SIEMENS AKTIENGESELLSCHAFT,MUMBAI vs. DDIT (IT) 2(1), MUMBAI

Ld. DR also admitted that all the issues are covered because ld. AO has relied upon the earlier year orders.

In subsequent year i.e. in A.Y.2009-10, the ld. DRP has held that assessee’s income is to be taxed on receipt basis and Revenue had come in appeal before the Tribunal. Accordingly, Department had preferred an appeal before the ITAT against the final assessment order. The Mumbai Tribunal, while adjudicating Siemens Aktiengesellschaft on the said issue for AY 2009-10 (ITA No. 2153/MUM/2014 & 2179/MUM/2014) has also decided this issue by its order dated 07.06.2024 in favour of the assessee and has upheld that the said income is to be taxed on receipt basis. The relevant extract of the Tribunal order is as under: - "79.The Id. DRP held that Hon'ble Bombay high Court in assessee's own case has accepted the contentions of the assessee in A. Y. 1986-87 to 1992-93, 1996-97, 1997-98 and 2001-02 wherein the Hon'ble Bombay High Court has considered the various ITAT decisions in assessee's own case and the stand of the assessee has been upheld that the receipt is to be taxed on actual receipts. Therefore, the AO is directed not to bring tax the income on account of royalty and ITS on accrual basis but to tax the same on receipt basis. After considering the submissions and decisions of the Tribunal and the Hon’ble Bombay High Court in the case of the Tribunal, this issue is decided in favour of the assessee that income on account of Royalty and FTS can be taxed only on receipt basis.

Even otherwise Article-12 of India-German tax treaty used the word "paid, payments of any kind received and payments of any amount". The Article 12 of India-Germany Tax Treaty which has been reproduced below: -"ARTICLE 12-Royalties and fees for technical services -

Hence, we do not find any reason to take any different position. Before us the Id. DR had submitted that there is a Siemens Aktiengesellschaft reference in the case of Ampacet Cyprus Ltd. Vs DCIT reported in (2020) 119 Taxmann.com 277 (Mum Trib) wherein the Tribunal has referred the matter to special Bench. In the context of the India-Cyprus Tax treaty where the issue is whether interest received should be taxed on receipt basis or on accrual basis. Since in assessee’s own case this issue stands settled by the Tribunal and by the Hon'ble Bombay High Court which is binding on us and therefore, reliance placed by the Id. DR in the aforesaid matter to refer to the Special Bench is declined. Thus, this ground raised by the Revenue is dismissed.

Thus, following the earlier year precedence and that now this issue is covered by the decision of the Hon’ble Bombay High Court, we hold that the income from ‘royalty and FTS’ shall be taxable on receipt basis. Accordingly, ground No.2 raised by the assessee is allowed.

Regarding charecterisation of receipt towards software as royalty which has been raised in ground No. 3 & 4, the facts are that the assessee received amount of Rs. 29,64,46,087 as consideration for supply of software to Siemens Ltd. and its other affiliate entities.

It has been stated that the software supplied forms an integral part of the equipment supplied and, therefore, partakes the character of supply of equipment and mere supply of equipment without the software would amount to supply of incomplete machinery, as the machinery cannot function without the software. The software supplied by the assessee can only be used on the equipment / hardware supplied by the assessee. Therefore, it has been stated that these software have no other utility except on its own equipments. The ld. AO like in the Siemens Aktiengesellschaft previous years has alleged that consideration for supply of software could be considered as ‘roylaty’ under the Act as well as tax treaty. This issue has been decided in favour of the assessee in the earlier years, the details of which are as under:- of Order 2006-07 8094/Mum/2010 06.05.2014 2005-06 1174/Mum/2010 30.05.2014 2004-05 4502/Mum/2009 18.05.2012 2003-04 2520/Mum/2008 09.07.2010 2002-03 2099/Mum/2007 and 10.12.2008 188/Mum/2007 2001-02 1957/Mum/2007and 08.12.2008 187/Mum/2007

The Tribunal in A.Y.2001-02 has held that supply of software is not taxed as 'royalty' which has been followed in the Siemens Aktiengesellschaft subsequent Tribunal orders from A.Y.2002-03 to 2006-07. The relevant extracts are as under:- "6. We have heard the rival submissions and perused the relevant material on record. There is no dispute on the fact that the assessee had not separately sold software but it was part and parcel of the equipment supplies to M/s Siemens Limited. The case of the assessee is that it should be taken at "Business Profits as per Article 7 to DTAA between India and Germany. On the other hand the Department wants it to be considered as falling under Article 13, being the royalty. We have to decide whether the sum of Rs.5.29 crores is to be considered as "Business profits" or "royalty. The Special Bench of the Tribunal in the case of Motorola Inc. Vs. DCIT (2005) 95 ITD 269 (Delhi) (SB) has considered this aspect and held that "the payment made to the assessee for use of software in the equipment did not amount to royalty either under the Income- tax Act or the DTAA. " The facts involved in the instant case are akin to those considered by the Special Bench in the afore- noted case. The Learned Department Representative could not point out any distinguishing feature in the facts of the instant case vis-a-vis that decided by the Special Bench. Respectfully following the view taken by the Special Bench in this aspect of the matter, we are of the considered opinion that the amount received by the assessee towards supply of software cannot be segregated from the supply of equipment and hence that portion cannot be considered as "royalty". We, therefore, approve the view taken by the learned CIT(A) on this issue. "

