MICRO FOCUS MARIGALANTE LTD,UNITED KINGDOM vs. DEPUTY COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION, CIRCLE-1(1), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE

BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER

IT(IT)A No. 905/Bang/2023 Assessment Year : 2021-22

M/s. Micro Focus Marigalante Ltd., M/s. Micro Focus Software The Deputy and Solutions India Pvt. Commissioner of Ltd., Income Tax, No. 66 1/6th Floor Olympia International Building, Taxation, Bagmane Tech Park, Circle – 1(1), Vs. Sir CV Raman Nagar, Bangalore. Bangalore – 560 093. PAN: AAFCE4838G APPELLANT RESPONDENT

Assessee by : Shri Ketan Ved, CA Revenue by : Shri D.K. Mishra, CIT (DR)

Date of Hearing : 01-02-2024 Date of Pronouncement : 22-03-2024 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal arises out of the final assessment order dated 22.09.2023 passed by the DCIT, International Taxation, Circle – 1(1), BLR for A.Y. 2021-22 on following grounds of appeal:

Page 2 of 11 IT(IT)A No. 905/Bang/2023 “The grounds mentioned hereinafter are without prejudice to one another. 1. That the order of the Learned Deputy Commissioner of Income-tax, International Taxation, Circle 1(1), Bangalore (`the learned Assessing Officer' or the 'the learned AO') passed pursuant to the directions of the learned Dispute Resolution Panel-2, Bangalore ('the learned Panel' or 'the learned DRP') is bad in law and facts, hence, liable to be quashed. 2. The Learned AO/ Learned DRP erred in treating the consideration received from ancillary support services as Fee for technical service ('FTS') as per the India-United Kingdom of Great Britain and Northern Ireland ('UK') Double Taxation Avoidance Agreement ('DTAA') and as per the Income-Tax Act, 1961 ('the Act'). The consideration received from the sale of software products also includes consideration for ancillary support services and these two are inseparable and cannot be taxed separately. The ancillary support services are part and parcel of the sale of software products. 3. The Learned AO / Learned DRP has erred in treating that the consideration received by the Appellant from the Indian distributor is in the nature of royalty taxable under section 9(1) (vi) of the Act and under Article 13 of India-UK DTAA. 4. The Learned AO / Learned DRP has erred in not following the Final Assessment Orders passed for AY 2019-20 and AY 2020-21 in Appellant's own case wherein consideration from the Indian distributor towards sale of software license is not treated as taxable under Royalty. 5. The Learned AO/ Learned DRP has erred in treating the software as 'customized software. 6. Without prejudice to the above, the learned AO has erred in treating the entire consideration of INR 1,53,80,49,135 for the sale of software and ancillary support services as receipts from ancillary support services taxable as FTS in the absence of bifurcation. 7. The learned AO/Learned DRP erred in arbitrarily treating 100% of the consideration towards ancillary support services as FTS as per the India-UK DTAA and as per the Act.

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2.2 It was submitted that assessee do not have any project office, liaison office, branch office, agent, or place of business operation in India. As such, the assessee does not have any Permanent Establishment (PE) in India within the meaning of Article 5 of the India UK DTAA. The assessee has earned the income from sale of software in India, which is treated as business income, and in

Page 4 of 11 IT(IT)A No. 905/Bang/2023 absence of a PE as per Article 5 of India-UK DTAA, the said income is considered as exempt from income tax in India and hence not offered for tax.

2.3 It was further submitted that assessee earned income from sale of software, which is treated as not taxable as per the DTAA entered between India and UK. It is also submitted that the customer while making the payment deducted TDS under section 195 of the Act, and thus the assessee computed ‘nil’ income and claimed a refund of TDS deducted by customers.

2.4 In support of the claim of the assessee, it relied on the decision of Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. and Ors. v/s. CIT reported in (2021) 432 ITR 431 (SC). The assessee thus prayed that the amount paid by resident Indian end users / distributors to the assessee for resale / use of computer software cannot be characterised as royalty under the provisions of Article 13(3) of India-UK DTAA.

2.5 The Ld.AO after considering various submissions of the assessee, held that, in addition to the sale of software product, the assessee also provided ancillary support services which is in- built in the cost of product sold which is in the form of installation support, technical support, guidance regarding errors crept in during installation and thereafter, navigation through the original software sold, periodical upgrading of software etc. The Ld.AO thus held that the services provided by the assessee were not only in the nature of FTS in terms of explanation to

Page 5 of 11 IT(IT)A No. 905/Bang/2023 Section 9(1)(vii) of the act but also FTS / FIS as per article 13(4) of India-UK DTAA.

2.6 The Ld.AO passed a draft assessment order proposing an addition in the hands of the assessee amounting to Rs.1,53,80,49,135/-.

