Data Processing Cost paid by the KBC Bank Branch to Head Office isn’t Royalty: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench while upholding the order passed by CIT(A) held that the Data Processing Cost paid by the KBC Bank Branch to Head Office is not Royalty.

The assessee, KBC Bank, Mumbai Branch paid Data Processing Cost of Rs. 88,26,181 to its Head Office, which according to the AO is a copyright-protected intellectual property, known as ICT Infrastructure, which is IT Hardware embedded with software and accordingly, the AO came to the conclusion that the it is a Royalty as per Clause-(iii), Explanation-2 to Section 9(1)(vi) of the Act.

Since the assessee has not deducted any tax at source, the AO disallowed the same under the provisions of Section 40(a)(ia) of the Act and added to the income of the assessee.

The CIT(A) held that the “Data Processing Cost” paid by the Assessee Branch to its Head Office does not amount to “Royalty” when such payment is based and determined on the usage of space/capacity and other key determinants towards usage of ICT infrastructure

The CIT(A) further held that the usage of the ICT infrastructure of the Bank by the Branch did not amount to “use” or “right to use” as per the provisions of Article 12(3) of the India – Belgium DTAA.

The CIT(A) also observed that the Indian branch of the Assessee Bank was not obliged to deduct tax at source while making payment for ‘Data Processing Cost’ of Rs. 34,64,227 to the Head Office and that Section 40(a)(ia) of the Act is not applicable to this payment.

The issue that came up for consideration of revenue appeal was the disallowance of data processing cost under section 40(a)(ia) of the Income Tax Act, 1961.

The assessee, at the time of hearing submitted that the issue is squarely covered in favor of the assessee by the decision of ITAT, Mumbai ‘I’ Bench in assessee’s own case for the where under an identical set of facts, the Tribunal has deleted additions made by the AO towards data processing cost paid to its head office under section 40(a)(i) of the Act for failure to deduct tax at source under section 194J of the Income Tax Act, 1961.

The Coram headed by the Vice President, Pramod Kumar, and Judicial Member Pavan Kumar Gadale held that there is no error in the order of the ld. CIT(A) in deleting additions made by the AO towards disallowance of data processing cost, hence, we are inclined to uphold the findings of ld. CIT(A) and reject the ground taken by the revenue.