CSC Technology Singapore Pte. Ltd., Singapore Vs. ADIT (ITAT Delhi)
Traveling expenses have been incurred in connection with technical services agreement. Therefore, the expenditure has been incurred for earning royalty/FTS. In spite of the fact that the agreement provides inter-alia for adequate level of support and posting its personnel, the expenses for which will be reimbursed, the fact remains that the expenditure has been incurred for earning the royalty/FTS. The expenditure is that of the assessee and not that of the Indian subsidiary company. Article 12 provides for taxation of royalty/FTS in the source country on gross basis at a concessional rate of tax. This means that the expenditure incurred for earning royalty/FTS is not deductible in computing gross royalties or gross FTS received by the assessee company. The assessee has found that taxation under the Income Tax Act, 1961 is not more beneficial to it. Therefore, the receipts have been offered for taxation under Article 12 of the DTAA.
It is clear from the language that this article taxes royalty/FTS on gross basis and does not permit deduction of expenses. Therefore, it is held that the alleged reimbursement of expenses for traveling or the expenses of the assessee- company are its expenses, liable to be included in its gross receipts. Although the decision in the case of CIT & Another Vs. Halliburton Offshore Services Inc. (2008) 300 ITR 268 (Uttrakhand) was rendered under section 44BB, yet, it deals with the amounts received by the assessee in India on account of provision of services and facilities in connection with, or supply of plant and machinery on hire, used or to be used, in the prospecting for, or extraction or production of, mineral oils. It has been held that the reimbursements will have to be included in the receipts for arriving at the presumptive income, being 10% of the receipts. This decision does support our aforesaid conclusion that gross receipts will include reimbursement of expenditure incurred by the assessee for the purpose of computing gross receipts. It is held accordingly.
In a nutshell, it is held that royalties and FTS are taxable on payment basis, and reimbursement of traveling expenses will have to be included in the gross receipts for the purpose of taxation.
INCOME TAX APPELLATE TRIBUNAL, DELHI
I.T.A. No. 5604(Del)/2010 Assessment year: 2007- 08
CSC Technology Singapore Pte. Ltd., Singapore
Vs.
Assistant Director of Income
Date of Pronouncement: 17.02.2012.
ORDER
PER K.G. BANSAL : A.M
The assessee has taken up 9 grounds in the appeal. Ground no. 1 has seven sub-grounds; ground no. 2 has three sub-grounds; ground nos. 3 and 4 have two sub-grounds each and ground no. 5 has three sub grounds. However, the ld. counsel for the assessee explained that the main issues are regarding the system of accounting and assessment of reimbursement of expenses by the AO. Therefore, while admitting that the grounds are narrative and argumentative in nature and, therefore, not in accordance with ITAT Rules, it is pleaded that the appeal may be decided on the basis of submissions made in the course of hearing. He will also raise material grounds of fact and arguments in the course of hearing. These may be considered and the appeal may be decided accordingly.
2. He furnished background facts in brief that the assessee- company is based in Singapore and it has no presence in India. Its income consists of receipts from licensing of software to four customers in India. One of the customers is CSC India Pvt. Ltd., which is its hundred per cent subsidiary company. Other three customers are unrelated to the assessee. Two main questions arise in the appeal-(i) whether, the royalty! Fees for Technical Services (‘FTS’ for short) is to be taxed on the basis of the gross amount, and (ii) whether, reimbursement of certain expenses are to be included in the receipts for the purpose of the levy of tax? There are other minor ground regarding charge ability of interest u!s 234B, liability to pay sur-charge and reconciliation of the receipts.
2.1 Coming to facts, it is submitted that SAP software is internally used by all the group companies. This software is procured from an unrelated party. The expenditure incurred for the use of the license by the group companies is shared by them on the basis of the extent of user. The whole of the payment is made by the head office. This expenditure pertains to the business of the group companies including the Indian subsidiary company. Therefore, the expenditure is reimbursed on the basis of the bills raised by the head office. This amount is not included in the receipts.
2.2 All the group companies also use remote access facilities provided by an unrelated party. In respect of the user, remote access charges (“RAS” charges) are paid by the head office. These expenses are also spread over the user-group companies on the basis of actual user. They reimburse the expenses to head office on the basis of bills raised by it. These amounts are also not includible in the receipts.
2.3 The assessee also incurs travel expenses in respect of employees of the head office who came to India for helping the work of the Indian subsidiary company. The expenses are in relation to air-tickets, hotel bills, taxi charges etc. The Indian company has reimbursed these expenses to the head office on cost to cost basis. These amounts are also not includible in the receipts.
2.4 The case of the ld. counsel is that all these reimbursements have been received in the immediately following year. The questions to be decided in connection with these reimbursements are –(i) whether any element of profit is involved in reimbursements; and (ii) if yes, whether the amounts are taxable in this or the next year? In general, the case of the ld. counsel is that no element of profit is involved in the reimbursements. Therefore, nothing is taxable either in this or in the succeeding year. In this connection, our attention has been drawn towards the provision contained in section 5(2), under which two types of income derived from whatever source are subject to tax in the case of a non-resident person – (a) which is received or deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deem to accrue or arise in India during such year. Our attention has also been drawn towards the provision contained in Article 12 of the Doublke Taxation Avoidance Agreement between India and Singapore (DTAA) which permits taxation of royalty/FTS on payment basis.
2.5 Our attention has been drawn to page no. 51 of the paper book, which furnishes the details of the reimbursements in a tabular form as under:-
