International Taxation

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May 2016

CA. Hinesh Doshi & CA. Ronak Soni

M/s. Capgemini Business Services (India) Ltd. v/s Assistant Commissioner of Income Tax [TS-100-ITAT-2016 (Mum)] dated 29th February 2016

Facts of the Case:

Capgemini Business Services India Limited had provided Information Technology Enabled Services (ITES) / \'Back Office Support Services\' to Unilever group companies.

The Assessee incurred an expenditure for purchase of “off the shelf” software from \'QAD Singapore Pvt. Ltd.\' but did not deduct any tax at source while making the payment as it had not purchased any copyright in the software rather, it had purchased only a copyrighted article named as \'MFG Pro Software.

The AO noticed that the assessee had incurred expenses in foreign currency for the purchase of software from QAD Singapore Pvt. Ltd. and that the assessee had purchased the right to use the software and the software is used for the business purpose in India. He, therefore, held that the same was liable for deduction of tax at source under section 195 of the Act in view of the provisions of section 9 of the Income Tax Act.

The assessee filed objections against the draft assessment order before the DRP. However, the DRP rejected the assessee\'s claim and held that the license to use the software would fall under the purview of royalty.

Aggrieved assessee filed an appeal before the Mumbai ITAT.


Whether the expenditure incurred by the Assessee constituted as royalty and whether the Assessee was liable to deduct tax at source or not?


ITAT rules that assessee\'s purchase from Singapore entity does not constitute \'royalty\' under India-Singapore DTAA, holds assessee simply purchased copyrighted work embedded in CD-ROM which would qualify as sale of copyrighted product and not transfer of copyright.

Further it opined that sale of such a CD ROM/diskette is not a license but it is a sale of a product, which of course is a copyrighted product and the owner of the copyright puts the conditions and restrictions on the use of the product so that his copyrights in the copyrighted article or the work, which has been written on such CD ROM/diskette, may not be infringe. Such conditions are not the license to use the product.

It further States that even though computer software will be included under \'literary work\' under Copyright Act, as the consideration is paid for the \'literary work\' and not \'copyright in the literary work\', the subject payment would not constitute royalty.

Hence the ITAT held the judgment in favour of the Assessee.

CIT v/s M Tech India Pvt. Ltd. [TS-19-HC-2016] (Delhi HC) dated: 19th January, 2016

Facts of the Case:

Assessee, M. Tech India Pvt Ltd is a Value Added Reseller (VAR) of the software related to healthcare and hospitality in India.

The assessee entered into VAR agreement with various foreign and Indian companies pursuant to which assessee purchased software from these parties and resold to various end-users in India.

The assessee claimed deduction of the purchases made while computing the taxable income. However, AO treated the payments made as “royalty” and not as purchase of software, thus, disallowing the expenditure u/s. 40(a)(i)/(ia) for non-deducting TDS.

Further, CIT (A) and ITAT overturned AO\'s order and deleted additions made u/s. 40a.

Aggrieved, Revenue filed an appeal before Delhi HC.


Whether payments made by assessee for purchase of software were in the nature of royalty and, therefore, the assessee was obliged to withhold tax on such payments?


HC remarked that in the cases where an assessee acquires the right to use software, the payment so made would amount to royalty. However, in cases where the payments are made for purchase of software as a product, the consideration paid cannot be considered to be use or the right to use the software. It is well settled that where software is sold as a product it would amount to sale of goods.

HC examined various clauses of the agreement and came to the conclusion that the agreement indicated that the assessee had been appointed for the purpose of reselling the software.

HC concluded that what was transferred was not copyright or the right to use a copyright but a mere transfer of copyrighted article for further resell and that did not give rise to any royalty income.

HC, thus, ruled in assessee\'s favour.

Cummins Limited, In re [TS-16-AAR-2016] (AAR- New Delhi) dated: 12th January, 2016

Facts of the case:

The applicant, Cummins Limited, is a company incorporated in the UK. Further, Cummins Technologies India Limited (“CTIL”) is a company engaged in the business of manufacture and sale of turbochargers.

CTIL purchases turbocharger components directly from third party in UK and US.

The applicant in relation to such purchases provides supply management services pursuant to Material Suppliers Management Service Agreement entered between the applicant and CTIL.

The supply management services rendered by applicant included:

a)Finalization of supplier prices from UK and US suppliers and ensuring market- competitive Pricing from suppliers,
b)Ensuring that the approved suppliers have the necessary manufacturing capacities and infrastructure to provide for the raw material requirements, performance review of the suppliers etc.


The applicant filed an application before AAR to examine following questions:

Whether the supply management services fees received by the applicant from CTIL was in the nature of “fees for technical services” or ”royalties” within the meaning of term in Article 13 of India-UK double tax avoidance agreement (\'India-UK treaty\')?

In view of the fact that the applicant did not have a Permanent Establishment (“PE”) in India in terms of Article 5 of the India-UK treaty, whether the payments received by the applicant are chargeable to income-tax in India?

Whether CTIL, the payer of supply management service fees were required to withhold tax as per sec. 195?


AAR clarified that it was important to see whether the services provided under agreement would lead to imparting of any technical knowledge and expertise to CTIL and thus whether the applicant was making available any technical knowledge, experience, skill know-how or processes to CTIL.

It noted that as per the agreement between the applicant and CTIL, CTIL was working with applicant only to ensure market competitive pricing from the suppliers.

It held, applicant maintains contract supply agreement with suppliers after identifying the products availability, capacity to produce and competitive pricing. The applicant is not imparting its technical knowledge and expertise to the Indian company based on which the Indian company will acquire such skills and will be able to make use of it in future. Therefore, the \'make available\' clause under India-UK Treaty is not satisfied.

It concluded that nature of services related to identification of products and competitive pricing cannot qualify as royalties under the provisions of Article 13 under India-UK Tax Treaty because it is not related with the use of, or the right to use any copyright, patent, trademark, design or modal, plan, secret formula or process etc.

Also it clarified that the applicant had no PE in India, the fees received were not taxable in India.

Thus, CTIL was not required to withhold tax u/s. 195.

ACIT vs. Pahilajrai Jaikishin [2016] 66 30 (Mumbai-Tribunal) dated: 1st February, 2016

Facts of the case:

The assessee is a partnership firm engaged in the business of manufacturing, trading and export of textile goods. Assessee paid commission to foreign agent for procuring export orders.

AO held that the payment made to the foreign commission agent are covered under managerial services and are not commission simply as claimed by the assessee firm. Since the assessee firm has not deducted the tax at source, it is hit by the provisions of section 40(a) (i) of the Act and tax should have been deducted at source by the assessee firm u/s 195 of the Act.

Thus the AO held that these payments to non-resident by assessee firm is income deemed to accrue or arise in India and chargeable to tax u/s 9(1) (vii) of the Act.

Aggrieved by the AO\'s order the assessee firm filed appeal with CIT (A).Aggrieved by the decision of the orders passed by the CIT (A), the Revenue filed an appeal with the Tribunal.


 Whether commission paid to overseas agent is a fee for technical/managerial services as defined in explanation 2 to Section 9(1) (vii) so as to bring it to tax under fiction created by deeming provisions of Section 9 ?


Obligation to deduct tax at source under section 195 arises only when payment is chargeable to tax under provisions of Act, in hands of non-resident.

Nothing was brought on record by the AO to establish that the said non-resident brokers have their place of establishment in India because they were operating in their respective countries. Thus, commission income neither accrued nor arose in India. Thus Provision of Section 195 does not apply when no income is found to be taxable in India. Therefore, there was no reason for making any disallowance under the provisions of Section 40(a) (i).

Revenue has to bring on record cogent material to prove that the technical knowledge is made available to the assessee firm which could be used in future so as to characterize payment of export commission as fee for technical/managerial service as defined in explanation 2 to Section 9(1) (vii) of the Act to bring it to tax under fiction created by deeming provisions of Section 9 of the Act.

In the absence of cogent material, it could not be said that the foreign brokers have any managerial expertise and the services rendered by them is for their self-use and their own benefit to maximize commission income.

Hence, the same cannot be brought to tax within the provisions of the Act.

In the result the Revenue\'s appeal is dismissed.