Income Tax Appellate Tribunal - Panji
India Soft Technologies Pvt. Ltd.,, ... vs Ddit (Int. Tax.)-I,, Pune on 24 January, 2018
आयकर अपीलीय अिधकरण,
अिधकरण, पुणे यायपीठ "ए" पुणे म
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
ी डी.
डी क णाकरा राव , लेखा सद य
एवं
ी िवकास अव थी,
अव थी याियक सद य के सम
BEFORE SHRI D.KARUNAKARA RAO, AM
AND SHRI VIKAS AWASTHY, JM
आयकर अपील सं. / ITA Nos.1709 to 1712/PUN/2013
िनधा रण वष / Assessment Years : 2008-09 to 2011-12
India Soft Technologies Private Ltd.,
Nirvana, 2nd Floor, Commercial 3,
Plot No.18, S.No.213/214/215,
Kalyani Nagar, Pune - 411 006
PAN : AABCI0540H .... अपीलाथ /Appellant
Vs.
DDIT (International Taxation)-I,
Pune .... यथ / Respondent
Assessee by : Shri M.K. Kulkarni
Revenue by : Shri Achal Sharma, Addl. CIT
सुनवाई क तारीख
/ घोषणा क तारीख /
Date of Hearing : 18.01.2018 Date of Pronouncement: 24.01.2018
आदेश / ORDER
PER D. KARUNAKARA RAO, AM :
There are 4 appeals filed by the assessee under consideration involving assessment years 2008-09 to 2011-12.
2. The issues raised in these appeals are identical and the grounds raised in these appeals are argumentative in nature. Therefore, we proceed to cull out the summary of the 4 grounds raised by the assessee for the A.Y. 2008-09.
ITA No.1709/PUN/2013
(A.Y. - 2008-09) Issues raised in the grounds :
(1) Assessee is of the view that the assessee being the distributor made payments to the non-residents suppliers for 2 ITA Nos.1709 to 1712/PUN/2013 India Soft Technologies Pvt. Ltd., purchase of the software products held to be chargeable to tax in the hands of residents, payee (Resident of UK/USA).
(2) Assessee raised the issue of absence of Permanent Establishment (PE) in India for the said supply of software.
(3) Further, assessee also raised the issue relating to correctness of retrospective application of Explanation 4 to section 9 of the I.T. Act. The nature of the payments according to the assessee did not constitute Royalty. Therefore, the provisions of section 195 has no application. Consequently, the order passed by the AO u/s.201 r.w.s.201(1A)of the Act is unsustainable.
Grounds Nos. 2, 3 and 4 are related to the issues already discussed above.
3. Briefly stated relevant facts culled out from the relevant assessment years 2008-09 include that the assessee claims that he is a distributor of software produced and marketed by certain companies from UK/ USA. The modus operandi of the assessee's business according to him includes that suppliers develops the software solutions abroad. Assessee is appointed as distributor for marketing of the said products. Assessee receives orders from the customers. Orders are placed in the name of the supplier company. The supplier ships the software products to the customers directly. The supplier raises the bill in the name of the assessee company. In turn, assessee raised the bill in the name of the customers. Assessee makes the payments to the suppliers abroad.
4. During the year under consideration, the Process System Enterprise ( in short 'PSE'), the Lanner Group Ltd., UK are the suppliers 3 ITA Nos.1709 to 1712/PUN/2013 India Soft Technologies Pvt. Ltd., from UK. GAMS Development Corporation of USA is another supplier. Assessee paid Rs.47,77,786/- to the said suppliers. Major remittances are made to the Lanner Group Ltd., UK for purchase of software for resale. While making the said payments to suppliers, assessee did not the effect the TDS and did not consider the payments as Royalty. In the proceedings u/s.201 and 201(1A) of the I.T. Act, AO raised the issue of assessee's failure to make TDS on the said remittances to the suppliers at USA/UK. On examination of the said agreements with the said suppliers, AO came to the conclusion that assessee has got right to sub- lease the said products. For example, the clauses of the agreement dated 15-06-2006 of the assessee with Process System Enterprise, UK are cited. As per Para No.2.2 of the said agreement, PSE (a supplier) grants the assessee a non-exclusive, non-transferable and non-assignable license to use the PSE software. Similar reading is done from the agreement with Lanner Group Ltd. UK. From these, the AO concluded that the license assessee receives from Lanner Group Ltd. is one with the right to grant the sub-licenses to the end users to use the software. AO found the element of Royalty in the said expressions. AO analysed the provisions of section 5(2) and section 9 of the Act to conclude that the payments made by the assessee to the suppliers constitute a taxable Royalty. Contents of Para Nos. 5.9 and 5.10 provide necessary explanation for holding the payments as Royalty. He also dealt with the newly introduced Explanation 4 retrospectively to section 9 of the Act and held the payments made by the assessee to non-resident suppliers for purchase of software as in the nature of Royalty within the meaning of section 9(1)(vi) of the Act or the relevant Article of the DTAA.
