Receipt of EY for Reimbursement of Costs of Centralized Services from Member Firms not ‘Royalty’: ITAT follows AAR Order [Read Order]

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT), while following an order of the Authority for Advance Rulings (AAR) held that the payments received by EY Global Services Limited towards reimbursements of costs of centralized services from the Member Firms cannot be termed as ‘royalty’ for the purpose of Income Tax Act, 1961.

EY Global Services Limited is providing technology and other support services and software licenses to the member firms of the EY Network. The assessee is said to be established as a non-profit central service provider to enable EY member firms to share the costs of centralized services. Accordingly, the assessee enters into agreements with each member firm, pursuant to which it provides services required by member firms and thereafter, recovered various costs incurred by it from the member firms on actual usage basis. Given the above, the assessee filed a ‘NIL’ return of income on 30th March 2012 contending that the payments received by the assessee from Indian member firms are mere reimbursement of costs and not taxable under the Act as well as the Double Taxation Avoidance Agreement between India and United Kingdom.

A bench of Shri Shamim Yahya, Accountant Member and Ms. Astha Chandra, Judicial Member observed that in order to seek certainty on the above tax position and avoid litigation with the Tax Department, the assessee had filed an application before the Authority of Advance Ruling (“AAR”) to seek an advance ruling that the payments so received by the assessee are not taxable in India under the Act or under the treaty. The AAR while pronouncing its ruling held that owing to the nature of services rendered by the assessee, all services except software charges are not taxable in India. Accordingly, the AAR held that software charges are taxable as “Royalty” as per the provisions of the Act and the treaty.

However, the Revenue submitted that the appeal is not at all maintainable inasmuch as AO has followed the ruling of Hon’ble AAR in assessee’s own case, hence CIT (A) has rightly dismissed the assessee’s appeal as not maintainable. It was further submitted that assessee has already filed a writ petition before the Hon’ble jurisdictional High Court against the above AAR ruling. The decision of Hon’ble High Court is still awaited.

Ruling in favour of the assessee, the Tribunal held that “Upon careful consideration, we find ourselves in agreement with the submissions made by the ld. DR for the Revenue. AO has only followed the ruling of AAR in assessee’s own case and as per the provisions of section 245S of the Act, ruling of Hon’ble AAR is binding upon the Revenue authorities.”

Support our journalism by subscribing to Taxscan AdFree. Follow us on Telegram for quick updates.