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

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ITITA 844/BANG/2022Status: DisposedITAT Bangalore07 February 2023AY 2019-207 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the DRP's decision to tax software sale receipts as royalty merely to keep the issue alive pending a review petition was incorrect. The Tribunal emphasized that a pending review petition does not obliterate the binding ratio of a Supreme Court judgment. Until an order on review is passed, the Supreme Court's decision remains binding. Therefore, the Tribunal ruled that income earned by the assessee on the sale of software is not taxable in India and deleted the additions made. Regarding the cross charges/reimbursement issue, the Tribunal noted that the AO had not considered the merits due to the assessee's failure to furnish details within the stipulated time. However, the assessee subsequently provided documents. Consequently, the Tribunal remitted this issue back to the AO with a direction to consider the furnished details and decide the matter in accordance with the law, providing the assessee a reasonable opportunity of being heard.

What were the facts?

The assessee, Altair Engineering Inc., a US-based company providing software solutions, filed an appeal against the final assessment order for AY 2019-20. The assessee initially declared a total income of Rs.95,59,50,892 but revised it to NIL, claiming a refund of TDS. The assessee argued that receipts from the sale of standard software were not taxable under the Act and the Indo-US DTAA, citing the Supreme Court's decision in Engineering Analysis Centre of Excellence P. Ltd. The Assessing Officer (AO) proposed to treat 50% of receipts as fees for technical services. The Dispute Resolution Panel (DRP) directed the AO to verify cross-charges/reimbursements and treat other software sale receipts as royalty, to keep the issue alive pending a review petition before the Supreme Court.

What were the issues?

1. Whether the income earned by the assessee on the sale of standard software is taxable in India as royalty under the Income-tax Act, 1961, and the Indo-US DTAA, notwithstanding the Supreme Court's decision in Engineering Analysis Centre of Excellence P. Ltd. v. CIT & Anr. (Assessee's contention: No, the Supreme Court's decision is binding and holds that income from standard software is not royalty. Revenue's contention: The DRP directed taxation to keep the issue alive due to a pending review petition before the Supreme Court). 2. Whether the AO correctly considered the details furnished by the assessee regarding cross charges/reimbursements when passing the final assessment order. (Assessee's contention: The AO failed to consider the submitted details. Revenue's contention: Not recorded, but implied by the AO's action of not considering the submissions within the stipulated time).

Which sections of the Income-tax Act were involved?

Section 143(3),Section 144C(13),Section 6(3),Section 9(1)(vi)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “B” BENCH : BANGALORE

Before: SHRI N.V. VASUDEVAN & Ms. PADMAVATHY S

For Appellant: Shri Tata Krishna, Advocate
For Respondent: Shri Sunil Kumar Singh, CIT-2(DR)(ITAT), Bengaluru
Hearing: 07.02.2023Pronounced: 07.02.2023

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER

IT(IT)A No.844/Bang/2022 Assessment year : 2019-20

Altair Engineering Inc., Vs. The Income Tax Officer, 1820, East Big Beaver Road, Ward International Taxation 1(1), Troy MI 999999, Bangalore. United States. PAN: AAICA 7762Q APPELLANT RESPONDENT

Appellant by : Shri Tata Krishna, Advocate Respondent by : Shri Sunil Kumar Singh, CIT-2(DR)(ITAT), Bengaluru.

Date of hearing : 07.02.2023 Date of Pronouncement : 07.02.2023 O R D E R Per Padmavathy S., Accountant Member This appeal is against the final order of assessment passed by the ITO, Ward International Taxation 1(1), Bangalore dated 22.7.2022 u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] for the assessment year 2019-20.

2.

The assessee is a company incorporated and registered in United States of America and is engaged in the business of providing software solutions. The assessee is a non-resident in India within the meaning

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of section 6(3) of the Act and during the relevant financial lyear 2018- 19 the assessee was a resident of US for the purpose of US tax and held tax residency certificate issued by the Internal Revenue Services for the calendar year 2018-19.

3.

