Income Tax Appellate Tribunal - Delhi
Netapp.B.V., Bengaluru vs Dcit, Circle-2(2)(2), Int. Tax., New ... on 11 July, 2022
ITA No.1975/Del/2020
IN THE INCOME TAX APPELLATE TRIBUN AL
DELHI BENCH "D": NEW DELHI
BEFORE SHRI C.M. GARG, JUDICIAL MEMBER
AND
SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER
ITA No. 1975/DEL/2020
[Assessment Year; 2017-18]
Net App. B.V. Vs DCIT, Circle-2(2)(2),
th
Room No. 615, 6 Floor, E-2 Block, International Taxation,
Civic Centre, Minto Road, New Delhi.
New Delhi-110002
PAN- AADCN2178C
Appellant Respondent
Appellant by : Sh. Nageshwar Rao. Adv.
Respondent by : Ms. Naina Soil Kapil, CIT-DR
Date of hearing : 23.06.2022
Date of pronouncement : 11.07.2022
ORDER
PER C.M. GARG. JM:
This appeal has been filed by the assessee against the order of the DCIT, Circle-2(2)(2), New Delhi u/s 143(3) read with Section 144C(13) of the Income-
tax Act, 1961 (in short "the Act"). During arguments before us the learned counsel for the assessee submitted that the assessee wants to only press ground nos. 3 & 4, which read as follows:1 ITA No.1975/Del/2020
"3. The learned AO/Hon'ble DRP has erred, in law and on facts, by holding that the income from the sale of software amounting to INR 73,90,97,440 is 'Royalty'/ 'Fees for Technical Services ' as per Article 12 of the Double Taxation Avoidance Agreement between India and Netherlands ('Treaty') and consequently, liable to tax in India.
4. The learned AO/Hon'ble DRP has erred, in law and on facts, by holding that the income from the sale of subscriptions amounting to INR 30,78,07,318 is 'Royalty'/ Fees for Technical Services' as per Article 12 of the Treaty and consequently, liable to tax in India.
2. We have heard arguments of both sides and perused the relevant material placed on the record of the Tribunal including paper book submitted by the assessee consisting of five annexures.
3. The learned counsel for the assessee submitted that this case pertains to the assessment year 2017-18 and the identical issue has been decided in favour of the assessee in assessee's own case in ITA No.6270/Del/2018, order dated 08.04.2022 by the 'D' Bench of ITAT, Delhi as ground No. 1 and 2 for AY 2014-15.
4. The ld. CIT, DR supported the order of the AO and CIT(A). However, in all fairness, the ld.CIT, DR did not controvert that in the similar and identical facts and circumstances the grounds No.1 and 2 of the assessee for AY 2014-15, which are similar to grounds No. 3 and 4 of the present appeal for AY 2017-18 have been decided in favour of the assessee by the Tribunal order dated 08.04.2022 (supra).
5. On careful consideration of the above submissions, we are of the view that ITA No.1975/Del/2020 the Tribunal in assessee's own case for AY 2014-15, order dated 08.04.2022, while adjudicating grounds No. 1 and 2 in favour of the assessee observed as follows:-
"8. We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to the taxability of receipts towards software and subscription. The AO had held the receipt to be royalty and taxed it @10% on the gross basis as per Article 12 in India-Netherland treaty. We find that AO in the order has noted the facts of the case in the year under consideration to be identical to that of earlier years. We find that identical issue arose in assessee's own case in A.Y. 2013-14 before the Co-ordinate Bench of Tribunal. The Co-ordinate Bench of Tribunal in ITA No.1882/Del/2017 order dated 20.09.2021 had decided the issue in favour of the assessee by observing as under:
"6.0 Ground Nos.3 & 4 are directed against the treatment of software and sale of subscription receipts as the royalty income under Article 12(3) of the India-Netherlands DTAA. The Assessing Officer, vide para 12 of the impugned final assessment order, has considered the subscription revenue of Rs.16,43,90,916/- in the nature of royalty and made addition to the extent of Rs.14,99,39,032/- in terms of Article 7 read with Article 12 of the DTAA. The Ld. AR submitted that the Assessing Officer has considered the addition on the basis of the view taken in the assessment order for Assessment Year 2008-09 and 2010-
11. It was further submitted by the Ld. AR that identical issue had come up for consideration before this Tribunal in Assessment Years 2008-09 and 2010-11 wherein the issue was restored to the file of the Assessing Officer with the direction to verify whether the facts of the case were identical to those as decided by the Hon'ble Delhi High Court in the case of Infrasoft Ltd. reported in 264 CTR 329 (Delhi). It was accordingly submitted that this issue also may be similarly restored as per the order of the Co-ordinate Bench in Assessment Year 2008-09 and 2010-11.
