No Tax withholding on purchase of software & reimbursement of expenses

No Tax withholding on purchase of software & reimbursement of expenses
IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'B' ITA No. 1376/Bang/08

Assessment Year : 2007-08

THE INCOME TAX OFFICER WARD-1(1), BANGALORE

Vs

M/s CGI INFORMATION SYSTEMS & MANAGEMENT CONSULTANTS PVT LTD

The revenue has filed an appeal against the order of learned CIT(A)-IV, Bangalore dated 31st March, 2008.c

2. The grounds of appeal raised by the revenue are as under:-

i) In so far as the chargeability of royalty arising on account of payment for acquisition of software is concerned, the learned CIT(A) has placed reliance on the order of the Hon'ble ITAT, Bangalore Bench in the case of M/s Samsung Electronics Ltd. (94 ITD 91) and dismissed the department's appeal. However, while passing the order relied upon, the learned CIT(A) has not taken into account the fact that the impugned transaction was not one of outright sale of software but was a license for limited use thereof.

ii) Further, in the order relied upon-in the case of M/s Samsung Electronics Co. Ltd. - the Hon'ble ITAT has placed reliance on the judgement of the Hon'ble Supreme Court in the case of Tata Consultancy Services vs The State of Andhra Pradesh (157 KLJ 345 (2004) =. However, while doing so, it has not taken into account the fact that the Hon'ble Supreme Court was adjudicating the matter in terms of the Andhra Pradesh General Sales Tax Act & not in terms of the Income Tax Act. As such, the said ratio would not be squarely applicable to the instant case. For the aforesaid reasons, the decision of the Hon'ble Tribunal in the case of M/s Samsung Electronics Co. Ltd. has not been accepted and an appeal has been filed before the Hon'ble High Court of Karnataka.

iii) Insofar as the chargeability of fees for technical services arising on account of payment for intranet fees is concerned, it has failed to appreciate that once the chargeability of the payment itself is not in doubt, the computation of the actual income in the hands of the recipient will not be material for the purpose of tax deduction at source under section 195 of the Income Tax Act. However, learned CIT(A) has allowed the assessee's appeal following the decision of the Hon'ble ITAT, Bangalore Bench in favour of the same assessee in ITA Nos.948 to 950/Bang/2005 dated 5.10.2007. The Department has not accepted the decision of the Hon'ble ITAT and is in appeal before the High Court of Karnataka.

iv) Further, the learned CIT(A) has failed to appreciate that payment by way of reimbursement of expenses cannot be allowed to go uncharged ignoring the provisions of section 44D of the Income Tax Act, so long as the chargeability of such payments is not in question.

3. The learned CIT(A) has decided the issue that no TDS is required to be deducted on acquisition of software in favour of the assessee after relying on the decision of this Bench. The payment for acquisition of software is neither in the nature of royalty as per section 9(1)(vi) nor did it constitute fees for technical services as per provisions of section 9(1)(vii). The learned CIT(A) held that tax is not required to be deducted on the acquisition of software after observing as under:-
"Coming to the merits, the learned CIT(A) had earlier taken the view that the payment made by the appellant for procuring Microsoft licenses was in the nature of payment for a copyright article and following the decision of Hon'ble ITAT, Bangalore Bench in the case of Samsung Electronics Ltd. reported in 94 ITD 91, it was observed that these payments cannot be considered as Royalty and the appellant was not liable to deduct tax in respect of this payment. However, with regard to intranet fees, the CIT(A) was of the opinion that this payment was for rendering technical services as defined in the IT Act wherein technical service clearly covers the rendering of technical or consultancy services. Hence, the CIT(A) concluded that the transaction can be said to make available technical knowledge, experience, skill, know-how or processes. In the context of whether the payment was in the nature of reimbursement, the CIT(A) was of the view that the decision of the Supreme Court in Transmission Corporation of AP Ltd. and Another vs CIT 239 ITR 587 was relevant in this context. The CIT(A) finally held that the issue as to whether the payments were in the nature of reimbursement was not relevant for deciding the application of the provisions relating to TDS and that this was particularly true in the context of payment of Royalty and fees for technical services since as per sec.44D no expenditure was allowable against such receipts in the case of a non-resident. In any case, the CIT(A) felt that the chargeability of tax in respect of intranet fees was not in doubt. Accordingly, the CIT(A) concluded that though the appellant was not liable for deducting tax in respect of fees for procuring Microsoft licenses, it was liable for deducting tax for intranet fees. On second appeal before the Hon'ble ITAT, Bangalore Bench in ITA Nos.948 to 950/Bang/2005 and ITA No.530/Bang/2006 dated 5.2.2007 held in favour of the appellant after examining the relevant clauses of the cost sharing agreement between the appellant and CGI Group Inc. Quebec, Canada, the extract of which is reproduced below:-

1. "CGI Group Inc. has developed an internal telecommunication and communication tool, which is accessible only to the members of CGI worldwide. This is historically knows as CGI Information Technology Infrastructure CGI Group Inc. is the absolute owner of the CGI Information Technology Infrastructure facility and holds the Intellectual Property Rights (IPR) for the same but no licenses are transferred to CGI-India. This is purely a communication related facility and includes the following:-
Network facility
Collaborative facility
Security facility
Eportal-intranet facility

2. CGI-India is providing Information Technology Solutions to companies within the CGI Group and other global customers.

3. As the communication tool developed by CGI Group Inc. is for mutual benefit, the parties propose to enter into a cost sharing agreement by which certain costs as mutually agreed upon, is shared between them.

