Tax alert which summarizes a recent ruling of the Mumbai Income Tax Appellate Tribunal (ITAT) in the case of Antwerp Diamond Bank NV (Taxpayer) on the issue of whether reimbursements made, by its Branch Office (BO) in India to its Head Office (HO) in Belgium, towards data processing facilitated by a software amounts to “royalty” under the India–Belgium Double Taxation Avoidance Agreement (DTAA).
The ITAT held that reimbursement by the BO towards cost of data processing, by accessing the HO’s software is not “royalty” as the BO does not have an independent right to use or control over such software. Accordingly, there is no withholding tax obligation for the BO on such payments. Further, the ITAT also held that the data processing cost reimbursed is specific to the BO and, hence, cannot be considered as a general HO expense for which a ceiling under the Indian Tax Laws (ITL) applies. Accordingly, such data processing cost are fully deductible as business expenditure for the BO.
The ITAT held that when the HO makes the payment for license of a software, any allocation of cost and reimbursement of the same by the Indian BO does not qualify as an independent payment of “royalty”. According to the ITAT, the Indian BO should have exclusive and independent use or right to use the software and for such usage payment should be made to qualify as royalty. Further, the ITAT has reiterated the principle that the expanded definition of “royalty” under the ITL cannot be read into a DTAA.
The ITAT has, helpfully, clarified that specific expense incurred by the HO for the BO do not qualify as a general HO expense and accordingly, the HO expense ceiling under the ITL does not apply to such expenses.
The ITAT held that reimbursement by the BO towards cost of data processing, by accessing the HO’s software is not “royalty” as the BO does not have an independent right to use or control over such software. Accordingly, there is no withholding tax obligation for the BO on such payments. Further, the ITAT also held that the data processing cost reimbursed is specific to the BO and, hence, cannot be considered as a general HO expense for which a ceiling under the Indian Tax Laws (ITL) applies. Accordingly, such data processing cost are fully deductible as business expenditure for the BO.
The ITAT held that when the HO makes the payment for license of a software, any allocation of cost and reimbursement of the same by the Indian BO does not qualify as an independent payment of “royalty”. According to the ITAT, the Indian BO should have exclusive and independent use or right to use the software and for such usage payment should be made to qualify as royalty. Further, the ITAT has reiterated the principle that the expanded definition of “royalty” under the ITL cannot be read into a DTAA.
The ITAT has, helpfully, clarified that specific expense incurred by the HO for the BO do not qualify as a general HO expense and accordingly, the HO expense ceiling under the ITL does not apply to such expenses.
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