5. In Para No.6 of the AO's order, there is discussion with regard to the Article 12 of Indo-USA DTAA and Article 13 of Indo-UK DTAA before 4 ITA Nos.1709 to 1712/PUN/2013 India Soft Technologies Pvt. Ltd., concluding the payments constitutes Royalty. He also extracted certain decisions in support of his conclusions. He also considered the assessee's reply in this regard. In Para No.8, there is reference to the judgment of Hon'ble Karnataka High Court in the case of CIT Vs. M/s. Samsung Electronics Company Ltd. vide ITA No.2808 of 2005 dated 15-10-2011 and many other decisions. In the Para No.9, the AO extracted the relevant portion from the said judgment and many other judgments from the same High Court. He also cited various decisions from AIR involving the cases of Millennium I.T Software Ltd. AAR No.835 of 2009, dated 28-09-2011 and Citrix Systems Asia Pvt. Ltd. AAR No.922 of 2009 dated 06-02-2012. Eventually, the AO concluded in Para No.10 of his order in favour of treating the assessee in default and invoked the provisions of section 201 and 201(1A) of the Act. For the sake of completeness of this order, relevant Para No.10 is extracted here as under :
"10. Accordingly, Assessee's contention is not acceptable, In view of above facts and case laws cited, the above mentioned payments received by the non-resident suppliers from the assessee are in the nature of Royalty within the meaning of section 9(1)(vi) of the Income-tax Act, 1961 and within the meaning of Article 12/13 of the DTAA between India and USA/UK. Therefore, the provisions of section 195 of the Income-tax Act. 1961 are squarely applicable for payments of licence fee and the assessee was bound by law to deduct the taxes before remitting the money to non- residents. By not deducting or withholding taxes, the assessee has committed a default in terms of sec. 201 (1) and 201(1A) of the Income-tax Act, 1961 and is therefore treated as "assessee in default" as per the provisions of section 201(1). In case of suppliers from UK, the assessee has entered into agreement on or after 1st June 2005, hence tax is to deducted at rate of 10% plus surcharge plus Education Cess as per section 115A(1)(b)(AA) of the Income-tax Act, 1961. In case of supplier from USA, as the assessee has not given evidence that agreement is entered on or after 1st June 2005 to claim the lower rate of 10% as per section 115A(1)(b)(AA) of the Income-tax Act, 1961, the tax to be deducted is calculated @15% as per DTAA between India and USA. Considering the provisions of section 201(1A), the assessee is also liable to pay simple interest @ 1% for every month or part of a month on the amount of such tax on which such tax was deductible to the date on which such tax is deducted."5
ITA Nos.1709 to 1712/PUN/2013 India Soft Technologies Pvt. Ltd.,
6. Assessee was required to pay the tax of Rs.5,81,081/- and interest of Rs.3,66,100/- total payment raised on this benefit for this year works out to Rs.9,47,182/-.
7. Aggrieved with the order of AO, assessee filed an appeal before the CIT(A) stating that the order passed by the AO u/s.201/201(1A) of the Act is bad in law. He also criticizes the finding of the AO in treating the assessee company as the assessee in default. Assessee is also critical of AO's finding that the payments made by the assessee constitute Royalty. As such, there are specific issues raised before the CIT(A) as in the case of the appeal before the Tribunal with reference to (1) existence of Permanent Establishment of the payees and (2) similar additions were made for A.Yrs. 2009-10 to 2011-12. Total payments raised is tabulated as under :
Assessment Year Additions made
2009-10 1,25,463-/
2010-11 1,61,307/-
2011-12 11,87,422/
8. Grounds raised by the assessee in all these 4 appeals are identical. They revolve around the finding of the AO that the payments made by the assessee to purchase the software products constitute Royalty and the retrospective amendment to section 9 qua the insertion of Explanation 4. There is a reference to Article 13 of Indo-UK DTAA and Article 12 of India-USA/Indo-Ireland and Indo-Canada DTAAs. Further, there is discussion in Para Nos. 2.1.27 of the order of CIT(A) with reference to Article 2 of the agreements under the heading "grant of licences" and submitted that the suppliers granted to the assessee the dealership rights to sub-licence the softwares in the territories of the customers and has been given the commercial right to demonstrate the software to the potential customers along with training. The dealer has right to 6 ITA Nos.1709 to 1712/PUN/2013 India Soft Technologies Pvt. Ltd., maintenance and supply support for the software to consumers. Eventually, the CIT(A) agreed with the finding of the AO as per the discussion given in Para Nos. 2.1.28 and 2.1.29 of his order. Relevant paras are extracted here as under :
"2.1.28 It can be seen from the above provisions of the agreements that the Appellant has been granted right to sub-license software by Performance Fluid Dynamics Limited, Lanner Group Limited, Scale-up and by Dyadem International Limited. In all the cases, the Appellant is also providing services of implementation, maintenance support and training. Further, the Appellant has been granted right to modify software with the consent of software developer to meet specific requirements of the customer by Performance Fluid Dynamics Limited and Lanner Group Limited. It is clear that all the above functions cannot be performed without the full knowledge of technical information in the software. These functions also cannot be performed without using copyright of the owner. Therefore, this is not an ordinary case, in which the distributor has purchased and sold software products to the customers but also has performed many other critical functions adding value to the products requiring use of copyright of the owner. Therefore, I hold that the Appellant has used copyright of the owner for performance of value added functions, for which the Appellant has paid 'royalty'. As mentioned earlier, this amount is taxable under the Income Tax Act. Since the Appellant has used copy right, it would be taxable under the relevant DTAA as well.
