Income Tax Appellate Tribunal - Delhi
Dcit (International Taxation), New ... vs Micro Focus Ltd., Uk on 17 May, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'E' NEW DELHI
BEFORE SHRI N. K. SAINI, ACCOUNTANT MEMBER
AND
MS SUCHITRA KAMBLE, JUDICIAL MEMBER
I.T.A .No. 3312/DEL/2016 (A.Y 2008-09)
DCIT (International Taxation) Vs Micro Focus Ltd.
Circle-2(2) (1), Room No. 411, The Lawn, 22-30,
4th Floor, E-2, Block, Dr. S. P. Old Bath Road, Berkshire
Mukherjee Civic Centre, Minto Road RG141QN, UK
New Delhi AAGCM3842B
(APPELLANT) (RESPONDENT)
I.T.A .No. 2376/DEL/2016 (A.Y 2009-10)
Micro Focus Ltd. Vs DCIT (International Taxation)
C/o. Deloitte Haskins & Sells LLP Circle-2(2) (2)
7th Floor, Bldg. 10B, DLF Cyber City, New Delhi
Phase-II
Gurgaon (RESPONDENT)
AAGCS3842B
(APPELLANT)
I.T.A .No. 2377/DEL/2016 (A.Y 2010-11)
Micro Focus Ltd. Vs DCIT (International Taxation)
C/o. Deloitte Haskins & Sells LLP Circle-2(2) (2)
7th Floor, Bldg. 10B, DLF Cyber City, New Delhi
Phase-II, Gurgaon
AAGCS3842B (RESPONDENT)
(APPELLANT)
I.T.A .No. 3313/DEL/2016 (A.Y 2011-12)
DCIT (International Taxation) Vs Micro Focus Ltd.
Circle-2(2) (1), Room No. 411, The Lawn, 22-30,
4th Floor, E-2, Block, Dr. S. P. Old Bath Road, Berkshire
Mukherjee Civic Centre, Minto Road RG141QN, UK
New Delhi AAGCM3842B
(APPELLANT) (RESPONDENT)
I.T.A .No. 177/DEL/2017 (A.Y 2013-14)
Micro Focus Ltd. Vs DCIT (International Taxation)
The Lawn, 22-30, Circle-2(2) (1), Room No. 411,
Old Bath Road, Berkshire RG141QN Block-E2, Civic Centre, J. L.
UK N. Marg, New Delhi
AAGCM3842B
(APPELLANT) (RESPONDENT)
Appellant by Sh. S. P. Singh, AR & Sh.
Sharad Goyal, CA
Respondent by Sh. Satpal Gulati, CIT DR
Date of Hearing 23.03.2018
Date of Pronouncement 17.05.2018
ORDER
PER SUCHITRA KAMBLE, JM
These appeals are filed by the assessee & Revenue against the Order dated 30/03/2016 for A.Y. 2008-09 passed by CIT(A), order dated 19/01/2016 passed by the DCIT Circle 2(2)(1) u/s 144C(1) r.w.s. 147/143(13) of the Income Tax Act, 1961 for A.Y. 2009-10, order dated 19/01/2016 passed by the DCIT Circle 2(2)(1) u/s 144C(1) r.w.s. 147/143(13) of the Income Tax Act, 1961 for A.Y. 2010-11, order dated 30/03/2016 for A.Y. 2011-12 passed by CIT(A) and order dated 10.08.2016 passed by ACIT Circle 2(2)(1) u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 for A.Y. 2013-14.
2. The grounds of appeal are as under:-
ITA No. 3312/Del/2016 (Assessment Year 2008-09)1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in holding that the consideration received by the assessee from various entities on account of sale of software is not royalty within the meaning of Article 13 of the India-UK DTAA ('DTAA').
2. Whether the Ld. CIT(A) has erred in not considering the effect of Article 3(2) of the DTAA in terms of which any term not defined in the DTAA is deemed to have the same meaning as it has under the domestic law and therefore, the clarification provided in explanation 4 to section 9(l)(vi) of the Act can be used for interpreting the terms used in Article 13 of the DTAA.