Furthermore, in AY2005-06, the Tribunal has examined the scenario wherein software was provided separately from any hardware, and it has adhered to the precedent established in assessee's own case for A. Y.2001-02. The relevant extract of the observations made by the Tribunal is as under:- "6. During the year under consideration, the assessee had supplied equipment to the various parties in India. The software required for the said equipment was also supplied by the assessee to its Indian customers. During the course of assessment proceedings, the A.O. verified the relevant invoices and found on such verification that the software in some cases Siemens Aktiengesellschaft was supplied by the assessee independently without any reference to the supply of corresponding equipment. He therefore treated the income earned by the assessee from the supply of software as in the nature of royalty and the same was brought 10 tax in the hands of the assessee as income from royalty. On appeal, the Id. CIT(A) held that the value of software could not be taxed as royalty in the hands of the assessee following the decision of the Tribunal in assessee's own case on similar issue for the earlier years ie. 2001-02 & 2002-03. He also took note of the fact that a similar issue was decided by his predecessor in favour of the assessee in assessment years 2003-04 & 2004-05. "

Now, this issue of taxation of royalty under the DTAA has been decided by the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited vs. CIT reported in (2021) 432 ITR 471(SC). The Hon'ble Supreme Court vide its order grouped various appeals before it into following four categories: - The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer. - The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end- users. - The third category concerns cases wherein the distributor happens to be a foreign, nonresident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or end- users. - The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, non-resident suppliers to resident Indian distributors or end-users 14. The Hon'ble Supreme Court held that the amounts paid by resident Indian end-users/distributors to non-resident computer Siemens Aktiengesellschaft software manufacturers/suppliers, as consideration for the resale/use of the computer software, is not 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 in all the categories of transactions mentioned above.

Before us comparison between facts of the case and the terms and conditions which have been submitted to the Id. AO during the assessment proceedings for later assessment years vis-a-vis the conclusions outlined by Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. has been given in the following manner: S.N. Engineering Analysis Siemens Conditions 01- Centre of Excellence (P) 01-2021 to 31-12-2021 Ltd., 1 GRANT OF LICENCE. Samsung The Purchaser shall have grants you a limited non- the perpetual and non- exclusive licence to install, use, exclusive right to use the access, display and run one Software Product on the copy of the Samsung Software devices for which such is on a single Samsung Mobile intended, whereby each Device, local hard disk(s) or Software Product may only other permanent storage be used on one device at media of one computer and any given time. you may not make Samsung Software available over a network where it could be used by multiple computers at the same time. 2 You may make one copy of the The Purchaser may make up Samsung Software in machine to three copies of the readable form for backup Software Product to be used purposes only; provided that for back-up purposes only. the backup copy must include all copyright or other proprietary notices contained on the original. 3 LIMITATIONS ON END USER The Purchaser shall not Siemens Aktiengesellschaft RIGHTS change, reverse engineer or You shall not, and shall not reverse compile the enable or permit others to, Software Products and shall copy, reverse engineer, not extract any parts decompile, disassemble, or thereof. Furthermore, the otherwise attempt to discover Purchaser shall not remove the source code or algorithms any alphanumeric of, the Software (except and identifiers, markings and only to the extent that such Copyright notices from the activity is expressly permitted data carriers and shall copy by applicable law such in their unchanged notwithstanding this form. The above provisions limitation), or modify, or shall apply analogously to disable any features of, the all associated Software, or create derivative documentation. works based on the Software. You may not rent, lease, lend, sublicense or provide commercial hosting services with the Software. 4 You may not transfer this The Supplier shall grant the EULA or the rights to the Purchaser the right to Samsung Software granted transfer the right to use herein to any third party granted to it to a third party. unless it is in connection with In such case, an agreement the sale of the mobile device is to be concluded with the which the Samsung Software third party by which the accompanied. In such event, third party shall not be the transfer must include all of granted any rights of use the Samsung Software over and above those (including all component parts, granted by the Supplier to the media and printed the Purchaser. materials, any upgrades, this EULA) and you may not retain any copies of the Samsung Software. The transfer may not be an indirect transfer, such as a consignment. Prior to the transfer, the end user receiving the Samsung Software must agree to all the EULA terms.

