessee by Tribunal decision in ITA No.799/Chny/2017 dated 03.08.2022, wherein the Tribunal considered the decision of Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Ltd., vs. CIT, [2021] 125 Taxmann.com 42 and allowed the claim of assessee on exactly identical facts and on the same pretext vide para 17 & 18 as under:-
“17. The learned Counsel for the Assessee now argued that the expenditure incurred towards its share of software cost which are in the nature of off-the-shelf software products such as of Microsoft Office [MS Office], IBM Lotus Notes, AVEVA, Auto CAD, etc. It was contended that the above said expenses were negotiated and incurred at a group level with the third-party vendors by the overseas Associated Enterprises [AE] on behalf of all the group entities and the corresponding cost was recharged to the various entities on a cost-tocost basis without any mark-up. He stated that this issue stands now covered by the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited Vs. Commissioner of Income Tax reported in [2021] 125 Taxmann.com 42 (SC), wherein the Hon’ble Supreme Court has held that “the amount paid by resident Indian and end-user / distributors to non-resident computer software manufacturers / suppliers , as consideration for resale / use of computer software through EULAs / distribution agreement, is not payment of royalty for use of copyright in computer software, and thus, the same does not give rise to any income taxable in India.”
18. We noted that this issue is covered by the decision of the Hon’ble Supreme Court wherein it is held that the expenditure incurred towards the purchase of the off-the-shelf software products is not in the nature of “Royalty” for use of copyright in the software and thus not liable for withholding of tax u/s.195 of the Act, we delete the disallowance and allow this issue of the Assessee.”
5.1 When this was confronted to ld. CIT-DR, he could not controvert the above fact situation and hence, respectfully following the Tribunal decision in the assessee’s own case and also, the issue stands covered in favour of assessee by the decision of Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd., supra, we delete the disallowance and allow the appeal of assessee on this issue.
6. The next issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of AO in regard to addition made on account of amount pertaining to provision of loss contracts and AO concluding that the provision for anticipated loss is a uncertain liability and not allowable as deduction u/s.37 of the Act. For this, assessee has raised following ground Nos.5 & 6:-
“5. The Ld. CIT(A) and the Ld. A0 erred in concluding that the provision for anticipated loss is an unascertained liability not allowable as a deduction under section 37 of the Act without appreciating that the such provision represents the excess of estimated contract expenditure over the estimated contract revenues.
6. The Ld. CIT(A) and the Ld. AO erred in concluding that future costs are not allowable as a deduction under the Act without appreciating that the accounting, of such costs is as per the requirements of the Accounting Standard -7, basis which, income subject to tax, has been recognized by the Appellant.”
7. Brief facts are that the assessee is a part of global group which undertakes provision of engineering, construction and project management activities. During the relevant financial year relevant to this assessment year, the assessee provided engineering design services to third parties such as Dow Chemicals, Tata projects, Swan Energy, Petronet LNG, Reliance Industries, IOCL etc. The assessee in its books of accounts during the relevant assessment year recorded a provision for loss contracts amounting to Rs.5,32,47,117/- and this loss was in relation to contract awaited with Reliance Industries Ltd., which was entered into during the financial year 2012-13 relevant to assessment year 2013-14. It was contended that this project was in progress during the relevant assessment year also It was claimed that this loss amount represents the expected loss on the contract which was recorded during the relevant assessment year in line with the requirements of AS-7, as prescribed by the Institute of Chartered Accountants of India. But said provision for loss was claimed as deduction by the assessee in computing the taxable income for the relevant assessment year. The AO during the course of assessment proceedings asked to provide the details regarding the provision for loss contracts and justify the same being allowed as an allowable expenditure, in view of it being a provision. The AO noted that the assessee other than claiming it to be an estimated contract cost did not furnish any other detail to substantiate the quantification of the same. The AO noted that this is only a provision for the expenses created by assessee on estimate and this is contingent in nature. According to AO, this is uncertained liability and therefore, disallowed and added to the total income of the assessee. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) also confirmed the action of the AO. Aggrieved, now assessee is in appeal before the Tribunal.
8. Now before us, the ld.AR for the assessee stated that once the same was disallowed by the AO and confirmed by CIT(A), the assessee reviewed and reversed the provision made on account of expected loss of contracts for the subsequent two years i.e., assessment year 2015-16 & 2016-17 and offered to tax in the said years. The ld.AR filed the details and she argued that once the income is offered in subsequent years and accepted as it by the AO in the assessment framed u/s.143(3) of the Act, no addition can be sustained in the relevant assessment year. She drew our attention to details filed before us, which reads as under:-