3. Whether on stated facts and in law the Ld CIT(A) has erred in not giving the effect of the subsequent amendment to Section 9(l)(vi) of the Act and also whether the amount received for use of software would be royalty in terms thereof.
4. the appellant craves to add, amend, modify or alter any grounds of appeal at the time or before the hearing of the appeal.ITA No. 2376/Del/2016 (Assessment Year 2009-10)
Appeal against the order under section 143(3) read with Section 144C(13) of the Income-tax Act, 1961 ("the Act") dated 19 January 2016 for the Assessment Year 2010-2011 passed by the Deputy Commissioner of Income Tax, Circle 2(2)(1), Intl. Taxation, New Delhi
1. That on the facts and in the circumstances of the case and in law, the assessment order passed under section 144C(1) read with section 147/143(13) of the Income-tax Act, 1961 ('the Act') by the Assessing Officer (' the AO') is erroneous and bad in law as well as in facts.
2. That on the facts and in the circumstances of the case and in law, the AO/Dispute Resolution Panel ("DRP") has erred in law by proposing to hold that the receipt from the sale of software products in India amounting to INR 126,466,420 is taxable as 'Royalty' as per the provisions of section 9(1 )(vi) of the Act read with Article 13 of the India-UK Double Taxation Avoidance Agreement ('DTAA').
3. That on the facts and circumstances of the case and in law, the AO/DRP has erred in law in ignoring the submissions placed on record by the assessee during the course of the assessment proceedings, and in not appreciating that the amount received from the sale of software is business income which in the absence of Permanent Establishment, business income cannot be made taxable in India.
4. That on the facts and circumstances of the case and in law, the AO / DRP erred on facts and in law in treating the sale of software as provision of copy righted of copy righted article for the purpose of Section 9(1)(vi) of the Act.
5. That on the facts and in the circumstances of the case, the AO/DRP has erred in law while carrying out the assessment of the-assessee for assessment year ('AY') 2009-10 under section 147 of the Act, reason being:
5.1There was no speaking order passed by the AO rejecting the objections filed by the assessee for opening of the assessment proceedings under section 147 of the Act.
5.2.Theassessment was completed within a very short period of time without providing the assessee an adequate opportunity of being heard.
6. That the A.O has erred in charging interest u/s 234B of the Act to the Appellant.ITA No. 2377/Del/2016 (Assessment Year 2010-11)
Appeal against the order under section 143(3) read with Section 144C(13) of the Income-tax Act, 1961 ("the Act") dated 19 January 2016 for the Assessment Year 2010-2011 passed by the Deputy Commissioner of Income Tax, Circle 2(2)(1), Intl. Taxation, New Delhi
1. That on the facts and in the circumstances of the case and in law, the assessment order passed under section 144C(1) read with section 147/143(13) of the Income-tax Act, 1961 ('the Act') by the Assessing Officer (' the AO') is erroneous and bad in law as well as in facts.
2. That on the facts and in the circumstances of the case and in law, the AO/Dispute Resolution Panel ("DRP") has erred in law by proposing to hold that the receipt from the sale of software products in India amounting to INR 126,466,420 is taxable as 'Royalty' as per the provisions of section 9(1 )(vi) of the Act read with Article 13 of the India-UK Double Taxation Avoidance Agreement ('DTAA').
3. That on the facts and circumstances of the case and in law, the AO/DRP has erred in law in ignoring the submissions placed on record by the assessee during the course of the assessment proceedings, and in not appreciating that the amount received from the sale of software is business income which in the absence of Permanent Establishment, business income cannot be made taxable in India.
4. That on the facts and circumstances of the case and in law, the AO / DRP erred on facts and in law in treating the sale of software as provision of copy righted of copy righted article for the purpose of Section 9(1)(vi) of the Act.
