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Income Tax Appellate Tribunal, DELHI BENCH: ‘D’ NEW DELHI
Before: SHRI G.S. PANNU, HON’BLE & SHRI SAKTIJIT DEY
PER SAKTIJIT DEY, JM:
Captioned appeals have been filed by the assessee assailing
the final assessment order passed under section 143(3) read with
section 144C(13) of the Income-tax Act, 1961 (for short ‘the Act’)
pertaining to assessment years 2015-16 and 2017-18 respectively
in pursuance to the directions of learned Dispute Resolution
Panel (DRP).
ITA No.7462/Del/2018 for AY: 2015-16
In ground nos. 1 to 5, the assessee has raised the common
issue of taxability of an amount of Rs.7,27,33,773/- received from
sale of licence to various Indian customers as royalty under
Article 12(3) of Indian – USA Double Taxation Avoidance
Agreement (DTAA).
Briefly the facts are, the assessee, a non-resident corporate
entity is a tax resident of United States of America (USA), hence,
governed under India – USA DTAA. As observed by Assessing
Officer, the assessee is a multi-channel application development
platform provider having over 350 customers spread in 45
countries. The assessee provides end to end integrated, cloud-
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based platform that enables enterprises to quickly design, build,
test, deploy and manage multi-channel application experience.
The assessee also provides a suite of customizable, ready-to-run
application that lower costs, ensure faster time to market, and
provide enterprises the flexibility to evolve at the speed of mobile
technology. For this purpose, assessee employs a specialized staff
of professionals globally dedicated to development, delivery, and
support of mobile solutions and technologies. It provides software
and support services to meet the demands of the ever changing
mobile landscape and provides customers with innovative
solutions.
Be that as it may, in the year under consideration, the
assessee received an amount of Rs.7,27,33,773/- from sale of
licence. However, in course of assessment proceeding, while
explaining the reason for not offering such income to tax, the
assessee submitted that the receipts are not in the nature of
royalty under Article 12(3) of India – USA DTAA, as, the said
provision does not cover a mere right to use of a copyrighted
product, but they cover only the use of or the right to use of the
copyright or embedded in the copyrighted products. The
Assessing Officer, however, was not convinced with the 3 | P a g e
ITA No.7462/Del/2018 & 616/Del/2021
submissions of the assessee and ultimately concluded that the
amount received is in the nature of royalty, both under section
9(1)(vi) of the Act as well as under Article 12(3) of India – USA
DTAA. Learned DRP, while dealing with assessee’s objections on
the issue, upheld the decision of the Assessing Officer.
Before us, learned counsel appearing for the assessee
submitted that the issue is squarely covered by the decision of the
Tribunal in assessee’s own case in assessment year 2014-15.
Though, learned Departmental Representative agreed with
the aforesaid submission of the assessee, however, he strongly
relied upon the observations of the Assessing Officer and learned
DRP.
We have considered rival submissions and perused
materials on record. It is evident, the assessee had entered into
End User Licence Agreement (EULA) with customers in India in
terms of which the assessee has granted licence to use certain
standardized software to the customer. The licences provided to
the end users are non-exclusive and non-transferable. The end
users of the licnese do not have any access to the source code,
nor there was any transfer of right in process or use of any
process. The limited right granted to the customers under EULA 4 | P a g e
ITA No.7462/Del/2018 & 616/Del/2021
is to use the software for their own internal purposes. Notably,
while deciding identical issue in assessee’s own case in
assessment year 2014-15, the Coordinate Bench in ITA
No.6018/Del/2017, dated 01.06.2022 has held as under:
“5. We have carefully considered the submissions of both the parties and gone through the record. 6. Ld. counsel of the assessee submitted that the issue is now squarely covered by the decision of Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Ltd. vs. The Commission of Income-tax in Civil Appeal Nos.8733-8734 of 2018. In this case, Hon'ble Apex Court expounded that consideration for the resale of the computer software through End User License Agreement (EULA)/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. Ld. counsel submitted that the facts in the assessee's case are identical. He further submitted that ITAT in assessee's own case earlier also has decided the issue in favour of the assessee. 7. Ld. DR for the Revenue could not dispute the above proposition. 8. Accordingly, respectfully following the precedent from Hon’ble Apex Court and duly taking note that Revenue has not disputed that the facts in this case are not identical, we set aside the order of the Revenue authorities and decide the issue in favour of the assessee.”
