INDIA SOFT TECHNOLOGIES PVT. LTD.,PUNE vs. DDIT (INT. TAX.)-I, PUNE

आदेश आदेश / ORDER आदेश आदेश

PER D. KARUNAKARA RAO, AM : There are 4 appeals filed by the assessee under consideration involving assessment years 2008-09 to 2011-12.

2 ITA Nos.1709 to 1712/PUN/2013 India Soft Technologies Pvt. Ltd.,

purchase of the software products held to be chargeable to tax in

the hands of residents, payee (Resident of UK/USA).

(2) Assessee raised the issue of absence of Permanent

Establishment (PE) in India for the said supply of software.

(3) Further, assessee also raised the issue relating to

correctness of retrospective application of Explanation 4 to section

9 of the I.T. Act. The nature of the payments according to the

assessee did not constitute Royalty. Therefore, the provisions of

section 195 has no application. Consequently, the order passed by

the AO u/s.201 r.w.s.201(1A)of the Act is unsustainable.

Grounds Nos. 2, 3 and 4 are related to the issues already

discussed above.

assessment years 2008-09 include that the assessee claims that he is a

distributor of software produced and marketed by certain companies

from UK/ USA. The modus operandi of the assessee’s business

according to him includes that suppliers develops the software solutions

abroad. Assessee is appointed as distributor for marketing of the said

products. Assessee receives orders from the customers. Orders are

placed in the name of the supplier company. The supplier ships the

software products to the customers directly. The supplier raises the bill

in the name of the assessee company. In turn, assessee raised the bill in

the name of the customers. Assessee makes the payments to the

suppliers abroad.

Enterprise ( in short ‘PSE’), the Lanner Group Ltd., UK are the suppliers

3 ITA Nos.1709 to 1712/PUN/2013 India Soft Technologies Pvt. Ltd.,

from UK. GAMS Development Corporation of USA is another supplier.

Assessee paid Rs.47,77,786/- to the said suppliers. Major remittances

are made to the Lanner Group Ltd., UK for purchase of software for

resale. While making the said payments to suppliers, assessee did not

the effect the TDS and did not consider the payments as Royalty. In the

proceedings u/s.201 and 201(1A) of the I.T. Act, AO raised the issue of

assessee’s failure to make TDS on the said remittances to the suppliers

at USA/UK. On examination of the said agreements with the said

suppliers, AO came to the conclusion that assessee has got right to sub-

lease the said products. For example, the clauses of the agreement dated

15-06-2006 of the assessee with Process System Enterprise, UK are

cited. As per Para No.2.2 of the said agreement, PSE (a supplier) grants

the assessee a non-exclusive, non-transferable and non-assignable

license to use the PSE software. Similar reading is done from the

agreement with Lanner Group Ltd. UK. From these, the AO concluded

that the license assessee receives from Lanner Group Ltd. is one with

the right to grant the sub-licenses to the end users to use the software.

AO found the element of Royalty in the said expressions. AO analysed

the provisions of section 5(2) and section 9 of the Act to conclude that

the payments made by the assessee to the suppliers constitute a taxable

Royalty. Contents of Para Nos. 5.9 and 5.10 provide necessary

explanation for holding the payments as Royalty. He also dealt with the

newly introduced Explanation 4 retrospectively to section 9 of the Act

and held the payments made by the assessee to non-resident suppliers

for purchase of software as in the nature of Royalty within the meaning

of section 9(1)(vi) of the Act or the relevant Article of the DTAA.

the Article 12 of Indo-USA DTAA and Article 13 of Indo-UK DTAA before

4 ITA Nos.1709 to 1712/PUN/2013 India Soft Technologies Pvt. Ltd.,

concluding the payments constitutes Royalty. He also extracted certain

decisions in support of his conclusions. He also considered the

assessee’s reply in this regard. In Para No.8, there is reference to the

judgment of Hon’ble Karnataka High Court in the case of CIT Vs. M/s.

