Zscaler, Inc vs Deputy Commissioner Of Income Tax ... on 6 March, 2023

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Delhi High Court - Orders

Zscaler, Inc vs Deputy Commissioner Of Income Tax ... on 6 March, 2023

Bench: Rajiv Shakdher

                           $~ 47
                           *     IN THE HIGH COURT OF DELHI AT NEW DELHI
                           +     W.P.(C) 14695/2022
                                 ZSCALER, INC.                             ..... Petitioner
                                                 Through: Mr Kishore Kunal with Ms Ankita
                                                          Prakash, Advs.
                                                 versus

                                  DEPUTY COMMISSIONER OF INCOME TAX CIRCLE
                                  INTERNATIONAL TAX 3(1)(1), DELHI & ORS. ..... Respondents
                                                Through: Mr Sunil Agarwal, Sr Standing
                                                           Counsel with Mr Shivansh B Pandia
                                                           and Mr Utkarsh Tiwari, Advs.
                                  CORAM:
                                  HON'BLE MR. JUSTICE RAJIV SHAKDHER
                                  HON'BLE MS. JUSTICE TARA VITASTA GANJU
                                                ORDER

% 06.03.2023 [Physical Hearing/Hybrid Hearing (as per request)] CM Appl.11049/2023 [Application filed on behalf of the petitioner seeking early hearing]

1. This application has been moved on behalf of the petitioner for advancing of the date of hearing in the matter.

2. The record shows that the accompanying writ petition is listed before the court on 24.08.2023.

3. Mr Sunil Agarwal, learned senior standing counsel, who appears on behalf of the respondents/revenue, says that he would have no objection if this court were to allow the application for early hearing and take up the writ petition for final hearing and disposal, today itself. 3.1. It is ordered accordingly.

4. The application is disposed of in the aforesaid terms.

W.P.(C) 14695/2022 1/5 Signature Not Verified Digitally Signed By:ATUL JAIN Signing Date:10.03.2023 19:06:27

W.P.(C) 14695/2022 & CM 45071/2022[Application filed on behalf of the petitioner seeking interim relief]

2. The petitioner has assailed the lower withholding tax certificate dated 03.08.2022 issued by the respondents/revenue concerning its application preferred under Section 197 of the Income Tax Act, 1961 [in short, "Act"]. Besides this, challenge is also laid to the communication/order dated 17.08.2022.

3. The petitioner had moved an application on 08.06.2022 under Section 197 of the Act requesting that a certificate be issued to it setting out the withholding tax at "NIL" rate.

3.1. Via the impugned order, this application has been rejected and the withholding tax rate has been fixed at 10%.

4. To be noted, the petitioner is a recipient of the fee remitted by its partners located in India. The petitioner claims that it has entered into various agreements, which are, broadly, referred to as „Reseller Agreements‟ with its partners in India for the purpose of providing software-based information security solutions.

4.1 According to the petitioner, it is likely to receive, under the agreements, from its reseller partners for the period-in-issue USD 5,39,68,374, which is equivalent to INR 4,18,41,68,013/-.

5. What is not in dispute is that in the earlier Assessment Years (AYs) i.e., AY 2019-20 and AY 2020-21, the petitioner offered to pay withholding tax at the rate of 10%.

5.1. These receipts were treated, at that juncture, as Fees for Technical Services (FTS) under Section 9(1)(vii) of the Act.

W.P.(C) 14695/2022 2/5 Signature Not Verified Digitally Signed By:ATUL JAIN Signing Date:10.03.2023 19:06:27

6. Mr Kishore Kunal, who appears on behalf of the petitioner, says that fresh reasoning has been accorded by the Supreme Court via its decision rendered in Engineering Analysis Centre of Excellence (P.) Ltd. v. Commissioner of Income tax, [2021] 432 ITR 471. 6.1. Mr Kunal says an application was filed for the period-in-issue i.e., Financial Year (FY) 2022-23 (AY 2023-24), seeking a certificate under Section 197 of the Act for imposing tax at the "NIL" rate. 6.2. Mr Kunal states that the impugned order fails to deal, not only with the petitioner‟s submission concerning Article 12 of the Indo-US Double Taxation Avoidance Agreement [in short, "DTAA"] which concerns fees for included services (FIS) available in India, but also the judgment of the Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd. 6.3. Mr Kunal states that other decisions in support of the application were also cited, which have not been adverted to in the impugned order. 6.4. In sum, the contention is that payment received by the petitioner against software-based information security solutions to its partners under the Reseller Agreements cannot be treated as Royalty, both as per Indo-US DTAA and the judgement rendered by the Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd.

6.5. According to Mr Kunal, there is no transfer of copyright owned by the petitioner in favour of its Indian Partners under Reseller Agreements.

7. We may note that in the counter-affidavit, the respondents/revenue have brought to the fore the fact that for AY 2021-22, the petitioner has deposited Equalization Levy (EL) at the rate of 2%. 7.1 This deposit, it appears, was made on 27.09.2022. According to the W.P.(C) 14695/2022 3/5 Signature Not Verified Digitally Signed By:ATUL JAIN Signing Date:10.03.2023 19:06:27 respondents/revenue, the AO was informed about the deposit of EL only thereafter i.e., on 20.10.2022.

8. Although, on merits, Mr Sunil Agarwal has raised several contentions, including the fact that the scope of the proceedings under Section 197 of the Act is different from assessment proceedings, he cannot but accept the fact that there is no discussion whatsoever in the impugned order, with regard to provisions of Article 12 of the Indo-US DTAA and the judgment of the Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd.

9. According to us, the concerned officer would have to re-examine the application filed on behalf the petitioner under Section 197 of the Act, both, in the backdrop of Article 12 of the Indo-US DTAA and the judgment of the Supreme Court rendered in Engineering Analysis Centre of Excellence (P.) Ltd.

9.1 That said, the other decisions which have been cited by the petitioner, will also have to be adverted to by the concerned officer.

10. Accordingly, the impugned certificate dated 03.08.2022 and communication/order dated 17.08.2022 are set aside. 10.1. The concerned officer will carry out a fresh exercise and pass an order once again, having regard to what has been stated by us hereinabove. 10.2. This exercise will be carried out by the officer within the next two weeks.

10.3. The concerned officer will grant hearing to the petitioner and/or its authorized representative. The date and time of hearing will be communicated to the petitioner via email.

10.4 The concerned officer will be at liberty to accord hearing via W.P.(C) 14695/2022 4/5 Signature Not Verified Digitally Signed By:ATUL JAIN Signing Date:10.03.2023 19:06:27 video conferencing (VC).

11. The writ petition is disposed of in the aforesaid terms. Pending application shall stand closed.

12. The date already fixed in the matter i.e., 24.08.2023 shall stand cancelled.

13. Parties will act based on the digitally signed copy of the order.

RAJIV SHAKDHER, J TARA VITASTA GANJU, J MARCH 6, 2023 pmc Click here to check corrigendum, if any W.P.(C) 14695/2022 5/5 Signature Not Verified Digitally Signed By:ATUL JAIN Signing Date:10.03.2023 19:06:27

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Delhi High Court - Orders