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Income Tax Appellate Tribunal, ‘B’ BENCH : CHENNAI
Before: SHRI ABRAHAM P. GEORGE & SHRI DUVVURU RL REDDY]
आदेश / O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
In this appeal filed by the assessee, which is directed against an order dated 22.01.2015 of ld. Commissioner of Income Tax (Appeals)-16, Chennai, it is aggrieved on being treated as an assessee in default u/s.201(1) of the Income Tax Act, 1961 (in short ‘’the Act’’)
ITA No.689/2015 :- 2 -: and levying interest on it u/s.201(1A) of the Act, on payments made for software annual maintenance charges and payments made for what is claimed as software license fees.
Arguing on the grounds relating to annual maintenance charges 2.
(in short ‘’AMC’’), ld. Counsel for the assessee submitted that assessee was primarily engaged in the business of software development.
According to him, during the relevant previous year, assessee had paid annual maintenance charges aggregating to �7,91,76,107/- to various Non Resident companies, listed hereunder:-
Sl.No Name of the party Country Amount (�)
1 Altova GmbH Australia 4,85,179 2 Core Security Technologies USA 5,00,738 3 Sparx Systems Pty. Ltd Australia 1,47,984 4 Riverbed Technology Pte Singapore 5,42,901 Ltd 5 Xenox Group Inc Canada 8,97,686 6 Oracle America Inc USA 7,66,01,619 As per the ld. Authorised Representative, such payments were considered by the lower authorities as fees for technical services.
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According to the ld. Authorised Representative, assessee had deducted tax at source on payment of �7,66,01,619/- to M/s. Oracle America Inc, USA, and accordingly, ld. Commissioner of Income Tax (Appeals) had directed the ld. Assessing Officer to give appropriate relief to the assessee after verification of such claim. However, with regard to other payments, as per the ld. Authorised Representative, ld.CIT (Appeals) upheld the order of the ld. Commissioner of Income Tax (Appeals), and treated such payments as fees for technical knowledge, experience, skill, know-how, made available to assessee by these companies through such AMCs.
. Contention of the ld. Authorised Representative, was that lower 3. authorities had failed to consider Double Taxation Avoidance Agreements (in short ’’DTAA’’) with USA, Australia, Singapore and Canada, where the term ‘’Royalty and fees for included services’’ were given narrower definition than what was given in the Act. As for the payments made to M/s.Altova GmbH, contention of the ld. Authorised Representative was that such payments were effected out of the proceeds from the export of software and payments. Thus, according to the ld. Authorised Representative, source for such payments were sales made by the assessee outside India and the source being situated outside India, it could not be taxed in India. Further, as per
ITA No.689/2015 :- 4 -: the ld. Authorised Representative, ld. Commissioner of Income Tax (Appeals) though he considered DTAA, did not state how the assessee satisfied the test of ‘’making available’’ the technical knowledge so as to consider the AMC payments as fees for included services.
Contention of the ld. Authorised Representative was that ld. Commissioner of Income Tax (Appeals) had applied certain positive and negative tests without appreciating the contention of the assessee that ‘’making available’’ in article 12 of respective DTAA’s was not satisfied in respect of the payments made for AMC to Non Residents in countries, with which India was having DTAA with making available clause. As per the ld. Authorised Representative, ld. Commissioner of Income Tax (Appeals) had erroneously held that payments made for AMC were in the nature of fees for technical services as defined in Section 9(1) (vii) of the Act. Reliance was placed on the invoices raised by the Non Residents on the assessee placed at paper book pages 1 to 61. Reliance was also placed on a decision of Co-ordinate Bench in assessee’s own case for assessment year 2008-09 in dated11.03.2014.
.Per contra, ld. Departmental Representative strongly supported the order of the Commissioner of Income Tax (Appeals).
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We have considered the rival contentions and perused the orders of the authorities below. Main contention raised by the ld. Authorised Representative before us is that India had DTAAs with USA, Australia, Singapore and Canada, where there was as specific definition for royalty and fees for included services. According to him, such definition gave a much narrower meaning than the definition for the terms royalty and fees for technical services given in the Act.
Important difference as per ld. Authorised Representative, was that for a payment to be considered as fees for included services, technical knowledge, experience, skill and know-how or processes has to be made available to the assessee. Contention was that AMC payments made to the companies listed at para 2 above, did not make available any such technical knowledge to the assessee. Assessee has placed specific reliance on the DTAA with the respective countries. What we find is that ld. Commissioner of Income Tax (Appeals) did not go into the question whether the technical services were made available to the assessee by companies listed at para 2 above, through the AMCs.
He held that the payments made, fell within the meaning of fees for technical services, applying certain tests like nature of services, requirement of professional expertise for running the services, element of human interface while providing services, whether the Non Resident companies had provided standard facilities or something
ITA No.689/2015 :- 6 -: more including any use of special machinery, etc. Ld. Commissioner of Income Tax (Appeals) however did not test the transactions with the relevant articles in respective DTAAs, with regard to definition of royalty and fees for included services. Assessee can always opt for the provision in the DTAA, if it finds such provisions to be more beneficial than the Act. Even in the orders passed by the ld. Assessing Officer u/s.201(1) and 201(1A) of the Act, application of ‘’making available’’ clause in the Article defining Royalty and fees for included services, in the respective DTAA’s have not been considered. No doubt, assessee has relied on an order dated 11.03.2014 of a Co-ordinate Bench in assessee’s own case for assessment year 2008-09 (ITA No.1202/Mds/2013) for its submission that tax was not required to be deducted on AMC charges paid to the Non Resident companies.
However, what we find from the said case is that the two companies to which assessee had paid AMC charges for previous year relevant to assessment year 2008-09 were Cognos Pte Ltd and Epicore (Asia) Ltd. As against this, payments made for the impugned assessment year were not to these two companies and hence the decision may not help the assessee’s case. Nevertheless, considering the facts and circumstances of the case, we are of the opinion that the question whether assessee was liable to deduct tax on AMC charges to Non Residents requires a fresh look by the ld. Assessing Officer. We set
ITA No.689/2015 :- 7 -: aside the orders of the lower authorities on this issue remit it back to the file of the ld. Assessing Officer for consideration afresh in accordance with law.
Adverting to the grounds relating to payments made to license 6. for software, without deducting tax at source. Ld. Counsel for the assessee submitted that dispute was limited to payments made by the assessee to one M/s.JQ Network Pte Ltd, Singapore (in short ‘’JQ Network’’, Singapore). As per the ld. Authorised Representative, aggregate amounts paid by the assessee to the above company came to �54,86,734/-. According to ld. Authorised Representative, ld. Assessing Officer had treated assessee as one in default considering payment to M/s.JQ Network Pte Ltd, Singapore as well as two other companies to be Royalty as defined in Section 9(1) (vi) of the Act. As
per the ld. Authorised Representative, ld. Assessing Officer took a view that software license fees paid by the assessee was Royalty. This view taken by the ld. Assessing Officer, as per ld. Authorised Representative was confirmed by the ld. Commissioner of Income Tax (Appeals), on the payments effected to JQ Network, Pte Singapore, observing that such payments were nothing but Royalty coming within the meaning of Article 12(3) of the DTAA between India and Singapore as well as
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Section 9(1) (vi) of the Act. As per the ld. Authorised Representative, ld. Commissioner of Income Tax (Appeals) was of a mistaken impression that assessee was granted a license by the payee for using latter’s software and therefore payments constituted Royalty.
Further, as per the ld. Authorised Representative, ld. Commissioner of Income Tax (Appeals) relied on Section 14(b) of Copyright Act, 1957.
According to the ld. Authorised Representative, ld. Commissioner of Income Tax (Appeals) failed to analyze the nature of the supplies made by JQ Network, Pte, Singapore and erroneously held that they had given software which was highly sophisticated and complex, requiring investments in millions of Dollar and hundreds of man-hours for development. Further, as per the ld. Authorised Representative, ld. Commissioner of Income Tax (Appeals) also came to an erroneous conclusion that assessee was using a software which was patented by JQ Network, Singapore. Relying on paper book pages 9 to 109, ld. Authorised Representative submitted that many of the invoices raised by JQ Network, Singapore clearly indicated that supply was for networking equipment and accessories. According to him, networking equipment supplied by JQ Network, Singapore had embedded software in it and the hardware would not work without such software. Further, as per the ld. Authorised Representative, the embedded software were not a standalone item but a part of the ITA No.689/2015 :- 9 -: hardware. Thus, according to him, what assessee acquired from JQ Network, Singapore was networking equipment with embedded software and the question of bifurcatation thereof did not arise.
Reliance was placed on the purchase orders issued by the assessee to JQ Network, Singapore, at paper book pages 24 to 84. According to him, such purchase orders clearly indicated that what were to be supplied were equipment with embedded software. As per the ld. Authorised Representative, assessee had no right nor the ability to make any changes in the embedded software which was nothing but firmware. Thus, according to him, there was no question of any Royalty element in the payments to JQ Network, for application of Section 201(1) and or Section 201(1A) of the Act.
Per contra, ld. Departmental Representative strongly supported the order of the Commissioner of Income Tax (Appeals).
We have considered the rival contentions and perused the orders of the authorities below. Lower authorities had treated the payments made by the assessee to M/s.JQ Network Pte as Royalty for software. Invoices raised by JQ Network on the assessee has been placed at paper book page 9 onwards. A reading of the invoices clearly indicate that many of the supplied items were hardware with ITA No.689/2015 :- 10 -:
embedded software. There is much strength in the argument of the ld. Authorised Representative that embedded software used in networking equipments without which the networking equipment could not be used, were not stand alone software. Ld. Commissioner of Income Tax (Appeals) had considered the payments made by the assessee to be Royalty for the license granted by the payees to the assessee for using the software. No examination has been done on the real nature software, whether it was firmware or embedded software or standalone software. The question whether the payments were Royalty or not hinges upon the nature of software supplied.
Unless a close analysis is done on the purchases orders and invoices relating to the supplies made by M/s. JQ Network on the assessee, it is not logically possible to come to a conclusion on the nature of payments effected by the assessee. In the circumstances, the question whether the payments effected by the assessee to JQ Network would constitute Royalty in our opinion also requires a fresh look by the ld. Assessing Officer. We therefore set aside the orders of the lower authorities on this issue also and revert it back to the file of the ld. Assessing Officer for consideration afresh in accordance with law.
In the result, the appeal of the assessee is allowed for 9. statistical purposes.
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Order pronounced on Tuesday, the 20th day of November, 2018, at Chennai.