4. CGI Group Inc. allows CGI-India to use the above facilities subject to the following terms and conditions:

4.1 CGI Group Inc. allows CGI-India to use the above facilities as an operational guidance for its day-to-day business.

4.2 For using the above facilities, CGI Group Inc. shall allocate the cost in respect of the facilities on an agreed basis.

4.3 CGI Group Inc. shall allocate the cost to CGI India on the basis of number of employees of CGI India based on the following formula:
Cost incurred "Number of employees of CGI India

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Total number of employees of CGI Group Worldwide

4.4 The term 'cost incurred under clause 4.3 does not include any mark up and is limited to the actual cost.

4.5 CGI-India shall not have any right to the Intellectual Property Rights (IPR) nor have any right to sell or license or lease or in any manner transfer the right assigned therein to other properties.

5. Any right in respect of CGI Information Technology Infrastructure or whatsoever in respect of any invention, improvements and other intellectual property rights in respect of CGI Information Technology Infrastructure or products shall vest with CGI Group Inc.".

6.1 The Hon'ble ITAT, Bangalore Bench therefore, made the following observations:-
CGI Group Inc. had developed an internal telecommunication and communication tool which is accessible to the members of CGI Worldwide known as CGI Information Technology Infrastructure.
CGI Group Inc. is the absolute owner of the Intellectual Property Rights (IPR) and no licenses are transferred to CGI India, i.e. the appellant.
The communication related facility includes Network Facility, Collaborative Facility, Security Facility and Eportal-Intranet Facility.
As the communication tool developed by CGI Group Inc. is for mutual benefit, the parties proposed to enter into a cost sharing agreement by which certain costs as mutually agreed upon is shared between them.
As per clause 4.4 of the agreement, the term 'costs' does not include any mark-up and is limited to the actual cost.

6.2 Based on the above observations, Hon'ble ITAT, Bangalore Bench, concluded that the agreement clearly provides that payments are to be made to reimburse the cost incurred by CGI Group of Canada for development of its software, which may be utilized by the members of the Group worldwide and that such services are known as intranet services. CGI Group is the absolute owner of the facility and also holds the Intellectual Property Rights and no license is transferred to the assessee in India. Reliance was placed on the decision of the Hon'ble Tribunal, Delhi Bench in the case of ACIT vs Modicon Network (P) Ltd. (14 SOT 204) wherein it was held that reimbursement of expenses had no element of income and therefore cannot be considered as fees for technical services. Hence, there was no liability to deduct tax u/s 195(1) of the Act. The relevant extract of the ITAT's order is reproduced below:-

"Looking to the facts of the case, we find that the facts in the case of Modicon Net Work (Supra) decided by Delhi Bench of the Tribunal is identical to the present case. In that case, the joint venture of three companies was formed a consortium for the purpose of bidding for operation GSM-based Cellular Services in India. The respective members of the consortium undertook their own pre-bid expenses till such time the bid was successful, which was to be reimbursed out of capital of assessee company. According to the agreement, the assessee reimbursed the expenses to HK Company. The Assessing Officer was of the view that such payment is to be treated as fees for technical services and section 195(1) is applicable. The Tribunal upheld the finding of CIT(A) in that case by rejecting revenue's appeal holding that such payments cannot be treated as fees for technical services or Royalty because no income element was embedded in such payment. Hence, sec. 195(1) is not applicable in the present case.

In the present case, on a perusal of the agreement of cost sharing, we have already noticed that the payments were made by the assessee for reimbursement of the expenses incurred by CGI Canada. It has been clearly mentioned in the agreement that the cost incurred does not include any mark up for income and that is limited to the actual cost. No material was brought on record by revenue that the cost reimbursed by the assessee includes element of income. Therefore, the decision of the Delhi Tribunal in the case of Modicon Network (supra) squarely applies in the present case ".

4. The Tribunal is taking a consistent stand that no TDS is required to be deducted in respect of acquisition of software. The issue has also been decided in the case of Sonata Information Technology in ITA No. 186, 191 to 196 & 199 dated 30th August, 2006. It is true that the department has not accepted the decision of the Tribunal and the matter is pending before the High Court. However, no decision of the Hon'ble jurisdictional High Court has been placed before us to support the contention of the revenue and therefore, we follow the order of the Tribunal and accordingly hold that the learned CIT(A) was justified in directing that no TDS is required when a software is acquired.

5. Another issue is as to whether the TDS is required to be deducted on reimbursement of expenses.

6. The Bangalore Bench in the case of BIAL vs ITO, Bangalore in ITA No.536 to 539/Bang/2006 vide order dated 17th December, 2007 has held that no TDS is required to be deducted when it is reimbursement of expenses. The Bangalore Bench vide order dated 17th December, 2007 observed that the expenses as incurred by the promoters compensated to them would not involve any profit element also and therefore, no deduction of tax is required to be made. Following that decision, we hold that no TDS was required to be deducted in respect of expenses reimbursed.

7. In the result, the appeal of the revenue is dismissed