From The Judiciary

Whether subscription fees for providing access to online databases treated as Royalty?

IQVIA AG (Previously known as IMS AG) TS-228-ITAT-2023(Mum)

Facts

The taxpayer company is a tax resident of Switzerland and a Tax Residency Certificate (TRC) has been issued to it. The company is in the business of providing market research reports on the pharmaceutical sector to its customers across the globe at a predetermined subscription price.

The taxpayer mainly collects, processes and utilizes the data and information, particularly in the fields of medicine and pharmaceuticals, for the delivery of reports through the online IQVIA knowledge link. The taxpayer company has entered into an agreement with its customers for providing IQVIA reports, who have been permitted to get access with applicable fees. It grants a nonexclusive and non-transferable license to use the IQVIA reports provided to the customers, thereby restricting the customer's use of information for its own benefit, backup, etc.

During FY 2017-18, the company received an income of INR 427. 1 million as subscription income from its third-party Indian Customers for online Subscription of IQVIA Reports, which the company has treated as non-taxable in India.

It was contented by the Assessing Officer (AO) that the subscription income received by the company is in nature of Royalty under Section 9(1)(vi) and under Article 12(3) of the Indo-Swiss tax treaty.

Held

The Mumbai Income Tax Appellate Tribunal (ITAT) noted that the jurisdictional HC had affirmed the decision of the Authority of Advance Rulings (AAR) in the case of Dun and Bradstreet Information Services India Pvt Ltd holding that consideration for the sale of Business Information Reports (BIRs) did not qualify as Royalty as per the provisions of Article 13(3) of the India-Spain tax treaty. The finding of the Authority for Advance Ruling (AAR) as approved by the jurisdictional HC, was on the following basis:

• The BIRs were a standardized product of the taxpayer, which provided factual information (available in the public domain) on the company’s existence, operation, financial conditions, etc.
• The BIRs were accessible by any subscriber on payment of the requisite price with regular internet access for which no particular hardware or software was required.
• The copyright in the BIRs was neither licensed nor assigned by the taxpayer to its customers.
• The transaction of sale of BIRs was like the sale of a book, which did not involve any transfer of intellectual property or a book.

Hence, keeping in mind the above, the additions made by the learned officer were deleted.

Our Comments

The Mumbai ITAT followed its own favorable decision on this very issue in the case of the taxpayer for previous years by relying on the decision of the jurisdictional Bombay HC in the case of Dun & Bradstreet Information Services India Pvt Ltd, where it has been held that payment for database subscription fees is not taxable as Royalty as the subscriber does not obtain any copyright in the database.

Does a Seconded Employee’s Salary reimbursement be treated as Fees for Technical Services (FTS)?

Juniper Networks Inc. TS-242-ITAT-2023

Facts

The taxpayer is a non-resident company incorporated under the laws of the United States. It had entered into an agreement for the secondment of its personnel with the Indian entity Juniper Networks India Pvt. Ltd. (Juniper India). It received reimbursement of the salary cost of the said employees from Juniper India.

The Revenue contended that the salary reimbursements received by the taxpayer were taxable as FTS.

Held

The Bangalore ITAT agreed to the taxpayer’s submission that:

• The reimbursement of the salary of the seconded employee was received on a cost-to-cost basis.
• Juniper India has deducted the appropriate taxes on the salary under Section 192 of the Income-tax Act,1961 (the Act).
• The reimbursement receipt of the salary of the seconded employee does not qualify as FTS under the India – USA tax treaty in the absence of making any technical knowledge or skill available to the Indian entity.

The Bangalore ITAT held that the jurisdictional HC ruling of Abbey Business Services India and Flipkart Internet Pvt. Ltd. Are squarely applicable to the facts of the present case. The ITAT also placed reliance on a co-ordinate bench ruling in the case of Tesco Bengaluru.

Our Comments

If certain criteria are met, seconded employees of foreign Group companies are, for all practical purposes, deemed to be employees of the Indian company and subject to tax in the source country, i.e., India. Thus, reimbursement of salary costs to the foreign company is not in the nature of FTS and there is no obligation to withhold tax on such reimbursement.

Once TNMM is accepted at an entity level, payment towards technical know-how cannot be segregated on a standalone basis for benchmarking

Tata Power Solar Systems Limited³ TS-287-ITAT-2023(Bang)-TP

Facts

The taxpayer entered into an international transaction with its Associated Enterprises (AEs), including a technical know-how vide license agreement payment. To compute the Arm's Length Price (ALP), the taxpayer aggregated all international transactions closely linked to each other. The Transfer Pricing Officer (TPO) accepted the benchmarking analysis done by the taxpayer applying Transactional Net Margin Method (TNMM) and accepted it for all international transactions except for the payment of technical know-how. The TPO concluded that the taxpayer should not have paid the technical know-how fees to its AE. On appeal, the Commissioner of Income-tax (Appeals) [CIT(A)] upheld the adjustment made by the TPO.

