Income Tax Appellate Tribunal - Bangalore
Blue Yonder Inc. , Bangalore vs Deputy Commissioner Of Income Tax, ... on 18 April, 2024
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH : BANGALORE
BEFORE SHRI GEORGE GEORGE K, VICE PRESIDENT AND
SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER
IT(IT)A No.1131/Bang/2023
Assessment Year : 2021-22
M/s. Blue Yonder Inc, Vs. DCIT (International Taxation),
15959 N Suite 400 Scottsdale, Circle - 1(2),
Arizona, Foreign Bengaluru.
United States.
PAN : AACCJ 3581 C
APPELLANT RESPONDENT
Assessee by : Shri. T. Suryanarayana, Advocate
Revenue by : Shri. M. K. Biju, CIT(DR)(ITAT), Bengaluru.
Date of hearing : 17.04.2024
Date of Pronouncement : 18.04.2024
ORDER
Per George George K, Vice President :
This appeal at the instance of the assessee is directed against the Final Assessment Order dated 31.10.2023 passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter called 'the Act'). The relevant Assessment Year is 2021-22.
2. Brief facts of the case are as follows:
Assessee is a foreign company incorporated in the USA. It is engaged in the business of providing software development, software maintenance, consulting and support services. For the Assessment Year 2021-22, the return of income was filed on 11.03.2022 declaring total income of Rs.53,37,69,480/-. The IT(IT)A No.1131/Bang/2023 Page 2 of 18 assessment was selected for scrutiny and notice under section 143(2) of the Act was issued on 27.06.2022. During the course of assessment proceedings, it was noticed that assessee was in receipt of the following income which was not offered to tax in India.
Sl. Nature of income Amount
No. (INR)
A Sale of software to third party customers in 10,99,25,719
India
B maintenance/installation/consulting/support 9,31,46,344
services to third party customers in India
C Reimbursement from Blue Yonder India Pvt 60,41,63,166
Ltd
3. The Draft Assessment Order (DAO) was passed under section 144C(1) of the Act, on 31.12.2022. In the DAO, the sale of software to third party customers in India was proposed to be brought to tax as "Royalty" under the Act and the relevant DTAA. Similarly, receipts from installation, maintenance and support services to third party customers were proposed to be taxed as Fee for Included Services (FIS). Out of total reimbursement from Blue Yonder India Pvt. Ltd., receipts of Rs.39,35,35,177/- towards hardware and software maintenance was treated as FIS as per India-US DTAA.
4. Aggrieved by the Draft Assessment Order, assessee filed appeal before the Dispute Resolution Panel (DRP) on 27.01.2023. The DRP, vide its directions dated 25.09.2023, disposed off the objections of the assessee. The DRP held that the AO has rightly brought to tax the aforesaid three receipts as "royalty" and "FIS". Pursuant to the DRP's directions, the impugned Final Assessment Order was passed.
IT(IT)A No.1131/Bang/2023 Page 3 of 18
5. Aggrieved by the Final Assessment Order dated 21.10.2023, assessee has filed the present appeal before the Tribunal raising the following grounds:
1 Final assessment order passed is invalid and liable to be quashed 1.1 That the order passed by the Respondent/Assessing Officer ('AO' for short) dated 31.10.2023, under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 ('the Act'), pursuant to the directions of the Dispute Resolution Panel ('the DRP' for short), is bad in law, contrary to the facts and circumstances of the case, provisions of the Act and settled legal principles, and is liable to be set aside. 1.2 That the Document Identification Number purportedly allotted to the directions dated 27.09.2023 issued by the Hon'ble DRP cannot be validated on the e-portal of the Income-tax Department and therefore, the directions issued contrary to Circular No.19/2019 dated 14.08.2019 issued by the Central Board of Direct Taxes is invalid, and consequently, the final assessment order is liable to be quashed. 2 Assessment proceedings not conducted in a proper manner 2.1 The FAO is bad on facts and in law and is in violation of the principles of natural justice. 2.2 The Ld. AO did not provide any opportunity to the Appellant to explain/ justify its case on responses received from various third-party Indian customers to whom notices under section 133(6) of the Act were issued by the Ld. AO.
