M/S. ALTAIR ENGINEERING INC.,,UNITED STATES vs. INCOME-TAX OFFICER, WARD INTERNATIONAL TAXATION-1(1), BENGALURU

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ITITA 734/BANG/2023Status: DisposedITAT Bangalore04 December 2023AY 2021-2212 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the receipts of Rs.106,45,39,629/- from the sale of software are not taxable in India as royalty. The Tribunal reasoned that the DRP's decision to tax the amount as royalty solely to keep the issue alive pending a review petition before the Supreme Court was incorrect. It emphasized that a review petition does not obliterate the ratio laid down in a judgment, which remains binding until an order on review is passed. Therefore, following the binding decision of the Hon'ble Supreme Court in Engineering Analysis Centre of Excellence Private Ltd. (supra), the additions were deleted. Regarding the cross-charges of Rs.2,67,77,488/-, the Tribunal restored the issue to the AO, following its own previous orders for AY 2019-20 and 2020-21, directing the AO to examine whether these amounts represent reimbursement of expenses. Grounds related to interest under Sections 234A and 234B were dismissed as consequential and rendered infructuous. The Special Leave Petition was dismissed as infructuous.

What were the facts?

The assessee, M/s. Altair Engineering Inc., a US-based company providing software solutions, is a non-resident in India. For Assessment Year 2021-22, it filed a return declaring Nil income and claiming a refund of Rs.10,34,84,610/-. The assessee received Rs.109,13,17,120/- from the sale of software, which it considered not taxable in India under the Income Tax Act and the Indo-US DTAA, relying on the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd. The Assessing Officer (AO), following DRP directions from AY 2019-20, passed a draft assessment order proposing to treat the entire receipts as 'royalty' under Section 9(1)(vi) of the Act and the DTAA. The assessee's objections to the DRP were rejected, and the DRP directed the AO to tax the receipts as royalty, citing the pendency of a review petition by the department in the Supreme Court.

What were the issues?

1. Whether the receipts of Rs.106,45,39,629/-, comprising direct sales of standard off-the-shelf software and sales to its subsidiary Altair India for onward distribution, are taxable as 'royalty' under Section 9(1)(vi) of the Income Tax Act, 1961, read with Explanations 2 and 4, and Article 12(3) of the Indo-USA DTAA, considering the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd. (Assessee's contention: No, the receipts are not royalty and the Supreme Court's decision is binding. Revenue's contention: Supported the AO and DRP orders, implying the receipts are royalty). 2. Whether the cross-charges of Rs.2,67,77,488/- for third-party software purchased on behalf of the subsidiary are taxable as royalty. (Assessee's contention: This issue is covered by previous Tribunal orders for AY 2019-20 and 2020-21, which restored the matter to the AO for examination as reimbursement. Revenue's contention: Supported the AO and DRP orders). 3. Whether the charging of interest under Sections 234A and 234B is justified. (Assessee's contention: Not explicitly stated, but implied by challenging the additions. Revenue's contention: Supported the AO and DRP orders).

Which sections of the Income-tax Act were involved?

Section 9(1)(vi),Section 143(3),Section 144C(13),Section 90(2),Section 234A,Section 234B

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “C” BENCH : BANGALORE

Before: SHRI GEORGE GEORGE K & SHRI LAXMI PRASAD SAHU

For Appellant: Shri. Tata Krishna, Advocate
For Respondent: Dr. Manjunath Karkihalli, CIT(DR)(ITAT), Bengaluru
Hearing: 01.12.2023Pronounced: 04.12.2023

Per George George K, Vice President:

IT(IT)A No.734/Bnag/2023

This appeal at the instance of the assessee is directed against final assessment order dated 29.08.2023, passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2021-22.

2.

