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ITA nos.362 and 1736 Energy Solutions International India Pvt. Ltd., Hyderabad.

The assessee, in turn, on the basis of the purchase order of the customer, places a purchase order with its overseas associated enterprises for procuring the required software. The payment from customers towards software is received only once and there are no recurring payments. The learned AR submitted that the assessee is neither authorised nor is capable of making copies of the software as the software is protected with hardware lock or software lock permitting use by the end customer in India. Control over the hardware and software locks (source code) are the exclusive domain of AE. It was submitted, as a part of implementation process the assessee only carries out the configuration and parameter setting to suit the specific output needs of the clients. He further submitted, the overseas AE contract directly with the Indian customer for entering into the end user license agreement. It was submitted, the assessee does not have access to the source code of the software and the question of replicating/re-producing the software does not arise. It was submitted that in the aforesaid circumstances, the payment made to the Associated Enterprises (AE) cannot be considered to be royalty. In this context, the learned AR referred to clauses 14.4 of OECD commentary to stress upon the fact, when there is distribution of software on back to back basis, there is no requirement to deduct tax at source. In this context, the learned AR relied upon a decision in case of CIT vs. Dynamic Vertical Software India Private Limited (332 ITR 222). It was further contended by the learned AR that neither the Assessing Officer nor the CIT (A) have considered the facts and materials placed before them in proper perspective and hence have arrived at an erroneous conclusion. The learned AR further submitted that, the order of the ITA nos.362 and 1736 Energy Solutions International India Pvt. Ltd., Hyderabad.

CIT (A) for the assessment years 2004-05 and 2005-06 on which the Assessing Officer and CIT (A) relied upon while deciding the issue in the meanwhile has been set aside by the Income-tax Appellate Tribunal, Hyderabad Bench in ITA Nos. 1624 and 1625/Hyd/08 dated 10-2-2010 and the issue, has been remitted back to the Assessing Officer for considering the same afresh. The learned AR therefore contended that for the impugned years also the matter may be remitted back to the Assessing Officer to decide afresh after considering the contentions of the assessee as well as the ratio laid down in the decision reported in CIT vs. Dynamic Vertical Software India Private Limited (supra).

ITA nos.362 and 1736 Energy Solutions International India Pvt. Ltd., Hyderabad.

8. It is a fact that the Hon'ble Delhi High Court in case of CIT vs. Dynamic Vertical Software India P. Ltd (supra) has held that in case of payment towards purchase and sale of software by an assessee who acted merely as a dealer cannot be termed as royalty so as to require deduction of tax at source u/s 40(a)(i) of the Act. However, the assessee is required to establish the fact on record by producing supporting evidence that it was merely a distributor of software to the Indian customer by procuring from the overseas associated enterprise. The assessee is required to prove that the payment made was not for 'royalty' as defined in explanation 2 to section 9(1)(vi) read with India-US DTAA. It appears from the assessment order as well as the order of the CIT (A) that they have come to the conclusion with regard to the payment being made by the assessee as 'royalty' primarily relying upon the order of the CIT (A) passed for assessment years 2004-05 and 2005-06. However, the said order of the CIT (A) was carried in appeal to the Tribunal by the assessee. The Tribunal vide order dated 10-2-2010 in ITA Nos.1624 and 1625/Hyd/2008 remitted the matter back to the file of the Assessing Officer with the following observation:-

with law and decide the same after hearing all the contentions of the assessee."

9. Therefore, considering the submission of the parties in the light of the ratio laid down in case of CIT vs. Dynamic Vertical Software India P. Ltd (supra) and keeping in view the direction given by the co-ordinate bench in assessee's own case for the assessment years 2004-05 and 2005-06, we also remit the issue back to the file of the Assessing Officer who shall consider it afresh after examining all the facts and materials on record. The Assessing Officer shall also take into consideration any decision which may be relied upon by the assessee in support of its claim. Since we have remitted the issue back to the file of the Assessing Officer for considering the same afresh, it will be open to the assessee to raise all other contentions with regard to its claim of not being liable to deduct tax at source u/s 195 of the Act. With the aforesaid observation, the matter is remitted to the file of the Assessing Officer for deciding the same in accordance with law after affording a reasonable opportunity of being heard to the assessee.