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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI PRAMOD KUMAR & SHRI SANDEEP SINGH KARHAIL
The present appeal has been filed by the Revenue challenging the impugned order dated 16/09/2021, passed under section 250 of the Income Tax Act, 1961 ("the Act") by the learned Commissioner of Income Tax (Appeals)-57, Mumbai [“learned CIT(A)”], for the assessment year 2015–16.
Park Air Systems Ltd. ITA No.2362/Mum./2021
The appeal filed before us is delayed by 9 days. We find that the Hon'ble Supreme Court vide order dated 10.01.2022, in M.A. no.21 of 2022, in M.A. no.665 of 2021, in Suo–Motu Writ Petition (Civil) no.3 of 2020, directed that the period from 15.03.2020 till 28.02.2022, shall stand excluded for the purpose of limitation as may be prescribed under any general or special laws in respect of all judicial and quasi judicial proceedings. As the due date for filing present appeal was falling within the aforesaid time-period, in view of the order passed by the Hon‟ble Supreme Court, there is no delay in filing the present appeal and we proceed to decide the appeal on merits.
The Revenue, in the present appeal, has raised following grounds:– “1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in 'lying the ratio of Hon'ble Supreme Court decision in the case of Engineering Analysis Centre of Excellence (P) Ltd.v.CIT [2021] 125 taxmann.com 42 (SC) in holding that the payment for use of computer software cannot be regarded as royalty without examining whether the facts of the impugned case is same as in the case of Engineering Analysis (supra).
2. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not remanding the matter back to the Assessing Officer to examine and verify the nature of the software and whether the facts involved in the impugned case is identical to the facts in the order of Hon'ble Supreme Court of Engineering Analysis (supra).
3. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the appeal without any application of mind as evident from the operative part of appellate order.
4. The Appellant prays that the order of the Ld. CIT(A) on the above ground(s) be set aside and that of the Assessing Officer be restored."
Park Air Systems Ltd. ITA No.2362/Mum./2021
The only grievance of the Revenue in the present appeal is against deletion of addition made by treating the payment received for offshore supply of software, which was embedded in hardware, as Royalty.
The brief facts of the case pertaining to the only issue arising in present appeal, as emanating from record are: The assessee is a company registered in United Kingdom and is a tax resident of United Kingdom. It primarily works in the area related to advanced air traffic control systems and is engaged in design, manufacture and installation of ground-based systems for use in air traffic control and air defence applications in the implementation of advanced air traffic control systems. For relevant assessment year, the assessee e-filed its return of income on 28/09/2016 declaring total income of Rs. Nil and claimed refund of Rs 1,41,22,180. During the year under consideration, assessee received payments from Airport Authority of India under purchase order for supply of transmitters and receivers with accessories. The purchase order involves (a) supply of hardware (including embedded software); (b) FAT, training and installation consultancy charges; (c) customs clearance charges; and (d) freight and insurance charges. The total consideration payable to the assessee, under the aforesaid purchase order, was Rs. 37,73,37,226.
During the assessment proceedings, the assessee was asked to show cause as to why receipt of Rs. 9,41,23,330, under purchase order
Park Air Systems Ltd. ITA No.2362/Mum./2021 issued by Airport Authority of India, for offshore supply of software should not be considered as Royalty under section 9(1)(vi) of the Act read with Article 13(2) of the India and UK Double Taxation Avoidance Agreement („DTAA‟). In reply, assessee submitted that the software is being supplied along with the hardware (i.e. embedded software in the equipment) and the same is required to make the hardware/equipment operational. The assessee further submitted that the software so supplied is embedded in the hardware and such software are neither to be supplied separately nor does it have any independent existence. The assessee also submitted that the software being supplied is therefore, in the nature of goods forming an integral part of the hardware system and thus, no tax would be payable in India in respect of such software supplied along with the hardware. The Assessing Officer vide order dated 23/01/2018 passed under section 143(3) r.w.s. 144C(3) of the Act did not agree with the submissions of the assessee and treated the consideration received for supply of software as Royalty under the provisions of the Act as well as DTAA.
The learned CIT(A) vide impugned order dated 16/09/2021, by placing reliance upon the decision of Hon‟ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT: [2021] 432 ITR 471 (SC), allowed the appeal filed by the assessee and deleted the addition made in respect of payment received for supply of software,
Park Air Systems Ltd. ITA No.2362/Mum./2021 which was embedded in hardware. Being aggrieved, Revenue is in appeal before us.
During the course of hearing, Shri Milind Chavan, learned Departmental Representative („learned DR‟) submitted that the decision of Hon‟ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. (supra) is not applicable to the facts and circumstances of the present case, as the nature of software in present case doesn‟t fall in any of the categories of software considered by the Hon‟ble Supreme Court in aforesaid decision. Learned DR further submitted that opportunity should be granted to the Assessing Officer to examine and verify the nature of software vis-à-vis aforesaid decision of Hon‟ble Supreme Court.
On the other hand, Shri Ashish K. Gupta, learned Authorised Representative submitted that the present case is covered in favour of the assessee by the aforesaid decision of Hon‟ble Supreme Court.
We have considered the rival submissions and perused the material available on record. In the present case, assessee is engaged in design, manufacture and installation of ground-based systems for use in air traffic control and air defence applications in the implementation of advanced air traffic control systems. Under the purchase order issued by Airport Authority of India, assessee supplied transmitters and receivers with accessories, during the year under consideration. The purchase order involves (a) supply of hardware (including embedded software); (b) FAT,
Park Air Systems Ltd. ITA No.2362/Mum./2021 training and installation consultancy charges; (c) customs clearance charges; and (d) freight and insurance charges. The Assessing Officer only disputed the claim of assessee in respect of payment received towards offshore supply of software and taxed the same as Royalty. In order to decide the sole issue in present appeal, it is relevant to note that, in the present case, following facts are not in dispute: (i) the software is supplied by the assessee along with the hardware/equipment; (ii) software is embedded in the hardware; (iii) such software, embedded in the hardware, cannot be supplied separately nor has any independent existence; and (iv) the software cannot also be separately or independently used. The Assessing Officer denied the relief to the assessee on the basis of his own interpretation of the term „Royalty‟ under the Act as well as DTAA, which after the decision of Hon‟ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. (supra) also no longer holds good. It is also not the case of Revenue that the hardware supplied by the assessee can be used separately without the software. Thus, both the components, i.e. hardware and software, form an integral part of the equipments supplied by the Assessee and in the absence of one component, entire equipment cannot be put to use for which it has been supplied.
We find that while dealing with a similar issue, in DIT vs Ericsson A.B. [2012] 343 ITR 470 (Del), wherein the taxpayer supplied various equipment (hardware) embedded with software to the Indian cellular
Park Air Systems Ltd. ITA No.2362/Mum./2021 operators, Hon‟ble Delhi High Court held that payment received by the taxpayer towards GSM system of which software was an inseparable part, which is incapable of independent use, could not be classified as payment towards Royalty. Hon‟ble Delhi High Court, in Ericsson A.B. (supra), further observed as under: “55. Once we proceed on the basis of aforesaid factual findings, it is difficult to hold that payment made to the assessee was in the nature of royalty either under the Income-Tax Act or under the DTAA. We have to keep in mind what was sold by the assessee to the Indian customers was a GSM which consisted both of the hardware as well as the software, therefore, the Tribunal is right in holding that it was not permissible for the Revenue to assess the same under two different articles. The software that was loaded on the hardware did not have any independent existence. The software supply is an integral part of the GSM mobile telephone system and is used by the cellular operator for providing the cellular services to its customers. There could not be any independent use of such software. The software is embodied in the system and the revenue accepts that it could not be used independently. This software merely facilitates the functioning of the equipment and is an integral part thereof.”
The aforesaid decision in Ericsson AB (supra) was subsequently followed by Hon‟ble Delhi High Court in DIT vs Nokia Networks OY [2013] 358 ITR 259 (Delhi) and CIT vs ZTE Corporation [2017] 392 ITR 80 (Delhi). All these decisions rendered by Hon‟ble Delhi High Court came up for consideration before Hon‟ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. (supra). In which case, after noting the relevant findings rendered by Hon‟ble Delhi High Court, at Para 110 to 116 of the judgment, Hon‟ble Supreme Court observed as under: “118. Consequently, the view contained in the determinations of the AAR in Dassault Systems K.K. (supra) and Geoquest Systems B.V. (supra) and the judgments of the High Court of Delhi in Ericsson A.B. (supra), Nokia Networks OY (supra), Infrasoft Ltd. (supra), ZTE Corporation (supra), state the law correctly and have our express approval. We may add that Park Air Systems Ltd. ITA No.2362/Mum./2021
the view expressed in the aforesaid judgments and determinations also accords with the OECD Commentary on which most of India's DTAAs are based."
Thus, in view of the aforesaid settled legal position, which has been rightly followed by the learned CIT(A) in present case, we find no infirmity in the impugned order.
In the result, appeal by the Revenue is dismissed. Order pronounced in the open court on 07/06/2022