2.3 The Ld. AO has failed to consider the facts of the Appellant's case in entirety and has drawn grossly erroneous conclusions based on conjectures, surmises and unilateral inference of the facts and submissions of the third-party Indian customers. 3 Gross errors in income computation 3.1 The Ld. AO and the Hon'ble DRP grossly erred in considering incorrect amount as returned income of the Appellant for the purpose of arriving at assessed income which has resulted in dual taxation of the same receipts.
4 Non-taxability of sale of software as royalty 4.1 The Ld. AO and the Hon'ble DRP have grossly erred in taxing the receipts from sale of software to Indian customers as royalty u/s 9(1)(vi) of the Act as well as under the India-USA Tax Treaty.
4.2 The Hon'ble DRP erred in disregarding the submission of the Appellant and not considering the decision of Hon'ble Karnataka High Court for AY 2008-09 and AY 2010-11 and the decision of this Hon'ble Tribunal for AY 2014-15 in Appellant's own case, wherein receipts from sale of software were held to be not taxable as 'Royalty', thereby violating the principle of judicial discipline. 4.4 The Ld. AO and the Hon'ble DRP have grossly erred in holding that the Appellant is not engaged in sale of off-the-shelf/shrink wrapped software and that that the software provided by the Appellant are specially designed and customised as per the requirements of its customers.
4.5 That the observation of the Ld. AO and the Hon'ble DRPthat the customers are not prohibited from modifying the source code is wholly erroneous and based on mere conjectures and surmises.
4.6 That the Ld. AO and the Hon'ble DRP erred on facts and in law in not appreciating that non-exclusive, non-transferable and royalty-free licence was granted to the customers that merely enabled use of a copyrighted product and thus, the consideration received would not be 'royalty' in terms of Section 9 (1)(vi) of the Act and India-USA DTAA.
IT(IT)A No.1131/Bang/2023 Page 4 of 18 4.7 The Ld. AO and the Hon'ble DRP erred in not following the principles laid down by the Hon'ble Supreme Court of India in the case of Engineering Analysis Centre of Excellence Pvt Ltd vs CIT [2021] 125 taxmann.com 42 (SC). 4.8 The Ld. AO and the Hon'ble DRP grossly erred in holding that since India-US DTAA is not based on the OECD Model, the commentary relied upon by the Hon'ble Supreme Court in the case of Engineering Analysis's to rule the issue in favour of the taxpayers is not applicable to the Appellant. 5 Non-taxability of AMC receipts as Fees for Included Services ("FIS") 5.1 The Ld. AO and the Hon'ble DRP have grossly erred in holding AMC receipts are taxable as FIS under the India-USA Tax Treaty.
5.2 The Hon'ble DRP erred in disregarding the submission of the Appellant and not considering the decision of Hon'ble Karnataka High Court for AY 2008-09 and AY 2010-11 and the decision of this Hon'ble Tribunal for AY 2014-15 in Appellant's own case, wherein receipts from AMC were held to be not taxable, thereby violating the principle of judicial discipline.
5.3 The Ld. AO and the Hon'ble DRP have failed to appreciate that provision of AMC services is an incidental service to the sale of software, and hence when the sale of software itself is not taxable, the provision of AMC services shall also not be taxable in India, as per Article 12(4) of the India-USA DTAA. 5.4 Without prejudice to the above grounds, the Ld. AO and the Hon'ble DRP have grossly erred in concluding that the AMC services provided by the Appellant is taxable as FIS, by alleging that it makes available technical knowledge, experience, skill, etc. to the customers.
6 Receipts subject to Equalization Levy 6.1 The Ld. AO and the Hon'ble DRP ought to have appreciated that receipts earned by the Appellant from sale of software from the Indian customers was subject to Equalization Levy in terms of the Finance Act, 2016 because the same was not taxable as 'royalty'.
6.2 That the action of the DRP in not providing an opportunity to the Appellant to file its response to the factual report obtained from the Ld. AO is in violation of principles of natural justice.
7. Non-taxability of reimbursement of expenses towards hardware and software maintenance as Fees for Included Services 7.1 The Ld. AO and the Hon'ble DRP have grossly erred in treating reimbursement of expenses towards hardware and software maintenance received by the Appellant as taxable in India as FIS 7.2 The Ld. AO and Hon'ble DRP have failed to appreciate that the Appellant had cross-
charged certain expenses incurred by it on behalf of BY India under the cost reimbursement agreement on an 'at-cost' basis, and that in the absence of any 'services' and the corresponding 'consideration', reimbursements cannot be taxed as FIS.
