Mumbai bench ITAT WNS North America Inc Extended deemed royalty by Finance Act 2012 cannot impact DTAA as treaty definition exhaustive; Reimbursement theory explained from PAYER and PAYEE angle in Intl taxation; Transfer pricing Freight companies

MUMBAI BENCHES “L”, MUMBAI ITA No.8621/Mum/2010 M/s.WNS North America Inc Date of Pronouncement : 14.12.2012 The contention of the ld. DR is two-fold. First, that any retrospective

amendment to the provisions of the Act is relevant for determining the taxability or deductibility of an amount even under the provision of the DTAA and second, the amount in question, when examined in the light of Explanation 5 to sec. 9(1)(vi) inserted retrospectively clearly, brings it in the scope of `royalty 3.5. We espouse the first segment of the contention of the ld. DR that the retrospective amendment to the provisions of the Act per se should be considered for determining the taxability of the amount even under the DTAA. Coming back to our context, if the retrospective amendment is in the realm of a provision of which no contrary

provision is there in the Treaty, then such amendment will have effect even under the DTAA and vice versa. 3.10. Reverting to the facts of the extant case, we observe that the term “royalty” has been defined in the DTAA as per Article 12(3). Such definition of the term “royalty” as per this Article is exhaustive. Pursuant to the insertion of Explanation (5) by the Finance Act, 2012, no amendment has been made in the DTAA to bring the definition of royalty at par with that provided under the Act. Subject matter of the Explanation is otherwise not a part of the definition of Royalty as per Article 12. As such, it is clear that the contention of the learned Departmental Representative that the retrospective insertion of Explanation 5 to section 9(1)(vii) should be read in the DTAA also,

cannot be countenanced.

In other words, the lease line services were availed by WNS India from MCI WorldCom etc., for which the assessee originally made the payment to such operators on behalf of WNS India and subsequently recovered the same from WNS India at cost without any mark up. The question is whether under these circumstances it can be said that the assessee got this

consideration of `6.41 crore in the nature of royalty? The case of the learned Departmental Representative rests on clause (iva) of

Explanation (2) to section 9(1)(vi) along with Explanation (5). It has been contended that the amount be considered as royalty in the hands of the assessee because it is for allowing the use of equipment. We are unable to comprehend this point of view for the reason that such charges were not recovered by the assessee because of providing any access to lease lines owned or  held by it.

Different consequences follow in the hands of the payer and
payee for making a claim of reimbursement of expenses having
profit element; or treating a part of contract value as reimbursement of expenses even without any mark-up. Whereas in some cases such claim for reimbursement may be tax neutral, while in others it may have bearing on tax liability. From the angle of payee, it will be tax neutral if there is question of computing business profits as per Article 7 because of computation of such income on net basis. But, it
will affect tax liability, if the tax is to be computed as per Article 12 by treating the amount as Royalty or Fees for technical services wherein the tax liability is determined on the gross amount itself. In the hands of non-resident payer, the claim for treatment of head office expenditure as reimbursement of expenses shall have bearing on the computation of deduction of head office expenditure as per
section 44C of the Act. In the like manner, there are several
provisions including Chapter X, which affect the amount of total income or the tax liability by wrong treatment of payment of expenses as reimbursement of expenses. The crux of the matter is that the payment of expenses is to be distinguished from and not intermingled with the reimbursement of expenses in the hands of payer as well as payee. In fact, it is the substance of the transaction which matters. The real character of a transaction cannot be cloaked under some superficial name. Once it is held that there is no profit element in such reimbursement it becomes manifest that the gross income of `6.14 crore recovered by the assessee from WNS India is equal to the same amount paid by it to MCI WorldCom etc., thereby leaving no surplus liable to tax under Article 7 of the DTAA. This issue is decided in assessee’s favour and the consequential ground is allowed.

IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI BENCHES “K”, MUMBAI

BEFORE SHRI R.S. SYAL (A.M.) AND SHRI VIVEK VARMA (J.M.) DHL Danzas Lemuir P. Ltd 12-12-2012 We have heard the rival submissions and perused the material

available on record. There is no discussion in the orders of the

authorities below about the relation of such parties with the assessee

with whom the assessee shared the revenues of freight and such

transactions have been processed under Chapter X. It appears that

these outside entities are otherwise unrelated parties. Because of their

respective agreements with the assessee’s AE in this regard, these

entities and transactions of assessee with such entities have assumed

the character of deemed international transactions and associated

enterprises in terms of section 92B(2). 6. The short controversy before us is to determine the ALP in respect

of transactions between the assessee and its AEs towards

receipt/payment of freight. The assessee shared profit in the ratio of

50:50 both on the payments made by it and the receipts of freight from

its AEs. We have perused the submissions and the finding of the ld.

CIT(A) on the functions performed, assets employed and risk undertaken

by both the AEs in such transactions. The ld. DR could not controvert

such finding that the functions performed, assets employed and risk

undertaken in both the AEs is same. The assessee paid certain sum to

its AEs abroad for doing the work similar to which it did for which it

received freight revenue from its AEs. The crux of the matter is that in

both the situations, the total receipts are taken on one hand, from which

all the expenses incurred in connection with the transportation of cargo

in both the countries are excluded The remaining amount is distributed

between the entity of origin country and the entity of destination country

in equal share. As the assessee has earned/paid revenue from/to its

AEs in the same proportion, in our considered opinion, the transactions

have been recorded at arm’s length price and there was no justification

for making such addition. We do not see any reason to interfere with the

impugned order. (Tribunal in the case of ACIT vs. M/s Agility

Logistics Pvt. Ltd. for assessment years 2004-05 to 2006-07.)

__._,_.___

mumbai bench retro amendment in section 9 royalty do not impact DTAA reibursement RSS dec.12.pdf

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mumbai bench transfer pricing freight profit split method ALP.pdf

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