Samsung Electronics Company Ltd. vide ITA No.2808 of 2005 dated

15-10-2011 and many other decisions. In the Para No.9, the AO

extracted the relevant portion from the said judgment and many other

judgments from the same High Court. He also cited various decisions

from AIR involving the cases of Millennium I.T Software Ltd. AAR

No.835 of 2009, dated 28-09-2011 and Citrix Systems Asia Pvt. Ltd. AAR

No.922 of 2009 dated 06-02-2012. Eventually, the AO concluded in Para

No.10 of his order in favour of treating the assessee in default and

invoked the provisions of section 201 and 201(1A) of the Act. For the

sake of completeness of this order, relevant Para No.10 is extracted here

as under :

“10. Accordingly, Assessee's contention is not acceptable, In view of above facts and case laws cited, the above mentioned payments received by the non-resident suppliers from the assessee are in the nature of Royalty within the meaning of section 9(1)(vi) of the Income-tax Act, 1961 and within the meaning of Article 12/13 of the DTAA between India and USA/UK. Therefore, the provisions of section 195 of the Income-tax Act. 1961 are squarely applicable for payments of licence fee and the assessee was bound by law to deduct the taxes before remitting the money to non- residents. By not deducting or withholding taxes, the assessee has committed a default in terms of sec. 201 (1) and 201(1A) of the Income-tax Act, 1961 and is therefore treated as "assessee in default" as per the provisions of section 201(1). In case of suppliers from UK, the assessee has entered into agreement on or after 1st June 2005, hence tax is to deducted at rate of 10% plus surcharge plus Education Cess as per section 115A(1)(b)(AA) of the Income-tax Act, 1961. In case of supplier from USA, as the assessee has not given evidence that agreement is entered on or after 1st June 2005 to claim the lower rate of 10% as per section 115A(1)(b)(AA) of the Income-tax Act, 1961, the tax to be deducted is calculated @15% as per DTAA between India and USA. Considering the provisions of section 201(1A), the assessee is also liable to pay simple interest @ 1% for every month or part of a month on the amount of such tax on which such tax was deductible to the date on which such tax is deducted.”

5 ITA Nos.1709 to 1712/PUN/2013 India Soft Technologies Pvt. Ltd.,

of Rs.3,66,100/- total payment raised on this benefit for this year works

out to Rs.9,47,182/-.

CIT(A) stating that the order passed by the AO u/s.201/201(1A) of the

Act is bad in law. He also criticizes the finding of the AO in treating the

assessee company as the assessee in default. Assessee is also critical of

AO’s finding that the payments made by the assessee constitute Royalty.

As such, there are specific issues raised before the CIT(A) as in the case

of the appeal before the Tribunal with reference to (1) existence of

Permanent Establishment of the payees and (2) similar additions were

made for A.Yrs. 2009-10 to 2011-12. Total payments raised is tabulated

as under :

Assessment Year Additions made 2009-10 1,25,463-/ 2010-11 1,61,307/- 2011-12 11,87,422/

They revolve around the finding of the AO that the payments made by the

assessee to purchase the software products constitute Royalty and the

retrospective amendment to section 9 qua the insertion of Explanation 4.

There is a reference to Article 13 of Indo-UK DTAA and Article 12 of

India-USA/Indo-Ireland and Indo-Canada DTAAs. Further, there is

discussion in Para Nos. 2.1.27 of the order of CIT(A) with reference to

Article 2 of the agreements under the heading “grant of licences” and

submitted that the suppliers granted to the assessee the dealership

rights to sub-licence the softwares in the territories of the customers and

has been given the commercial right to demonstrate the software to the

potential customers along with training. The dealer has right to

6 ITA Nos.1709 to 1712/PUN/2013 India Soft Technologies Pvt. Ltd.,

maintenance and supply support for the software to consumers.

Eventually, the CIT(A) agreed with the finding of the AO as per the

discussion given in Para Nos. 2.1.28 and 2.1.29 of his order. Relevant

paras are extracted here as under :

“2.1.28 It can be seen from the above provisions of the agreements that the Appellant has been granted right to sub-license software by Performance Fluid Dynamics Limited, Lanner Group Limited, Scale-up and by Dyadem International Limited. In all the cases, the Appellant is also providing services of implementation, maintenance support and training. Further, the Appellant has been granted right to modify software with the consent of software developer to meet specific requirements of the customer by Performance Fluid Dynamics Limited and Lanner Group Limited. It is clear that all the above functions cannot be performed without the full knowledge of technical information in the software. These functions also cannot be performed without using copyright of the owner. Therefore, this is not an ordinary case, in which the distributor has purchased and sold software products to the customers but also has performed many other critical functions adding value to the products requiring use of copyright of the owner. Therefore, I hold that the Appellant has used copyright of the owner for performance of value added functions, for which the Appellant has paid ‘royalty’. As mentioned earlier, this amount is taxable under the Income Tax Act. Since the Appellant has used copy right, it would be taxable under the relevant DTAA as well.