7.3 The Ld. AO and Hon'ble DRP have grossly erred in not taking cognizance of various judicial decisions cited by the Appellant, including those rendered by the Hon'ble Supreme Court, wherein it is held that 'reimbursements' are not taxable in India, in the absence of income element.
7.4 Without prejudice to the above grounds, the Ld. AO and the Hon'ble DRP have grossly erred in holding that the Appellant has provided 'technical services' to Blue Yonder India Private Limited and to other customers and, has 'made available' such technical knowledge, experience, skill, etc. and therefore, reimbursements represent 'fees' charged for such services taxable as 'Fees for Included Services' ['FIS'] under the India-USA Tax Treaty.
IT(IT)A No.1131/Bang/2023 Page 5 of 18 8 Short grant of credit for taxes withheld at source ('TDS') 8.1 The Ld. AO erred in granting TDS credit only to the extent of INR 58,741,937 (as against INR 58,826,527) thereby resulting in short grant of TDS credit amounting to INR 84,590.
9. Levy of interest under section 234A, 234B and section 234C of the Act 9.1 The Ld. AO erred in levying interest under section 234A, 234B and section 234C of the Act amounting to INR 2,593,832, 15,562,992 and INR 3,273,264, respectively. 10 Erroneous adjustment of refunds already issued for AY 2021-22 10.1 The Ld. AO erred in treating INR 62,109,757, as refunds already issued for AY 2021- 22, when no such refunds had been issued to the Appellant. 11 Initiation of penalty proceedings 11.1 The Ld. AO and the Hon'ble DRP erred in initiating penalty proceedings under section 270A of the Act for alleged under-reporting of income.
6. The learned AR submitted that the issues raised in grounds 4, 5 and 7 and its sub-grounds are squarely covered by the Order of the Tribunal in the assessee's own case for the Assessment Year 2019-20 in IT(IT)A No.401/Bang/2023 and IT(IT)A No.403/Bang/2023 (order dated 03.01.2024). With regard to other grounds viz., 1 to 3 and 8 to 11, no specific arguments were raised by the learned AR, hence same are dismissed.
7. The learned DR was unable to controvert the assertions made by the learned AR that grounds 4, 5 and 7 along with its sub-grounds are covered in favour of assessee by order of ITAT for Assessment Year 2019-20 (supra).
8. We have heard the rival submissions and perused the material on record. The issues for adjudication before us were with regard to taxability in India of the following three receipts:
1. Receipt from sale of software Rs.10,99,25,719/-
2. Receipt from sale and installation and Rs. 9,31,46,344/-
support services IT(IT)A No.1131/Bang/2023 Page 6 of 18
3. Reimbursement of computer and hardware Rs.39,35,35,177/- maintenance (from Indian entity)
9. We find that as regards the taxability of receipts on account of sale of software and from sale of installation and support services to third persons, the issues are squarely covered by the Order of the Tribunal in assessee's own case for the Assessment Year 2019-20 in IT(IT)A No.424/Bang/2023 (Revenue's appeal). The discussions on these issues are at paras 14.1 to 14.15 and final conclusion is at para 15. The Tribunal had followed previous decisions in assessee's own case and judgment of the Hon'ble Apex Court in the case of Engineering Analysis Centre of Excellance (P) Ltd., Vs. CIT reported in (2021) 432 ITR 472 (SC). The relevant contentions raised by the learned AR, learned DR and the findings of the Tribunal in assessee's own case for Assessment Year 2019-20 reads as follows:
"Revenue's Appeal in IT(IT)A No.424/Bang/2023:
14. Ground Nos.1 to 3 of the revenue's appeal are with regard to non-
taxability of sale of software and AMC as royalty.
