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Income Tax Appellate Tribunal, DELHI BENCH ‘D’, NEW DELHI
Before: SH. ANIL CHATURVEDI & SH. ANUBHAV SHARMA
This appeal filed by the assessee is directed against the order dated 16.08.2018 of the Deputy Director of Income Tax, New Delhi under section 143(3)/144C(13) of the Income Tax Act pursuant to the direction of Dispute Resolution Panel (DRP) – 2, New Delhi order dated 11.07.2018 for Assessment Year 2014-15.
Brief facts of the case as culled out from the material on record are as under:-
Assessee is a company stated to have been incorporated under the laws of the Kingdom of Netherland. Assessee filed its return of income for A.Y. 2014-15 on 28.11.2014 declaring total income of Rs.5,70,377/-. Assessee thereafter revised the return of income on 21.03.2016 declaring total income of Rs.5,70,380/- and claiming higher refund. The case was selected for scrutiny and notices u/s 142(1), 143(2) of the Act was issued and served on the assessee. During the course of assessment proceedings, assessee inter alia submitted that the business model/process of the company remained the same as in earlier years. AO noticed that during the year under consideration assessee had entered into international transactions with its Associated Enterprises (AE). For determination of arm’s length price for international transaction with AE, reference was made to TPO. The transactions between the AE and the assessee were examined by the TPO but no adverse inference was drawn by TPO. AO thereafter in the draft assessment order passed u/s 143(3)/144C dated 30.12.2017 proposed the total taxable income at Rs.5,23,15,00,092/-. Aggrieved by the draft assessment order dated 30.12.2017, Assessee carried the matter before DRP. DRP vide order dated 02.07.2018 passed u/s 144C(5) directed the AO to complete the assessment as per the directions contained therein. Consequent to the directions of DRP, AO passed order dated 16.08.208 u/s 143(3)/144C(13) and determined the total income of the assessee at Rs.5,23,150,092/-. Aggrieved by the aforesaid order of AO, assessee is now before us and has raised the following grounds of appeal:
1. The learned AO has erred, in fact and law, by holding that the income from the sale of software is royalty income under Article 12(3) of the Double Taxation Avoidance Agreement between India and Netherlands (‘Treaty’) and consequently liable to tax in India.
2. The learned AO has erred, in fact and law, by holding that the income from the sale of subscriptions is royalty income under Article 12(3) of the Treaty and consequently liable to tax in India.
3. The learned AO has erred, in law and in facts, by holding that the income from the provision of the services is royalty income and fees for technical services (“FTS”) under Article 12(4) of the Treaty and consequently liable tax in India.
4. Without prejudice to the above grounds, the learned AO has erred, in law and in facts, by calculating tax payable on additions made on income from sale of subscription at the rate of 40% (excluding cess and surcharge) instead of calculating at 10% on the gross basis as per Article 12 of the Treaty.
5. Without prejudice to the above grounds, the learned AO has erred, in law and in facts, by calculating tax payable on additions made on income from sale of software at the rate of 40% (excluding cess and surcharge) instead of calculating at 10% on the gross basis as per Article 12 of the Treaty.
6. Without prejudice to the above grounds, the learned AO has erred, in law and in facts, by calculating tax payable on interest income in the nature referred to in Section 115A(1)(a)(iiaa) of the Act at the rate of 40% (excluding cess and surcharge) as against the rate of 5% (excluding cess and surcharge) as envisaged under the provisions of Section 115A(1)(a)(iiaa) of the Act.
7. The learned AO has erred, in law and in facts, in levying interest under Section 234A of the Act, amounting to INR 32,07,834, disregarding the fact that the Company had furnish its Return of Income within the time allowed under Section 139 of the Act.
8. The learned AO has erred, in law and in facts, in levying interest under Section 234B of the Act, amounting to INR 8,50,07,601, disregarding the fact that the entire income of NetApp B.V., which has been held to be taxable, was subject to withholding taxes in India owing to which advance tax was not liable to be paid.
9. The learned AO has erred in initiating penalty proceedings under Section 271 (1)(c) of the Act, since the Appellant is not liable to tax in India.
The Appellant submits that each of the above grounds is independent and without prejudice to one another.”
