Case Law Details
Vanderlande Industries Private Limited Vs ACIT (ITAT Pune)
A cursory glance at the definition of the term `Royalties’ makes it patent that the hitherto content of para 4 of Article 12 comprising of copyright royalty cases only became subject matter of sub-para (a) of the amended para 4 of Article 12. In addition, para 4(b) also came to be added, which deals exclusively with industrial royalty cases, thereby enveloping, consideration for the use of or the right to use industrial, commercial or scientific equipment, subject to certain exceptions, which are not applicable to the case under consideration. Thus, it is manifest that India and Netherlands have agreed to bring industrial royalty, of the nature as obtaining in the present appeal, within the scope of Article 12 of the DTAA w.e.f. 30-08-1999. The assessment year under consideration is 2012-13. As such, it would only be the amended definition of the term `Royalties’ in the DTAA, which will prevail. Since para 4(b) of Article 12 of the DTAA specifically covers consideration for use of any industrial or commercial equipment, the payment made by the assessee for use of the overall ICT Infrastructure set up by its Netherlands entity would fall within the term `Royalties’ under the DTAA. As the case is admittedly covered u/s.9(1)(vi) of the Act and also found to be covered by Article 12 of the amended DTAA, we hold that the amount paid by the assessee is chargeable to tax in the hands of the Netherlands entity. Failure of the assessee to deduct tax at source from payment made to the Netherlands entity clearly magnetizes section 40(a)(i) of the Act. We, therefore, accord our imprimatur to the view canvassed by the authorities in making and sustaining the disallowance.
FULL TEXT OF THE ORDER OF ITAT PUNE
This appeal by the assessee is directed against the order passed by the ld. CIT(A)-5, Pune on 25-09-2017 in relation to the assessment year 2012-13.
2. The only issue raised herein is against the confirmation of disallowance made by the Assessing Officer (AO) u/s.40(a)(i) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’).
3. Succinctly, the factual matrix of the case is that the assessee, an Indian based Private Limited Company, is wholly owned by Vanderlande Industries Holding, B.V. Netherlands (hereinafter also called“VIBV”). The assessee is engaged in the business of baggage handling at Airports, Distribution Centre, Express Parcel Sortation facilities and related services. During the year under consideration, the assessee paid a sum of Rs.53,53,204/- to VIBV, its Netherlands based holding company, which was claimed as reimbursement on account of IT Support Services. No deduction of tax at source was made. On being called upon to explain the reasons for non-withholding of tax, the assessee submitted that the amount paid to VIBV was in the nature of reimbursement of IT Support Services cost and hence did not require any tax deduction. The assessee further stated that VIBV entered into arrangements in Netherlands for various facilities and services which were to be used by Vanderlande and its group companies located in different countries, including India. The payment made was reimbursement for Desktop services, like storage of data or backup and restore etc.; Communication services like Instant Messaging, remote VPN Access etc.; and Application services like Solidworks, SugarCRM, Primavera, JD Edwards Enterprise, E-mail & Calendering etc. The assessee made out a further claim before the AO that the payment made by the assessee to VIBV was in the nature of `fees for technical services’. Relying on Article 12 of the Double Taxation Avoidance Agreement between India and Netherlands (hereinafter also called `the DTAA’), the assessee contended that no services were “made available” by VIBV to the assessee so as to bring the payment within the purview of `fees for technical services’. The AO rejected the characterization of payment as `fees for technical services’ by the assessee and held the same as `Royalty’ covered u/s.9(1)(vi) read with Article 12 of the DTAA. The ld. CIT(A) echoed the assessment order on the point, against which the assessee has come up in appeal before the Tribunal.
4. We have cogitated over the rival submissions in Virtual Court and scanned the relevant material on record. The issue before the Tribunal is to decide the nature of payment made by the assessee to VIBV. In case the amount paid by the assessee turns out to be chargeable to tax in the hands of its Netherlands associated enterprise and since the assessee failed to deduct tax at source, it would be hit by section 40(a)(i) of the Act mandating the disallowance. On the other hand, if the amount paid by the assessee is found not to be chargeable to tax either as reimbursement, or royalty or fees for technical services either under Act or under the DTAA, the assessee would escape the rigor of the provision.
5. In order to decide as to whether or not the amount paid by the assessee is chargeable to tax in the hands of Netherlands entity, we need to comprehend the real nature of transaction. The ld. AR invited our attention towards the Services Agreement between the assessee and its Netherlands entity (called in the Agreement as `Services’) entered on 01-09-2008, whose copy has been placed at page 49 onwards of the paper book. In the extant appeal, we are concerned only with the nature of Information Communication Technologies (ICT) Services claimed to have been availed by the assessee, as has been set out in clause III of the Agreement, reading as under:
III. Information, Communication Technologies (‘ICT’) and Quality Management Services shall provide all the services in respect of determination, investigation, implementation, improvement and control of overall ICT infrastructure, including, but not limited to, the following services:
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- Business Process & Information Support, Helpdesk, Security, ICT Program & Project Management;
- Desktop services such as Storage, Remote Access (VPN/Portal), Internet, etc.
- Communication services such as Video Conferencing/Audit Conferencing, UMTS and GPRS cards etc.
- Corporate Applications such as JDE One, JDE World, Primavera, CAP, CAPE, VILA, SolidWorks, E-mail & calendaring, SugarCRM, Synergy (SCM & Change), Doors, HP Quality Center, SmarTeam, CCDraft, Intranet, Lotus Notes Apps, Genesis, Lasernet, Insight, WIFA, ESOT and certain hosted applications such as Vision, Pview, etc.
- ICT-Management, Process Information Experts, Infrastructure, Wide Area Network (“WAN”)/Local Area Network (“LAN”).
- Usage of the Information Technology: Office Systems, ERP Systems, Engineering Automation and Networks and telecommunication;
- Development and support of new software releases and software updates to provide the users with new applications and new releases.
6. Article 2 of the Agreement deals with payment of Fees. Anent to the `Information, Communication Technologies and Quality Management’ Services, this Article provides for charging by the Netherlands company: “on the basis of Cost Plus arm’s length markup”. The term `Cost’, as used in this Article, has been defined in Article 2.2.1 to: “include both direct cost and indirect cost”. The term `direct cost’ has been defined to: “mean allocable and other reasonable expenses” wholly and exclusively incurred by Services in the course of provision of Services pursuant to the terms of this Agreement. The term `indirect cost’ has been defined to: “mean the allocable overhead expenses of Services”. The term `Arm’s length mark-up’ has been defined to “mean the profit margin computed having regard to the comparable data . . . .”.
7. Page 134 of the paper book contains detail of JD Edwards Suite software purchased by the Netherlands entity. 744 licenses of this software were purchased, which were used by it in its overall ICT Infrastructure. Page 119 of the paper book, to which our attention was drawn by the ld. AR, contains details of ICT cost allocation by the Netherlands entity to the assessee for the months of November, 2011 to February, 2012. A perusal of this page transpires that for the months of November, 2011 to February, 2012, the assessee had 18 units of access (described as No. of workstations), 19 units of access, 18 units of access and 20 units of access respectively to the overall ICT Infrastructure. Fixed cost per unit of access for all the months was 403.91, giving fixed cost for the November, 2011 at 7270.38. Thereafter, a further amount towards share in the additional software cost at 568.95 was charged making the total charge at 7839.33 for the month of November, 2011. Similar is the position for other months given on the same page. The ld. AR was required to give bifurcation of month-wise total costs incurred by the Netherlands entity on maintaining the overall ICT Infrastructure and how it was allocated to the world-wide group-companies. No such information could be made available. To answer the query, the ld. AR again relied on page 119 of the paper book as discussed above indicating the share of the assessee’s cost on the basis of number of units of access and not the overall costs incurred by the Netherlands company and the manner of cost allocation to the world-wide group-companies.
8. The following salient features emerge from various clauses of the Agreement and above documents, as are material for our purpose:-
a. The Netherlands entity purchased various software, such as, JDE One, JDE World, Primavera, CAP, CAPE, VILA, SolidWorks, Email & calendaring, SugarCRM, Synergy (SCM & Change), Doors, HP Quality Center, SmarTeam. It also purchased Information Support, Local Area Network, Wide Area Network, ERP Systems etc. for setting up its overall ICT Infrastructure.
b. All the group entities were allowed access to the ICT Infrastructure.
c. All the direct and indirect costs incurred in setting up, updating and maintaining the ICT Infrastructure were aggregated by the Netherlands entity.
d. Such costs were increased by an arm’s length mark-up and then allocated to the world-wide group entities
e. It is a case of cost allocation by the Netherlands entity to various group companies depending upon their extent of user.
9. From the above discussion, it becomes overwhelmingly pellucid that:-
(i) It is not a case of reimbursement of expenses, as was made out by the assessee before the authorities below. The raison d’etre is the loading of the costs incurred by the Netherlands entity with the arm’s length mark-up. Once a mark-up is added, the case goes outside the ambit of reimbursement.
(ii) The ld. AR claimed that ICT charges were a composite payment made by the assessee towards royalty for purchase of software and fees for technical services and both were not chargeable to tax in the hands of VIBV. Qua the royalty part, we are not on the same page with the ld. AR. It is not a case of the Netherlands entity purchasing and then selling/transferring the software to the assessee. Rather, the holding company purchased the software and installed the same in its overall ICT Infrastructure. What the assessee has been charged for is only towards the usage of the IT Infrastructure and not the cost of any identified software. Ergo, the contention that the assessee purchased software through its Netherlands entity and payment of consideration for such purchase did not constitute Royalty in the hue of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (2021) 432 ITR 472 (SC) is sans merits. Per contra, the software were purchased by the Netherlands entity for its own IT Infrastructure and were not transferred to the assessee. The ratio of the Hon’ble Summit Court decision, if at all, would apply in the hands of the Netherlands entity at the time of purchase of the software from third party vendors before installing them in its overall ICT Infrastructure and not at the time of earning revenue from the group entities including the assessee for allowing access to its overall ICT Infrastructure.
(iii) Qua the second part of the payment, the ld. AR contended that it was in the nature of `fees for technical services’ and, ergo, not chargeable to tax in the hands of Netherlands entity because nothing was “made available” by it to the assessee within the meaning of the DTAA. This contention is again fallacious and far-fetched. In fact, there are no such two categories of the ICT payment as claimed. The Invoices raised by the Netherlands entity contain only one monthly-charge figure, which is based on the units of access by each entity. Notwithstanding that, no such possibility exists also because we have noted supra that the holding company purchased software licenses and other equipments for setting up and maintaining its overall ICT Infrastructure which was made available for use to all the worldwide group-entities for deriving services by means of access to it. Our attention has not been drawn towards any requisition of services made by the assessee to its holding company and then the holding company delivering the necessary output to the assessee. On the other hand, it is a case of the assessee using the overall ICT Infrastructure of the Netherlands entity for getting served rather than the Netherlands entity providing specific services to the assessee. The services derived or availed by the assessee are the result of the use of the overall ICT Infrastructure. In that view of the matter, the contention of the ld. AR about the bifurcation of ICT costs into two parts, viz., royalty and fees for technical services and, ex consequenti, both going outside the tax-net, is preposterous, artificial and unsubstantiated. We want to accentuate that there is a marked difference between, por una parte, one person deriving some service by use of a facility provided by the other, and, por otra parte, the other party providing the service. Instantly, we are dealing with a case of the first category.
(iv) The assessee, in fact, paid a monthly sum to its Netherlands entity depending upon the extent of user of the overall ICT Infrastructure set up by the latter.
10. This brings us to the question of determination as to whether the payment made by the assessee for the use of overall ICT Infrastructure as per point (iv) above is chargeable to tax in the hands of Netherlands entity. In our considered opinion, such a payment is covered by the definition of ‘Royalty’ as given in Explanation 2 read with Explanations 4 & 5 to section 9(1)(vi) of the Act. The rationale behind our decision is that the payment for the use of ICT Infrastructure maintained by the Netherlands entity, is a consideration for “the use or right to use any industrial, commercial… equipment”, covered under clause (iva) of Explanation 2 to section 9(1)(vi) of the Act. Further, the Explanation 5 provides that the Royalty includes consideration, inter alia, in respect of `any property’ whether or not the possession or control of it is with the payer or is used directly by the payer or the location of such property is in India. In light of the definition of term `Royalty’ as given in section 9(1)(vi), it becomes overt that the payment made by the assessee for the use of the ICT Infrastructure of the holding company falls in the definition of `royalty’ and hence is chargeable to tax within the meaning of section 9(1)(vi)(b) of the Act. The ld. AR fairly admitted the chargeability of the amount in question u/s.9(1)(vi) of the Act.
11. He, however, stressed on the DTAA to argue that the amount of Royalty paid by the assessee for the use of overall ICT Infrastructure was not chargeable to tax in the hands of the Netherlands entity u/s.90(2) of the Act. There can be no dispute on the applicability of section 90(2), which provides that when the Central Government has entered into an agreement with the Government of any country outside India, inter alia, for avoidance of double taxation, then in relation to the assessee to whom such agreement applies, the provisions shall apply to the extent they are more beneficial to the assessee. Simply put, if the provisions of DTAA are more beneficial to an assessee vis-à-vis its counterpart in the Act, then the assessee has the option to be ruled by the DTAA.
12. Now we advert to the DTAA between India and Netherlands to ascertain if the amount received by the holding company gets any beneficial tax treatment there under. The DTAA was notified, firstly, on 27-03-1989. Article 12 of the DTAA deals with Royalties, Fees for Technical Services and Payments for the use of equipment. Para 4 of Article 12 defines the term `Royalties’ as under:
`The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including motion picture films and works on film or video tape for use in connection with television, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. ‘
13. At this juncture, it would be apt to note that the contents of para 4 of the Article 12 are equivalent of the contents of clauses (v) and clauses (i) to (iii) of Explanation 2 to section 9(1)(vi), which are largely in the nature of copyright royalty. Clause (iva) of Explanation 2 to section 9(1)(vi) talks about the industrial royalty, being, the consideration for `the use or right to use any industrial, commercial or scientific equipment…’. The extant case is of consideration paid by the Indian assessee for the use or right to use of the overall ICT Infrastructure of the Netherlands holding company. This being a case of industrial royalty, is not covered within the ambit of the above para 4 of Article 12 of the DTAA dated 27th March 1989.
14. However, it is crucial to take note of an amendment carried out to the DTAA vide Notification No.11050 dated 30-08-1999 by providing that with effect from 01-04-1997, the existing Article 12 would be substituted with a new Article 12. Para 4 of the Article 12 of the 1999 Notification, defines the term `Royalties’ as under:
`4(a) The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including motion picture films and works on film or video tape for use in connection with television, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.
(b) payments of any kind received as consideration for the use of, or the right to use industrial, commercial or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 and 8A (Shipping and Air Transport) from activities described in paragraph 2(a) of Article 8 or paragraph 4(b) of Article 8A.’
15. A cursory glance at the definition of the term `Royalties’ makes it patent that the hitherto content of para 4 of Article 12 comprising of copyright royalty cases only became subject matter of sub-para (a) of the amended para 4 of Article 12. In addition, para 4(b) also came to be added, which deals exclusively with industrial royalty cases, thereby enveloping, consideration for the use of or the right to use industrial, commercial or scientific equipment, subject to certain exceptions, which are not applicable to the case under consideration. Thus, it is manifest that India and Netherlands have agreed to bring industrial royalty, of the nature as obtaining in the present appeal, within the scope of Article 12 of the DTAA w.e.f. 30-08-1999. The assessment year under consideration is 2012-13. As such, it would only be the amended definition of the term `Royalties’ in the DTAA, which will prevail. Since para 4(b) of Article 12 of the DTAA specifically covers consideration for use of any industrial or commercial equipment, the payment made by the assessee for use of the overall ICT Infrastructure set up by its Netherlands entity would fall within the term `Royalties’ under the DTAA. As the case is admittedly covered u/s.9(1)(vi) of the Act and also found to be covered by Article 12 of the amended DTAA, we hold that the amount paid by the assessee is chargeable to tax in the hands of the Netherlands entity. Failure of the assessee to deduct tax at source from payment made to the Netherlands entity clearly magnetizes section 40(a)(i) of the Act. We, therefore, accord our imprimatur to the view canvassed by the authorities in making and sustaining the disallowance.
16. In the result, the appeal is dismissed.
Order pronounced in the Open Court on 09th February, 2022.
