A Division Bench of Bombay High Court ruled that the payment received by the Colgate Palmolive Marketing SDN BHD, from the Colgate Palmolive (India) Limited to access the SAP system does not amount to process royalty under Section 9(1)(vi) of the Income Tax Act, 1961. Thus, not taxable.
The assessee, Colgate Palmolive Marketing SDN BHD, is an entity incorporated in Malaysia and is engaged in the business of marketing, distribution and sale of household products, fabrics and personal care.
The assessee and Colgate Palmolive (India) Limited (CPI) entered into an Agreement with the Assessee for use of the Assessee’s SAP system.
Also, it was stated that CPI was required to make payments towards consideration for the use of the system, consideration towards rendering services consisting of costs of maintenance, up-gradation of the system to keep it functional and fees for training personnel for using the SAP system.
The appeal was filed by the revenue department against the order of Income Tax Appellate Tribunal (ITAT) which was in favour of the assessee.
During the assessment proceedings, the assessing officer observed that the returns were Nil income. The AO observed that the payments received on account of the use of the SAP system were covered under the definition of ‘Royalty’ as defined under Explanation 2 (iii) to Section 9 (1) (vi) of the Income Tax Act, and accordingly taxed the same.
Furthermore, the AO also observed that the payments received on account of rendering services were in the nature of ‘fees for technical services’.
The ITAT observed that till Assessment Year 2001-2002, Section 9(1)(vi) did not provide for equipment royalty. Since equipment royalty was not coming within the meaning of royalty as provided under Section 9(1)(vi) read with Explanation 2 before the amendment of the Finance Act, 2001, the said payment could not have been brought to tax under the Act for Assessment Year 1999-2000.
Based on the evidence presented, the tribunal reached a conclusion that the payment from CPI to the Assessee was not related to any right, property, or information. This determination was based on the fact that CPI had been given restricted access to the SAP system by setting up its own communication line and utilizing the data already available in the system.
The court noted that the payment made by CPI to the Assessee cannot be categorized as royalty according to Explanation 5. Based on the evidence presented, it was established that CPI had been provided restricted access to the SAP system at its own expense to utilize the data available within the system. This finding aligns with the decision made by the ITAT.
Hence, payment made by CPI cannot be regarded as payment for use of the system and therefore cannot amount to royalty under the said Explanation 5, thus not taxable.
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