LDRA LIMITED,UNITED KINGDOM vs. ASSISTANT COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION, CIRCLE-1(2), BANGALORE

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

BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(IT)A No. 863/Bang/2022 Assessment Year : 2019-20 M/s. LDRA Ltd., The Assistant Portside, Monks Ferry, Commissioner of Birkenhead, Income-tax, Wirral, International CH 41 5LH, Taxation, United Kingdom. Vs. Circle – 1(2), PAN: AABCL8338E Bangalore. APPELLANT RESPONDENT Assessee by : Shri Ketan .K.Ved, CA : Shri Sunil Kumar Singh, Revenue by CIT-2 (DR) Date of Hearing : 18-04-2023 Date of Pronouncement : 16-05-2023 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the final assessment order dated 27.07.2022 passed by Ld.ACIT, International Taxation, Circle -1(2), Bangalore for A.Y. 2019-20 on following grounds of appeal: “Based on the facts and circumstances of the case, the Appellant respectfully craves leave to refer an appeal under section 253(1) of the Income-tax Act, 1961 ('the Act') against the order passed by the Assistant Commissioner of Income Tax, International Taxation Circle 1(2), Bangalore dated 27 July 2022 under section 143(3) r.w.s 144C(13) of the Act on the following grounds

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Characterisation of revenue from maintenance and support services 1. On the facts and circumstances of the case and in law, the learned Assessing Officer (`A0') under the directions of the Hon'ble Dispute Resolution Panel (`DRP') erred in making an adjustment of Rs 1,10,12,257/- to the total income of the Appellant, by assessing revenue from maintenance and support services of Rs 1,10,12,257 as Fees for Technical Services (`FTS') under the Act and the India-UK Tax Treaty. 2. On the facts and circumstances of the case, the learned AO under the directions of the Hon'ble DRP has erred in fact in assuming that the revenue of Rs 1,10,12,257 towards maintenance and support services pertains to training provided by the Appellant to the end-users. 3. On the facts and circumstances of the case and in law, learned AO under the directions of the Hon'ble DRP has erred in holding that the revenue from maintenance and support services 'make available' technical services to the end-users and hence, is in the nature of 'FTS' income as per India-UK Tax Treaty. 4. Without prejudice to above grounds, based on the facts and circumstances of the case, the learned AO under directions of the Hon'ble DRP has erred in law in taxing the maintenance and support services revenue of Rs 1,10,12,257 at the rate of 15 percent under the India-UK Tax Treaty, without appreciating that the Act provides for a beneficial tax rate of 10 percent. Interest on refund 5. On the facts and circumstances of the case, the learned AO has erred in law in computing interest under section 244A of the Act in the computation sheet annexed to the final assessment order passed under section 143(3) r.w.s 144C(13) of the Act. The Appellant craves leave for a hearing in this matter before disposing of the said appeal and leave to add, alter, amend or delete any or all of the above grounds of appeal, at or prior to hearing of the appeal, so as to enable the Hon'ble Tribunal to decide this appeal according to law. Tax Effect: The tax effect arising on account of grounds 1 to 4 is Rs 16,51,839. The Appellant has not provided tax effect for each of these grounds separately, since grounds 1 to 4 are in relation to a single adjustment of Rs 1,10,12,257. Further, ground 5 relates to interest under section 244A of the Act and hence, its tax effect is not calculated separately.”

Page 3 of 17 IT(IT)A No. 863/Bang/2022 2. Brief facts of the case are as under: 2.1 Assessee is a company incorporated and registered in United Kingdom. Its principal business activity is sale of LDRA Tool Suite (“LDRA Software”) license and provision of maintenance and support services in relation to the said software. For the year under consideration, assessee filed its return of income on 29.11.2019 declaring Nil income. The case was selected for scrutiny and statutory notices were issued to assessee in response to which various submissions were made by the authorised representatives. 2.2 The Ld.AO passed the draft assessment order on 29.09.2022 by holding the revenue received from maintenance and support services as fee for technical services as per the Double Taxation Avoidance Agreement between India and UK. The Ld.AO was of the opinion that sum of Rs.1,10,12,257/- was chargeable to tax in India as FTS. 2.3 On receipt of the draft assessment order, assessee filed objections before the DRP. The DRP after considering various submissions of the assessee observed and held as under: “2.4 The Assessing Officer, in the Draft Assessment Order has not accepted the assessee's claim. He observed that there is nature of 'make available' of support services to the Indian Customers. The software support agreement describes Page 4 of 6 about training support being provided from licensor i.e. LDRA to the customers regarding the use of software package. Once the user learns about the nature of package, they are independent on their own with regard to a particular version of the software package, unless there is an update/enhancement of the software package for which another training session would be conducted to transfer the technical knowledge on how to use the upgraded version. Thus, a regular cycle of 'Making available' of the technical service is rendered by the assessee.