7.0 Per contra, the Ld. CIT-DR relied upon the assessment order.
8.0 Having heard the rival submissions and after having perused the final assessment order, we fully agree with the contentions of the Ld. AR 3 ITA No.1975/Del/2020 that the addition of software income is wholly based on the assessment order passed for Assessment Year 2008-09. This assessment order was the subject matter of appeal before the Co-ordinate Bench in ITA No. 4871/Del/2013, wherein after noting the parity of facts between the case of the assessee and facts involved in the case decided by the Hon'ble Delhi High Court in the case of Infrasoft Ltd. (supra), the matter was restored to the Assessing Officer for verification. The relevant observations of this Tribunal are being reproduced herein under:
"48. Ground No. 3 and 4 of the appeal of the assessee are against the order of the Ld. assessing officer in holding that income from sale of software and income from sale of subscriptions is royalty income under article 12 (3) of the treaty and consequently liable to tax in India. Ld. Assessing Officer has discussed the whole gamut of the taxation of the software taxable as royalty in paragraph No. 6 of his order. Before us, Ld. Authorized Representative submitted that now the issue is squarely covered in favour of the assessee in view of the decision of the Hon'ble Delhi High Court in case of Director of income tax versus Infrasoft Ltd 264 CTR 329 (Delhi).He also submitted a chart during the course of hearing that compares the software considered by Hon'ble Delhi High Court and the features of the software licensing agreement in the present case. He has demonstrated that the issue involved is similar stating various aspects of software licensing agreement as under:
Soft Limited Assessee
Clause 1 of
Clause 2(a) of the
Software License:
Infrasoft License
Agreement:
"Supplier grants to
"(a) Infrasoft grants Buyer a nonexclusive
License a non-exclusive, license to use the
non-transferable license to accompanying software
use the software in in machine- readable
accordance with this form ("Software"),
agreement and the Infrasoft together with the
License Schedule." accompanying
documentation."
Clause 2(d) of the Clause 2 of
infrasoft License End User Software
Agreement: License:
"(d) Licensee may make one "NetApp shall retain
copy of the software and title to the Software and
associated support the accompanying
information for backup documentation and all
purposes, provided that the
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ITA No.1975/Del/2020
copy shall include copies and any
Infrasoft's copyright and derivative works
other proprietary notices. thereof. Customer shall
All copies of the Software not make any copies of
shall be the exclusive the Software except as
property of Infrasoft." reasonably required for
backup purposes."
Clause 2(h) of
Infrasoft license agreement
Clause 2 of
Software License:
"(h) Licensee may not copy,
decompile. disassemble or
"Buyer must not make
reverse-engineer the
any copies of the
Software without infrasoft's
Software except as
written consent. The
reasonably necessary
Licensee's rights shall not
for backups. Neither
be restricted by this Clause
Buyer nor any third
2(h) to the extent that local
party may: (a) reverse
law grants Licensee a right
engineer or try to
to do so for the purpose of
reconstruct or discover
achieving interoperability
any source code or
with other software and in
underlying ideas used
addition thereto Infrasoft
in the Software; or (b)
undertakes to make
remove or conceal any
information relating to
product identification
interoperability available to
or proprietary notices
Licensee subject to such
contained in or on toe
reasonable conditions as
Software or products;
Infrasoft may from time to
or (c) except as allowed
time impose including a
in Suppliers user
reasonable fee for doing so.
documentation, modify
To ensure Licensee receives
or create a derivative
toe appropriate
work of any part of the
information, Licensee must
Software.
first give Infrasoft sufficient
details of its objectives and
Buyer must not publish
the other software
or provide any results
concerned. Requests for the
of benchmark tests run
appropriate information
on the Software to a
should be directed to the
third party without
Vice president Technical of
Suppliers prior written
Infrasaft"
consent.
