Husco International Inc , Pune V. Assistant Commissioner of Income Tax (Int Tax) Circle-1, Pune

ITA 145/PUN/2021

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 5192 (ITAT-PUNE)
• Duration Of Justice: 4 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-09-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 23-09-2021
• Assessment Year: 2016-2017
• Appeal Filed On: 04-05-2021
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANURAG SRIVASTAVA
• Assessee Lawyers: RAHUL CHARKHA
• Keywords: Transfer pricing; Double taxation relief; International transaction; Additional evidence; Permanent establishment; Revised return
• Section: 43; 115A; 13; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH, C PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER . / ITA NO.145/PUN/2021 / ASSESSMENT YEAR : 2016-17 HUSCO INTERNATIONAL INC., A4, TALEGAON DABHADE INDUSTRIAL AREA, TALUKA MAVAL 410507 MAHARASHTRA-INDIA PAN : AABCH9478D VS. A CIT (IT), CIRCLE -1, PUNE APPELLANT RESPONDENT / ORDER PER R.S.SYAL, VP : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE FINAL ASSESSMENT ORDER DATED 05-03-2021 PASSED BY THE ASSESS ING OFFICER (AO) U/S.143(3) R.W.S.144C(13) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMEN T YEAR 2016-17. 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESS EE IS A COMPANY INCORPORATED IN THE USA. IT IS ENGAGED IN THE DEVELOP MENT AND MANUFACTURE OF HYDRAULIC AND ELECTRO HYDRAULIC AND ELEC TRO- HYDRAULIC CONTROLS FOR OFF-HIGHWAY AND AUTOMOTIVE APPLICATIONS. THE ASSESSEE BY SHRI RAHUL CHARKHA REVENUE BY SHRI ANURAG SRIVASTAVA DATE OF HEARING 24-09-2021 DATE OF PRONOUNCEMENT 27-09-2021 ITA NO.145/PUN/2021 HUSCO INTERNATIONAL INC., 2 ASSESSEE ASSISTS ORIGINAL EQUIPMENT MANUFACTURERS (OEMS) THROUGHOUT THE PRODUCT DEVELOPMENT PROCESS. A RETURN WAS FILED DECLARING CERTAIN INTERNATIONAL TRANSACTIONS. THE AO MADE A RE FERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE AR MS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS. THE TPO ACCEPTED ALL THE TRANSACTIONS AT ALP. DURING THE COURSE OF D RAFT ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT TOTAL RECEIPTS O F THE ASSESSEE FROM INDIAN OPERATIONS AMOUNTED TO RS.30,40,10, 666/-, AGAINST WHICH IT HAD SHOWN ONLY RECEIPTS OF RS.6.29 CRORE A S INCOME. THE ASSESSEE WAS SHOW CAUSED AS TO WHY THE REMAINING R EVENUE AMOUNTING TO RS.24,10,95,476/- BE NOT CHARGED TO TAX. IN THE ABSENCE OF ANY DETAIL OR EXPLANATION FORTHCOMING FROM THE SIDE OF TH E ASSESSEE, THE AO HELD THE REMAINING AMOUNT OF RS.24.10 CR ORE AS RECEIPTS IN THE NATURE OF ROYALTY/FEES FOR TECHNICAL SERVICES (F TS) WITHIN THE MEANING OF SECTION 9(1)(VI)/9(1)(VII) AND ADDED IT TO THE TOTAL INCOME. THE ASSESSEE APPROACHED THE DISPUTE RESOLUTION PANEL (DRP) WHICH ALLOWED RELIEF IN RESPECT OF SOME OF THE ITEMS OF REVENUE. FOR THE REMAINING ITEMS OF THE REVENUE, THE ASSESS EE HAS COME UP IN APPEAL BEFORE THE TRIBUNAL. 3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND GONE THROUGH THE RELEVANT MATERIAL ON RECORD. THE FOUR ITEMS OF REVENUE INC LUDED BY ITA NO.145/PUN/2021 HUSCO INTERNATIONAL INC., 3 THE AO IN THE TOTAL INCOME WHICH HAVE BEEN ASSAILED IN THE EXTAN T APPEAL ARE AS UNDER: I. CAPITAL GOODS SALES RS.96,58,128/- II. REIMBURSEMENT OF TRAVELLING, FREIGHT AND OTHER RS.12,68,764/- III. REIMBURSEMENT OF INTERNET CHARGES (RECEIVED) RS.30,31,448/- IV. ALLOCATION OF INSURANCE CHARGES (RECEIVED) R S.1,62,666/- 4. WE ESPOUSE THE ABOVE ITEMS AD SERIATIM FOR CONSIDERATION AND DECISION. THE FIRST ITEM OF SALE OF CAPITAL GOODS AMOUNTING TO RS.96,58,128/- HAS TWO COMPONENTS, NAMELY, REVENUE FR OM SOFTWARE