Brief facts of the case are as follows:

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Assessee is a company incorporated and registered in USA. It is engaged in the business of providing software solutions. It is non-resident in India within the meaning of section 6(3) of the Act. For the Assessment Year 2021-22, the return of income was filed on 14.03.2022 declaring Nil income and claimed refund of Rs.10,34,84,610/- being tax deducted at source. The assessee was in receipt of a sum of Rs.109,13,17,120/- being consideration received from sale of software. The assessee was of the view that the receipts are not chargeable to tax both as per the Income Tax Act and Indo-US DTAA. Assessee had relied on the judgment of the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd., Vs. CIT and Another reported in (2021) 432 ITR 471 (SC). The return of income filed by the assessee was selected for scrutiny and notice under section 143(2) of the Act was issued on 27.06.2023. In response to the various notices issued under section 142(1) of the Act (refer page 2 of the final assessment order), assessee had duly complied with the same. The AO passed draft assessment order on 22.12.2022 proposing to treat the total receipt of Rs.109,13,17,120/- as ‘royalty’ within the meaning of explanation 2 to section 9(1)(vi) of the Act as well as the provisions of DTAA. The AO relied on the directions of the Dispute Resolution Panel (DRP) issued for the Assessment Year 2019-20 in assessee’s own case.

3.

Aggrieved by the draft assessment order, assessee filed objections before the DRP. During the proceedings before the DRP, assessee furnished additional evidence in respect of cross charges of cost to the subsidiary (Altair India Ltd.,) for third party software purchases on behalf of such subsidiary to the tune of Rs.2,67,77,488/-. The DRP issued direction on 21.07.2023 under section 144C(5) of the Act. The DRP rejected the objections raised by the assessee and held that facts for the impugned Assessment Year 2021-22 are identical to facts for

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Assessment Year 2020-21. Therefore, it was concluded by the DRP that directions issued by the earlier panel for Assessment Year 2020-21 in assessee’s own case are applicable to this Assessment Year also. Pursuant to the directions of the DRP, the AO passed the impugned final assessment order under section 143(3) r.w.s. 144C(13) of the Act, on 29.08.2023 by treating the entire receipts of the assessee amounting to Rs.109,13,17,120/- as ‘royalty’ under section 9(1)(vi) of the Act.

4.

Aggrieved by the Final Assessment Order dated 29.08.2023, assessee has filed the present appeal before the Tribunal. The learned Counsel for the assessee has filed a Paper Book enclosing therein the case laws relied on, the submissions made before the income tax authorities, copy of the subsidiary distribution agreement entered into between the assessee and Altair India, the relevant amendments to the distribution agreement, copy of the tax residency certificate, etc. The learned AR submitted that the issue in question is covered in favour of assessee by the orders of the Tribunal for Assessment Year 2019-20 in IT(IT)A No.844/Bang/2022 (order dated 07.02.2023) and also in assessee’s own case in Assessment Year 2020-21 in ITA No.642/Bang/2023 (order dated 30.10.2023).

5.

The learned DR supported the orders of the AO and DRP.

6.

We have heard the rival submissions and perused the material on record. Assessee is in receipt of Rs.109,13,17,120/- on account of sale of software and also cross charges of cost to the subsidiary for the third party software purchases on behalf of such subsidiary. The breakup of the total receipt of Rs.109,13,17,120/- of the assessee as per Form 26AS for the relevant assessment Year is as under:

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Particulars Gross Amount (Rs.) Direct Sale of standard [off the shelf] software 45,02,30,620 to end customers in India Distribution of software by the Appellant for onward sale through the subsidiary distribution agreement with Altair India Engineering Pvt. Ltd. (Hereinafter referred to as 'Altair India') 50,71,73,756 [i.e., Gross amount on which tax was deducted at source as reflecting in Form 26AS [A] Total receipts as per Form 26AS 95,74,04,376 Distribution of software by the Appellant for onward sale through the subsidiary distribution agreement with Altair India. 10,71,35,253 [Gross amount on which tax was not deducted at source relying on the decision of Engineering Software (supra) [B]] Cross-charge of costs to the subsidiary [i.e., Altair India] for third party software 2,67,77,488 purchased on behalf of such subsidiary Total 109,13,17,116

7.

The assessee before the Tribunal had raised 11 grounds and its various sub- grounds. Grounds 1 and 2 are general and no specific adjudication is called for. Hence, same are rejected. With regard to grounds 3, 4 and 5, assessee did not raise any arguments on the same. Hence, the same are rejected. Ground Nos.10 and 11 are with regard to charging of interest under section 234A and 234B. Charging of interest under section 234A and 234B is consequential. Hence, these grounds are also dismissed. The surviving grounds and its sub-grounds viz., grounds 6, 7, 8 and 9 reads as follows:

6.

As regards the addition of Rs. 45,02,30,620/- and Rs. 61,43,09,009/-, being receipts from Direct Sale of standard [off the shelf] software by the Appellant to end customers and receipts from sale of software by the

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Appellant to Altair India for onward distribution under the Subsidiary Distribution Agreement, respectively, as ‘royalty’:

6.1 The Lower Authorities are not justified in making the addition of Rs.106,45,39,629/- (Rs. 45,02,30,620 + Rs. 61,43,09,009), being receipts from Direct Sale of standard [off the shelf] software by the Appellant to end customers and receipts from sale of software by the Appellant to Altair India for onward distribution under the Subsidiary Distribution Agreement, respectively, as income in the nature of ‘royalty’. 6.2 The Lower Authorities are not justified in failing to appreciate that the receipts of Rs. 106,45,39,629/- would not amount to ‘royalty’ within the meaning of section 9(1)(vi) read with Explanations 2 and 4 thereto. 6.3 Without prejudice to the above, the Learned ITO is not justified in perversely concluding that the Appellant’s software is highly customizable, not shrink wrap or off the shelf software, involves transfer of rights and amount to process or rendition of service, without reading the agreement as a whole and appreciating the functionalities of the software dealt by the Appellant and merely based on surmises & conjectures. 6.4 Without prejudice to the above, even if the software is cloud based, the Learned ITO is not justified in taxing the sale of software as royalty. 6.5 Without prejudice to the above, the Lower Authorities are not justified in failing to appreciate that the receipts Rs. 106,45,39,629/- would not amount to ‘royalty’ within the meaning of Article 12(3) of the Indo-USA DTAA read with section 90(2) of the IT Act. 6.6 Without prejudice to the above, the Lower Authorities have erred in treating the receipts of Rs. 106,45,39,629/- as ‘royalty’, by ignoring the binding decision of the Honourable Supreme Court in Engineering Analysis Centre of Excellence Private Ltd.’s case

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(supra), thus violating the principles of Article 141 of the Indian Constitution.

6.7 Without prejudice to the above, the Lower Authorities having conceded that the case of the Appellant is covered by the decision in Engineering Analysis Centre of Excellence Private Ltd.’s case (supra), have erred in failing to follow such binding decision merely on the basis that the review petition against the said judgement filed by the department is pending before the Honourable Supreme Court, thus violating the principles of judicial discipline.

6.8 Without prejudice to the above, the Lower Authorities have erred in treating the receipts of Rs. 106,45,39,629/- as ‘royalty’, by ignoring the binding decision of this Honourable Tribunal in the Appellant’s own case in IT (IT)A No. 844/Bang/2022, dated 07.02.2023 for AY 2019-20.

6.9 Without prejudice to the above, the Learned ITO has erred in changing his stand year after year under identical facts & circumstances of the case for sustaining the charge on the subject sale of software.

7.

As regards the addition of Rs. 2,67,77,488/- being costs of third party software purchased by the Appellant on behalf of Altair India, cross- charged by the Appellant to Altair India:

7.1 The Lower Authorities are not justified in making the addition of Rs.2,67,77,488/- being costs of third party software purchased by the Appellant on behalf of Altair India, cross-charged by the Appellant to Altair India.

7.2 The Lower Authorities are not justified in making the impugned addition of Rs. 2,67,77,488/- without considering the submissions

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made by the Appellant and the documents furnished in support of such submissions.

7.3 Without prejudice to the above, the Lower Authorities are not justified in making the impugned addition of Rs. 2,67,77,488/- without appreciating that the same represents reimbursement received by the Appellant from Altair India towards third party software purchased by it on behalf of Altair India and hence there is no income element embedded in such reimbursement.

7.4 Without prejudice to the above, the Lower Authorities are not justified in making the impugned addition of Rs. 2,67,77,488/- by failing to appreciate that the said sum does not amount to ‘royalty’ within the meaning of section 9(1)(vi) read with Explanations 2 and 4 thereto.

7.5 Without prejudice to the above, the Lower Authorities are not justified in failing to appreciate that the impugned addition of Rs.2,67,77,488/-would not amount to ‘royalty’ within the meaning of Article 12(3) of the Indo-USA DTAA read with section 90(2) of the IT Act.

7.6 Without prejudice to the above, the Lower Authorities are not justified in treating the above sum of Rs. 2,67,77,488/- as ‘royalty’, by ignoring the binding decision of the Honourable Supreme Court in Engineering Analysis Centre of Excellence Private Ltd.’s case (supra), thus violating the principles of Article 141 of the Indian Constitution.

7.7 Without prejudice to the above, the Lower Authorities having conceded that that the case of the Appellant is covered by the decision in Engineering Analysis Centre of Excellence Private Ltd.’s case (supra), have erred in failing to follow such binding decision merely on the basis that the review petition against the said judgement filed by the department is pending before the

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Honourable Supreme Court, thus violating the principles of judicial discipline.

7.8 Without prejudice to the above, the Lower Authorities have erred in treating the receipts of Rs. 2,67,77,488/- as ‘royalty’, by ignoring the binding decision of this Honourable Tribunal in the Appellant’s own case in IT (IT)A No. 844/Bang/2022, dated 07.02.2023 for AY 2019-20.

8.

Without prejudice to the above, the Learned ITO having treated the total receipts of Rs. 109,13,17,120/- as ‘royalty’ within the meaning of section 9(1)(vi) of the IT Act, has erred in making the addition of the said amount under the head ‘Income from Other Sources’ and levying tax on the said sum at 40% plus applicable surcharge and cess. 9. Without prejudice to the above, the Learned ITO erred in failing to follow the principle of consistency by arbitrarily changing the tax rate to 40% in the impugned year as compared to 10% in the AY 2019-20.

8.

We shall adjudicate the above grounds as under:

9.

Ground No.6 and its sub-grounds:

The above grounds relate to issue of taxability as royalty on account of receipt on sale of software by the assessee to its end customer in India and also receipt of sale proceeds effected through an Indian distributor. The total receipt is Rs.106,45,39,629/- (Rs.45,02,30,620/- direct sale to end customers + Rs.61,43,09,009/- sale through distribution agreement). With regard to the taxability of the above amounts as royalty within the meaning of section 9(1)(vi) read with explanations (2) and (4) thereof, we find that an identical issue was considered in assessee’s own case for Assessment Years 2019-20 and 2020-21

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(supra). The relevant finding of the Bangalore Bench of the Tribunal in assessee’s own case for Assessment Year 2019-20 (supra) which has been followed in the Tribunal order for Assessment Year 2020-21 reads as follows : “10. We heard the rival submissions and perused the material on record. We notice that the DRP while considering the impugned addition has held that – 2.6.5 It is seen from the details submitted by the assessee that it undertook the following transactions with India customers during the financial year a. Direct sale of standard off the shelf software licenses to end customers Rs. 38.53 crores b. Distribution through subsidiary distribution agreement with Altair India. Rs. 57.13 crores c. Cross charge of costs to the subsidiary for sale 3rd party licenses Rs. 1.54 crores 2.6.6 We direct the AO to verify whether the amounts mentioned in column c of Rs 1.5 crores pertain to cross charges / reimbursements and if they are found to be reimbursement, no question of taxing the same would arise. We direct he AO to tax the remaining amounts from the sale of software as 'royalty' .This direction is issued in order to keep the issue alive as the department has filed a review petition before the Hon’ble Supreme Court in the case of Engineering Analysis Centre of excellence Pvt Ltd v. the Commissioner of Income Tax & another. In the said review petition, one of the pleas taken is that in the batch of cases decided before the Hon'ble Supreme Court the owner of the soft ware has in fact parted with at least one of the rights listed in section 14(a)/14(b) of the copyrights Act. Another issue raised in the review petition is that the India has expressed its reservations on the OCED commentary on the aspect of taxing of software royalty. Further, the circulars have been issued by the CBDT while interpreting the explanation the Explanation 4 to section 9(1)(vi) which was inserted vide finance Act, 2012 (w.e.f 1-6-1976) to further emphasize that the sale of software is royalty.” 11. We also notice that the DRP has deleted the addition made by the AO in para 2.6.2 of the order. From the plain reading of the above observations it

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becomes clear that the DRP has accepted that the ratio laid down by the Hon’ble Supreme Court in the case of of Engineering Analysis Centre of Excellence P. Ltd. (supra) is applicable to the additions made towards sale of software. The reason as quoted by the DRP for taxing the amount as royalty is to keep the issue alive as the Department has filed a Review Petition before the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P. Ltd. supra). This decision of the DRP, in our view, is not correct. Mere filing of Review petition does not obliterate the ratio laid down in the judgment under review. It is only when an order on review is passed that the ratio can undergo change subject to the outcome of the review order. Till then, the ratio of the decision operates with force and remains binding on all the subordinate courts in the country. Considering the binding effect of the decision of the Hon’ble Supreme Court (supra), we hold that the income earned by the assessee on sale of software is not taxable in India and accordingly the additions made towards the same is deleted.”

10.

In light of the above order of the Tribunal in assessee’s own case, the addition made of Rs.106,45,39,629/- is deleted.

11.

Ground No.7 and its sub-grounds

The above grounds and its sub-grounds relate to the addition of Rs.2,66,77,488/- being the cost of third party software purchase by the assessee on behalf of its subsidiary in India and cross charged by the assessee to its subsidiary (Altair India). We find this issue also has been considered by the Bangalore Bench of the Tribunal in assessee’s own case for Assessment Year 2019-20 (supra) which has been followed subsequently by the Tribunal in assessee’s own case for Assessment Year 2020-21. The Tribunal had restored the matter to the AO to examine whether it is reimbursement of expenses. The relevant finding of the Tribunal for Assessment Year 2019-20 reads as follows:

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“12. With regard to the amount received as reimbursement / cross charge of cost by the assessee, we notice that the AO while passing the final assessment order did not consider the issue on merits for the reason that the assessee was given opportunity to furnish the details and that the assessee failed to do so within the time stipulated. We also notice that the assessee has vide letter dated 15.7.2022 has sought for an adjournment and on 25.7.2022, furnished documents such as invoices, certificate in Form 15CA and 15CB, purchase orders by the assessee on third party, etc. In view of this, we remit the issue back to the AO with a direction to consider the various details furnished by the assessee and decide the issue in accordance with law. Needless assessee may be given reasonable opportunity of being heard. It is ordered accordingly.”

12.

In view of the above order of the Tribunal in assessee’s own case for Assesment Years 2019-20 and 2020-21, the issue raised in ground No.7 and its sub-grounds are restored to the files of the AO. It is ordered accordingly.

13.

Grounds 8 and 9

The above grounds are regarding rate tax imposed @ 40% on taxability of Rs.109,13,17,120/-. Since we have allowed ground 6 in favour of assessee and restored ground 7 to file of the AO, grounds 8 and 9 are rendered infructuous. Hence, these grounds are dismissed.

SP No.39/Bang/2023

14.

Since we have decided the issue on merits, the SP filed by the assessee has been infructuous and same is dismissed.

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15.

In the result, the appeal filed by assessee is partly allowed and the stay petition is dismissed.

Pronounced in the open court on the date mentioned on the caption page.

Sd/- Sd/- Sd/- (LAXMI PRASAD SAHU) (GEORGE GEORGE K) Accountant Member Vice President Bangalore. Dated: 04.12.2023. /NS/*

Copy to: 1. Appellants 2. Respondent 3. DRP 4. CIT 5. CIT(A) 6. DR,ITAT, Bangalore. 7. Guard file By order

Assistant Registrar, ITAT, Bangalore.

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