IN THE ITAT MUMBAI BENCH ‘L’
ACIT vs. First Advantage (P.) Ltd.
IT Appeal Nos. 3029 and 3030 (Mum.) of 2010
[Assessment years 2008-09 and 2009-10]
May 18, 2012
J. Sudhakar Reddy, Accountant Member – The present appeals preferred by the Revenue, are directed against impugned separate but identical order dated 28th January 2010, passed by the Commissioner (Appeals)-X, Mumbai, for assessment years 2008-09 and 2009-10 respectively.
2. The facts, as brought out by the Commissioner (Appeals) vide Paras-1.1 to 1.1.2, in his order, are extracted below:-
“1.1 Brief facts are that the appellant is a resident company, incorporated under the Companies Act, 1956. It is primarily engaged in providing employment background screening services to its clients, which consists of checks such as education screening, employment screening, address verification, criminal check/verification, reference check, database verification, hiring management services, assessment solution which the clients can choose from.
1.1.1 The appellant has entered into a Reimbursement Agreement with First Advantage Corporation, United States of America (‘FADV US’). It has been agreed between FADV India and FADV US that FADV India shall reimburse to FADV US at actual cost (with no profit mark-up) for various purchases / upgrades by FADV US which include data cards, application, support software and OS/OS upgrades amounting to Rs. 83,75,075/- for the financial year ended 31 March 2008.
1.1.2 The AO has stated that the purchase/upgrades by FADV US which include data cards, application, support software and OS/OS upgrades are squarely covered under Section 9(1)(vi) and hence are in the nature of royalty as defined under the Act. The AO relied on Supreme Court decision in Transmission Corporation of AP & Anr. v. CIT (239 ITR 587) (SC) to contend that the purpose of section 195(1) is to see that sum is chargeable u/s. 4 of the Act, and the said provision is tentative in nature and rights of parties are not affected. Accordingly the AO passed an order under Section 195(2) of the Act holding payments as Royalty under the Act and directing to withhold taxes at 10.56% on gross basis as per Section 115A of the Act.”
3. Before the first appellate authority, the assessee contended as follows:-
(i) Provisions of section 195(1) of the Income Tax Act, 1961 (for short “the Act”) would be applicable only to payments which are chargeable to tax under the provisions of the Act. There should be an income element embedded in such payments;
(ii) Section 2(24) of the Act defines the term “Income” and includes profits and gains. The term “reimbursement” has not been defined under the Act and hence, should be understood in common parlance.
(iii) The assessee reimbursed expenditure to FADV US which does not include any element of profit or mark-up and, hence, no TDS is required.
(iv) The payment in question being reimbursement of expenditure cannot be regarded as payment for royalty under any of the clauses mentioned under section 9(1)(vii) of the Act;
(v) That the payment in question are reimbursement to FADV US towards purchases by the assessee of data card application and support software and, hence, are purely payments for the use of copyright article and not for the right to use any copyright in an article.
(vi) The judicial precedence had made it clear that what is royalty is the consideration for the use of or the right to use the copyright in an article and not the right to use a copyrighted article and, hence, the reimbursement in question is not a payment for royalty;
(vii) That under the Indo U.S. DTAA, under Article-12, only consideration paid for the use of or the right to use any copyright would fall under the definition of royalty and it is clear that the payment in question do not fall under the category;
(viii) That when there is no transfer of source code and know-how in a software product, the payment received in respect of the same does not fall within the definition of royalty. The assessee relied on the OECD commentary and decisions of various Courts and Tribunal.
4. The first appellate authority concluded that the payment has to be considered as reimbursement of expenses not liable to withholding tax. Further, he examined the other contentions of the assessee and observed that the agreement with FADV U.S. forbid the assessee from transferring or modifying the software. While observing that the current transaction cannot be considered as a transfer of a copyright either in part or in whole came to a conclusion that being reimbursement of expenditure, there is no transfer of a copyright. Thereafter, he referred to various decisions of the Courts and Tribunal. While concluding, he observed that the payment for use of software does not amount to payment of royalty within the meaning of term as defined in India U.S. DTAA or section 9(1)(vii) of the Act. Alternative, he held that being pure reimbursement of expenditure, the assessee was not allowed to deduct tax. Aggrieved, the Revenue is in appeal before the Tribunal on the following Grounds for assessment year 2008-09:-
“On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that the payment to be made to First Advantage Corporation was not taxable in India, ignoring the fact that the payment made was clearly in the nature of “royalty”.
5. Before us, the learned Departmental Representative submitted that the assessee was purchasing software through its associate and it is not a case of reimbursement of expenditure. He submitted that the agreement in question produced by the assessee was entered in July 2009, and whereas the financial year during which the expenditure was incurred was 2007-08. He referred to Para-1.3.1 of the impugned order passed by the Commissioner (Appeals) and disputed the same and submitted that the purchase of software through associate concern cannot be considered as reimbursement of expenditure. On the issue as to whether the payment was to be considered as payment of royalty, he relied on the recent judgment of the Hon’ble Karnataka High Court in CIT v. Samsung Electronics Co. Ltd.  185 Taxman 313.
6. Learned Counsel for the assessee, on the other hand, submitted that Microsoft software was purchased by the associate concern on behalf of the assessee and it is well settled in number of decisions of the Tribunal and the Courts that the payment in question, when not for the transfer of right in the software would not amount to payment for royalty. He contended that it is a case of sale of copyrighted article. He referred to the paper book where a number of invoices have been placed and argued that the payment cannot be considered as payment for royalty either under the Act or under the DTAA.
7. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and on a perusal of the papers on record, as well as the case laws cited before us, we hold as follows:-
8. At page-70 of assessee’s paper book, a copy of the reimbursement agreement dated 15th July 2009, entered between the assessee and the First Advantage Corporation, St. Petersburg, has been placed. In clause 3, it is stated that the terms of the agreement are effective from 1st April 2007. This demonstrates that the agreement in question was entered into after 27 and a half months of the transactions. The nature of agreement is at clause-1 / page-70 of assessee’s paper book which is extracted for ready reference.
“1. Reimbursement of expenses:
It is hereby agreed between FADV and FADV India that FADV India shall reimburse FADV for various purchases / upgrades including but not limited to data cards, application, support software and OS/OS upgrades.
It is hereby also agreed between FADV and FADV India that FADV India shall reimburse FADV at actual cost.”
9. A plain reading of the same demonstrate that FADV is acting as an agent of the assessee for various purchases / upgrades. This cannot be a reimbursement. It is purchase on behalf of the assessee. In other words, what can be said is that the assessee has routed its purchases through FADV U.S. Such routing of purchases cannot be called as reimbursement of expenses.
10. When we look at the invoices, copies of which are placed in the paper book, it shows that FADV U.S. has treated the assessee as its customer and raised bills. In other words, it appears that this is nothing but a sale of software by FADV U.S. to FADV India. Looking at the issue of sale from this angle also, we are of the opinion that the first appellate authority erred in coming to a conclusion that this is a mere reimbursement of expenses. The agreement and the invoices are not indicating the same facts. The agreement appears to be an after thought.
11. As the Commissioner (Appeals) based his decision on the premise that the assessee has reimbursed expenses. He has not examined the nature of software acquired by the assessee, as the agreement and other material were not on record. Facts have to be verified. Accordingly, we restore the issue to the file of Commissioner (Appeals) and direct him to examine the nature of software purchased by the assessee and then apply the law to the facts.
12. In the result, both the appeals are allowed for statistical purposes.