GARTNER IRELAND LTD,MUMBAI vs. DDIT (IT) RG 3(1), MUMBAI

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ITA 7174/MUM/2014Status: DisposedITAT Mumbai27 September 2017AY 2007-085 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the issue of whether software subscription fees constitute royalty is debatable, with divergent High Court opinions. Since the assessee's interpretation was supported by a Tribunal decision at the time of filing, and all particulars were furnished, penalty under Section 271(1)(c) is not leviable.

What were the facts?

The assessee, Gartner Ireland Limited, received subscription fees from Indian companies for research data distributed via software. The assessee claimed these fees as business income, exempt due to no Permanent Establishment in India, and filed a NIL return. The AO treated the income as royalty and levied tax and penalty.

What were the issues?

Whether penalty under Section 271(1)(c) can be levied when the taxability of subscription income as royalty is a debatable issue with conflicting judicial pronouncements.

Which sections of the Income-tax Act were involved?

Section 271(1)(c)

AI-generated summary — verify with the full judgment below

Cases cited in this judgment(2)Show list

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Income Tax Appellate Tribunal, “L” Bench, Mumbai

For Appellant: Shri Farrokh Irani
For Respondent: Shri T.A. Khan
Hearing: 27.9.2017Pronounced: 27.9.2017

O R D E R Per B.R. Baskaran (AM) :-

The appeal filed by the assessee is directed against the order dated 28- 08-2014 passed by Ld CIT(A)-10, Mumbai confirming the penalty of Rs.59.08 lakhs levied by the AO u/s 271(1)(c) of the Act for assessment year 2007-08.

2.

The Ld A.R submitted that the assessee herein is a company registered in the Republic of Ireland and is a resident of that country as per the provisions of Article 4 of DTAA entered with that Country by India. It is engaged in the business of distribution of research products, which are compilations of Economic and business data and reports. These data are distributed in the form of software subscriptions. During the year under consideration, the assessee received gross subscription fee of Rs.590.89 lakhs from various Indian companies. The assessee claimed the same as business income and exempt, since it does not have Permanent Establishment in India. Accordingly the assessee filed NIL return of income for the year under consideration. The AO treated the same as Royalty income and accordingly levied tax @ 10%, which worked out to Rs.59.08 lakhs. The AO levied penalty thereon u/s 2 Gartner Ireland Ltd.

271(1)(c) of the Act @ 100% of the tax. The Ld CIT(A) also confirmed the penalty and hence the assessee has filed this appeal before us.

3.

It is pertinent to note that the income assessed by the AO has since been confirmed by Ld CIT(A) and Tribunal. The Ld A.R submitted that the assessee has challenged the order passed by the Tribunal by filing appeal before Hon’ble High Court of Bombay and the same has since been admitted.

4.

The Ld A.R submitted that the Bangalore bench of Tribunal has held on 30-12-2004, in the case of WIPRO Limited, that the payments made to the assessee herein were not royalty and hence no tax is required to be deducted at source. The assessee filed its return of income for the year under consideration on 24-10-2007 declaring NIL income on the reasoning that the payments received by it by way of subscriptions are not royalty and it cannot also be taxed as business income, since it does not have Permanent Establishment in India. On the date of filing the return of income for the year under consideration, there existed a decision of Tribunal supporting the stand of the assessee. The ld A.R submitted that the assessee has furnished all the details relating to the subscription income and hence it cannot be said that the assessee has either concealed the particulars of income or furnished inaccurate particulars of income.

5.

He submitted that the ITAT has followed the decision rendered by the Bangalore bench of Tribunal in the case of Wipro Ltd (supra) in the assessee’s own case in AY 2004-05 and decided an identical issue in favour of the assessee, vide its order dated 30-07-2010. However, for the year under consideration, the assessing officer passed the draft assessment order on 05- 08-2010 without following the decision rendered by the ITAT in AY 2004-05. However, subsequently the decision rendered by the Bangalore bench of Tribunal was reversed by the Hon’ble Karnataka High Court on 15.10.2011 in the case of WIPRO Ltd (2011) 203 Taxman 621)(Kar). By the time, the Tribunal heard the quantum appeal of the year under consideration, the 3 Gartner Ireland Ltd.

decision of Hon’ble Karnataka High Court has come and hence the Tribunal, in the instant year, has decided the issue against the assessee, vide its order dated 24.07.2013 passed in by following the decision rendered by Hon’ble Karnataka High Court, since the Hon’ble Karnataka High Court has rendered its decision on the very same payments/receipts.

6.

The Ld A.R submitted that the Hon’ble Delhi High Court has also considered an identical issue in the case of Infrasoft Ltd (2013)(39 taxmann.com 88)(Delhi) and has decided the same in favour of the assessee by holding that the subscription received for right to use of software program would not give rise to any royalty income in terms of India USA DTAA. The Hon’ble Delhi High Court has mentioned in paragraph 98 of its order that it is not in agreement with the decision rendered by Hon’ble Karnataka High Court in the case of Samsung Electronics Co Ltd, which was rendered on identical issue. Accordingly he submitted that the issue is a highly debatable one and hence the penalty cannot be levied.

7.

The Ld A.R also submitted that the appeal of the assessee has since been admitted by Hon’ble High Court of Bombay and hence on that count also, the impugned issue becomes debatable and hence no penalty is attracted. The Ld A.R also invited our attention to the copy of notice issued u/s 271(1)(c) of the Act and submitted that the AO did not strike off inapplicable portion and the same shows non-application of mind on the part of the AO and hence on this count also penalty is not leviable.

8.

On the contrary, the Ld D.R placed strong reliance on the orders passed by the tax authorities. The Ld D.R also placed his reliance on the written submissions given by his predecessor, wherein, it was contended that the admission of appeal by the Hon’ble High Court cannot be a ground to cancel the penalty.

4 Gartner Ireland Ltd.

9.

We have heard rival submissions and perused the record. From the arguments advanced by Ld A.R, it can be noticed that there are divergent views on the impugned issue, viz., whether the subscription received for granting right to use a software falls under the definition of Royalty or not. The Hon’ble Karnataka High Court has taken the view in the case of Wipro Ltd (supra) and Samsung Electronics Co Ltd that the payment made for right to use software would be in the nature of Royalty. However, the Hon’ble Delhi High Court did not agree with the view taken by Hon’ble Karnataka High Court. In the instant case, at the time of filing return of income, the assessee’s view got support from the order passed by Bangalore bench of Tribunal in the case of Wipro Ltd. It is the case of the assessee that it has furnished all the particulars relating to the subscription receipts and it claimed exemption only upon interpretation of provisions of law, which is now demonstrated as debatable in nature. It is a well settled proposition of law, the issues, which are debatable in nature, would not give rise to penalty u/s 271(1)(c) of the Act. Hence we are of the view that the assessee cannot be subjected to charge of either concealment of particulars of income and furnishing of inaccurate particulars of income. Hence the penalty levied by the AO u/s 271(1)(c) of the Act is liable to be deleted.

10.

The written submissions given by Ld D.R relate to the proposition that the issue shall become debatable only the appeal of the assessee is admitted by Hon’ble High Court. However, the discussions made in the preceding paragraph, in our view, clearly demonstrate that the issue is debatable in nature.

11.

In view of the foregoing discussions, we set aside the order passed by Ld CIT(A) and direct the AO to delete the impugned penalty levied u/s 271(1)(c) of the Act.

5 Gartner Ireland Ltd.

12.

In the result, the appeal of the assessee is allowed.

Order has been pronounced in the Court on 27.9.2017.

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