2.1.29 With the result, I confirm the action of the learned AO to tax this amount as a 'royalty' on which the tax payer ought to have deducted tax. Accordingly, I hold that the demand of tax and interest raised by the learned AO does not require any interference."
Similar is the finding in the appeals pertaining to A.Yrs. 2009-10 to 2011-12.
9. Aggrieved with the above finding of the CIT(A), the assessee raised the current appeals for all the 4 assessment years. Issues as narrated in the preceding paragraphs are common.
10. Before us, Ld. AR for the assessee brought our attention to the list of the suppliers, i.e. PSE, Lanner Group Ltd.,UK and GAMS Development Corporation and submitted that there is no 'PE' for the said concerns in India. Referring to the way the officers applied Articles 12 and 13 of the respective DTAAs with USA and UK respectively, Ld. AR submitted that 7 ITA Nos.1709 to 1712/PUN/2013 India Soft Technologies Pvt. Ltd., the existence of the 'PE' is relevant before any payments of this kind are to be brought under the said Articles 12 and 13, as the case may be, of the respective DTAAs. Bringing our attention to the findings of the Hon'ble Bombay High Court in the case of CIT Vs. Siemens Aktiongesellschaft 15 DTR 0233, Ld. AR for the assessee submitted that the said judgment is relevant for the legal proposition that in the absence of PE, the amounts in respect of which Tribunal has recorded a finding that the income sought to be assessed as Industrial or Commercial profits and not assessable to tax in India as admittedly assessee has no PE in India. The question of applying the deeming provisions would not arise. According to the Ld. AR, without going into these issues, such income would not be taxable in terms of the DTAA which is more beneficial. He also brought our attention to the decision of the Tribunal in the case of M/s. Reliance Industries Ltd. - ITA Nos. 1980, 1981, 1983, 2984, 2523, 2529/Mum/2008 dated 18-05-2016 and submitted that said decisions are not finally concluded according to the Ld. AR. In view of the significance of this aspect relating to the existence of PE of the payees, the applicability of the provisions of Article 12 and 13 of the respective DTAAs is premature.
11. Referring to the correctness of the finding of the AO and the CIT(A) on the nature of payments as Royalty or otherwise, Ld. AR for the assessee submitted that there are various decisions in this regard including the judgment in the case of Hon'ble Karnataka High Court in the case of Samsung Electronics Company Ltd. vide ITA No.2808 of 2005 dated 15-10-2011 and the judgment of Hon'ble Delhi High Court in the case of Pr.CIT Vs. M. Tech India (P) Ltd. 287 CTR 213 (Del.) and M/s.Reliance Industries Ltd. (supra). AO and the CIT(A) did not consider these decisions before holding the said payments constitutes the Royalty. 8
ITA Nos.1709 to 1712/PUN/2013 India Soft Technologies Pvt. Ltd., For the reason of bringing clarity and applicability of the relevant provisions with regard to the existence of the PE as well as applicability of various decisions of various High Courts, Ld. AR for the assessee submitted that all the issues may be remanded to the file of AO for fresh adjudication on the entire gamut of the issues.
12. On perusal of the 'written note' furnished by the Ld. AR for the assessee, we find the allegation of neither the subleasing nor the modification of the software products imported by the assessee have been attempted by the assessee. He merely stated that the payments made for use of copyright articles does not constitute Royalty.
13. Per Contra, Ld. DR for the Revenue relied heavily on the orders of AO and the CIT(A). Bringing our attention to the dealership agreement with the suppliers, Ld. DR submitted that the assessee has got the right to sub-lease the software products received by the assessee. Assessee has been given the commercial rights, distribution rights, right to demonstrations, right to modification of the software etc by the suppliers. However, he never pointed out any case of such sublease or whether assessee has undertaken any modification of the software in order to cater the needs of the specific customers in India. Further, he submitted that the assessee has raised this Ground No.3 linked to Ground No. 1 of grounds of appeal and mentioned that the said grounds are never raised either before the AO or before the CIT(A). In the absence of finding of fact on the existence of PE payees, there is a need for finding of fact on this issue by the lower authorities.