Clause 2(f) of the The Software is
Infrasoft License Agreement Supplier's confidential
is quoted as below: property and is
protected by copyrights
"(f) The Software shall be and by one or more
used only for Licensee's U.S. patents issued or
own business as defined pending. Buyer must
within the Infrasoft License take adequate steps to
Schedule and shat? not, protect the Software
without prior written from unauthorized use
consent from Infrasoft; or disclosure."
(i) be loaned, rented, sold,
Clause 2 of
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ITA No.1975/Del/2020
transferred to any third End User Software
party License :
(ii) used by any parent,
subsidiary or affiliated "Customer shall not,
entity of Licensee nor shall Customer
allow any third party
(iii) Used for the operation
to: (i) decompile,
of a service bureau or for
disassemble, decrypt,
data processing.
extract, or otherwise
reverse engineer or
attempt to reconstruct
or discover any source
code or underlying
ideas, algorithms, or
file formats of or of any
components used in the
Software by any means
whatever; or (ii)
remove or conceal any
product identification.,
copyright, patent or
other notices contained
in or on the Software or
accompanying
documents; or (iii)
modify the Software,
incorporate it into or
with another Software,
or create a derivative
work of any part of the
Software. Customer
must not publish or
provide any results of
benchmark tests run on
the Software to a third
party without NatApp's
prior written consent.
Clause 7 of
End User Software
License:
"THIS LICENSE IS
PERSONAL TO
CUSTOMER..
CUSTOMER SHALL
NOT ASSIGN,
SUBUCENSE OR
TRANSFER THE
LICENSE OR
AGREEMENT
WITHOUT NET APRS
PRIOR WRITTEN
APPROVAL; ANY
ATTEMPT TO DO SO
SHALL BE VOID."
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ITA No.1975/Del/2020
49. The revenue is also not seriously disputed before us that the issue is not covered by the decision of the Hon'ble Delhi High Court. However the issue needs to be verified by the Ld. assessing officer whether the licensing agreement involved in the present appeal is similar to the issue decided by the Hon'ble Delhi High Court. Therefore we set aside ground3 and 4 of the appeal of the assessee back to the file of the Ld. assessing officer to decide the issue afresh considering the decision of the Hon'ble Delhi High Court. In the result ground No. 3 and 4 of the appeal of the assessee allowed with above direction."
8.1 It is also pertinent to note that the issue of software royalty was recently adjudicated by the Hon'ble Apex Court in the case of Engineering Analysis Center of Excellence Pvt. Ltd. vs. CIT (2021) 432 ITR 471 (SC). The Hon'ble Apex Court, in its detailed judgment, has analyzed various aspects of the issue taking into consideration end user license, Copy Right Act, and provisions contained in DTAA and the Income Tax Act and has laid down the parameters to test whether the receipt from sale of software would tantamount to royalty or not. Therefore, in view of the above, the Assessing Officer is directed to carry out the necessary exercise in accordance with the directions issued by the Co-ordinate Bench in Assessment Year 2008-09 duly keeping in mind the ratio laid down by the Hon'ble Apex Court in the case of Engineering Analysis Center of Excellence Pvt. Ltd. vs. CIT (supra) and adjudicate the issue accordingly after giving due and proper opportunity to the assessee to present its case. Thus, ground Nos. 3 & 4 are allowed for statistical purposes."
9. We further find that consequent to the direction of the Tribunal, AO passed order on 19.03.2022 u/s 254 r.w.s 143(3) of the Act for A.Y. 2013-14 and the AO has accepted the income declared by the assessee and no addition was made. Since the facts of the case in the year under consideration are identical to that of earlier years, we following the decision of Tribunal for A.Y 2013-14 and for similar reasons are of the view that no addition is required to be made. Thus the grounds of assessee are allowed."
6. Undisputedly, grounds No.1 and 2 for AY 2014-15 are similar to grounds No. 3 and 4 for AY 2017-18. Therefore, we hold that the issue is covered in favour 7 ITA No.1975/Del/2020 of the assessee by the order dated 08.04.2022 (supra). Respectfully following the same, grounds No.3 and 4 of the assessee are allowed.
7. Ld. Representatives of both the sides have also agreed that grounds No.5 and 6 are consequential and, thus, restored to the file of the AO for consideration at the time of passing appeal effect order.
8. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 11th July, 2022.
Sd/- Sd/- (PRADIP KUMAR KEDIA) (C.M. GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 11th July, 2022. dk Copy forwarded to : 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR
Asstt. Registrar, ITAT, New Delhi 8