Consideration Received By Colgate Palmolive Malaysia From It’s Indian Entity For Providing Access To SAP System Is Not Royalty, Not Taxable : Bombay High Court

The Bombay High Court has held that consideration received by assessee Colgate Palmolive's Malaysian arm from its Indian entity for providing access to System Analysis Program Development (SAP) system is not taxable as royalty.

The bench of Justice K.R.Shriram and Justice Firdosh P. Pooniwalla has observed that the payment of USD 11,80,500 made by Colgate Palmolive (India) Limited (CPI) to the Assessee could not have been brought to tax under the Act as equipment royalty.

The appellant/assessee, Colgate Palmolive Marketing SDN BHD, is an entity incorporated in Malaysia. The assessee is in the business of marketing, distribution and sale of household products, fabrics and personal care. Colgate Palmolive (India) Limited (CPI) entered into an Agreement dated 14th May, 1998 with the Assessee for use of the Assessee’s SAP system.

As per the Agreement, the Assessee was to charge CPI for the use of the SAP system. 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. For the Financial Year 1998- 99, as per the Agreement, CPI paid to the Assessee a sum of USD 11,80,500 for the use of the SAP system and a sum of USD 3,85,000 towards rendering services.

During the course of assessment proceedings, the AO, on verifying the Return of Income and financial statements, found that the Assessee had received an amount of USD 3,85,000 on account of rendering services to CPI and a sum of USD 11,80,500 on account of use of the SAP system.

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), and taxed the same. The AO observed that the payments received on account of rendering services were in the nature of ‘fees for technical services’.

By an Order passed under Section 143(3), the AO completed the assessment by taxing the payments. The Assessee filed an Appeal before the Commissioner of Income Tax (Appeals). The CIT(A), dismissed the Assessee’s Appeal by an order.

The ITAT allowed the Appeal of the Assessee and held that the payment of USD 11,80,500/- made by CPI to the Assessee was not royalty under the provisions of the Act and hence was not liable to be taxed on the following grounds:

1. The provisions of the Income Tax Act, 1961, as far as they are applicable to Assessment Year 1999-2000, did not provide for equipment royalty. The payment of USD 11,80,500 made by CPI to the Assessee could not have been brought to tax as equipment royalty.
2. Explanation 6 to Section 9(1)(vi) clarifies that the expression “process” includes and shall be deemed to have always included transmission by satellite, cable, optic fibre or by any other similar technology, whether or not the process is secret. Explanation 6 includes within the definition of process live transmission of programmes such as channel feed and not access of the SAP system of the Assessee as done by CPI, which is a standard facility provided by the Assessee to CPI, and is used for input of data and generation of reports. Explanation 6 also does not take the case of the department any further.
3. CPI had been granted limited access to the SAP system by establishing a communication line at its own cost for use of data available in the SAP system. Hence, payment made by CPI cannot be regarded as payment for use of the system and therefore cannot amount to royalty.
4. Even if Explanation 4 to Section 9(1)(vi) is taken into consideration, it provides that the transfer of all or any rights in respect of any right, property or information includes, and has always included, transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. For Explanation 4 to apply again there has to be transfer of right to use a computer software. The Assessee has not transferred to CPI the right to use any computer software. It has only allowed CPI to access the SAP system.

The bench while upholding the ITAT’s ruling held that since the consideration received by the Assessee from CPI towards the use of SAP system is not royalty in terms of DTAA, it would be a business profit under Article 7 of DTAA.

Case Title: Commissioner of Income Tax Versus M/s. Colgate Palmolive Marketing SDN BHD

Case No.: Income Tax Appeal No. 171 Of 2018

Date: 21/07/2023

Counsel For Petitioner: Suresh Kumar

Counsel For Respondent: Percy Pardiwalla

Click Here To Read The Judgement