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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B. R. BASKARAN
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI B. R. BASKARAN, ACCOUNTANT MEMBER IT(IT)A No.35/Bang/2021 Assessment Year :2017-18 M/s. Kennametal Inc., Vs. ACIT (International Taxation), C/o. Kennametal India, Circle – 1(2), 8/9th Mile, Tumkur Road, Bengaluru. Bengaluru – 560 073. PAN: AACCK 6397 B ASSESSEE RESPONDENT Assessee by : Shri. K. R. Vasudevan, Advocate Revenue by : Shri. Sumer Singh Meena, CIT(DR)(ITAT), Bengaluru. Date of hearing : 14.02.2022 Date of Pronouncement : 16.02.2022 O R D E R Per N. V. Vasudevan, Vice President :
This is an appeal by the assessee against the final Order of Assessment dated 12.12.2020 passed by the ACIT, International Taxation, Circle – 1(2), Bengaluru, under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter called ‘the Act’).
The only issue that arises for consideration is as to whether the Revenue authorities were justified in bringing to tax a sum of Rs.22,88,26,438/- as royalty within the meaning of section 9(1)(vi) of the Act and also as fees for included services within the meaning of article 12(4)(a) r.w.s. 9(1)(vii) of the Act of the India-USA Double Taxation Avoidance Agreement (DTAA).
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The factual circumstances under which the aforesaid addition was made by the AO and confirmed by the Dispute Resolution Panel (DRP) are that the assessee is a foreign assessee incorporated under the laws of Commonwealth of Pennsylvania, USA and is engaged in the business of materials science, tooling and wear-resistant solutions. During the year under consideration, the assessee provided information technology support services (IT Services') to its group entities globally including its subsidiaries, Kennametal India Ltd (`KIL') and Kennametal Shared Services Private Limited (KSSPL). For AY 2017-18, the assessee filed its return of income on November 29, 2017 declaring taxable income of Rs.15,784,932. The assessee did not offer to tax a sum of Rs.22,88,26,438/- received towards “Information Technology” charges for providing information technology services provided to KIL/KSSPL.
In the draft order of assessment dated 19.12.2019, the AO brough to tax the sum of Rs.22,88,26,438/- being Information Technology charges received from KIL/KSSPL and determined the total income of the assessee as follows:
Particulars Amount (In INR) Total income as per return of income 15,784,932 Add: Adjustment towards information technology charges on 228,826,438 treatment as feesfor technical services. Total income 244,611,370
According to the assessee, as per the agreement between the assessee and Kennametal India Ltd., (KIL) and Kennametal Shared Services Pvt. Ltd.(KSSP), it rendered the following information technology services:
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Provide computerized enterprise and financial systems to enable Service Recipient to effectively and efficiently conduct and carry out its business. Support applications and IT systems, such as helpdesk, desktop and application support and other processes. Support through storage of data in accordance with relevant legal requirements as communicated by Service Recipient. Consultation and support to assist with development and installation of upgrades and new applications. Support though the establishment and maintenance of disaster recovery procedures and facilities. Advice, consultation and assistance concerning the effective use of computerized systemsprovided by the Kennametal Global Systems Network. Advice, consultation and assistance in identifying, specifying, communicating and implementing enhancements to the computerized system provided by the Kennametal Global Systems Network in order to increase Service Recipient's capabilities and to improve Service Recipient's productivity.
According to the assessee, the payments so received was not chargeable to tax in India for the following reasons: a. The amount reimbursed by KIL/KSSPL to the Assessee is in the nature of reimbursement of cost incurred in connection with usage of copyrighted article and not towards any "technical or consultancy services". b. The predominant purpose of the arrangement is to share the cost of IT services incurred by the Assessee and hence, the other various IT services rendered cannot be termed as "ancillary or subsidiary" to the application or enjoyment of the copyrighted software. The license fees are only a minimal part of the cross charge, and even that is not royalty under the India-USA DTAA. c. Further, the Assessee does not made available any technical knowledge, experience, skill or know and there is no transfer of technology but only the provision of various IT services.
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d. The assessee also placed reliance on judicial precedents where it has been held that pure reimbursements cost to cost basis does not comprise any element of income.