2.1.29 With the result, I confirm the action of the learned AO to tax this amount as a ‘royalty’ on which the tax payer ought to have deducted tax. Accordingly, I hold that the demand of tax and interest raised by the learned AO does not require any interference.”

Similar is the finding in the appeals pertaining to A.Yrs. 2009-10 to

2011-12.

the current appeals for all the 4 assessment years. Issues as narrated in

the preceding paragraphs are common.

of the suppliers, i.e. PSE, Lanner Group Ltd.,UK and GAMS Development

Corporation and submitted that there is no ‘PE’ for the said concerns in

India. Referring to the way the officers applied Articles 12 and 13 of the

respective DTAAs with USA and UK respectively, Ld. AR submitted that

7 ITA Nos.1709 to 1712/PUN/2013 India Soft Technologies Pvt. Ltd.,

the existence of the ‘PE’ is relevant before any payments of this kind are

to be brought under the said Articles 12 and 13, as the case may be, of

the respective DTAAs. Bringing our attention to the findings of the

Hon’ble Bombay High Court in the case of CIT Vs. Siemens

Aktiongesellschaft 15 DTR 0233, Ld. AR for the assessee submitted that

the said judgment is relevant for the legal proposition that in the absence

of PE, the amounts in respect of which Tribunal has recorded a finding

that the income sought to be assessed as Industrial or Commercial

profits and not assessable to tax in India as admittedly assessee has no

PE in India. The question of applying the deeming provisions would not

arise. According to the Ld. AR, without going into these issues, such

income would not be taxable in terms of the DTAA which is more

beneficial. He also brought our attention to the decision of the Tribunal

in the case of M/s. Reliance Industries Ltd. – ITA Nos. 1980, 1981, 1983,

2984, 2523, 2529/Mum/2008 dated 18-05-2016 and submitted that

said decisions are not finally concluded according to the Ld. AR. In view

of the significance of this aspect relating to the existence of PE of the

payees, the applicability of the provisions of Article 12 and 13 of the

respective DTAAs is premature.

on the nature of payments as Royalty or otherwise, Ld. AR for the

assessee submitted that there are various decisions in this regard

including the judgment in the case of Hon’ble Karnataka High Court in

the case of Samsung Electronics Company Ltd. vide ITA No.2808 of

2005 dated 15-10-2011 and the judgment of Hon’ble Delhi High Court

in the case of Pr.CIT Vs. M. Tech India (P) Ltd. 287 CTR 213 (Del.) and

M/s.Reliance Industries Ltd. (supra). AO and the CIT(A) did not consider

these decisions before holding the said payments constitutes the Royalty.

8 ITA Nos.1709 to 1712/PUN/2013 India Soft Technologies Pvt. Ltd.,

For the reason of bringing clarity and applicability of the relevant

provisions with regard to the existence of the PE as well as applicability

of various decisions of various High Courts, Ld. AR for the assessee

submitted that all the issues may be remanded to the file of AO for fresh

adjudication on the entire gamut of the issues.

assessee, we find the allegation of neither the subleasing nor the

modification of the software products imported by the assessee have

been attempted by the assessee. He merely stated that the payments

made for use of copyright articles does not constitute Royalty.

AO and the CIT(A). Bringing our attention to the dealership agreement

with the suppliers, Ld. DR submitted that the assessee has got the right

to sub-lease the software products received by the assessee. Assessee

has been given the commercial rights, distribution rights, right to

demonstrations, right to modification of the software etc by the suppliers.

However, he never pointed out any case of such sublease or whether

assessee has undertaken any modification of the software in order to

cater the needs of the specific customers in India. Further, he submitted

that the assessee has raised this Ground No.3 linked to Ground No. 1 of

grounds of appeal and mentioned that the said grounds are never raised

either before the AO or before the CIT(A). In the absence of finding of fact

on the existence of PE payees, there is a need for finding of fact on this

issue by the lower authorities.

nature of payments as Royalty, rights given by the suppliers to the

dealer, applicability of the provisions of section 195 of the Act etc. On

9 ITA Nos.1709 to 1712/PUN/2013 India Soft Technologies Pvt. Ltd.,

hearing both the sides, we find there are some gaps relating to the facts

which are required to be collected by the revenue authorities.

