TII Instant Update - 2018-TII-INSTANT-ALL-527

CASE LAWS

2018-TII-51-ITAT-MUM-INTL

DDIT Vs RELIANCE COMMUNICATION LTD: MUMBAI ITAT (Dated: February 2, 2018)

Income tax - Sections 9(1)(vi), 40(a)(i), 195(2) - India-USA, India-Australia, India-Israel, India-Sweden & India-Singapore DTAAs - Article 12 - Copyright Act, 1957 - Sections 14, 30 & 51

Keywords: Equipment-royalty - Process - Right to use - Royalty - TDS.

Assessee is a part of Reliance (ADAG)Group.The group consists many an entities, including Reliance Communication Ltd. (RCL), Reliance Telecom Ltd., Reliance BPO Ltd. and Reliance Communication Infrastructure Ltd. RCL. is engaged in business of telecommunication. Other three entities were also connected with wireless telecommunication net-work in India. For that purpose, they entered into various contracts with non-resident-entities and made certain payments for purchase of software. The assessees made applications u/s.195 of the Act, requesting the AO.s to allow them to make payments to non-residents without deducting tax at source. However, the AOs held that payments made by them to the non residents were taxable in India, that they should deduct tax at source before making such payments. Accordingly, the assessees deducted the taxes.

On appeal, the FAA held that the assessees did not own any rights for transferring the software licenses, that they were not having the power to decode the machine code of the software nor did they had the power to make copies of software (except for back-up), that they had obtained only the right to use the software for their business purpose and obtained no other rights in the Software, that the assessee had acquired the hardware and software simultaneously, that they did not acquire any right of duplication of software except for its own use. He also deliberated upon the provisions of the Indian Copyright Act,1957(ICA) and held that payment made by them for acquiring copy of the software did not amount to royalty within the definition under Article 12(3) of the DTAAs. Finally, he allowed the appeals holding that there was no obligation on part of the assessees to deduct tax at source for the payments made to the non-resident entities.

Having heard the parties, the ITAT held that,

Whether the canvas of the expression 'royalty' is much wider in the I-T Act as compared to DTAAs - YES: ITAT

+ the term ‘royalty', used in commercial and business world frequently, is understood to be a compensation or feed paid to an Owner for the use of his intellectual property like patents, copyrighted-works, franchises or natural resources.A royalty payment is made by those who wish to make use of it for the purposes of generating revenue or other such desirable activities. In most cases, royalty is designed to compensate the Owner for the asset's use and they are legally binding. The terms under which royalties are based on is called a license agreement. The license agreement defines the limits and restrictions of the royalties, such as its limitations pertaining to geographic territory, how long the agreement will last or the type of products with particular royalty cuts. License agreements are regulated specially if the resource Owner is the government or if the license agreement is a private contract;

+ a comparison of the provisions of DTAA.s and the section 9 of the Act clearly reveals that term royalty does not connote the same meaning even if both are casually glanced at. In the DTAAs royalty 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 cinematograph films, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial,commercial or scientific experience. But, the Act has expanded the meaning of Royalty by adding explanations to the section. The canvass of term royalty is broader in the Act, as compared to the ones referred in tax treaties. While making amendments to the Act, the Parliament has not amended the DTAA.s with these five countries. So, the treaties, as they are, will be applicable and will govern the tax incidence of the transactions covered by them, if an assessee opts out for them. It has to be remembered that while dealing with taxation of non-resident-entities provisions of tax treaties have to considered and that domestic law will not have preference over the DTAAs;

Whether when the agreements with the non-resident vendors clear refer to restrictions on duplication of the software and no transfer of copyright and return of copies of software on termination, it is a clear-cut case of payment being made for the copyrighted article and such payment is not to be construed as royalty - YES: ITAT

+ all the agreements stipulate that the assessee would be using the software for ‘operation of its wireless network only'.Thus it is clear that it was prevented from utilising the software for commercial uses. Had the ultimate authority been with the assessee, it could have used the software in the manner it wanted. It could make copies of Software or the documentation or parts thereof for archival purposes only. Restriction on copying the software clearly establishes that the suppliers of the softwares were the sole and exclusive owner of the rights, title and property in Software and the Source Codes Software. Agreements forbid the assessee from transferring, assigning, sub-licensing, using by outsourcing,decompiling, reverse-engineering, disassembling/decoding the software. None of the agreement talks of transferring of copyright to the assessee by the suppliers - rather it is clearly mentioned in the agreements that copyright would remain with them. Agreements provide returning of the copies of the software to the vendors upon termination or cancellation of the agreements. So, we hold that the consideration paid by the assessee to the suppliers for acquiring copy of software was not for the ‘use of copyright or transfer of right to use of copyright' the payment was made for the ‘copyrighted article' and that the payments made by the assessee to the vendors of software cannot be taxed as royalty.