14.1 The ld. A.R. submitted that as stated above, while filing the return of income, the Assessee had declared Rs. 44,23,96,360/- as income and claimed the same amount as exempt income in Schedule EI thereby declaring NIL income. In the assessment order, the only issue on which an addition was sought to be made was the reimbursements received from BY India which the AO sought to treat as 'Fees for Included Services'. While computing the total assessed income, the Assessing Officer erroneously proceeded on the basis that Rs. 44,23,96,360/- is the returned income and computed the assessed income at Rs. 92,18,40,761/- as under:
Sl. No Particulars Returned income
1. Returned income 44,23,96,360/-
2. Reimbursement receipts considered 47,94,44,402/-
taxable by the Assessing Officer
3. Total assessed income 92,18,40,761/-
IT(IT)A No.1131/Bang/2023
Page 7 of 18
The break-up of Rs. 44,23,96,360/- is as under:
Sl. No Particulars Returned income
1. Software and maintenance 18,08,12,620/-
receipts
2. Reimbursement receipts from BY 26,15,83,740/-
India
3. Total receipts as per return of 44,23,96,360/-
income
14.2 Thus, it is evident that the Assessing Officer taxed software, annual maintenance and installation receipts to the tune of Rs. 18,08,12,620/-, without providing any reasons for the same and clearly the same was on account of an error in computation rather than an intended addition to the total income.
14.3 The ld. A.R. submitted that in any case, the Assessee had received a sum of Rs. 18,08,12,620/- towards sale of software and provision of annual maintenance and installation services to third party Indian customers, which is neither taxable under Section 9(1)(vi) of the Act nor under Article 12 of the India-USA Double Taxation Avoidance Agreement ('India-USA DTAA' for short) as 'royalty'. The CIT(A) granted relief to the Assessee holding that the same would not qualify as royalty and consequently, the consideration received by the Assessee towards maintenance services, implementation and consultancy services would not be taxable in India as fees for technical services. He submitted that the ld. CIT(A) placed reliance on the decision of this Tribunal in Assessee's own case for assessment year 2014-15 and held that the sale of software would not constitute royalty under the provisions of the Act and the India-USA DTAA. Further, it was held that since the receipts on account of sale of software are not in the nature of royalty, the income received towards annual maintenance services, implementation and consultancy services also cannot be brought to tax as FTS.
14.4 The ld. A.R. submitted that the issue on taxability of income from sale of software is squarely covered by the decision of the Hon'ble Karnataka High Court in Assessee's own case for assessment year 2008-09 and 2010- 11 (Order dated 29.05.2023 in ITA No. 977/2017) and this Tribunal for assessment year 2014- 15 in Assessee's own case (Order dated 12.08.2021 in IT(IT)A No. 2696/Bang/2017), and also by the decision of the Hon'ble Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd. v.
IT(IT)A No.1131/Bang/2023 Page 8 of 18 CIT (reported in [2021] 125 taxmann.com 42 (SC)). Further, theissue on taxability of income from AMC is squarely covered in Assessee's own case for the assessment years 2008-09 and 2010- 11 by the decision of the High Court of Karnataka and for assessment year 2014-15 by the decision of this Tribunal.
14.5 He submitted that the Revenue, in the written submissions filed on 07.09.2023, has attempted to distinguish the above decisions alleging that the Assessee provides customized software solutions over cloud based on the specific needs of its customers and not merely shrink-wrapped software. For this purpose, the draft assessment order for assessment year 2021-22 has been relied upon.
14.6 He submitted that firstly, an assessment order for a subsequent assessment year, that too a draft one, where the Company has contested the underlying addition to total income, cannot be the basis to decide the issue for the current assessment year. Further, it is also submitted that the material/ agreements gathered as a part of assessment proceedings for a subsequent assessment year cannot be used for concluding on the taxability of underlying transactions in a prior assessment year.
14.7 Secondly, there is no customization involved. The Assessee is engaged in sale of standardized software. There are various standard modules that the Assessee has already created in the software that it licenses. Depending on the sector that the customer belongs to and the requirement laid down, the modules are provided to the customer. There is no further customization of the software codes etc. based on customer's requirements. He submitted that the Assessee does not provide any rights to the customer to exploit the software sold and the software is used by the customer in their capacity as an end/ ultimate user.
14.8 He submitted that clause 5 relied upon in the agreement with Asian Paints produced along with the Revenue's written submissionsdated 07.09.2023 nowhere indicates that there is customization. All that the clause states is that there could be some third party software embedded in the software provided by the Assessee to the end customers and states that such third party software is subject to additional terms of use. This cannot, by any stretch of imagination, lead to the conclusion that there is parting with the copyright right in the software. Which of the rights contemplated in Section 14 of the Copyright Act has been parted with is not forthcoming from the written submissions filed. The responses to notices issued 133(6) for assessment year 2021-22 as extracted in the draft assessment order for assessment year 2021-22 of Pepsi Co. do not also indicate that it is IT(IT)A No.1131/Bang/2023 Page 9 of 18 customized software. It is only an inference drawn by the Assessing Officer on the basis of surmises.
