WORLD COURIER INDIA PRIVATE LIMITED ,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-7(1)(2), BANGALORE

We will first take up for consideration the appeal for Assessment Year 2014-15. As far this appeal by the assessee is concerned, the only issue that arises for consideration is as to whether the Revenue authorities were justified in disallowing sum paid by the assessee as software

The assessee is a company. It is a wholly owned subsidiary of World Courier (Group) Inc, USA. The assessee provides specialized courier services and supply chain services to domestic and overseas customers. For Assessment Year 2014-15, the assessee filed the return of income declaring total income of Rs.5,93,68,070/-. In the course of assessment proceedings, the AO noticed that the assessee had paid a sum of Rs.1,24,82,818/- to its overseas group company World Courier Management Inc, USA. The AO was of the view that the above said payment to the non-resident was in the nature of royalty and therefore was taxable in India. Since the assessee did not deduct tax at source while making the payment to the aforesaid non- resident as required under section 195 of the Act, the AO was of the view that the sum claimed as deduction should be disallowed and added to the total income of the assessee.

The assessee submitted that there was a Management Information System (MIS) maintenance agreement under which the World Courier Management Inc, USA, which was proprietor of softwares which would help the World Courier Group offices located across the globe to track the movements of the courier. The in-house developed software is supported by Information Systems based out of Stamford, Connecticut which is the main computer centre for the World Courier Group and supplies a variety of information to the operating, marketing, sales and finance and administration teams. This also includes Infrastructure Services, which is responsible for the design and availability of IT infrastructure for the World

Under the Software Maintenance Agreement, World Courier Inc. is required to provide inter alia the following services: a. Remedial maintenance consisting of diagnosis and corrective action for problems in the operation of the software b. Supply of all product upgrades and new releases and installation of such upgrades and new releases c. Provide such software and or system enhancements as may from time to time be requested by the Customer, at extra cost d. Provide consultancy services in connection with the purchase and operation of computer hardware and software (other than the software to be maintained), including installation and training, as fees to be agreed in advance

The assessee submitted that under India – USA Double Taxation Avoidance Agreement (DTAA) as per Article 12(3)(a) of the "Royalty" is defined as "payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematographic films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or information concerning industrial, commercial, or scientific experience." The assessee further submitted that it has no right to use the copyright in the

Since the definition of "Royalty" and "Fees for Included Services" as per the provisions of the DTAA are more beneficial than those of the Act, the Software Maintenance Fees if at all taxable in India would need to fall within the category of "Royalty and Fees for Included Services" as per Article 12 of the Treaty. The assessee relied on the decision of the Hon’ble Delhi High Court in the case of DIT vs Ericsson AB (343 TR 470) (Delhi). Further, the proposition that the definition of the term 'royalty' under the Act will not have any overriding impact on the definition of the term 'royalty' as provided under Article 12(3)(a) of the Treaty.

The AO did not agree with the submissions made by the assessee and following the decision of the Hon’ble Karnataka High Court in the case of Samsung Electronics Co. Ltd., 345 ITR 495 (Karn), he held that the payment in question was in the nature of royalty as it is a payment for a right to use the software and he accordingly disallowed the claim of the assessee for deduction of a sum of Rs.1,28,84,818/-. He, however, allowed depreciation on computer software at 60% and disallowed a sum of Rs.84,89,691/-.

Learned Counsel for the assessee placed reliance on the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd., Vs. CIT, Civil Appeal No.s8733 and 8734/2018, judgment dated 02.03.2021 wherein the Hon’ble Supreme Court has taken a view contrary to the view taken by the Hon’ble Karnataka High Court in the case of Samsung Electronics Co. Ltd., (supra). The learned DR, while relying on the order of the CIT(A), further pointed out that neither the AO nor the CIT(A) have examined the end users licence agreement to find out whether there was any assignment of any copyright and therefore the issue should be remanded to the AO for consideration afresh. He pointed out that agreement in question does not appear to be purely for use of software but consists of other services also and this aspect also should be examined by the AO.

We have carefully considered the rival submissions, perused the order 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 India in the hands of the recipient. The decision of Hon'ble Karnataka High Court in the case of CIT vs. Samsung Electronics Ltd. 345 ITR 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

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 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)(vi) 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

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 the case 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 Assessee in the light of the provisions of the DTAA as to whether the same would amount to royalty. We accordingly remand the issue to the AO. The AO will afford opportunity of being heard to the Assessee in the set aside proceedings. The

ITA No.1727/Bang/2017 : In this appeal, the issue to be 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.

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 for statistical purposes.