Before us, at the outset, Learned AR submitted that the effective grounds that required adjudication are Ground Nos. 1 to 6 and further the ground raised by the assessee in Ground Nos. 1 to 5 are interconnected and are with respect to the taxing of the sale of software and subscribers as royalty income. In view of the aforesaid submissions of Learned AR, we first proceed with deciding Ground Nos. 1 to 5.
AO noticed that during the year under consideration, assessee had received Rs. 26,28,99,905/- from the sale of software and received Rs. 259,679,810/- towards subscriptions.
The assessee was asked to show-cause as to why the payment received by the assessee not be taxed as royalty to which assessee filed detailed submissions and it was inter alia submitted that the business model/processes of the assessee was similar to that of earlier years. It was further submitted that the payment received by the assessee did not constitute royalty and was therefore not taxable in India for the reason that the payment was for the use of a copyrighted article and not use of copyrights, the Distributors do not have the right to copy, distributors/customers do not own any of the IPR in and to the software and the software is embedded in the storage equipment and sold as a consolidated product and cannot be used separately. It was further submitted that the software provided does not require any customization for Indian customers and is to be used only in the business without right to reproduce/sub-license or any rights to exploit the copyright in the software. (The detailed submissions are reproduced by the AO on pages 5-11 of the draft assessment order). The submissions of the assessee were not found acceptable to AO. AO noted that the activities undertaken by the assessee during the relevant assessment year was identical to the activities undertaken by the assessee in A.Y. 2008-09, 2010-11 and 2011-12. He was further of the view that software receipts and subscription receipts were in the nature of royalty and taxable @10% on the gross basis as per Article 12 of the India- Netherlands treaty. The AO in the draft assessment order thus proposed the aforesaid addition. Aggrieved by the proposed addition, assessee carried the matter before DRP. Before DRP assessee inter alia submitted that in assessee’s own case for A.Y. 2008-09 & 2010-11, the Hon’ble Delhi High Court had ruled in favour of the assessee on the appeal filed by the department. DRP noted that against the order of Hon’ble High Court on the issue of royalty, the competent authority was contemplating to file SLP before the Hon’ble Apex Court. It accordingly upheld the proposed addition by AO. The AO thereafter in the assessment order framed u/s 143(3)/144C(13) of the Act dated 16.08.2018 treated the amount received from software and subscription receipts as royalty and taxed it @10% on gross basis. Aggrieved by the order passed by the AO consequential to the direction of DRP, assessee is now before us.
Before us, Learned AR at the outset submitted that the issue raised in the present grounds is covered in assessee’s favour by the decision of Tribunal in assessee’s own case for A.Y. 2013-14. He pointed to the order in order dated 20.09.2021 placed at page 165 of the paper book. He pointed to the para 6 of the order which is at pages 85 & 86 of the paper book and from there he pointed that the matter was restored to the file of AO and the AO was directed to carry out the necessary exercise in accordance with the directions issued by the Co- ordinate Bench of Tribunal in A.Y. 2008-09 and in the light of the ration laid down by the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence P. Ltd. vs. CIT reported in (2021) 432 ITR 471 (Supreme Court). He submitted that consequent to the direction of the Tribunal, an order was passed by the AO u/s 254 r.w.s 143(3) of the Act vide order dated 19.03.2022 and the AO accepted the income declared by the assessee without making any addition. He placed on record the copy of the aforesaid order. He therefore submitted that since the issue in the year under consideration is identical to that of earlier years, therefore, following the order of the Co-ordinate Bench of Tribunal in earlier years, the matter be decided.
Learned DR on the other hand did not controvert the submissions made by Learned AR but however supported the order of lower authorities.
We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to the taxability of receipts towards software and subscription. The AO had held the receipt to be royalty and taxed it @10% on the gross basis as per Article 12 in India-Netherland treaty. We find that AO in the order has noted the facts of the case in the year under consideration to be identical to that of earlier years. We find that identical issue arose in assessee’s own case in A.Y. 2013-14 before the Co-ordinate Bench of Tribunal. The Co-ordinate Bench of Tribunal in order dated 20.09.2021 had decided the issue in favour of the assessee by observing as under: “6.0 Ground Nos.3 & 4 are directed against the treatment of software and sale of subscription receipts as the royalty income under Article 12(3) of the India-Netherlands DTAA. The Assessing Officer, vide para 12 of the impugned final assessment order, has considered the subscription revenue of Rs.16,43,90,916/- in the nature of royalty and made addition to the extent of Rs.14,99,39,032/- in terms of Article 7 read with Article 12 of the DTAA. The Ld. AR submitted that the Assessing Officer has considered the addition on the basis of the view taken in the assessment order for Assessment Year 2008-09 and 2010-11. It was further submitted by the Ld. AR that identical issue had come up for consideration before this Tribunal in Assessment Years 2008-09 and 2010-11 wherein the issue was restored to the file of the Assessing Officer with the direction to verify whether the facts of the case were identical to those as decided by the Hon’ble Delhi High Court in the case of Infrasoft Ltd. reported in 264 CTR 329 (Delhi). It was accordingly submitted that this issue also may be similarly restored as per the order of the Co-ordinate Bench in Assessment Year 2008-09 and 2010-11.