5. That on the facts and in the circumstances of the case, the AO/DRP has erred in law while carrying out the assessment of the-assessee for assessment year ('AY') 2009-10 under section 147 of the Act, reason being:
5.1. There was no speaking order passed by the AO rejecting the objections filed by the assessee for opening of the assessment proceedings under section 147 of the Act.
5.2 The assessment was completed within a very short period of time without providing the assessee an adequate opportunity of being heard.
6. That the A.O has erred in charging interest u/s 234B of the Act to the Appellant.ITA No. 3313/Del/2016 (2011-12)
Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in holding that the consideration received by the assessee from various entities on account of sale of software is not royalty within the meaning of Article 13 of the India-UK DTAA ('DTAA').
1. Whether the Ld. CIT(A) has erred in not considering the effect of Article 3(2) of the DTAA in terms of which any term not defined in the DTAA is deemed to have the same meaning as it has under the domestic law and therefore, the clarification provided in explanation 4 to section 9(l)(vi) of the Act can be used for interpreting the terms used in Article 13 of the DTAA.
2. Whether on stated facts and in law the Ld C1T(A) has erred in not giving the effect of the subsequent amendment to Section 9(l)(vi) of the Act and also whether the amount received for use of software would be royalty in terms thereof.
3. The appellant craves to add, amend, modify or alter any grounds of appeal at the time or before the hearing of the appeal.
ITA No. 177/Del/2017 (Assessment Year 2013-14)Appeal against the order under section 143(3) read with Section 144C(13) of the Income-tax Act, 1961 ("the Act") dated 10 August 2016 for the Assessment Year 2013-2014 passed by the Assistant Commissioner of Income Tax, Circle 2(2)(1), Intl. Taxation, New Delhi
1. That on the facts and in the circumstances of the case and in law, the AO/Dispute Resolution Panel ("DRP") has erred in law by proposing to hold that the receipt from the sale of software products in India amounting to INR 190,710,730 is taxable as 'Royalty' as per the provisions of section 9(l)(vi) of the Act read with Article 13 of the India-UK Double Taxation Avoidance Agreement ('DTAA').
2. That on the facts and circumstances of the case and in law, the AO/DRP has erred in law in ignoring the submissions placed on record by the assessee during the course of the assessment proceedings, and in not appreciating that the amount received from the sale of software is business income which in the absence of Permanent Establishment, cannot be made taxable in India.
3. That on the facts and circumstances of the case and in law, the Ld. AO has erred in concluding that the assessee had accepted that its receipts are not taxable in India on the basis of the fact that the assessee had not applied for no or nil withholding tax certificates under section 195/197 of the Act.
4. That the AO has erred in charging interest under section 234B of the Act to the assessee.
3. The assessee is a company incorporated in UK. It is engaged in the business of development and distribution of software products. It sells software products in India, either through its distributors or directly to the customers. The assessee enters into contracts with its customers on principal to principal basis and sale of software licenses is concluded outside India (offshore supplies). The assessee filed its return of income for the captioned assessment year on April 29, 2013 vide acknowledgement no. 618261361290413 declaring taxable income as NIL and claiming a refund of Rs. 7,07,986, in response to the notice issued, by the Id. AO u./ s 148 of the Act. The return of the assessee was selected for scrutiny and assessment was completed u/s 144C(3) r.w.s. 147 vide assessment order dated May 23, 2014. The income of the appellant was assessed, at Rs. 1,46,56,078/ - as under:-
S.No. Particulars Amount (INR)
1 Returned Income NIL
2 Additions on account of royalty 1,46,56,078
Total Assessed Income 1,46,56,078
Aggrieved by his order of the Assessing Officer , the assessee filed appeal before the CIT(A). The CIT(A) allowed the appeal of the assessee for Assessment Year 2008-09. The Revenue is in appeal before us.
4. The Ld. DR submitted that the Assessing Officer has rightly made an addition of Rs.1,46,56,078/- in the nature of royalty. The CIT(A) ignored the fact that the consideration received by the assessee from various entities on account of sale on software is not royalty within the meaning of Article 13 of the Indian UK DTAA. The Ld. DR further submitted that the CIT(A) has not considered the effect of Article 3(2) of the DTAA in terms of which any term not defined in the DTAA. The Ld. DR submitted that it is deem to have the same meaning as it has under the domestic law, and, therefore, the clarification provided in Explanation 4 to Section 9 (1)(vi) of the Act can be use for interpreting the terms used in Article 13 of the DTAA. The Ld. DR further submitted that the CIT(A) has not given the effect of the subsequent Amendment to Section 9(1) (vi) of the Act and also whether the amount received for use of Software would be royalty in terms thereof.
5. The Ld. AR submitted that the consideration received by the Company is squarely covered under the definition of royalty both under the Act and treaty as well. The same is under the Clause of distributors Agreement which is referred by the Assessing Officer in the assessment order. The Ld. AR relied upon the Hon'ble Delhi High Court decision in case of Infra Soft Ltd. (2013) 39 Taxman.com 88.
6. We have heard both the parties and perused the material available on record. The Distributer Agreement gives non exclusive ratio to only distributor to market and distribute the software products to third parties throughout the territory distributor will Act as independent Contractor only and will neither Act on behalf of Micro Focus nor purport to represent Micro Focus in any way. Thus, the Ld. AR submitted that the consideration received by the micro focus from the customers in India towards off shore supply of software could not be charitable to tax in India under the Act read with India UK Tax. The assessee enters into contracts with its customers on principal to principal basis and that the sale of software licenses is made outside of India. No portion of sale is carried out in India and the payment is made directly by the customers to the bank account in United Kingdom. It is pertinent to note that the Assessing Officer has referred this distributor agreement but has not taken the cognizance of the Clause of these agreements. The submissions made by the Ld. AR clearly set out what are the effects of this Distribution Agreement. In view of Section 90(2) of the Income Tax Act, the assessee opts for Double Taxation Avoidance Agreement between India and UK to override the provisions of the Act as there is no corresponding amendment to the definition of the term royalty in Article 13(3) of the aforesaid DTAA as carried out in the definition of royalty u/s 9 (1)(6) of the Act. The amendment will not be applicable as held in Hon'ble Delhi High Court decision in case of Infra Soft Ltd. (supra). The Income represents business income of the respondent outside of India and should be covered under the definition of royalty. In absence of any permanent established in India, the same would not be chargeable to Tax in India in Article 7 of India UK Tax Treaty. Further, the same cannot be treated as royalty income under the Act or India-UK Tax Treaty.
7. The assessee is only selling copy righted article and there is no payment for use of copy right or acquiring the right to use the copy right and hence the same is not covered within the definition of royalty in DTAA. It is the separate position that the payment made for the use of copy righted article should be treated as business income and not the royalty income. The reliance on the Hon'ble Delhi High Court decision in case of Infra Soft Ltd. and M. Tech. India Pvt. Ltd is relevant in the assessee's case as Infra Soft Ltd. The Hon'ble High Court held in the order that payment to be qualified as a royalty payment it is necessary to establish that there is a transfer of all or any rights including grant of license in respect of copy right of a literally artistic or scientific work. In order to treat the consideration paid by the licensee is royalty, it is to be established that the licensee by making such payments obtains all or any of the copy righted rights of such literally work. The parting of intellectual property rights inherent in and attach to the software product in favoure of the licensee customer is what is contemplated by the treaty for payment to be classified as royalty payment. The enjoyment of some or all the rights which the copy right owner has necessary to invoke the royalty definition view from this angle on non exclusive and non transferable license in attempting the use of a copy righted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingredient article 12 of DTAA. The license granted to the licensee permitting him to do the computer program and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copy righted product for his internal business purpose. The said process is necessary to make the program functional and to have excess to it and is qualitatively different from the right contemplated by the said paragraph because it is only integral to the use of copy righted product apart from such incidental facilities. The licensee has no right to deal with the product just as the owner would be in a position to do. The licensee has been prohibited from copying, decompiling, de-assembling or reverse engineering the software without the written consent of Infra Soft. The license agreement between Infra Soft and its customers stipulates that all copyrights and intellectual property rights in the software and copies made by the licensee were own by Infrasoft and only Infrasoft has the power to grant license rights for use of the software. The license granted by the Infrasoft is limited to those necessary to enable the licensee to operate the program. The rights transferred are specific to the nature of computer programs. Copying the program onto the computer's hard drive or random access memory or making archival copy is an essential step in utilizing program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7 of India-UK DTAA.