Held by the ITAT

The ITAT held that the technical know-how is integral and inseparable to the business segment of the taxpayer, and it would be impracticable and also inappropriate to evaluate payment of technical know-how fee on a standalone basis. Hence adjustments made by the TPO towards technical know-how fees though TPO accepted entity-level margins, were to be deleted.

Our Comments

Judicial precedence upheld it to be impractical and inappropriate to evaluate transactions on a standalone basis. Once the authorities accept the entity-level margins as the Most Appropriate Method (MAM), treating a particular transaction as a separate international transaction is inappropriate.

Without explicit proof of arrangement, AMP expenses cannot be a fictional international transaction performing DEMPE activities

L’Oreal India Private Limited4 TS-262-ITAT-2023(Mum)-TP

Facts

The assessee, an entrepreneur licensee, entered into a license agreement with its AE to distribute and advertise licensed products in a specified territory. The AO fictionally presumed Advertising, Marketing and promotion expenses (AMP expenses) were incurred in a mall and retail outfits for sales are in nature of advertising and brand promotion and cannot be categorized as selling expenses. The AO passed an assessment order to treat AMP expenses as international transactions and make adjustments to Transfer Pricing (TP).

Held by the ITAT

The ITAT dismissed AMP expenses as an international transaction stating that these expenses were incurred wholly and exclusively for the assessee’s business in India with no intent of benefiting its overseas AE without any explicit arrangement.

Our Comments

In the absence of explicit understanding’ or an ‘arrangement’ or ‘action in concert’, to incur AMP expenses on behalf of its AE, it should be deemed expenses incurred in the ordinary course of business.

RPM is considered as MAM for pure distributors

Bristol Myers Squibb India Private Limited TS-270-ITAT-2023(Mum)-TP

Facts

The assessee, engaged in the distribution of critical care products, selected the Resale Price Method (RPM) as MAM since no value addition was done to the products imported from the AE. The TPO held that the significant expenses incurred by the assessee towards advertising and marketing expenses affected the margins of an entity. Hence, TPO adopted TNMM as MAM.

Held by ITAT

The ITAT held that rejecting RPM due to lower AMP expenses incurred by comparable companies is not tenable and observed that TPO had not rejected the computation of gross margin done by the assessee but has rejected the method adopted since the AMP expenses vs sales ratio of comparable companies is low.

Our Comments

In cases of pure distributors with no value addition to the product imported, RPM is considered the MAM even after incurring selling and marketing expenses.

Taxability of services of transportation of goods by vessel, in the hands of the steamer agents and importers, under the Service Tax regime

The Chennai and Ennore Ports Steamer Agents Association vs. Union of India and Ors. TS-219-HC-2023(MAD)-ST

Facts

Writ petitions were filed before the Madras HC challenging the vires of Notifications, Circulars and provisions of Service Tax law by which the liability to pay service tax in respect of “services of transportation of goods by a vessel from a place outside India upto the customs station of clearance in India,” was entrusted in the hands of the steamer agents and subsequently in the hands of the importers, during the period January to June 2017.

Ruling

HC held that service tax could not be demanded from ‘steamer agents’ and ‘importers’ in India in the case of Cost, Insurance and Freight (CIF) contracts, as neither is the service recipient.

According to the Court, it is the foreign shipping liner who engages the service of various other persons in transporting goods. Hence, the foreign shipping liner receiving the service can be taxed, not the importers and steamer agents. To such an extent, there is a flaw in Notification No. 3/2017-ST and Notification No. 15/2017-ST.

Although an option to pay tax on 1.4% of the total CIF value of imported goods has been provided by Notification No. 16/2017-ST, only the recipient of service is liable to pay tax at this compounded rate.

In CIF contracts, the value of all incidental services consumed in the course of import is built into the import value of goods on which customs duty is already paid. Therefore, importers cannot be mulcted with a double tax on ocean freight either directly or indirectly.

Moreover, the steamer agents are already service providers and are taxed for their services to the shipping liners.