7.0 Per contra, the Ld. CIT-DR relied upon the assessment order.
8.0 Having heard the rival submissions and after having perused the final assessment order, we fully agree with the contentions of the Ld. AR that the addition of software income is wholly based on the assessment order passed for Assessment Year 2008-09. This assessment order was the subject matter of appeal before the Co-ordinate Bench in wherein after noting the parity of facts between the case of the assessee and facts involved in the case decided by the Hon’ble Delhi High Court in the case of Infrasoft Ltd. (supra), the matter was restored to the Assessing Officer for verification. The relevant observations of this Tribunal are being reproduced herein under: “48. Ground No. 3 and 4 of the appeal of the assessee are against the order of the Ld. assessing officer in holding that income from sale of software and income from sale of subscriptions is royalty income under article 12 (3) of the treaty and consequently liable to tax in India. Ld. Assessing Officer has discussed the whole gamut of the taxation of the software taxable as royalty in paragraph No. 6 of his order. Before us, Ld. Authorized Representative submitted that now the issue is squarely covered in favour of the assessee in view of the decision of the Hon‘ble Delhi High Court in case of Director of income tax versus Infrasoft Ltd 264 CTR 329 (Delhi).He also submitted a chart during the course of hearing that compares the software considered by Hon‘ble Delhi High Court and the features of the software licensing agreement in the present case. He has demonstrated that the issue involved is similar stating various aspects of software licensing agreement as under:
Soft Limited Assessee • Clause 1 of Software License: • Clause 2(a) of the Infrasoft License Agreement: “Supplier grants to Buyer a “(a) Infrasoft grants License a nonexclusive license to use the non-exclusive, non- accompanying software in machine- readable form transferable license to use the software in accordance with (“Software”), together with the this agreement and the accompanying documentation.” Infrasoft License Schedule.” • Clause 2 of End User Software License: • Clause 2(d) of the infrasoft “NetApp shall retain title to the License Agreement: Software and the "(d) Licensee may make one accompanying documentation copy of the software and and all copies and any associated support information derivative works thereof. for backup purposes, provided Customer shall not make any that the copy shall include copies of the Software except Infrasoft’s copyright and other as reasonably required for proprietary notices. All copies backup purposes.” of the Software shall be the exclusive property of • Clause 2 of Software License: Infrasoft.” • “Buyer must not make any Clause 2(h) of Infrasoft license copies of the Software except agreement as reasonably necessary for backups. Neither Buyer nor “(h) Licensee may not copy, decompile. disassemble or any third party may: (a) reverse engineer or try to reverse-engineer the Software reconstruct or discover any without infrasoft’s written source code or underlying consent. The Licensee's rights shall not be restricted by this ideas used in the Software; or (b) remove or conceal any Clause 2(h) to the extent that local law grants Licensee a product identification or right to do so for the purpose proprietary notices contained of achieving interoperability in or on toe Software or with other software and in products; or (c) except as addition thereto Infrasoft allowed in Suppliers user undertakes to make documentation, modify or information relating to create a derivative work of any interoperability available to part of the Software. Licensee subject to such reasonable conditions as Buyer must not publish or Infrasoft may from time to provide any results of time impose including a benchmark tests run on the reasonable fee for doing so. To Software to a third party ensure Licensee receives toe without Suppliers prior written appropriate information, consent. Licensee must first give Infrasoft sufficient details of The Software is Supplier's its objectives and the other confidential property and is software concerned. Requests protected by copyrights and by for the appropriate information one or more U.S. patents should be directed to the Vice issued or pending. Buyer must president Technical of take adequate steps to protect Infrasaft” the Software from unauthorized use or • disclosure.” Clause 2(f) of the Infrasoft License Agreement is quoted • as below: Clause 2 of End User Software License : “(f) The Software shall be used only for Licensee's own “Customer shall not, nor shall business as defined within the Customer allow any