Bombay High Court
Commissioner Of Income Tax (It) -3 vs Ms Lucent Technoligies Grl Llc on 1 July, 2024
Author: G.S. Kulkarni
Bench: G. S. Kulkarni
Digitally signed
by AARTI
AARTI
2024:BHC-OS:10307-DB
GAJANAN
GAJANAN PALKAR
PALKAR Date:
2024.07.15
18:31:24 +0530
4.ITXA.3695, 3081, 611, 621,&612.2020.doc
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL (L) NO.3695 OF 2018
WITH
INCOME TAX APPEAL (L) NO.3081 OF 2018
WITH
INCOME TAX APPEAL NO.611 OF 2020
WITH
INCOME TAX APPEAL NO.621 OF 2020
WITH
INCOME TAX APPEAL NO.612 OF 2020
Commissioner of Income Tax (IT)-3 Mumbai .... Appellant
Versus
M/s. Lucent Technologies GRL LLC .... Respondent
Mr Suresh Kumar for the Appellant.
Mr. Percy Pardiwalla, Senior Advocate a/w. Mr. Jas Sanghavi & Mr.
Yash Prakash i/b. PDS Legal for the Respondent.
CORAM : G. S. KULKARNI &
SOMASEKHAR SUNDARESAN, JJ.
DATE : 1 JULY, 2024 Oral Judgment (Per G.S. Kulkarni, J) :
1. This is a batch of Appeals filed by the Appellant-Revenue against the Respondent-assessee, who is common in all these proceedings.
2. Income Tax Appeal (L) No.3695 of 2018 pertains to the assessment year 2006-07 and Income Tax Appeal (L) No.3693 of 2018 pertains to the assessment year 2010-11. Both these appeals arise from the common order passed by the Income Tax Appellate Tribunal (for short "the Tribunal").
3. There are three other connected appeals, namely, Income Tax Page 1 of 10 1 July, 2024 Aarti Palkar ::: Uploaded on - 15/07/2024 ::: Downloaded on - 16/07/2024 04:37:47 :::
4.ITXA.3695, 3081, 611, 621,&612.2020.doc Appeal No.611 of 2020, Income Tax Appeal No.621 of 2020, Income Tax Appeal No.612 of 2020 and Income Tax Appeal No.3081 of 2018, which pertain to the assessment year 2004-05, 2007-08, 2005-06 and 2003-04 respectively.
4. Insofar as Income Tax Appeal (L) No.3695 of 2018 and Income Tax Appeal (L) No.3693 of 2018 are concerned, the Revenue has raised the following question of law:-
"Whether on the facts and in the circumstances of the case and in law, the Tribunal has erred in not holding payments received by the assessee for supply of software to Reliance Infocomm Limited (now Reliance Communication Limited) to be in the nature of "royalty" under Section 9(1)(vi) of the Income Tax Act, 1961?"
5. Insofar as the other three Appeals are concerned, [Income Tax Appeal No.611 of 2020, Income Tax Appeal No.621 of 2020, Income Tax Appeal No.612 of 2020] the question of law as raised is similar, which by consent of the parties is re-framed as under :-
"Whether on the facts and circumstances of the case and in law, the Tribunal has erred in holding that the payment made to assessee did not amount to income of the payee by way of "royalty" under Section 9(1)(vi) of the Income Tax Act, 1961?"
6. We have heard Learned Counsel for the parties. The relevant facts which are not in dispute and common to these proceedings are as follows:
7. In regard to the assessment years in question, the Respondent-assessee filed its return of income declaring NIL income, Page 2 of 10 1 July, 2024 Aarti Palkar ::: Uploaded on - 15/07/2024 ::: Downloaded on - 16/07/2024 04:37:47 :::
4.ITXA.3695, 3081, 611, 621,&612.2020.doc and also claimed Tax Deducted at Source ( "TDS") from the payments received from the purchasers (referred as "Reliance"). The return as filed by the Respondent was taken up for scrutiny by issuance of notices under Section 143(2) read with Section 142(1) of the Income Tax Act, 1961 ("the Act"). The assessing officer was of the view that receipts of the amounts in question from Reliance were on account of supply of the copyright software as per the terms of the Wireless Software Assignment and License Agreement. However, the case of the assessee was to the effect that the amount was a business income and was not taxable in India, in the absence of or assessee having a Permanent Establishment (PE) in India.
8. The Respondent-assessee contended that the Revenue receipts were in terms of the sale, as the software is supplied to Reliance was not a customized software, but a software which was sold to several clients. The Assessing Officer did not agree with the assessee's case, and held that the supply of such software amounted to a transfer of intellectual property rights, and hence, the consideration paid to the assessee was in fact towards a license to use the software, as no title or interest in the software was transferable to the user. The Assessing Officer accordingly held that the transaction not being a sale of the software and being a payment received for the license to use such software, it was taxable as 'royalty' in terms of Section 9(1)(vi) of the Act, read with relevant Article of the Double Taxation Avoidance Agreement ("DTAA") (i.e. Article 12 under the Indo-US DTAA and similar clauses in the other DTAA's)
9. As regards the assessee's claim for refund of the TDS, the Assessing Officer noted that Reliance had claimed refund of the tax as Page 3 of 10 1 July, 2024 Aarti Palkar ::: Uploaded on - 15/07/2024 ::: Downloaded on - 16/07/2024 04:37:47 :::
4.ITXA.3695, 3081, 611, 621,&612.2020.doc paid by it on such transaction, on the basis of an order passed by the Commissioner of Income-Tax (Appeals) ("CIT(A)") and hence, the claim of the assessee for refund of the amount be not entertained. Thus, the amount received by the assessee from Reliance was assessed as royalty and accordingly, was sought to be taxed.
10. Aggrieved by the orders passed by the Assessing Officer in treating such income as royalty income, the assessee approached the CIT(A). The assesee's appeal was adjudicated by the CIT(A) taking into consideration the agreements in question as also the transaction being viewed and considered on the applicability of Section 9(1)(vi) of the Act and the relevant Articles of the DTAA, namely, Article 12. The CIT(A) accordingly held that such amount received by the assessee did not amount to receipt of 'royalty' within the meaning of Section 9(1)(iv) of the Act. The Revenue being aggrieved by such orders of the CIT(A) carried the proceedings before the Tribunal. By the impugned orders, the Tribunal confirmed the orders passed by the CIT(A) by upholding the contentions as raised on behalf of the assessee and recording finding against the Revenue.
11. In the course of hearing of these appeals, Mr. Suresh Kumar, Learned Counsel for the appellant-revenue as also Mr. Pardiwalla, Learned Senior Counsel for the assessee alongwith Mr. Jas Sanghavi would contend that the question Whether the payments made by the Reliance Communication Limited for obtaining computer software whether were liable to be taxed in India as 'royalties' under the provisions of Section 9(1)(vi) of the Act had fallen for consideration of the Court in Income Tax Appeal No.1655 of 2018 alongwith connected Writ Petition No.1737 of 2018, Writ Petition No.1842 of Page 4 of 10 1 July, 2024 Aarti Palkar ::: Uploaded on - 15/07/2024 ::: Downloaded on - 16/07/2024 04:37:47 :::
4.ITXA.3695, 3081, 611, 621,&612.2020.doc 2018 & Writ Petition No.1850 of 2018, decided by this Court on 21 st June, 2024. Also a batch of appeals filed by the Revenue on similar issues filed against the Reliance Industries Ltd., came to be disposed of by an order dated 24th June, 2024.
12. We have perused the said orders. Learned Counsel for the parties are in agreement that the issue of law which we have noted hereinabove and which has arisen for the consideration of the Court in the case of Commissioner of Income Tax (LTU) Vs. Reliance Industries Ltd. (supra) would in fact answer, the question of law as raised in the present appeals.
13. Mr. Pardiwalla has submitted that once in respect of the party making payment to the assessee, such question of law had fell for consideration of the Court and was gone into in the proceedings of such party which had made payment to the present assessee, and when the Court had come to a considered view that the payment for software which was supplied by the assessee was not liable to be taxed as 'royalty' under the provisions of Section 9(1)(vi) of the Act, then certainly, the present assessee which had in fact supplied the software, cannot be treated differently and the same parameters of law would be required to be applied.
14. We find substance in the contentions raised by Mr. Pardiwalla that the question of law as raised by the Revenue in the present batch of appeals would stand covered by our orders in Income Tax Appeal No.1655 of 2018 and also a batch of appeals decided by us on 24 th June, 2024 in Income Tax Appeal No.28 of 2018 and other connected appeals. For the sake of convenience, we note our order passed in Page 5 of 10 1 July, 2024 Aarti Palkar ::: Uploaded on - 15/07/2024 ::: Downloaded on - 16/07/2024 04:37:47 :::
4.ITXA.3695, 3081, 611, 621,&612.2020.doc Income Tax Appeal No.1655 of 2018 which reads thus:-
"PC :
1. We have heard Mr. Suresh Kumar, Learned Counsel for the Appellant-Revenue and Mr. M. Agarwal, Learned Counsel for the Respondent.
2. At the outset, Mr. Suresh Kumar has stated that the Revenue would not have any objection for this Bench taking up the proceedings.
3. This Appeal of the Revenue assails an order dated 14th July, 2017 passed by Income Tax Appellate Tribunal ("Tribunal"), whereby a batch of appeals filed by the Revenue against the orders passed by the Commissioner of Income-Tax (Appeals) (for short "CIT(A)) stand dismissed. The primary issue which had arisen for consideration of the Tribunal was as to whether the remittance made by the assessee to foreign parties on account of purchase of certain computer software, required for the business of the assessee, would be liable to tax in India as "royalty" under the provisions of Section 9(1)
(vi) of the Income Tax Act, 1961 ("the Act") or would it be a business income of the recipient companies.
4. In its application as filed under Section 195(2) of the Act the assessee raised contentions as to why remittance made to such foreign parties was not liable to be taxed as "royalty", under the provisions of Section 9(1)(vi) of the Act. Such application of the assessee was rejected by an order dated 14 th September, 2003 passed by the Deputy Director of Income Tax (International Tax). The assessee carried the matter in appeal before the CIT(A). The appeals filed by the assessee were allowed by the CIT(A), against which at the behest of the Revenue the proceedings reached the Tribunal.
5. In assailing the orders passed by the Tribunal the Revenue has urged the following substantial question of law which we have reframed:-
"Whether the payments made by the assessee for obtaining computer software were liable to be to taxed in India as royalties under the provisions of Section 9(1)(vi) of the Act?"
6. We have heard the Learned Counsel for the parties. We have been taken through the impugned orders passed by the Tribunal.
7. The Tribunal considering the provisions of the IT Act, as also the position in law as laid down in various decisions has observed that the assessee had made purchases of computer software from the residents of Denmark and Finland. It was observed that such purchases would fall within the provisions of the Double Taxation Avoidance Agreement ("DTAA") entered between India and these Page 6 of 10 1 July, 2024 Aarti Palkar ::: Uploaded on - 15/07/2024 ::: Downloaded on - 16/07/2024 04:37:47 :::
4.ITXA.3695, 3081, 611, 621,&612.2020.doc countries. The Tribunal also observed that a co-ordinate Bench of the Tribunal in the assessee's own case in ITAS No.2529/Mum/2008 and ITAS No.4587/Mum/ 2010 had held that in such cases similar remittances made to the residents of Germany and France, were held to be not liable for deduction of tax at source. The Tribunal, following the decision of its co-ordinate Bench, in assessee's own case, dismissed the appeal filed by the Revenue by the impugned order.
8. At the outset, Learned Counsel for the parties would fairly state that the question of law as raised in the present appeals, is no more res integra in view of the authoritative pronouncement of the Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. vs. Commissioner of Income Tax 1. In the said case the Assessing Officer, applying Article 12(3) of the DTAA entered between India and U.S.A. as also the provisions of Section 9(1)(vi) of the IT Act ,to the transaction between the parties, held that the transaction involved copyright, which attracted the payment of royalty and accordingly, tax was required to be deducted at source by the Indian importer. Since this was not done, it was held that the assessee was liable to make good the payment of TDS which it had not deducted. Also interest under Section 201(1)(A) of the Act was levied. The Appeal before the Commissioner was also dismissed.
9. In these circumstances, the proceedings had reached the Tribunal at the instance of the assessee. The assessee succeeded in these proceedings, with the ITAT setting aside the concurrent findings of both the authorities below. On such backdrop, the proceedings reached the High Court.
10. The High Court of Karnataka, in similar proceedings, on examination of the End User Licence Agreement ("EULA") involved in such transactions found that what was sold by way of computer software, including the right or interest in copyright, which gave rise to the payment of royalty, would be an income deemed to have accrued in India under Section 9(1)(vi) requiring deduction of tax at source. The orders passed by the High Court were assailed before the Supreme Court. It is also required to be noted that similar issues had arisen before the Delhi High Court interalia in the case of DIT vs. Ericson A.B. and DIT vs. Nokia Network. The Delhi High Court however took a view contrary to the view taken by the High Court of Karnataka. The Supreme Court examined the issues as arising from the decisions of both the High Courts in the case of Engineering Analysis Centre of Excellence (P.) Ltd (supra). The Supreme Court in its decision rendered in the said case upheld the view taken by the Delhi High Court in interpreting such transactions in the context of Section 9(1)(vi) of the Act. The Supreme Court held that considering the provisions of DTAA, there was no obligation on the persons mentioned in Section 195(1) of the Act to deduct tax at source as the distribution agreements, in the facts of the case did not create any interest or right in such distributors/end users, which amounted to the 1 [2021] 125 taxmann.com 42 (SC) Page 7 of 10 1 July, 2024 Aarti Palkar ::: Uploaded on - 15/07/2024 ::: Downloaded on - 16/07/2024 04:37:47 :::
4.ITXA.3695, 3081, 611, 621,&612.2020.doc use or right to use any copyright. It was held that the provisions of Section 9(1)(vi) of the Act along with Explanation 2 and 4 thereof which dealt with royalty, not being more beneficial to the assessee, had no application in the facts of the case. It would be appropriate to extract the conclusion as rendered by the Supreme Court in which reads thus:-
"168. Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in section 195 of the Income-tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income-tax Act (section 9(1)
(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases.
169. Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-
resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income-tax Act were not liable to deduct any TDS under section 195 of the Income-tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment.
170. The appeals from the impugned judgments of the High Court of Karnataka are allowed, and the aforesaid judgments are set aside. The ruling of the AAR in Citrix Systems (AAR) (supra) is set aside. The appeals from the impugned judgments of the High Court of Delhi are dismissed."
(emphasis supplied)
11. It is not in dispute that transactions in the present case are similar to what had fell for consideration of the Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd (supra). Also there is no dispute that there is a DTAA entered with the countries in question, with whose residents the transactions were entered into by the assessee.
15. In the aforesaid circumstances, it is clear that the approach of the Assessing Officer in the present case was against the correct position in law as held by the Tribunal, and now also endorsed by the Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd (supra). In this view of the matter, we are in agreement with Mr. Madhur Agarwal that these four Appeals would not give rise to the question of law as noted by us hereinabove.
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4.ITXA.3695, 3081, 611, 621,&612.2020.doc
16. As fairly pointed out by the learned Counsel for the parties, as the facts are not in dispute as also the DTAA in question applicable we are not discussing the facts involved in each of these Appeals.
17. The Appeals are accordingly dismissed as they do not give rise to any question of law. No costs."
18. The order dated 24th June, 2024 passed in Income Tax Appeal No.28 of 2018 is also required to be noted, as we had disposed of a batch of appeals filed by the Revenue in terms of what we had decided in Income Tax Appeal No.1655 of 2018 Commissioner of Income Tax-(LTU) vs. Reliance Industries Ltd. (supra).
"P.C.:
1. We have heard learned counsel for the parties.
2. We have listed these appeals as the parties are ad idem that they would stand covered by the order dated 21 June, 2024 passed by this Court in Income Tax Appeal No. 1655 of 2018 [Commissioner of Income Tax-(LTU) vs. Reliance Industries Ltd.]. We, however, find that some of these appeals, on account of prior orders passed by the Division Bench directing service of the appeals on the respondent and on failure to take appropriate steps the appeals stood dismissed without further reference to the Court. We are, however, informed that in fact, in many of these appeals, the respondent, on service of the proceedings by the department, had already filed vakalatnama and therefore, there was no need for further steps to be taken by the department to serve the respondent/assessee and hence the automatic order was not applicable. This is also agreed on behalf of the respondent/assessee. In this view of the matter, we restore to the file of this Court all the appeals which came to be automatically dismissed by such orders passed by the Division Bench.
3. Office to accordingly take further appropriate steps to show these appeals as restored."
19. It is hence clearly seen from the aforesaid orders that this Court had come to the considered view that the question of law would in fact stand covered by the authoritative pronouncement of the Supreme Court in the case of Engineering Analysis Centre of Page 9 of 10 1 July, 2024 Aarti Palkar ::: Uploaded on - 15/07/2024 ::: Downloaded on - 16/07/2024 04:37:47 :::
4.ITXA.3695, 3081, 611, 621,&612.2020.doc Excellence (P.) Ltd. vs. Commissioner of Income Tax2.
20. For the aforesaid reasons, no fault can be found in the orders passed by the Tribunal. The appeals would not give rise to any open question of law. They are accordingly dismissed. No costs.
[SOMASEKHAR SUNDARESAN, J.] [ G. S. KULKARNI, J. ] 2 [2021] 125 taxmann.com 42 (SC) Page 10 of 10 1 July, 2024 Aarti Palkar ::: Uploaded on - 15/07/2024 ::: Downloaded on - 16/07/2024 04:37:47 :::