There is no dispute that factually the issue stands on the
same footing as assessment year 2014-15. Therefore, respectfully
following the decision of the Coordinate Bench in assessee’s own
case, as referred to above, we hold that the receipt in dispute is
not in the nature of royalty, hence, not taxable in India. The
Assessing Officer is directed to delete the addition. These grounds
are allowed.
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ITA No.7462/Del/2018 & 616/Del/2021
In ground no. 6, the assessee has challenged the addition of
Rs.1,23,20,383/- by treating it as Fee for Included Services (FIS)
under Article 12(4)(a) of Indian – USA DTAA. As discussed earlier,
while completing the assessment, the Assessing Officer held that
the amount received by the assessee towards granting licence
under EULA is in the nature of royalty, hence, taxable in India. In
the context of the said reasoning, the Assessing Officer held the
view that the receipts from annual maintenance charges of the
software are in the nature of FIS/FTS, both under the tax treaty
as well as under section 9(1)(vii) of the Act. Accordingly, he
brought to tax the amount of Rs.1,23,20,383/-. Learned DRP,
while deciding the objections of the assessee, upheld the decision
of the Assessing Officer.
We have considered rival submissions and perused the
materials on record. It is evident, being of the view that annual
maintenance charges are ancillary and subsidiary to the grant of
licence for right to use software, which is treated as royalty, the
Assessing Officer concluded that receipt from annual
maintenance charges is in the nature of FIS under Article 12(4)(a)
of India – USA DTAA as well as under section 9(1)(vii) of the Act.
However, while deciding the issue of taxability of receipts from 6 | P a g e
ITA No.7462/Del/2018 & 616/Del/2021
granting of licence, we have held that they are not in the nature of
royalty under the treaty provisions. That being the case, the
receipt from annual maintenance charges being not ancillary or
subsidiary to any royalty income cannot be brought to tax under
Article 12(4)(a) of the tax treaty. Therefore, it has to be seen,
whether it can come within the purview of Article 12(4)(b) of the
tax treaty. As could be seen, to be considered as FIS under Article
12(4)(b) under the tax treaty, the make available condition has to
be satisfied. In the facts of the present appeal, the Departmental
Authorities have failed to demonstrate that while rendering the
services, the assessee had made available technical knowledge,
experience, skills, knowhow etc. to the recipient of such services.
That being the case, the amount received cannot be treated as FIS
under Article 12(4)(b) of the tax treaty.
In any case of the matter, the entire case of the revenue is,
the amount received falls under Article 12(4)(a) of the treaty. In
view of the aforesaid, we hold that the amount received is not
taxable in India as it cannot be treated as FIS under Article 12(4)
of the tax treaty. Accordingly, we direct the Assessing Officer to
delete the addition.
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ITA No.7462/Del/2018 & 616/Del/2021
Ground no. 7, being consequential in nature, does not
require adjudication.
In the result, appeal is allowed, as indicated above.
ITA No.616/Del/2021 for AY: 2017-18
Ground no. 1, being a general ground, does not required
specific adjudication.
The issue raised in ground no. 2 is identical to the issue
raised in ground nos. 1 to 5 of ITA No. 7462/Del/2018 decided by
us in the earlier part of the order. Therefore, our decision therein,
will apply mutatis mutandis to this appeal as well. Accordingly,
the Assessing Officer is directed to delete the addition.
In ground no. 3, the assessee has raised the issue of
taxability of receipts from annual software maintenance charges
as FIS under Article 12(4)(a) of India – USA DTAA. This ground is
identical to ground no. 6 of ITA No. 7462/Del/2018 decided in
earlier part of the order. Following our decision therein, we direct
the Assessing Officer to delete the addition.
In ground no. 4, the assessee has raised the issue of
erroneous application of tax at the rate of 40% instead of 10%
under section 115(1)(b)(B) of the Act, with regard to the income
offered to tax in the return of income. It is an agreed position 8 | P a g e
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before us that the Assessing Officer has not, at all, considered the
issue. Therefore, it was submitted before us to restore this issue
to the Assessing Officer.
Considering the submissions of the parties, we restore this
issue to the Assessing Officer with a direction to verify assessee’s
claim and decide the issue in accordance with law. This ground is
allowed for statistical purposes.
Ground no. 5, being a general ground, is dismissed.
In the result, the appeal is partly allowed.
To sum up, the appeal for assessment year 2015-16 is
allowed and the appeal for assessment year 2017-18 is partly
allowed.
Order pronounced in the open court on 11th January, 2023
Sd/- Sd/- (G.S PANNU) (SAKTIJIT DEY) PRESIDENT JUDICIAL MEMBER
Dated: 11th January, 2023. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi
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