14.9 He further submitted that as stated above, the purchasers of the software had no right, proprietary or exclusive, except to use the said software for their internal business. The payments received by the Assessee is for the use of copyrighted article and not for the use of a copyright. He submitted that no right vests in the end-users to reproduce, sell or make copies of the same.
14.10 He submitted that a non-exclusive, non-transferable and royalty-free license was granted to the purchasers that merely enabled use of a copyrighted product and thus, the consideration received would not be 'royalty' in terms of Section 9 (1)(vi) of the Act. Section 9(1)(vi) of the Act defines royalty to inter alia mean any consideration received for (i) the transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property (clause (i)); (ii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property (clause (iii)); (iii) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to inSection 44BB (clause (iva)). He submitted that the Assessee owns the title, copyright and other intellectual property rights in the software and the same is not transferred to the customers in India and therefore, the consideration received by the Assessee would not constitute royalty in terms of Section 9(1)(vi) of the Act.
14.11 Even in terms of Article 12 of the India-US DTAA, Article 12(3) of the India-USA DTAA defines the term 'royalty' as "payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and ....."
14.12 He submitted that even in terms of the DTAA, the payments made to the Assessee would not constitute 'royalty' within the meaning of Article 12 of the India-USA DTAA as the payments are not for transfer of copyright to the purchasers but for sale of software.
IT(IT)A No.1131/Bang/2023 Page 10 of 18 14.13 With respect to annual maintenance and installation services rendered to Indian customers, the Assessee submits that the said services are a part and parcel of the sale of software and therefore, the nature of such services would derive its value from the principal component of the transaction, i.e., sale of software. Therefore, he submitted that the said receipts also cannot be brought to tax given that the underlying software would not be taxable as royalty under the provisions of the Act read with the DTAA.
14.14 Without prejudice to the above, the ld. A.R. submitted that that the income towards AMC would not constitute Fees for Included services under India-USA DTAA given that:
- the AMC services are inextricably and essentially linked to sale of underlying software, which is not chargeable to tax as royalty; and
- The Assessee does not 'make available' any technical knowledge, experience, skill, etc. to the customers while provision of such services.
14.15 The ld. A.R. also placed reliance on the decision of Hon'ble Karnataka High Court (rendered for AY 2008-09 and AY 2010-11) and this Tribunal's decision (rendered for AY 2014-15) in Assessee's own case, wherein it was held that income towards AMC is not liable to tax in India.
15. We have heard the rival submissions and perused the materials available on record. Admittedly, this issue came for consideration before this Tribunal as discussed in ground Nos.2 to 5 in assessee's appeal as above. Accordingly, this issue raised by the revenue is dismissed."
10. Since the facts of the instant case is identical to the facts considered by the Tribunal for the Assessment Year 2019-20, we hold that receipt from sale of software cannot be brought to tax as "royalty". Similar is the receipt from installation and support services as FIS.
11. As regards the reimbursement of computer and hardware maintenance, we find that the issue is squarely covered in favour of the assessee by the Order of the Tribunal in ITA No.401/Bang/2023 for the Assessment Year 2019-20 (the IT(IT)A No.1131/Bang/2023 Page 11 of 18 assessee's appeal). The relevant contention of the AR, DR and the findings of the Tribunal for the Assessment Year 2019-20 reads as follows:
"4. Ground Nos.2 to 5 in assessee's appeal are with regard to erroneous treatment of reimbursements as 'royalty'/'fees' for included services.