The assessee filed a return of income for the AY 2019-20 declaring a total income of Rs.95,59,50,892 on 28.11.2019. Subsequently, the assessee filed a revised return on 28.11.2020 declaring a total income of NIL claiming a refund of TDS of Rs.10,55,34,711 deducted on an amount of Rs.97,22,03,524 being consideration received from the sale of standard software which is treated as not taxable under the Act and the Indo-US DTAA. In this regard, the assessee relied on the decision of the Supreme Court in the case of Engineering Analysis Centre of Excellence P. Ltd. v. CIT & Anr., [2021] 432 ITR 471 (SC).

4.

The assessee’s case was selected for scrutiny and statutory notices were duly served on the assessee. The AO passed a draft assessment order proposing to treat 50% of the total receipt of Rs.97,22,03,354 as receipts towards fees for technical services. Aggrieved, the assessee filed the objections before the DRP.

5.

The DRP called on the assessee to provide the break up of the impugned receipts to which the assessee submitted the following details:-

1.

Direct sale of standard software to end customers – Rs.38.53 crores.

IT(IT)A No.844/Bang/2022 Page 3 of 7

2.

Distribution of software by the assessee for onward sale through subsidiary distribution agreement with Altair India Engg. P. Ltd. – Rs.57.13 crores. 3. Cross charge of cost to Altair India for third party software purchase on behalf of Altair India – Rs.1.5 crores. 6. The assessee submitted before the DRP that the first two payments are covered by the decision of the Hon’ble Supreme Court in the case of of Engineering Analysis Centre of Excellence P. Ltd. (supra). With regard to the third payment the assessee submitted that it is merely a reimbursement of cost with no income element and therefore cannot be treated as fees for technical services. The DRP directed the AO to verify the amount pertaining to the cross charges/reimbursement and held that if they are found to be reimbursement, question of taxing the same would not arise. With regard to the other two receipts- from sale of software, the DRP directed the AO to treat the same as royalty. The AO passed the final assessment order pursuant to the directions of the DRP. Aggrieved, the assessee is in appeal before the Tribunal.

7.

The assessee raised 9 grounds pertaining to the impugned additions. Ground Nos. 10 & 11 are consequential.

8.

During the course of hearing the assessee presented arguments with regard to Ground No.7.1 & 7.2 which reads as follows and prayed that if these two grounds are adjudicated in favour of the assessee, the rest of the grounds would become academic and could be left open. The ld. AR submitted that the DRP while passing the order has

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accepted the fact that the assessee’s case with respect to sale of software is covered by the decision in of Engineering Analysis Centre of Excellence P. Ltd. (supra) and has stated that in order to keep the issue alive for the department given that a review petition is pending before the Hon’ble Supreme Court in the said case. The ld. AR submitted that the DRP has directed the AO to treat the receipt as royalty ignoring the binding decision of the Hon’ble Supreme Court. It is also submitted that as per the constitution the law laid down by the Hon’ble Supreme Court would also be binding on the DRP and therefore the DRP is not justified in confirming the addition made towards sale of software for an amount of Rs.95,67,31,284. The ld. AR further submitted that in the case of of Engineering Analysis Centre of Excellence P. Ltd. (supra) it is clearly held that income from standard software does not amount to royalty within the provisions of the I.T. Act as well as the Indo-US DTAA. Accordingly the ld AR submitted that on merits also the impugned additions need to be deleted.

9.

With regard to the reimbursement of cross charges received, the ld. AR submitted that as per the directions of the DRP, the assessee furnished the relevant details before the AO on 25.7.2022. However, the AO while passing the final assessment order had not considered the submissions and the evidence furnished by the assessee and retained the addition accordingly. In this regard, the ld. AR prayed for a direction from the Tribunal to consider the details furnished before the AO.

IT(IT)A No.844/Bang/2022 Page 5 of 7

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.”

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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.

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

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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.

13.

In the result, the appeal of the assessee is partly allowed.

Pronounced in the open court on this 7th day of February, 2023.

Sd/- Sd/-

( N V VASUDEVAN ) ( PADMAVATHY S ) VICE PRESIDENT ACCOUNTANT MEMBER

Bangalore, Dated, the 7th February, 2023. /Desai S Murthy /

Copy to:

1.

Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order

Assistant Registrar ITAT, Bangalore.

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