LICENSES AMOUNTING TO RS.86,55,225/-; AND REVENUE FROM S ALE OF OTHER CAPITAL GOODS AMOUNTING TO RS.10,02,903/-. INSOFAR AS THE REVENUE FROM SOFTWARE LICENSES IS CONCERNED, THE ASSESSE E CLAIMED BEFORE THE DRP THAT IT CENTRALLY NEGOTIATED AND PROCURED STANDAR DIZED SOFTWARE FROM THIRD PARTY VENDORS FOR ITS OWN USE AS WELL A S OTHER GROUP ENTITIES GLOBALLY. IT WAS PUT FORTH THAT THE ALLOCATION OF SU CH COSTS WAS DONE BETWEEN THE GROUP ENTITIES ON COST-TO-COST BA SIS WITHOUT ANY MARK UP. COPIES OF INVOICES OF THIRD PARTY VEN DORS WERE PRODUCED AS ADDITIONAL EVIDENCE. THE DRP CALLED FOR A REM AND REPORT FROM THE AO WITH REFERENCE TO SUCH ADDITIONAL EVIDENC E. THE AO IN HIS REMAND REPORT SUBMITTED THAT THE ASSESSEES CONTEN TION OF THE AMOUNT BEING IN THE NATURE OF REIMBURSEMENT OF EXPENS ES WAS NOT TENABLE. HE FURTHER OPINED THAT THE ISSUE OF SOFTWARE LICENSE S WAS DISPUTED AND PENDING BEFORE THE HONBLE SUPREME COURT AND HENCE ITA NO.145/PUN/2021 HUSCO INTERNATIONAL INC., 4 THE AMOUNT IN QUESTION WAS HELD TO BE TAXABLE AS ROYALTY. THE ASSESSEE REITERATED ITS CONTENTION THAT THE AMOUNT PAID BY IT TO THE THIRD PARTIES WAS CROSS CHARGED AS SOFTWARE COST TO ITS GROU P ENTITIES INCLUDING THE INDIAN ENTITY FOR A SUM OF RS.86.55 LAKH. IN THE LIGHT OF CERTAIN DECISIONS INCLUDING CIT VS. SAMSUNG ELECTRONICS COMPANY LTD. (2010) 320 ITR 209 (KARNATAKA) , THE DRP HELD THAT THE AMOUNT RECEIVED BY THE ASSESSEE FROM ITS INDIAN COUNTERPART WAS IN THE NATURE OF ROYALTY AND HENCE TAXABLE. IT ALSO REJECTED THE ASSESSEE S CONTENTION OF REIMBURSEMENT AND HELD THE AMOUNT CHARGEABLE TO TAX U/S.9(1)(VI) OF THE ACT READ WITH EXPLANATIONS 4, 5 AND 6 THE RETO ALONG WITH THE PROVISIONS OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND THE USA (DTAA). 5. BREAK-UP OF TOTAL SOFTWARE CHARGES PAID BY THE AS SESSEE TO THIRD PARTY VENDORS AND THAT RECOVERED FROM ITS ENTITIES GLOBALLY IS AVAILABLE AT PAGE 24 OF THE WRITTEN SUBMISSIONS, WHICH READS A S UNDER: DETAILED WORKING OF SOFTWARE LICENSE COST OF UDS 1,35,090 ALLOC ATED BY THE APPELLANT TO HUSCO INDIA DATE NAME OF VENDOR DOC NO. PO NUMBER AMOUNT OF INVOICE (USD) PAPER BOOK REFERENCE NUMBER 4-NOV-14 PTC INC 55037910 384945 368,886 ITAT-1929 AND ITAT 1939 TO ITAT-1940 4-NOV-14 PTC INC 55037910 384945 18,813 ITA NO.145/PUN/2021 HUSCO INTERNATIONAL INC., 5 12-NOV-14 PRODUCT SPACE SOLUTIONS INC. 55037934 384987 11,750 ITAT-1931 13-NOV-14 CDW COMPUTER CENTERS INC. 55037936 384995 1,186 ITAT-1936 13-NOV-14 CDW COMPUTER CENTERS INC. 55037936 384995 784 13-NOV-14 CDW COMPUTER CENTERS INC. 55037936 384995 795 13-NOV-14 CDW COMPUTER CENTERS INC. 55037936 384995 144 12-SEP-14 PRODUCT SPACE SOLUTIONS INC., 55038026 385037 11,750 ITAT-1932 2-MARCH-15 PRODUCT SPACE SOLUTIONS INC., 55038354 385110 11,750 ITAT-1933 20-MAR-15 PRODUCT SPACE SOLUTIONS INC., 55038306 385143 11,750 ITAT-1934 30-APR-14 TRAINER EXPENSE 18003822 NA 313 ITAT-1945 15-JAN-15 TRAINER EXPENSE 25018692 NA 5,177 ITAT-1945 TOTAL 443,098 ENTITY NAME ALLOCATION KEY NO. OF EMPLOYEES ALLOCATION TOTAL (USD) HUS 32 172,916.16 172,916.16 ITAT-1921 AUTO WK 10 54,036.30 54,036.30 HIL 12 64,843.56 64,843.56 HCP 3 16,210.89 16,210.89 HIP (INDIA) INVOICE NO. HIP2015023 DATED MAY 30, 2015 25 135,090.75 135,090.75 ITAT-1919 82 TOTAL 443,098 6. THE FIGURES IN THE ABOVE TABLE ARE GIVEN IN THE US DOLLARS. IT CAN BE SEEN THAT THE ASSESSEE INCURRED TOTAL SOFTWARE EXPE NSES AT 4,43,098 US DOLLARS AND RECOVERED THE EQUAL AMOUNT FROM ITS GROUP ENTITIES WITHOUT ANY MARK UP WITH THE SHARE OF THE INDIAN ENTITY STANDING AT 1,35,090.75 US DOLLARS, WHICH IS EQUIVALENT TO RS.8 6.55 LAKH UNDER