BACKUP COPY- After The Purchaser may make up installation of one copy of the to three copies of the SOFTWARE PRODUCT Software Product to be used pursuant to this EULA, you for back-up purposes only. may keep the original media on which the SOFTWARE PRODUCT was provided by Microsoft solely for backup or archival purposes. If the original media is required to use the SOFTWARE PRODUCT on the COMPUTER, you may make one copy of the SOFTWARE PRODUCT solely for backup or archival purposes. Except as expressly provided in this EULA, you may not otherwise make copies of the SOFTWARE PRODUCT or the printed materials accompanying the SOFTWARE PRODUCT Subject to the terms of The Purchaser shall have conditions set forth in this the perpetual and non- Article 20, Licence, JT exclusive right to use the MOBILES is hereby granted a software product on the nonexclusive restricted licence devices for which such is to use the Software and intended, whereby each Documentation, but only for JT software product may only Siemens Aktiengesellschaft MOBILES' own operation and be used on one device at maintenance of the System in any given time. accordance with this contract, and not otherwise. The Purchaser shall not there is no further right to sub- change, reverse engineer or licence or transfer, nor is there reverse compile the any right to reverse engineer, Software Products and shall modify, reproduce in any not extract any parts manner otherwise than thereof. permitted by the licence to the end-user Thus, the ratio and principle laid down by the Hon'ble Supreme Court is clearly applicable on the facts of the assessee's case and accordingly we hold that consideration received for supply of software cannot be taxed as royalty under India German DTAA 16. During the course of hearing, the Id. DR had strongly relied upon the observation made in the assessment order and submitted that a review petition had also been filed before the Hon'ble Supreme Court in the matter of Engineering Analysis Centre of Excellence Pvt Ltd However, the same is not entertained because judgment of the Hon'ble Supreme Court as on today is binding on us. Moreover, there are various other decisions of the Hon'ble High Courts on this issue which has been highlighted before us, the same is not being reproduced Accordingly, we hold that this issue is covered in favour of the assessee not only in its own case as well as by the judgement of the Hon'ble Supreme Court and therefore we hold that income derived by the assessee from supply of software cannot be subject to taxation as royalty either under Income Tax Act or under treaty. Thus, ground Nos. 2- 5 raised by the assessee are allowed."

Accordingly, respectfully following the aforesaid decision of the Tribunal wherein, this issue has been dealt and discussed threadbare considering all the facts, we allow this ground of the assessee holding that supply of software cannot be subject to Siemens Aktiengesellschaft taxation as royalty under India-Germany DTAA. Accordingly, grounds No. 3 & 4 are allowed.

Now coming to the issue of transfer pricing adjustment, the facts are that assessee had received royalty for technical know- how and fees for technical assistance from Indian Associated Enterprises ('Indian AEs). In this regard the Indian AE's have withheld tax at source at 10% for the payments made to the assessee under the provisions of Tax Treaty. The assessee filed its return of income and Form No. 3CEB on receipt/cash basis.

The assessee had given detailed functions, assets and risks analysis in accordance with Rule 10B and Rule 10C of the Income-tax Rules, 1962 (the Rules); based on which a comprehensive economic analysis was undertaken to review the arm's length nature of its international transactions in its Transfer Pricing Study Report. Further, it had been stated that the India AEs earned Net Cost-Plus mark-up (NCP)/Net Profit Margin (NPM) (after considering services availed from assessee) that are consistent with the margins carried by independent comparable companies. Accordingly, applying the Transactional Net Margin Method (TNMM) and from the analysis as aforesaid, the services rendered by assessee are considered to be compliant with the arm's length principle. Before us, the case of the Siemens Aktiengesellschaft assessee has been that the international transactions relating to the compensation received in respect of technical services rendered to its Indian AEs; are mirror reflections of corresponding transactions entered by the Indian AEs. In this regard, the assessee has filed a detailed submission to demonstrate how the transactions reported by the assessee and its Indian AEs are mirror transactions, vide letter dated 13/09/2011. In respect of the Indian AEs, orders have been passed by the Ld. TPO determining the payments made by them are higher than the arm's length price. Thus, accordingly, it had been submitted that it cannot be held that assessee had under charged albeit, Indian AE have over paid.

Additionally, it had been submitted that assessee has borrowed CUP method to benchmark the transaction considering that the rates are approved by the Central Government / RBI which is to be considered to be compliant with the arm’s length principle under the CUP.

This issue had come up for consideration before the Tribunal in A.Y.2009-10, whether the addition made by the ld. TPO will be deleted as they are on adhoc basis without a specific method prescribed u/s.92C as per the parameters laid down in Rule 10B. Whereas, the ld. TPO had made adhoc adjustment of 10% of the value of international transaction after stating that transaction of the assessee with the AE are not mirror transactions.

In so far as additional grounds are concerned ld. Counsel for the assessee had submitted that since on merits, the issues are covered therefore, these additional grounds should be kept open. Accordingly, additional grounds are dismissed as infructuous.

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