However, HC dismissed the challenge to Notification No. 1/2017-ST and Section 66C(2) of the Finance Act, 1994, as well as Notification No. 28/2012-ST, elaborating that as long as there is a territorial nexus between the service being taxed and its consumption in India whether directly or indirectly, such challenge cannot be countenanced and consequently, challenge to provisions of the Place of Provision of Services Rules, 2012 has to fail.

Our Comments

While delivering this judgment, the Madras HC has referred to the Gujarat HC’s decision in SAL Steel Ltd vs. Union of India [(2019) SCC Online Guj 3706] as well as the Apex Court ruling in UOI vs. Mohit Minerals [2022 SCC Online SC 657]. These verdicts were rendered in the context of the taxability of ‘importers’ vis-à-vis CIF contracts. Therefore, the present decision gains significance for steamer agents/ persons in charge of vessels who have been facing huge service tax demands from January to April 2017.

A similar writ from the Steamer Agents’ Association is currently pending before the Karnataka HC, and it would be worthwhile to wait for the outcome thereof.

Whether a credit note issued by the manufacturer to a dealer considering the warranty replacement of a defective part in the automobiles sold, is exigible for sales tax under various State Sales Tax enactments?

The correctness of the observations made in Mohd. Ekram Khan & Sons vs. CTT [(2004) 6 SCC 183] was also under the scanner

Tata Motors Ltd vs. The Deputy Commissioner of Commercial Taxes (Spl.) & Anr. TS-227-SC-2023-VAT

Facts

Reference was made to the Larger Bench in a batch of 34 appeals to decide the question as to whether, in case of a warranty for the supply of free spare parts, once the replacement was made and the defective part was returned to the manufacturer, sales tax would be payable on such transaction of spare part, based on credit note issued by the manufacturer.

Ruling

Upholding the liability, Larger Bench observed that a perusal of the definition of “credit note” in various dictionaries and Law Lexicons would clearly indicate that the same, issued by a manufacturer to a dealer, is a valuable consideration within the meaning of “sale” under both Central Sales Tax Act and the respective State enactments.

In the case of warranty replacements, there are two aspects to be considered - (i) transfer of property between dealer and customer/ purchaser of the automobile, and (ii) receipt of a valuable consideration by the dealer from the manufacturer in the form of a credit note and thus, the bifurcation of the two transactions “cannot be accepted.”

Accordingly, SC concluded that the earlier judgment in Mohd. Ekram Khan’s case is not “erroneously rendered” when applied to the aforesaid conspectus of facts. However, it would not apply where the dealer has simply received a spare part from the manufacturer to replace a defective part under warranty.

Our Comments

Although the judgment pertains to the erstwhile State enactments, the same is likely to have ramifications under the GST law. The tax authorities could invoke demands against dealers where the manufacturers have issued credit notes vis-à-vis warranty replacements fulfilled on their behalf.

Hence, to mitigate the risk, the businesses may revisit their warranty stock requirement and seek free-of-cost supplies from manufacturers to fulfill warranty obligations.

Tribunal holds capital gains on the sale of unlisted shares of an Indian company by a non-resident to be computed in Rupees

Legatum Ventures Ltd. v. Assistant Commissioner of Income-tax (IT) (Circle-3(1)(2) [2023] 149 taxmann. com 436 (Mumbai - Trib.))

The ITAT’s Mumbai Bench has held that capital gains liability on the sale of unlisted shares by a non-resident (NR) shall be computed in Rupees as per Section 112(1)(c)(iii) of the Act and not in foreign currency terms as per first proviso to Section 48.

In the given case, the assessee was a UAE-based company that sold shares of an Indian company and declared a long-term capital loss of around INR 30 million after applying the first proviso to Section 48. However, the tax officer held that the gains should be computed as per the provisions of Section 112(1) (c)(iii), which resulted in a gain of INR 171.4 million. This was on the basis that if a special provision (Section 112(1)(c) (iii)) was in place, the same shall prevail over the general provision (first proviso to Section 48). The Tribunal upheld this contention.

Our Comments

The 1^st proviso to Section 48 provides for the computation of capital gains on transfer, inter-alia of Indian company’s shares in foreign currency, which then needs to be reconverted into Indian currency. As against the same, Section 112(1)(c)(iii) provides for the computation of capital gains in Indian Rupees without applying the provisions of inter-alia 1st proviso to Section 48. The interplay between these provisions has been a debated matter.

Considering the non-residents' investments in foreign currency, they seek to compute the gains in foreign currency and not Indian Rupees. This decision is to have a bearing, especially where the foreign currency computation results in losses. From the perspective of bringing certainty to foreign investors investing in India, it is pertinent to address this aspect through proper clarifications on the present provisions.