Page 4 of 17 IT(IT)A No. 863/Bang/2022 2.5 Having considering submissions of the assessee and Draft Assessment Order passed by AO, this panel observes this issue has to be dealt with provisions of Section 90 of the Income Tax Act in accordance with India- UK DTAA. The definition of Tee for Technical Services' as per section 9(1) (vii) is deals with Explanation 2.—For the purposes of this clause, “fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries"; 2.6 The Maintenance and Support services paid by the Assessee are managerial, technical and consultancy charges and will fall under the "fees for included/technical fees" as per the provisions of the DTAAs. However, both the treaties with India & UK, at Article 13, have "make available" clause. Broadly, 'Make Available' means. by providing services (fees for technical services / fees for included services in the instant case), the provider of the services has equipped the recipient of the services in such a manner that the recipient of the services is enabled to do such services independently / apply such knowledge independently. 2.7 Further, this panel finds that as per the Article 3(2)(a) such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State. It is relevant to bring forth the Article 13(2)(a), which is reproduced as under: "2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed : (a) In the case of royalties within paragraph 3(a) of this Articles, and fees for technical services within paragraphs 4(a) and (c) of this Article,— ii) During subsequent years, 15 per cent of the gross amount of such royalties or fees for technical services; and

Page 5 of 17 IT(IT)A No. 863/Bang/2022 4. For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term "fees for technical services" means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received ; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received ; or (c) make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design Thus it becomes clear that whatever technical knowledge, skills and information received by the Assessee from the AEs under this Master Services Agreement shall remain with the Assessee even after the termination of the Agreement. Therefore, the technical knowledge, skill. know-how are made available to the Assessee, who can apply the information or technical knowledge in its business operations. 2.8 In view of the above discussion, we are of a considered view that the "make available' clause has been satisfied and as per the Treaty provisions the fees paid to the AEs are taxable and the provisions of Income Tax Act, 1961 is applicable to the Assessee. Therefore, we do not find infirmity in the findings of the Assessing and the grounds of objection is rejected. 2.9 As regards the assessees objection for proposing tax a the rate of 15% as per India-UK Treaty, this panel brings forth the Article I 3(2)(a)(ii) of para 4(a) and (c) as per India- UK Treaty, wherein it has clearly stated the during the subsequent year under consideration taxation should be calculated at 15% which is being reproduced as under: ii) During the subsequent years, 15 per cent of the gross amount of such royalties or fees for technical services and

Page 6 of 17 IT(IT)A No. 863/Bang/2022 Hence, this panel finds no merit in this ground. Accordingly, the ground of objection is therefore rejected. 2.10 However, it is seen that assessee relied on the judgement of Hon'ble Supreme Court in the case of Engineering Analysis Center for Excellence Pvt. LTD and claimed that since the Royalty income itself if not chargeable to tax, the related support services is also not taxable. This panel is therefore hereby opines that the above case the facts are entirely different from the present case. On perusal of the software support agreement between Hindustan Aeronautical Limited, Nasik and Liverpool Data Research Associates Limited, it is clear that there is nature of 'make available' of support services to Indian customers. This agreement also describes about the training support being provided from the licensor i.e., LDRA to the customers regarding the use of software package. In the view of the above discussion, this panel upholds the action of AO/TPO. Accordingly, this ground of objection of the assessee is therefore rejected. 3. Directions of this Panel, as per the discussions above, are hereby communicated to the assessee and the departmental authorities concerned as per the provisions of section 144C(5) of Income Tax Act.” 2.4 On receipt of the DRP directions, the Ld.AO passed the impugned order by making addition in respect of the revenue received by assessee as maintenance and support service to be FTS and chargeable to tax in India. 2.5 Aggrieved by the order of the Ld.AO, assessee preferred appeal before this Tribunal. Ground no. 1 is general in nature. Ground nos. 2-3: 3. The Ld.AR before this Tribunal submitted that the issues raised in the grounds 2-3 of the appeal are in respect of the chargeability of maintenance and support service receipt by the assessee to be taxable in India as FTS as per India-UK DTAA. 4. The Ld.AR submitted as under:

Page 7 of 17 IT(IT)A No. 863/Bang/2022 4.1 Assessee is a tax resident in UK for year under consideration and had entered into specific agreement with end users that includes India based customers to grant non-exclusive and non- transfer license to “use” the software and to provide maintenance and support services. He thus submitted that the assessee thus executes a software license agreement and software support agreement with the end users. 5. During the year under consideration, assessee had received a sum of Rs.3,35,83,767/- from India based end users and distributors comprising of following: Particulars Amount (in Rs) Sale of software licenses 2,25,71,510 Maintenance and support 1,10,12,257 services Total 3,35,83,767 6. He submitted that the revenue received from sale of software licenses was considered as not taxable in India in view of the various favourable decisions on the subject. Non-taxability of the amounts received on sale of software licenses has been accepted by the AO. 7. He submitted that the revenue from the maintenance and support services was also considered as not taxable in India being inextricably linked to the sale of software and also on account of the fact that by rendering these services, the Appellant did not make available technical knowledge, skill, etc., to the service recipient and therefore the maintenance and support services fees would not fall within the purview of the term "fees for technical services" under the India-UK DTAA.

Page 8 of 17 IT(IT)A No. 863/Bang/2022 8. The Ld.AR invited our attention to the software support agreement with Hindustan Aeronautics Ltd. placed at page 148 of the appeal set wherein it provided for training that read as under: “Training – the licensor will organize on a regular basis courses providing education and training needs for users of the package. Fees for attendance at such course will be at the licensor’s prevailing rates.” 9. The Ld.AR submitted that the revenue authorities reached to the conclusion that the software support services were made available by assessee to its customers merely based on the training clause (reproduced hereinabove) in the SSA agreement and that amounted to rendering of technical services. 10. It is the submission of the Ld.AR that the maintenance and support service fee received amounting to Rs.1,10,12,257/- does not comprise of any payment in relation to “training”, and therefore there cannot be any amount that could be considered as fees for technical services that was made available. He relied on the following decisions in support of his contentions.  Informatica LLC vs. ACIT in IT(TP)A No. 913/Bang/2019  Micro Focus Marigalante Ltd. vs. ITO in IT(IT)A No. 877/Bang/2022 On the contrary, the Ld.DR relied on the orders of the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 11. We note that assessee had received a total revenue of Rs.3,35,83,767/- (comprising of Rs.2,25,71,510/- for sale of software license and Rs.1,10,12,257/- for maintenance and support service fee). The breakup of the disallowance made by the revenue authorities are as under:

Page 9 of 17 IT(IT)A No. 863/Bang/2022 Sale of Maintenance Total Sr. software and support Description revenue No licenses service fees (in (in Rs.) (in Rs.) Rs.) Revenue received by 1. LDRA Ltd. from 14,46,834 67,86,955 82,33,788 Direct sales to end users Revenue received by LDRA Ltd. from 2. 4,35,405 2,74,500 7,09,905 FTD Infocom Pvt. Ltd. ['Distributor'] Revenue received by LDRA Ltd. from 3. LDRA 2,06,89,271 39,50,802 2,46,40,074 Technology Pvt. Ltd. ['Distributor'] TOTAL 2,25,71,510 1,10,12,257 3,35,83,767 12. The Ld.AR submitted that the relevant support service agreement in respect of the above three distributors and end users as the case may be, is placed in the appeal memo at pages 119,120 and 121. On perusal of page 119, we note that the parties mentioned therein being Hindustan Aeronautics Ltd., Pentair Water India Pvt. Ltd., Cyient Ltd., Capgemini Technology Services India Ltd. and Honeywell Technology Solutions Lab Pvt. Ltd. are the end users to whom the assessee made direct sales. The parties mentioned at pages 120 and 121 is the distributor being FTD Infocom Pvt. Ltd. and LDRA Technology Pvt. Ltd. 13. Following are the relevant clauses that are commonly present in all the agreements between the assessee and the end users/Distributors in India. The extract has been scanned and

Page 10 of 17 IT(IT)A No. 863/Bang/2022 reproduced from the copy of the agreement between the assessee and Painter Water India Ltd, placed at Pages 133 to 136 of the appeal set:

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Page 14 of 17 IT(IT)A No. 863/Bang/2022 14. Referring to the above, it was submitted that there was no transfer of technology and the training was not in the nature of transfer of any technical skill etc. as per the agreement and that even if the services rendered is deemed to be training, the ‘make available’ clause as prescribed in Article- 12 of India-UK Double Taxation Avoidance Agreement (DTAA) is not satisfied, since the services acquired by the recipient does not enable it to apply the technology. Further, Article-7 provides that business income would be taxable in India only if the payee has permanent establishment (PE) as per Article 5 of the treaty in India. Since the payee does not have any PE in India, the said amount still will not be taxable in India. 15. It is admitted position that the services are provided by the assessee to its end users / distributors to improve their soft skill in order to understand the use of the software licensed. This support rendered by the assessee would only improve the skills of the employees of end users but it does not involve transfer of any technology which is made available to the assessee for its future use. In terms of Article-12 of DTAA, ‘fees for technical services’ include managerial, technical or consultancy services if such services are ancillary and subsidiary to the application or enjoyment of the right, property or information or it make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein or it consist of the development and transfer of a technical plan or technical design but excludes any service that does not enable the person acquiring the service to apply the technology contained therein.

Page 15 of 17 IT(IT)A No. 863/Bang/2022 We find that the services as availed by the assessee is covered in none of these clauses. 16. Hon’ble Supreme Court in the case of GE India Technology Cen. (P) Ltd. vs. CIT reported in193 Taxman 234 held that, tax withholding provisions would trigger only in case sum so paid was chargeable to tax in India. Since, the payment was not chargeable to tax, there was no obligation to deduct TDS. It is submitted that the assessee before us was a general training which would not fit into the definition of managerial, technical or consultancy services as held in various decision of coordinate benches of the Tribunal. 16.1 Further, we also note that ‘make available’ clause under India-UK DTAA would be satisfied only when the services rendered results in transmitting technical knowledge so that the recipient end users could derive an enduring benefit and utilize such knowledge or know how on its own in future without the aid and support of the assessee. In the present case, since there was no transfer of technology, but it was a case of rendering the general training services, the ‘make available’ clause does not stand satisfied. The decision of Hon’ble Ahmedabad Tribunal in ITO vs. Veeda Clinical Research (P) Ltd. Reported in 35 Taxmann.com 577 rendered on similar factual matrix supports the same view. 16.2 Further, Article-7 provides that business income would be taxable in India only if the payee has permanent establishment (PE) in India. Since the payee does not have any PE in India, there was no obligation paying tax in India.

Page 16 of 17 IT(IT)A No. 863/Bang/2022 17. It is also submitted by the Ld.AR that the amount of maintenance and support service fee received by the assessee for the year under consideration does not comprise of any payment relating to a training fees. He relied on the invoices placed in the appeal set in respect of the alleged payments in support of this contention. The entire payment arising out of the software support agreement schedule is only in respect of the annual maintenance and the support provided by the assessee. Further it is also noted that the support service rendered by the assessee is intrinsically connected with the software license agreement entered into by the assessee with respective end users / distributors. 18. There is nothing on record brought by the revenue to establish that the training has been imparted by the assessee to the end users / distributors in order to charge the amount to be taxable as FTS in India. Further, admittedly there is no PE of assessee in India and therefore the said amount cannot even be taxed as business receipts by invoking Article 7 rw.Article 5 of DTAA. We therefore direct the Ld.AO to delete the addition made in respect of the alleged software maintenance and support services to be FTS. Accordingly, ground nos. 2-3 raised by the assessee stands allowed. 19. Ground no. 4 raised by the assessee being the alternate plea need not be adjudicated as the assessee has been granted relief on the main issue.

Page 17 of 17 IT(IT)A No. 863/Bang/2022 20. Ground no. 5 – This issue being consequential in nature, we direct the Ld.AO to compute the interest on refund u/s. 244A of the Act in accordance with law. In the result, the appeal filed by the assessee stands allowed. Order pronounced in the open court on 16th May, 2023.

Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 16th May, 2023. /MS /

Copy to: 1. Appellant 2. Respondent 3. CIT 4. DR, ITAT, Bangalore 5. Guard file By order

Assistant Registrar, ITAT, Bangalore