QLIKTECH INTERNATIONAL AB,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION, CIRCLE-2(2), BANGALORE

The assessee is a company incorporated in Sweden and is engaged in the business of sale of software products and rendering information technology services. The business of the assesseee includes software materialization, marketing and support of the software material Qlikview for which it enjoys all intellectual property rights such as patent, trademark and IT(IT)A No. 173/Bang/2021 Page 2 of 32 copy rights. The assessee has entered into an agreement with its subsidiary QlikTech India Private Ltd. for onward sale of shrink wrapped software to the end users/ customers in India as per the distribution / license agreement. As per the said agreement QlikTech India Private Ltd., will promote and resell assessee’s products to the end users within the prescribed territory in accordance with the terms and conditions set forth in the agreement. A copy of the distributor agreement dated 16.11.2011 and End users Licence Agreement (EULA) which forms Appendix 1 to the Distribution Agreement are at pages 106 to 112 of the assessee’s paper book. The following features in the said agreement are material for a decision in deciding the 1st issue in this appeal and the same are that (i) the distributor gets only a non-exclusive and non-transferable license to resell computer software. (ii) No copyright in the computer program is transferred to either the distributor or to the ultimate end-user. (iii) The end-user can use the computer program itself, but there is no further right to sub-license or transfer or reverse-engineer, modify, reproduce in any manner otherwise than permitted by the license to the end-user; (iv) The distributor pays the computer program’s price as goods, in a medium that either stores the software or embeds it in the hardware;(v) The distributor does not get the right to use the product; and (vi) The end-user can only use the computer program by installing it in the computer hardware owned by the end-user and cannot in any manner reproduce it for sale or transfer.

The assessee filed its return of income for the AY 2017-18 declaring NIL income. The AO in the draft assessment order passed on 12th December 2019 held that the entire receipts of Rs.24,45,50,141/- from sale of software products is taxable as royalty under Article 12(3) of the India- Sweden Double Taxation Avoidance Agreement (DTAA) and u/s 9(1)(vi) of IT(IT)A No. 173/Bang/2021 Page 3 of 32 the Income Tax Act, 1961 (Act) which defines the term “Royalty”. The relevant provisions of the DTAA and the Act reads thus:

Aggrieved by the order of the CIT(A) the assessee is in appeal before the Tribunal raising the following grounds :-

The Ld. Counsel for the assessee submitted that assessee is a tax resident of Sweden, therefore, in view of Section 90(2) of the Act or the DTAA whichever is more beneficial to the assessee shall apply. He submitted that since the definition of royalty provided under Article 12 of the India-Sweden DTAA is more beneficial as compared to the provisions of Section 9(1)(vi) of the Act, therefore, the provisions of DTAA shall apply. He submitted that the Tribunal in assessee's own case for the immediately preceding Assessment Year i.e., Assessment Year 2012-13 and 2013-14 had held that what is being provided by Qlik India to end users is neither the copyright in the software nor the use of the copyright in the software but IT(IT)A No. 173/Bang/2021 Page 7 of 32 right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. It has held that the right that is being transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income. He submitted that the QlikTech Software product in question in the current year and also in the preceding assessment year is the same, He further submitted that the sale of software in the instant case cannot be held to be "use of process" or "information concerning Industrial, commercial or scientific experience" because the end users do not have any access to the source code and what is available merely for their use is software product as such and not the process embedded in it and all intellectual property rights and other rights relating to the QlikTech products at all times is the exclusive property of the assessee. He submitted that assessee in the instant case has merely transferred the right to use the copyrighted article. He submitted that AO and the Ld. CIT(A) relying on the decision of Hon'ble Karnataka High Court in the case of CIT vs. Samsung Electronics Ltd. 345 ITR 494 and CIT vs Lucent Technologies vide and that those decisions 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 Taxmann.com 42 (SC).

The Ld. DR on the other hand strongly relied on the order of the Ld. CIT(A).

We have heard the arguments of both the parties and perused the material on record.