CONSIDERATION. THE FIRST MAJOR ITEM OF SPENDING IN THE ITA NO.145/PUN/2021 HUSCO INTERNATIONAL INC., 6 ABOVE TABLE IS PURCHASE OF SOFTWARE FROM PTC INC. A C OPY OF THE INVOICE HAS BEEN PLACED AT PAGE 1929 OF THE PAPER BOOK. PTC INC. RAISED THIS INVOICE ON THE ASSESSEE IN THE USA. UNDER THE ` INVOICE DESCRIPTION COLUMN, THE DETAILS HAVE BEEN GIVEN ABOUT THE NATU RE AND QUANTITY OF EACH SOFTWARE PRODUCT LICENSED TO THE ASSESS EE. FOR EXAMPLE, ITEM AT SL.NO.1 IS PKG-3504G-F: CREO ENGINEER II WITH ADVANCED ASSEMBLY GLOBAL AND NUMBER OF LICENSES SOLD TO THE ASSESSEE ARE NINE. NEXT ITEM IS MNT-3504GF-T2: SUPPORT FOR : CREO ENGINEER II WITH ADVANCED ASSEMBLY GLOBAL AND NUMBER OF LICENSES SOLD IS AGAIN NINE. THERE IS ANOTHER ITEM WITH SALE OF SIXTY LIC ENSES GIVEN AT SL.NO.8 AS MNT-CPE5065F- T2: SUPPORT FOR:PTC PLM VIEW AND PRINT ONLY LICENSE. THE LAST ITEM IN THE INVOICE IS ONE HUNDRED TWENTY LICENSES OF MNT-CPE5049F-T2: SUPPORT FOR: WINDCHILL PDMLINK-HEAVY USER LICENSE. PAGES 25 TO 29 CON TAIN TERMS OF `PTC SOFTWARE PRODUCT LICENSING BASIS. THE TERM CONCURRENT USER (CU) HAS BEEN DEFINED TO MEAN EACH CONCURRENT USER PRODUCT LICENSE MAY BE USED BY ONE INDIVIDUAL PERSO N AT ANY GIVEN TIME. THE CLAUSE WITH THE HEADING `GLOBAL LICENSE STA TES: A `GLOBAL LICENSE ALLOWS THE CUSTOMER TO INSTALL, OPERATE AND USE SUCH LICENSED PRODUCT AT ANY OF THE CUSTOMERS SITE(S) THROUGHO UT THE WORLD, NOTWITHSTANDING ANY RESTRICTIONS IN THE LICENSE AGREEMEN T IN ITA NO.145/PUN/2021 HUSCO INTERNATIONAL INC., 7 RELATION TO LIMITING USE OF LICENSED PRODUCTS TO THE COUNTRY OF INSTALLATION, BUT SUBJECT TO COMPLIANCE WITH ALL APPLICABLE EXPORT LAWS AND REGULATIONS. SIMILAR IS THE POSITION REGARDING OTHER INVOICE S RAISED BY THE THIRD PARTY VENDORS, NAMELY, PRODUCT SPACE S OLUTIONS AND CDW COMPUTER CENTERS INC. PATTERN OF INVOICES FROM THE THREE COMPANIES INDICATES THAT A SPECIFIC NUMBER OF LICENSES OF E ACH SOFTWARE PRODUCT WERE PURCHASED BY THE ASSESSEE WITHOUT ACQUIRING ANY COPYRIGHT THEREIN AND IT WAS ALLOWED USER OF SUCH LICENS ES BY ITS GROUP ENTITIES INCLUDING INDIA FOR WHICH IT GOT REIMBURSEMENT OF COST. THUS IT IS OBVIOUS THAT THE LICENSORS PERMITTED THE ASSESSEE ONLY TO INSTALL, OPERATE AND USE THEIR SOFTWARE PRODUCTS TO THE EXTENT OF COPIES PURCHASED BY IT. 7. THE PRIMARY CONTENTION OF THE ASSESSEE HAS BEEN THAT TH E RECEIPT IS IN THE NATURE OF REIMBURSEMENT AND HENCE NOT TAXABLE. IN PRINCIPLE, CHARGEABILITY IS ATTRACTED ON THE INCOME ELEMENT EMBEDDED IN A REVENUE RECEIPT. A RECEIPT DE HORS PROFIT ELEMENT, WHICH IS ONLY REIMBURSEMENT, IS NOT TAXABLE. HOWEVER, WE NEED TO EXAMIN E FROM THE FACTS IF IT IS REALLY A CASE OF REIMBURSEMENT. THE ASSES SEE MADE FACTUAL SUBMISSION BEFORE THE DRP, AS HAS BEEN REPRODUCED ON PAGE 23 OF ITS DIRECTION, TO THE EFFECT THAT: `HUSCO USA CENTRALLY NEGOTIATES AND PROCURES STANDARDIZED SOFTWARE FROM THIRD PA RTY ITA NO.145/PUN/2021 HUSCO INTERNATIONAL INC., 8 VENDORS, WITHOUT ANY CUSTOMIZATION OR MODIFICATION, FOR THE USE OF SELF AND FOR USE BY HUSCO GROUP ENTITIES GLOBALLY AND DISTRIBUTES THE SAME TO THE GROUP/AFFILIATE COMPANIES AS PER THEIR REQUIREMENT. WHEN THE DRP SENT THE RELEVANT MATERIAL TO THE AO FOR HIS COMMENTS, WHICH HAVE TABULATED ON PAGE 28 OF THE DIRECTION, THE AO, DID NOT APPROVE THE CONTENTION OF REIMBURSEMENT. THE ASSESSEE IN RESPONSE TO THE AOS COMMENTS, AS EXTRACTED ON THE SAM E PAGE IN TABULAR FORM, STATED: `THE APPELLANT HAD PAID SUCH AMOUNT TO TH IRD PARTIES FOR EXPENSES INCURRED ON BEHALF OF THE INDIAN GRO UP ENTITY WHICH WAS LATER ON CROSS CHARGED AT ACTUAL COST BASIS TO THE INDIAN GROUP ENTITY. FROM THE STAND OF THE ASSESSEE