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Income Tax Appellate Tribunal, DELHI BENCH: ‘C’, NEW DELHI
Before: SH. H.S. SIDHU & SH. O.P. KANT
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: ‘C’, NEW DELHI BEFORE SH. H.S. SIDHU, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER ITA Nos. 1182 & 4976 /Del/2012 Assessment Years: 2007-08 & 2009-10 Vs. M/s. ADIT, International Taxation, Hampson Russel Ltd. Dehradun Partnership, C/o- Price Water House Coopers Pvt. Ltd., Plot No. 18-A, Station Road, Bandra (West) Mumbai. PAN : AADFH8957J (Appellant) (Respondent) And ITA No. 1225/Del/2012 Assessment Year: 2007-08 M/s. Hampson Russell Ltd. Vs. ADIT, International Taxation, Partnership, 510 715-5 Avenue, Dehradun S.W. Calgry Alberta, Canada PAN : AADFH8957J (Appellant) (Respondent)
Department by Sh. Amrit Lal, Sr.DR Assessee by S/sh. Ravi Sharma & Rishabh Malhotra, Advocates Date of hearing 08.03.2017 Date of pronouncement 21.04.2017 ORDER PER O.P. KANT, A.M.: Out of these three appeals, two appeals have been preferred by the Revenue and one appeal has been preferred by the assessee. The
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appeals having ITA No. 1182/Del/2012 and ITA No. 1225/Del/2012 are preferred by the Revenue and the assessee respectively and are directed against order dated 22/12/2011 of learned Commissioner of Income-tax (Appeals)-II, Dehradun (in short the CIT-A) for assessment year 2007-08. The appeal having ITA No. 4976/Del/2012 has been preferred by the Revenue against the order of the Ld. CIT-A dated 05/07/2012 for assessment year 2009-10. In these appeals, issues involved are interconnected and thus all these appeals were heard together and disposed of by this consolidated order for convenience and brevity. 2. First we take up the appeal of the Revenue having ITA No. 1182/Del/2012 and appeal of the assessee in ITA No. 1225 related to assessment year 2007-08. The grounds raised by the Revenue and the assessee in their respective appeals are reproduced as under:
Grounds of appeal of Revenue in ITA No. 1182/Del/2012
i. Whether on facts and circumstances of the case, the CIT(A) had erred in characterizing income from supply of off-the-shelf software and services ancillary and subsidiary thereto squarely covered in the definition of section 9(I)(vi) of the act and Article 12 of Indo- Canada DTAA and taxable as Royalty, as step-in-aid to actual mining of mineral oils and thus chargeable under section 44BB ignoring the distinctive scheme of taxation of royalty in the Act. ii. Whether on facts and circumstances of the case, the CIT(A) has erred in holding that the assessee’s income on account of supply of software and upgrades, and additions thereto of the already supplied software had proximate nexus with extraction of production of mineral oil and was covered under Section 44BB ignoring that income by way of royalty taxable under the provisions of section 44D/44DA read with section 115A could not be covered under the provisions of Section 44BB of the Act as clarified in proviso thereto.
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iii. Whether on facts and circumstances of the case, the CIT(A) had erred in holding that the receipts on account of provision of standardized software to entities engaged in exploration of mineral oil, was taxable under section 44BB of the Act by wrongly relying upon the CBDT’s instruction No. 1862 and ignoring the argument that second limb of the exception in explanation 2 to section 9(1)(vi) i.e. project “undertaken by the recipient” was not considered in the said instructions and the receipts from sale of software and support services ancillary thereto, for a project not undertaken by the recipient, were in the nature of royalty falling under the provisions of Section 44D/44DA read with section 115A which could not be covered under the provisions of section 44BB of the Act. iv. The appellant prays for leave to add, amend, modify or alter any grounds of appeal at the time of before the hearing of the appeal.
Grounds of Appeal of the assessee in ITA No. 1225/Del/2012
i. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) –II [“the CIT(A)”] erred in holding that the receipts pertaining to sale of software accruing outside India pertaining to the Appellant’s contract with various oil and gas companies in India would be liable to tax in India under the scheme of presumptive taxation contained in Section 44BB of the Income-tax Act, 1961. ii. It is prayed that the Deputy Director of Income-tax be directed to delete the addition to income of Rs.63,92,548/- (being 10% of Rs.6,39,25,481/- as per section 44BB of the Act) from the income of the appellant as the same does not fall within the purview of Section 44BB of the Act. iii. The appellant craves leave to add, alter, amend or withdraw all or any of the grounds of appeal herein and to such statements, documents and papers as may be considered necessary either at or before the appeal hearing.