Revenue's appeal dismissed

2018-TII-77-ITAT-DEL-TP

MAGNETI MARELLI POWERTRAIN INDIA PVT LTD Vs ADDL CIT: DELHI ITAT (Dated: January 31, 2018)

Income tax - ALP - benefit test - CUP - manufacture of ECUs - payment of technical fees - TNMM

The Assessee company, a Joint Venture between Magneti Marelli Powertrain S.P.A., Italy, Suzuki Motor Corporation, Japan and Maruti Suzuki India Limited, is engaged in the business of manufacturing and selling Engine Control Units in India. Consequent to filing of its return declaring total income 69,07,87,080/-, the AO referred the matter to the TPO for determination of ALP of the international transactions entered into by assessee with its AEs comprising of purchase of raw materials, sale of goods, payment of royalty, payment of technical know how, and reimbursement of legal expenses. For determination of the arm’s length price of these international transactions with its AE, the assessee considered TNMM as the MAM for its activity pertaining to manufacture of ECUs. The TPO analyzed various clauses of the Joint Venture agreement and after considering the arguments advanced by assessee, he rejected the TNMM adopted by assessee comparing the margin at entity levels. He, on the other hand, applied CUP method as the MAM for determination of the ALP of the payment of technical assistance and accordingly made an upward adjustment at Rs.40,38,99,999/-. The assessee approached the DRP but was not successful. Accordingly, the AO in the final order made addition of the same.

On appeal, the ITAT held that,

Whether mere fact that the overall profit earned by assessee is more, will not justify combined benchmarking and will not ipso facto lead to interference that all international transactions are at ALP - YES: ITAT

Whether multiple year data can be adopted for benchmarking, only if the data for the current year does not result into determination of correct prices - YES: ITAT

Whether when Assessee did receive technical information from its overseas AE and had earned income by using the same, it cannot be said that it has ALP at nil - YES: ITAT

Whether some sort of comparison is inevitable under TNMM, unless it is shown that Assessee did not get any advantage at all by making payment to its AE - YES: ITAT

+ as far as lumpsum technical fees is concerned, the counsel for assessee submitted that identical issue had come up before the Tribunal in assessee’s own case in the immediately preceding assessment year and the Tribunal vide ITA No.801/Del/2016 for the assessment year 2011-12 has discussed the issue and restored the matter to the file of AO/TPO. Therefore, he has no objection if the issue is restored with similar directions. It is seen that the DR has no objection for the same. Therefore, it has to be seen that the Tribunal in ITA No.801/Del/2016 has observed that:

["....It is seen that the assessee clubbed transactions of import of raw material, sub-assembles and components, payment of technical assistance fees, payment of royalty, payment of software and purchase of fixed assets under one segment of ‘Manufacturing of the automotive components’ and analyzed all such transactions on a combined basis. This type of combined benchmarking of all the international transactions is not in accordance with law. The mere fact that the overall profit earned by the assessee is more, would not ipso facto lead to the interference then all the international transactions are at ALP. Thus, the approach so adopted by the assessee in combining so many international transaction for determining ALP on a consolidated basis, is incorrect....The next major flaw in the assessee’s calculation is that it took into consideration the ‘Projected operating profit margin’ to show that its international transaction for the current year was at ALP. The requirement under the relevant provisions of the Act along with the rules is however to consider the 'actual' figures and not any 'projected' figures....It is further seen that the assessee showed mean operating margin of certain comparables at 6.65% on the basis of past three years data. This kind of approach adopted by the assessee cannot be approved for the obvious reason that Rule 10B(4) provides that the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Proviso of this rule for use of multiple year data is only an exception and not a rule, which can be invoked if the data for the current year does not result into the determination of correct prices...."]

["....The approach adopted by TPO is also not correct. He rejected TNMM as applied by the assessee by holding that CUP method was applicable. However, he computed the ALP of such transaction under CUP as Nil. There is no dispute on the fact that the assessee did receive technical information in respect of ECUs to be manufactured by it for four different models of cars pertaining to Maruti, Fiat and Tata. When technical information was admittedly obtained, it could not be said that the assessee ought not to have paid any consideration for that to its AE. The TPO seems to have gone wrong by considering that the foreign AE contributed capital to the tune of Rs. 20 crores and odd and took away a sum of Rs. 38 crores and odd in the shape of fees for technical services. This type of comparison made by the TPO for determining that the ALP of the international transaction of payment of technical fee at Nil, has no legal legs to stand on. When he resorted to the application of CUP method, it was incumbent upon him to ask the assessee for the submission of details of some comparable uncontrolled transactions. There is no reference to the asking or supplying of any such information by the assessee in the first instance, or the TPO thereafter venturing to find out such comparables at his own. What is required under the CUP method is to compare the price paid with certain uncontrolled comparable transaction to analyze if the price paid in an international transaction is at ALP. Nothing of the sort has been done by the TPO to make comparison of any comparable case with that of the assessee. He simply proceeded to adopt nil value of as ALP of the international transaction of payment of technical fee and proposed addition for the full amount. Thus, when the assessee did receive technical information and earned income by using the same, it cannot be said that it has ALP at nil. Some sort of comparison is inevitable under this method, unless it is shown that the assessee did not get any advantage at all by making payment to its AE...."]

+ therefore, respectfully following the decision of the Tribunal in assessee’s own case in the preceding year, the issue is restored to the file of AO/TPO for applying the TNMM in respect of technical fee payment for determination the arm’s length price.

Case remanded