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2020 (3) TMI 969 - HC - Income TaxInterpretation of Section 44BB and 44DA - income on account of receipts from provision of software enabled solutions to the oil and gas industry along with providing annual maintenance services of the software - categorization of the income of the assessee - whether Royalty or FTS - whether the receipts from the activities rendered by the assessee fall under Section 44BB or fall within the purview of Section 44DA after the amendment introduced by the Finance Act, 2010? - HELD THAT:- If the nature of services rendered have a proximate nexus with the extraction of production of mineral oils, it would be outside the ambit of the definition of FTS. In the instant case, since the nature of services rendered by the Petitioner gets excluded from the definition of “FTS”, in light of what is discussed above, the next logical question that arises for consideration is whether the Petitioner can claim the benefit of Section 44BB. The answer to this question is contingent on factual determination, as the legal position has changed from April 01, 2011. It is now required to be considered whether the receipts in the hands of the assessee qualify to be “royalty” or not? If the answer to this question is in the affirmative, then in that event, the relevant provision would now be 44DA(1). CIT has also made certain observations that the assessee is not transferring the ownership in the software to the purchaser and is only granting a license to use the same. It has been further held that under Clause (v) of Explanation 2 to Section 9 (1) (vi) of the Act, transfer of all or any rights in respect of any copyright is ‘Royalty’. It has been held that if the software continues to be owned by the licensor, the use thereof would amount to ‘Royalty’. From the above it manifests that the contracts executed by the assessee are composite contracts and there is no bifurcation with respect to the nature of consideration relating to the services rendered. The assessee has not segregated its activities into supply of software and maintenance/support services. The entire income derived under the contracts was offered for taxation under section 44BB. Revenue in its note of arguments has contended that ‘supply of software’ is ‘royalty’ and ‘other services’ are ‘FTS’ and accordingly Petitioner is liable to pay tax under Section 44DA of the Act. Whether the services of updating the software/renewal of license or warranty services or maintenance of software are inextricably and essentially linked to the supply of the software and are ancillary services is a question of fact that would require determination after examining the dominant purpose of such contracts. In our opinion, there is no factual clarity on this aspect. We do not find any such distinction/segregation that can be inferred with respect to the receipts in the hands of the assessee under the contracts executed by it, referred above. The CIT being a fact-finding body has failed to give a reasoned order with respect to the nature of income and its subsequent application. In view of the afore-going discussion, we set aside the impugned order and the matter is remanded to the file of the Ld. CIT to assess the Petitioner’s income and tax payable thereon by first determining the nature of the income/receipts in the hands of the assessee in light of the observations made in this judgment. The CIT, would be required to give a finding of fact on the following aspect: Whether the income from services provided by the Assessee including the supply of software as well as ancillary services such as maintenance and installation would be covered under the definition of Royalty under the Explanation 2 to section 9(vi) of the Income Tax Act? If the answer to the above question is in the affirmative, the income would be taxable under section 44DA. On the contrary, if the answer is in the negative, the income of the assessee would not be taxable under section 44DA but section 44BB [as held in ONGC [2015 (7) TMI 91 - SUPREME COURT] as well as CBDT Circular No. 1862 dated 22.10.1990] since it is excluded from the definition of Fees for Technical Services under the Explanation 2 to section 9(vii) of the Act, being covered under the exception relating to mining and like activities provided in the definition of FTS. Lastly, though this ground has not been raised by the assessee, however, it is required to be examined whether the assessee’s case would be covered under the India-Australia DTAA. Article 12(3) of the said DTAA provides the definition of Royalty. The Petitioner is granted liberty to claim benefit under the said DTAA before the Ld. CIT if it wishes to do so. Besides, in the event the answer to the question is in the affirmative, the assessee shall also be at liberty to assail such findings on merit, as we have refrained ourselves from determining whether the income of royalty is excluded from the definition under the Act. The writ petition is allowed in the above terms.
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