Piaggio & C.S.p.A., Pune V. Deputy Commissioner of Income-tax,

ITA 258/PUN/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 6790 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 22-02-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANDEEP GARG
• Keywords: Sale consideration of property below Jantri Value; Transfer pricing; Double taxation relief; International transaction; Deemed to accrue or arise in india; Application of stay; Wholly owned subsidiary
• Section: 143(3); 234B; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NO. 309 /P U N/20 1 5 / ASSESSMENT YEAR: 20 1 0 - 11 PIAGGIO & C.S.P.A C/S. SRBC & ASSOCIATES LLP, C - 401, 4 TH FLOOR, PANCHSHIL TECH PARK, YERAWADA, PUNE 411006 . / APPELLANT PAN: AA FCP3921K VS. THE DY. COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION) - II, PUNE . / RESPONDENT (INTERNATIONAL TAXATION) - II, PUNE . / RESPONDENT . / ITA NO. 258 /P U N/201 6 / ASSESSMENT YEAR: 20 11 - 12 PIAGGIO & C.S.P.A C/S. SRBC & ASSOCIATES LLP, C - 401, 4 TH FLOOR, PANCHSHIL TECH PARK, YERAWADA, PUNE 411006 . / APPELLANT PAN: AAFCP3921K VS. THE DY. COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION), CIRCLE - 2, PUNE . / RESPONDENT ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 2 SA.NO.84/PUN/2016 SA.NO.84/PUN/2016 (ARISING OUT OF ITA NO.309/PUN/2015) / AS SESSMENT YEAR : 20 10 - 11 PIAGGIO & CSPA C/O. SRBC & ASSOCIATES LLP, C - 401, 4 TH FLOOR, PANCHSHIL TECH PARK, YERAWADA, PUNE - 411006 PUNE 411 006 PAN : AAFCP3921K . APP LICANT VS. VS. DY.COMMISSIONER OF INCOME - TAX (INTERNATIONAL TAXATION - II),PUNE . RESPONDENT SA.NO.8 5 /PUN/2016 (ARISING OUT OF ITA NO. 258 /PUN/201 6 ) / ASSESSMENT YEAR : 20 11 - 12 PIAGGIO & CSPA C/O. SRBC & ASSOCIATES LLP, C - 401, 4 TH FLOOR, PANCHSHIL TECH PARK, YERAWADA, PUNE - 411006 PUNE 411 006 PAN : AAFCP3921K . APP LICANT VS. DY.COMMISSIONER OF INCOME - TAX (INTERNATIONAL TAXATIO N - II),PUNE . RESPONDENT ASSESSEE BY : S /S HRI RAJAN VORA AND RAJENDRA AGIWAL REVENUE BY : SHRI SANDEEP GARG, CIT / DATE OF HEARING : 11.01. 201 7 / DATE OF PRONOUNCEMENT: 21 . 03 .201 7 ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 3 / O RDER PER SUSHMA CHOWLA, JM: BOTH T HE APPEAL S FILED BY THE ASSESSEE ARE AGAINST SEPARATE ORDER S OF DCIT (IT) - II, PUNE & DCIT (IT), CIRCLE - 2, PUNE , DATED 1 8 . 0 2 .201 5 & 29.01.2016 RELATING TO ASSESSMENT YEAR S 2010 - 11 & 20 11 - 12 PASSED UNDER SECTION 143(3) R. W.S. 1 44C (5) AND 144C(13) R.W.S. 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) . ACT) . 2. BOTH THE APPEALS RELATING TO THE SAME ASSESSEE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. HOWEVER, REF ERENCE IS BEING MADE TO THE FACTS AND ISSUE IN ITA NO.309/PUN/2015 TO ADJUDICATE THE ISSUE. 3 . FIRST, WE SHALL TAKE UP THE APPEAL FILED BY THE ASSESSEE IN ITA NO.309/PUN/2015, WHEREIN THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1 . GROUND 1 : R OYALTY RECEIVED UNDER THE ROYALTY AGREEMENT SHOULD NOT BE TAXED @ 20% - RS.37,80,66,508 1.1. APPLICABILITY OF TAX RATE A ) ERRED IN FACTS AND IN LAW IN HOLDING THAT THE ROYALTY AGREEMENT DATED 1 A ) ERRED IN FACTS AND IN LAW IN HOLDING THAT THE ROYALTY AGREEMENT DATED 1 APRIL 2008 IS NOT A NEW AGREEMENT AND HENCE, IN CONSIDERIN G THE ROYALTY AGREEMENT AS AN EXTENSION OF THE LICENSE AND TECHNICAL ASSISTANCE AGREEMENT DATED 27 MARCH 1998 AND TO APPLY TAX RATE OF 20% UNDER THE INDIA - ITALY DTAA INSTEAD OF 10.56% UNDER SECTION 115A OF THE ACT. B ) ERRED IN FACTS AND IN LAW IN HOLDING T HAT THERE ARE NO CHANGES IN THE ROYALTY AGREEMENT DATED 1 APRIL 2008 AND THE LICENSE AND TECHNICAL ASSISTANCE AGREEMENT DATED 27 MARCH 1998 AND HENCE, IN CONSIDERING THE ROYALTY AGREEMENT AS AN EXTENSION OF THE LICENSE AND TECHNICAL ASSISTANCE AGREEMENT AN D TO APPLY TAX RATE OF 20% UNDER THE INDIA - ITALY DTAA INSTEAD OF 10.56% UNDER SECTION 115A OF THE ACT. 2. GROUND 2: AMOUNT RECEIVED FOR RECHARGE OF SUPPLY OF SAP SOFTWARE - RS.9,30,58,722 ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 4 2.1. REIMBURSEMENT NOT TAXABLE ERRED IN FACTS TO AP PRECIATE THAT THE AMOUNT RECEIVED TOWARDS RECHARGE OF SUPPLY OF SAP SOFTWARE IS A REIMBURSEMENT AND DOES NOT HAVE ANY ELEMENT OF INCOME IN THE HANDS OF THE APPELLANT, AND HENCE IS NOT CHARGEABLE TO TAX. 2.2. NOT IN THE NATURE OF ROYALTY ERRED IN FACTS AND IN LAW IN HOLDING THAT THE AMOUNT RECEIVED TOWARDS SUPPLY OF SAP SOFTWARE IS IN THE NATURE OF ROYALTY AND CHARGEABLE TO TAX UNDER THE PROVISIONS OF THE ACT AS WELL AS UNDER THE INDIA - ITALY TAX TREATY. THE INDIA - ITALY TAX TREATY. 2.3. APPLICABILITY OF TAX RATE ERRED IN FACTS AND IN LAW IN HOLDING THAT THE AMOUNT RECEIVED FOR RECHARGE OF SAP SOFTWARE IS NOT ELIGIBLE FOR THE RATE OF 10.5575% AS PER THE PROVISIONS OF SECTION 115A(1)(B)(AA) OF THE ACT. 3. GROUND 3 : AMOUNT RECEIVED FOR RECHARGE OF THI RD PARTY SERVICE PROVIDER FEES - RS.3,22,86,613 3.1 REIMBURSEMENT NOT TAXABLE ERRED IN FACTS TO APPRECIATE THAT THE AMOUNT RECEIVED TOWARDS RECHARGE OF THIRD PARTY SERVICE COST IS A REIMBURSEMENTS AND DOES NOT HAVE ANY ELEMENT OF INCOME IN THE HANDS OF THE APPELLANT, AND HENCE, IS NOT CHARGEABLE TO TAX. 3.2. NOT IN THE NATURE OF ROYALTY 3.2. NOT IN THE NATURE OF ROYALTY ERRED IN FACTS AND IN LAW IN HOLDING THAT THE AMOUNT RECEIVED TOWARDS RECHARGE OF THIRD PARTY SERVICE PROVIDER FEES IS IN THE NATURE OF ROYALTY. 3.3. APPLICABILITY OF TAX RATE ERRED IN FACTS AND IN LAW IN HOLDING THAT THE AMOUNT RECEIVED FOR RECHARGE OF THIRD PARTY SERVICE PROVIDER FEES IS NOT ELIGIBLE FOR THE RATE OF 10.5575% AS PER THE PROVISIONS OF SECTION 115A(1)(B)(BB) OF THE ACT. 4. GROUND 4 : CONSIDERATION R ECEIVED FOR PROVIDING SERVICES IN CONNECTION WITH IMPLEMENTATION OF SAP SOFTWARE - RS.1,56,48,535 4.1. NOT IN THE NATURE OF ROYALTY ERRED IN FACTS AND IN LAW IN HOLDING THAT THE AMOUNT RECEIVED FOR PROVIDING SERVICES IN CONNECTION WITH IMPLEMENTATION OF SAP SOFTWARE IS IN THE NATURE OF ROYALTY. 4.2 ERRED IN FACTS AND IN LAW IN HOLDING THAT THE AMOUNT RECEIVED FOR PROVIDING SERVICES IN CONNECTION WITH IMPLEMENTATION OF SAP SOFTWARE IS NOT ELIGIBLE FOR THE RATE OF 10.5575% AS PER THE PROVISIONS OF SECTION 115A(1)(B)(BB) OF THE ACT. 5. GROUND 5 : AMOUNT RECOVERED TOWARDS REIMBURSEMENT OF EXPENDITURE - RS. 35,33,373 5.1 REIMBURSEMENT NOT TAXABLE ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 5 A) ERRED IN FACTS IN NOT APPRECIATING THAT THE FOLLOWING RECEIPTS ARE TOWARDS REIMBURSEMENT AND DO NOT HAVE A NY ELEMENT OF INCOME IN THE HANDS OF THE APPELLANT, AND HENCE ARE NOT CHARGEABLE TO TAX. A ) RE - WORK CHARGES - RS 314,573 A ) RE - WORK CHARGES - RS 314,573 B ) INSURANCE COST - RS 3,218,800 B) FURTHER, ERRED IN FACTS AND IN LAW IN ENHANCING THE INCOME OF THE APPELLANT BY THE SAID AMOU NTS 5.2 NOT IN THE NATURE OF ROYALTY ERRED IN FACTS AND IN LAW IN HOLDING THAT THE ABOVE RECEIPTS ARE IN CONNECTION WITH IMPLEMENTATION OF SAP SOFTWARE, AND HENCE, ARE IN THE NATURE OF ROYALTY WHICH ARE CHARGEABLE TO TAX UNDER THE PROVISIONS OF THE ACT A S WELL AS UNDER THE INDIA - ITALY TAX TREATY. 5.3 APPLICABILITY OF TAX RATE ERRED IN FACTS AND IN LAW IN HOLDING THAT THE AMOUNT RECEIVED FOR PROVIDING SERVICES IN CONNECTION WITH IMPLEMENTATION OF SAP SOFTWARE IS NOT ELIGIBLE FOR THE RATE OF 10.5575% AS P ER THE PROVISIONS OF SECTION 115A(1)(B)( BB ) OF THE AC T. 6. GROUND 6 : AMOUNT RECOVERED TOWARDS REIMBURSEMENT OF CONSULTANCY FEES - RS. 2,655,812 6.1. REIMBURSEMENT NOT TAXABLE A ) ERRED IN FACTS IN NOT APPRECIATING THAT THE RECHARGE OF PROFESSIONAL FEES IS TOWARDS REIMBURSEMENT AND DOES NOT HAVE ANY ELEMENT OF INCOME IN THE HANDS OF THE APPELLANT, AND HENCE IS NOT CHARGEABLE TO TAX. B ) FURTHER, ERRED IN FACTS IN NOT REDUCING THE SAID AMOUNT FROM THE GROSS TOTAL INCOME OF THE APPELLANT. 6.2. NOT IN THE N ATURE OF ROYALTY ERRED IN FACTS AND IN LAW IN HOLDING THAT THE REIMBURSEMENT OF PROFESSIONAL FEE IS IN CONNECTION WITH IMPLEMENTATION OF SAP SOFTWARE, AND HENCE, IS IN THE NATURE OF ROYALTY WHICH IS CHARGEABLE TO TAX UNDER THE PROVISIONS OF THE ACT AS WE LL AS UNDER THE INDIA - ITALY TAX TREATY. 6.3. APPLICABILITY OF TAX RATE ERRED IN FACTS AND IN LAW IN HOLDING THAT THE AMOUNT RECEIVED FOR REIMBURSEMENT OF PROFESSIONAL FEES IS NOT ELIGIBLE FOR THE RATE OF 10.5575% REIMBURSEMENT OF PROFESSIONAL FEES IS NOT ELIGIBLE FOR THE RATE OF 10.5575% AS PER THE PROVISIONS OF SECTION 115 A(1)(B)( BB ) OF THE ACT. 7. THE LEARNED AO ERRED IN LEVYING INTEREST UNDER SECTION 234 B OF THE ACT. 8. THE LEARNED AO ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) FOR FURNISHING INACCURATE PARTICULARS OF INCOME AND FOR CONCEALING THE PARTICULARS OF INCOME. THE ABOVE GROUNDS OF APPEAL ARE MUTUALLY EXCLUSIVE AND WITHOUT PREJUDICE TO EACH OTHER. THE APPELLANT PRAYS FOR LEAVE TO ADD, ALTER, AMEND AND / OR MODIFY ANY OF THE GROUNDS OF APPEAL AT OR BEFORE THE HEARING OF THE APPEAL. 