Taxability of royalty under retrospective law & reimbursement of expenses

WNS North America Inc vs. ADIT (ITAT Mumbai)

 The assessee, a USA company, received Rs. 6.41 crores towards reimbursement of international telecom connectivity charges. The assessee claimed that the said amount did not fall within the definition of “royalty” in Article 12 of the India-USA DTAA apart from the fact that as it was a “reimbursement of expenses“, it was not income. The department claimed that irrespective of the position under the DTAA, in view of the retrospective insertion of Explanation 5 to s. 9(1)(vi) by the FA 2012 w.r.e.f. 1.6.1976, the said amount had to be assessed as “royalty“. On appeal by the assessee to the Tribunal, HELD allowing the appeal:

 

(i) A retrospective amendment to the Act has no bearing on the DTAA because s. 90(2) makes it clear that the provisions of the Act shall apply only to the extent that it is favourable to the assessee. While a retrospective amendment will alter the provisions of the Act, it will not per se have the effect of automatically altering the analogous provision of the Treaty. Further, though the DTAA provides that the laws in force in India shall govern the taxation of income, this is subject to the exception that there is nothing to the contrary in the DTAA. Similarly, under Article 3(2), as the term “royalty” is defined in Article 12, the definition in s. 9(1)(vi) will have no application;

 

(ii) On merits, even if the retrospective amendment applied, the amount would not constitute “royalty” because it was not received “for the use or right to use any industrial, commercial or scientific equipment” owned by the assessee. The equipment was owned by the telecom operators and the amount could be considered as royalty in their hands but not in the hands of an intermediary like the assessee who merely made the payment and got the reimbursement;

 

(iii) Further, the said amount, being a pure reimbursement of expenses without any mark up cannot be considered as income in the hands of the assessee. However, the onus is on the assessee to show, by leading evidence, that there is no element of profit in such reimbursement and that the contract price has not been bifurcated to show a portion thereof as reimbursement. Mere nomenclature of “reimbursement” is not relevant. On facts, as the assessee established that there was no mark up, the amount was not assessable.