The Delhi bench of Income Tax Appellate Tribunal ( ITAT ) granted relief ,ruling that the amount received as reimbursements for expenses related to software subscription services should not be taxed as technical services income under Article 12 of the of the India-USA Double Taxation Avoidance Agreement ( DTAA ) or Section 9(1)(vii) of the Income Tax Act,1961. The ITAT concluded that these amounts represented reimbursed costs rather than fees for technical services.
Korn Ferry, the appellant-assessee company received Rs.55,29,572/- for reimbursement and general management charges. The assessee had submitted before the Assessing Officer ( AO ) that reimbursement/general management charges had been received by it from Futurestep Recruitment Services Pvt. Ltd. and Hay Consultants India Private Limited, which were wholly-owned subsidiaries.
Get a Copy of Income Tax Refunds (Law & Procedure), Click here
The assessee acted as a central hub for its affiliates, buying services like Cyberreason Antivirus, LinkedIn, and Microsoft. The costs were then shared among the affiliates, helping them save on expenses compared to buying these services on their own.
The assessee also stated that the Rs.55,29,572/- was for reimbursing expenses related to software subscription services. The assessee provided a copy of the Master Services Agreement between mResource LLC and Korn/Ferry International Futurestep. The agreement showed that mResource LLC was providing mobile and online services as a Global Provider on a Software as a Service ( SaaS ) basis.
The assessee accessed these services through mResource LLC by paying monthly fees as agreed. mResource LLC appointed the assessee as a distributor of the platform to client companies, allowing the partner to use the platform for its own needs or on behalf of clients.
Get a Copy of Income Tax Refunds (Law & Procedure), Click here
The AO based on the agreement contended that the assessee was providing services to its clients after getting licenses from service providers and setting up a central platform for further licensing. The assessee charged only for using this infrastructure, not for the software itself. The services were provided with a markup as allowed in the contract.
The AO contended that because there was a markup on the charges, the receipts were considered income from technical services rather than mere reimbursement. Therefore, the AO treated these receipts as taxable technical services income under both the Act and the DTAA.
The AO relied on the case Rieter Machine Works Limited Vs. ACIT. It ruled that costs recovered for third-party software, used in IT services for an Indian company, are taxable as ‘Fees for Technical Services’ or ‘royalty’ under the DTAA.
Get a Copy of Income Tax Refunds (Law & Procedure), Click here
The assessee, dissatisfied by the decision of the AO appealed before the tribunal.
The tribunal noted that the assessee received Rs.28,76,000 from Futurestep Recruitment Services Pvt. Ltd. and Rs.26,52,000 from Hay Consultants India Pvt. Ltd., which are the only subsidiaries. The assessee procured services from third parties, paid for them, and then got reimbursed by the subsidiaries.
The two-member bench, consisting of Anubhav Sharma ( Judicial Member ) and Dr. B.B.R Kumar ( Accountant Member ), allowed the appeal. They concluded that since the amounts were reimbursements, they should not be taxed. Additionally, the payments did not involve the provision of any knowledge or know-how to the subsidiaries, so they did not qualify as a fee for inclusive services ( FIS ).
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