2.7 In the draft assessment order, the assessee preferred objections before the DRP. The DRP after considering various submissions of the assessee rejected the applicability of FIS, but held that the services rendered by assessee were in the nature of FTS by observing as under: “6.6 As per Article 13 clause 4. For purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment is received; or make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. 6.7 Thus, the services are in the nature of FTS, it is evidently clear that the services come under para 4(b) of Article 13 of the DTAA and the payments are fees for included services. the services are ancillary and subsidiary to the use of Software which is protected by Law. The services are related to the application or enjoyment of the intangible and granting of the right to use the asset. Because the services are ancillary and subsidiary to the use of the software, the fees for these services are considered for included services under Para 4(b) of Article 12.” 2.8 On receipt of the DRP directions, the Ld.AO passed the impugned final assessment order making addition in the hands of the assessee.

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2.9 Aggrieved by the final assessment order, the assessee filed the present appeal before this Tribunal.

5.1 The Ld.AR drew our attention to the draft order of the Ld.AO where he himself admits that the software cost charged by the assessee includes the cost of service and cost of support and distribution activities. The Ld.AR also drew our attention to the copy of the invoice which clearly states that the software product is sold to Indian entity by the assessee for the purpose of resale. Accordingly the Ld.AR submitted that the assessee’s case is covered under the decision of the Hon’ble Supreme Court in the case of Engineering Analysis (supra). The Ld.AR further relied on the following decisions of the Coordinate Bench where the decision of the Hon’ble Supreme Court has been followed under similar circumstances:- Informatica LLC v. ACIT, IT(IT)A No.913/Bang/2019 dated (i) 5.7.2021

Page 7 of 11 IT(IT)A No. 905/Bang/2023 Informatica LLC v. ACIT, IT(IT)A No.2867/Bang/2019 (ii) dated 5.8.2021 (iii) Blue Yonder Inc. v. DCIT, IT(IT)A No.2696/Bang/2019 dated 12.8.2021 The Ld.DR relied on the order of the DRP.

We have perused the submissions advanced by both sides in the light of records placed before us.

5.2 We note that similar issue has been considered by Coordinate Bench of this Tribunal in assessee’s own case for A.Y. 2019-20 in ITA No. 877/Bang/2022 vide order dated 13.03.2023 wherein it has been held as under: “9. We heard the parties and perused the material on record. We notice that a similar issue has been considered by the coordinate Bench in the case of LLC v. ACIT, IT(IT)A No.2867/Bang/2019 dated 5.8.2021 where it is held that – “6. We notice that an identical issue has been examined by the coordinate bench in the assessee’s own case in AY 2016-17 and it has been decided in favour of the assessee with the following observations: 5. Similar issue for AY 2011-12 in the case of Nice Ltd. came up before the Hon’ble High Court of Karnataka in ITA No.7/2019 and vide judgment dated 26.3.2021 it was held as under:- The controversy involved in the present case, as “7. informed by the learned Counsel for the parties stands concluded on account of the judgment delivered by the Hon’ble Supreme Court in the case of ENGINEERING ANALYSIS CENTRE FOR EXCELLENCE PRIVATE LIMITED VS COMMISSIONER OF INCOME TAX & ANOTHER – AIR 2021 SC 124 / 432 ITR 471 (SC). The Apex Court in the aforesaid case has held in paragraphs 27, 47, 52, 168 & 169 as under: “27. The machinery provision contained in Section 195 of the Income Tax Act is inextricably linked with the charging provision contained in Section 9 read with Section 4 of the Income Tax Act, as a result of which, a person resident in India, responsible for paying a sum of money, “chargeable under the provisions of [the] Act”, to a non-resident, shall at the

Page 8 of 11 IT(IT)A No. 905/Bang/2023 time of credit of such amount to the account of the payee in any mode, deduct tax at source at the rate in force which, under Section 2(37A)(iii) of the Income Tax Act, is the rate in force prescribed by the DTAA. Importantly, such deduction is only to be made if the non-resident is liable to pay tax under the charging provision contained in Section 9 read with Section 4 of the Income Tax Act, read with the DTAA. Thus, it is only when the non-resident is liable to pay income tax in India on income deemed to arise in India and no deduction of TDS is made under Section 195(1) of the Income Tax Act, or such person has, after applying Section 195(2) of the Income Tax Act, not deducted such proportion of tax as is required, that the consequences of a failure to deduct and pay, reflected in Section 201 of the Income Tax Act, follow, by virtue of which the resident-payee is deemed an “assessee in default”, and thus, is made liable to pay tax, interest and penalty thereon. This position is also made amply clear by the referral order in the concerned appeals from the High Court of Karnataka, namely, the judgment of this Court in GE Technology (supra). 47. In all these cases, the “licence” that is granted vide the EULA, is not a licence in terms of Section 30 of the Copyright Act, which transfers an interest in all or any of the rights contained in Sections 14(a) and 14(b) of the Copyright Act, but is a “licence” which imposes restrictions or conditions for the use of computer software. Thus, it cannot be said that any of the EULAs that we are concerned with are referred to Section 30 of the Copyright Act, inasmuch as Section 30 of the Copyright Act speaks of granting an interest in any of the rights mentioned in Sections 14(a) and 14(b) of the Copyright Act. The EULAs in all the appeals before us do not grant any such right or interest, least of all, a right or interest to reproduce the computer software. In point of fact, such reproduction is expressly interdicted, and it is also expressly stated that no vestige of copyright is at all transferred, either to the distributor or to the end- user. Asimple illustration to explain the aforesaid position will suffice. If an English publisher sells 2000 copies of a particular book to an Indian distributor, who then resells the same at a profit, no copyright in the aforesaid book is transferred to the Indian distributor, either by way of licence or otherwise, inasmuch as the Indian distributor only makes a profit on the sale of each book.