We find from the judgment of the Jurisdictional High Court, in the case of DCIT Vs Infrasoft Ltd. 264 CTR 329 has elaborately explained as to what constitutes licensing agreement, its exclusivity, non- transferability, as to what constitutes a copyright and how the amounts paid for transfer of copyright and amounts paid for royalty defer in connection with the Article 7 and Article 12 of the DTAA. The judgments also dealt with the licenses, copyrights, loan rent sale, sublicense,transfer of copy of software as well as royalties. The judgments also considered the decision of the Hon'ble Karnataka High Court in the case of Samsung Electronics Co. Ltd. with regard to copyright and royalty. The operative portion of the said judgment of the Hon'ble High Court of Delhi is as under: "85. The Licensing Agreement shows that the license is non- exclusive, non-transferable and the software has to be uses in accordance with the Agreement.Only one copy of the software is being supplied for Qliktech International AB vs. DCIT each site. The licensee is permitted to make only one copy of the software and associated support information and that also for backup purposes. It is also stipulated that the copy so made shall include Infrasoft's copyright and other proprietary notices. All copies of the Software are the exclusive property of Infrasoft. The Software includes a licence authorisation device, which restricts the use of the Software.The software is to be used only for Licensee‟s own business as defined within the Infrasoft Licence Schedule. Without the consent of the Assessee the software cannot be loaned, rented,sold, sublicensed or IT(IT)A No. 173/Bang/2021 Page 10 of 32 transferred to any third party or used by any parent, subsidiary or affiliated entity of Licensee or used for the operation of a service bureau or for data processing. The Licensee is further restricted from making copies, decompile, disassemble or reverse-engineer the Software without Infrasoft's written consent. The Software contains a mechanism which Infrasoft may activate to deny the Licensee use of the Software in the event that the Licensee is in breach of payment terms or any other provisions of this Agreement. All copyrights and intellectual property rights in and to the Software,and copies made by Licensee, are owned by or duly licensed to Infrasoft.

The Licensing Agreement shows that the license is non- exclusive, non-transferable and the software has to be uses in accordance with the agreement. Only one copy of the software is being supplied for each site. The licensee is permitted to make only one copy of the Qliktech International AB vs. DCIT software and associated support information and that also for backup purposes. It is also stipulated that the copy so made shall include Infrasoft's copyright and other proprietary notices. All copies of the Software are the exclusive property of Infrasoft. The Software includes a licence authorisation device, which restricts the use of the Software. The software is to be used only for Licensee's own business as defined within the Infrasoft Licence Schedule. Without the consent of the Assessee the software cannot be loaned, rented, sold, sublicensed or transferred to any third party or used by any parent, subsidiary or affiliated entity of Licensee or used for the operation of a service bureau or for data processing. The Licensee is further restricted from making copies, decompile, disassemble or reverse- engineer the Software without Infrasoft's written consent. The Software contains a mechanism which Infrasoft may activate to deny the Licensee use of the Software in the event that the Licensee is in breach of payment terms or any other provisions of this Agreement. All copyrights and intellectual property rights in and to the Software, and copies made by Licensee, are owned by or duly licensed to Infrasoft.

In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid

The license granted by the Assessee is limited to those necessary to enable the licensee to operate the program. The rights transferred are specific to the nature of computer programs. Copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they do no more than enable the effective operation of the program by the user, should be disregarded in analyzing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business income in accordance with Article 7.

There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining ITA No. 1185/Del/2019 Qliktech International AB vs. DCIT his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a nonexclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been IT(IT)A No. 173/Bang/2021 Page 12 of 32 transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially coextensive with the owner/transferor who divests himself of the rights he possesses pro tanto.

The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said Qliktech International AB vs. DCIT process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do.

There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Income Tax Act or under the DTAA.