third Infrasoft License Schedule and party to: (i) decompile, shat? not, without prior disassemble, decrypt, extract, written consent from Infrasoft; or otherwise reverse engineer or attempt to reconstruct or (i) be loaned, rented, sold, discover any source code or transferred to any third party underlying ideas, algorithms, (ii) used by any parent, or file formats of or of any subsidiary or affiliated entity components used in the of Licensee Software by any means whatever; or (ii) remove or (iii) Used for the operation of a conceal any product service bureau or for data identification., copyright, processing. patent or other notices contained in or on the Software or accompanying documents; or (iii) modify the Software, incorporate it into or with another Software, or create a derivative work of any part of the Software. Customer must not publish or provide any results of benchmark tests run on the Software to a third party without NatApp's prior written consent. • Clause 7 of End User Software License: “THIS LICENSE IS PERSONAL TO CUSTOMER.. CUSTOMER SHALL NOT ASSIGN, SUBUCENSE OR TRANSFER THE LICENSE OR AGREEMENT WITHOUT NET APRS PRIOR WRITTEN APPROVAL; ANY ATTEMPT TO DO SO SHALL BE VOID.”
The revenue is also not seriously disputed before us that the issue is not covered by the decision of the Hon‘ble Delhi High Court. However the issue needs to be verified by the Ld. assessing officer whether the licensing agreement involved in the present appeal is similar to the issue decided by the Hon‘ble Delhi High Court. Therefore we set aside ground3 and 4 of the appeal of the assessee back to the file of the Ld. assessing officer to decide the issue afresh considering the decision of the Hon‘ble Delhi High Court. In the result ground No. 3 and 4 of the appeal of the assessee allowed with above direction.”
8.1 It is also pertinent to note that the issue of software royalty was recently adjudicated by the Hon’ble Apex Court in the case of Engineering Analysis Center of Excellence Pvt. Ltd. vs. CIT (2021) 432 ITR 471 (SC). The Hon’ble Apex Court, in its detailed judgment, has analyzed various aspects of the issue taking into consideration end user license, Copy Right Act, and provisions contained in DTAA and the Income Tax Act and has laid down the parameters to test whether the receipt from sale of software would tantamount to royalty or not. Therefore, in view of the above, the Assessing Officer is directed to carry out the necessary exercise in accordance with the directions issued by the Co-ordinate Bench in Assessment Year 2008-09 duly keeping in mind the ratio laid down by the Hon’ble Apex Court in the case of Engineering Analysis Center of Excellence Pvt. Ltd. vs. CIT (supra) and adjudicate the issue accordingly after giving due and proper opportunity to the assessee to present its case. Thus, ground Nos. 3 & 4 are allowed for statistical purposes.”
We further find that consequent to the direction of the Tribunal, AO passed order on 19.03.2022 u/s 254 r.w.s 143(3) of the Act for A.Y. 2013-14 and the AO has accepted the income declared by the assessee and no addition was made. Since the facts of the case in the year under consideration are identical to that of earlier years, we following the decision of Tribunal for A.Y 2013-14 and for similar reasons are of the view that no addition is required to be made. Thus the grounds of assessee are allowed.
Ground No.6 is with respect to the tax payable on interest income.
It was noticed that assessee had received interest on incorporate loan from NTPL amounting to Rs. 5,70,377/-. The AO taxed the interest income @40%. It is the contention of the assessee that the AO has considered it to be an interest income as referred in Section 115A(1)(a)(iiaa) of the Act and taxed it @ 40% as against the rate of 5% as envisaged under the provisions of Section 115A(1)(a)(iiaa) of the Act. He fairly submitted that the matter may be remitted back to the file of AO for necessary verification and directions to which Learned DR has not objection.
We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to rate of tax to be applied to the interest income. In view of the agreement of Learned AR and Learned DR for restoring the matter back to the file of AO for necessary verification, we restore the issue to the file of AO for carrying out necessary verification and thereafter to bring it to tax in accordance with law. Needless to state that the AO shall grant adequate opportunity of hearing to the Assessee. Assessee is also directed to promptly furnish all the required details called for by the authorities. Thus the ground of the assessee is allowed for statistical purposes.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 08.04.2022