The AO firstly noticed that similar payments were a subject matter of examination in the assessment of the assessee for the earlier Assessment Years 2009-10 to 2013-14. Thereafter, the AO proceeded to hold that the payments received by the assessee would be chargeable to tax in India for the following reasons:
The receipts from KIL/KSSPL are mainly in the nature of cross i) charges. The Assessee acquired license for the software SAP from SAP AG, Germany and this included one time cost as well as recurring cost. The Assessee has a centralized data centre in USA which houses the server that caters to SAP access and also provides the various services. The same was allotted to the individual entities based on the number of SAP users in each entity. Even if the assessee were not the licensee, the payment received by ii) it from the group entities would not have escaped the definition of Royalty under the DTAA, as the payment is for use of copyright in SAP software The AO therefore concluded that the payments made by KIL/KSSPL iii) to the Assessee are basically in the nature of Royalty. He also held that the sum is also taxable as "Fees for included iv) services".
The Assessee filed objection before the DRP against the proposal of the AO to tax the aforesaid receipts in his Draft Assessment Order. The DRP however rejected the contention of the assessee and upheld the addition made by the AO. The addition was incorporated in the final Order of Assessment against which the assessee has filed the present appeal before the Tribunal.
At the time of hearing, it was admitted by both the parties that identical issue had come up before the Tribunal in assessee’s own case in Assessment
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Years 2009-10 to 2013-14 in ITA Nos.801 to 806/Bang/2019. It was also not disputed that the facts of the case were identical to the facts in this appeal which is in relation to Assessment Year 2017-18. In the aforesaid decision, the Tribunal remanded the issue to the AO for fresh consideration de novo on following terms:
“7. We have heard the rival submissions. Similar issue came for consideration before this Tribunal rendered in the case of Ivl/s. World Courier (India) Pvt. Ltd. vs. ACIT in ITA Nos. 1727, 1577/Bang/2017 dated 11.08.2021,wherein held that "11. We carefully considered the rival submissions, perused theOrder of the AO and Ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the issue to be decided in the grounds raised by the assessee is in relation to taxability of payment in question in 111dia in the hands of the recipient. The decision of Hon'ble Karnataka High Court in the case of CIT vs. Samsung Electronics Ltd. 345 ITI? 494 on the basis of which the revenue authorities concluded that the payment in question is in the nature of royalty, now stand overruled by the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. (2021) 125 Toxmann.com 42 (SC). The Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Dd. (2021) 125 Taxmann.com 42 (SC) held that A copyright is an exclusive right that restricts others from doing certain acts. A copyright is an intangible right, in the nature of a privilege, entirely independent of any material substance. Owning copyright in a work is different from owning the physical material in which the copyrighted work may be embodied. Computer programs are categorised as literary work under the Copyright Act. Section 14 of the Copyright Act states that a copyright is an exclusive right to do or authorise the doing of certain acts in respect of a work, including literary work. The Hon’ble Court took the view that a transfer of copyright would occur only when the owner of the copyright parts with the right to do any of the acts mentioned in section 14 of the Copyright Act, I957(Copyright Act). in the case of a computer program, section 14(1)) of the Copyright Act, speaks explicitly of two sets of acts:
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The seven acts enumerated in sub-clause (a); and 2. The eighth act of selling or giving of commercial rental or offering for sale or commercial rental any copy of the computer program. The seven acts as enumerated in section 14(a) of the Copyright Act, in respect of literary works are: 1. To reproduce the work in any material form, including the storing of it in any medium electronically; 2. To issue copies of the work to the public, provided they are not copies already in circulation; 3. To perform the work in public, or communicate it to the public; a. To make any cinematographic film or sound recording in respect ofthe work; 4. To make any translation of the work,. 5. To make any adaptation of the work; and 6. To do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub- clauses (1) to (6). The court held that a licence from a copyright owner, conferring no proprietary interest on the licensee, does not involve parting with any copyright. It said this is different from a licence issued undersection 30 of the Copyright Act, which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. What is 'licensed' by the foreign, non- resident supplier to the distributor and resold to the resident end-user, or directly supplied to the resident end-user, is the sale of a physical object which contains an embedded computer program. Therefore, it was a case of sale of goods. The payments made by end-users and distributors are akin to a payment for the sale of goods and not for a copyright license under the Copyright Act. The decision of the Hon'ble Karnataka High Cour in the case of CIT Vs. Samsung Electronics Co. Ltd. (2011) 16 taxmann.com 141 (Kara.), on which the revenue authorities placed reliance in making the impugned addition stood overruled by the Hon’ble Supreme Court. 12. On the question whether the provisions of the Act can override the provisions of the DTAA, the Hon'ble Court held that Explanation 4 was inserted in section 9(1)(vi) of the ITA in 2012
