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Income Tax Appellate Tribunal, BANGALORE BENCHES “B”, BANGALORE
Before: Shri George George K, JM & Ms.Padmavathy S, AM
Appellant by : Sri.Sumeet Kurana, CA Respondent by : Sri.Manjunath Karhihalli, CIT -DR Date of Pronouncement : 18.10.2022 Date of Hearing : 18.10.2022 O R D E R
Per George George K, JM :
1. This appeal at the instance of the assessee is directed against final assessment order dated 12.03.2022 passed u/s 143(3) r.w.s. 144C(13) of the I.T.Act. The relevant assessment year is 2018-2019.
The brief facts of the case are as follows: The assessee is a company incorporated in Natick, Massachusetts, United States of America. The assessee is a developer of mathematical computing software for Engineers and Scientists. The assessee sells software licenses to Mathworks India Private Limited (MWI). It is claimed that Mathworks India subsequent resells the software license to end users. For the assessment year 2018-2019, the return of income was filed on 22.09.2019 declaring `Nil’ income. The 2 IT(TP)A No.364/Bang/2022 M/s.The Mathworks Inc. assessment was selected for scrutiny and notice u/s 143(2) of the I.T.Act was issued on 22.09.2019. During the course of assessment proceedings, it was noticed that the assessee had received following income from its Indian affiliate namely MWI during the relevant assessment year:-
Sl. Particulars Amount (in INR) No.
Maintenance 40,88,81,074 2. Perpetual and annual 78,03,51,983 license fees Total payments received 118,92,33,057 3. The Assessing Officer directed the assessee to explain why the aforesaid income earned cannot be treated as (i) royalty u/s 9(1)(vi) of the I.T.Act and Article 12 of the India- US Double Taxation Avoidance Agreement (DTAA), (ii) fees for included services (FIS) as per Article 12 of the DTAA and Fees for Technical Services (FTS) u/s 9(1)(vii) of the I.T.Act. The assessee filed objections to the proposed addition. However, the A.O. rejected the assessee’s contentions and treated the income earned from sale of software as a royalty, in the draft assessment order passed on 09.04.2021.
Aggrieved, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide its directions dated 09.04.2021 rejected the objections of the assessee. The DRP relied on the judgment of the Hon’ble jurisdictional High Court in the case of CIT (International Taxation) v. Samsung Electronics Co.Ltd. reported in 2012) 345 ITRT 494 (Kar.). Pursuant to the DRP’s directions, the impugned final assessment order was passed on 12.03.2022.
3 IT(TP)A No.364/Bang/2022 M/s.The Mathworks Inc. 5. Aggrieved by the final assessment order, the assessee has filed the present appeal before the Tribunal, raising the following grounds:-
“The grounds mentioned hereinafter are without prejudice to one another.
1. That on the facts and in the circumstances of the case, the order of the Deputy Commissioner of Income tax, International Taxation, Circle - 2(2), Bengaluru ('the learned AO') passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 ('the Act') in respect of Assessment Year (AY) 2018-19 is erroneous, based on incorrect interpretation of law, devoid of facts, contrary to the provisions of law and is liable to be quashed. Treating income earned by assessee from sale of software as taxable as royalty in India 2. That on the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP erred in treating the receipts of INR 780,351,983 from licensing of software as 'royalties' and subjecting the same to income-tax under section 9(1)( vi) of the Act and Article 12 of the India-US Double Taxation Avoidance Agreement (The Treaty').
The learned AO / Hon'ble DRP has grossly erred in relying on the Karnataka High Court Ruling in the case of Samsung Electronics Company Limited' that has been categorically overruled by the Hon'ble Supreme Court ruling in the case of Engineering Analysis Centre of Excellence Private Limited, wherein it was held that shrink-wrap software is not in the nature of royalty as per Double Taxation Avoidance Agreement. (Tax effect : 8,43,95,067) Treating income earned by assessee for rendering maintenance service as Fee for Technical Services in India 4. The learned AO erred in treating the receipts of INR 408,881,074 towards maintenance services as Fee for Technical Services as per section 9(1)(vii) of the Act and Fee for included services as per para 4(a) of Article 12 of Treaty. (Tax effect: 4,42,20,488)
4 IT(TP)A No.364/Bang/2022 M/s.The Mathworks Inc. The Appellant craves leave to add to and / or to alter, amend, rescind, modify, the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal.”
The assessee has filed two sets of paper book running into 347 pages enclosing therein the case laws relied on, software license agreement (SLA), submissions made before the AO / DRP etc. The learned AR submitted that the income earned from sale of software by the assessee is on sale of shrink-wrapped software to MWI. It was stated that MWI resells the software to end users in India. It was further submitted that the purchased software is neither downloaded nor copies on the hard disk of MWI. It was submitted that the end-user is entitled to use the software distributed / sold by MWI upon acceptance of terms and conditions stated in the Software License Agreement (SLA), and there is no transfer of a copyright as governed by section 30 of the Copyrights Act, 1957. Further, the learned AR by placing reliance on the judgment of the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited v. CIT & Anr. reported in (2021) 432 ITR 471 (SC) submitted that the case laws relied on by the AO and the DRP has been specifically overruled in the judgment of the Hon’ble Apex court in the case, cited supra.
The learned Departmental Representative, on the other hand, submitted that the software license agreement (SLA) / EULA has never examined by the AO nor the DRP. Therefore, it was submitted that the matter may be remanded to the AO to examine the same and take a decision in the light of the 5 IT(TP)A No.364/Bang/2022 M/s.The Mathworks Inc. dictum laid down by the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited v. CIT & Anr (supra).
We have heard rival submissions and perused the material on record. The assessee earns income from sale of software to its Indian affiliate, namely, MWI. It is stated that the Indian affiliate resells software to end users in India. It is submitted that the end users is entitled to use the software distributed / sold by Mathworks India upon acceptance of the terms and conditions stated in the software license agreement. We noticed that there is no reference to various clauses of the software license agreement neither in the order of the A.O. nor in the directions of DRP. The AO and the DRP have merely followed the dictum laid down by the Hon’ble jurisdictional High Court in the case of CIT (International Taxation) v. Samsung Electronics Co.Ltd. (supra), which has been specifically overruled by the judgment of the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited v. CIT & Anr. (supra). Since the terms and conditions stated in the software license agreement has not been examined by the AO nor the DRP, we deed it appropriate to restore the matter to the files of the AO. The AO is directed to examine software license agreement. The end-user is entitled to use the software distributed / sold by MWI upon acceptance of terms and conditions stated in the SLA. The A.O. after examining the same, shall follow the dictum laid down by the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited v.
6 IT(TP)A No.364/Bang/2022 M/s.The Mathworks Inc. CIT & Anr. (supra). The AO shall afford a reasonable opportunity of hearing to the assessee. It is ordered accordingly.
In the result, the appeal filed by the assessee is allowed for statistical purpose.
Order pronounced on this 18th day of October, 2022.