4.1 In this regard, the ld. A.R. submitted that during the year, the Assessee had received a sum of Rs. 47,94,44,402/- towards reimbursements of expenses incurred by the Assessee on behalf on BY India. The break-up of such reimbursements is as under:
Sl. No Nature of reimbursement Amount
1. Computer hardware maintenance 3,88,04,561
2. Employee immigration expenses 2,85,02,503
3. Employee insurance charges 11,44,589
4. Professional fees 3,98,45,239
5. Host country tax 8,60,70,802
6. Computer software maintenance 17,37,43,255
7. Subscription charges 7,52,70,596
8. Telecommunication charges 1,97,41,529
9. Restricted Stock Unit expenses 1,63,21,328
Total 47,94,44,402
4.2 He submitted that the Assessing Officer held the aforesaid payments to be in the nature of 'fees for technical services' in the hands of the Assessee on the ground that the Assessee makes available technical and managerial skills and knowledge to BY India for the latter to function seamlessly in software product developmentand services. On appeal, with respect to the payments towards (i) Employee immigration expenses; (ii) employee insurance charges; (iii) professional fees; and (iv) restricted stock unit expenses, the CIT(A) deleted the addition made holding that the same would not fall under the category of technical or consulting services and that they do not satisfy the conditions to be treated as 'fees for included services'. As regards payments received towards (i) computer software maintenance; (ii) subscription charges; and (iii) telecommunication charges, the CIT(A) held the same to be in the nature of 'royalty' and sustained the addition. However, the ld. CIT(A) failed to adjudicate on reimbursements received towards (i) computer hardware maintenance; and (ii) host country tax. He submitted that the Assessee has filed an application under Section 154 of the Act before the CIT(A) seeking rectification to the said extent and the same is pending adjudication.
IT(IT)A No.1131/Bang/2023 Page 12 of 18 4.3 In this regard, he submitted that the payments received by the Assessee were purely in the nature of cost-to-cost reimbursements and does not contain any income element. The various services are procured centrally from various vendors for commercial and administrative reasons and the costs pertaining to the relevant BY entities is cross charged without any mark-up. While the Assessee procures the services centrally, the distribution, installation, postsale services if any are the responsibility of the service provider and the Assessee is not involved at any stage. He submitted that the terms of the cost reimbursement agreement clearly evidences that the payments made to the Assessee were pure reimbursements without any mark-up being charged. In this regard, he placed reliance is placed on the following decisions:
- DIT v. A.P. Moller Maersk A S (reported in [2017] 78 taxmann.com 287 (SC)) paras 10-11;
- CIT v. Siemens Aktiongesellschaft - (reported in [2009] 177 Taxman 81 (Bombay)) para 33; and
- CIT v. Dunlop Rubber Co. Ltd. (reported in [1982] 10 Taxman 179 (Calcutta)) pages 37-39 of the caselaw compilation.
4.4 The ld. A.R. has given a brief description of the reimbursements as follows:
(i). Computer software maintenance:
(a) The Assessee has entered into agreement with Dell and Cisco for software and hardware maintenance support services on a day-
to-day basis for its group companies, including BY India. In terms of the agreement, the cost in this regard is borne by the Assessee and allocated to BY India on a cost-to-cost basis for the charges allocable to BY India.
(ii). Subscription charges:
(b) The Assessee makes payments to LinkedIn and Monster for usage of their database by group companies including BY India for hiring potential candidates. The Assessee does not obtain any modification or reproduction rights from the vendors. The cost incurred by the Assessee is allocated to each group entity including BY India and cross charged on a cost-to-cost basis.
IT(IT)A No.1131/Bang/2023 Page 13 of 18
(iii). Telecommunication charges:
(c) He submitted that the Assessee makes payment to 'Sprint' for the usage of link lines. This provides customers with a secure VPN solution with any-to-any intranet connectivity, as a private means to connect their enterprise sites and between multiple customers over VPN. The Assessee bears the cost and the same is allocated to BY India on a proportionate and cost-to-cost basis.
4.5 The ld. A.R. submitted that while the Assessing Officer held the above to be FTS, the ld. CIT(A) held the receipts to be in the nature of royalty. Under the DTAA, in order for a payment to be in the nature of fees for technical services, the services ought to 'make available' technical knowledge, experience, skill, know-how or processes, or consists of the development and transfer of a technical plan or technical design. Technology will be considered 'make available' when the person acquiring the service is enabled to apply the technology without depending on the provider. He placed reliance in this regard on the decision of the Hon'ble High Court of Karnataka in the case of CIT v. De Beers India Minerals (P.) Ltd. (reported in [2012] 21 taxmann.com 214 (Karnataka) - para 22. In the present case, the mandatory precondition of 'make available' is not satisfied in any of the aforesaid services, and therefore the payments are not in the nature of fees for technical service. In view of the above, he submitted that the reimbursements received from BY India is not taxable in India either under the Act or under the DTAA.
4.6 With regard to taxability of computer software and hardware maintenance expenses, the ld. A.R. submitted that the services are provided to BY India on a need basis and post availing such services, BY India will not be able to independently apply the knowledge. No technical knowledge, skill etc. are made available to BY India by the service providers. Therefore, the receipts in respect of these expenses cannot be held to be FIS under Article 12 of the DTAA.
4.7 The ld. A.R. submitted that the ld. CIT(A) was also not correct in holding the same to be 'royalty'. As is evident from the agreements entered into between the Assessee and Cisco, and the Assessee and Sai Global, no exclusive or proprietary right in the software is made available to the user of the software and only a mere right to use the software is given. The order of the CIT(A) nowhere discusses how the payments for software IT(IT)A No.1131/Bang/2023 Page 14 of 18 maintenance can be construed as royalty. He placed reliance on the following decisions:
- Hon'ble Supreme Court of India in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT; and
- Hon'ble Karnataka High Court's order for assessment year 2008- 09 and AY 2010-11 and this Tribunal's order for assessment year 2014-15 in Assessee's own case - para 4.1 4.8 On the issue of taxability of subscription charges, the ld. A.R. submitted that the payments are made for usage of the database by the group companies for hiring of potential candidates. The reimbursements received from BY India towards the use of database of Salesforce is in the nature of a consideration to obtain rights to use the copyrighted database and not the right to use the copyright in the database. He submitted that the copyright is not transferred to the subscribers. He further submitted that BY India does not get the physical access or control over the equipment used by Salesforce in collating and maintaining the database. The subscription fee paid is not for the use of the equipment but for availing the facility of accessing the data/information collated by Salesforce. On a perusal of the agreement with Service Now Inc. it is evident that the customer is granted non-sublicensable, non-transferable and non-exclusive licenses. He placed reliance on the following decisions:
- Pluralsight LLC. V. DCIT (order dated 21.08.2023 passed by this Hon'ble Tribunal in ITA No. 37/Bang/2023) - paras 11-14 and 20;
- Goldman Sachs & Co. LLC v. DCIT (reported in [2023] 152 taxmann.com 251 (Mumbai - Trib.)) - paras 16-19; and
- DCIT v. Welspun Corporation Limited (reported in [2017] 77 taxmann.com 165 (Ahm.)) - paras 46-50.
4.9 On the issue of taxability of telecommunication expenses, the ld. A.R. submitted that the ld. CIT(A) has relied on the decision of this Tribunal in the case of Vodafone South Limited v. DDIT to hold that telecommunication charges claimed as reimbursement are to be held to be royalty under the DTAA which has now been reversed by the jurisdictional High Court reported in Order dated 14.07.2023 passed in ITA No. 160/2015 and connected matters. In any event, he submitted that reimbursements received from BY India towards the usage of link line provided by Spirit for basic IT(IT)A No.1131/Bang/2023 Page 15 of 18 bandwidth services does not involve any right to use scientific equipment.
He placed reliance on the following decisions:
- Telefonica Depreciation Espama v. ACIT (order dated 10.08.2023 passed by this Hon'ble Tribunal in IT(IT)A No. 2657/Bang/2019) - paras 3.8 to 5.2.21;
- Communications Global Network Services Limited v. DCIT (order dated 29.08.2023 passed by this Hon'ble Tribunal in IT(IT)A No. 89/Bang/2019) - paras 5-8; and
- Cerner Healthcare Solutions India (P.) Ltd v. DCIT (reported in [2022] 141 taxmann.com 564 (Bangalore - Trib.)) - Paras 15-20.
5. On the other hand, the ld. D.R. submitted that the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT reported in 432 ITR 471 (SC) considered the agreements related to the parties who were the party to the cases before the Hon'ble Supreme Court and the Hon'ble Supreme Court has no occasion to examine the agreement entered by the present assessee with the various parties. As such, the ratio laid down in that judgement cannot be applied to the facts of the assessee's case.
6. We have heard the rival submissions and perused the materials available on record. Admittedly, the impugned issue came for consideration before Hon'ble Karnataka High Court for the assessment years 2008-09 & 2010- 11 and the Hon'ble Court vide order in ITA No.977 of 2017 dated 29.5.2023 has held as under:
JUDGMENT Learned Advocate for the assesses submits that issue involved in this petition's covered by the decision of the Hon'ble Supreme Court in Civil Appeal Nos.8733- 8734/2018, which is sought to be reviewed.
2. The same is not disputed by Shri K.V.Aravind, learned standing counsel for the Revenue.
3. Hence, the following:
IT(IT)A No.1131/Bang/2023 Page 16 of 18 ORDER (1) Appeal is allowed.
(2) Substantial questions of law are answered in favour of assessee and against Revenue.
(3) As prayed for, liberty is reserved to re-open this appeal based on the outcome of review petition in R.P.(C) No.001422-001497/2021 pending before the Hon'ble Supreme Court. No costs."
6.1 Further, the Tribunal in assessment year 2014-15 had an occasion to examine the same issue in IT(IT)A No.2696/Bang/2017 dated 12.8.2021 wherein held as under:
"3. Brief facts of the case are as follow:
The draft assessment order was passed on 31.12.2016, wherein it was concluded that the amount received by the assessee-company for sale of software would constitute royalty within the meaning of Article 12(3) of the DTAA and as per the provisions of section 9(1)(vi) of the I.T.Act. The A.O. also brought to tax the receipts from Indian customers on account of annual maintenance service, implementation and consulstancy as fees for technical services u/s 9(1)(vii) of the I.T.Act and fees for included services under Article 12(4)(a) of India-US DTAA. The assessee filed objections before the Dispute Resolution Panel (DRP). The DRP issued directions dated 08.09.2017. The DRP rejected the objections raised by the assessee. Accordingly, final assessment order was passed on 12.10.2017 u/s 143(3) r.w.s. 144C(13) of the I.T.Act.
4. Aggrieved by the final assessment order, the assessee has preferred this appeal before the Tribunal. The learned AR, at the very outset, submitted that the issue in question is squarely covered in favour of the assessee by the judgment of the Hon'ble Apex Court in the case of Engineering Analysis Centre of Excellence P.Ltd. v.
CIT reported in [2021] 432 ITR 471 (SC), wherein it was categorically held that sale of software would not constitute royalty within the provisions of section 9(1)(vi) of the I.T.Act and Article 12(4)(a) of the DTAA between India and USA.
4.1 As regards the amounts received towards annual maintenance services, implementation and consultancy services, it was stated that IT(IT)A No.1131/Bang/2023 Page 17 of 18 when the receipts on account of sale of software itself not included asroyalty. Miscellaneous income on the same such as annual maintenance also cannot be brought to tax as fees for technical services.
4.2 The learned Departmental Representative was not able to controvert the submissions made by the assessee. In view of the judgment of the Hon'ble Apex Court, which is identical to the facts of the instant case, we hold that the payment received by the assessee-company towards sale of software would not constitute royalty and cannot be brought to tax. Further the miscellaneous receipts on account of sale of software also cannot be brought to tax as fees for technical services. It is ordered accordingly.
5. In the result, the appeal filed by the assessee is allowed."
6.2 Contrary to this, now the ld. D.R. wants to reargue the case on same issue considered by jurisdictional High Court as well as by the Tribunal on earlier occasion stating that the agreements of the present assessee were not examined by the Hon'ble Supreme Court. In our opinion, when the issue is already settled by the Hon'ble Supreme Court, we are not in a position to take a different view on the same matter. Judicial discipline requires consistency in its proceedings. Being so, applying the ratio laid down by earlier decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. cited (supra), we allow the ground Nos.2 to 5 in favour of the assessee. Accordingly, these grounds of the appeal of the assessee are allowed."
12. The aforesaid Order of the Tribunal (para 6.2) had followed the judgment of Hon'ble Apex Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd., Vs. CIT (supra) and held that reimbursement of computer and hardware maintenance from entity in India cannot be FTS/FIS. Since the facts of instant case and the facts considered by Tribunal for Assessment Year 2019-20 in assessee's own case are identical, we allow ground 7 and its sub-grounds. It is ordered accordingly.
IT(IT)A No.1131/Bang/2023 Page 18 of 18
13. In the result, appeal filed by the assessee is partly allowed.
Pronounced in the open court on the date mentioned on the caption page.
Sd/-
Sd/- Sd/-
(LAXMI PRASAD SAHU) (GEORGE GEORGE K)
Accountant Member Vice President
Bangalore.
Dated: 18.04.2024.
/NS/*
Copy to:
1. Appellants 2. Respondent
3. DRP 4. CIT
5. CIT(A) 6. DR, ITAT, Bangalore.
7. Guard file
By order
Assistant Registrar,
ITAT, Bangalore.