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to clarify that the "transfer of all or any rights" in respect of any right, property, or information included and had always included the "transfer of all or any right for use or right to use a computer software". The court ruled that Explanation 4 to section 9(1)(w) expanded the scope of royalty under Explanation 2 to section 9(1)(vi). Prior to the aforesaid amendment, a payment could only be treated as royalty if it involved a transfer of all or any rights in copyright by way of license or othersimilar arrangements under the Copyright Act. The court held that once a DTAA applies, the provisions of the Act can only apply to the extent they are more beneficial to the taxpayer and therefore the definition of 'royalties' will have the meaning assigned to it by the DTAA which was more beneficial. It was held that the term 'copyright' has to be understood in the context of the Copyright Act. The court said that by virtue of Article 12(3) of the DTAA, royalties are payments of any kind received as a consideration for "the use of, or the right to use, any copyright "of a literary work includes a computer program or software. It was held that regarding the expression "use of or the right to use", the position would be the same under explanation 2(v) of section 9(1)(w) because there must be, under the licence granted or sales made, a transfer of any rights contained in sections 14(a) or 14(b) of the Copyright Act. Since the end-user only gets the right to use computer software under a nonexclusive licence, ensuring the owner continues to retain ownership Sunder section 14(b) of the Copyright Act read with sub-section 14(a) (i)-(vii), payments for computer software sold/licenced on a CD/other physical media cannot be classed as a royalty. 13. As contended by the learned DR, neither the AO nor the CIT(A)had the benefit of the decision of the Hon 'ble Supreme Court in thecase of Engineering Analysis Centre of Excellence (P) Ltd. (supra) and therefore in all fairness, the issue should be remanded to the AO to examine the terms of the agreement under which right were granted to the Assesseein the light of the provisions of the DTAA as to whether the same would amount to royalty. We accordingly remand the issueto the AO. The AOwill afford opportunity of being heard to theAssesseein the set aside proceedings. The appeal of the Assessee is accordingly treated as allowed for statistical purpose.
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ITA No.1727/Bang/2017 : In this appeal, the issue to he decided is as to whether the AO is justified in disallowing a sum of Rs.1,15,68,449/-being software charges on the ground of non-deduction of tax at source. The facts and circumstances under which this addition is made by the AO under section 40a(ia) of the Act are identical to the facts and circumstances as it prevailed in Assessment Year 2014-15. We have already remanded the issue to the AO for fresh consideration with certain directions. The said directions and decisions will equally apply to the present Assessment Year also. We hold and direct accordingly. The other issues raised in the grounds of appeal were not pressed by the learned Counsel for the assessee. The appeal of the Assessee is accordingly treated as partly allowed for statistical purpose. 15. In the result, the appeal for AY 2014-15 is treated as allowed for statistical purpose while the appeal for AY 2012-13 is treated as partly allowed forstatistical purposes." 7. In view of the above order of Tribunal, the issues raised by assessee are remitted to the file of AO to examine the terms of the agreement dated 01.07.2005 under which rights are granted to the subsidiary and in the light of the DTAA as to whether the same would amount to Royalty. TheAO will afford opportunity of being heard to the assessee in proceedings.” 10. Both the parties agree that the aforesaid issue needs to be set aside to the AO for examination afresh as was directed by the Tribunal in the aforesaid order.
Accordingly, we set aside the order of the AO and remand the issue to the AO for consideration afresh on the lines indicated by the Tribunal in the order referred to above, after affording opportunity of being heard to the assessee. The appeal of the assessee is accordingly treated as allowed for statistical purposes.
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In the result, the appeal of the assessee is allowed for statistical purposes.
Pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- (B. R. BASKARAN) (N. V. VASUDEVAN) Accountant Member Vice President Bangalore. Dated: 16.02.2022. /NS/*
Copy to: 1. Assessees 2. Respondent 3. CIT 4. CIT(A) 5. DR 6. Guard file By order Assistant Registrar, ITAT, Bangalore.