The licensees are not allowed to exploit the computer software commercially, they have acquired under licence agreement, only the copy righted software which by itself is an article and they have not acquired any copyright in the software. In the case of the Assessee company, the licensee to whom the Assessee company has sold/licensed the software were allowed to make only one copy of the software and associated support information for backup purposes with a condition that such copyright shall include Infrasoft copyright and all copies of the software shall be exclusive properties of Infrasoft. Licensee was allowed to use the software only for its own business as IT(IT)A No. 173/Bang/2021 Page 13 of 32 specifically identified and was not permitted to loan/rent/sale/sub- licence or transfer the copy of software to any third party without the consent of Infrasoft.

The licensee has been prohibited from copying, decompiling, de- assembling, or reverse engineering the software without the written consent of Infrasoft.The licence agreement between the Assessee company and its customers stipulates that all copyrights and intellectual property rights in the software and copies made by the licensee were owned by Infrasoft and only Infrasoft has the power to grant licence rights for use of the software. The licence agreement stipulates that upon termination of the agreement for any reason, the licencee shall return the software including supporting information and licence authorization device to Infrasoft.

The incorporeal right to the software i.e. copyright remains with the owner and the same was not transferred by the Assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. What the licensee has acquired is only a copy of the copyright article whereas the copyright remains with the owner and the Licensees have acquired a computer programme for being used in their business and no right is granted to them to utilize the copyright of a computer programme and thus the payment for the same is not in the nature of royalty.

We have not examined the effect of the subsequent amendment to section 9 (1)(vi) of the Act and also whether the amount received for use of software would be royalty in terms thereof for the reason that the Assessee is covered by the DTAA, the provisions of which are more beneficial.

The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA.

What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is IT(IT)A No. 173/Bang/2021 Page 14 of 32 transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be business income.

We are not in agreement with the decision of the Andhra Pradesh High Court in the case of SAMSUNG ELECTRONICS CO. LTD (SUPRA) that right to make a copy of the software and storing the same in the hard disk of the designated computer and taking backup copy would amount to copyright work under section 14(1) of the Copyright Act and the payment made for the grant of the licence for the said purpose would constitute royalty. The license granted to the Qliktech International AB vs. DCIT licensee permitting him to download the computer programme and storing it in the computer for his own use was only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process was necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said provision because it is only integral to the use of copyrighted product. The right to make a backup copy purely as a temporary protection against loss, destruction or damage has been held by the Delhi High Court in DIT v. M/s Nokia Networks OY (Supra) as not amounting to acquiring a copyright in the software.

In view of the above we accordingly hold that what has been transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty income."

The Tribunal has discarded the aforesaid commentary of OECD as well as Klaus Vogel only on the ground that it is not safe to rely upon the same. However, what is ignored is that when the technical terms used in the DTAA are the same which appear in Section 9(1)(vi), for better understanding all these very

On a final note, India's change in position to the OECD Commentary cannot be a fact that influences the interpretation of the words defining royalty as they stand today. The only manner in which such change in position can Qliktech International AB vs. DCIT be relevant is if such change is incorporated into the agreement itself and not otherwise. A change in executive position cannot bring about a unilaterall legislative amendment into a treaty concluded between two sovereign states. It is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere amendment to Section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. Any attempt short of this, even if it is evidence of the State's discomfort at letting data broadcast revenues slip by, will be insufficient to persuade this Court to hold that such amendments are applicable to the DTAAs."

In the result, both the appeals of the revenue are dismissed."

Since the facts of the instant assessment year are identical to the facts of the two preceding assessment years decided by the Tribunal in assessee's own case, therefore, respectfully following the decision of the coordinate bench of the Tribunal we set aside the order of the Ld. CIT(A) and hold that consideration received by the assessee for sale of software cannot be treated as royalty under the provision of section 9(1)(vi) of the Act as well as Article 12 of the India-Sweden DTAA and that the sale of IT(IT)A No. 173/Bang/2021 Page 17 of 32 software products by the assessee to its Indian distributors for further sale to end users is not in the nature of transfer of "copyright" and therefore not taxable in the hands of the assessee as "royalty" under the provision of section 9 (1)(vi) of the Act as well as Article 12 of the India-Sweden DTAA. The material difference between the earlier Assessment year and the present Assessment year is that due to change of jurisdiction of the assessee from Delhi to Bangalore, the jurisdictional High Court would be Karnataka High Court and the decision of Hon'ble Karnataka High Court in the case of CIT vs. Samsung Electronics Ltd. 345 ITR 494 and CIT vs Lucent Technologies vide is in favour of the revenue and against the assessee. But as rightly pointed out by the learned counsel for the assessee, those decisions of the Hon’ble Karnataka High Court, 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 Taxmann.com 42 (SC). The Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. (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, 1957(Copyright Act). In the case of a computer program, section 14(b) of the Copyright Act, speaks explicitly of two sets of acts:

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 license or other similar 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)(vi) 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 non-exclusive licence, ensuring the owner continues to retain ownership under section 14(b) of the IT(IT)A No. 173/Bang/2021 Page 20 of 32 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.

In the light of the aforesaid discussion, the grounds raised by the assessee with regard to taxing receipts on sale of off-the-shelf software are allowed.

The assessee entered into an agreement with Qlik India Ltd., whereby it agreed to provide assistance to Qlik India in respect of certain back office support operations, through it’s shared services center. Copy of the said agreement is at pages 113-119112 of the assessee’s Paper Book. As per the said agreement, the assessee agreed to provide the following assistance to QlikTech India :

The assessee received a sum of Rs.98,93,448/- from Qlick India for provision of shared services. The plea of the assessee that the said receipt is not chargeable to tax in India was that the services were rendered outside India and payments were received outside India by the person to IT(IT)A No. 173/Bang/2021 Page 23 of 32 whom services were provided. It was the plea of the assessee that it being a non-resident, in terms of section 5(2)(b) & (c) of the Act, it is only income that is chargeable to tax in India that which accrue or arise in India or is deemed to accrue or arise in India. Since the services in question was rendered outside India, payment cannot be regarded as income that accrues or arises in India. Assessee also pointed out that payment in question cannot be regarded as “Fees for Technical Services” (FTS). The assessee brought to the attention of the AO the provisions of section 9(1)(vii) which defines the terms of FTS to mean any consideration for rendering any managerial, technical or consultancy services. The plea of the assessee was that back office services rendered by the assessee were neither managerial, technical or consultancy services. The assessee, therefore, submitted that the receipt in question cannot be brought to tax as FTS.

Without prejudice to the above submission, the assessee submitted that in terms of Article 12(3) (b) The term 'fees for technical services' means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provisions of services by technical or other personnel. The definition under the Act and DTAA is therefore one and the same as far as FTS is concerned. In terms of Article 12(2) of the DTAA, it is taxable in the State in which it arises, i.e., India. The assessee submitted that under article 12 of the India-Sweden DTAA, FTS cannot be brought to tax in India because under the protocol to the India-Sweden DTAA if under any Convention, Agreement or Protocol between India and a third State which is a member of the OECD, India limits its taxation at source on, inter alia, fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in the India-Sweden DTAA, the same

The assessee submitted that it was a tax resident of Sweden and therefore it was entitled to avail the benefit of the MFN clause as contained in the Protocol to the India-Sweden DTAA by virtue of which, it can claim the benefit of the "make available" condition imposed for bringing to tax the fees for technical services in the India-Portuguese / India-USA DTAA. It was submitted that since the provisions of India Sweden DTAA read with India-Portuguese /India-USA DTAA are more beneficial as compared to the provisions of the Act, the same will override the provisions of the Act, to the extent to which the provisions of the said DTAAs are more beneficial.

The assessee submitted that for the purposes of the services, as provided by the assessee to Qlik India, to be covered under the definition of FIS/ FTS as contained in the India-Portuguese / India- USADTAA, it is important that the said services fall in the nature of technical or consultancy services as the definition of the term FIS/ FTS in the DTAA covers only technical and consultancy services and does not cover services which are managerial in nature. It was submitted by the assessee that the services provided by the assessee, even if considered to be managerial in nature, the same would not fall in the nature of technical or consultancy services and accordingly, would not fall within the definition of FIS/ FTS as contained in the India- Portuguese / India-USA DTAA. Therefore, the same would not be liable to tax in India under Article 12 of DTAA.

Without prejudice to the above, it was submitted that if the services provided by the assessee are considered to be technical or consultancy services, even otherwise, the payments in respect of the same would be considered as FIS/ FTS only if –

The AO, however, did not agree with the submissions made by the assessee and he held that services were in the nature of consultancy and services were regarded as FTS. With regard to the argument on Article 12 of the India-Sweden Tax Treaty, reliance was placed by the assessee on NSN. The AO held that the services rendered by the assessee was made

On appeal by the assessee, the CIT(A) concurred with the view of the AO and placed reliance on the decision of the Authority for Advanced Ruling (AAR) in the case of Areva T & D India Ltd., (2012) 18 taxmann.com 171 (AAR – New Delhi). In the decision relied upon by the CIT(A), it was held that the person providing services, if he has a PE in India then FTS is taxable under DTAA as well as under the Act.

Aggrieved by the order of the CIT(A), the assessee has raised ground No.3 before the Tribunal.

We have heard the rival submissions. The learned Counsel for the assessee drew our attention to the decision of the ITAT Pune Bench in the case of Sandvik AB Vs. DDIT (2015) 61 taxmann.com 31 (Pune – Trib.). In the aforesaid decision, the Hon’ble Pune Bench had to consider the effect of the protocol of DTAA between India-Sweden with regard MFN Clause. The facts of the case before the Pune Tribunal were that the assessee, a non-resident company, incorporated in Sweden had received 'Management Service Fee' from Indian AEs for direction or guidance relating to business strategy and its group policies. The Assessing Officer taxed the consideration received for services rendered by it as fees for technical services under article 12 on the ground that article 12 included managerial, technical or consultancy services. The assessee stated that the above payment was not taxable in view of the protocol to DTAA between India and Sweden on article 12 and that the services provided by the assessee- company were managerial in nature and, hence, were non-technical. The DRP did not accept the contention of the assessee that the services

We are of the view that the assessee is entitled to take the benefit of MFN Clause rely on the provisions of Article 12(4)(v) of the Inda- Portuguese DTAA and claim that the receipts can be brought to tax only if the services provided makes available technical knowledge, experience, skill, etc., to the person acquiring the services. The decision of the Pune Tribunal in the case of Sandvik AB (supra) clearly supports the plea of the assessee in this regard.

The meaning of the expression make available were considered by the Tribunal in the case of Raymond Ltd. Vs. DCIT (2003) 80 TTJ (Mum) 120. The Tribunal after elaborate analysis of all the related aspects observed that :-

Going by the nature of services enumerated in the present case, we are of the view that the services were purely in the nature of back office services and nothing can be regarded as having been made available to the recipient of services. As per the terms of the Service Agreement, it is clear that the assessee only provides corporate back office services to QlikTech India and such services are not consultancy services and the same do not involve transfer of any technical knowledge or skill or experience to the recipient. The CIT(A) has erred in law and on facts in stating that, since the business model and the accounting and financial policies of the business remains the same, the consultancy services could be utilised by the Indian entity in its business year after year, thereby satisfying the 'make available' condition. On the contrary, the CIT(A) has failed to appreciate that the year on year rendition of services by the assessee to the Indian entity proves that technical knowledge is not transferred or made available to the Indian entity for independently function without the aid of the assessee. We therefore agree with the plea of the assessee and hold that the sum received towards shares services were not in the nature of FTS and cannot be brought to tax in India as “FTS”. The sum in question cannot be taxed as business profits also, as under Article 7(1) of DTAA, as the receipts in question cannot be attributed to the permanent establishment. Ground No.3 is accordingly allowed.

In the result, appeal of the assessee is allowed.