Taxability of amount received by a Switzerland based non-resident from its Indian Affiliate

This case concerns a Switzerland-based company, Rieter Machine Works Limited, and its Indian affiliate, Rieter India Private Limited (RIPL). The dispute revolves around the taxability of payments received by Rieter Machine Works from RIPL. While the company offered some IT service charges to tax as royalty under the India-Switzerland Double Taxation Avoidance Agreement, it claimed another receipt of approximately Rs. 3.84 crore as reimbursement for expenses, including third-party software costs and infrastructure, and thus not taxable. The Tribunal found that the nature of services rendered was the same, regardless of whether the software was in-house or third-party, and dismissed the appeal.

IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH, ‘C’ PUNE
BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND
SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER

ITA No.19/PUN/2021

Assessment Year : 2016-17

Rieter Machine Works Limited,
C/o. Rieter India Private Limited,
306-308, 3rd Floor,
Western Wing (A-2),Nyati Unitree,
Samrat Ashok Road, Yerwada,
Pune – 411 006
PAN : AADCR1340N

vs

ACIT (International Taxation),
Circle-2, Pune

Assessee by Shri M.P. Lohia &
Shri Nikhil Mutha
Revenue by Shri Shekhar L. Gajbhiye
Date of hearing 14-10-2021
Date of pronouncement 21-10-2021

ORDER

This appeal by the assessee is directed against the final assessment order dated 09.12.2020 passed by the Assessing Officer (AO) u/s.143(3) r.w.s.144C(13) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation to the assessment year 2016-17.

2. Succinctly, the facts of the case are that the assessee filed its return with total income of Rs.22,30,38,350/-. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the arm’s length price of certain international transactions declared by the assessee. The TPO, vide his order dated 10-06-2019 passed u/s.92CA(3), did not propose any transfer pricing adjustment. The AO observed that the assessee had included a sum of Rs.20,04,14,231/- in its total income, being, IT service charges received through RIPL and offered it for tax at 10% in terms of the Double Taxation Avoidance Agreement between India and Switzerland (DTAA). However, another receipt of Rs.4,05,96,997/- from RIPL was not offered for taxation. On being called upon to explain the reasons, the assessee submitted that a sum of Rs.17,02,173/- was in the nature of reimbursement of expenses received from RIPL, representing supply of clothes required for Rieter India employees, Promotional gifts for exhibitions and expenses incurred by employees towards their accommodation, laundry, transport, good etc, which was charged back without any mark-up. The AO accepted the transaction as not chargeable to tax. The remaining amount of Rs.3,88,94,824/-

3. Having held that the receipt of Rs.3.84 crore is neither reimbursement nor royalty for software, the next question is to find out true nature of the receipt. It has been noticed above that the assessee rendered I.T. services to its group companies including RIPL and offered a sum of Rs.20.04 crore to tax as royalty/fees for technical services. We have further found that the nature of services provided under the Master Agreement for which Rs.20.04 crore has
been offered to tax is exactly similar to that claimed to be reimbursement for which Rs.3.84 crore has been received. In fact, there is only one Master agreement with RIPL under which the composite I.T. services were rendered to the group companies including RIPL - whether with the help of own software or those purchased from third party vendors. Whereas the assessee offered revenue to tax insofar the consideration for the I.T. services rendered from its own developed software is concerned, but claimed the corresponding revenue to the extent of cost incurred in purchasing software from third party vendors and the cost incurred in setting up the matching infrastructure, as reimbursement and
hence not exigible to tax. But for that, the nature of service is same. This shows that the assessee received Rs.23.92 crore.

4. In the result, the appeal is dismissed.
Order pronounced in the Open Court on 21st October, 2021.

Please find attached the enclosed file for the full judgement.