DCIT, INTL TAXN, CIRCLE-1(2), BNG, BENGALURU vs. BLUE YONDER INC., U.S.A

O R D E R Per Bench : These appeals at the instance of the Revenue are directed against two Orders of CIT(A) both dated 09.05.2024 passed under section 250 of the Act. The relevant Assessment Years are 2012-13 and 2018-19.

2. Common issues are raised in these appeals and the CO; hence, they were heard together and are being disposed off by this consolidated order.

3. First, we shall adjudicate the Revenue’s appeals.

The grounds raised for both the Assessment Years are identical. They read as follows:

(i) Whether on the facts and in the circumstances of the case and in law, the CIT(A) has erred in holding that reimbursements under the head software maintenance are not Royalty receipts or FIS by relying on SC decision in the case Of Engineering Analysis without examining the specific agreements of this assessee? Whether on the facts and in the circumstances of the case (ii) and in law, the CIT(A) has erred in not recognising the fact that the reimbursement for hardware maintenance are technical services which has been made available to the Indian entity, and are hence liable to be taxed as FTS?

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5. Brief facts of the case are as follows:

Assessee for Assessment Years 2012-13 and 2018-19 received certain amounts from its Indian subsidiary M/s. JDA Software Inc., (now Blue Yonder Inc.,) towards (i) subscription charges for use of database, (ii) telephone and broadband charges (iii) computer maintenance expenses and (iv) other reimbursements. The AO, in the assessment completed for Assessment Years 2012-13 and 2018-19, held that these payments are for Fees for Included services (FIS) and brought the same to tax.

6. Aggrieved by the assessment completed for Assessment Years 2012-13 and 2018-19, assessee preferred appeals before the First Appellate Authority (FAA). The assessee, for Assessment Year 2012-13, also challenged the reopening of assessment before the FAA. The CIT(A), for Assessment Year 2012-13, did not adjudicate the grounds relating to the validity of reopening of assessment. However, on merits, the CIT(A) decided the issue for both the Assessment Years i.e., for Assessment Years 2012-13 and 2018-19 in favour of the assessee by following the judgment of the Hon’ble High Court of Karnataka for Assessment Years 2008-09 and 2010-11 in assessee’s own case and also the Tribunal Order in assessee’s own case for Assessment Year 2019-20 in IT(IT)A No.401/Bang/2023 (Order dated 03.01.2024).

“11. As regards the reimbursement of computer and hardware maintenance, we find that the issue is squarely covered in favour of the assessee by the Order of the Tribunal in for the Assessment Year 2019-20 (the assessee’s appeal). The relevant contention of the AR, DR and the findings of the Tribunal for the Assessment Year 2019-20 reads as follows: “4. Ground Nos.2 to 5 in assessee’s appeal are with regard to erroneous treatment of reimbursements as ‘royalty’/’fees’ for included services. 4.1 In this regard, the ld. A.R. submitted that during the year, the Assessee had received a sum of Rs. 47,94,44,402/- towards reimbursements of expenses incurred by the Assessee on behalf on BY India. The break-up of such reimbursements is as under:

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Sl Nature of Amount . reimbursement 1. Computer hardware 3,88,04,561 2. Employee immigration 2,85,02,503 3. Employee insurance charges 11,44,589 4. Professional fees 3,98,45,239 5. Host country tax 8,60,70,802 6. Computer software 17,37,43,255 7. Subscription charges 7,52,70,596 8. Telecommunication charges 1,97,41,529 9. Restricted Stock Unit expenses 1,63,21,328 Total 47,94,44,402

4.2 He submitted that the Assessing Officer held the aforesaid payments to be in the nature of ‘fees for technical services’ in the hands of the Assessee on the ground that the Assessee makes available technical and managerial skills and knowledge to BY India for the latter to function seamlessly in software product development and services. On appeal, with respect to the payments towards (i) Employee immigration expenses; (ii) employee insurance charges; (iii) professional fees; and (iv) restricted stock unit expenses, the CIT(A) deleted the addition made holding that the same would not fall under the category of technical or consulting services and that they do not satisfy the conditions to be treated as ‘fees for included services’. As regards payments received towards (i) computer software maintenance; (ii) subscription charges; and (iii) telecommunication charges, the CIT(A) held the same to be in the nature of ‘royalty’ and sustained the addition. However, the ld. CIT(A) failed to adjudicate on reimbursements received towards (i) computer hardware maintenance; and (ii) host country tax. He submitted that the Assessee has filed an application under Section 154 of the Act before the CIT(A) seeking rectification to the said extent and the same is pending adjudication. 4.3 In this regard, he submitted that the payments received by the Assessee were purely in the nature of cost-to-cost reimbursements

IT(IT)A Nos.1302, 1326/Bang/2024 C.O. No.34/Bang/2024 (in IT(IT)A No.1302/Bang/2024) Page 6 of 13 and does not contain any income element. The various services are procured centrally from various vendors for commercial and administrative reasons and the costs pertaining to the relevant BY entities is cross charged without any mark-up. While the Assessee procures the services centrally, the distribution, installation, postsale services if any are the responsibility of the service provider and the Assessee is not involved at any stage. He submitted that the terms of the cost reimbursement agreement clearly evidences that the payments made to the Assessee were pure reimbursements without any mark-up being charged. In this regard, he placed reliance is placed on the following decisions: - DIT v. A.P. Moller Maersk A S (reported in [2017] 78 taxmann.com 287 (SC)) paras 10-11; - CIT v. Siemens Aktiongesellschaft – (reported in [2009] 177 Taxman 81 (Bombay)) para 33; and - CIT v. Dunlop Rubber Co. Ltd. (reported in [1982] 10 Taxman 179 (Calcutta)) pages 37-39 of the caselaw compilation. 4.4 The ld. A.R. has given a brief description of the reimbursements as follows: (i). Computer software maintenance: (a) The Assessee has entered into agreement with Dell and Cisco for software and hardware maintenance support services on a day-to-day basis for its group companies, including BY India. In terms of the agreement, the cost in this regard is borne by the Assessee and allocated to BY India on a cost-to-cost basis for the charges allocable to BY India. (ii). Subscription charges: (b) The Assessee makes payments to LinkedIn and Monster for usage of their database by group companies including BY India for hiring potential candidates. The Assessee does

IT(IT)A Nos.1302, 1326/Bang/2024 C.O. No.34/Bang/2024 (in IT(IT)A No.1302/Bang/2024) Page 7 of 13 not obtain any modification or reproduction rights from the vendors. The cost incurred by the Assessee is allocated to each group entity including BY India and cross charged on a cost-to-cost basis. (iii). Telecommunication charges: (c) He submitted that the Assessee makes payment to ‘Sprint’ for the usage of link lines. This provides customers with a secure VPN solution with any-to-any intranet connectivity, as a private means to connect their enterprise sites and between multiple customers over VPN. The Assessee bears the cost and the same is allocated to BY India on a proportionate and cost-to-cost basis. 4.5 The ld. A.R. submitted that while the Assessing Officer held the above to be FTS, the ld. CIT(A) held the receipts to be in the nature of royalty. Under the DTAA, in order for a payment to be in the nature of fees for technical services, the services ought to ‘make available’ technical knowledge, experience, skill, know- how or processes, or consists of the development and transfer of a technical plan or technical design. Technology will be considered ‘make available’ when the person acquiring the service is enabled to apply the technology without depending on the provider. He placed reliance in this regard on the decision of the Hon’ble High Court of Karnataka in the case of CIT v. De Beers India Minerals (P.) Ltd. (reported in [2012] 21 taxmann.com 214 (Karnataka) – para 22. In the present case, the mandatory precondition of ‘make available’ is not satisfied in any of the aforesaid services, and therefore the payments are not in the nature of fees for technical service. In view of the above, he submitted that the reimbursements received from BY India is not taxable in India either under the Act or under the DTAA. 4.6 With regard to taxability of computer software and hardware maintenance expenses, the ld. A.R. submitted that the services are provided to BY India on a need basis and post availing such services, BY India will not be able to independently apply the knowledge. No technical knowledge, skill etc. are made available

IT(IT)A Nos.1302, 1326/Bang/2024 C.O. No.34/Bang/2024 (in IT(IT)A No.1302/Bang/2024) Page 8 of 13 to BY India by the service providers. Therefore, the receipts in respect of these expenses cannot be held to be FIS under Article 12 of the DTAA. 4.7 The ld. A.R. submitted that the ld. CIT(A) was also not correct in holding the same to be ‘royalty’. As is evident from the agreements entered into between the Assessee and Cisco, and the Assessee and Sai Global, no exclusive or proprietary right in the software is made available to the user of the software and only a mere right to use the software is given. The order of the CIT(A) nowhere discusses how the payments for software maintenance can be construed as royalty. He placed reliance on the following decisions: - Hon’ble Supreme Court of India in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT; and - Hon’ble Karnataka High Court’s order for assessment year 2008¬09 and AY 2010-11 and this Tribunal’s order for assessment year 2014-15 in Assessee’s own case – para 4.1 4.8 On the issue of taxability of subscription charges, the ld. A.R. submitted that the payments are made for usage of the database by the group companies for hiring of potential candidates. The reimbursements received from BY India towards the use of database of Salesforce is in the nature of a consideration to obtain rights to use the copyrighted database and not the right to use the copyright in the database. He submitted that the copyright is not transferred to the subscribers. He further submitted that BY India does not get the physical access or control over the equipment used by Salesforce in collating and maintaining the database. The subscription fee paid is not for the use of the equipment but for availing the facility of accessing the data/information collated by Salesforce. On a perusal of the agreement with Service Now Inc. it is evident that the customer is granted non-sublicensable, non- transferable and non-exclusive licenses. He placed reliance on the following decisions:

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- Pluralsight LLC. V. DCIT (order dated 21.08.2023 passed by this Hon’ble Tribunal in – paras 11-14 and 20; - Goldman Sachs & Co. LLC v. DCIT (reported in [2023] 152 taxmann.com 251 (Mumbai – Trib.)) – paras 16-19; and - DCIT v. Welspun Corporation Limited (reported in [2017] 77 taxmann.com 165 (Ahm.)) – paras 46-50. 4.9 On the issue of taxability of telecommunication expenses, the ld. A.R. submitted that the ld. CIT(A) has relied on the decision of this Tribunal in the case of Vodafone South Limited v. DDIT to hold that telecommunication charges claimed as reimbursement are to be held to be royalty under the DTAA which has now been reversed by the jurisdictional High Court reported in Order dated 14.07.2023 passed in and connected matters. In any event, he submitted that reimbursements received from BY India towards the usage of link line provided by Spirit for basic bandwidth services does not involve any right to use scientific equipment. He placed reliance on the following decisions: - Telefonica Depreciation Espama v. ACIT (order dated 10.08.2023 passed by this Hon’ble Tribunal in IT(IT)A No. 2657/Bang/2019) – paras 3.8 to 5.2.21; - Communications Global Network Services Limited v. DCIT (order dated 29.08.2023 passed by this Hon’ble Tribunal in IT(IT)A No. 89/Bang/2019) – paras 5-8; and - Cerner Healthcare Solutions India (P.) Ltd v. DCIT (reported in [2022] 141 taxmann.com 564 (Bangalore - Trib.)) – Paras 15-20.

5. On the other hand, the ld. D.R. submitted that the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT reported in 432 ITR 471 (SC) considered the agreements related to the parties who were the party to the cases before the Hon’ble Supreme Court and the Hon’ble Supreme Court has no occasion to examine the IT(IT)A Nos.1302, 1326/Bang/2024 C.O. No.34/Bang/2024 (in IT(IT)A No.1302/Bang/2024) Page 10 of 13 agreement entered by the present assessee with the various parties. As such, the ratio laid down in that judgement cannot be applied to the facts of the assessee’s case.

ORDER (1) Appeal is allowed. (2) Substantial questions of law are answered in favour of assessee and against Revenue. (3) As prayed for, liberty is reserved to re-open this appeal based on the outcome of review petition in R.P.(C) No.001422- 001497/2021 pending before the Hon'ble Supreme Court. No costs.”

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6.1 Further, the Tribunal in assessment year 2014-15 had an occasion to examine the same issue in IT(IT)A No.2696/Bang/2017 dated 12.8.2021 wherein held as under: “3. Brief facts of the case are as follow: The draft assessment order was passed on 31.12.2016, wherein it was concluded that the amount received by the assessee-company for sale of software would constitute royalty within the meaning of Article 12(3) of the DTAA and as per the provisions of section 9(1)(vi) of the I.T.Act. The A.O. also brought to tax the receipts from Indian customers on account of annual maintenance service, implementation and consultancy as fees for technical services u/s 9(1)(vii) of the I.T.Act and fees for included services under Article 12(4)(a) of India-US DTAA. The assessee filed objections before the Dispute Resolution Panel (DRP). The DRP issued directions dated 08.09.2017. The DRP rejected the objections raised by the assessee. Accordingly, final assessment order was passed on 12.10.2017 u/s 143(3) r.w.s. 144C(13) of the I.T.Act. Aggrieved by the final assessment order, the assessee has 1. preferred this appeal before the Tribunal. The learned AR, at the very outset, submitted that the issue in question is squarely covered in favour of the assessee by the judgment of the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence P.Ltd. v. CIT reported in [2021] 432 ITR 471 (SC), wherein it was categorically held that sale of software would not constitute royalty within the provisions of section 9(1)(vi) of the I.T.Act and Article 12(4)(a) of the DTAA between India and USA.

4.1 As regards the amounts received towards annual maintenance services, implementation and consultancy services, it was stated that when the receipts on account of sale of software itself not included as royalty. Miscellaneous

IT(IT)A Nos.1302, 1326/Bang/2024 C.O. No.34/Bang/2024 (in IT(IT)A No.1302/Bang/2024) Page 12 of 13 income on the same such as annual maintenance also cannot be brought to tax as fees for technical services. 4.2 The learned Departmental Representative was not able to controvert the submissions made by the assessee. In view of the judgment of the Hon’ble Apex Court, which is identical to the facts of the instant case, we hold that the payment received by the assessee-company towards sale of software would not constitute royalty and cannot be brought to tax. Further the miscellaneous receipts on account of sale of software also cannot be brought to tax as fees for technical services. It is ordered accordingly.

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Assessee is aggrieved by non-adjudication of grounds with regard to the reopening of assessment. Since we have decided the issue on merits, the grounds relating to reopening of assessment is not adjudicated and the same is rendered infructuous.