The Income Tax Appellate Tribunal (ITAT), Mumbai Bench held that no income Tax applicable on receipt of software license fees from an Indian subsidiary.
The assessee, SCA Hygiene Products AB is a company incorporated, and fiscally domiciled, in Sweden. It has a subsidiary in India by the name of SCA Hygiene Products India Pvt Ltd (SCA-India). Under a service agreement the assessee was under an obligation to render services, which included “providing hardware and software for various ERP systems, CRM Systems and other business systems” to its India subsidiary at cost.
It was under this arrangement that the assessee provided SAP software and licence to the SCA-India, on a cost to cost basis without any markup being charged on the same, and received an amount equivalent to Rs. 1,30,04,613.
During the course of scrutiny assessment proceedings, the Assessing Officer noticed these facts and required the assessee to show cause as to why the SAP software licence charges not be brought to tax under article 12(3)(a) of India Sweden Double Taxation Avoidance Agreement.
It was, inter alia, explained by the assessee that this receipt of Rs.1,30,04,613 reflects a reimbursement simpliciter, that the SAP licenses were acquired from a rank outsider, that as it is pure reimbursement without any markup, there is no income element embedded therein. The assessee also advanced certain arguments on other facets regarding the inapplicability of Article 12(3)(a) to the facts of this case.
The Assessing Officer noted that there was no evidence on record that the market value of services to various group entities is not equivalent to the payments received by the assessee from group entities. He was further of the view that “once a right has been provided for a cost, then the fact that there is no markup or any profit would not take the receipt out of income nature.”
The assessee raised the ground that whether it has been erred by the Authorities in not considering the fact that Appellant has only recharged actual cost it incurred for acquiring SAP licenses from third party and since there is no profit element the same is not taxable in India.
The Coram headed by the Vice President, Pramod Kumar held that the receipt of software license fees by the assessee, from its Indian subsidiary, is reimbursement of software license fees paid by the assessee to a third party, and, therefore, it cannot constitute income taxable in the hands of the assessee.
As this income was not taxable under the domestic law provisions in India, the ITAT saw no need to deal with the other aspects of the matter with respect to non-taxation of this income under the provisions of the Indo-Swedish tax treaty.
Subscribe Taxscan Premium to view the Judgment