4. BRI EFLY, IN THE FACTS OF THE CASE, THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION HAD FILED THE RETURN OF INCOME DECLARING TOTAL INCOME OF RS.119.40 ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 6 CRORES. THE FIRST ISSUE RAISED IN BOTH THE APPEALS IS COMMON AND IN ORDER TO ADJUDICATE THE ISSUE, REFERENCE I S BEING MADE TO THE FACTS AND ISSUE IN ITA NO.309/PUN/2015. THE ASSESSEE IS A FOREIGN COMPANY . PIAGGIO GROUP WAS BASED IN PONTEDERA (PIA, ITLY) AND WAS INTO MANUFACTURING OF MOTORIZED TWO WHEELERS. SINCE OCTOBER, 2003 THE PIAGGIO GROUP WAS CONTROLLED BY IMMSI S.P.A. AN INDUSTRIAL AND PROPERTY HOLDING QUOTED ON THE MILAN STOCK EXCHANGE. PIAGGIO GROUPS PRODUCTION INCLUDES SCOOTERS, MOTORCYCLES AND MOPEDS IN DISPLACEMENT FROM 50CC TO 1200CC UNDER THE PIAGGIO, VESPA, GILERA, DERBI, APRILIA, MOTO GUZZI AND SCARABEO BRANDS. THE GROUP ALSO MANUFACTURES THE APE, PORTER AND QUARGO RANGES OF THREE AND FOUR - WHEELED LIGHT GOODS TRANSPORT VEHICLES. THE PIAGGIO GROUP HAS FACTORIES IN ITALY, SPAIN, INDIA AND THE PEOPLES REPUBLIC OF CHINA AND SALES NETWORK IN 55 COU NTRIES IN EVERY CONTINENT. IN 2009, THE PIAGGIO GROUP SOLD 607,700 VEHICLES IN THE WORLD, 410,300 OF WHICH IN THE 2 - WHEELER BUSINESS AND 197,400 IN COMMERCIAL VEHICLE BUSINESS. THE CORE COMPANY OF THE PIAGGIO GROUP IS PIAGGIO & C.S.P.A . LOCATED IN PONTED ERA (PISA, ITLY). THE COMPANY WAS PRIMARILY INTO LIGHT WHEELED TRANSPORT SECTOR, WHICH COMPRISES 2, 3 AND 4 WHEELED VEHICLES. THE ASSESSEE COMPANY RECEIVED ROYALTY INCOME AND TECHNICAL FEES FOR THE SERVICES RENDERED FOR SAP IMPLEMENTATION AND FEES FOR TP CONSULTANCY RENDERED IN INDIA TO ITS ASSOCIATE ENTERPRISES NAMELY PIAGGIO VEHICLES PVT. LTD., BARAMATI, INDIA AND THE SAME WAS OFFERED TO TAX AS DETAILED BELOW: - SR NO NATURE OF RECEIPT AMOUNT OFFERED FOR TAX @ REMARKS 1 ROYALTY ON 3 WHEELER 37,80,66,5 08 10.5575% U/S 115A RWS 195A AS PER AGREEMENT DATED 01/08/2008 2 ROYALTY ON 3 WHEELER - CNG/LPG 1,51,80,804 20% AS PER DTAA AS PER AGREEMENT DATED 30/10/2003 3 ROYALTY ON 4 WHEELER 8,36,43,207 20% AS PER DTAA AS PER AGREEMENT DATED 03/03/2004 4 TECHNICAL FEES FOR SERVICES RENDERED 57,35,11,559 10.5575% U/S 115A RWS 195A AS PER AGREEMENT DATED 25/02/2008 5 FEES FOR SAP IMPLEMENTATION 14,09,93,879 10.5575% U/S 115A RWS 195A ON CONSERVATIVE BASIS NO AGREEMENT. THE ASSESSEE HAS RESERVED RIGHT TO CONTEST THE NON - TAXABILITY OF THIS INCOME 6 FEES RELATING TO TRANSFER PRICING 26,55,812 10.5575% U/S 115A RWS 195A NO AGREEMENT. THE ASSESSEE HAS ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 7 ON CONSERVATIVE BASIS RESERVED RIGHT TO CONTEST THE NON - TAXABILITY OF THIS INCOME TOTAL 119,40,51,759 5. THE ASSE SSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAD RECEIVED ROYALTY FROM PI A G G IO VEHICLE S PVT. LTD. (IN SHORT PVPL ) AS PER A GREEMENT DATED 30.10.2003 , 03.03.2004 AND A GREEMENT DATED 01.04.2008. THE ROYALTY RECEIVED AS PER A GREEMENT DATED 30.10.2003 AND 03.03.2004 WAS OFFERED FOR TAXATION @ 20% AS PER DTAA BETWEEN INDIA AND ITALY BUT THE ROYALTY RECEIVED AS PER A GREEMENT DATED 01.0 8 .2008 WAS OFFERED FOR TAXATION @ 10.55% AS PER SECTION 115A OF THE ACT AS UNDER: - SR NO NATURE OF AGREEMENT DATE OF AGREEMENT AND TERMS OF AGREEMENT AMOUNT RECEIVED OFFERED FOR TAXATION 1 TECHNOLOGY LICENSE AGREEMENT FOR MANUFACTURE OF CNG/LPG POWERED THREE WHEELED VEHICLES FOR GOODS TRANSPORTATION 30/10/2003 - FOR 10 YEARS FOR USE OF TRADE MARK, PRODUCTION, DISTRIBUTION, SELL AND SERVICE OF THE 15180804 20% AS PER DTAA BETWEEN INDIA AND ITALY FOR GOODS TRANSPORTATION BETWEEN P&C (ASSESSEE) AND PVPL SERVICE OF THE LICENSED PRODUCTS - ROYALTY @5% OF NET EX - FACTORY SALE 2 LICENSE TO USE TRADEMARKS AND PATENT AND KNOW HOW TO PRODUCE AN D SELL THE THREE WHEELED VEHICLES BETWEEN P&C AND PVPL 01/04/2008 FOR 10 YEARS 2.5% ROYALTY ON NET EX - FACTORY TURNOVER. 378066508 10.5575% + SC+EC U/S 115A 3 TECHNOLOGY LICENSE AGREEMENT FOR MANUFACTURE OF FOUR WHEELED VEHICLES FOR GOODS TRANSPORTATIO N BETWEEN P&C AND PVOL 03/03/2004 FOR 10 YEARS ROYALTY @ 5% ON NET EX - FACTORY TURNOVER 83643207 20% AS PER DTAA BETWEEN INDIA AND ITALY TOTAL 47,68,90,519 6. THE ASSESSING OFFICER FURTHER NOTED THAT THE AGREEMENT MENTIONED AT SERIAL NO.2 DATED 0 1.04.2008 WAS EXTENSION OF AGREEMENT REFERRED TO IN SERIAL NO.1 DATED 30.10.2003, THEREFORE, SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE PROPOSING TO TAX THE ROYALTY RECEIVED AS PER THE SAID AGREEMENT @ 20%. ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 8 7. ANOTHER ISSUE WHICH WAS RAISED BY THE ASS ESSING OFFICER WAS THAT THE ASSESSEE DURING THE YEAR HAD RECEIVED FEES FOR TECHNICAL SERVICES FROM PVPL, INDIA, WHICH WAS OFFERED TO TAX UNDER SECTION 115A OF THE ACT AS DETAILED HEREUNDER: - SR NO NATURE OF SERVICES AGREEMENT DETAILS AMOUNT RECEIVED RATE A T WHICH OFFERED FOR TAXATION 1 SERVICE FEES FOR ENGINE MANUFACTURE BETWEEN P&C AND PVPL FOR ENGINEERING, DESIGNING AND DEVELOPING NEW DIESEL ENGINES 25/2/2008 FOR COST PLUS 5.3% MARK UP FEES FOR TECHNICAL SERVICES I.E. ONGOING SUPPORT SERVICES, TECHNI CAL SERVICES 573511559 10.5575% + SC+EC U/S 115A 8 . THE ASSESSING OFFICER FURTHER NOTED THAT THE AGREEMENT DATED 25.02.2008 WAS NOT APPROVED BY THE GOVERNMENT OF INDIA AND THE ASSESSING OFFICER WAS OF THE VIEW THAT THE PROVISIONS OF SECTION 115A OF THE A CT WERE NOT APPLICABLE TO THIS INCOME AND HENCE, THE SAME WERE ALSO TAXABLE IN INDIA @ 20% AS PER DTAA PROVISIONS BETWEEN INDIA AND ITALY. ACCORDINGLY, SHOW CAUSE NOTICE IN THIS REGARD WAS ALSO ISSUED TO THE ASSESSEE. 9. ANOTHER ITEM NOTED BY THE ASSES SING OFFICER WAS THAT THE ASSESSEE HAD RECEIVED FEES FOR PROVIDING ASSISTANCE IN IMPLEMENTATION OF SAP FROM PVPL, INDIA WHICH WAS OFFERED TO TAX UNDER SECTION 115A OF THE ACT AS UNDER: - S. NO. NATURE OF SERVICES AGREEMENT DETAILS AMOUNT RECEIVED RATE AT WHICH OFFERED FOR TAXATION (I) THIRD PARTY SERVICE PROVIDER FEES INCLUDING PURCHASE OF SOFTWARE OF RS.7,42,40,862 NO AGREEMENT 74240862 10.5575% + SC+EC U/S. 115A (II) SAP LICENSE PURCHASE NO AGREEMENT 18817860 10.5575% + SC+EC U/S. 115A (III) REIMBURSE MENT OF EMPLOYEE TRAVEL COSTS FROM PVPL NO AGREEMENT 3389167 10.5575% + SC+EC U/S. 115A (IV) FEES FOR THIRD PARTY SERVICES AND EMPLOYEE COST NO AGREEMENT 44545981 10.5575% + SC+EC U/S. 115A (V) FEES RELATING TO TRANSFER PRICING CONSULTANCY NO AGREEMENT 2 655812 10.5575% + SC+EC U/S. 115A TOTAL 14,36,49,682 ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 9 10 . THE ASSESSING OFFICER NOTED THAT THERE WAS NO AGREEMENT FOR PROVIDING ABO VE MENTIONED TECHNICAL SERVICES, THEREFORE, THE PROVISIONS OF SECTION 115A OF THE ACT WERE NOT APPLICABLE TO THE SAID T RANSACTION. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE FEES FOR TECHNICAL SERVICES WERE TO BE TAXED IN INDIA @ 20% AS PER DTAA PROVISION BETWEEN INDIA AND ITALY. ACCORDINGLY, SHOW CAUSE NOTICE IN THIS REGARD WAS ALSO ISSUED TO THE ASSESSEE. 11. AN OTHER ITEM OF RECEIPT IN THE HANDS OF ASSESSEE WAS ON ACCOUNT OF RECOVERY OF EXPENSES OF RS.53,439/ - WHICH WAS RELATED TO WITH THE SERVICES PROVIDED BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISES AND THE ASSESSING OFFICER WAS OF THE VIEW THAT THE RECOVERY OF EXPENSES WAS PART AND PARCEL OF FEES FOR TECHNICAL SERVICES. THE ASSESSING OFFICER WAS OF THE VIEW THAT FEES FOR TECHNICAL SERVICES AND ROYALTY WAS TAXABLE ON GROSS BASIS AS PER SECTION 9(1)(VI) AND 9(1)(VII) OF THE ACT, HENCE, THE AMOUNT HAD TO BE BROUG HT TO TAX @ 20% AS PER DTAA PROVISIONS. FOR THIS ASPECT, SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE. DTAA PROVISIONS. FOR THIS ASPECT, SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE. IN REPLY, THE ASSESSEE FURNISHED WRITTEN SUBMISSIONS WHICH ARE INCORPORATED AT PAGES 5 TO 16 OF THE ASSESSMENT ORDER. THE FIRST CONTENTION RAISED BY T HE ASSESSEE WAS THAT THERE WAS DIFFERENCE BETWEEN RECEIPT OF ROYALTY FROM PVPL, INDIA . THE ASSESSEE CLAIMED THAT THE PAYMENT WAS GOVERNED BY AGREEMENT DATED 01.0 4 .2008. HOWEVER, THE ASSESSING OFFICER WAS OF THE VIEW THAT THERE WAS NO MATERIAL DIFFERENCE BETWEEN EARLIER AGREEMENT DATED 26.03.1998 AND AGREEMENT DATED 01.08.2008. THE ASSESSING OFFICER MADE REFERENCE TO VARIOUS CLAUSES OF THE AGREEMENT DATED 26.03.1998 AT PAGES 16 AND 17 OF THE ASSESSMENT ORDER AND THE NATURE OF SERVICES INVOLVED IN AGREEMEN T DATED 01.0 4 .2008 WHICH ARE INCORPORATED AT PAGE 18 OF THE ASSESSMENT ORDER AND CONCLUDED AS UNDER: - ON COMPARISON OF BOTH AGREEMENTS ABOVE, IT IS NOTICED THAT THERE IS NO CHANGE AS FAR AS THE PURPOSE OF AGREEMENTS AND THE SERVICES INVOLVED THEREIN ARE C ONCERNED. AS CLEARLY MENTIONED IN THE AGREEMENT DATED 01/08/2008, THE PVPL (THE ASSESSEE) INTENDS TO CONTINUE TO OBTAIN FROM PIAGGIO EXPERT TECHNICAL ASSISTANCE FOR TECHNOLOGICAL UP GRADATION OF ITS VEHICLES AND THAT PVPL NEEDS TO USE THE PIAGGIO TRADEMAR KS AND THE PATENTS AND KNOW - HOW FOR A FURTHER PERIOD OF 10 YEARS FROM THE DATE OF THIS AGREEMENT . ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 10 12 . THE ASSESSING OFFICER WAS OF THE VIEW THAT THE SECOND AGREEMENT WAS RENEWAL OF EARLIER AGREEMENT DATED 26.03.1998 SINCE THE TIME LIMIT OF 10 YEARS HAD EX PIRED. THEREFORE, THE SECOND AGREEMENT WAS HELD TO BE ONLY AN EXTENSION OF EARLIER AGREEMENT FOR FURTHER 10 YEARS BY THE ASSESSING OFFICER. THE ASSESSING OFFICER THUS, HELD THAT THE ROYALTY RECEIVED AS PER SECOND AGREEMENT WAS TAXABLE IN INDIA @ 20% AS P ER DTAA PROVISIONS BETWEEN INDIA AND ITALY. THUS, THE ASSESSING OFFICER MADE PROPOSAL TO TAX THE ROYALTY INCOME OF RS.37,80,66,508/ - @ 20% AS PER DTAA BETWEEN INDIA AND ITALY. 1 3 . REGARDING TECHNICAL SERVICES PROVIDED, THE ASSESSEE FURNISHED THE REPLY AN D EXPLANATION OF ASSESSEE WAS ACCEPTED AND THE FEES FOR TECHNICAL SERVICES RECEIVED BY THE ASSESSEE AS PER AGREEMENT DATED 25.02.2008 WAS TAXED @ 10.55%. 14. THE ASSESSING OFFICER FURTHER CONSIDERED THE SUBMISSIONS OF THE ASSESSEE 14. THE ASSESSING OFFICER FURTHER CONSIDERED THE SUBMISSIONS OF THE ASSESSEE REGARDING FEES FOR SAP IMPLEMENTATION AND FEES RELATING TO TRANSFER PRICING CONSULTANCY, WHEREIN THE REPLY OF ASSESSEE IS REPRODUCED AT PAGES 20 AND 21 OF THE ASSESSMENT ORDER. THE FIRST ASPECT WHICH WAS DECIDED BY THE ASSESSING OFFICER WAS WHETHER THE LICENSE FEES RECEIVED BY THE ASSESSEE IS CHARGEABLE TO TAX IN INDIA UNDER THE ACT. THE ASSESSING OFFICER TOOK NOTE OF RELEVANT PROVISIONS OF ROYALTY AS PER SECTION 9(1)(VI) OF THE ACT AND CONSIDERED THE NATURE OF PAYMENT AND THE DEFINITION OF COMPUTER SOFTWARE AS PROVIDED IN EXP LANATION (3) UNDER SECTION 9(1)(VI) OF THE ACT. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE PAYMENT FOR RIGHT TO USE SOFTWARE WAS IN THE NATURE OF ROYALTY AND TAXABLE AS PER CLAUSE (V) OF EXPLANATION (2) OF SECTION 9(1)(VI) OF THE ACT. REFERENCE WAS A LSO MADE TO THE FINANCE ACT, 2012, WHEREIN IT HAS BEEN CLARIFIED THAT THE RIGHT TO USE COMPUTER SOFTWARE, INCLUDING GRANTING OF LICENSE, IS ROYALTY AS PER EXPLANATION (4). IN VIEW THEREOF, THE ASSESSING OFFICER HELD THAT THE PAYMENT WAS IN THE NATURE OF R OYALTY AND TAXABLE AS ROYALTY UNDER SECTION 9(1)(VI) OF THE ACT. THE ASSESSING OFFICER ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 11 REFERRED TO ARTICLE 13 OF THE DTAA BETWEEN INDIA AND ITALY WHICH DEALT WITH ROYALTY AND FEES FOR INCLUDED SERVICES AND WAS OF THE VIEW THAT AS PER DTAA, ROYALTY MEANS P AYMENTS OF ANY KIND RECEI VED AS CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE, ANY COPYRIGHT OF LITERARY, ARTISTIC OR SCIENTIFIC WORK OR SECRET FORMULA OR PROCESS OR FOR INFORMATION CONCERNING INDUSTRIAL COMMERCIAL OR SCIENTIFIC EXPERIENCE INCLUDING GA INS DERIVED FROM THE ALIENATION OF ANY SUCH RIGHT OR PROPERTY WHICH ARE CONTINGENT ON THE PRODUCTIVITY, USE OR DISPOSITION THEREOF OR PAYMENTS OF ANY KIND RECEIVED AS CONSIDERATION FOR THE USE OF, OR T HE RIGHT TO USE, ANY INDUSTRIAL, COMMERCIAL OR SCIENTIF IC EQUIPMENT. THE ASSESSING OFFICER THUS, HELD THAT THE LITERARY OR SCIENTIFIC WORK OBVIOUSLY INCLUDE S THE SOFTWARE AND THERE IS NO REQUIREMENT OF TRANSFER OF COPYRIGHT FOR TREATING THE PAYMENT AS ROYALTY UNDER DTAA. ANOTHER POINT NOTED BY THE ASSESSING OFFICER WAS THAT THE PROPERTY WHICH HAS BEEN TRANSFERRED BY T HE ASSESSEE TO ITS AFFILIATES IN INDIA IS THE LICENSE AND SUB - LICENSES IN RESPECT OF CERTAIN SOFTWARES. AND IT IS FURTHER CHARGING THESE AFFILIATES BASED ON THE ACTUAL USAGE PER ANNUM. T HE ASSE SSING OFFICER FURTHER OBSERVED THAT AS THE SOURCE CODE OR THE OBJECT CODE OF THESE SOFTWARES HAS BEEN PROTECTED UNDER THE COPYRIGHT ACT, THESE SOFTWARES CAN EVEN QUALIFY AS SECRET FORMULA OR SECRET PROCESS. EVEN BY THIS MEANING ALSO, THE PAYMENT RECEIVED FOR GRANTING THE SOFTWARE LICENSES COMES UNDER THE HEADING OF ROYALTY. HENCE , IT WAS HELD THAT THE CHARACTER OF PAYMENTS RECEIVED FOR RIGHT TO USE SOFTWARE AND FOR SUPPORT SERVICES WAS CLEARLY ROYALTY AS DEFINED IN ARTICLE 13 OF THE DTAA AS WELL AS EXPL ANATION (2) TO SECTION 9(1)(VI) OF THE ACT. THE ASSESSING OFFICER CONCLUDED BY HOLDING THAT THE RECEIPTS ON ACCOUNT OF RIGHT TO USE SOFTWARE (LICENSE FEES) AND SUPPORT SERVICES WERE IN THE NATURE OF ROYALTY UNDER THE ACT AS WELL AS DTAA BETWEEN INDIA AND ITALY. 15. RELIANCE WAS PLACED ON SERIES OF DECISIONS IN THIS REGARD BY THE ASSESSING OFFICER AND IT WAS HELD THAT THE PAYMENTS RECEIVED BY THE FOREIGN COMPANY FOR ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 12 SUPPLY OF SOFTWARE AND SUPPORT SERVICES CONSTITUTE ROYALTY UNDER THE DTAA AS WELL AS UNDE R THE ACT. THE ASSESSING OFFICER FURTHER OBSERVED THAT IN CIT VS. S AMSUNG ELECTRONICS CO. LTD. IN ITA NO.2808/2005 , JUDGMENT DATED 15.10.2011, THE HONBLE HIGH COURT OF K ARNATAKA HAD NOT ACCEPTED THE ARGUMENTS THAT IT WOULD BE ONLY A SALE OF COPY OF COPYR IGHTS SOFTWARE. THE HONBLE HIGH COURT HELD THAT IT WAS PAYMENT TOWARDS PRICE OF CD, THE SOFTWARE AND THE LICENSE TO USE GRANTED AND THE PAYMENT WAS HELD AS ROYALTY, AS DEFINED IN INCOME TAX ACT AND DTAA INVOLVED THEREIN. FURTHER, RELIANCE WAS PLACED ON ANOTHER DECISION OF HONBLE HIGH COURT OF K ARNATAKA IN CIT VS. M/S. SY NOPSIS INTERNATIONAL OLD LTD. IN ITA NOS.11 TO 15/2008 AND 17/2008 , JUDGMENT DATED 03.08.2008, WHEREIN IT WAS HELD THAT THE LEGAL PERMISSION GRANTED BY SOFTWARE LICENSE UNDER THE TERMS O F AGREEMENT WAS RIGHT TO USE THE CONFIDENTIAL INFORMATION EMBEDDED IN THE SOFTWARE, INVOLVED THE TRANSFER OF CERTAIN RIGHTS, WHICH THE OWNER OF COPYRIGHT POSSESSED IN THE COMPUTER SOFTWARE EVEN THOUGH IT WAS NOT TRANSFER OF EXCLUSIVE RIGHT IN THE COPYRIGHT . THE HONBLE HIGH COURT HELD THAT UNDER THE DTAA, THE CONSIDERATION PAID FOR THE USE OF CONFIDENTIAL INFORMATION IN THE FORM OF COMPUTER PROGRAMME SOFTWARE ITSELF CONSTITUTED ROYALTY AND ATTRACTS THE TAX. IT WAS FURTHER HELD THAT IT WAS NOT NECESSARY FO R THERE TO BE A TRANSFER OF EXCLUSIVE RIGHT IN THE COPYRIGHT. THE SAID PAYMENT WAS HELD TO BE WITHIN MISCHIEF OF EXPLANATION (2) OF CLAUSE (VI) OF SUB - SECTION 9(1) OF THE ACT AND THERE WAS LIABILITY TO PAY THE TAX. FURTHER, RELIANCE WAS PLACED ON SERIES OF OTHER DECISIONS OF DIFFERENT BENCHES. THE ASSESSING OFFICER ALSO REFERRED TO THE CASE LAWS RELIED UPON BY THE ASSESSEE AND OBSERVED THAT THE SAID CANNOT BE RELIED UPON AS THE FACTS IN THE SAID CASE WERE AT VARIANCE. WITH REGARD TO RELIANCE OF THE ASSE SSEE ON OECD REVISED COMMENTARY TO RAISE THE ISSUE REGARDING TAXABILITY OF LICENSE FEES RECEIVED, WHEREIN THE ARGUMENT OF THE ASSESSEE WAS THAT WHAT HAS BEEN TRANSFERRED WAS NOT THE COPYRIGHT BUT THE COPYRIGHTED ARTICLE OR PROGRAMME COPY. THE ASSESSING OF FICER MADE REFERENCE TO THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN CIT VS. BOOTS CO. (I) LTD. ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 13 (1995) 214 ITR 175 (BOM) , WHEREIN REFERENCE WAS MADE TO THE WORD SIMILAR, WHICH AS PER THE HONBLE HIGH COURT CONNOTES THAT THE PAYMENT MADE TO THE A SSESSEE NEED NOT TO BE IN THE NATURE OF ROYALTY, COMMISSION OR FEES ONLY; IT COULD BE ANY PAYMENT OF LIKE NATURE I.E. MADE IN CONSIDERATION OF USE OR SUPPLY OF SUCH ASSET, KNOWLEDGE OR SERVICES IN SOME MANNER AS ROYALTY FEES FOR TECHNICAL SERVICES, ETC. T HEN THE HONBLE HIGH COURT CONSIDERED THE ISSUE OF COPYRIGHT AND COPYRIGHTED ARTICLE OR PROGRAMME COPY AND HELD THAT THE TRANSFER OF RIGHT IN THE PROPERTY AND TRANSFER OF RIGHT IN RESPECT OF PROPERTY WERE TWO DISTINCT TRANSFERS AND HAD DIFFERENT LEGAL AFFA IRS . IN FIRST SECTION, RIGHTS WERE PURCHASED, WHICH ENABLE USE OF THOSE RIGHTS WHILE IN THE OTHER, NO PURCHASE IS INVOLVED, ONLY RIGHT TO USE IS GRANTED. THE ASSESSING OFFICER THUS, CONCLUDED BY HOLDING THAT THE PAYMENTS RECEIVED BY THE ASSESSEE WERE RIG HT TO USE SOFTWARE AND FOR SUPPORT SERVICES CONSTITUTED ROYALTY UNDER DTAA AS WELL AS THE ACT. 1 6 . THE NEXT CONTENTION MADE BY THE ASSESSEE WAS THAT WHERE NO COPYRIGHT 1 6 . THE NEXT CONTENTION MADE BY THE ASSESSEE WAS THAT WHERE NO COPYRIGHT WAS TRANSFERRED TO PVPL, INDIA AND WHERE THE PVPL, INDIA COULD NOT MAKE COPIES OF SOFTW ARE FOR PUBLIC DISTRIBUTION OR EXPLOIT THE COPYRIGHT COMMERCIALLY IN ANY MANNER BUT COULD USE THE SAME FOR INTERNAL PURPOSES; THUS, THE AMOUNT RECEIVED FOR SALE OF SOFTWARE WAS NOT TAXABLE IN INDIA. THE ASSESSING OFFICER WAS OF THE VIEW THAT WHERE IT WAS NOT THE SALE OF SOFTWARE BUT ONLY THE LICENSE TO USE SOFTWARE, PAYMENTS RECEIVED BY THE ASSESSEE ON THE BASIS OF ACTUAL USAGE OF SOFTWARE PARTAKE THE NATURE OF ROYALTY AND NOTHING ELSE. THEREFORE, THE FEES FOR SALE OF SOFTWARE LICENSE AND RELATED EXPENSES AMOUNTING TO RS.14.36 CRORES WAS TAXED @ 20% AS PER DTAA BETWEEN INDIA AND ITALY. 