M/S. ALTAIR ENGINEERING INC.,,UNITED STATES vs. INCOME-TAX OFFICER, WARD INTERNATIONAL TAXATION-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 ['the Act' for short] for the assessment year 2020-21 dated 13.7.2023. The assessee also filed stay petition seeking the stay of outstanding disputed demand of Rs.51,28,42,784/- for the assessment year 2020-21.

ITA No.642/Bang/2023 M/s. Altair Engineering Inc., Bangalore Page 2 of 12 section 6(3) of the I.T. Act. During the relevant FY 2019-20 (AY 2020-21), the Assessee was a resident of the United States for America for the purpose of U.S. taxation and also held tax residency certificates issued by the Internal Revenue Services (IRS) for the calendar years 2019 and 2020. 2.1 The Assessee filed a return of income for the impugned AY on 12.02.2021 declaring a total income of Rs. NIL/- and claiming a refund of Rs. 11,75,95,485/- (being tax deducted at source) on the basis that sum of Rs. 1,08,55,63,748/- being consideration received from the sale of standard software was not chargeable to tax both as per the IT Act and the Indo-USA DTAA, by relying on the decision in Engineering Analysis Centre of Excellence Private Ltd., vs. CIT Another [2021]432 ITR 471 (SC).

2.2 The break-up of the total receipts of Rs. 1,0.8;55,63,748/- of the Assessee as per Form No. 26AS for the FY 2019-20 (AY 2020-21) is as under [With reference to paragraph 2.2.2 of the directions of the Learned DRP]:

Particulars Amount (Rs.) 36,44,20,248 Direct Sale of standard [off the shelf] software to end customers Distribution of software by the Assessee for 67,12,80,331 onward - sale through the subsidiary distribution agreement with Altair India Engineering Pvt. Ltd. (hereinafter referred to as 'Altair India') Cross-charge of costs to the subsidiary [i.e. 4,98,63,169 Altair India] for third party software purchased on behalf of such subsidiary

TOTAL 1,08,55,63,748

ITA No.642/Bang/2023 M/s. Altair Engineering Inc., Bangalore Page 3 of 12 - . . 2.3 The case of the Assessee was selected for scrutiny by issue of notice under section 143(2) of the Act dated 29.06.2021. The Assessee duly filed a response to the said notice on 29.07.2021.

2.4 The Income Tax Officer, Ward International Taxation - 1(1), Bengaluru (Learned ITO) passed the draft Assessment order on 28.09.2022 proposing to treat the total receipts of Rs. 1,08,55,63,748/- of the Assessee as per Form No. 26AS for the FY 2019-20 (AY 2020-21) as 'Royalty' within the meaning of Explanation 2 to section 9(1)(vi) of the IT Act as well as the provisions of the DTAA by relying on the directions of the Learned DRP for preceding AY 2019-20.

2.5 Aggrieved by the same, the Assessee filed its' objections in Form No. 35A before the Learned Dispute Resolution Panel-1, Bengaluru (hereinafter referred to as DRP'). As a part of the said objections, the Assessee furnished, additional evidences in respect of cross-charge of costs to the subsidiary [i.e. Altair India] for third party software purchased on behalf of such subsidiary to the tune of Rs. 4,98,63,169/-.

2.6 With respect to the additional evidences furnished before the Learned DRP in respect of cross-charge of costs to the subsidiary [i.e. Altair India] for third party software purchased on behalf of such subsidiary to the tune of Rs. 4,98,63,169/-, the Learned DRP called for a remand report from the Learned AO.

2.7 The Learned AO forwarded the remand report dated 26.04.2023 to the Learned DRP.

2.8 The Learned DRP issued directions dated 06.06.2023 under section 144C(5) of the IT Act. In the paragraph 2.2.2 of the said directions, the DRP observed that the assessee

ITA No.642/Bang/2023 M/s. Altair Engineering Inc., Bangalore Page 4 of 12 undertook the following transactions with the Indian customers during the FY in question: A. Direct Sale of standard [off the shelf] software to end customers - Rs. 36,44,20,248/- B. Distribution of software by the Assessee for onward sale through the subsidiary distribution agreemen.t with Altair Andia Engineering Pvt. Ltd. (hereinafter referred to as 'Altair India') - Rs. 67,12,80,331/- C. Cross-charge of costs to the subsidiary [i.e. Abair India] for third party software purchased on behalf of such subsidiary - Rs. 4,98,63,169/-

2.9 As the facts of the case for the impugned AY are identical to the facts for the AY 2019-20, the Learned DRP reiterated its' directions for the earlier AY 2019-20.

2.10 Pursuant to the above directions, the Learned AO passed the final assessment order under section 143(3) read with section 144C(13) of the Act on 13.07.2023 for the AY 2020-21, treating the total receipts of Rs. 1,08,55,63,748/- of the Assessee as per Form No. 26AS for the FY 2019-20 (AY 2020-21) as royalty under section 9(1)(vi) of the IT Act and making an addition in respect of the same under the head “Profits and gains from business/profession” under section 28 of the Act. Consequent to the same, the Learned AO issued a demand notice on 13.07.2023 raising a demand of Rs. 51,28,42,780/-.

2.11 Aggrieved by the above final assessment order dated 13.07.2023 and the directions of the Learned -DRP, the Assessee has preferred the instant appeal before us.

ITA No.642/Bang/2023 M/s. Altair Engineering Inc., Bangalore Page 5 of 12

5.1. The impugned directions of the Learned DRP dated 06.06.2023 are invalid and bad in law as the same are in violation of the CBDT Circular No. 19/2016, dated 14.08.2019. 5.2. The Learned DRP having accepted that the case of the Appellant is squarely covered by the decision in Engineering Analysis Centre of Excellence Private Ltd., vs. CIT & Another [2021] 432 ITR 471 (SC), is not justified in directing the Learned Assessinq Officer to treat the total receipts to the tune of Rs. 1,08,55,63,748/- as 'royalty', thus violating the principles of Article 141 of the Indian Constitution and judicial discipline.

5.3. The Learned DRP having accepted that the facts of the case for the impugned AY is similar to that of the case for AY 2019-20, has erred in failing to follow the decision of this Honourable Tribunal in the Appellant's own case for the AY 2019-20, despite such decision being brought to the notice of the Learned DRP.

5.4. The Learned DRP has erred in failing to consider the additional evidences furnished by the Appellant with respect to cross-charge of costs to the subsidiary [i.e. Altair India] for standard software purchased from third parties on behalf of such subsidiary to the tune of Rs. 4,98,63,169/-.”

4.1 These grounds are not argued before us since the main issue is covered by earlier order of the Tribunal in assessee’s own case for the assessment year 2019-20 in IT(IT)A No.844/Bang/2022 vide

ITA No.642/Bang/2023 M/s. Altair Engineering Inc., Bangalore Page 6 of 12 order dated 7.2.2023. Hence, these are grounds dismissed as not argued.

6.1. The Lower Authorities are not justified in making the addition of Rs. 1,03,57,00,579/- (Rs. 36,44,20,248 + Rs. 67,12,80,331), 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. 1,03,57,00,579/- would not amount to 'royalty' within the meaning of section 9(1)(vi) read with plantations 2 and 4 thereto. 6.3. Without prejudice to the above, the Lower Authorities are not justified in failing to appreciate that the receipts Rs. 1,03,57,00,579/- 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.

6.4. Without prejudice to the above, the Lower Authorities have erred in treating the receipts of Rs. 1,03,57,00,579/- 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.

6.5. 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

ITA No.642/Bang/2023 M/s. Altair Engineering Inc., Bangalore Page 7 of 12 Honourable Supreme Court, thus violating the principles of judicial discipline.

6.6. Without prejudice to the above, the Lower Authorities have erred in treating the receipts of Rs. 1,03,57,00,579/- as 'royalty', by ignoring the binding decision of this Honourable Tribunal in the Appellant's own case for AY 2019-20.

5.1 After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in assessee’s own case in assessment year 2019-20 in IT(IT)A No.844/Bang/2022 vide order dated 7.2.2023, wherein the Tribunal has held as under:

“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

ITA No.642/Bang/2023 M/s. Altair Engineering Inc., Bangalore Page 8 of 12 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 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.” 5.2 In view of the above order of the Tribunal in assessee’s own case, the addition is deleted on similar lines.

7.1. The Lower Authorities are not justified in making the addition of Rs.4,98,63,169/- 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. 4,98,63,169/- without considering the submissions 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. 4,98,63,169/- 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.

ITA No.642/Bang/2023 M/s. Altair Engineering Inc., Bangalore Page 9 of 12 7.4 Without prejudice to the above, the Lower Authorities are not justified in making the impugned addition of Rs. 4,98,63,169/- 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. 4,98,63,169/-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. 4,98,63,169/- 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 b' 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.

7.8. Without prejudice to the above, the Lower Authorities have erred in treating the receipts of Rs. 4,98,63,169/- as 'royalty', by ignoring the binding decision of this Honourable Tribunal in the Appellant's own case for AY 2019-20. 6.1 At the time of hearing, the ld. A.R. submitted that the assessee has raised this issue before ld. DRP. The ld DRP has called for the remand report from the ld. AO. Admittedly, assessee has raised an objection vide objection no.3 before the ld. DRP and the ld. DRP called for remand report on this issue from the ld. AO who has given the reply on this to the ld DRP as follows:

“6. Objection no:3 The assessee has also stated that the learned assessing officer has erred in perversely stating that an amount of Rs. 4,98,63,169/- as cross charges out of the total receipts of Rs. 108,55,63,748/- but could not submit any evidence in

ITA No.642/Bang/2023 M/s. Altair Engineering Inc., Bangalore Page 10 of 12 support of the claim made, when no such details were sought during the proceedings:

6.1 In this connection, it is humbly stated that the assessee vide the notice u/s 142(1) dated 29.08.2022 vide point no. 4 was duly asked to furnish the details of "consideration received in respect of cross charges". In compliance to the said notice the assessee company vide its reply dated 04.09.2022 submitted partial details of the cross charges. However, the said details of the cross charges were not substantiated by any documentary evidences. In view of the above stated facts, the objection raised by the assessee company is treated as invalid and is also treated as disposed off. It is also noteworthy to mention here that the assessee 7. has majorly raised objection against the addition made in the draft assessment order and vide his objection filed before the Hon'ble DRP Bangalore, it has once again furnished the similar kind of details which were furnished during the course of assessment proceedings and the same were considered at the time of finalisation of the Draft assessment order. Further the judicial pronouncements relied upon by the assessee have also been considered and are found distinguishable. 8. In view of the above stated facts, the remand report on additional evidences submitted by the assessee during the course of remand proceedings is submitted for kind perusal and consideration. However, the case may be decided on merits by the Hon'ble DRP Bangalore.”

6.2 However, the ld DRP failed to give any findings on this issue. Hence, in our opinion, it is appropriate to remit this issue to the file of ld. AO for fresh consideration as in earlier order in assessee’s own case in assessment year 2019-20 vide the Tribunal order cited (supra), where in the Tribunal remitted the issue to the file of ld. AO with following observations:

“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

ITA No.642/Bang/2023 M/s. Altair Engineering Inc., Bangalore Page 11 of 12 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.”

6.3 In view of the above order of Tribunal, these grounds are remitted to the file of AO on similar directions. 7. Ground Nos.8 & 9 of the assessee’s appeal are reproduced as under:

“8. Without prejudice to the above, the Learned ITO having treated the total receipts of Rs. 1,08,55,63,748/- 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 'Profits and gains from business/profession' under section 28 of the IT Act and levying tax on the said sum at 40% plus applicable surcharge and cess.

7.1 These grounds are infructuous in view of our findings in ground Nos.6 to 6.6 of this order. Accordingly, these grounds are dismissed as infructuous. 8. Ground Nos.10 & 11 of the assessee’s appeal are reproduced as under:

ITA No.642/Bang/2023 M/s. Altair Engineering Inc., Bangalore Page 12 of 12 8.1 Charging of interest u/s 234A & 234B of the Act is mandatory and consequential in nature and is to be computed accordingly. 9. In the result, the appeal of the assessee is partly allowed for statistical purposes. 10. Since we have disposed the appeal herein, the stay petition becomes infructuous and dismissed accordingly.

Order pronounced in the open court on 30th Oct, 2023

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

Bangalore, Dated 30th Oct, 2023. VG/SPS

Copy to:

Asst. Registrar, ITAT, Bangalore.