Page 9 of 11 IT(IT)A No. 905/Bang/2023 Importantly, there is no right in the Indian distributor to reproduce the aforesaid book and then sell copies of the same. On the other hand, if an English publisher were to sell the same book to an Indian publisher, this time with the right to reproduce and make copies of the aforesaid book with the permission of the author it can be said that copyright in the book has been transferred by way of licence or otherwise, and what the Indian publisher will pay for, is the right to reproduce the book, which can then be characterized as royalty for the exclusive right to reproduce the book in the territory mentioned by the licence. 52. There can be no doubt as to the real nature of the transactions in the appeals before us. What is “licensed” by the foreign, nonresident supplier to the distributor and resold to the resident enduser, or directly supplied to the resident end-user, is in fact the sale of a physical object which contains an embedded computer programme, and is therefore, a sale of goods, which, as has been correctly pointed out by the learned counsel for the assessees, is the law declared by this Court in the context of a sales tax statute in Tata Consultancy Services v. State of A.P., 2005(1) SCC 308 (see paragraph 27). 168. Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in S.195 of the Income Tax Act to deduct tax at source, as the distribution agreements/ EULAs in the facts of these cases do not create any interest or right in such distributors/endusers, which would amount to the use of or right to use any copyright. The provisions contained in the Income Tax Act (S. 9(1) (vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases. 169. Our answer to the question posed before us, is that the amounts paid by resident Indian endusers/distributors to nonresident computer software manufacture/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

Page 10 of 11 IT(IT)A No. 905/Bang/2023 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. 8. In the light of the aforesaid judgment delivered by the Hon’ble Supreme Court, the question of law framed in the present appeal is decided in favour of the assessee and against the revenue.” 6. Further, the judgment relied on by the DRP in the case of Samsung Electronics (supra) was reversed by the Hon’ble Supreme Court in Civil Appeal No.8733- 8734/2018 &Ors. in the case of Engineering Analysis Centre for Excellence Private Limited v. CIT &Anr. (supra) which has been extracted in the foregoing paragraph. Being so, the issue before us is already settled by the Hon’ble Supreme Court in favour of assessee.” 7. Accordingly, following the decision rendered by Hon’ble Supreme Court in the case of Engineering Analysis Centre for Excellence Pvt. Ltd. (supra) and also following the decision rendered by the co-ordinate bench in AY 2016-17, we hold that receipts by way of sale of software licenses and provision of ancillary support services connected with the sale of software products cannot be assessed as royalty/FTS income in the hands of the assessee. Accordingly, we set aside the order passed by the AO on this issue.” 10.We notice that in assessee’s case, the consideration received is towards sale of software and other ancillary support services which fact has not been disputed by the lower authorities. We are therefore of the considered view that the decision of the apex Court in the case of Engineering Analysis (supra) and the above decision of the coordinate Bench are clearly applicable in assessee’s case. Accordingly, we set aside the order passed by the AO and delete the addition made.” 5.3 We also note that the Ld.AO himself has referred to the assessment order passed for A.Ys. 2019-20 and 2020-21 wherein admittedly the issue is identical. Reference is drawn to para 13 of the draft assessment order. The facts in the present year are

Page 11 of 11 IT(IT)A No. 905/Bang/2023 admitted to be similar and identical with that of the preceding years. The revenue has not been able to bring out any distinguishing feature in the relevant Assessment Year under consideration. We therefore are of the considered view that the decision of Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. and Ors. v/s. CIT (supra) and the decision of Coordinate Bench of this Tribunal in assessee’s own case are clearly applicable for year under consideration also. We therefore do not find any merit in the addition made by the Ld.AO and the same deserves to be deleted. Accordingly, ground nos. 2-7 raised by the assessee stands allowed. In the result, the appeal filed by the assessee stands allowed. Order pronounced in the open court on 22nd March, 2024.

Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 22nd March, 2024. /MS / Copy to: 1. Appellant 2. Respondent 3. CIT 4. DR, ITAT, Bangalore 5. Guard file 6. CIT(A) By order

Assistant Registrar, ITAT, Bangalore