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

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by assessee is directed against assessment order passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter “the Act”) dated 23.6.2023 for the assessment year 2020-21. The assessee has raised following grounds of appeal:

“The grounds mentioned hereinafter are without prejudice to one another. 1. That the order of the Learned 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

IT(IT)A No.623/Bang/2023 Micro Focus Marigalante Ltd., Bangalore Page 2 of 8 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. Without prejudice to the above, the learned AO has erred in treating the entire consideration of INR 71,49,90,256 for the sale of software and ancillary support services as receipts from ancillary support services taxable as FTS in the absence of bifurcation. 4. 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. 5. The learned AO has inadvertently mentioned the interest payable of INR 27,32,692 without providing a bifurcation of the applicable interests. 6. The learned AO has inadvertently treated an amount of INR 19,48,800, which is towards 'TDS on interest on refund', as 'refund issued' in the Order. However, such TDS on interest on refund is not reflected in any of the subsequent AY's Form 26AS and neither the credit of such TDS is claimed in the Return of Income filed. 7. The learned AO has erred in law and on facts and circumstances of the case in initiating penalty proceedings under section 270A of the Act.”

IT(IT)A No.623/Bang/2023 Micro Focus Marigalante Ltd., Bangalore Page 3 of 8 related services as non-taxable income. According to the ld. AO, the assessee has received the payment not only to sale of software but also for providing back up support such as distribution and services and customer support services for installation of technical support etc. Thus, the ld. AO was of the view that the compensation received not only consists of the cost of product but also cost of services, cost of support & distribution activities, which would amount to rendering of technical services. Therefore, he treated the 100% of that receipt as “fee for technical services” at Rs.71,49,90,256/-, the assessee sought direction from the ld. DRP on this issue. The ld. DRP vide direction dated 16.5.2023 confirmed the same by observing as under: “2.4 Having considered the submission of the assessee, the Panel perused the Distribution Agreement of the taxpayer with its Indian Entity. The Distributor, the Indian company gets access to the source code from the Supplier and in turn resells it to another End user or Distributor to enable the End user to download a copy of the software from a server hosted and maintained by the Supplier Factory. The End user will not be able to download the Software product unless it has indicated the acceptance of the Applicable terms and conditions of the Parent or the Affiliate. The Distributor is not granted any explicit or implicit rights to create or update or make or reproduce, distribute or make available to any third party, the software products except as permitted. The Distributor is not permitted to remove or alter any patent, copyright or trademark on the Software products and cannot sub license, assign or transfer the software product or any part of it. 2.5 Having perused the submissions made, the Panel observed as under: As regards the ground of objection raised with respect of treatment of provision of ancillary support services as Fee for technical services by the AO, the assessee submitted that the ancillary services include updates and patches that are akin to the software supplied by the assessee Company to distributors/ resellers in India, these are real time updates, version upgrades, bug-fixes, patches, etc. to the software sold by the Company which are ancillary to the sale of software.

IT(IT)A No.623/Bang/2023 Micro Focus Marigalante Ltd., Bangalore Page 4 of 8 2.6 The Panel concurs with the conclusion of the AO that the services rendered by the Indian Company vide the Distribution Agreement include not just providing routine support services but technical support in terms of correction of errors crept in during installation, installation support, periodic up gradation of software which are ancillary and subsidiary to the application or enjoyment of Software for which the payment has been made. Accordingly the Panel holds that the payments made for provision of ancillary support services are in the nature of fees for technical services as per Article 13(4) of India-UK DTAA. 2.7 The assessee has placed reliance on the judgment of Hon'ble Supreme Court in the case of Engineering Analysis Centre for Excellence Pvt. Ltd. With due respect to the judgment of the Hon'ble Supreme Court it is clear that the judgment of the Apex Court is on the issue of Sale of software by a Non Resident to an Indian Entity which would not be considered as Royalty. Whereas the assessee's case is different, the Assessee has not only sold the software but also provided technical support services or anciliary services to the Indian entity which is royalty/FTS income in the hands of the assessee as discussed in preceding paragraphs.

Against this assessee is in appeal before us. 3. After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in assessment year 2019-20. The Tribunal vide order in IT(IT)A No.877/Bang/2022 vide order dated 13.3.2023, wherein 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:- “7. The controversy involved in the present case, as informed by the learned Counsel for the parties stands concluded on account of the

IT(IT)A No.623/Bang/2023 Micro Focus Marigalante Ltd., Bangalore Page 5 of 8 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 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. A simple 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. 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

IT(IT)A No.623/Bang/2023 Micro Focus Marigalante Ltd., Bangalore Page 6 of 8 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 end user, 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/end users, 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 end users/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 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

IT(IT)A No.623/Bang/2023 Micro Focus Marigalante Ltd., Bangalore Page 7 of 8 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.”

3.1 In view of the above order of the Tribunal, taking a consistent view, we delete the addition made by the ld. AO. 4. The next ground for our consideration is with regard to chargeability of interest at Rs.27,32,692/- without providing bifurcation of the applicable interest. In our opinion, this is consequential and mandatory in nature and to be computed u/s 234A, 234B & 234C of the Act, as such this ground is infructuous. This ground of appeal is dismissed. 5. Next ground of appeal is with regard to mentioning in the computation sheet of tax and interest in the assessment order that refund amount at Rs.19,48,800/-. In our opinion, the ld. AO required to examine the Form No.26AS and given credit amount of refund in accordance with law. Ordered accordingly. 6. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 12th Oct, 2023

Sd/- Sd/- (Beena Pillai) (Chandra Poojari) Judicial Member Accountant Member

Bangalore, Dated 12th Oct, 2023. VG/SPS

IT(IT)A No.623/Bang/2023 Micro Focus Marigalante Ltd., Bangalore Page 8 of 8

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Asst. Registrar, ITAT, Bangalore.