8. Thus, the issue relating to the consideration received by the assessee from various entities on account of sale of software is not royalty within the meaning of Article 13 of the India UK DTAA, the effect of Article 3(2) of DTAA clearly set out the definition of royalty as per the distributor agreement and the end user license agreement which was produced before the Assessing Officer as well as before the CIT(A). The DRP has not taken into account the correct and true meaning of the royalty and the services do not come under the purview of royalty. The Hon'ble High Court in case of Principal CIT Vs. M. Tech India Pvt. Ltd. vide order dated 19/1/2016 has held that payment made by reseller for the purchase of software for sale in Indian market could not be considered as royalty. IT is observed and held that amendments cannot be read retrospectively in consonance with the treaty. The Ld. DR's contention was that as per the judgment in the case of Shine Satellite, the amendment has to be given retrospective effect. But when we read the judgment of the Hon'ble High Court in case of New Sky Satellite, the Hon'ble Delhi High Court held in para 60 as follows:
"60. Consequently, since we have held that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word "royalty" in Asia Satellite, when the definitions were in fact pari material (in the absence of any contouring explanations), will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement, unless the said DTAAs are amended jointly by both parties to incorporate income from data transmission services as partaking of the nature of royalty, or amend the definition in a manner so that such income automatically becomes royalty. It is reiterated that the Court has not returned a finding on whether the amendment is in fact retrospective and applicable to cases preceding the Finance Act of 2012 where there exists no Double Tax Avoidance Agreement.
61. For the above reasons, it is held that the interpretation advanced by the Revenue cannot be accepted. The question of law framed is accordingly answered against the Revenue. The appeals fail and are dismissed, without any order as to costs."
Therefore, in fact, the reliance of New Sky Satellite by the Ld. DR is favouring the assessee's case and the issue involved before us is squarely covered by the judgment of Infra Soft Pvt. Ltd. as well as New Sky Satellite (Shine Satellite).
9. In result, appeal being ITA No. 3312/DEL/2016 for A.Y. 2008-09 filed by the Revenue is dismissed.
10. As regards to ITA No. 2376/DEL/2016 for A.Y. 2009-10 and ITA No. 2377/DEL/2016 for A.Y. 2010-11 filed by the Assessee, the Ld. AR submitted that the facts are same to that of A.Y. 2008-09. In view of the above findings, the appeals of the assessee are allowed. As regards to ITA No. 3313/DEL/2016 for A.Y. 2011-12 filed by the Revenue, the Ld. AR again submitted that the facts are same to that of A.Y. 2008-09. In view of the above findings, the appeal of the Revenue is dismissed.
11. There is a delay of 72 days in filing appeal for 2013-14 by the assessee being ITA No. 177/DEL/2017. The assessee has filed separate affidavit stating therein that the assessee could not file the appeal within time for the reasons stated in the affidavit filed by the assessee. It appears that the reasons for filing appeal belatedly are satisfactory. Therefore, the delay is condoned. As relates to other facts of the case for Assessment Year 2013-14, the same are identical with the factual aspects of Assessment Year 2008-09. Therefore, in view of the above findings for A.Y. 2008-09, the appeal of the assessee is allowed.
12. In result, Appeals filed by the revenue are dismissed and appeals filed by the assessee are allowed.
Order pronounced in the Open Court on 17th May, 2018.
(N. K. SAINI) (SUCHITRA KAMBLE)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 17/05/2018
R. Naheed *
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2. Respondent
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5. DR: ITAT
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ITAT NEW DELHI
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