TAKEN BEFORE THE AO/DRP, IT IS EVIDENT THAT IT SET UP A CASE THAT IT PURCHASED CERTA IN NUMBER OF LICENSES OF DIFFERENT SOFTWARE AND CHARGED, INTER ALIA, THE INDIAN ENTITY FOR THE LICENSES ISSUED TO THE LATTER. HOWEVER, P AGE 24 OF THE WRITTEN SUBMISSIONS BEFORE THE TRIBUNAL AS EXTRACTED SUPRA NARRATES A DIFFERENT STORY. IT DEMONSTRATES THAT THE COSTS INC URRED BY THE ASSESSEE ON ALL THE SOFTWARE PRODUCTS PURCHASED FROM PTC INC. AND TWO OTHER VENDORS WERE AGGREGATED AND SUCH TOTAL INVOIC E VALUE WAS ALLOCATED BETWEEN FIVE ENTITIES INCLUDING THE ASSESSEE ITSELF O N THE BASIS OF NUMBER OF EMPLOYEES OF EACH ENTITY. A FORTIOR I, IT IS A CASE OF `ALLOCATION OF THE AGGREGATED COSTS ON THE BASIS O F NUMBER OF ITA NO.145/PUN/2021 HUSCO INTERNATIONAL INC., 9 EMPLOYEES AND NOT `REIMBURSEMENT. THE PATENT REASON IS TH E MISSING OF ONE-TO-ONE LINK BETWEEN THE COST OF PURCHASE OF THE SOF TWARE FOR THE INDIAN ENTITY AND ITS, AS SUCH, RECOVERY, WHICH IS A CO NDITION PRECEDENT FOR `REIMBURSEMENT. HAD IT BEEN A CASE OF TH E ASSESSEE PURCHASING A PARTICULAR NUMBER OF SOFTWARE LICENSES FROM TH E VENDORS AND THEN TRANSFERRING THEM AT THE IDENTICAL PRICE TO THE INDIAN E NTITY, IT WOULD HAVE AMOUNTED TO REIMBURSEMENT. THE MANNER OF C HARGING DONE BY THE ASSESSEE RUNS CONTRARY TO THE CONCEPT OF REIM BURSEMENT. THE CONTENTION OF THE ASSESSEE THAT IT CROSS-CHARGED ALL THE ENTITIES WITHOUT ANY MARK-UP DOES NOT ADVANCE THE CASE ANY FURTHE R. INSOFAR AS THE INDIAN TAXABILITY OF A NON-RESIDENT IS CONCERNED, IT IS ONLY THE AMOUNT OF REVENUE FROM INDIA WHICH MATTERS AND NOT WHAT THE NON- RESIDENT EARNS FROM ITS GROUP ENTITIES SITUATED IN OTHER COUNTRIES . EVEN IF ALLOCATION OF COMBINED COST IS WITHOUT ANY MARK-UP, IT NEED NOT NECESSARILY BE REIMBURSEMENT QUA EACH PARTICIPANT INDIVIDUALLY. 8. FROM THE ABOVE TABLE, IT CAN BE SEEN THAT THE ASSES SEE INCURRED TOTAL COSTS AT 4,43,098 USDS FOR WHICH VENDORS INVOICES HAV E BEEN PLACED ON RECORD. SUCH AMOUNT HAS BEEN CROSS CHARGED T O FIVE ENTITIES INCLUDING SELF AND THE INDIAN ENTITY. THE CHARGE TO THE INDIA N ENTITY IS 1,35,090.56 USDS (ABOUT 30% OF TOTAL COST) ON THE BASIS O F PROPORTION OF NUMBER OF ITS EMPLOYEES TO THE TOTAL EMPLOYEES O F FIVE ITA NO.145/PUN/2021 HUSCO INTERNATIONAL INC., 10 ENTITIES TAKEN TOGETHER. IT IS NOT A CASE OF IDENTICAL RECOVERY O F THE EXACT COST OF THE DESIGNATED NUMBER OF SOFTWARE PURCHASED AND TRANSFERRED TO THE INDIAN ENTITY. THE VERY FACT THAT THE INDIA N ENTITY HAS BEEN CHARGED ON THE BASIS OF NUMBER OF EMPLOYEES, DIVORCED FROM THE ACTUAL NUMBER OF SOFTWARE PRODUCTS TRANSFERRED TO IT, AMPLY PROVES THAT THERE IS NO ONE-TO-ONE CORRELATION BETWEEN THE OUT-GO AND IN-COME OF THE ASSESSEE ON THIS SCORE, THEREBY JEOPARDISING THE CONCEPT OF REIMBURSEMENT. IF THE INDIAN ENTITY IS CHARGED H IGHER OR LOWER THAN WHAT IS ACTUALLY DUE FROM IT WITH THE CORRESPONDING DOWNWARD OR UPWARD ADJUSTMENT IN THE SHARE OF ALLOCATION TO THE ENTITIES SITUATED IN OTHER FOREIGN DESTINATIONS, THE DENTED SHARE O F REVENUE FROM THE INDIAN ENTITY WILL AFFECT THE INDIAN INCOME TAX DUE FROM THE NON-RESIDENT ASSESSEE NOTWITHSTANDING THE FACT THAT ITS OVERALL COST RECHARGE REMAINS WITHOUT ANY MARK-UP. FOR TH E FOREGOING REASONS, WE ARE NOT INCLINED TO COUNTENANCE THE C ONTENTION OF `REIMBURSEMENT, WHICH IS HEREBY REPELLED. 9. WE HAVE NOTED ABOVE THE ASSESSEES CONTENTION THAT IT PURCHASED A CERTAIN NUMBER OF DIFFERENT SOFTWARE PRODUCTS AND TRANSFERRED SOME OF THEM TO THE INDIAN ENTITY AT THE SAME COS T AND HENCE NO TAXABLE EVENT OCCURRED. THE AO, APART FROM NOT ACCEPTING THE CONTENTION OF REIMBURSEMENT, OBSERVED THAT: `FURTHER, ON E OF THE ITA NO.145/PUN/2021 HUSCO INTERNATIONAL INC., 11 TRANSACTION PERTAINING TO SOFTWARE OF RS.86,55,225 IS A DISPU TED MATTER AND PENDING BEFORE THE HONBLE SUPREME COURT. GIVEN THE STAND OF THE DEPARTMENT, THE SAID AMOUNT SHOULD BE CONSIDER ED AS ROYALTY INCOME TAXABLE IN THE HANDS OF THE ASSESSEE. THE DRP HELD THE RECEIPT TO BE IN THE NATURE OF `ROYALTY BY RELYING ON THE SAMSUNG ELECTRONICS (KARN) . THUS IT IS ESTABLISHED THAT THE AUTHORITIES BELOW HAVE TREATED THE AMOUNT CHARGED FROM THE INDIAN ENTITY AS R OYALTY IN THE HANDS OF THE ASSESSEE ON ACCOUNT OF TRANSFER OF SO FTWARE LICENSES TO THE FORMER. FOR DOING THIS, THEY RELIED ON THE JUDGMENTS, INTER ALIA, SAMSUNG (KARN)(SUPRA) . THE QUESTION WHETHER THE TRANSFER OF COMPUTER SOFTWARE PARTAKES OF THE CHARACTER OF ROYALTIES R ECENTLY CAME UP FOR CONSIDERATION BEFORE THE HONBLE SUPREME COU RT IN ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT. LTD. VS. CIT ( 2021) 432 ITR 472 (SC). AFTER ANALYZING THE IDENTICAL ISSUE IN THE BACKDROP OF SIMILAR EXPRESSION AS USED IN ARTICLE 12(3) OF THE DTAA, IT HAS BEEN HELD THAT OWNERSHIP OF COPYRIGHT IN A WORK IS DIFF ERENT FROM THE OWNERSHIP OF THE PHYSICAL MATERIAL IN WHICH THE COP YRIGHTED WORK MAY HAPPEN TO BE EMBODIED. PARTING WITH COPYRIGHT ENTAILS PARTING WITH THE RIGHT TO DO ANY OF THE ACTS MENTIONED IN SECTION 14 OF THE COPYRIGHT ACT. WHERE THE CORE OF A TRANSACTION IS TO AUTHO RIZE THE END-USER TO HAVE ACCESS TO AND MAKE USE OF THE LICENSED COMPUTER ITA NO.145/PUN/2021 HUSCO INTERNATIONAL INC., 12 SOFTWARE PRODUCT OVER WHICH THE LICENSEE HAS NO EXCLUSIVE RIGHTS, NO COPYRIGHT IS PARTED WITH. 10. ADVERTING TO THE FACTS AS OBTAINING IN THE INSTANT CASE, IT IS SEEN THAT THE ASSESSEE ACQUIRED ONLY A LIMITED RIGHT OF USER IN RE SPECT OF SPECIFIC SOFTWARE PRODUCTS FROM PTC INC. AND TWO OTHER VENDORS, WHICH ARE IN THE NATURE OF COPYRIGHTED ARTICLES. AS SUCH, THERE CANNOT POSSIBLY BE A SITUATION OF IT PASSING ON THE COPYRIGHT IN THEM TO ITS GROUP ENTITIES. IT HARDLY NEEDS TO BE ACCENTUATED THAT NO ONE CAN TRANSFER A BETTER RIGHT IN A PRODUCT THAN HE HIMSELF HAS . SINCE THE ASSESSEE ITSELF OBTAINED ONLY A LIMITED ACCESS TO THE SOFTWARE PRODUCTS DE HORS THE RIGHT TO COPY THE SAME, THE SEQUITUR IS THAT IT COULD NOT HAVE TRANSFERRED ANYTHING MORE THAN THAT TO ITS ENTITIES GLOBALLY INCLUDING INDIA. ERGO, THERE CAN BE NO QUESTION OF TREATING THE AMOUNT RECEIVED FROM THE INDIAN ENTITY ON TRANSFER OF COPYR IGHTED ARTICLES AS ROYALTY IN THE HANDS OF THE ASSESSEE WITHIN THE ME ANING OF ARTICLE 12(3) OF THE DTAA. RESPECTFULLY FOLLOWING THE RATIO DECIDENDI IN THE CASE OF ENGINEERING ANALYSIS CENTRE OF EXCELLENCE PVT. LTD. (SUPRA), WE HOLD THAT THE AUTHORITIES BELOW WERE NOT JUSTIFIED IN INCLUDING THE AMOUNT IN QUESTION IN THE TOTAL INCOME OF THE ASSESSEE AS ROYALTY BY RELYING ON THE JUDGMENT IN THE CA SE OF SAMSUNG (KARN)(SUPRA) , WHICH IS NO MORE A GOOD LAW AFTER THE ITA NO.145/PUN/2021 HUSCO INTERNATIONAL INC., 13 ADVENT OF THE ENGINEERING ANALYSIS (SC)(SUPRA) . RESULTANTLY, THE RECEIPT IS HELD TO BE NOT TAXABLE NOTWITHSTANDING THE REJECTION OF THE CONTENTION OF REIMBURSEMENT. 11. THE NEXT MOOT QUESTION IS THAT IF THE RECEIPT FROM THE IN DIAN ENTITY IS NOT ROYALTY, CAN IT BE CHARGED TO TAX AS REGULAR BUSIN ESS INCOME? ARTICLE 7 OF THE DTAA DEALS WITH `BUSINESS PROFITS. IN ORDER TO BRING ANY BUSINESS PROFIT WITHIN THE FOLD OF TOTAL INCOM E, IT IS SINE QUA NON THAT THE ASSESSEE MUST HAVE A PERMANENT ESTABLISHMENT IN INDIA. ABSENT ANY PERMANENT ESTABLISHMENT OF AN ASSESSE E IN INDIA, THE RECEIPT CANNOT BE INCLUDED IN THE TOTAL INCOME ON THAT SCORE. 12. IT IS WORTHWHILE TO MENTION THAT THE ASSESSEE MADE SALE OF FINISHED GOODS IN INDIA INCLUDING THE FIRST TRANSACTION OF RS. 7.21 CRORE AND ODD AS TAKEN NOTE BY THE AO ON PAGE 7 OF THE DRAFT O RDER. THE DRP EXCLUDED IT FROM THE TOTAL INCOME AFTER RECEIVING REMAND R EPORT FROM THE AO ACCEPTING THAT THE ASSESSEE DID NOT HAVE ANY PE RMANENT ESTABLISHMENT IN INDIA. THE SAME RAISON D`ETRE APPLIES HERE ALSO AND HENCE THE AMOUNT OF RS.86,55,225 CANNOT BE CHARGED AS BUSINESS PROFITS AS WELL UNDER THE DTAA. IN THE FINAL ANALYSIS, THE RE CEIPT OF RS.86,55,225 IS NOT CHARGEABLE TO TAX. 13. THE SECOND COMPONENT OF THIS RECEIPT IS REVENUE F ROM OTHER CAPITAL GOODS AMOUNTING TO RS.10,02,903/-. THE AO INCLUDED THIS ITA NO.145/PUN/2021 HUSCO INTERNATIONAL INC., 14 AMOUNT IN THE TOTAL INCOME OF THE ASSESSEE. THE DRP ALLOWED RE LIEF TO THE EXTENT OF RS.4,31,870/- . THE ASSESSEE IS IN APPEA L AGAINST THE CONFIRMATION OF DISALLOWANCE OF RS.5,71,033/- TOWARDS PRO CUREMENT AND SUPPLY OF CAPITAL GOODS. GROUND NO. 8 RAISED IN THIS REGARD WAS NOT PRESSED BY THE LD. AR. THE SAME IS, THEREFORE, DISMIS SED AS NOT PRESSED. 14. THE NEXT ISSUE RAISED IN THIS APPEAL IS AGAINST THE TAXAB ILITY OF REIMBURSEMENT OF TRAVELLING, FREIGHT AND OTHER CHARGES AMOU NTING TO RS.12,68,764/-. THE ASSESSEE CONTENDED BEFORE THE DRP THAT IT WAS A MERE CASE OF REIMBURSEMENT OF TRAVELLING AND REL ATED EXPENSES INCURRED ON BEHALF OF ITS INDIAN ENTITY WITHOUT ANY MARK UP A ND HENCE THE SAME DID NOT CONSTITUTE ITS INCOME. THE DRP DID NOT ACCEPT THE ASSESSEES VERSION ON THE GROUND THAT THERE WAS NO EVIDE NCE OF REIMBURSEMENT. 15. WE HAVE GONE THROUGH THE DETAILS OF TRAVELLING AND F REIGHT EXPENSES INCURRED BY THE ASSESSEE AND RECOVERED FROM VARIOUS GROUP ENTITIES INCLUDING THE ONE IN INDIA. SUCH COPIOUS DETAILS HAVE B EEN PLACED AT PAGE 43 OF THE WRITTEN SUBMISSIONS. THE FIRST MAJO R AMOUNT IS PAYMENT TO M/S CRYSTAL MIGRATION SERVICES CORPORATION TOTALING TO 8,880 USD. A COPY OF THE INVOICE RAISED BY M/S CRYSTAL MIGRA TION SERVICES CORPORATION IS AVAILABLE AT PAGE 1952 OF THE PAPE R BOOK. ITA NO.145/PUN/2021 HUSCO INTERNATIONAL INC., 15 IMMEDIATELY NEXT PAGE OF THE PAPER BOOK CONTAINS BREAK-UP OF SUCH CHARGES. SEVEN EMPLOYEES OF THE INDIAN ENTITY AVAILED THIS BE NEFIT WHOSE NAMES ALONG WITH THE AMOUNT CHARGED BY M/S CRYSTAL MIGRATION SERVICES CORPORATION HAVE BEEN GIVEN ON THE NEXT PAGE TOTALING 1920 USDS. IT IS THIS AMOUNT THAT HAS BEEN CHARGED TO THE INDIAN ENTITY. THE NEXT INVOICE IS OF GO RITEWAY TRANSPORTATION GROUP WITH TOTAL 5,655.85 USDS. A COPY OF SUCH INVOICE HAS BEEN PLACED AT PAGE 1960 OF THE PAPER BOOK. DETAILS ON THE INVO ICE INDICATE THREE EMPLOYEES OF THE INDIAN ENTITY AND THE CHARGE IS TOWARDS THEIR TRANSPORTATION. THE AMOUNT PERTAINING TO ONLY THES E THREE EMPLOYEES HAS BEEN RECOVERED AS SUCH FROM THE IN DIAN ENTITY. AGAIN, THERE IS ANOTHER INVOICE OF GO RITEWAY TRANSPORTATION A T PAGE 1963 OF THE PAPER BOOK WITH VALUE OF 8,898.04 USD S. EMPLOYEES OF THE INDIAN ENTITY HAVE BEEN NAMED AT TWO PLACES IN SUCH AN INVOICE. THE EXACT AMOUNT AS CHARGED BY GO RITE WAY TRANSPORTATION GROUP FROM THE ASSESSEE HAS BEEN RECOVER ED FROM THE INDIAN ENTITY. THIS INVOICE IS ALSO FOR TRANSPORTATION. SIMILAR IS THE POSITION REGARDING OTHER INVOICES WHICH ARE IN RELATION TO LODGIN G AND BOARDING OF INDIAN EMPLOYEES RECOVERED FROM THE IND IAN ENTITY WITHOUT ANY PROFIT ELEMENT. IN VIEW OF THE ABOVE DISCUS SION, IT IS CLEAR THAT ONE-TO-ONE LINK IS OVERTLY ESTABLISHED BETWEEN THE AMO UNT ITA NO.145/PUN/2021 HUSCO INTERNATIONAL INC., 16 PAID BY THE ASSESSEE TO THIRD PARTY VENDORS AND THAT RECOV ERED FROM THE INDIAN ENTITY, WHICH IS EVIDENTLY WITHOUT ANY MARK UP. AS IT IS ONLY REIMBURSEMENT OF COST NOT CONTAINING ANY PROFIT ELEME NT, THERE CAN BE NO QUESTION OF INCLUDING SUCH RECEIPTS IN THE TOTAL IN COME OF THE ASSESSEE. THIS ISSUE IS DETERMINED IN FAVOUR OF THE AS SESSEE. 16. THE NEXT ISSUE IS AGAINST THE INCLUSION OF REIMBUR SEMENT OF INTERNET CHARGES FROM THE INDIAN ENTITY TO THE TUNE OF RS.30 ,31,448/-. THE AO INCLUDED SUCH AMOUNT IN THE TOTAL INCOME AS PER THE DR AFT ORDER. THE ASSESSEE ASSAILED THE SAME BEFORE THE DRP, W HICH REJECTED THE ASSESSEES CONTENTION BY OBSERVING THAT NO EVIDENCE WAS FURNISHED. 17. WE HAVE GONE THROUGH THE MATERIAL ON RECORD. T HE ASSESSEE HAS PLACED A TABULATION OF SAMPLE INVOICES OF INTERNET CHARGE S ALLOCATED BY IT TO THE INDIAN ENTITY ON PAGE 44 OF THE WRITTEN SUBMISSIONS. A VENDOR CALLED VERIZON RAISED INVOICES ON THE ASSESSEE, SAMPLE OF WHICH HAVE BEEN PLACED AT PAGE 2008 TO 2022 OF THE PAPER BOOK. THESE INVOICES DISTINCTLY POINT OUT `LOCATION/S ERVICE INDEX, NAMELY, THE USER. INDIAN ADDRESS WITH THE EXACT A MOUNT OF CHARGE HAS BEEN MENTIONED, WHICH HAS BEEN RECOVERED. THUS IT IS EVIDENT THAT IT IS NOT A CASE OF COST SHARING OF TOTAL COSTS BE TWEEN ALL THE ENTITIES ON SOME ALLOCATION KEY BUT CHARGING THE EXACT AMOU NT ITA NO.145/PUN/2021 HUSCO INTERNATIONAL INC., 17 PAID FOR THE INDIAN ENTITY. THIS INDICATES THAT THE ASSESSEE PA ID THE AMOUNT IN QUESTION TO VERIZON FOR INTERNET ACCESS AND THEN RE COVERED IT FROM THE INDIAN ENTITY AS SUCH WITHOUT ANY MARK UP. AS IT IS ALSO A CASE OF REIMBURSEMENT, THERE CANNOT BE ANY QUESTION OF IN CLUDING IT IN THE TOTAL INCOME OF THE ASSESSEE. WE, THEREFORE, ORDER TO EXCLUDE RS.30,31,448/- FROM THE TOTAL INCOME OF THE ASSESSEE ON TH IS SCORE. THE ASSESSEE SUCCEEDS. 18. ANOTHER ISSUE RAISED IN THIS APPEAL IS AGAINST THE RA TE OF TAX AT WHICH THE INCOME DECLARED BY THE ASSESSEE HAS BEEN CHARG ED. THE FACTS APROPOS THIS ISSUE ARE THAT THE ASSESSEE FILED ITS RETU RN DECLARING TOTAL INCOME OF RS.6,29,15,190/-. A COPY OF SUCH RETURN HAS BEEN PLACED AT PAGE 10 ONWARDS OF THE PAPER BOOK. DETAIL OF THE INCOME HAS BEEN GIVEN THEREIN UNDER THE HEAD `REVENUE EARNED B Y THE COMPANY, WHICH CONSISTS OF ROYALTY; ALLOCATION OF MANAGEMENT CHARGES; INSTALLATION OF CAPITAL GOODS; INSURANCE CHARGES; EN GINEERING CHARGES; SOFTWARE CHARGES; AND INTEREST INCOME OF RS.27,6 4,952/-. THE INTEREST INCOME WAS SEPARATELY OFFERED FOR TAXATION. WE ARE CONCERNED ONLY ABOUT THE RATE AT WHICH THE REMAINING INCOME O F RS.6,01,50,239/- SHOULD BE CHARGED TO TAX. THE ASSESSE E OFFERED SUCH INCOME UNDER ARTICLE 12 OF THE DTAA @15%. SCHEDULE OS OF THE INCOME-TAX RETURN WITH THE CAPTION `INCOME FROM OTHER SOUR CES, ITA NO.145/PUN/2021 HUSCO INTERNATIONAL INC., 18 FAIRLY INDICATES THAT THE ASSESSEE OFFERED SUCH INCOME OF R S.6.01 CRORE AS INCOME FROM ROYALTY AND TECHNICAL SERVICES. THE AO TAXED SUCH INCOME AT THE OFFERED TAX RATE OF 15% IN THE DRAFT ORD ER. THE ASSESSEE CONTENDED BEFORE THE DRP THAT THE INCOME OF RS.6. 01 CRORE WAS WRONGLY OFFERED FOR TAXATION AT 15% AS PER THE PROVISIO NS OF THE DTAA AND THE SAME SHOULD BE CHARGED TO TAX AT LOWER RATE O F 10% PLUS SURCHARGE AND CESS AS PER SECTION 115A OF THE ACT. THE DRP, RELYING ON THE JUDGMENT OF HONBLE SUPREME COURT IN GOETZ (INDIA) LTD. VS. CIT (2006) 284 ITR 323 (SC), HELD THAT THE CLAIM OF THE ASSESSEE WAS NOT MAINTAINABLE BECAUSE IT HAD NOT FILED A REV ISED RETURN WITH THE CORRECT RATE OF TAX. THAT IS HOW, THE ASSESS EE IS AGGRIEVED BY THE TAXATION OF RS.6.01 CRORE @15%. 19. SECTION 115A(1)(B)(A) & (B), AS AMENDED BY THE FINANCE ACT, 2015 W.E.F. 01-04-2016, PRESCRIBES THE RATE OF TAX AT 10% ON INCOME OF A NON-RESIDENT BY WAY OF ROYALTY AND FEES FOR TECHNIC AL SERVICES. PRIOR TO THAT, THE RATE OF TAX UNDER THESE PROVISIONS WAS 20% AND 25% RESPECTIVELY. ON THE OTHER HAND, THE DTAA PRESCRIBES THE R ATE OF TAX OF ROYALTY AND FTS AT 15%. THE ASSESSEE DID NOT NOTICE THE C HANGE IN THE RATE OF TAX COMING INTO FORCE FROM THE A.Y. 2016-17 UNDER CONSIDERATION FOR THE FIRST TIME. SINCE THE RATE OF TAX AS PER THE DTAA WAS BENEFICIAL THAN THE OLD RATE AS PER SECTION 115A, THE ASS ESSEE ITA NO.145/PUN/2021 HUSCO INTERNATIONAL INC., 19 FILED ITS RETURN WITH THE RATE AS PER THE DTAA. LATER ON, THE MISTAKE WAS REALIZED AND THE CLAIM WAS LODGED, WHICH CAME TO BE RE PELLED. NATURE OF INCOME UNDER CONSIDERATION AS ROYALTY/FEES FOR TEC HNICAL SERVICES IS NOT DISPUTED. THE RATE OF TAX UNDER THE ACT ON SUCH INCOME FOR THE YEAR GOT SLASHED TO 10%. SECTION 90(2) OF TH E ACT CLEARLY ENUNCIATES THAT WHERE THE CENTRAL GOVERNMENT HAS ENTE RED INTO A DTAA THEN THE PROVISIONS OF THIS ACT SHALL APPLY TO THIS EXTENT THEY ARE MORE BENEFICIAL TO THE ASSESSEE. IT MEANS THAT IF THE PROVISIONS OF THE ACT FAVOUR THE ASSESSEE OVER THOSE OF TH E DTAA, IT CAN OPT FOR THE FORMER. NO EXCEPTION CAN BE TAKEN TO THE A SSESSEE EXERCISING THE OPTION OF BEING GOVERNED BY THE RATE OF TAX U NDER THE ACT. THE AUTHORITIES BELOW HAVE REJECTED THE ASSESSEES CLAI M ON THE GROUND THAT IT WAS NOT MADE IN THE INCOME TAX RETURN. IN OUR OPINION, THERE CAN BE NO ESTOPPEL AGAINST THE PROVISIONS OF THE ACT. T HE PURPOSE OF AN ASSESSMENT IS TO DETERMINE THE CORRECT AMOUN T OF INCOME AND TAX PAYABLE THEREON. IF THE ACT PROVIDES FOR SO FT- PEDDLING, THEN THAT CANNOT BE WHISKED AWAY BY THE OFFICERS. AS IT IS A MATTER OF EXERCISING THE OPTION AND THE ASSESSEE DID IT IN A PARTICULAR WAY WHICH WAS MORE BENEFICIAL TO IT ALBEIT DURING THE COURSE O F THE ASSESSMENT PROCEEDINGS ITSELF, THE CLAIM OUGHT NOT TO HAVE BEEN DENIED. BE THAT AS IT MAY, EVEN THOUGH THE JUDGMENT IN GOETZE ITA NO.145/PUN/2021 HUSCO INTERNATIONAL INC., 20 (SUPRA) PROVIDES THAT THE AO HAS NO POWER TO ENTERTAIN CLAIM MADE OTHERWISE THAN BY WAY OF A REVISED RETURN, IT UNEQUIVOCALLY P ROVIDES: `THAT THE ISSUE IN THIS CASE IS LIMITED TO THE POWER OF THE ASSE SSING AUTHORITY AND DOES NOT IMPINGE ON THE POWER OF THE TRIBUNAL UNDER S. 254 OF THE IT ACT, 1961. THUS IT IS EVIDENT, THAT THERE IS NO SUCH CONSTRAINT ON THE POWER OF THE TRIBUNAL AND IT CAN GRANT RIGHTF UL RELIEF ON A POINT FOR WHICH NO CLAIM WAS MADE IN THE RETURN OF INC OME. WE, THEREFORE, HOLD THAT NO FAULT CAN BE FOUND WITH THE ASSESSEE EXERCISING THE OPTION AS PER SECTION 90(2) OF THE ACT TO BE GOVERNED B Y THE REDUCED RATE OF TAX OF 10% PLUS SURCHARGE ETC. IN TERMS O F SECTION 115A OF THE ACT. IT IS, THEREFORE, DIRECTED THAT TAX BE CHAR GED ON THE DECLARED INCOME OF THE ASSESSEE FROM ROYALTY AND FTS AT 10 % UNDER THE ACT. 20. GROUND NO.7 ABOUT INSURANCE CHARGES WAS NOT PRE SSED, WHICH IS HEREBY DISMISSED. OTHER GROUNDS ARE EITHER CONSEQUENTIAL OR PREMATURE. 21. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH SEPTEMBER, 2021. SD/- SD/- ( S.S. VISWANETHRA RAVI ) (R.S.SYAL) JUDICIAL MEMBER VIC E PRESIDENT PUNE; DATED : 27 TH SEPTEMBER, 2021 ITA NO.145/PUN/2021 HUSCO INTERNATIONAL INC., 21 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE DRP-3, MUMBAI-1/ DRP-3, MUMBAI-2/ DRP-3, MUMBAI-3/ 3. THE CIT(IT & TP), PUNE 4. 5. DR, ITAT, C BENCH, PUNE / GUARD FILE. / BY ORDER, // TRUE COPY // SENIOR P RIVATE SECRETARY , / ITAT, PUNE DATE 1. DRAFT DICTATED ON 24-09-2021 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 27-09-2021 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *