AVAYA INTERNATIONAL SALES LIMITED,GURGAON vs. ACIT, CIRCLE- INT. TAXATION 1(1)(1), NEW DELHI

O R D E R PER ANUBHAV SHARMA, J. M.:

1.

2. Brief facts of the case is that the assessee Avaya International Sales Limited (Avaya Ireland' or 'the Assessee') is a company incorporated in Ireland and a tax resident of Ireland. The assessee is engaged in the business of developing, marketing, licensing and providing enterprise communication networks related hardware, software and services to the customers located in different geographies in the world, including India. During the year under consideration, the assessee has earned income from sale of hardware, software and rendering of standard automated services to Indian customers. The assessee filed the original return of income under section 139(4) of the Act for Assessment Year 2016-17 on March 30, 2018 reporting Nil income and claiming a refund of Rs. 6,02,56,590 (for tax deducted at source) in the return of income. The return of income was selected for scrutiny by the Assistant Commissioner of Income Tax, Circle 1(1)(1), International Taxation ('the Ld. AO') and a notice dated 30 August 2018 under section 143(2) of the Act was issued to the assessee. Further, a notice dated 9 October 2018 under 142(1) of the Act along with detailed questionnaire was issued to the assessee. The assessee filed the requisite documents and information as sought by the Ld. AO in connection with the assessment proceedings.

3. During the course of assessment proceedings, the Ld. AO had required the assessee to submit reason as to why income from sale of software should not be taxable. In this regard, the Assessee had filed detailed submissions wherein it was submitted that receipt from sale of software do not qualify as transfer of 'copyright' and hence, is out of the ambit of 'royalty' as per Article 12(3) of the India-Ireland Double Taxation Avoidance Agreement (DTAA') and hence, is not taxable in India.

4. Further during the course of assessment proceedings, the Ld. AO had required the Assessee to submit reason as to why income from rendering Page | 2 Avaya International Sales Ltd sale of standard automated services should not be taxable as fees for technical services ('FTS'). In this regard, the Assessee had filed detailed submissions wherein it was submitted that the services provided by the Assessee are purely standard automated in nature and the same did not involve any human intervention. Accordingly, the same should not qualify as FTS as per Article 12 of the India- Ireland DTAA and hence, not taxable in India.

5. The Ld. AO treated the software sales as royalty and provision of business support activities as technical services taxable as FTS. The ld CIT(A) had deleted the addition of treating the software sales for the purpose of royalty by following relevant para 6.29 while sustained the additions of technical support as FTS as under:- “6.29 On the basis of the above observations, I find that the payment made by the customers of the appellant cannot be characterized as royalty either under the Income Tax Act or under the DTAA. The basis for conclusion as borrowed from judicial decision in this case summed up as under: • The customer has not been given any of the seven rights under S. 14 (a) (i) to (vii) of the Copyright Act, 1957 and, therefore what is transferred is not a copyright but actually a copyrighted article • The customer cannot commercially exploit the software and therefore a copyright is not transferred. • The software provided under the contract is goods and therefore no royalty can be said to be paid it. “

2. Ground 2: Initiation of penalty proceedings under section 271(1)(c), 271BA and 271F of the Act 2.1 That on the facts and circumstances of the case and in law, the learned CIT(A) has erred in dismissing grounds of appeal of the Appellant against the initiation of penalty proceedings under section 271(1)(c), 271BA and 271F of the Act. 2.2 That on the facts and circumstances of the case and in law, the learned CIT(A) has failed to appreciate that penalty proceedings initiated by the learned AO under section 271(1)(c), 271BA and 271F of the Act against the Appellant are bad in law and hence, the learned CIT(A) has erred in not directing the learned AO to drop these penalty proceedings.”

4. Avaya International Sales Ltd 2,77.739.39 (INR 1,77,75,194) as income from sale of software and hence, taxable as 'Royalty' at the rate of 10% as per Article 12 of the India-Ireland DTAA. It is prayed that the addition made by the Ld. AO be deleted. Ground No 5. On the facts and circumstances of the case, and in law, Ld. AO has erred in characterising the receipts from rendering of standard automated services as 'fees for technical services within the meaning of Article 12 of the India- Ireland DTAA. It is prayed that the income from rendering of standard automated services does not qualify as 'fees for technical services' as per India-Ireland DTAA. Ground No 6. On the facts and circumstances of the case, and in law, Ld. AO has erred in characterising the receipts to the tune of INR 30,04,84.790 as income from provision of services taxable as 'fees for technical services' at the rate of 10% as per Article 12 of the India-Ireland DTAA. It is prayed that the addition made by the Ld. AO be deleted. Ground No 7. On facts and circumstances of the case, and in law, Ld. AO erred in levying interest under section 234A of the Income-tax Act, 1961. It is prayed that the interest under section 234A of the Act be deleted. Ground No 8. On facts and circumstances of the case, and in law, Ld. AO erred in levying interest under section 234B of the Income-tax Act, 1961. It is prayed that the interest under section 234B of the Act be deleted. Ground No 9. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act on the additions made in the final assessment order. Your Appellant prays that the penalty proceedings be dropped. Ground No 10. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271F of the Act for delay in filing of return of income. Your Appellant prays that the penalty proceedings be dropped. Ground No 11. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271BA of the Act for non-filing of report from an accountant as required under section 92E of the Act. Avaya International Sales Ltd Your Appellant prays that the penalty proceedings be dropped. All the grounds of appeals stated above are without prejudice to each other.”

