AVEVA INFORMATION TECHNOLOGY INDIA PVT. LTD.,MUMBAI vs. DCIT-9(1), MUMBAI

Date of Hearing 20/06/2019 Date of Pronouncement 26/07/2019 आदेश आदेश / O R D E R आदेश आदेश PER G.MANJUNATHA (A.M):

This appeal filed by the assessee is directed against order of the Ld CIT(A)-24, Mumbai, dated 30/08/2017 and it pertains to Assessment Year-2011-12. 2. The assessee has raised following grounds of appeal:-

1. General ground 1.1. On the facts and circumstances of the case, the Hon’ble CIT(A) and the learned AO have erred in assessing the total income of the Appellant at Rs 1887,70,640/-as against the returned income of Rs 5,31,20,670. 1.2. On the Facts and circumstances of the case, the Hon'ble CIT(A) has erred in disregarding the submissions made by the Appellant and holding that the Appellant has failed to prosecute its appeal before him.

Aveva Information Technology India Pvt.Ltd..

5. Levy of interest under Section 234B of the Act

5.1. On the facts and circumstances of the case, the Hon'ble CIT(A) and the learned AO have erred in levying interest amounting to Rs 1,00,86,236 under Section 234C of the Act. 6. Levy of interest under Section 234C of the Act

6.1. On the facts and circumstances of the case, the Hon'ble CU(A) and the learned AO have erred in levying excess interest amounting to Rs 27,624 under Section 234C of the Act, 7. Initiating penalty proceedings 7.1. On the facts and circumstances of the case, the Hon'ble CIT(A} and the learned AO have erred in initiating penalty proceedings under Section 271(1)(c) of the Act. 3. The brief facts of the case are that the assessee company is engaged in the business of rendering consultancy and other software development related services etc, filed its return of income for AY 2011-12 on 30/11/2011, declaring total income at Aveva Information Technology India Pvt.Ltd.. Rs.5,81,20,670/-. The case was selected for scrutiny and notice u/s 143(2) and 142(1) of the Income Tax Act, 1961 (hereinafter the Act) were issued. In response to notices, the Ld. Authorized Representative of the assessee appeared from time to time and filed various details as called for. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has entered into distribution agreement with M/s Aveva Solutions Ltd. England, a parent company of the assessee. The Assessing Officer further noted that Aveva is the license holder to use various software products and also own intellectual property rights related to the software. As per the agreement dated 10/07/2005, the assessee distributes and sublicense CAD and CAM software products developed by Aveva to the customers within Indian territory and provides training and sales support to the customers. As per the terms and conditions of this agreement, Aveva has appointed the assessee to sublicense software products to individuals and providing marketing services within Indian Territory. In terms of distribution agreement, the assessee has debited license fee of Rs.13,06,49,972/- to Aveva without deduction of tax at source as required u/s 195 of the Act. Therefore, the Assessing Officer called upon the assessee to explain as to why license fee paid to Aveva, England, shall not be disallowed u/s 40(a)(ia) of the Act, for failure to Aveva Information Technology India Pvt.Ltd.. deduct tax at sources u/s 195 of the Act. In response, the assessee vide its letter 30/10/2013 filed a detailed written submissions which has been reproduced at para 4.3 on pages 2 to 9 of assessment order. The sum and substance of the arguments of the assessee, before the Assessing Officer are that license fee paid to Aveva England is for distribution of copyrighted software products in India but not payment for acquiring copyrights in software, therefore, the question of deduction of TDS u/s 195 of the Act, does not arise, consequently, no disallowance could be made u/s 40(a)(ia) of the Act. The Assessing Officer after considering the submissions of the assessee and also relied upon various judicial precedents, including the decision of the Hon’ble Karnataka High Court in the case of Samsung Electronics Ltd. & Ors. in of 2005 held that a right granted by way of license to make a copy of the computer program and use it for internal business and back up would itself amount transfer of right to use copyrights. In absence of such license, making a copy of would have been an act of infringement under the copyright Act, 1957. Accordingly, payment for purchase of copy of a computer program for internal business use by an end user as well as for resell to end user was held taxable as royalty under the Income Tax Act, as well as under respective double tax avoidance agreement. Accordingly, by taking note of agreement

Aveva Information Technology India Pvt.Ltd.. between the assessee and its parent company Aveva, England,he came to the conclusion that payment of license fee to its parent company covered under the definition of royalty as defined u/s 9(1)(vi), therefore, the assessee ought to have deduct TDS as required u/s 195 of the Act. Since, the assessee has failed to deduct tax at source, total payment made to its parent company had been disallowed u/s 40(a)(ia) of the Act.

4. Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A). Before the Ld. CIT(A), the assessee has filed elaborate written submission along with certain judicial precedents which has been reproduced at para-2.3.1 on pages 4 to 34 of the Ld. CIT(A)’s order. The assessee has reiterated its submissions made before the Assessing Officer to argue that distribution of copyrighted software products in India for end users and payment for such products does not come under the definition of royalty as defined u/s 9(1)(vi) of the Act, consequently, requirement of deduction of tax at source u/s 195 of the Act, does not arise, therefore, the Assessing Officer was incorrect in disallowing payment made to Aveva, England for purchase of copyrighted software u/s 40(a)(ia) of the Act. The Ld. CIT(A) after considering the submissions of the assessee held that the Assessing Officer has brought out clear facts in light of distribution agreement between the Aveva Information Technology India Pvt.Ltd.. assessee and Aveva, U.K. that payment made to its parent company for software products is covered under the definition of royalty as defined u/s 9(1)(vi) of the Act, consequently, the assessee ought to have deducted tax at source, as required u/s 195 of the Act. Since, the assessee has failed to deduct tax at source as required u/s 195 of the Act, the Assessing Officer was right in disallowing total payment made to Aveva England u/s 40(a)(ia) of the Act. Similarly, the Ld. CIT(A) rejected the ground taken by the assessee regarding short credit of TDS however, direct the Assessing Officer to verify the same and grant proper relief.

Aveva Information Technology India Pvt.Ltd.. in where under identical set of facts and also on the basis similar distribution agreement, the Tribunal held that payment made by the assessee to Aveva Solutions Ltd., England for procuring and distributing copyrighted software on principle to principle basis could not be treated as payment towards royalty as defined u/s 9(1)(vi) of the Act, consequently, the assessee is not required to deduct tax at source u/s 195 of the Act, on such payment and hence no disallowance could be made u/s 40(a)(ia) of the Act. The Ld. AR further submitted that the Tribunal had further considered the issue of TDS under the provisions of section 201(1) and 201(1A) of the Act, for impugned AY in and held that the assessee was not liable to deduct tax at source on payment made to Aveva England and also it cannot be treated that assessee is in default within the provisions of section 201(1) and 201(1A) of the Act. The Ld. AR further submitted that even though the Assessing Officer has relied upon the decision of the Hon’ble Karnataka High Court in the case of CIT vs Samsung Electronics Ltd. & Ors.(supra) while deciding the issue of payment made for copyrighted products to come to the conclusion that said payments are covered u/s 9(1)(vi) of the Act, but Hon’ble jurisdictional High Court of Bombay had an occasion to consider an identical issue in the case of DCIT vs M/s Reliance Jio Infocomm Ltd. in ITA No.1395

Aveva Information Technology India Pvt.Ltd.. of 2016 and by following the decision of the Hon’ble Delhi High Court in the case of CIT. Vs. Siemens Aktiongesellschaft. (2009) 310 ITR 320 held that mere amendment in the Act, would not override provisions of double tax avoidance agreement, unless such amendment is brought out in the agreement, as said payments covered under DTAA cannot be taxed under the provisions of Income Tax Act, 1961.

5.We have heard the rival submissions and perused the material before us. We would like to refer to some of the clauses of the agreement, entered into between the assessee and ASL, as same would help us to decide the issue before us. As per the agreement ‘Aveva end user’ was defined as under :- Aveva End User shall mean a third party within the Territory who is licensed by Aveva or an Aveva License to use one or more of the Products Clause 2 and Cl.3 deals with licence and delivery as follows: 2 Licence 2.1 AVEVA hereby grants to the Company with effect from the Effective Date a non- exclusive, non-transferable licence to do the following only within the Territory and in -accordance with this Agreement: 2.1.1 market, promote and demonstrate the Products; 2.1.2 grant Sub-licenses of and distribute the Products; 2.1.3 provide training and First Line Support to End Users and AVEVA End Users; and 2.1.4 copy the Products for the purposes only of fulfilling its obligations under this Agreement. Delivery of Products 3.1. AVEVA shall provide to the Company within 10 business days of the Commencement Date copies (in such number as AVEVA shall determine) of the latest version of each of the Products in object code only. 3.2. Upon receipt of an executed Sub-licence the Company shall deliver a copy of the relevant Product or Products to the End User. 3.3. AVEVA may provide New Versions to the Company from time to time. Any New Version made available to the Company shall form part of the relevant Product and shall be subject to this Agreement. The Company shall, promptly upon receipt of a New Version, provide a copy of the same to each End User of the relevant Product and ensure that all relevant marketing and promotional materials and all demonstrations of the relevant Product include such New Version. Some of the other useful clauses of the agreement are reproduced, as same would be helpful in deciding the issue and same read as under: 7. Sub-licences 7.1. Subject to clause 7.3 below, the Company shall ensure that every End User to which the Company provides one or more of the Products shall enter into a valid and binding Sub-licence with the Company on the Standard Terms set out in Schedule C. 7.2. AVEVA may amend the Standard Terms from time to time and the Company shall, upon receipt of written notice of the same and subject to clause 7.3 below, incorporate such amendments into all subsequent Sub-licences. 7.3. Prior to entering into the first Sub-licence in any jurisdiction within the Territory the Company shall ensure that the Standard Terms are reviewed by a reputable experienced lawyer qualified to practice in such jurisdiction and that written xxxx 4 Security codes 4.1 A valid security code is necessary in order to use each of the Products. The Company shall either: 4.1.1 request from AVEVA or such third party as directed by AVEVA a security code for each copy of one or more Products on behalf of itself and End Users; or 4.1.2 where permitted to do so by AVEVA, generate a security code for each copy of one or more Products on behalf of itself and End Users. The Company shall generate or request as appropriate replacement security codes in good time prior to the expiry of the relevant earlier security code. xxxxx 11 Fees and Royalty Sub-licence Fee