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The facts in brief as culled out from the orders of the lower authorities are that the assessee, a firm constituted under the laws of Alberta Canada, is a resident of Canada. During relevant period, the assessee supplied software for seismic data processing and geological data interpretation to the companies involved in exploration and production of mineral oil. The assessee was also engaged in upgradation and maintenance of software already supplied for the purpose of exploration and production of mineral oils. For the year under consideration, the assessee filed return of income on 30/10/2007 declaring total income of Rs.8,09,010/-. The assessee offered receipts amounting to Rs.80,90,071/- from upgradation and maintenance services under section 44BB of the Income-tax Act, 1961 (in short “the Act”) and the receipts amounting to Rs.6,39,25,481/- from supply of software was treated as sale of a copyrighted article, and not offered to tax, claiming to be not subjected to tax in India. In the scrutiny assessment completed under section 143(3) of the Act dated 31/12/2009, the Assessing Officer took a view that the payment on account of sale of software is being made for the use of the process, trademark or similar property as mentioned in the definition of the royalty as defined in clause (iii) of Explanation-2 to section 9(1)(vi) or within sub clause(iv) of Explanation-2 and accordingly, the AO taxed the receipt from sale of software as royalty. 3.1 On further appeal, on the issue of sale of software, the Ld. CIT-A observed that the transaction would amount to sale of a copyright article as laid down in the case of Motorola Inc. reported at 95 ITD 269 (SB, Delhi) and no royalty would arise under section 9(1)(vi) of the Act. However, the Ld. CIT-A took a view that receipt from sale of software would be taxed under section 44BB of the Act. Aggrieved with the above
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finding of the Ld. CIT-A, both the Revenue and the assessee are in appeal raising the grounds as reproduced above. 4. Ld. Senior Departmental Representative supporting the grounds of Revenue’s appeal, relied on the order of the Assessing Officer and submitted that income from supply of the software was covered in section 9(1)(vi) of the Act and accordingly taxable as royalty and the Ld. Commissioner of Income-tax (Appeals) has wrongly characterized the same as income chargeable under section 44BB of the Act ignoring the distinctive scheme of taxation of royalty under the Act. He further submitted that the Ld. CIT-A has also ignored that income by way of royalty taxable under the provisions of section 44D/44DA r.w.s. 115A of the Act could not be covered under the provision of section 44BB of the Act. He further submitted that while considering income from sale of software taxable under section 44BB of the Act, the Ld. CIT-A has wrongly relied on CBDT instruction No. 1862 . He submitted that learned CIT-A ignored the fact that second limb of the exception in Explanation - 2 to section 9(1)(vi) of the Act i.e. project ‘undertaken by the recipient’ was not considered in the said instruction and thus the receipt from sale of software and support services, for a project not undertaken by the recipient, were in the nature of royalty under the provisions of section 44D/44DA r.w.s. 115A of the Act. In respect of grounds raised in the assessee’s appeal, the Ld. Senior DR relied on the order of the Assessing Officer. 5. On the other hand, Ld. counsel of the assessee submitted that the assessee during the course of the year under consideration, supplied software for the purpose of seismic data interpretation for their own business and at no point of time, the ‘copyright’ or any other ‘intellectual property right’ has been transferred to the purchaser of software. He
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further submitted that the issue of sale of software and taxability as royalty thereon, is no more res integra in view of judgments of the Hon’ble High Court of Delhi in the case of CIT Vs. Nokia Networks Oy, (2013) 358 ITR 259 (Delhi), DIT vs. Ericsson AB, (2012) 343 ITR 470 (Del) and DIT Vs. Infrasoft Ltd. (2014) 264 CTR (Del) 329, wherein the Hon’ble High Court has held that sale of software is akin to supply of ‘copyrighted article’ and cannot come within the purview of royalty. The Ld. counsel further submitted that during the year the assessee has supplied software to one of the company namely, ‘Reliance Industries Ltd’ and the Tribunal has the decided the issue in the case of ‘Reliance Industries Ltd.’ observing that sale of seismic data processing/intimidation software would not come within the purview of royalty. 6. In support of the grounds raised in the appeal of the assessee, the Ld. counsel submitted that the issue of taxability sale of software has been tested on the touchstone of treaty principle, hence, it was not permissible to go to the Act and tax the transaction under section 44BB of the Act. He further submitted that it is settled law that if a receipt is not taxable as per the treaty provisions, it cannot be taxed under the provisions of the income tax Act, 1961. In support of his contention, he relied on the judgment of the Hon’ble Supreme Court in the case of Union of India Vs. Azadi Bachao Andolan, 263 ITR 706. 7. We have heard the rival submission and perused the relevant material on record. In both the appeals of the Revenue and the assessee the first issue which arises for our consideration is as follows:
“Whether income from supply of software and software maintenance/ support services to entities engaged in exploration of mineral oil is squarely covered in the definition of ‘royalty’ under
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section 9(1)(vi) of the Act., and taxable under the provisions of section 44D/44DA read with section 115A of the Act, or could be covered under the provisions of section 44BB of the Act.” 8. The Assessing Officer has considered income from sale of software as royalty. The income from software maintenance/support services has not been treated by the Assessing Officer as royalty, though in the grounds raised before the Tribunal, the Revenue has challenged this action of the Assessing Officer also. The Assessing Officer has elaborately discussed the issue of taxability of sale of software in para-5 onwards in the assessment order. The Assessing Officer concluded that the payment to the assessee has been made for the use of the process or trade Mark or similar property as mentioned in the definition of the ‘royalty ’as defined in clause (iii) of Explanation - 2 to section 9(1)(vi) of the Act or it may even fall within some clause (iv) of Explanation-2 to section 9(1)(vi) of the Act. The relevant clause (iii) and (iv) of Explanation -2 to section 9(1)(vi) are reproduced as under: “Explanation 2.—For the purposes of this clause, "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— (i) …………………………………….. (ii) ……………………………………. (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ;
Ld. CIT-A after taking into consideration the submission of the assessee that the consideration received for sale of the software by the assessee was for sale of the ‘copyrighted product’ and following the decisions relied by the assessee including the decision in the case of
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Motorola Inc. Ericsson Radio Systems AB and Nokia Corporation Vs. DCIT (2005) 95 ITD 269 (Del-SB). The relevant finding of the Ld. CIT-A on the issue in dispute is extracted as under:
“4.2 The learned AR is seen to have relied upon a number of case laws, copies of most of them have been placed on record. These case laws have been perused and the principles contained examined for their applicability, albeit limited, in present circumstances since the cases rest on their peculiar facts. However, the case of Geo Quest Systems BV [193 Taxman 81 (AAR)] is of special interest for this matter. 4.3 Examining the standard contract copy supplied during appellate proceedings, it is seen that there are several ingredients in the language of these contracts:- i. The licence of the software has been supplied; ii. The payment could be in the shape of a monthly lease or lump sum payment; iii. The licensee shall receive all documentation and “executable code” for the programme; iv. Ownership of the programmes remains with the licensor; v. There is a confidentiality clause. Keeping the above facts in view, this transaction would amount to sale of a “copyrighted article” as laid down in the case of Motorola Inc. reported at 95 ITD 269 (SB-Delhi). Thus, this transaction cannot be treated as “royalty” u/s 9(1)(vi) of the Act. However, the alternative submission of the Ld. AR to consider taxability u/s 44BB of the Act since the goods and related services have a direct nexus with exploration of mineral oils, is also worth looking into. As has been mentioned earlier (para 4.1 supra) that even u/s 44BB of the Act revenues, whether accruing in India or outside, are to be taxed, this aspect needs to be examined.”
In the case of DIT Vs. Nokia Networks Oy (supra), the assessee company sold GSM Equipment (hardware as well as software as well as installation and commissioning of the two and also after sale services)
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manufactured by it in Finland to Indian telecom operators from outside India on the principle to principle basis, under independent buyer seller arrangements. The Hon’ble High Court in the case on the issue of taxability of such sale in India, concluded that the place of negotiation, the place of signing of agreement or formal acceptance thereof or our responsibility of the assessee are irrelevant circumstances. Since the transaction relates to the sale of goods, the relevant factor and determinative factor would be as to where the property in goods passes. In the present case, the finding is that the property passed on the high seas. Concededly, In the present case, the goods were manufactured outside India and even the sale has taken place outside India. Once that fact is established, even in those cases where it is one composite contract (though it is not found to be so in the present case) (supplies) to be segregated from the installation and only then would question of apportionment arise having regard to the express language of section 9(1)(i) of the Act, which makes the income taxable in India to the extent it arise in India. 11. In the case of Director of Income Tax Vs. Ericsson AB (supra) also the Hon’ble High Court held that since the transaction relates to supply of goods and both the transfer of property in goods and risk passed outside India, no taxable event took place in India. The Hon’ble High Court further agreed with the submission of the Ld. counsel of the assessee that even assuming the payment made by the cellular operator is regarded as payment by way of royalty as defined in Explanation-2 below section 9(1)(vi) of the Act, nevertheless, it can never be regarded as royalty within the meaning of the said term in Article 13, para-three of the DTAA. This is so because the definition in the DTAA is narrower than the definition in the Act.
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In the case of Director of Income Tax Vs. Infrasoft Ltd. (supra) the assessee, an international software marketing and development company, opened a branch office in India and imports packages in the form of floppy disks or CDs customized according to the requirement of customer and delivery of system entails installation of system and training of customers for operation alongwith of dating in providing support for solving any software issues. The Assessing Officer treated the entire amount received by the assessee company for transfer of software as well as other incidental services in the nature of royalty. The Tribunal held that such income was not liable to be taxed as royalty as what has been transferred is not copyright or right to use copyright but a limited right to use copyrighted material which does not give rise to any royalty income. The Hon’ble High Court distinguished the copyright and copyrighted article in the judgment as under:
“87. 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 by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. Distinction has to be made between the acquisition of a "copyright right" and a "copyrighted article". Copyright is distinct from the material object, copyrighted. Copyright is an intangible incorporeal right in the nature of a privilege, quite independent of any material substance, such as a manuscript. Just because one has the copyrighted article, it does not follow that one has also the copyright in it. It does not amount to transfer of all or any right including licence in respect of copyright. Copyright or even right to use copyright is distinguishable from sale consideration paid for "copyrighted" article. This sale consideration is for purchase of goods and is not royalty. 88. 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.
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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 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 non-exclusive 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 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 co-extensive with the owner/ transferor who divests himself of the rights he possesses pro tanto. 90. 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 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. 91. 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. 92. 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 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.
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The licensee has been prohibited from copying, de-compiling, 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. 94. 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. 95. 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. 96. The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA. 97. What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is 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. 98. We are not in agreement with the decision of the Andhra Pradesh High Court in the case of SAMSUNG ELECTRONICS C O. 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 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
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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. 99. 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. 100. The question of law is thus answered in favour of the Assessee and against the Revenue that the Income Tax Appellate Tribunal was right in holding that the consideration received by the respondent Assessee on grant of licences for use of software is not royalty within the meaning of Article 12(3) of the Double Taxation Avoidance Agreement between India and the United States of America.”
The Hon’ble High Court in above case upheld the finding of the Tribunal that what has been transferred is not copyright or right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty income either under the income tax Act or under the DTAA. 14. Further in the case of Reliance Industries Ltd (supra), with reference to the supply of software by the assessee to Reliance Industries Limited, the Tribunal held that sale of seismic data processing/interpretation software could not come within the purview of royalty under the DTAA. 15. Thus, from the decisions cited above, it is evident that the standardized software sold from outside India are merely sale of ‘copyrighted material’ and not sale of ‘copyright’ embedded in the software and is not taxable in India as consideration received for ‘royalty’. 16. We find that before us the Ld. counsel has contested that neither the income from supply of software nor from maintenance, installation etc. was income from royalty under the DTAA between India and Canada. Simultaneously, we also find from the order of the Assessing Officer as well as from the Ld. CIT-A that though the issue of income
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from supply of software as income from ‘royalty’ has been examined under the provisions of the Income Tax Act, however, the issue of ‘royalty’ viz-a-viz ‘computer software’ whether as sale or support services has not been examined in respect of scope of ‘royalty’ under the DTAA either by the Assessing Officer or by the Ld. CIT-A. We find that section 90(2) of the Act prescribes that the assessee to whom DTAA applies, the provisions of the Act shall apply to the extent they are more beneficial to the assessee. We find that the assessee supplied software to M/s. Reliance Industries Ltd. and while examining the deductibility of tax at source on payment made by M/s Reliance Industries Ltd. to the assessee, the Tribunal has examined whether the payment made by M/s. Reliance Industries Limited to the assessee was in respect of royalty under the DTAA. The relevant finding of the Tribunal is reproduced as under:
In view of our detailed discussion made above, the assessee cannot be said to have paid the consideration for use of or the right to use copyright but has simply purchased the copyrighted work embedded in the CD- ROM which can be said to be sale of ‘good’ by the owner. The consideration paid by the assessee thus as per the clauses of DTAA cannot be said to be /royalty' and the same will be outside the scope of the definition of ‘royalty’ as-provided in DTAA and would be taxable as business income of the recipient. The assessee is entitled to the fair .use of the work/product including making copies for temporary purpose for protection against damage or loss even without a license provided by the owner in this respect and the same would not constitute infringement of any copyright of the owner of the work even as per the provisions of section 52 of the Copyright Act,1957.
Thus, respectfully following the above decision of the Tribunal in the case of Reliance Industries Limited (supra), we hold that receipt from sale of software by the assessee from outside India, is not taxable as royalty in terms of the articles of the DTAA between the India and the Canada. Thus, ground no. 1 of the Revenue’s appeal is dismissed.
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The second issue which emerges in the appeals before us is whether the income from software supply and software maintenance/support services etc. should be taxed under section 44D/44DA of the Act or under section 44BB of the Act. The assessee segregated its activity of supply of software and maintenance/support services. The income from supply of software was treated as not taxable in India as the sales were made outside India. The income from activity of software maintenance/support services was offered for taxation under section 44BB of the Act as being related to the exploration / mining activity. The Assessing Officer, accepted the part of the income declared under section 44BB of the Act, however, the part of income from supply of software treated by the assessee as non-taxable in India, was not accepted by him. The Ld. CIT-A, on the other hand accepted the income from supply of software as not taxable in India, however, treated the both the income from supply of software as well as software maintenance/support services as taxable under section 44BB of the Act. The Ld. CIT-A in para-4.4 to 4.8 of his order, has observed as why the receipts from sale of software and related services are a step in aid for exploration of mineral oils and thus should be considered under section 44BB of the Act. The relevant part of the order is reproduced as under:
“4.4 The software and its related services are a step-in-aid for exploration of mineral oils since they help in pinpointing underground oil resources. A commercial transaction for such an activity would fall within the purview of section 44BB of the Act considering the mandate thereon which may be briefly discussed. 4.5 Critical components of Section 44BB of the Act are:- i) The intended beneficiary should be a non-resident. ii) He should be engaged in the business of providing services, facilities and equipment for extraction or production of mineral oils. iii) The provisions of Sec. 42, 44D, 115A or 293A should not apply.
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This section requires there to be a proximate and live nexus with the activity of prospecting, extraction or production of mineral oils. For examining this proposition help is taken of certain case laws which would be discussed later 4.6 The principles contained in the following case laws will also be used to determine the issue of nexus of appellant’s business with activities allowed for computing income u/s 44BB of the Act:- (1) ONGC vs. I AC reported in 29 ITD 422 (Del) (2) CIT vs. ONGC Ltd. reported in 309 ITR 244 (UK) (3) ARB Inc. vs. JCIT reported in 93 ITD 520 (Del) (4) ONGC vs. ACIT reported in 9 SOT 8/107 TTJ 551 (Del) (5) OHM Ltd. reported in 200 Taxman 7 (AAR-Delhi) Furthermore, Instruction No 1862 dated 22.10.1990 may also be reproduced for understanding the nature of receipts which can be classified as Fees for Technical Services(FTS):- “Definition of fees for technical services’ in Explanation 2 to section 9(l)(vii) - Whether prospecting for, or extraction or production of, mineral oil are ‘mining’ operations 1. The expression "fees for technical services" has been defined in Explanation 2 to section 9(1)(vii) of the Income-tax Act, 1961 as under : "Explanation 2 : For the purpose of this clause, fees for technical services ’ means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly mining, or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head ‘Salaries. ’ " 2. The question whether prospecting for, or extraction or production of, mineral oil can be termed as 'mining' operations, was referred to the Attorney General of India for his opinion. The Attorney General has opined that such operations are mining operations and the expressions 'mining project' or 'like project' occurring in Explanation 2 to section 9(l)(vii) of the Income-tax Act would cover rendering of services tike imparting of training and carrying out drilling operations for exploration or exploitation of oil and natural gas. 3. In view of the above opinion, the consideration for such services will not be treated as fees for technical services for the purpose of Explanation 2 to section 9(1 ){vii) of the Income-tax Ad, 1961. Payments for such services Jo a foreign company, therefore, will be income chargeable to tax under the provisions of section 44 BB of the Income-tax Act, 1961 and not under the special provision jar the taxation of fees for technical services contained in section 115 A, read with section 44D of the Income-tax Act, 1961. ”
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4.7 Having discussed this, it would be pertinent to examine the activities carried out by the appellant so that it could be ascertained whether these activities amount to prospecting for or extraction of mineral oils, or for that matters ‘mining’. Also it needs to be seen whether the appellant’s activities have any proximate nexus to prospecting for or extracting mineral oils. It is seen that the Appellant markets Software which analyzes data which in turn aids in exploration of mineral oils. Thus this software would be a step-in-aid to the actual mining of mineral oils. In view of this position section 44BB, as requested for by the Ld AR vide his letter dated 30-11-11, is applicable on the facts of this case. 4.8 Thus, it is held that all receipts from sale of software to the provision of maintenance, training, etc. are covered u/s 44BB of the Act and will be taxed as such considering the law laid down as per the cases mentioned in para 4.1 supra.”
In the grounds raised before us, it is contended by the Revenue that income by way of royalty taxable under the provisions of section 44D/44DA r.w.s. 115A, could not be covered under the provisions of section 44BB of the Act as clarified in the provisio thereto. 20. The relevant proviso below section 44BB of the Act reads as under:
“provided that this subsection shall not apply in a case where the provisions of section 42 or section 44D or [section 44 DA or] section 115A or section 293A apply for the purposes of computing profit and gains or any other income referred to in those sections.”
In above proviso, the word “section 44 DA” has been inserted by the finance Act 2010, w.e.f. 01/04/2011. 22. We find that the issue of taxability of income under section 44BB viz-a-viz section 44D came up before the Hon’ble Supreme Court in the case of Oil and Natural Gas Corporation Limited Vs. Commissioner of Income Tax, 376 ITR 306 (SC). The Hon’ble Supreme Court after
18 ITA Nos. 1182 & 4976/Del/2012 & ITA No. 1225/Del/2012
analyzing the provisions of section 44BB and 44D of the Act and circular No.1862 dated 22/10/1990, opined that pith and substance of each contracts/agreement, which establish that the activity is connected inextricably with prospecting, extraction or production of mineral oil, would decide the taxability under section 44BB of the Act. The relevant finding of the Hon’ble Supreme Court is reproduced as under:
“13. The Income Tax Act does not define the expressions “mines” or “minerals”. The said expressions are found defined and explained in the Mines Act, 1952 and the Oil Fields (Development and Regulation) Act 1948. While construing the somewhat pari materia expressions appearing in the Mines and Minerals (Development and Regulation) Act 1957 regard must be had to the provisions of Entries 53 and 54 of List I and Entry 22 of List II of the 7th Schedule to the Constitution to understand the exclusion of mineral oils from the definition of minerals in Section 3(a) of the 1957 Act. Regard must also be had to the fact that mineral oils is separately defined in Section 3(b) of the 1957 Act to include natural gas and petroleum in respect of which Parliament has exclusive jurisdiction under Entry 53 of List I of the 7th Schedule and had enacted an earlier legislation i.e. Oil Fields (Regulation and Development) Act, 1948. Reading Section 2(j) and 2(jj) of the Mines Act, 1952 which define mines and minerals and the provisions of the Oil Fields (Regulation and Development) Act, 1948 specifically relating to prospecting and exploration of mineral oils, exhaustively referred to earlier, it is abundantly clear that drilling operations for the purpose of production of petroleum would clearly amount to a mining activity or a mining operation. Viewed thus, it is the proximity of the works contemplated under an agreement, executed with a non- resident assessee or a foreign company, with mining activity or mining operations that would be crucial for the determination of the question whether the payments made under such an agreement to the non-resident assessee or the foreign company is to be assessed under Section 44BB or Section 44D of the Act. The test of pith and substance of the agreement commends to us as reasonable for acceptance. Equally important is the fact that the CBDT had accepted the said test and had in fact issued a circular as far back as 22.10.1990 to the effect that mining operations and the expressions “mining projects” or “like projects” occurring in Explanation 2 to Section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas and hence payments made under such agreement to a non-resident/foreign company would be chargeable to tax under the provisions of Section 44BB and not Section 44D of the Act. We do not see how any other view can be taken if the works or services mentioned under a particular agreement is directly associated or inextricably connected with prospecting, extraction or production of mineral oil. Keeping in mind the above provision, we have looked into each of the contracts involved in the present group of cases and find that the brief description of the works covered under each of the said contracts as
19 ITA Nos. 1182 & 4976/Del/2012 & ITA No. 1225/Del/2012
culled out by the appellants and placed before the Court is correct. The said details are set out below. |S. No. |Civil |Work covered under the contract | | |Appeal | | | |No. | | | |4321 |Drilling of exploration wells and carrying | | | |out seismic surveys for exploratory drilling.| | |740 |Drilling, furnishing personnel for manning, | | | |maintenance and operation of drilling rig and| | | |training of personnel. | | |731 |Drilling, furnishing personnel for manning, | | | |maintenance and operation of drilling rig and| | | |training of personnel. | | | | | | |1722 |Furnishing supervisory staff with expertise | | | |in operation and management of Drilling unit.| | |729 |Capping including subduing of well, fire | | | |fighting. | | |738 |Capping including subduing of well, fire | | | |fighting. | | |1528 |Analysis of data to prepare job design, | | | |procedure for execution and details regarding| | | |monitoring. | | |1532 |Study for selection of enhanced Oil Recovery | | | |processes and conceptual design of Pilot | | | |Tests. | | |1520 |Engineering and technical support to ONGC in | | | |implementation of Cyclic Steam Stimulation in| | | |Heavy Oil Wells. | | |2794 |Assessment and processing of seismic data | | | |along with engineering and technical support | | | |in implementation of Cyclic Steam | | | |Stimulation. | | |1524 |Conducting reservoir stimulation studies in | | | |association with personnel of ONGC. | | |1535 |Laboratory testing under simulated reservoir | | | |conditions. | | |1514 |Consultancy for optimal exploitation of | | | |hydrocarbon resources. | | |2797 |Consultancy for all aspects of Coal Bed | | | |Methane. | | |6174 |Analysis of data of wells to prepare a job | | | |design. | | | | | | |1517 |Geological study of the area and analysis of | | | |seismic information reports to design 2 | | | |dimensional seismic surveys. | | |7226 |Opinion on hydrocarbon resources and | | | |foreseeable potential. | | |7227 |Opinion on hydrocarbon resources and | | | |foreseeable potential. | | |7230 |Opinion on hydrocarbon resources and | | | |foreseeable potential. | | |6016 |Opinion on hydrocarbon resources and | | | |foreseeable potential. | | |6008 |Evaluation of ultimate resource potential and| | | |presentations outside India in connection | | | |with promotional activities for Joint Venture| | | |Exploration program. |
20 ITA Nos. 1182 & 4976/Del/2012 & ITA No. 1225/Del/2012
| |1531 |Review of sub-surface well data, provide | | | |repair plan of wells and supervise repairs. | | |733 |Repair of gas turbine, gas control system and| | | |inspection of gas turbine and generator. | | |741 |Repair and inspection of turbines. | | |737 |Repair, inspection and overhauling of | | | |turbines. | | |736 |Inspection, engine performance evaluation, | | | |instrument calibration and inspection of far | | | |turbines. | | |1522 |Replacement of choke and kill consoles on | | | |drilling rigs. | | |1521 |Inspection of gas generators. | | |1515 |Inspection of rigs. | | |2012 |Inspection of generator. | | |1240 |Inspection of existing control system and | | | |deputing engineer to attend to any problem | | | |arising in the machines. | | |1529 |Inspection of drilling rig and verification | | | |of reliability of control systems in the | | | |drilling rig. | | |2008 |Expert advice on the device to clean insides | | | |of a pipeline. | | |2795 |Feasibility study of rig to assess its | | | |remaining useful life and to carry out | | | |structural alterations. | | |925 |Engineering analysis of rig. | | |1519 |Imparting training on cased hold production | | | |log evaluation and analysis. | | |1533 |Training on well control. | | |1518 |Training on implementation of Six Sigma | | | |concepts. | | |1516 |Training on implementation of Six Sigma | | | |concepts. | | |6023 |Training on Drilling project management. | | |2796 |Training in Safety Rating System and | | | |assistance in development and audit of Safety| | | |Management System. | | |1239 |To develop technical specification for 3D | | | |Seismic API modules of work and to prepare | | | |bid packages. | | |1527 |Supply supervision and installation of | | | |software which is used for analysis of flow | | | |rate of mineral oil to determine reservoir | | | |conditions. | | |1523 |Supply, installation and familiarization of | | | |software for processing seismic data. |
The above facts would indicate that the pith and substance of each of the contracts/agreements is inextricably connected with prospecting, extraction or production of mineral oil. The dominant purpose of each of such agreement is for prospecting, extraction or production of mineral oils though there may be certain ancillary works contemplated thereunder. If that be so, we will have no hesitation in holding that the payments made by ONGC and received by the non-resident assessees or foreign companies under the said contracts is more appropriately assessable under the provisions of Section 44BB and not Section 44D of the Act. On the basis of the said conclusion reached by us,
21 ITA Nos. 1182 & 4976/Del/2012 & ITA No. 1225/Del/2012
we allow the appeals under consideration by setting aside the orders of the High Court passed in each of the cases before it and restoring the view taken by the learned Appellate Commissioner as affirmed by the learned Tribunal.”
In the instant case, we observe that, the Assessing Officer himself has assessed the income from software maintenance/support services under the section 44BB of the Act, and now , it is contested before us that said income should fall under section 44D/44DA of the Act. In our considered opinion, once the Assessing Officer has accepted the taxability of income under section 44BB of the Act, he cannot be allowed to change the stand taken by him in the assessment order. Even otherwise, in view of the decision of the Hon’ble Supreme Court in the case of Oil and Natural Gas Corporation Limited versus CIT (supra), if the substance of the contract/agreement is connected with the prospecting, extraction or production of mineral oil, the income has to be assessed under the provisions of section 44BB of the Act. In the case, the assessee supplied software and provided software maintenance/support services in respect of software supplied, which were to be utilised in exploration of mineral oil, and thus the relevant income from sale of software and software maintenance/support services has been rightly assessed under section 44 BB of the Act. 24. The second part of the contention raised by the Revenue is that the income from royalty was taxable under section 44DA of the Act and, therefore, in such case provisions of section 44BB were not applicable in view of the proviso inserted below section 44 DA of the Act. The relevant proviso below section 44 DA reads as under:
“provided further that the provisions of section 44BB shall not apply in respect of the income referred to in this section.”
22 ITA Nos. 1182 & 4976/Del/2012 & ITA No. 1225/Del/2012
We find that said proviso has been inserted by finance bill 2010 w.e.f. 01/04/2011 only. Since, the assessment year in consideration before us is assessment year 2009-10, the said proviso was not applicable over the facts of the instant case. The Revenue has contended before us that said amendment in the Act was only clarificatory in nature and thus its application has to be read into the main provisions w.e.f. the time the main provision came into effect in view of the decision of the Hon’ble Supreme Court in the case of Sedco Forex International drilling Vs. CIT 279 ITR 310. 26. In our opinion, the amendment brought by the Finance Act, 2011 cannot be made effect from the retrospective effect as that it adversely affects the interest of the assessee. We are in agreement with the findings of the Hon’ble Supreme Court in the case of Sedco Forex International Drilling Incorporation Vs. Commissioner of Income Tax, (supra) that clarificatory provisions should be made applicable form the date when the main provision was introduced. The relevant paragraph of the judgment is reproduced as under:
“14. As was affirmed by this Court in Goslino Mario (supra), a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication [See also : Reliance Jute & Industries Ltd. vs. CIT (1979) 13 CTR (SC) 186 : (1980) 1 SCC 139]. An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See : Sonia Bhatia vs. State of U.P. AIR 1981 SC 1274, 1282 para 24 : (1981) 2 SCC 585, 598]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See : Shyam Sunder vs. Ram Kumar (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman Das vs. CIT (1997) 138 CTR (SC) 214 : (1997) 1 SCC 352, 354; CIT vs. Podar Cement (P) Ltd. (1997) 141 CTR (SC) 67 : (1997) 5 SCC 482, 506]. But if it changes the law it is not presumed to be retrospective irrespective of the fact that the phrase used are 'it is declared’ or 'for the removal of doubts’.” 27. It is well settled law that an amendment to the taxing statute, if results in higher tax burden on assessee then it is prospective in nature
23 ITA Nos. 1182 & 4976/Del/2012 & ITA No. 1225/Del/2012
and not retrospective. We find that this issue has been dealt elaborately by Hon’ble High Court (Uttrakhand) in B.J. Services Company Middle East Ltd. & Ors. vs. Deputy Director Of Income Tax (International Taxation) 339 ITR 169.
We are not inclined to accept the contentions advanced on behalf of the Revenue, for the simple reason that the issue is squarely covered by the decision of Hon’ble Delhi High Court in the case of DIT-II Vs OHM Limted 352 ITR 406 and by the decision of the ITAT in CGG Veritas Services SA Vs. Additional Director of Income Tax (International Taxation) Reported in 50 SOT 335. Thus, grounds no. 2 & 3 of the appeal of the Revenue are dismissed. 29. The next issue is in respect of ground raised by the assessee in its appeal. In the ground, the assessee has challenged assessment of income from sale of software to entities engaged in exploration of mineral oil as taxable under section 44BB of the Act. 30. Before us, the Ld. counsel submitted that issue of taxability of receipt’s from sale of software has been tested on the touchstone of treaty principle and, therefore, it was not permissible to go to the Act and tax the transaction. However, on perusal of the order of the Assessing Officer as well as the Ld. CIT-A, we find that the issue of sale of software was examined by them only from the angle of the taxability under the income tax Act, 1961 and not from the perspective of relevant treaty. The learned counsel of the assessee has first time raised this issue before us. We have decided that sale of software is not amounted to ‘Royalty’ under the relevant treaty. As far as receipts from software maintenance & support services are concerned, the assessee itself has declared said receipts u/s 44BB of the Act. Thus, the contention of the learned counsel
24 ITA Nos. 1182 & 4976/Del/2012 & ITA No. 1225/Del/2012
that it is not permissible to go to the Act to tax the transaction is not accepted being a composite transaction. 31. We find that global receipts pertaining to any contract having approximate nexus with the activity of prospecting for or extraction of mineral oil, are required to be taken for computing profit under section 44 BB of the Act, in view of the decision of the Hon’ble Uttrakhand High Court in the case of Sedco Forex International Inc. reported in 299 ITR 238 (UK). 32. In the case of Oil and Natural Gas Corporation Limited Vs. Commissioner of Income Tax (supra), the appellants have categorized the different contracts under eight heads, which fulfilled the eventual test of pith and substance of agreement, namely, whether the services to be rendered under the agreement is directly or inextricably linked with the prospecting, extraction or production of mineral oil. The list of such eight contracts in said case, is reproduced as under:
1) Carrying out seismic surveys and drilling for oil and gas 2) Services starting/re-starting/enhancing production of oil and gas from wells 3) Services for prospecting for exploration of oil and or gas 4) Planning and supervision of repair of wells 5) Repair, Inspection or Equipment used in the exploration, extraction or production of oil and gas 6) Imparting Training 7) Consultancy in regard to exploration of oil and gas 8) Supply, Installation, etc. of software used for oil and gas exploration”
Thus, we find that supply, installation etc. of software used for oil and gas exploration has been held as taxable under section 44BB of the Act. In the present case, the software maintenance/support services has already been accepted by the assessee as falling under section 44 BB of
25 ITA Nos. 1182 & 4976/Del/2012 & ITA No. 1225/Del/2012
the Act . Since the software maintenance/support services was carried in respect of the software sold by the assessee, both the activity of sale of software and software maintenance/support services are composite contract to be considered u/s 44BB of the Act. In the instant case, the Ld. CIT-A has assessed the supply of software and software maintenance/support services as taxable under section 44BB of the Act. The Hon’ble High Court of Uttrakhand in the case of Commissioner of Income-tax Vs. Halliburton Offshore Services Inc. reported in 300 ITR 265 held that the amount paid or payable whether in India or outside India have to be included for the purpose of computing global receipts under section 44BB of the Act. The relevant finding of the Hon’ble High Court as under :
“6. Thus, it is clear from the perusal of s. 44BB that all the amounts either paid or payable (whether in India or outside India) or received or deemed to be received (whether in India or outside India) are mutually inclusive. This amount is the basis of determination of deemed profits and gains of the assessee @ 10 per cent. Therefore, in our view, the Tribunal fell into error in not appreciating the difference between the amount and the income. Amount paid or received refers to the total payment to the assessee or payable to the assessee or deemed to be received by the assessee, whereas income has been defined under s. 2(24) of the IT Act and s. 5 and s. 9 deal with the income and accrued income and deemed income. Sec. 4 is the charging section of the IT Act and definition as well as the incomes referred in ss. 5 and 9 are for the purpose of imposing the income-tax under s. 143 (3). Sec. 44BB is a complete code in itself. It provides by a legal fiction to be the profits and gains of the non-resident assessee engaged in the business of oil exploration @ 10 per cent of the aggregate amount specified in sub-s. (2). It is not in dispute that the amount has been received by the assessee company. Therefore, the AO added the said amount which was received by the non-resident company rendering services as per provisions of s. 44BB to the ONGC and imposed the income-tax thereon.”
26 ITA Nos. 1182 & 4976/Del/2012 & ITA No. 1225/Del/2012
In view of above decisions of the Hon’ble Supreme Court and High Courts, we uphold the finding of the Ld. CIT-A on the issue in dispute and the ground raised in the appeal of the assessee is dismissed. 35. In the result, appeals both of the Revenue and the assessee are dismissed.
ITA No. 4976/Del/2012 for AY : 2009-10
In ITA No. 4976/Del/2012 for assessment year 2009-10, the assessee has rendered only services of software maintenance/support in relation to the software supplied. The Assessing Officer has treated the software maintenance/support services as integral part of the sale of the software and the consideration received for such services has been held as royalty under the provisions of the income tax Act. In assessment year 2007-08 the services of software maintenance/support were accepted by the Assessing Officer as falling under section 44BB of the Act. While deciding the issue for assessment year 2007-08, we have upheld the taxability of software maintenance/ support services under section 44BB of the Act. Thus, following our findings in assessment year 2007-08, we dismiss the Ground 1 to ground 7 of the appeal of the Revenue. 37. In ground No. 8, the Revenue has challenged the finding of the Ld. CIT-A that interest under section 234B of the Act was not chargeable. 38. Before us the Ld. Senior DR supporting the grounds submitted that the assessee was required to pay interest under section 234B of the Act. 39. The Ld. counsel on the other hand submitted that issue in dispute
27 ITA Nos. 1182 & 4976/Del/2012 & ITA No. 1225/Del/2012
is covered in the favour of the assessee by the decision of the Hon’ble Delhi High Court in the case of Jacobs civil(2011) 330 ITR 578(Delhi). 40. We have heard the rival submission and perused the relevant material on record. In the decision of the Jacobs Civil (supra), the Hon’ble High Court has held that if the assessee had no role in deducting or collecting the tax, the question of payment of interest would not arise, however, if there is a default in making advance tax, the assessee is liable to pay interest under section 234B of the Act. In view of the above decision of the Hon’ble High Court, we restore the issue to the file of the Assessing Officer to decide the liability of interest under section 234B of the Act in accordance with law. It is needless to mention that the assessee shall be provided opportunity of hearing on the issue in dispute. 41. In the result, the appeal of the Revenue is allowed partly for statistical purposes. 42. To sum up, Revenue’s appeal having ITA No. 1182/Del/2012 and the assessee’s appeal having ITA No. 1225/Del/2012 are dismissed and another appeal of the Revenue in ITA No. 4976/Del/2012 is allowed partly for statistical purposes. The decision is pronounced in the open court on 21st April, 2017. Sd/- Sd/- (H.S. SIDHU) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 21st April, 2017. RK/-(D.T.D) Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi