Income Tax Appellate Tribunal - Bangalore
Informatica Llc , Bangalore vs Assistant Commissioner Of Income Tax, ... on 9 May, 2024
IT(IT)A No.1099/Bang/2023
Informatica LLC, Bangalore
IN THE INCOME TAX APPELLATE TRIBUNAL
"C'' BENCH: BANGALORE
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND
SHRI KESHAV DUBEY, JUDICIAL MEMBER
IT(IT)A No.1099/Bang/2023
Assessment Year: 2021-22
Informatica LLC
2100, Seaport Boulevard
Redwood City, California
United States of America
C/o Informatica Business Solutions ACIT (International Taxation)
Private Limited Circle-1(2)
Vs.
No.66/1, Bagmane Commerz 02, Bangalore
Bagmane Tech Park
Bangalore 560 093
Karnataka
PAN NO : AACCI2354Q
APPELLANT RESPONDENT
Appellant by : Smt. Tanmayee Rajkumar, A.R.
Respondent by : Ms. Neera Malhotra, D.R.
Date of Hearing : 09.05.2024
Date of Pronouncement : 09.05.2024
ORDER
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal by assessee is directed against order of AO passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (in short "The Act") dated 18.10.2023. The assessee has raised following grounds of appeal:
1. Assessment bad in law and on facts The assessment order dated 18 October 2023 passed by the Assistant Commissioner of Income-tax (International Taxation), Circle-1(2) ['the Ld. AO'] under section 143(3) read with section 144C(5) of the Income tax Act, 1961 ('the Act'), is bad in law and on facts.
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2. Erroneous demands The Ld. AO has erred in:
a) Determining the total income of the Appellant at INR 53,74,49,127;
b) Determining a tax payable of INR 5,86,89,445;
c) Determining a net refund of INR 19,35,725 as already issued to the Appellant;
d) Erroneous mention that a refund of INR 1,935,725 has already been issued to the Appellant; and
e) Computing net refund of INR 3,23,299 as due to the Appellant.
3. Erroneous treatment of the consideration received for sale of software and provision of ancillary support services as 'royalty' 3.1 Without prejudice to the previous grounds, the Ld. AO and the DRP have erred in holding that consideration received by the Appellant would qualify 'royalty' under Article 12 of the Double Taxation Avoidance Agreement between India and The United State of America (the DTAA') and therefore subject to tax.
3.2 The Ld. AO and the DRP erred in failing to appreciate that notwithstanding the retrospective amendment made to section 9(1)(vi) of the Act vide Finance Act, 2012, the definition of 'royalty' under the DTAA has not undergone any change, and therefore the beneficial provisions of the DTAA continues to apply in the Appellant's case.
3.3
a) The Ld. AO and the DRP erred in holding that the Appellant has transferred certain rights to the distributors/ customers and therefore, the consideration for sale of software was taxable as royalty under the DTAA.
b) The Ld. AO and DRP failed to appreciate that access to software wherein a subject matter of copyright is embedded, without the right to exploit the copyright, does not amount to use or right to use the copyright in the copyrighted work.
3.4 The Ld. AO and DRP erred in holding that the consideration received by the Appellant is towards allowing the use or right to use a design, model or process and hence constituted royalty under the DTAA.
3.5 The Ld. AO and DRP misinterpreted the terms of the Informatica License and Service Agreement ('ILSA') based on selective reading of the clauses contained therein and thereby, erred in arriving at the conclusions mentioned above.
3.6 a) The Ld. AO and the DRP failed to appreciate that the facts in the instant case were similar to those in the case of Engineering Analysis Centre of Excellence Pvt Ltd vs CIT [2021] 125 taxmann.com 42 (SC) and erred in not following the binding decision of the Hon'ble SC.
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b) The Ld. AO erred in not following the decision of the Hon'ble SC on the basis that the Revenue had filed a review petition before the Hon'ble SC and that the matter had not attainted finality.
3.7 The L AO and the DRP have erred in not following the decisions pronounced by the jurisdictional Bangalore Bench of the Income-tax Appellate Tribunal ['ITAT'] in the Appellant's own case for AY 2015-16 and AY 2016-17, wherein following the Hon'ble SC decision in the case of Engineering Analysis (supra), the ITAT, inter alia, held that consideration received from sale of software was not taxable in India.
3.8 The Ld. AO and DRP have erred in disregarding the Appellant's submissions that the consideration received by the Appellant was chargeable to Equalisation Levy pursuant to amendments introduced vide the Finance Act, 2020 and therefore, the consideration was exempt u/s 10(50) of the Act from being taxed as royalty therein.
4. Initiation of penalty 4.1 The Ld. AO has erred in initiating penalty proceedings under section 274 read with section 270A of the Act.
5. Relief 5.1 The Appellant prays that the Ld. AO be directed to grant all such relief arising from the preceding grounds as also all relief consequential thereto.
2. Facts of the case are that the Appellant is engaged in the business of developing, manufacturing and distribution of software products. The Appellant had entered into agreements with distributors/resellers/customers in India for supplying software products and ancillary support services.
2.1 For the financial year 2020-21, relevant to the assessment year 2021-22, the Appellant received a sum of Rs. 23,86,73,233/- towards sale of software license and Rs. 29,87,75,892/- towards provision of ancillary support services. The Appellant filed its return of income declaring 'Nil' income on the basis that the consideration received from sale of software license and provision of ancillary support services to the Indian distributors/customers was not taxable in India as Royalty/Fees for Technical Services ("FTS").
IT(IT)A No.1099/Bang/2023 Informatica LLC, Bangalore Page 4 of 9 2.2 The return of income of the Appellant was selected for scrutiny and thereafter, the Assessing officer passed a draft assessment order proposing to make an addition of Rs. 53,74,49,125/- on the ground that the consideration received by the Appellant was for the use or right to use a design, model or process and the same constituted 'royalty' within the meaning of Article 12 of the DTAA and is liable to taxation in India as per the Act as well as the under the DTAA. 2.3 The Appellant filed its objections before the Dispute Resolution Panel ("DRP") which vide directions dated 12.09.2023 affirmed the addition proposed by the AO in the draft assessment order. Thereafter, the AO passed a final assessment order bringing to tax the entire consideration of Rs. 53,74,49,125/- received by the Appellant towards sale of software and provision of ancillary services, following its directions for assessment year 2019-20. 2.4 Aggrieved by the aforesaid order, the Appellant has preferred the present appeal before us.
3. With regard to ground No.3, the ld. A.R. for the assessee submitted that the issue of sale of software and ancillary services is squarely covered by the decision of this Tribunal in Appellant's own case for assessment years 2015-16 and 2016-17 vide order dated 05.08.2021 in IT(TP)A No. 2867/Bang/2018 (paragraphs 6 and 7) and order dated 05.07.2021 in IT(TP)A No. 913/Bang/2019 (paragraphs 5 to 7), wherein the Tribunal followed the decision of the Hon'ble Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT (reported in [2021] 125 taxmann.com 42 (SC)).
3.1 She submitted that the clauses of the agreements, which are similar to the agreement for AYs 2015-16 and 2016-17, make it clear that the case stands covered by the Hon'ble Supreme Court's decision in Engineering Analysis. Clause 1.2 of the sample agreement makes it clear that what is granted is only a non-exclusive, non-transferable, non-sublicensable license to only use the software, only in object IT(IT)A No.1099/Bang/2023 Informatica LLC, Bangalore Page 5 of 9 code format. Clause 1.2 makes it clear that except for a reasonable number of back-up copies, the customer cannot copy the software. Clause 1.4 makes it clear that the customer cannot distribute, sell, sub-license, subcontract or otherwise transfer copies of or rights to Products or any portion thereof or adapt, translate, reverse engineer, decompile or otherwise derive the source code for the products or allow third parties to do so. Clause 1.7 expressly states that all the proprietary rights, including copyrights remain the property of the Appellant. It is therefore evident that the distributors/customers only have a right to use the software and none of the rights in Section 14 of the Copyright Act are available to them.
3.2 With respect to ancillary support services rendered to distributors/ customers, the she submitted 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, she 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.
3.3 She further submitted that the Appellant has also discharged equalisation levy on receipts from sale of software and ancillary support services and therefore in terms of section 10(50) of the Act, the said income shall be exempt from income tax.
3.4 The ld. A.R. therefore submitted that the Appellant had received a sum of Rs. 53,74,49,125/- towards sale of software and provision of ancillary services to Indian distributors/customers, is neither taxable under Section 9(1)(vi) of the Act nor under Article 12 of the India-USA DTAA. Wherefore, she most humbly prayed that this Tribunal may be pleased to allow the present appeal, in the interests of justice and equity.
3.5 The ld. D.R. strongly relied on the orders of lower authorities.
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4. After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in assessee's own case for the assessment year 2016-17 in IT(IT)A No.913/Bang/2019 vide order dated 5.7.2021, wherein held that the ld. DRP is not justified in following the judgement of Hon'ble Karnataka High Court in the case of CIT Vs. Samsung Electronics (345 ITR 494) on the reason that the said judgement was overruled by Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. reported in (2021) 432 ITR 471, wherein held as follows:
"12. We have carefully considered the rival contentions and perused the records.
13. Undisputed fact of the case are, Assessee is an ILD license holder and responsible for providing connectivity to calls originating/terminating outside India. Assessee has entered into an agreement with NTOs for international carriage and connectivity services. According to the assessee, payment made to NTOs is towards inter-connectivity charges.
14. Assessee has also entered into a CTA with a Belgium entity Belgacom. Belgacom had certain arrangement with the Omantel for utilisation of bandwidth. Omantel transferred certain portion of its capacity to Belgacom and Belgacom had in turn transferred a portion of its capacity to the assessee.
15. Admittedly the equipments and the submarine cables are situated overseas. To provide ILD calls, assessee had availed certain services from NTOs. It is also not in dispute that Belgacom, a Belgium entity with whom assessee has entered into an agreement does not have any 'permanent establishment' in India.
16. Shri. Pardiwala contended that the payments made by assessee cannot be treated as either Royalty or FTS34 or business profits as no part of the activity was carried out in India. Revenue's reply to his contention is that, the income belongs to the payee. If, in the opinion of assessee, tax was not deductible, he ought to have approached the AO for the nil deduction certificate. It is also the further case of the Revenue that the agreement between assessee and the payee did not specify that income was not taxable.
17. The first question is whether the ITAT was correct in holding that DTAA cannot be considered under Section 201 of the IT(IT)A No.1099/Bang/2023 Informatica LLC, Bangalore Page 7 of 9 Act. It was argued by Shri. Percy Pardiwala that this issue is covered by the decision in GE Technolgy. We may record that a DTAA is a sovereign document between two countries. In GE Technology, the Apex Court has held as follows:
"7. ...While deciding the scope of Section 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of Section 195. Hence, apart from Section 9(1), Sections 4, 5, 9, 90, 91 as well as the provisions of DTAA are also relevant, while applying tax deduction at source provisions."
(Emphasis supplied)
18. The above passage has been noted and extracted in Engineering Analysis. Thus it is clear that an assessee is entitled to take the benefit under a DTAA between two countries. Hence, the ITAT's view that DTAA cannot be considered in proceedings under Section 201 of the Act is tenable.
19. The second question for consideration is whether the ITAT was correct in holding that the amendment to provisions of Section 9(1)(vi) inserting the Explanations will result in amendment of DTAA. The answer to this question must be in the negative because in Engineering Analysis, the Apex Court has held that Explanation 4 to Section 9(1)(vi) of the Act is not clarificatory of the position as on 01.06.1976 and in fact expands that position to include what is stated therein vide Finance Act, 2012.
20. The Explanation 5 and 6 to Section 9(1)(vi) of the Act has been inserted with effect from 01.06.1976. This aspect has also been considered in Engineering Analysis holding that the question has been answered by two Latin Maxims, lex no cogit ad impossibilia i.e. the law does not demand the impossible, and impotentia excusat legem i.e. when there is disability that makes it impossible to obey the law, the alleged disobedience of law is excused and it is held in Engineering Analysis as follows:
"85. It is thus clear that the "person" mentioned in section 195 of the income Tax Act cannot be expected to do the impossible, namely, to apply the expanded definition of "royalty" inserted by explanation 4 to section 9(1)(vi) of the Income Tax Act, for the assessment years in question, at a time when such explanation was not actually and factually in the statute."
"100. Also, any ruling on the more expansive language contained in the explanations to section 9(1)(vi) of the IT(IT)A No.1099/Bang/2023 Informatica LLC, Bangalore Page 8 of 9 Income Tax Act would have to be ignored if it is wider and less beneficial to the assessee than the definition contained in the DTAA, as per section 90(2) of the Income Tax Act read with explanation 4 thereof, and Article 3(2) of the DTAA "
21. The third question is, whether the payments made to NTOS for providing interconnect services and transfer of capacity in foreign countries is chargeable to tax as royalty. It was argued by Shri. Pardiwala, that for subsequent years in assessee's own case, the ITAT has held that tax is not deductable when payment is made to non-resident telecom operator. This factual aspect is not refuted. Thus the Revenue has reviewed its earlier stand for the subsequent assessment years placing reliance on Viacom etc35, rendered by the ITAT. In that view of the matter this question also needs to be answered against the Revenue.
22. The fourth question is whether the Income Tax Authorities have jurisdiction to bring to tax income arising from extra- territorial source. Admittedly, the NTOs have no presence in India. Assessee's contract is with Belgacom, a Belgium entity which had made certain arrangement with Omantel for utilisation of bandwidth. In substance, Belgacom has permitted utilisation of a portion of the bandwidth which it has acquired from Omantel. It is also not in dispute that the facilities are situated outside India and the agreement is with a Belgium entity which does not have any presence in India. Therefore, the Tax authorities in India shall have no jurisdiction to bring to tax the income arising from extra- territorial source.
23. The fifth question is whether the Revenue is right in holding that withholding tax liability should be levied at a higher rate. It was contended by Shri. Pardiwala that this issue is covered in assessee's favour in CIT Vs. M/s. Wipro36 and the same is not disputed. Hence, this question also needs to be answered against the Revenue.
24. The sixth question is whether assessee can be held liable for non-reduction of tax at source for payments made for the A.Ys. on the basis of amendment to Section 9(1)(vi) of the Act. This aspect has been considered by us while answering question No.2. It is held in Engineering Analysis that an assessee is not obliged to do the impossible. Admittedly, the A.Y.s under consideration are 2008-09 to 2012-13 and the Explanation has been inserted by Finance Act, 2012. In addition, we have also held that assessee is entitled for the benefits under DTAA."
IT(IT)A No.1099/Bang/2023 Informatica LLC, Bangalore Page 9 of 9 4.1 Further, for the assessment year 2015-16, Tribunal has followed this order of the Tribunal in IT(TP)A No.2867/Bang/2018 dated 5.8.2021. In view of the above, we allow the ground of the assessee in this appeal.
5. In the result, appeal of the assessee is allowed. Order pronounced in the open court on 9th May, 2024 Sd/- Sd/-
(Keshav Dubey) (Chandra Poojari)
Judicial Member Accountant Member
Bangalore,
Dated 9th May, 2024.
VG/SPS
Copy to:
1. The Applicant
2. The Respondent
3. The CIT
4. The DR, ITAT, Bangalore.
5 Guard file
By order
Asst. Registrar,
ITAT, Bangalore.