(a) Regarding the right to sub-lease the software products, no finding

of fact is gathered by the authorities that assessee has actually

subleased the software products to various dealers/sub-dealers. Same is

the case with regard to the right to modify the existing software received

from the suppliers. Specific to the products received by the assessee for

the customers in India, one need to examine if these products were infact

subjected to modifications if any, to meet the specific requirements of the

customers in India, before the payments are remitted to the suppliers.

AO need to examine subleasing of the dealership rights to others as

authorized by the agreement between the suppliers and the assessee.

There is need for remanding the issue to the file of AO for fresh

consideration.

(b) Regarding the existence of PE for the payees abroad UK/USA, this

issue has come up for the first time before the Tribunal. The fact on the

existence of PE, according to Ld. AR for the assessee, is a matter both on

facts and law. Therefore, this issue is rightly raised from the legal point

of view and prayed for admitting the same and remanding to the file of

AO for adjudication, if required. Considering the fact that this issue is

also partly legal in nature, we are of the opinion that Ground No.3 and

other related limbs of grounds of appeal are admitted and remanded to

the file of AO for a decision before invoking the Article 12 and 13 of the

respective DTAAs. Further, we notice that the above referred issues

relating to PE are required to be adjudicated considering the judgmental

law in existence as on date. There is need for remanding the issue to the

file of AO for fresh consideration.

10 ITA Nos.1709 to 1712/PUN/2013 India Soft Technologies Pvt. Ltd.,

(c) Regarding the nature of payments, whether it constitutes Royalty

or otherwise, the same depends on facts of each case which are to be

gathered by the AO in the proposed remand proceedings. There are

divergent decisions in law on the said Royalty. If the remittances are

relatable to mere receiving the software products from the suppliers and

passing it on to the customers, playing the role of a dealer, we do not find

there is any Royalty involved in these remittances. However, as argued

by the Ld. DR for the Revenue, relying on the orders of the AO and the

CIT(A), if there is exploitation of the software products obtained from the

suppliers for commercial benefits of the assessee or its customers

through the mechanism of subleasing or through mechanism of

incorporating the modification in the said software to meet the demands

of the customers, the conclusions may vary depending on the facts.

Therefore, we are of the opinion that the AO should invoke the requisite

verification and modification and application of law to the above referred

issues and decide the issue afresh as per the law. AO shall grant

reasonable opportunity of being heard to the assessee. Accordingly, the

grounds raised by the assessee for A.Y. 2008-09 are allowed for

statistical purposes.

statistical purposes.

ITA Nos. 1710 to 1712/PUN/2013 (By Assessee – A.Yrs. 2009-10 to 2011-12)

referred issues are found to be common. Accordingly, the arguments

and the counter arguments of the assessee and the Ld. DR for the

Revenue respectively are also identical. Considering our finding on these

issues in Para No.13 of this order, we are of the opinion that all the

11 ITA Nos.1709 to 1712/PUN/2013 India Soft Technologies Pvt. Ltd.,

grounds raised by the assessee in the above assessment years should

also be remitted to be file of AO for fresh adjudication. Accordingly, all

the grounds raised by the assessee in the abovementioned three appeals

are also allowed for statistical purposes.

12 are allowed for statistical purposes.

statistical purposes.

Order pronounced in the open court on this 24th day of January, 2018.

Sd/- Sd/- (VIKAS AWASTHY) (D. KARUNAKARA RAO) �याियक �याियक सद�य �याियक �याियक सद�य सद�य /JUDICIAL MEMBER लेखा सद�य लेखा लेखा सद�य लेखा सद�य सद�य / ACCOUNTANT MEMBER सद�य पुणे Pune; �दनांक Dated : 24th January, 2018. सतीश आदेश क� �ितिलिप अ�ेिषत आदेश क� �ितिलिप अ�ेिषत/Copy of the Order forwarded to : आदेश क� �ितिलिप अ�ेिषत आदेश क� �ितिलिप अ�ेिषत

अपीलाथ� / The Appellant 1. ��यथ� / The Respondent 2. 3. CIT(A)-IT/TP, Pune 4. CIT- IT/TP, Pune िवभागीय %ितिनिध, आयकर अपीलीय अिधकरण, “A Bench” 5. Pune; गाड� फाईल / Guard file. 6.

आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER,स आदेशानुसार

स�यािपत �ित //True Copy// Senior Private Secretary //True Copy// आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune