Synamedia Ltd. [formerly known as ‘NDS Limited’] Vs ACIT (ITAT Bangalore)
It is the case of the Assessee that the receipts in question are pure reimbursement of expenses incurred by the Assessee for and on behalf of NDS Pay TV. It is the case of the revenue that (Para 2.1 of AO’s order) that reimbursement of expenses may be made by the service provider at actual or alternatively, the agreement may provide a fixed amount towards reimbursement and that the issue that generally arises in such cases is to see whether such reimbursements of expenses is purely reimbursement or for rendering services. Therefore according to the revenue the nature of reimbursement of expenses has to be examined and if the receipts for services rendered then whether the charge for the services is equivalent to the cost or not becomes immaterial. Therefore, if the receipts fall within the ambit of Sec.9(1)(v) (vi) or (vii) of the Act, then it would constitute income in the hands of the assessee chargeable to tax. Thereafter the AO has in paragraph 2.5 of his order proceeded to hold that on perusal of same copy of invoices furnished along with the submission dated 2.11.2012 and 13.12.2012, the assessee is providing business support services to NDS Pay Tv, though the invoices show that the same were in relation to purchase of fixed assets and reimbursement of expenses. He thereafter went ahead and held that the assessee is providing procurement services for plant and machinery, capital assets, computers to be used by NDS Pav Tv in its projects and that the procurement services extended from creating, approval, confirmation of purchase order to the receipt of material, invoicing and payment release and also equipment maintenance services. He also held that services of providing information technology will include identifying appropriate software and solutions for NDS Pav TV to successfully utilize cost advantaged locations and resources for application development. In so far as reimbursement of expenses is concerned, the AO has held that the assessee is providing human resources services in terms of managing overseas accommodation of NDS Pav TV employees, insurance benefits, travel plans, immigration services etc. He also held that the assessee is providing Marketing assistance support to NDS Pav TV employees who travel abroad for business purposes and that the services include arrangement of business meetings, marketing capabilities of NDS Pay TV to potential customers etc.,
Having made the above observations (which are in our opinion purely on surmises and without first giving a finding that there is no one to one tally between the actual cost and actual sum reimbursed by NDS Pav TV to the assessee and that there is an element of mark up in such payments) he also observed that there is no written agreement between the parties regarding Cost Contribution Agreement (CCA) in relation to AY 2010-11 but such agreement existed from 1.4.2011 (i.e., from AY 2011-12 onwards). He went on to analyze the terms of the said agreement and found that the preamble to the Agreement provided that the agreement is being entered into to obtain benefits of corporate purchasing contracts and for administrative simplicity. The AO has thereafter referred to cases where the factual finding (in the case of Van Oord Acz Marine Contractors (52 SOT 423 (Chennai ITAT) was that the assessee could not show that the price reflected in the invoices were comparable to similar services provided by international parties. He also referred to decisions rendered in the context of TDS provisions and cases where there were agreements for secondment of employees and where employees costs were reimbursed. He thereafter proceeded to hold that reimbursements are in the nature of FTS.
The DRP made a reference to the preamble to the agreement dated 1.4.2011 and held that the same did not exist for AY 2010-11 and is not relevant. The DRP however concluded that the AO has given valid reasons for treating the receipts by the Assessee as FTS. With regard to the argument that under the DTAA, taxability of FTS is subject to the condition that the FTS should make available technical knowledge to the person to whom services were rendered, the DRP by merely observing that the AAR in the case of Perfetti Vam Melle Ltd., 342 ITR 200 (AAR) and Mersen India Pvt.Ltd. 249 CTR 345(AAR) held that make available also includes providing expert advice and including one time assistance. The DRP thereafter observed that the Assessee also provided maintenance and support services and finally concluded that the except payment for software which was held to be in the nature of royalty, the remaining payment constituted FTS taxable in India under the provisions of the DTAA.
We are of the view that in principle we hold that pure reimbursement does not give rise to any income and the decisions cited by the learned AR in this regard lay down the above principle. We find that the revenue authorities have not firstly held that as to whether there was one-to-one tally of sums spent by the Assessee that was reimbursed by NDS Pay Tv. Once this factual finding is rendered then there has been no payment for any services whatsoever. The question is can one infer that the sums reimbursed were for services rendered by Assessee when there is one to one tally. In our view it cannot be said so. As we have already mentioned the AO has proceeded to draw inferences on surmises and conjectures. Firstly there is no evidence to show that services were rendered which can be termed as FTS. Under the DTAA FTS can be taxed only when it makes available technical knowledge to the person making payment. On the application of “make available” clause of the DTAA, there is no finding whatsoever as to what was the technical service made available to NDS Pay TV. We, therefore, deem it fit to set aside this issue and remand the same for consideration by the AO in the light of the observations made above (in particular with regard to actual tally of expenses incurred and reimbursed by NDS Pay Tv to Assessee), in accordance with law, after affording assessee opportunity of being heard
FULL TEXT OF THE ORDER OF ITAT BANGALORE
Present appeal has been filed by assessee against final assessment order dated 16.12.2016 passed by Ld.ACIT, Circle-1(2), International Taxation u/s. 143(3) r.w.s. 147 and 144C of the Act for Assessment Year 2007-08 on following revised grounds of appeal.
“Based on the facts and circumstances of the case and in law, Synamedia Limited [formerly known as `NDS Limited] (hereinafter referred to as the ‘Appellant’) respectfully craves leave to prefer an appeal against the order passed by the Assistant Commissioner of Income-tax, International Taxation, Bengaluru (hereinafter referred to as the ‘learned AO’), dated December 16, 2016 under Section 143(3) read with section 147 and 144C of the Act (The Impugned order’) inter-alia on the following grounds:
That on the facts and circumstances of the case and in law:
A. Grounds of appeal relating to corporate tax matters
1. The learned AO has erred in law and in fact, in treating the receipts pertaining to licensing of software by the Appellant to be in the nature of ‘royalty’ as defined under the provisions of the Act read with the Double Taxation Avoidance Agreement entered into between India and United Kingdom (`DTAA’).
2. The learned AO has erred in fact, in treating the receipts pertaining to sale of hardware in the nature of Set Top Box, Viewing cards, CAM hardware etc. by the Appellant to be in the nature of a licensing arrangement and treating the same as ‘royalty’ as defined under the provisions of the Act and DTAA.
3. The learned AO has erred in law and in fact, in treating the receipts on account of rendering of support services to be in the nature of ‘Fees for Technical Services’ (`FTS’) as defined under the provisions of the Act read with the DTAA.
4. The learned AO has erred in law and in fact by treating the amounts as recovered by the Appellant from Cisco Video Technologies India Private Limited (`CVTIPL’) to be in the nature of consideration received for provision of ‘Business support services’ chargeable to tax as FTS as defined under the provisions of the Act and the DTAA.
B. Grounds of appeal relating to other matters
5. The learned AO has erred in law and facts by levying interest of INR 10,95,44,982 under section 234B of the Act, on account of the adjustments proposed to the returned income, by not appreciating the fact that even in a scenario wherein the impugned receipts were to be considered as Royalty/FTS taxable in India, the entire such receipts of the appellant were liable to be subjected to withholding tax provisions of the Act and accordingly, there was no requirement for the Appellant to pay advance tax in respect of such receipts.
The Appellant submits that each of the above grounds is independent and without prejudice to one another.
The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon’ble Tribunal to decide on the appeal in accordance with the law.”
The Ld.AR at the outset submitted that the issue raised in Grounds 1-4 relates to the question where receipts on sale of hardware with embedded software therein could be taxed as royalty.
He submitted that identical issue on similar facts have been considered by coordinate bench of this Tribunal in assessee’s own case for assessment years 2006-07, 2012-13, 2013-14, 2010-11 in ITA Nos. 363, 504, 505/Bang/2017 and 255/Bang/2014.
2. Brief facts of the case are as under:
The facts and circumstances that give rise to the aforesaid grounds of appeal are that the assessee is a non-resident foreign company incorporated in United Kingdom. It is in the business of supply of open digital technology and services to digital pay television (pay-TV) platform operators and content providers. The assessee entered into agreement with its customers for supply of integrated hardware systems along with embedded software. The hardware is primarily in the form of viewing cards, Set-top-Box (STB) and other connected components, usually used in viewing television through satellite. The embedded software is required to run the hardware components. The assessee received the following sums in respect of supply of integrated hardware systems along with embedded software.
2.1 During the AY 2007-08, Assessee filed a NIL return of income. The return of income was processed under section 143(1) of the Income Tax Act, 1961 (`the Act’) and the case was not picked for scrutiny under section 143(3) of the Act. Subsequently, the AO re-opened the assessment by issuing a notice under section 148 of the Act citing that certain third party receipts were not offered to tax in the return of income for AY 2007-08. Various Submissions were filed before the Ld.AO in relation to notices issued.
2.2 In the draft assessment order served on the Assessee, the Assessing Officer has proposed to make the following additions:
i) Treatment of receipts on account of supply of software license as royalty amounting to Rs. 48,80,75,507/-
ii) Treatment of receipts on account of sale of hardware in the nature of Set-Top-Box (‘STB’), viewing cards, Conditional Access Module hardware (‘CAM hardware’) etc. as royalty amounting to Rs. 33,83,56,660/-.
iii) Treatment of receipts on account of provision of support services to be in the nature of ‘Fees for Technical Services’ (‘FTS’) amounting to Rs. 1,16,08,302/- which were received in respect of rendering of support services in relation to software / hardware supplied to customers.
iv) Treatment of amounts recovered from Cisco Video Technologies India Pvt. Ltd. (‘CVTIPL’) on account of amount paid to their parties on behalf of CVTIPL amounting to Rs. 5,74,94,598/- as FTS.
3. The Ld.AR submitted that assessee granted exclusive non-transferrable license to customers in India to enable them to use the software for provision of DTH services to Indian subscribers. It is also submitted that the hardware sold is transferred outside in India and it constitutes business income of the foreign company which is not comparable to tax in India unless the PE situated in India to which income is directly attributable. He submitted that the STB viewing cards, CAM hardware etc were sold and not licensed and the title in the ownership of the goods passed to the customer on sale of hardware components along with the risk.
4. The Ld.AR argued that treating the receipts on account of rendering support services to be in the nature of FTS needs to satisfy certain criteria as per India UK DTAA. As there is a make available clause, it is a necessity that the technical knowledge and skill must remain with the person receiving the services even after a particular contract comes to an end. The use of a product which is embedded with technology shall not be considered to be “make available”.
5. The Ld.AR submitted that authorities below erroneously treated amount recovered from CISCO to be on account of business support services. He submitted that the assessee has not provided any services to CVTIPL and the amount recovered was on account of payments made to third party vendors on behalf of CISCO for administrative convenience. He placed reliance on the decision of coordinate bench of this Tribunal in assessee’s own case (supra) for preceding assessment years and subsequent assessment years on identical issue wherein this Tribunal followed the decision of Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. reported in (2021) 125 taxmann.com 42.
Ld.AR submitted that for year under consideration, the present assessee has received incomes from following parties.
