On facts, payments made by Indian Branch office
for accessing the software installed in the server belonging to the head
office is in the nature of reimbursement of expenses and not royalty
under the India-Belgium Double Taxation avoidance agreement (DTAA).
Definition of Royalty as widened in Income-tax Act (ITA) is not relevant
for the purpose of DTAA.
Facts:
The Taxpayer, a tax resident of Belgium, was operating in India through a Branch office (BO).
The
Taxpayer (HO) acquired a banking application software named as
“Flexcube” (Software) from an Indian software company. The software was
installed in the server at Belgium and was apparently used for banking
purposes by the HO all over the world. The said software license was
also amended to allow the Indian BO to use it by making it accessible
through a server located in Belgium.
The cost to get data processed was reimbursed by the BO, on a pro-rata basis to the HO.
The
Tax Authority disallowed the above payment on the basis that the
payment constituted ‘royalty’ on which no taxes were withheld at source.
The Taxpayer submitted that:
• The payment was in the nature of reimbursement;
•
Also, it did not satisfy the requirement of payment made for ‘use of’
or ‘right to use’ any copyright for it to be treated as ‘royalty’ under
the India – Belgium DTAA.
On appeal, the CIT(A) agreed with the
Taxpayer and held that the data processing cost paid by the Indian BO
does not amount to ‘royalty’.
Aggrieved, the Tax Authority appealed before the Tribunal.
Held:
The
BO sends data to the HO for getting it processed as per the requirement
of banking operations. As per the terms of the agreement between the HO
and the third party, the HO has non-transferable rights to use software
and the HO cannot assign, sub-license or otherwise transfer the
software. The HO allocates expenditure of the I.T. resources on a
pro-rata basis.
Insofar as the BO is concerned, it is only
reimbursing the cost of processing of its business data to the HO, which
has been allocated to it on a pro-rata basis. Such reimbursement does
not fall within the ambit of the definition of “royalty” under the DTAA.
In
the present case, the payment made by the BO is not for ‘use of’ or
‘right to use’ software. The BO does not have any independent right to
use or control over the main frame of the computer software installed in
Belgium. To qualify as ‘royalty’ under the DTAA, the payment should be
qua the use or the right to use the software exclusively by the BO. The
BO should have exclusive and independent use or right to use the
software and for such usage, payment should be made.
It is also
not the case of the Tax Authority that the HO has provided any copyright
of the software or copyrighted article developed by the HO for the
exclusive use of the BO for which the BO is making royalty payment along
with a mark-up exclusively for royalty.
The definition of
‘royalty’ under the DTAA is exhaustive and not inclusive. Therefore, it
has to be given the meaning as contained in the DTAA itself and the
widened definition of royalty after its retroactive amendment by the
Finance Act 2012 should not be looked into.
Reimbursement of
data processing cost to the HO does not fall within the ambit of
definition of ‘royalty’ under the DTAA and accordingly, there is no tax
withholding obligation for the BO.