1 7 . THE LAST ITEM OF INCOME WAS REIMBURSEMENT OF EXPENSES OF EURO 53,439 I.E. INR OF 33,89,167/ - . SINCE THE ASSESSEE HAD NOT EXPLAINED THE NATURE OF REIMBURSEMENT TRANSACT ION SERVICES, THE SAME WAS TREATED AS PART OF EXPENDITURE INCURRED FOR THE EMPLOYEES DEBITED FOR IMPLEMENTATION OF SAP SOFTWARE AND THE ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 14 SAME WERE CONSIDERED AS PART OF ROYALTY FOR SAP SOFTWARE AND TAXED UNDER SECTION 9(1)(VI) OF THE ACT. THE ASSESSEE HAD NOT PROVIDED THE AMOUNT IN INDIAN CURRENCY AND THE ASSESSING OFFICER WORKED OUT THE SAME AT RS.35,33,386/ - AND TAXED THE SAME @ 20%. THE ASSESSING OFFICER ALSO NOTED THAT WHERE THE INTERNATIONAL TRANSACTION OF THE ASSESSEE WAS ABOVE RS.15 CRORES, REFERENC E WAS MADE TO THE TRANSFER PRICING OFFICER (IN SHORT THE TPO) , WHICH IN TURN, WAS ASSIGNED TO ADDL. CIT (TP) BUT NO ADJUSTMENT WAS MADE TO THE VALUE OF INTERNATIONAL TRANSACTION BY THE SAID TPO AND HENCE, NO ADJUSTMENT WAS MADE TO THE VALUE OF INTERNATIO NAL TRANSACTION. 1 8 . THE ASSESSEE HAD FILED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (IN SHORT THE DRP) , WHICH WAS REJECTED, CONSEQUENTLY, THE ASSESSING OFFICER PASSED FINAL ASSESSMENT ORDER, UNDER WHICH THE FEES FOR SALE OF SOFTWARE LICENSE AND R ELATED RECEIPTS OF RS.14.36 CRORES WERE TREATED AS ROYALTY AND TAXED @ 20%. FURTHER, ROYALTY INCOME OF RS.37.80 CRORES WAS TAXED @ 20% AS PER DTAA AS FURTHER, ROYALTY INCOME OF RS.37.80 CRORES WAS TAXED @ 20% AS PER DTAA AS AGAINST 10.55% CLAIMED BY THE ASSESSEE IN THE RETURN OF INCOME. 1 9 . THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF ASSESSING OFFICER PASSED UNDER SECTION 143(3) R.W.S. 144C OF THE ACT. 20 . THE FIRST ISSUE RAISED BY THE ASSESSEE IS AGAINST THE RATE TO BE APPLIED ON ROYALTY RECEIVED UNDER THE ROYALTY AGREEMENT DATED 01.04.2008. THE LEARNED AUTHORIZED REPRE SENTATIVE FOR THE ASSESSEE POINTED OUT THAT AS PER ROYALTY AGREEMENT ENTERED INTO BETWEEN THE PARTIES WHICH IS DATED 01.04.2008, THE ASSESSEE HAD CLAIMED BENEFIT UNDER SECTION 115A OF THE ACT THAT THE RECEIPTS RECEIVED FROM THE INDIAN ENTITY IS TO BE TAXED @ 10% AS AGAINST THE RATE PRESCRIBED IN THE TREATY BETWEEN INDIA AND ITALY @ 20%. HE FURTHER POINTED OUT THAT THE ASSESSING OFFICER HAD DENIED THE BENEFIT TO THE ASSESSEE ON THE SURMISE THAT THE NEW AGREEMENT BETWEEN THE PARTIES WAS RENEWAL OF OLD AGREEM ENT. OUR ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 15 ATTENTION WAS DRAWN TO THE AGREEMENT DATED 26.03.1998 WHICH IS PLACED AT PAGES 41 ONWARDS AND THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE STRESSED THAT THE SAID AGREEMENT WAS BETWEEN TWO DIFFERENT PARTIES I.E. THE SUBSIDIARY OF THE ASS ESSEE AND JV BETWEEN PIAGGIO AND PIAGGIO GREAVES VEHICLES PVT. LTD. THE SAID AGREEMENT HAD TO BE APPROVED BY RBI AFTER WHICH THE SUPPLEMENTARY AGREEMENT WAS EXECUTED, UNDER WHICH ACKNOWLEDGEMENT WAS GIVEN TO MANUFACTURING OF APE MP 501 AND APE MP 601. OU R ATTENTION WAS DRAWN TO DIFFERENT CLAUSES OF AGREEMENT, UNDER WHICH REIMBURSEMENT FEES WAS RECEIVED AND ALSO ROYALTY WAS RECEIVED @ 2.5% OF THE TOTAL TURNOVER. THE SAID AGREEMENT ADMITTEDLY, WAS FOR A TERM OF 10 YEARS WITH CLAUSE THAT THE SAME COULD FURT HER BE EXTENDED WITH MUTUAL CONSENT OF THE PARTIES. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT IN 1999, SUBSIDIARY COMPANY MERGED WITH THE PARENT COMPANY, SO THE PARENT COMPANY THEREAFTER, ENTERED INTO NEW AGREEMENT AND ALSO M /S. GREAVES EXITED THE JV AND THE SAID CONCERN BECAME PIAGGIO VEHICLE IN 2000. HE FURTHER REFERRED TO THE AGREEMENT EXECUTED ON 01.04.2008 AND POINTED OUT THAT AS PER CLAUSE 3 OF THE AGREEMENT, THE TECHNOLOGY WAS GIVEN FOR MANUFACTURE OF NOT ONLY APE 50 1 AND APT 60 1 BUT ALL VARIANTS DEVELOPED BY THE ASSESSEE FOR PERIOD OF 10 YEARS. HE STRESSED THAT AS PART OF THE NEW AGREEMENT, ENTITY IN INDIA COULD USE THE UPGRADED TECHNOLOGY OF ASSESSEE AND ALSO TECHNOLOGY FOR NEW PRODUCTS, UNDER WHICH ROYALTY WAS GIVEN ON RECURRING BASIS AND NO REIMBURSEMENT WAS GIVEN. HE STRESSED THAT THE NEW AGREEMENT ENTERED INTO BETWEEN THE PARTIES IS LEGALLY ENFORCEABLE AGREEMENT AND THE SAME HAD TO BE READ SEPARATELY FROM EARLIER AGREEMENT. IN THIS REGARD, HE PLACED RELIANCE ON THE RATIO LAID DOWN BY THE HONBLE HIGH COURT OF CALCUTTA IN CIT VS. BORHAT TEA CO. LTD. (1993) 203 ITR 987 (CAL), UNDER WHICH IT WAS HELD THAT RENEWAL OF FDR WAS A FRESH CONTRACT BECAUSE OF VARYING RATES AND TERMS, ETC. AND COULD NOT BE SAID TO BE RENEWAL OF EARLIER ONE. FURTHER, REFERENCE WAS MADE TO SPECIAL BENCH DECISION OF KOLKATA IN ITO VS. CHLORIDE INDIA LTD. (2000) 75 ITD 69 ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 16 (KOL) , WHEREIN THE FACTS WERE IDENTICAL TO THE FACTS BEFORE US, UNDER WHICH IT WAS HELD THAT ONCE THE EARLIER AGREEMENT HAD E XPIRED AND NEW AGREEMENT WAS SIGNED, THEN THE SAME WOULD BE FRESH AGREEMENT BETWEEN THE PARTIES EVEN IF ALL THE TERMS AND CONDITIONS WERE SAME. HE STRESSED THAT IN THE CASE OF ASSESSEE, THE TERMS BETWEEN THE PARTIES HAD UNDERGONE CHANGE AND HENCE, IT CANN OT BE SAID THAT IT WAS RENEWAL. HE FURTHER STRESSED THAT THE HONBLE HIGH COURT OF CALCUTTA HAS APPROVED THE DECISION OF SPECIAL BENCH OF KOLKATA TRIBUNAL IN CHLORIDE GROUP PLC. VS. CIT (2002) 253 ITR 514 (CAL) . FURTHER, RELIANCE WAS PLACED ON OTHER DECI SIONS OF DIFFERENT BENCHES OF THE TRIBUNAL INCLUDING PUNE BENCH OF TRIBUNAL IN GKN HOLDINGS PLC VS. DDIT (IT) (2015) 167 TTJ 408 (PUNE) , WHEREIN, IN ALL CASES, THERE WAS RENEWAL OF AGREEMENT AND IT WAS HELD TO BE SEPARATE AGREEMENT. 2 1. THE LEARNED DEPART MENTAL REPRESENTATIVE FOR THE REVENUE ON THE OTHER HAND, POINTED OUT THAT IN THE EARLIER AGREEMENT, THE TERM OF 10 YEARS WAS FIXED BUT THERE WAS OPTION OF EXTENSION OF PERIOD AVAILABLE BETWEEN THE PARTIES. HE THERE WAS OPTION OF EXTENSION OF PERIOD AVAILABLE BETWEEN THE PARTIES. HE ADMITTED THAT THERE WAS NO LUMP SUM PAYMENT OF ANY FEES BUT ROYALTY WAS PAID AND ONLY ON THIS BASIS, IT CANNOT BE SAID THAT IT WAS A NEW AGREEMENT BETWEEN THE PARTIES. REFERRING TO THE DECISION OF HONBLE HIGH COURT OF CALCUTTA IN CIT VS. BORHAT TEA CO. LTD. (SUPRA) , THE LEARNED DEPARTMENTAL REPRESEN TATIVE FOR THE REVENUE POINTED OUT THAT PROCEDURE WAS TO EXECUTE A NEW AGREEMENT BUT IN THE PRESENT CASE THERE WAS NO NEW AGREEMENT BUT EXTENSION OF OLD AGREEMENT . REFERRING TO THE RATIO LAID DOWN BY THE HONBLE HIGH COURT OF CALCUTTA IN CHLORIDE GROUP PL C. VS. CIT (SUPRA), THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT THE TERMS AGREED UPON BETWEEN THE PARTIES W ERE DIFFERENT IN THE NEW AGREEMENT AND ALSO THE RATE OF ROYALTY FIXED BETWEEN THE PARTIES WAS DIFFERENT. ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 17 22 . WE HAVE HE ARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE FIRST ISSUE WHICH ARISES IN THE PRESENT CASE IS THE RATE OF TAX TO BE APPLIED ON THE ROYALTY INCOME RECEIVED BY THE ASSESSEE UNDER THE ROYALTY AGREEMENT DATED 01.04.2008. THE ASSESSEE WAS A PUBLIC LIM ITED COMPANY AND QUALIFIED AS TAX RESIDENT OF ITALY. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE WAS ENGAGED IN THE MANUFACTURE OF MOTORIZED TWO WHEELERS. THE ASSESSEE GROUP WAS INVOLVED IN PRODUCTION OF SCOOTERS, MOTORCYCLES AND MOPEDS IN DISPLACEMEN T FROM 50CC TO 1200CC UNDER THE PIAGGIO, VESPA, GILERA, DERBI, APRILIA, MOTO GUZZI AND SCARABEO BRANDS. THE GROUP ALSO MANUFACTURE D THE APE, PORTER AND QUARGO RANGES OF THREE AND FOUR - WHEELED LIGHT GOODS TRANSPORT VEHICLES. THE MANUFACTURING UNITS OF THE ASSESSEE WERE ESTABLISHED IN ITALY, SPAIN, INDIA AND CHINA WITH SALES SPREAD OVER IN SEVERAL COUNTRIES. THE ASSESSEE HAD ENTERED INTO AN AGREEMENT WITH PVPL , INDIA , UNDER WHICH IT RECEIVED ROYALTY. THE FIRST AGREEMENT WAS ENTERED INTO WITH PIAGGIO VEICO LI EUROPEI S.P.A. THE SAID SUBSIDIARY HAD ENTERED INTO LICENSE AND TECHNICAL ASSISTANCE AGREEMENT WITH PIAGGIO GREAVES VEHICLES PVT. LTD., WHICH WAS JOINT VENTURE OF ASSESSEE AND GREAVES LTD. THE SAID CONCERN IS NOW KNOWN AS PIAGGIO VEHICLES PVT. LTD. T HE EARLIER AGREEMENT IS DATED 26.03.1998 , UNDER WHICH RIGHT AND LICENSE TO USE THE TECHNICAL INFORMATION, DRAWINGS AND KNOW - HOW AND ALL ADDITIONAL TECHNICAL INFORMATION AS WELL AS TRADE MARK RELATED TO DIESEL ENGINE VERSIONS OF PIAGGIO BRANDED 3 - WHEELERS H AVING THE COMMERCIAL DENOMINATION OF APE MP 501 AND APE MP 601 WAS AGREED FOR A PERIOD OF 10 YEARS FROM THE EFFECTIVE DATE. THE COPY OF THE SAID AGREEMENT IS PLACED AT PAGES 41 TO 104 OF THE PAPER BOOK. APE MP 501 AND APE MP 601 ARE THE PLATFORMS BASED O N WHICH VEHICLES ARE PRODUCED BY PIAGGIO, INDIA. THE VERSION OF ASSESSEE WAS THAT ON THE EXPI RY OF OLD AGREEMENT, PIAGGIO, INDIA AND THE ASSESSEE NEGOTIATED FRESH TERMS AND CONDITIONS AND ENTERED INTO A NEW ROYALTY AGREEMENT W.E.F. 01.04.2008 FOR A PERIOD OF 10 YEARS. THE COPY OF SAID AGREEMENT IS PLACED AT PAGES 105 TO 120 OF THE PAPER BOOK. AS PER FRESH AGREEMENT, THE ROYALTY EARNED WAS OFFERED FOR ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 18 TAXATION @ 10% PLUS SURCHARGE AND EDUCATION CESS, AS PER PROVISIONS OF SECTION 115A(1)(B)(AA) OF THE ACT. THE ASSESSING OFFICER ON COMPARISON OF BOTH THE AGREEMENTS, WAS OF THE VIEW THAT SINCE THERE WAS NO CHANGE AS FAR AS THE PURPOSE OF AGREEMENT AND THE SERVICES INVOLVED WERE CONCERNED, SINCE UNDER THE AGREEMENT DATED 01.04.2008 ALSO, PVPL, INDIA INTENDED TO OBTAIN FROM THE ASSESSEE EXPERT TECHNICAL ASSISTANCE FOR TECHNOLOGY UPGRADATION OF ITS VEHICLES AND SINCE PVPL NEEDED TO USE THE TRADEMARK AND KNOW - HOW FOR FURTHER PERIOD OF 10 YEARS, THE SAID AGREEMENT WAS EXECUTED, WHICH WAS NOTHING ELSE BUT AN EXTENS ION OF EARLIER AGREEMENT. HENCE THE ROYALTY RECEIVED AS PER SECOND AGREEMENT WAS TAXED @ 20% AS PER DTAA PROVISION BETWEEN INDIA AND ITALY. THE ASSESSING OFFICER ALSO POINTED OUT THAT EVEN IF THE TAX LIABILITY WAS WORKED OUT AS PER SECTION 115A OF THE AC T, IT COMES TO 20% PLUS SURCHARGE AND EDUCATION CESS, WHEREAS TAX RATE APPLICABLE AS PER DTAA WAS ONLY 20% WHICH WAS BENEFICIAL TO THE ASSESSEE AND HENCE, THE ROYALTY WAS TAXED @ 20%. THE DRP UPHELD THE ORDER OF ASSESSING OFFICER AND THE ASSESSEE IS IN AP PEAL BEFORE US. 23 . IN ORDER TO ADJUDICATE THE ISSUE, WE NEED TO LOOK INTO THE TERMS OF OLD AND NEW ROYALTY AGREEMENT WHICH IS BEING REFERRED TO BY THE AUTHORITIES BELOW. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE HAD TABULATED THE POINTS O F DIFFERENCE BETWEEN OLD AGREEMENT AND NEW ROYALTY AGREEMENT BY REFERRING TO THE CLAUSES OF AGREEMENT AND HAS ELABORATELY REFERRED TO THE AGREEMENTS AS SUCH. WHILE ENTERING INTO EARLIER AGREEMENT , THE REQUIREMENT WAS TO RECEIVE THE APPROVAL FROM RBI AND T HEREAFTER, EXECUTE THE AGREEMENT. THE FIRST POINT OF DIFFERENCE WHICH HAS BEEN POINTED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IS THE PARTIES TO THE AGREEMENT I.E. IN THE OLD AGREEMENT, THE SUBSIDIARY OF THE PRESENT COMPANY I.E. THE ASSESSEE BEFORE US HAD ENTERED INTO AN AGREEMENT WITH JV WHICH WAS BETWEEN THE SUBSIDIARY OF ASSESSEE COMPANY AND JV BETWEEN THE ASSESSEE AND GREAVE LTD. HOWEVER, THE PARTIES TO THE NEW ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 19 ROYALTY AGREEMENT ARE THE ASSESSEE ITSELF AND PIAGGIO, INDIA WHICH IS WHOLLY OWNED SUBSIDIARY OF THE ASSESSEE. COMING TO THE SCOPE AND OBJECT OF FIRST AGREEMENT AS PER ARTICLE 2.1, THE JV VEHICLES WOULD BE 3 - WHELLERS HAVING COMMERCIAL DENOMINATION OF APE MP 501 AND APE MP 601 . AS PER THE SAID CLAUSE, JV VEHICLES SHALL UTI LIZE GREAVES AS THE SOURCE FOR ALL ENGINES. IT WAS ALSO PROVIDED THE RIGHT TO USE LICENSE, INFORMATION TO USE THE LICENSED INFORMATION TO PRODUCE JV VEHICLES IN THE TERRITORY AND TO DISTRIBUTE AND SELL THE JV VEHICLES IN THE TERRITORY. IT WAS ALSO GIVEN EXCLUSIVE RIGHT AND LICENSE, WHICH WAS NON - TRANSFERABLE RIGHT AND LICENSE, TO USE PIAGGIO TRADEMARKS IN CONNECTION WITH DISTRIBUTION, SALE AND SERVICING OF JV VEHICLES IN THE TERRI TORY AND NON - EXCLUSIVE RIGHT AND LICENSE OUTSIDE THE TERRITORY. AS PER ARTI CLE 3.1, IT WAS FURTHER AGREED UPON BETWEEN THE PARTIES THAT THE LICENSOR SHALL LET THE LICENSEE ACCESS TO THE TECHNOLOGY AND KNOW - HOW NECESSARY FOR THE MANUFACTURE OF COMPONENTS AND PARTS OF JV VEHICLES WHICH ARE AVAILABLE OR NOT AVAILABLE WITH IT. IT WA S AGREED BETWEEN THE PARTIES THAT THE RIGHT OR LICENSE WAS GRANTED ONLY FOR THE PRODUCTION, DISTRIBUTION AND SALE OR SERVICING OF JV VEHICLES AND NO OTHER VEHICLES. THE LICENSEE WAS GIVEN THE RIGHT TO SUB - CONTRACTING FOR MANUFACTURE, SALE AND DISTRIBUTION , ETC. OF JV VEHICLES AND ADDITIONAL VEHICLES AN D PARTS WITH TERRITORY OF INDIA. HOWEVER, IT WAS NOT ENTITLED TO GRANT ANY OTHER PERSON, THE RIGHT OR LICENSE TO USE THE LICENSED INFORMATION TO PRODUCE JV VEHICLES OR TO DISTRIBUTE THE SAME IN INDIA OR IN O THER COUNTRIES. AS PER CLAUSE 3.5, IT WAS AGREED UPON THAT ADDITIONAL MODELS OF THE JV VEHICLES AND / OR OTHER VEHICLES BASED ON THE LICENSORS TECHNOLOGY AND KNOW - HOW MAY BE ADDED TO THE JV VEHICLES BY FOLLOWING THE PROCEDURE PRESCRIBED. AS PER CLAUSE 4 .1, THE LICENSOR WAS RESPONSIBLE FOR PROVIDING THE DESIGN WITHIN THE LICENSE D INFORMATION RELATING TO JV VEHICLES AS WELL AS FOR THE DESIGN CORRECTNESS OF ALL MODIFICATIONS AND / OR IMPROVEMENT THERETO RECOMMENDED BY THE LICENSOR. THE LICENSOR SHALL TRANS FER TO THE LICENSEE THE LICENSED INFORMATION WHICH WAS NECESSARY, COMPREHENSIVE AND REASONABLY NECESSARY FOR THE PRODUCTION, DISTRIBUTION, SALE AND ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 20 SERVICING OF JV VEHICLES UNDER JV LICENSE. THIS IS AS PER ARTICLE 4.1 OF OLD AGREEMENT AND IT WAS FURTHER A GREED THAT THE LICENSED INFORMATION SHALL INCLUDE INFORMATION RELATING TO APE 601 CHASSIS. THE OTHER TERMS AGREED UPON BETWEEN THE PARTIES WERE TECHNICAL INFORMATION AND DOCUMENTATION IN THIS REGARD AND TERMS RELATING TO PRODUCTION OF JV VEHICLES. AS PER ARTICLE 6, IT WAS FURTHER AGREED UPON BETWEEN THE PARTIES THAT THE LICENSOR WAS TO MAKE AVAILABLE TO THE LICENSEE ANY DESIGN CHANGE MADE TO THE JV VEHICLES AND ANY OTHER VEHICLE OR TECHNOLOGICAL IMPROVEMENTS DEVELOPED BY THE LICENSOR. THE LICENSEE HAD TO IMPLEMENT THE SAID MODIFICATIONS OR IMPROVEMENTS IN ITS PRODUCTION PROCESS WITHIN REASONABLE TIME. AS PER ARTICLE 10, THE LICENSOR WAS TO PROVIDE TECHNICAL ASSISTANCE IN INDIA AND TRAINING TO THE LICENSEE PERSONNEL IN INDIA AND IN ITALY FOR FACILITATING THE TRANSFER OF TECHNOLOGY AND KNOW - HOW FOR SUPPORTING THE REORGANIZATION OF PLANT, FOR SUPPORTING THE PRODUCTION PREPARATION OF JV VEHICLES, ALL THE LOCAL PARTS AND ALL THE SUBSTITUTE PARTS AND FOR START UP OF THEIR LOCAL PRODUCTION. THE COST OF PERSONNE L GIVING TECHNICAL ASSISTANCE IN INDIA TO THE LICENSEE WAS TO BE BORNE BY THE LICENSOR. THE LICENSOR WAS TO BEAR THE COST OF LUNCH OF THE LICENSORS PERSONNEL DURING WORKING DAYS AT THE PLANT CANTEEN. IN CASE ANY TECHNICAL ASSISTANCE, TRAINING IN INDIA W AS REQUESTED BY THE LICENSEE THEN THE COST OF THE SAME SHALL BE CHARGED TO THE LICENSEES ACCOUNT. AS PER ARTICLE 11, LICENSEE WAS AUTHORIZED TO USE THE LICENSED INFORMATION IN CONNECTION WITH IMPROVEMENT OF THE MANUFACTURE, QUALITY, RELIABILITY AND PERFO RMANCE OF THE GREAVES GARUDA VEHICLES. AS PER ARTICLE 13, THE PARTIES AGREED UPON THE CONSIDERATION TO BE PAID TO THE LICENSOR BY THE LICENSEE, WHEREIN LICENSE WAS GRANTED TO THE LICENSEE TO PRODUCE, SUB - CONTRACT AND SELL THE VEHICLES AND PARTS THEREOF TH ROUGH LICENSED INFORMATION, TRAINING AND TECHNICAL ASSISTANCE INCLUDING THE USAGE OF INTELLECTUAL PROPERTY RIGHTS INCLUDED IN THE KNOW - HOW PACKAGE, IMPROVEMENTS OF THE GREAVES GARUDA VEHI CL ES AND OF THE PLANT, UNDER WHICH THE LICENSEE AGREED TO PAY LUMP SU M FEES OF INDIAN RUPEES SIXTY MILLION IN THREE INSTALLMENTS TO THE LICENSOR. FURTHER, ROYALTY @ 2.5% OF THE ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 21 TOTAL NET EX - FACTORY TURNOVER OF THE LICENSEE WAS TO THE PAID ON SEMI - ANNUAL BASIS TO THE LICENSOR. AS PER ARTICLE 14, IT WAS AGREED THAT THE LICE NSOR AND THE LICENSEE MAY FROM TIME TO TIME AGREE TO INCORPORATE INTO AND MAKE SUBJECT TO THIS AGREEMENT, ADDITIONAL TRADE - NAMES, TRADEMARKS OR LOGOS HELD OR OWNED BY THE LICENSOR , FOR WHICH THE SUPPLEMENT TO ANNEX B HAD TO BE EXECUTED. THE LICENSEE UNDER TOOK NOT TO ALLOW ANY OTHER PERSON TO USE THE NAME, TRADEMARK OR ANY OTHER SIMILAR MARKS, NAMES OR DESIGNS, ETC. EXCEPT WITH PRIOR WRITTEN CONSENT OF THE LICENSOR. THE LICENSOR HAD EXCLUSIVE RIGHT TO REGISTER PIAGGIO TRADEMARKS IN THE TERRITORY AND LICENS EE HAD NO SUCH RIGHTS. BESIDE OTHER TERMS, ARTICLE 18 PROVIDED THAT THE TERM OF AGREEMENT WOULD BE 10 YEARS FROM THE EFFECTIVE DATE. HOWEVER, AFTER THE EXPIRY OF AGREEMENT, THE SAME COULD BE EXTENDED BY MUTUAL CONSENT BY THE PARTIES. IT WAS ALSO AGREED THAT THE PARTIES COULD TERMINATE THE AGREEMENT AT ANY TIME WITH MUTUAL CONSENT IN WRITING. AS PER ARTICLE 18.3 , IN ADDITION TO OTHER RIGHTS AND REMEDIES EITHER PARTY HAS RIGHT TO TERMINATE THE AGREEMENT IN THE EVENT OF BREACH OF ANY SUBSTANTIVE AND SIGNIF ICANT MATERIAL PROVISION OF THE AGREEMENT BY OTHER PARTY; AND MERGER, CONSOLIDATION OR REORGANIZATION OF THE OTHER PARTY WHICH RESULTS IN THE CHANGE IN THE CONTROL OR MANAGEMENT OF THE OTHER PARTY. FOR REMOVAL OF DOUBTS, IT WAS ALSO PROVIDED THAT IN CASE OF MERGER OF LICENSOR INTO ITS CURRENT 100% PARENT COMPANY , IT S REGISTERED OFFICE IN ITALY IS PERMITTED, THEN SUCCESSOR SHALL AUTOMATICALLY SUCCEED TO ALL RIGHTS AND OBLIGATIONS OF THE LICENSOR. AS PER AGREEMENT, THE PARTIES ALSO AGREED THAT IF FOR SOME R EASON, THE AGREEMENT COULD NOT BE PROCEEDED WITH, THEN WHAT WERE THE RIGHTS AND LIABILITIES OF EACH OF THE PARTIES AND WHAT HAPPENED TO DISPOSAL OF PENDING CONFIRMATION ORDERS RECEIVED BY THE LICENSEE. AS PER ANNEXURE, DIMENSION AND WEIGHT TABLE OF APE 50 1 AND APE 601 ARE ANNEXED ALONG WITH MODIFICATION AND DESIGN CHANGES FOR ALL OF THE VERSIONS OF JV VEHICLES, AS PER ANNEXURE A2 AND A3 . AS PER ANNEXURE B , PIAGGIO TRADEMARKS ARE ENLISTED. ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 22 24 . NOW, COMING TO THE TERMS OF ROYALTY AGREEMENT BETWEEN THE AS SESSEE AND PVPL, INDIA WHICH WAS EXECUTED ON 01.04.2008. THE PARTIES TO THE AGREEMENT WERE NOT THE SUBSIDIARY OF THE ASSESSEE BUT THE ASSESSEE HIMSELF WITH PVPL AS LICENSEE WHICH WAS WHOLLY OWNED SUBSIDIARY OF THE ASSESSEE AND NOT THE JV BETWEEN ANY TWO P ARTIES. IT MAY BE CLARIFIED HERE ITSELF THAT GREAVES WHICH WAS JV WITH THE ASSESSEE IN THE ORIGINAL AGREEMENT HAD EXITED THE SAID AGREEMENT AND THE OLD AGREEMENT CONTINUED FOR THE BALANCE TERM OF AGREEMENT. AS PER THE PREAMBLE TO THE AGREEMENT DATED 01.0 4.2008, IT WAS RECOGNIZED THAT THE LICENSOR WAS WORLD LEADER IN DESIGN, MANUFACTURE AND SALE OF VARIOUS VEHICLES INCLUDING IN PARTICULAR THREE WHEELERS MARKETED UNDER THE TRADEMARK APE , FOR WHICH IT HAD DEVELOPED TECHNIQUES OF MANUFACTURE , METHODS OF QUAL ITY CONTROL AND OTHER INFORMATION RELATING TO PRODUCTION, DISTRIBUTION, SALE AND SERVICING. IT WAS FURTHER ACKNOWLEDGED THAT PVPL INTENDED TO CONTINUE TO OBTAIN FROM PIAGGIO EXPERT, TECHNICAL ASSISTANCE FOR TECHNOLOGICAL UPGRADATION OF ITS VEHICLES, AS HE REINAFTER DEFINED , FACELIFT TO THE EXISTING PRODUCTS, COMPLIANCE WITH CMVR REGULATIONS IN INDIA AND FACILITATION TO DEVELOP NEW VARIANTS / APPLICATIONS OF THE VEHICLES. THE LICENSOR THEREBY GRANT AND PROVIDE TO THE LICENSEE, THE LICENSES AND THE RIGHTS TO USE CERTAIN PATENTS AND KNOWHOW, TRADE NAMES AND TRADEMARKS IN CONNECTION THERETO. IT WAS FURTHER PROVIDED THAT AND WHEREAS PVPL NEEDS TO USE THE PIAGGIO TRADEMARKS AND THE PATENTS AND KNOWHOW FOR FURTHER PERIOD OF TEN YEARS FROM THE DATE OF THIS AGREEME NT. AS PER ARTICLE 1 INTERPRETATION, THE WORD VEHICLES SHALL MEAN THREE WHEELERS AND VARIANTS THERETO MANUFACTURED BY PVPL AND SOLD UNDER PIAGGIO TRADEMARKS INCLUDING THEIR PARTS, COMPONENTS, ACCESSORIES, ETC. AS PER ARTICLE 2.2, IT WAS RECOGNIZED TH AT THE VEHICLES WHICH WERE PRESENTLY PRODUCED BY THE LICENSEE UNDER THE LICENSOR S LICENSE WERE THE SEVERAL VERSIONS OF THE PIAGGIO BRANDED THREE WHEELERS HAVING THE COMMERCIAL DENOMINATION OF APE. ARTICLE 3 REFERS TO GRANT OF LICENSES AND RIGHTS TO USE, WHEREIN AN EXCLUSIVE AND NON - TRANSFERRABLE RIGHT AND LICENSE TO USE THE PIAGGIO TRADEMARKS AND PATENTS AND KNOWHOW TO PRODUCE THE ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 23 VEHICLES AND DISTRIBUTE AND SELL THE VEHICLES IN THE TERRITORY WAS GRANTED BY THE LICENSOR TO LICENSEE . T HE LICENSEE HAD NO RIGHT TO GRANT SUB - LICENSE EXCEPT WITH THE PRIOR CONSENT OF THE LICENSOR . IN CONSIDERATION OF THE LICENSE GRANTED BY THE LICENSOR TO USE THE TRADEMARK TO PRODUCE , SUB - CONTRACT, DISTRIBUTE AND SELL THE VEHICLES AND PARTS THEREOF, INCLUDING THE USE OF ONLY PROPERTY RIGHTS , T HE LICENSEE AGREED TO PAY THE LICENSOR ROYALTY @ 2.5% OF THE TOTAL NET EX - FACTORY TURNOVER OF THE LICENSEE. THE ROYALTY WAS PAYABLE ON QUARTERLY BASIS. THESE WERE THE TERMS AS PER ARTICLE 4 OF THE AGREEMENT. VARIOUS OTHER TERMS WERE AG REED UPON BETWEEN THE PARTIES IN RESPECT OF TRADEMARKS, PROTECTION OF PATENTS AND KNOWHOW AND TRADE MARKS, REPRESENTATIONS AND WARRANTIES AND CONFIDENTIALITY OF INFORMATION. THE TERM OF THE AGREEMENT WAS FIXED FOR TEN YEARS UNLESS TERMINATED EARLIER. IT W AS ALSO PROVIDED THAT THE AGREEMENT AFTER NATURAL EXPIRY COULD BE EXTENDED BY MUTUAL CONSENT BY THE PARTIES. THE PARTIES ALSO AGREED THAT THE AGREEMENT COULD BE TERMINATED AT ANY TIME BY MUTUAL CONSENT IN WRITING. 2 5 . THE ISSUE WHICH ARISES BEFORE US I S WHETHER THE SAID AGREEMENT EXECUTED ON 01.04.2008 IS AN EXTENSION OF EARLIER AGREEMENT DATED 08.01.1998. THE FIRST POINT OF DISTINCTION POINTED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IS THE PARTIES TO THE AGREEMENT. ADMITTEDLY, O N THE DATE OF EXECUTION OF AGREEMENT I.E. 08.01.1998 , THE PARTIES WERE DIFFERENT. O VER A PERIOD OF TEN YEARS , T HERE WAS AMALGAMATION AND TAKING OVER AND THE CURRENT PARTIES WHO ARE EXECUTING THE AGREEMENT DATED 01.04.2008 WERE THE PARTIES WHO WERE EXECUTI NG THE AGREEMENT EVENTUALLY. AS PER ARTICLE 2.1, THE JV VEHICLES HAVE BEEN DEFINED TO BE APE 501 AND APE 601. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE BEFORE US POINTED OUT THAT THERE IS MATERIAL DIFFERENCE IN THE SCOPE OF THE AGREEMENT, WH EREIN AS PER OLD AGREEMENT, LICENSEE HAD RIGHT TO USE THE LICENSED INFORMATION AS WELL AS GET TECHNICAL ASSISTANCE AND TRAINING ALONG WITH RIGHT TO USE PATENTS, TRADEMARKS AND TRADE NAMES, WHEREAS UNDER THE NEW ROYALTY AGREEMENT, ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 24 THE LICENSEE HAD A RIGHT T O USE PATENTS, KNOWHOW, TRADE NAMES AND TRADEMARKS. THE NEXT POINT OF DISTINCTION WAS MADE BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS THE TECHNICAL ASSISTANCE AND TRAINING PROVIDED UNDER THE OLD AGREEMENT AND NOT SO BEING PROVIDED UNDER THE NEW AGREEMENT. THE NEXT POINT OF DIFFERENCE WAS THE TECHNOLOGY TO BE PROVIDED UNDER THE OLD AGREEMENT FOR LICENSED VEHICLES I.E. JV VEHICLES AND GREAVES GARUDA VEHICLES. IN OTHER WORDS, VEHICLES WERE ONLY APE MP 50 1 AND APE 601 AND THEIR VERSIONS. HOWEVER, UNDER THE NEW ROYALTY AGREEMENT, PIAGGIO LICENSED VEHICLES WERE ALL THE VERSIONS OF PIAGGIO BRANDED THREE WHEELERS HAVING COMMERCIAL DENOMINATION OF APE. OUR ATTENTION WAS DRAWN TO THE ANNEXURE 5 OF THE OLD AGREEMENT, WHEREIN THE LICENSED TRADEM ARK WAS AVAILABLE ONLY FOR CLA SS 12 VEHICLES. HOWEVER, UNDER THE ANNEXURE - 1 TO THE SECOND AGREEMENT, THERE WERE NO RESTRICTIONS AND THE LICENSOR LICENSED THE TRADEMARKS FOR PIAGGIO AND PIAGGIO HEXAGON LOGO. FURTHER, UNDER THE OLD AGREEMENT, THERE WAS ALS O A CLAUSE, WHEREIN ON THE VEHICLE, LOGO HAD TO BE PUT IN THAT THERE WAS USE OF PIAGGIO TRADEMARK, WHICH WAS NOT PART OF NEW ROYALTY AGREEMENT. OUR ATTENTION WAS ALSO DRAWN TO THE DIFFERENCE IN VARIOUS CLAUSES OF THE AGREEMENT RELATING TO IMPROVEMENT OF G REAVES GARUDA VEHICLES, IMPROVEMENT OF PLANT, PURCHASE OF ENGINES WHICH WAS THERE IN THE OLD AGREEMENT AND ABSENT IN THE NEW AGREEMENT. THE NEXT DIFFERENCE POINTED OUT BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS THAT THE LUMP SUM FEES OF RS.60 MILLION WAS AGREED TO BE PAID AND ROYALTY @ 2.5% OF THE TOTAL NET EX - FACTORY TURNOVER OF THE LICENSEE WAS TO BE PAID ALONG WITH CHARGES FOR TECHNICAL ASSISTANCE. HOWEVER, UNDER THE NEW ROYALTY AGREEMENT, THE PAYMENT IS ONLY OF ROYALTY @ 2.5% OF THE TOTAL NET EX - FACTORY TURNOVER OF THE LICENSEE. THE PERIODICITY OF PAYMENT OF ROYALTY WAS ALSO CHANGED FROM SEMI - ANNUAL BAS IS TO QUARTERLY BASIS. THE NEXT POINT OF DIFFERENCE I.E. TERRITORY TO WHICH LICENSE EXTENDED I.E. THE EARLIER TERRITORY WAS ONLY TO THE TERRITORY OF INDIA AND AS PER NEW AGREEMENT, THE TERRITORY WAS NOT ONLY THE ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 25 TERRITORY OF INDIA BUT ALSO EXPORT TO ANY OTHER COUNTRY AS MAY BE MUTUALLY AGREED. FURTHER, NON - COMPETITION CLAUSE AS PROVIDED IN THE OLD AGREEMENT IS ABSENT IN THE NEW ROYAL TY AGREEMENT. FURTHER, THE OLD AGREEMENT WAS GOVERNED BY THE LAW OF THE GREAT BRITAIN, WHEREAS AS PER ARTICLE 14 OF THE NEW AGREEMENT, THE PARTIES WOULD BE GOVERNED BY THE JURISDICTION OF COURTS OF INDIA. 2 6 . ON COMPARISON OF THE TERMS AGREED UPON BETWEE N THE PARTIES IN THE OLD AGREEMENT AND THE NEW ROYALTY AGREEMENT AND AFTER GOING THROUGH THE SCOPE AND OBJECT OF THE AGREEMENT AND VARIOUS TERMS, WE FIND ONE MAIN MATERIAL DIFFERENCE I.E. IN THE EARLIER AGREEMENT, THE ASSESSEE HAD GIVEN LICENSE TO PRODUCE PIAGGIO BRANDED THREE WHEELERS HAVING COMMERCIAL DENOMINATIONS OF APE MP 501 AND APE MP 601. IT IS SO PROVIDED IN ARTICLE 2.1. THE ARTICLE 2.2 OF THE NEW AGREEMENT DATED 01.04.2008 , HOWEVER, REFERS TO THE VEHICLES WHICH ARE PRESENTLY PRODUCED BY THE LICE NSEE UNDER THE LICENSORS LICENSE BEING SEVERAL VERSIONS OF PIAGGIO BRANDED THREE WHEELERS HAVING COMMERCIAL DENOMINATIONS OF APE. THE ANNEXURE TO THE OLD THREE WHEELERS HAVING COMMERCIAL DENOMINATIONS OF APE. THE ANNEXURE TO THE OLD AGREEMENT PROVIDED THE TRADEMARKS TO BE USED BY THE ASSESSEE WERE ONLY RESTRICTED TO APE 501 AND APE 601. HOWEVER, AS PER ANNEXURE TO THE NEW AGREEMENT, THE ASSESSEE HAS PROVIDED THE LICENSE TO MANUFACTURE AND SELL THE VEHICLES UNDER THE BRAND NAME APE, WHICH ENCOMPASSES ALL KINDS OF VEHICLES. THE ASSESSEE ALSO POINTED OUT THAT IN VIEW OF EXTENDED LICE NSE PROVIDED TO THE ASSESSEE, IT LAUNCHED APE CITY DIESEL OF THREE WHEELER S UNDER APE BRAND WHICH WAS DIFFERENT FROM APE 501 AND APE 601 BRANDS, WHICH WAS POSSIBLE SINCE IT WAS GOVERNED BY THE TERMS OF NEW ROYALTY AGREEMENT. THE SECOND MAIN DIFFERENCE IN THE AGREEMENT IS THE TERRITORY TO WHICH THE LICENSE EXTENDS. UNDER THE OLD AGREEMENT, THE LICENSE WAS GIVEN TO PRODUCE, DISTRIBUTE AND SELL THE LICENSED VEHICLES IN INDIA ONLY, WHEREAS UNDER THE NEW ROYALTY AGREEMENT, THE DISTRIBUTION AND SELLING OF LICEN SED VEHICLES IS NOT RESTRICTED TO INDIA ONLY BUT EXPORT CAN BE MADE TO ANY OTHER COUNTRY, WHICH SHALL BE MUTUALLY AGREED BETWEEN THE PARTIES. ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 26 THERE ARE OTHER VARIANTS IN THE TERMS OF AGREEMENT VIS - - VIS PURCHASES TO BE MADE, THE PERIODICITY OF PAYMENT OF CONSIDERATION , NON - COMPETE CLAUSE, ETC. ACCORDINGLY, WE HOLD THAT N E W ROYALTY AGREEMENT IS NOT AN EXTENSION OF OLD AGREEMENT BUT AN INDEPENDENT LEGALLY ENFORCEABLE AGREEMENT. AS PER CONTRACT LAW, THE PARTIES ARE BOUND BY THE TERMS AND CONDITIONS OF NEW A GREEMENT WHICH ARE AT VARIANCE WITH OLD AGREEMENT AND HENCE, IT IS HELD THAT ON THE EXPIRY OF TERM OF OLD AGREEMENT, THE RIGHTS AND OBLIGATIONS BETWEEN THE PARTIES WERE EXTINGUISHED AND THE ASSESSEE ENTERED INTO A FRESH AGREEMENT WITH FRESH RIGHTS AND OBLI GATIONS WHICH MAY ALSO CALLED AS REVISED BUT THE SAME CULMINATES INTO EXECUTION OF NEW ROYALTY AGREEMENT. EVEN IF SOME OF THE TERMS AND CONDITIONS IN EARLIER AGREEMENT CONTINUED TO GOVERN THE PARTIES DOES NOT MEAN THAT A NEW AGREEMENT HAS NOT BEEN EXECUTE D BETWEEN THE PARTIES. ON THE EXPIRY OF EARLIER AGREEMENT, NEW UNDERSTANDING HAS BEEN CULMINATED INTO A NEW AGREEMENT. WHERE THE TERMS OF NEW AGREEMENT SHALL NOW GOVERN THE RIGHTS AND OBLIGATIONS OF THE PARTIES, THEN WE HOLD THAT THE SAID AGREEMENT BETWE EN THE PARTIES IS A NEW ROYALTY AGREEMENT AND NOT AN EXTENSION OF OLD AGREEMENT. UNDER SECTION 115A OF THE ACT, IT IS PROVIDED THAT IN CASE ANY NEW ROYALTY AGREEMENT IS ENTERED INTO AFTER FIRST DAY OF JUNE, 2005, THE APPLICABLE TAX RATES ON THE ROYALTY IN COME WOULD BE 10% PLUS SURCHARGE AND EDUCATION CESS. WE FIND SUPPORT FROM THE RATIO LAID DOWN BY THE HONBLE HIGH COURT OF CALCUTTA IN CIT VS. BORHAT TEA CO. LTD. (1993) 203 ITR 987 (CAL) AND ALSO THE RATIO LAID DOWN BY THE SPECIAL BENCH OF KOLKATA TRIBUN AL IN ITO VS. CHLORIDE INDIA LTD. (SUPRA) WHICH HAS BEEN APPROVED BY THE HONBLE HIGH COURT OF CALCUTTA IN CHLORIDE GROUP PLC. VS. CIT (SUPRA). ACCORDINGLY, WE HOLD THAT THE APPLICABLE TAX RATE ON THE ROYALTY INCOME AS PER SECTION 115A OF THE ACT IS 10% P LUS SURCHARGE AND EDUCATION CESS. THE ASSESSING OFFICER IS DIRECTED ACCORDINGLY. THE GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE IS THUS, ALLOWED. ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 27 2 7 . THE SECOND ISSUE RAISED BY WAY OF GROUNDS OF APPEAL NO.2 TO 4 IS AGAINST THE TAX RATE TO BE APPLIED O N THE AMOUNT RECOVERED BY THE ASSESSEE FOR RECHARGE OF SUPPLY OF SAP SOFTWARE . 2 8 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT AS PER GLOBAL POLICY, THE ASSESSEE DECIDED TO SUPPLY SAP TO ALL ENTITIES, WHEREIN THE ASSESSEE DECID ED TO IMPLEMENT SAP AGREEMENT WITH ITS AFFILIATED COMPANIES. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT BEFORE THE ASSESSING OFFICER, THERE WERE THREE GROUNDS AS RAISED BY WAY OF GROUNDS OF APPEAL NO.2.1 TO 2.3. NOW, THE LIMI TED QUESTION WHICH IS TO BE ADJUDICATED IS THE RATE TO BE APPLIED AS PER SECTION 115A OF THE ACT. OUR ATTENTION WAS DRAWN TO COMMUNICATION BETWEEN THE PARTIES WHICH WAS NOT A FORMAL AGREEMENT BUT EXCHANGE OF TERMS BETWEEN THE ASSESSEE AND THE RECIPIENT CO MPANY. IN THE YEAR 2011, THERE WAS FURTHER IMPLEMENTATION OF AN AGREEMENT. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT WHAT IS TO BE CONSIDERED I S REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT WHAT IS TO BE CONSIDERED I S WHETHER FOR SERVICES RENDERED, IT IS TO BE TAXED @ 10% IN THE ABSENCE OF ANY FO RMAL AGREEMENT OR 20% AS PER DTTA . HE FAIRLY POINTED OUT THAT IN THE NEXT YEAR FOR UPGRADATION, AN AGREEMENT WAS ENTERED WHICH REFERS TO THE LICENSE GIVEN IN ASSESSMENT YEAR 2010 - 11. REFERENCE WAS MADE TO THE AGREEMENT PLACED AT PAGES 137 ONWARDS OF THE PAPER BOOK. HE POINTED OUT THAT GROUND OF APPEAL NO.2 RAISED BY THE ASSESSEE WAS AGAINST THE AMOUNT RECOVERED FOR RECHARGE OF SUPPLY OF SAP SOFTWARE AND GROUND OF APPEAL NO.3 WAS AGAINST THE AMOUNT RECOVERED OF RECHARGE OF THIRD PARTY SERVICE PROVIDER FEE S IN CONNECTION WITH SAP IMPLEMENTATION AND GROUND OF APPEAL NO.4 WAS THE CONSIDERATION FOR PROVIDING SERVICES IN CONNECTION WITH IMPLEMENTATION OF SAP SOFTWARE. 2 9 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE OTHER HAND, FAIRLY AGREED THAT THERE WAS NO AGREEMENT BETWEEN THE PARTIES DURING THE YEAR CONSIDERATION BUT IT WAS ONLY A LETTER EXCHANGE D BETWEEN THE PARTIES. HE ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 28 FURTHER REFERRED TO THE ORDER OF DRP RELATING TO ASSESSMENT YEAR 2011 - 12 WHICH HAS REFERRED TO THE NEW AGREEMENT EXECU TED BETWEEN THE PARTIES. 30 . THE LIMITED ISSUE WHICH ARISES IN THE PRESENT GROUNDS OF APPEAL IS AGAINST THE TAX RATE TO BE APPLIED ON THE AMOUNT RECEIVED FOR RECHARGE OF SUPPLY OF SAP SOFTWARE AT RS.9.30 CRORES, RECHARGE OF THIRD PARTY SERVICE PROVIDER FE ES OF RS.3.22 CRORES AND SERVICES IN CONNECTION WITH IMPLEMENTATION FOR SAP SOFTWARE AT RS.1.56 CRORES. BEFORE THE AUTHORITIES BELOW, THE DISPUTE WAS WHETHER THE SAME WAS IN THE NATURE OF ROYALTY OR NOT. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSE SSEE HAS POINTED OUT THAT THE SAID ISSUE IS NOT IN DISPUTE AND THE ONLY DISPUTE WHICH ARISES IS THE RATE OF TAX TO BE APPLIED. THE CASE OF THE REVENUE WAS THAT THE SAME IS TO BE TAXED @ 20% IN VIEW OF DTAA BETWEEN INDIA AND ITALY, WHEREAS THE CASE OF ASSE SSEE WAS THAT THE PROVISIONS OF SECTION 115A OF THE ACT WERE TO BE APPLIED AND THE SAME IS TO BE TAXED @ 10% PLUS SURCHARGE PLUS EDUCATION CESS. IN THIS CONNECTION, IT MAY BE POINTED OUT THAT FOR THE YEAR UNDER CONSIDERATION THE CONNECTION, IT MAY BE POINTED OUT THAT FOR THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD ENTERED INTO EXCHANGE TERMS OF AGREEMENT AND NO FORMAL AGREEMENT WAS ENTERED. HOWEVER, IN THE SUCCEEDING YEAR, THE ASSESSEE HAD ENTERED INTO AN AGREEMENT WITH RECIPIENT COMPANY. THE DRP WHILE PASSING THE ORDER RELATING TO ASSESSMENT YEAR 2011 - 12 HAD HELD THE RECEIPTS TO BE ROYALTY BUT BY AN ORDER OF RECTIFICATION UNDER SECTION 154 OF THE ACT, THE SAME IS HELD TO BE TAXABLE @ 10% PLUS SURCHARGE PLUS EDUCATION CESS. EVEN IN ASSESSMENT YEAR 2012 - 13, SIMILAR RECEIPTS HAVE BEEN TAXED BY THE ASSESSING OFFICER HIMSELF @ 10% PLUS SURCHARGE PLUS EDUCATION CESS. THE NATURE OF RECEIPTS IN THE YEAR UNDER CONSIDERATION ARE ADMITTEDLY, SAME AND FOLLOWING THE SAME PARITY OF REASONING, WE HOLD THAT THE RECEIPTS ARE TO BE TAXED UNDER THE PROVISIONS OF SECTION 115A @ 10% PLUS SURCHARG E PLUS EDUCATION CESS. ACCORDINGLY, GROUNDS OF APPEAL NO.2 TO 4 ARE PARTLY ALLOWED. ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 29 31 . THE ISSUE IN GROUND OF APPEAL NO.5 RAISED BY THE ASSESSEE IS AGAINST THE CHARGEABILITY OF TAX @ 20% AS ROYALTY UNDER THE INDIAN ITALY DTAA, THE AMOUNTS RECOVERED TOWA RDS REIMBURSEMENT OF EXPENSES. THE ASSESSEE CLAIMS THAT IT HAD RECEIVED REIMBURSEMENT ON ACCOUNT OF RE - WORK CHARGES OF RS. 3,14,573/ - AND INSURANCE COST OF RS.32,18,800/ - . THE ASSESSEE CLAIMED THAT IT HAD TAKEN GROUP INSURANCE POLICY TO COVER THE PRODUCT LIABILITY RISK FOR ALL THE PIAGGIO GROUP COMPANY ACROSS THE GLOBE AND INSURANCE COST INCURRED BY THE ASSESSEE WAS ALLOCATED TO THE COMPANIES IN THE GROUP WITHOUT ANY MARK UP. THE RE - WORK CHARGES WERE CHARGED BY THE ASSESSEE IN RESPECT OF EXPENSES INCURRED BY THE ASSESSEE TO RECTIFY THE DEFECT / DEFAULT IN VEHICLES PURCHASED FROM PIAGGIO, INDIA. THE CLAIM OF ASSESSEE WAS THAT WHERE INITIALLY, EXPENSES HAD BEEN INCURRED BY IT AND LATER ON RECOVERED AS REIMBURSEMENT ON COST TO COST BASIS WITHOUT ANY MARK UP AND IN THE ABSENCE OF ANY ELEMENT OF MARK UP, THERE WAS NO MERIT THAT NO INCOME WAS OFFERED TO TAX. HOWEVER, THE ASSESSING OFFICER ON ERRONEOUS PRESUMPTION HAD TREATED THE SAME TO BE INCURRED IN CONNECTION WITH SAP IMPLEMENTATION PROJECT AND TAX ED RECEIPT S AS SOFTWARE ROYALTY @ 20% UNDER INDIA ITALY DTAA. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN THIS REGARD REFERRED TO THE DETAILS ALONG WITH COPY OF INVOICES PLACED AT PAGES 159 TO 164 OF THE PAPER BOOK, WHICH WERE FILED BEFORE THE ASSESSI NG OFFICER AND POINTED OUT THAT WHERE THE EXPENDITURE ARE NOT RELATED TO SAP IMPLEMENTATION PROJECT, THEN THE SAME CANNOT BE TREATED AS ROYALTY. IN ANY CASE, IT WAS REIMBURSEMENT OF EXPENSES WITHOUT ANY MARK UP AND IN THE ABSENCE OF ANY INCOME ELEMENT, TH E SAME ARE NOT TO BE TAXED @ 20%. HE ALSO POINTED OUT THAT IN THE SUBSEQUENT ASSESSMENT YEAR, THE DRP HAVE HELD THAT REIMBURSEMENT OF INSURANCE AND RE - WORK CHARGES WERE NOT LIABLE TO TAX IN INDIA IN THE ABSENCE OF ANY ELEMENT OF INCOME. WE FIND MERIT IN THE CLAIM OF ASSESSEE SINCE IN THE FACTS OF THE CASE, IT IS A CASE OF REIMBURSEMENT OF EXPENSES INCURRED BY THE ASSESSEE, WHICH IN TURN, WERE ALLOCATED TO THE ENTITIES . S UCH REIMBURSEMENT OF EXPENSES WITHOUT ANY MARK UP DOES NOT JUSTIFY ITS TAXABILITY IN ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 30 THE HANDS OF ASSESSEE BEING ROYALTY @ 20%. WE REVERSE THE ORDER OF ASSESSING OFFICER IN THIS REGARD AND ALLOW THE GROUND OF APPEAL NO.5 RAISED BY THE ASSESSEE. 3 2. NOW, COMING TO THE GROUND OF APPEAL NO.6 RAISED BY THE ASSESSEE WHICH IS AGAINST THE AMOUN T RECEIVED TOWARDS CONSULTANCY FEES CHARGED BY THE ASSESSING OFFICER TO TAX @ 20% UNDER INDIA ITALY DTAA AS AGAINST 10.55% OFFERED BY THE ASSESSEE. THE ASSESSEE HAD RECOVERED SUM OF RS. 26,55,812/ - FROM PVPL, INDIA TOWARDS REIMBURSEMENT OF CONSULTANCY FEES PAID BY IT TO THIRD PARTY SERVICE PROVIDER. THE ASSESSEE HAD CLAIMED THE SAID TO BE IN THE NATURE OF FEES FOR TECHNICAL SERVICES AND CHARGEABLE TO TAX AS PER SECTION 115A(1)(B)(BB) OF THE ACT @ 10% PLUS APPLICABLE SURCHARGE AND EDUCATION CESS . THE CLAIM OF ASSESSEE WAS THAT THE SAID FEES IS TAXABLE AS TECHNICAL SERVICES IN VIEW OF EXPLANATION (2) TO SECTION 9(1)(VII) OF THE ACT WHICH DEFINES FEES FOR TECHNICAL SERVICES R.W.S. SECTION 115A(1)(B)(BB) OF THE ACT. 33 . THE LEARNED DEPARTMENTAL REPRESENTATI VE FOR THE REVENUE PLACED RELIANCE ON THE ORDERS OF AUTHORITIES BELOW. 34 . AS PER CLAUSE (BB) TO SECTION 115A(1)(B) OF THE ACT, IT IS PROVIDED AS UNDER: - 115A(1)(B)(BB) AN AMOUNT OF INCOME TAX CALCULATED ON THE INCOME BY WAY OF ROYALTY, IF ANY, INCLUDED IN THE TOTAL INCOME, AT THE RATE OF 10% IF SUCH ROYALTY IS RECEIVED IN PURSUANCE OF AN AGREEMENT MADE ON OR AFTER THE 1 ST DAY OF JUNE, 2005. 35 . FURTHER, EXPLANATION TO SECTION 9(1)(VII) OF THE ACT DEFINES FEES FOR TECHNICAL SERVICES AS UNDER: - FOR THE REMOVAL OF DOUBTS IT IS HEREBY DECLARED THAT FOR THE PURPOSES OF THIS SECTION WHERE INCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA UNDER CLS. (V), (VI) AND (VII) OF SUB - S. (1) SUCH INCOME SHALL BE INCLUDED IN THE TOTAL INCOME OF THE NON - RESIDENT, WHETHER OR NOT , - ( I ) THE NON - RESIDENT HAS A RESIDENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTION IN INDIA; OR ( II ) THE NON - RESIDENT HAS RENDERED SERVICES IN INDIA . ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 31 3 6 . THE CONDITIONS PRESCRIBED UNDER SECTION 115A R.W.S. 9(1)(VII) OF THE ACT ARE WIDE ENOUGH TO INCLUDE REIM BURSEMENT OF CONSULTANCY FEES AS FEES FOR TECHNICAL SERVICES IN THE HANDS OF ASSESSEE. ACCORDINGLY, WE HOLD THAT THE AMOUNT OF RS.26,55,812/ - IS TO BE TAXED @ 10% PLUS APPLICABLE SURCHARGE AND EDUCATION CESS. 3 7 . THE GROUND OF APPEAL NO.7 RAISED BY THE A SSESSEE IS AGAINST CHARGING OF INTEREST UNDER SECTION 234B OF THE ACT. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE SAID SECTION 234B IS NOT APPLICABLE TO PARENT COMPANY WHERE THE ENTIRE INCOME WAS SUBJECT TO WITHHOLDING TAX IN INDIA. IT WAS POINTED OUT THAT THE ASSESSING OFFICER HAD LEVIED THE SAID INTEREST PURSUANT TO VARIATIONS MADE IN THE FINAL ASSESSMENT ORDER AND HENCE, THE SAME NEEDS TO BE DELETED CONSEQUENT TO DELETION OF VARIATION. WE FIND MERIT IN THE PLEA OF ASSE SSEE. WE HAVE ALREADY ADJUDICATED VARIOUS ISSUES ON WHICH ADDITIONS WERE MADE IN THE HANDS OF ASSESSEE AND DECIDED THE SAME IN FAVOUR OF ASSESSEE. ACCORDINGLY, THE HANDS OF ASSESSEE AND DECIDED THE SAME IN FAVOUR OF ASSESSEE. ACCORDINGLY, THE ASSESSING OFFICER IS DIRECTED TO DELETE THE INTEREST CHARGED UNDER SECTION 234B OF THE ACT . THE GROUND OF APPEAL NO.7 RAISED BY THE ASSESSEE IS THUS, ALLOWED. 3 8 . NOW, COMING TO THE APPEAL IN ITA NO.258/PUN/2016 . THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. GROUND 1 : ROYALTY RECEIVED UNDER THE ROYALTY AGREEMENT SHOULD NOT BE TAXED @ 20% - RS.47,29,35,915 1.1 APPLICABILITY OF TAX RATE A ) ERRED IN FACTS AND IN LAW IN HOLDING THAT THE ROYALTY AGREEMENT DATED 1 APRIL 2008 IS NOT A NEW AGREEMENT AND HENCE, IN CONSIDERING THE ROYALTY AGREEMENT AS AN EXTENSION OF THE LICENSE AND TECH NICAL ASSISTANCE AGREEMENT DATED 27 MARCH 1998 AND TO APPLY TAX RATE OF 20% UNDER THE INDIA - ITALY DTAA INSTEAD OF 10.5575% UNDER SECTION 115A OF THE ACT. B ) ERRED IN FACTS AND IN LAW IN HOLDING THAT THERE ARE NO CHANGES IN THE ROYALTY AGREEMENT DATED 1 APRIL 2008 AND THE LICENSE AND TECHNICAL ASSISTANCE AGREEMENT DATED 27 MARCH 1998 AND HENCE, IN CONSIDERING THE ROYALTY AGREEMENT AS AN EXTENSION OF THE LICENSE AND TECHNICAL ASSISTANCE AGREEMENT AND TO APPLY TAX RATE OF 20% UNDER THE INDIA - ITALY DTAA INSTEAD O F 10.5575% UNDER SECTION 115A OF THE ACT. ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 32 2. GROUND 2 : AMOUNT RECEIVED TOWARDS SAP SOFTWARE MAINTENANCE CHARGES RS.3,10,12,563 2.1 APPLICABILITY OF TAX RATE A ) ERRED IN FACTS AND IN LAW IN HOLDING THAT THE AMOUNT RECEIVED TOWARDS SAP SOFTWARE MAINTENANC E CHARGES IS IN THE NATURE OF ROYALTY AND CHARGEABLE TO TAX UNDER THE PROVISIONS OF THE ACT AS WELL AS UNDER THE INDIA - ITALY DTAA. B ) ERRED IN FACTS AND IN LAW IN HOLDING THAT THE AMOUNT RECEIVED TOWARDS SAP SOFTWARE MAINTENANCE CHARGES IS NOT ELIGIBLE FOR T HE RATE OF 10.5575% AS PER THE PROVISIONS OF SECTION 115A OF THE ACT. 3. THE LEARNED AO ERRED IN LEVYING INTEREST UNDER SECTION 234B OF THE ACT. 4. THE LEARNED AO ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) FOR FURNISHING INACCURATE P ARTICULARS OF INCOME AND FOR CONCEALING THE PARTICULARS OF INCOME. 3 9 . THE FIRST ISSUE RAISED BY THE ASSESSEE BY WAY OF GROUND OF APPEAL NO.1 IS AGAINST THE RATE OF TAX TO BE APPLIED ON THE ROYALTY RECEIVED UNDER THE ROYALTY AGREEMENT. WE HAVE ALREADY DE CIDED THIS ISSUE IN ASSESSMENT YEAR 2010 - 11 AND FOLLOWING THE SAME RATIO, WE HOLD THAT THE ROYALTY AGREEMENT ENTERED INTO ON 01.04.2008 WAS A NEW AGREEMENT, THE TAX RATES TO BE APPLIED WERE AS PER SECTION 01.04.2008 WAS A NEW AGREEMENT, THE TAX RATES TO BE APPLIED WERE AS PER SECTION 115A OF THE ACT @ 10% PLUS APPLICABLE SURCHARGE AND EDUCATION CESS. HENCE THE GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE IS ALLOWED. 40 . NOW, COMING TO THE GROUND OF APPEAL NO.2 RAISED BY THE ASSESSEE I.E. THE AMOUNT RECEIVED TOWARDS SAP SOFTWARE MAINTENANCE CHARGES AT RS.3,10,12,563/ - . THE LEARNED AU THORIZED REPRESENTATIVE FOR THE ASSESSEE HAS NOT PRESSED THE SAID GROUND OF APPEAL . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE HAS NOT PRESSED THE SAID GROUND OF APPEAL AS THE DRP VIDE ORDER PASSED UNDER SECTION 154 OF THE ACT HAS DIRECTED THA T THE SAID RECEIPTS ARE TO BE TAXED UNDER SECTION 115A OF THE ACT @ 10% PLUS SURCHARGE PLUS EDUCATION CESS. H ENCE, THE SAME IS DISMISSED AS NOT PRESSED . 41 . THE ISSUE IN GROUND OF APPEAL NO.3 RAISED BY THE ASSESSEE IS AGAINST THE CHARGING OF INTEREST UNDER SECTION 234B OF THE ACT AND IT IS CLAIMED THAT IN CASE THE ITA NOS. 309/PUN/2015 ITA NO.258 /P U N/201 6 PIAGGIO & C.S.P.A 33 ADDITION MADE IN THE HANDS OF ASSESSEE IS DELETED, THEN NO FURTHER INTEREST IS CHARGEABLE UNDER S ECTION 234B OF THE ACT. THE ASSESSEE HAS ALSO PLEADED THAT IT IS FOREIGN COMPANY AND IT IS NOT LIABLE TO LEVY OF INTEREST UNDER SECTION 234B OF THE ACT. WE FIND THAT THE RATE OF TAXES TO BE APPLIED IS BEING DECIDED IN FAVOUR OF THE ASSESSEE AND CONSEQUEN TLY, NO INTEREST IS CHARGEABLE UNDER SECTION 234B OF THE ACT. THE GROUND OF APPEAL NO.3 RAISED BY THE ASSESSEE IS THUS, ALLOWED. 42. IN VIEW OF DECIDING THE MAIN APPEALS OF THE ASSESSEE, THE STAY APPLICATIONS FILED BY THE ASSESSEE BECOMES INFRUCTUOUS . 4 3 . IN THE RESULT, BOTH THE APPEALS OF ASSESSEE ARE PARTLY ALLOWED AND THE STAY APPLICATIONS OF ASSESSEE ARE DISMISSED . ORDER PRONOUNCED ON THIS 21 ST DAY OF MARCH , 201 7 . SD/ - SD/ - ( ANIL CHATURVED I ) ( SUSHMA CHOWLA ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; D ATED : 21 ST MARCH , 201 7 . GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. THE APPELLANT ; 2. THE RESPONDENT; 3. THE DRP , PUNE ; 4. THE DIT (TP/IT), PUNE ; 5. THE DR B , ITAT, PUNE; 6. GUARD FILE . / BY ORDER, // TRUE COPY // / ASSISTANT REGIST RAR, , / ITAT, PUNE