8. In regard to appeal of the revenue in it can be observed that the ld CIT(A) in para No. 6.29 and 6.30 had made relevant finding, however, the disputed question of fact and law in regard to issue involved stand now settled by the judgment of Hon'ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT and Another (2022) 3SCC 321, wherein, the Hon’ble Apex Court categorized the batch of appeals before it into following four categories of software payments: Category 1 – Sale of software directly to an end user by a non- resident Category 2 – Sale of Software by a non-resident to Indian distributors for resale to end customers in India Category 3 – Sale of software by a non-resident to a foreign distributor for resale to end customers in India Category 4 – Software bundled with hardware and sold by foreign suppliers to Indian distributors or end users. And held as under:- “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.”

ITA No.714/Del/2020 Avaya International Sales Ltd 8.1 The ld DR could not submit anything on fact or law to support the findings of the ld CIT(A) consequent to the judgment of the Hon'ble Supreme Court in Engineering Analysis Centre of Excellence Pvt Ltd (supra). 8.2 In the light of the aforesaid, Bench is of the considered opinion that the issue involved in this regard is now further covered in favour of the assessee by the decision of the Hon'ble Supreme Court. Thus, the grounds in appeal of the revenue have no substance.

9. In regard to appeal of the assessee the sum and substance of the argument on behalf of the assessee was that there is no dispute to the fact that the disputed standard automated services were in the nature of technical services and only submission was that these technical services were without human intervention. The ld AR submitted that the question of human intervention is a question of facts and need to be examined by the Tax Authorities below but the same was not examined.

10. In this context it is relevant to observe that the assessee had raised a ground in the alternative which the ld CIT(A) adjudicated in para 10.1 and 10.2 in his order as follows:- “10.1 The appellant had filed detailed written submission which is summarized as under: Ground No 12 Without prejudice to any other grounds of appeal

filed by the Appellant, on the facts and in the circumstances of the case and in law, the Ld. AO, has inadvertently considered the amount of provision of standard automated services as INR 30,04,84,790 instead of USD 9,714(INR 6,19,380).

1. Our submission • Without prejudice to our arguments in Ground 5 and Ground 6 of the submission, the Appellant submits that the Ld. AO has inadvertently considered the amount from provision of standard automated services as INR 30,04,84,790. • As mentioned in the bifurcation of total amount of receipts appearing in Form 26AS in para 2 of the submission above.. the Appellant submits that the receipts from provision of standard automated services is INR 6,19,380. • In this regard, alisting of invoices along with sample copies of invoices pertaining to provision of standard automated services is Page | 7 Avaya International Sales Ltd enclosed herewith for your Honour's reference (Page no to of the Paperbook).)

1. Prayer • In light of the above, on a without prejudice basis, the Appellant humbly requests your Honour to consider the amount in connection to provision of standard automated services as INR 6,19,380 Findings: 10.2 The appellant pointed out that the receipts from provision of standard automated services is Rs. 6,19,380/- as against the receipt of Rs. 30,04,84,790/- as taken by the AO. The AO is directed to verify the facts stated by the appellant and modify the consideration from provision of services at Rs 6,19,380/- after due verification. The ground of appeal is statistically allowed.”

11. As with regard to the alleged non examination of the issue in context of human intervention the ld DR submitted that the ld CIT(A) has taken into consideration those aspects and the reference made to the observation of ld CIT(A) in para 7.5 as follows:- “7.5 The AO observed in the assessment order that it is ample clear from the perusal of agreement entered into by the assessee with the Indian clients that for providing the technical services, human intervention is there in the form of service desk, support staff, Avaya accredited technician, Not only off site service but on site service was provided to the Indian clients as per the agreement. As per the Service Agreement following services through technical staff were to be provided to the Indian clients during the period of agreement. 2.1.2 Remote Tier III/Tier IV technical support service Under this service Avaya will provide the following technical support services directly to Partner's end user's own support staff • Assistance in isolating and recommending corrective action to resolve an escalated problem and to dial into the partner's and user's Avaya Product e.g. communication manager, to attempt to resolve the problem remotely on the product. • Case management and tracking of all service escalations • 24x7 remote support for major severity situations • Business day remote support for all other situations • Tier 3 (backbone) technical product support for Avaya products • Dispatch of Avaya accredited technicians with/without spare parts to supported sites and carry out on site hardware replacement and any further diagnostics activity.”

ITA No.714/Del/2020 Avaya International Sales Ltd 12. The ld DR relied on the judgment of Hon'ble Supreme Court in case of CIT Vs. M/s. Bharti Cellular 193 Taxman 97(SC) which is also been relied upon by the ld AR. The sum and substance of the judgment of the Hon'ble Supreme Court in M/s. Bharti Cellular (supra) is that question of human intervention needs to be examined by the expert and relevant finding of the Hon'ble Supreme Court are in para 7 to 11 which are reproduced below for convenience:- “7. Aggrieved by the AO's order, DTL filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)] being Appeal No. 34/09- 10 for the AY 2004-05. In the order dated 8th December 2010, dismissing the appeal, the CIT(A) agreed with the contention of DTL that Section 194C of the Act would apply since electricity was 'goods' as defined under Section 2 of the Sales of Goods Act and in terms of the contract, PGCIL was in fact transporting such goods to DTL. The CIT (A), however, held that "in the absence of sufficient legal precedent on the subject, I am unable to reject the view taken by Ld. Assessing Officer". The CIT (A), therefore, confirmed the said order of the AO. Some relief was granted as far as the calculation of interest payable. The order of the ITAT 8. DTL then carried the matter further in appeal to the Income Tax Appellate Tribunal (TTAT) by filing 2011 (for AY 2004-05). The ITAT agreed with the DTL that what had been availed by it from PGCIL was not a technical service. It was held that DTL was not liable to be saddled with higher liability of TDS. The appeal was accordingly allowed.