11.1 The Company shall set the Sub-licence Fees taking into account the Pricing Guidelines 11.2 The Company may amend such Sub-licence Fees from time to time in accordance with the Pricing Guidelines and shall promptly provide written notice of such amendment together with an updated list of Sub- licence Fee to AVEVA. 11.3 AVEVA shall be entitled at its sole option at any time to adjust the Pricing Guidelines. Such adjustments shall take effect immediately.

Royalty 11.4 Royalty shall be calculated on the remainder of all Sub-licence Fees less any relevant Third Party Royalties in accordance with the following provisions: 11.4.1 in relation to Initial Fees paid or payable by an End User during each Quarter, the Royalty shall be calculated in accordance with Schedule D on the remainder of such Initial Fees less any relevant Third Party Royalties; 11.4.2 in relation to Annual Fees paid or payable by an End User during each Quarter, the Royalty shall be calculated in accordance with Schedule D on the remainder of such Annual Fees less any relevant Third Party Royalties; and 11.4.3 in relation to any other forms of Sub-licence Fees paid or payable by an End User during each Quarter, such Sub-licence Fees shall be treated as follows for the purposes of calculating the relevant Royalty: (i) a proportion of such Sub-licence Fees shall be deemed to be Initial Fees and Royalty shall be payable thereon in accordance with clause 11.4.1; and (ii) the remainder of such Sub-licence Fees shall be deemed to be Annual Fees and Royalty shall be payable thereon in accordance with clause 11.4.2, and the proportions in which such Sub-licence Fees shall be deemed to be Initial Fees and Annual Fees shall be as set out in AVEVA Group plc's revenue recognition policy as amended from time to time.

If we consider all these facts it becomes clear that the assessee was functioning as a distributor of ASL. There is no doubt that ASL is a tax resident of UK and as per the provisions of India-UK DTAA was eligible to be governed by the tax treaty to the extent it was more beneficial vis- a- vis the provisions of the Act. 5.1.The AO and the FAA had held the assessee was in receipt of royalty as the payments made by it to ASL for the distribution of software products would qualify as royalty in the hands of ASL, as per the Expl.2 to section 9(1)(vi) of the Act as well as the provisions of Article-13 of the India UK tax treaty. On the other hand, the assessee claimed that payment made by it could not be treated as royalty. 5.1.1.Before deciding the issue of Roylaty, we want to hold that ASL did not have any PE in India in terms of Article 5 of the treaty.Article-13 of the treaty defines the term royalty as under :- (a) 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 cinematography films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b) .. … From the above it is clear that consideration paid for the use of/ the right to use the copy right of any scientific work etc. would qualify as royalty. In other words if the payment is not for intellectual properties such as copyright, patents trademarks etc., the payment cannot be treated as royalty. The assessee had acquired right to sell the copy righted article (software products)and not the right to use the copyright. We would like to refer to case of Vinzas Solutions India (P.) Ltd. of Hon'ble Madras High Court (supra), wherein it was held that there was a difference between a transaction of sale of a copyrighted article and one of, copyrights itself, that the provisions of section 9(1)(vi) as a whole would stand attracted in case of latter and not former. Similarly in the case of Dynamic Vertical Software India (P.) Ltd. the Hon'ble Delhi High Court dealt with similar issue. In that matter the assessee was purchasing the software from Microsoft and sold it further in Indian market. The AO treated the payment made by the assessee to Microsoft as royalty and, therefore, came to the conclusion that tax at source was to be deducted. The FAA confirmed the order of the AO, however, the Tribunal deleted the addition. The Hon’ble Court held that by no stretch of imagination it would be termed as "royalty”. In the other cases, referred to by the assessee before us, similar view had been taken. 5.1.2.Here,we would also like to refer to Explanation-2 to section 9(1)(vi) wherein royalty has been defined. As per the definition term royalty envisages payment for transfer of all or any rights in intellectual properties( such as copyrights, patents etc.) by the owner of such intellectual property by any other person. It is clear that the Act does not contain a definition of such intellectual properties that are included within the scope of term royalty. 5.1.3.We are aware that a retrospective amendment has been made to Explanation to section 9(1)(vi) of the Act by Finance Act, 2012. Earlier, the explanation read as under :- Royalty means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains’ for…. v) the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films. The Finance Act 2012 inserted Explanation 4 to the Section 9(1)(vi) of the Act with retrospective effect from 1/06/1976. The same is reproduced below: Explanation 4. - For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a license) irrespective of the medium through which such right is transferred. From the amendment it is clear that it covers the transfer of all or any right for use/right to use of computer software including grant of license. The amendment has been made to the section i.e., to domestic law. But,t here is no corresponding change in Tax Treaty. It is also to be remembered that the assessee had already made the payment before the amendment was introduced. At the point of making payment to ASL, the assessee was not liable to deduct tax at source. So, now it cannot be compelled to deduct tax. The basic principal of taxation stipulates that nobody is supposed to perform the impossible. We find that in the case of B4U International Holding Ltd.(ITA/3326/Mum/2006)the Tribunal had held as under :- “17.Coming to the argument of the Learned Departmental Representative that the amendment to the Finance Act, 2012 changes the position, we find that there is no change in the DTAA between India and USA. Thus, the amendment have no affect on our decision.” In the case of Leonhardt Andra (249ITR418) the Hon’ble Calcutta High Court has held as under :- “royalty was not defined in the Agreement for Avoidance of Double Taxation between India and Germany and was not included within the term “industrial and commercial profits”. The term “royalty” not being defined in the Agreement for Avoidance of Double Taxation the definition in the Act would prevail. Therefore, the sums received by the assessee for design and technical services for the construction work were in the nature of royalty within the meaning of the term in section 9(1)(vi) of the Act, which was taxable and did not constitute industrial and commercial profits. The fact that the assessee had no permanent establishment in India was of little consequence”. Similar is the position of Indo-UK DTAA, where term Royalty has not been defined. Considering the above, we are of the opinion that definition

Aveva Information Technology India Pvt.Ltd.. of term royalty as appearing in the India UK DTAA apply and amendments made by Finance Act,2012 would have no bearing on the present case. Even the Cir.No.333 of CBDT states that where a DTAA provides for a particular mode of computation of income, the same should be followed irrespective of the provisions of the Act. In the case before us, the DTAA is providing particular mode of computation for royalty. As per the agreement the assessee did not have any right to generate the license key or make copies of license key or was provided access to source code in the software. The ASL software products were developed and marketed by it were in the nature of shrink-wrap-software-products that are also known as off the shelf software products. The assessee had no role in developing a software, it was just distributing the software to the end users. Therefore, we are of the opinion that payment by the assessee to ASL for procuring and distributing copyrighted software on principal to principal basis could not be treated as payment towards royalty.ASL was not having a PE in India, therefore, the assessee was not liable to deduct tax at source as per the provision of section 195 of the Act, hence, for its failure it cannot be treated as A-I-D u/s. 201.Reversing the order of the FAA we decide effective First effective Ground of appeal(Gs.OA-1to3)in favor of the assessee.

Aveva Information Technology India Pvt.Ltd.. consequently, the assessee is not required to deduct tax at source u/s 195 of the Act and hence, no disallowance could be made u/s 40(a)(ia) of the Act. Therefore, we direct the Assessing Officer to delete additions made towards disallowance u/s 40(a)(ia) of the Act.

The Ld. AR for the assessee submitted that the issue may be set- aside to the file of the Assessing Officer to verify the facts to ascertain whether is there any credit for TDS and also to grant credit, therefore, we set-aside the issue to the file of the Assessing Officer and directed the Assessing Officer to call necessary enquiries in light of evidence filed by the assessee including TDS certificate if, any and grant relief accordingly.

13. The next issue that came up for our consideration from ground no.5 and 6 of assessee’s appeal is levy of interest u/s 234B and 234C of the Act. Levy of interest u/s 234B and 234C is mandatory and consequential in nature, therefore, we direct the Assessing Officer to verify the facts in light of provisions of section 234B and compute interest as applicable on the basis of total income computed for the year under consideration. We further direct the Assessing Officer to compute 234C interest on returned income.

Aveva Information Technology India Pvt.Ltd.. 14. The next issue that came up for our consideration from ground no.7of assessee’s appeal is initiation of penalty proceedings u/s 271(1)(c) of the Act. We find that ground taken by the assessee is premature, which does not require adjudication at this point of time and hence, the same is dismissed as in fructuous.

Order pronounced in the open court on this 26/07/2019