14. We heard both the parties on the issues, i.e. existence of PE, nature of payments as Royalty, rights given by the suppliers to the dealer, applicability of the provisions of section 195 of the Act etc. On 9 ITA Nos.1709 to 1712/PUN/2013 India Soft Technologies Pvt. Ltd., hearing both the sides, we find there are some gaps relating to the facts which are required to be collected by the revenue authorities.
(a) Regarding the right to sub-lease the software products, no finding of fact is gathered by the authorities that assessee has actually subleased the software products to various dealers/sub-dealers. Same is the case with regard to the right to modify the existing software received from the suppliers. Specific to the products received by the assessee for the customers in India, one need to examine if these products were infact subjected to modifications if any, to meet the specific requirements of the customers in India, before the payments are remitted to the suppliers.
AO need to examine subleasing of the dealership rights to others as authorized by the agreement between the suppliers and the assessee. There is need for remanding the issue to the file of AO for fresh consideration.
(b) Regarding the existence of PE for the payees abroad UK/USA, this issue has come up for the first time before the Tribunal. The fact on the existence of PE, according to Ld. AR for the assessee, is a matter both on facts and law. Therefore, this issue is rightly raised from the legal point of view and prayed for admitting the same and remanding to the file of AO for adjudication, if required. Considering the fact that this issue is also partly legal in nature, we are of the opinion that Ground No.3 and other related limbs of grounds of appeal are admitted and remanded to the file of AO for a decision before invoking the Article 12 and 13 of the respective DTAAs. Further, we notice that the above referred issues relating to PE are required to be adjudicated considering the judgmental law in existence as on date. There is need for remanding the issue to the file of AO for fresh consideration.
10
ITA Nos.1709 to 1712/PUN/2013 India Soft Technologies Pvt. Ltd.,
(c) Regarding the nature of payments, whether it constitutes Royalty or otherwise, the same depends on facts of each case which are to be gathered by the AO in the proposed remand proceedings. There are divergent decisions in law on the said Royalty. If the remittances are relatable to mere receiving the software products from the suppliers and passing it on to the customers, playing the role of a dealer, we do not find there is any Royalty involved in these remittances. However, as argued by the Ld. DR for the Revenue, relying on the orders of the AO and the CIT(A), if there is exploitation of the software products obtained from the suppliers for commercial benefits of the assessee or its customers through the mechanism of subleasing or through mechanism of incorporating the modification in the said software to meet the demands of the customers, the conclusions may vary depending on the facts. Therefore, we are of the opinion that the AO should invoke the requisite verification and modification and application of law to the above referred issues and decide the issue afresh as per the law. AO shall grant reasonable opportunity of being heard to the assessee. Accordingly, the grounds raised by the assessee for A.Y. 2008-09 are allowed for statistical purposes.
15. In the result, appeal of the assessee for A.Y. 2008-09 is allowed for statistical purposes.
ITA Nos. 1710 to 1712/PUN/2013 (By Assessee - A.Yrs. 2009-10 to 2011-12)
16. From the grounds of these appeals of the assessee, the above referred issues are found to be common. Accordingly, the arguments and the counter arguments of the assessee and the Ld. DR for the Revenue respectively are also identical. Considering our finding on these issues in Para No.13 of this order, we are of the opinion that all the 11 ITA Nos.1709 to 1712/PUN/2013 India Soft Technologies Pvt. Ltd., grounds raised by the assessee in the above assessment years should also be remitted to be file of AO for fresh adjudication. Accordingly, all the grounds raised by the assessee in the abovementioned three appeals are also allowed for statistical purposes.
17. In the result, appeals of the assessee for A.Yrs. 2009-10 to 2011- 12 are allowed for statistical purposes.
18. To sum up, all the appeals of the assessee are allowed for statistical purposes.
Order pronounced in the open court on this 24th day of January, 2018.
Sd/- Sd/-
(VIKAS AWASTHY) (D. KARUNAKARA RAO)
याियक सद य /JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
पुणे Pune; दनांक Dated : 24th January, 2018.
सतीश
आदेश क ितिलिप अ ेिषत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. CIT(A)-IT/TP, Pune
4. CIT- IT/TP, Pune
5. िवभागीय %ितिनिध, आयकर अपीलीय अिधकरण, "A Bench"
Pune;
6. गाड फाईल / Guard file.
आदेशानुसार
/ BY ORDER,स
स यािपत ित //True Copy//
//True Copy// Senior Private Secretary
आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune