Income Tax Appellate Tribunal - Hyderabad
Energy Solutions International ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD "B " BENCH, HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI
SAKTIJIT DEY, JUDICIAL MEMBER
ITA No.362/Hyd/2011 & ITA No. 1736/Hyd/2012
Assessment Year 2007-08 & 2008-09.
Energy Solutions International -v- DCIT, Cir-2(2),
India Pvt. Ltd., Hyderabad. Hyderabad.
PAN:AABCP 2325 F
(Appellant) (Respondent)
Appellant by Shri S. Raghunathan
Respondent by Shri Solgy Jose T. Kottaram
Date of Hearing 07-11-2013
Date of pronouncement 06 -o1-2014
ORDER
PER SAKTIJIT DEY, J.M:
These two appeals are filed by the assessee against separate orders of CIT (A)-III, Hyderabad pertaining to the assessment years 2007-08 and 2008-09. Since assessee is common, and identical issues are involved in these two appeals, these are heard, clubbed together and disposed of by this consolidated order for the sake of convenience.
2ITA nos.362 and 1736 Energy Solutions International India Pvt. Ltd., Hyderabad.
2. At the outset, the learned AR submitted that he does not want to press grounds raised relating to violation of priciples of natural justice in both the appeals. Hence ground No.2 in ITA No.362/Hyd/2011 and ground No.3 in ITA No. 1736/Hyd/2012 are dismissed as not pressed.
3. The only common issue in the present appeals of the assessee is with regard to the disallowance made u/s 40(a) (i) of the Act on alleged failure on the part of the assessee to deduct tax at source on the payment of royalty.
4. Since facts in both the appeals are identical, we will deal with the facts as taken from ITA No.362/Hyd/2011.Briefly stated facts are, the assessee is a private limited company engaged in the business of providing consulting services and software solutions and support services in relation to pipeline networks. In the course of providing installation, augmentation, consultancy and support services to the ultimate clients for their pipeline projects, the assessee procures certain high end technology software licenses from its associate enterprise, Energy Solutions International Inc, U.S.A and sells it to the ultimate customers. For the impugned assessment year, the assessee filed its return of income on 31-10- 2007 declaring a total income of Rs.34,73,050/-. During the assessment proceedings, the Assessing Officer while examining the accounts of the assessee noted that the assessee had debited an amount of Rs.1,58,03,062/- towards software. On further examination, the Assessing Officer noted that the said expenditure includes the payment made towards purchase of certain software from Energy Solutions International, US and Neoware UK Limited for 3 ITA nos.362 and 1736 Energy Solutions International India Pvt. Ltd., Hyderabad.
an amount of Rs.1,33,46,155/-. The Assessing Officer on verifying details of bills/purchase orders was of the view that the payment in respect of the aforesaid software/licenses are in the nature of 'royalty' within the meaning of section 9(1)(iv) of the Act and hence was subject to the provisions of section 195 of the Act. Since the assessee has not deducted any tax at source on these payments, the Assessing Officer issued a show cause notice proposing to disallow the expenditure claimed u/s 40(a)(i) of the Act. Though the assessee objected to the proposed disallowance, the Assessing Officer primarily relying upon the finding of the CIT (A) in the appeal order passed for the assessment years 2004-05 and 2005-06 on identical issue, held that the amount paid is royalty, hence subject to TDS provisions u/s 195(1) of the Act. Since the assessee has not deducted any tax at source on such payments, the Assessing Officer disallowed the entire expenditure of Rs.1,33,46,155/- and added the same to the income of the assessee for the impugned assessment year. Being aggrieved of the said order of assessment, the assessee preferred an appeal before the CIT (A). The CIT (A) also sustained the disallowance.
5. The learned AR submitted before us that the assessee had purchased software from the parent company and sold it to the end user on back to back basis and as such the assessee is only a distributor of the software. It was further submitted that as per the terms of agreement, the assessee cannot make any development modification to the software. Further explaining, the learned AR submitted that the assessee does not provide any development services to the software products procured by it for resale. The customer based in India places a purchase order with the assessee.
4ITA nos.362 and 1736 Energy Solutions International India Pvt. Ltd., Hyderabad.
The assessee, in turn, on the basis of the purchase order of the customer, places a purchase order with its overseas associated enterprises for procuring the required software. The payment from customers towards software is received only once and there are no recurring payments. The learned AR submitted that the assessee is neither authorised nor is capable of making copies of the software as the software is protected with hardware lock or software lock permitting use by the end customer in India. Control over the hardware and software locks (source code) are the exclusive domain of AE. It was submitted, as a part of implementation process the assessee only carries out the configuration and parameter setting to suit the specific output needs of the clients. He further submitted, the overseas AE contract directly with the Indian customer for entering into the end user license agreement. It was submitted, the assessee does not have access to the source code of the software and the question of replicating/re-producing the software does not arise. It was submitted that in the aforesaid circumstances, the payment made to the Associated Enterprises (AE) cannot be considered to be royalty. In this context, the learned AR referred to clauses 14.4 of OECD commentary to stress upon the fact, when there is distribution of software on back to back basis, there is no requirement to deduct tax at source. In this context, the learned AR relied upon a decision in case of CIT vs. Dynamic Vertical Software India Private Limited (332 ITR 222). It was further contended by the learned AR that neither the Assessing Officer nor the CIT (A) have considered the facts and materials placed before them in proper perspective and hence have arrived at an erroneous conclusion. The learned AR further submitted that, the order of the 5 ITA nos.362 and 1736 Energy Solutions International India Pvt. Ltd., Hyderabad.
CIT (A) for the assessment years 2004-05 and 2005-06 on which the Assessing Officer and CIT (A) relied upon while deciding the issue in the meanwhile has been set aside by the Income-tax Appellate Tribunal, Hyderabad Bench in ITA Nos. 1624 and 1625/Hyd/08 dated 10-2-2010 and the issue, has been remitted back to the Assessing Officer for considering the same afresh. The learned AR therefore contended that for the impugned years also the matter may be remitted back to the Assessing Officer to decide afresh after considering the contentions of the assessee as well as the ratio laid down in the decision reported in CIT vs. Dynamic Vertical Software India Private Limited (supra).
6. The learned Departmental Representative also expressed the view that the matter may be remitted back to the file of the Assessing Officer for considering the same afresh.
7. We have heard the contentions of the parties and perused the materials on record as well as the orders of the lower authorities. The sum and substance of the assessee's contention before us is, it is only a distributor of the software procured from its AEs to the end customer. In other words, the assessee has sold the software as it is as back to back sale. Apart from the carrying out initial configuration and parameter setting to suit the specific needs of the clients the assessee has done nothing more. It is further contention of the assessee that the provision contained u/s 9(1)(iv) read with Article 12(3) of the India-US DTAA makes it clear that only a payment for the right to use any copy right can be treated as payment for royalty.
6ITA nos.362 and 1736 Energy Solutions International India Pvt. Ltd., Hyderabad.
8. It is a fact that the Hon'ble Delhi High Court in case of CIT vs. Dynamic Vertical Software India P. Ltd (supra) has held that in case of payment towards purchase and sale of software by an assessee who acted merely as a dealer cannot be termed as royalty so as to require deduction of tax at source u/s 40(a)(i) of the Act. However, the assessee is required to establish the fact on record by producing supporting evidence that it was merely a distributor of software to the Indian customer by procuring from the overseas associated enterprise. The assessee is required to prove that the payment made was not for 'royalty' as defined in explanation 2 to section 9(1)(vi) read with India-US DTAA. It appears from the assessment order as well as the order of the CIT (A) that they have come to the conclusion with regard to the payment being made by the assessee as 'royalty' primarily relying upon the order of the CIT (A) passed for assessment years 2004-05 and 2005-06. However, the said order of the CIT (A) was carried in appeal to the Tribunal by the assessee. The Tribunal vide order dated 10-2-2010 in ITA Nos.1624 and 1625/Hyd/2008 remitted the matter back to the file of the Assessing Officer with the following observation:-
" We have considered the rival submissions and perused the material available on record. After considering hate facts of the case, we find that both the representatives of rival parties agreed to send back the matters to the file of the Assessing Officer for reconsideration. In view of the above, we agree with the representatives of the parties and send back all the issues including additional grounds to the file of the Assessing Officer for consideration afresh in accordance 7 ITA nos.362 and 1736 Energy Solutions International India Pvt. Ltd., Hyderabad.
with law and decide the same after hearing all the contentions of the assessee."
9. Therefore, considering the submission of the parties in the light of the ratio laid down in case of CIT vs. Dynamic Vertical Software India P. Ltd (supra) and keeping in view the direction given by the co-ordinate bench in assessee's own case for the assessment years 2004-05 and 2005-06, we also remit the issue back to the file of the Assessing Officer who shall consider it afresh after examining all the facts and materials on record. The Assessing Officer shall also take into consideration any decision which may be relied upon by the assessee in support of its claim. Since we have remitted the issue back to the file of the Assessing Officer for considering the same afresh, it will be open to the assessee to raise all other contentions with regard to its claim of not being liable to deduct tax at source u/s 195 of the Act. With the aforesaid observation, the matter is remitted to the file of the Assessing Officer for deciding the same in accordance with law after affording a reasonable opportunity of being heard to the assessee.
8. ITA No.1736/Hyd/2012- asst. year 2008-09: Issue being common and facts being identical, following our decision in ITA No.362/Hyd/11, we remit this matter also back to the file of the Assessing Officer for deciding the same afresh in accordance with our direction given hereinabove.
8ITA nos.362 and 1736 Energy Solutions International India Pvt. Ltd., Hyderabad.
9. In the result, both the appeals are treated as allowed for statistical purposes.
Order pronounced in the court on 06 -01-2014.
Sd/- Sd/-
(CHANDRA POOJARI) (SAKTIJIT DEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad,
Dated the 6 th January, 2014.
Jmr*
Copy to:-
1) Energy Solutions International (India) Pvt. Ltd., First Floor, GHB House, Plot No.264/A (Extn.) Road No.10, Jubilee Hills, Hyderabad. DCIT, Cir-1(2) Aayakar Bhavan, Hyderabad.
2) DCIT, Cir-2(2), 8 th Floor, B- Block, IT Towers, Hyderabad.
3) CIT (A)-III, Hyderabad.
4) CIT-II, Hyderabad.
5) The Departmental Representative, I.T.A.T., Hyderabad.
9ITA nos.362 and 1736 Energy Solutions International India Pvt. Ltd., Hyderabad.