TMI Blog2023 (9) TMI 215X X X X Extracts X X X X X X X X Extracts X X X X ..... thorities to suggest that the assessee has PE in India. Further the CIT(A) in all these assessment years in fact deleted the additions holding that Assessee does not have a PE in India. We also find that the CIT(A) while deleting the penalty levied u/s 271(1)(c) held that the assessee has not concealed any particulars of income and has disclosed all material facts during the assessment as well as MAP proceedings. CIT(A) has considered all the aspects of the material and concluded that the assessee has disclosed all material facts during the assessment as well as MAP proceedings and has not concealed any particulars of income. We see no infirmity in the order passed. We further observe that at best it is only a difference of opinion as to whether there exists PE in India for Assessee or not. There is no conclusive proof that the assessee has PE in India. In the penalty proceedings the AO simply relied on the MAP proceedings in holding that the assessee has PE in India which in fact is not correct. As we said earlier it is only on assumption that the assessee has PE in India and by way of deeming fiction the profits were attributed for such assumed PE by the authorities in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the non-resident payee as is evident in the instant case wherein the assessee filed nil Return of Income considering that it had no PE which was subsequently negated by the department during the assessment proceedings and also admitted by the assessee in MAP proceedings that it was having a taxable presence in India, therefore, penalty provisions u/s 271(1)(c) would be applicable in its case for concealment of particulars of income. (v) Whether on the facts and circumstances of the case the Ld.CIT(A) has erred in holding that the assessee ahs not concealed any particulars of income and quashing the impugned penalty order u/s 271(1)(c) without appreciating the fact that the Hon ble High Court of Karnataka in the case of M/s Toyota Kirloskar Motor (P) Ltd. Vs. UOI [2019] 109 taxmann.com 137 (Karnataka HC) has also that the MAP order is an adjustment to assessment order and is not annulment of assessment order. 2. The Ld. DR submits that in all these assessment years the assessee filed returns of income declaring Nil income and the assessments were completed u/s 143(3) r.w.s. 144C of the Act bringing to tax the amounts received by the assessee towards supply of spares contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Centre of Excellence Private Limited Vs. CIT 432 ITR 471 held that supply of software and document is not royalty. The Ld. Counsel further referring to MAP proceedings submits that it is only on assumption and by deeming fiction it was held that the assessee has a PE in India and the Assessing Officer has not established that there exists PE in India for assessee. Therefore, the Ld. Counsel for the assessee submits that there is no concealment of income or furnishing all inaccurate particulars by the assessee which warrant any penalty u/s 271(1)(c) of the Act. 4. Heard rival submissions, perused the orders of the authorities below. 5. We observe that the assessee in all these assessment years filed returns declaring NIL income. The assessments were completed by the AO treating the amounts received by the assessee for report maintenance support services, supply of spares, supply of hardware software and installation and training services, repair support, software maintenance support, etc. as royalty on the ground that the assessee has existence of PE in India. However, the Ld.CIT(A) deleted the additions made in all these assessment years holding that there is no existence o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sclosed by him. 5.1.3 In the present case, the AO has levied penalty u/s 271(1) (c) of the Act on account of Concealment of Particulars of Income' which is being contested by the Appellant in this appeal. Accordingly, my findings with reference to the above has been laid down in the subsequent paragraphs. 5.2 The Appellant's case consists of the following issues on merits: 1. Existence of PE in India and consequent taxability of the Offshore Supply of Hardware / Equipments, 2. Taxability of Hardware Maintenance Services, 3. Taxability of the Supply of Software and Documentation, 4. Taxability of Software Maintenance Services. 5.2.1 With regard to the point 1 and 2 above, the Appellant has submitted that it does not constitutes a PE in India and accordingly, the Appellant has not offered its receipts on account of Offshore Supply of Hardware and Equipments. The said fact was also supported by the Advance ruling obtained by the Appellant's client Airport Authority of India in 292 ITR 102 by the Hon ble Authority of Advance Ruling wherein it was held as under: there is nothing in assessment orders relating to 'R' which subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is made clear in that Agreement that Raytheon's activities under the contracts (for hardware software repairs) shall remain confined to their work outside India. The agreement between the applicant and Grintex negates the inference that Grintex discharges any responsibility in connection with hardware repair support contract or the software maintenance contract as an agent of Raytheon. [Para 9.4] 5.2.2 Accordingly, the Appellant had submitted that the Offshore Sale of Hardware / Equipments is not taxable in India. The AO, however, held that these exist a PE in India and hence, attributed the Receipts from Offshore Supply as Business Receipts taxable in India and also taxed the revenues received under the Hardware Maintenance Services. 5.2.3 It is pertinent to note that against the Assessment Orders passed by the AO, the Appellant was provided relief from this office for years AY 2000-01 to AY 2017- 18 and it has been consistently held by this office and my predecessor(s) that the Appellant does not constitute a PE in India accordingly, the Offshore Supply of Hardware/ Equipment was held as not taxable in India. In addition, the Hon'ble AAR in its order also he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.2.5 With regard to the Taxability of the Supply of Software, the Appellant also placed on record the explanation that it followed a view that the said supply do not amount to the sale of copyright and accordingly, the receipts on account of the said supply cannot be regarded as Royalty. The said view was based on the various judicial pronouncements which included the judgments of Jurisdiction High Courts which is now supported by the recent judgment of Hon'ble Supreme Court of India in the case of Engineering Analysis Centre of Excellence Private Limited vs. CIT [2021] 432 ITR 471 wherein it was held that since, the income earned by the Appellant from transfer of licensed product, being in the nature of transfer of copyrighted article would not constitute Royalty under the India-US DTAA, the same would fall under Article 7 (Business Profits) of India-US DTAA, and in the absence of a PE of the Appellant in India, the same shall not be taxed in India. 5.2.6 The Appellant further submitted that it had filed an application under Mutual Agreement Procedure ( MAP ) with the Competent Authorities and the issue of taxability of supply of software was settled in order to buy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic, unless such copies are already in circulation, and the other acts mentioned in section 14 of the Copyright Act. (iv) A licence from a copyright owner, conferring no proprietary interest on the licensee, does not entail parting with any copyright and is different from a licence issued under section 30 of the Copyright Act, which is a licence which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the licensed computer software product over which the licensee has no exclusive rights, no copyright is parted with and consequently, no infringement takes place, as is recognized by section 52(1 )(aa) of the Copyright Act. It makes no difference whether the end-user is enabled to use computer software that is customized to its specifications or otherwise. (v) A non-exclusive, non-transferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights mentioned in section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer of licensed product, being in the nature of transfer of copyrighted article would not constitute Royalty under the India-US DTAA. The same would fall under Article 7 (Business ProfitsI of India-US DTAA, and in the absence of a PE of the Appellant in India (as discussed aboveI, the same shall not be taxed in India. Thus, the around is answered in favour of the Appellant. Considering the above facts that the issue on merits have already been decided in favour of Appellant in its own case and is squarely covered by the decision of Hon'ble Supreme Court, the penalty levied by AO cannot sustain. 5.2.8 Further, with regard to the taxability of the Software Maintenance Services, the AO has held that the services are in the nature of Fees for Included Services and accordingly, made an addition to the total income and consequently levied Penalty under section 271(1)(c) of the Act upon settlement under MAP. However, the AO's view was rebutted by the Appellant by contending that the said services are ancillary and subsidiary to the supply of software embedded in the hardware (as also decided by AAR in its ruling) and since supply of software is no longer consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 271 (1 )(c) of the Act that which information / fact was concealed. Therefore, it can be said that at the most there exists a difference of view between the AO and the Appellant. 5.2.11 The Appellant also submitted that it had not concealed the particulars of its income as all the relevant facts and information were submitted during the course of the assessment proceedings as and when called for and the positions taken by it was basis the various judicial pronouncements available. Thus, it can be said that the above issues of existence of PE in India, Royalty, Fees for Included Services, and the related Treaty issues are interpretation issues wherein the Appellant has taken a view and the AO has taken another view thus, it cannot be regarded as Concealment of Income. 5.2.12 Further, this office has also passed an Order dated 13 December 2022 disposing the Penalty levied by the AO for the AY 2007-08 i.e., MAP year bearing similar facts to the subject year wherein the penalty was deleted holding as under: 5.1.15. Further, I find merits in the Appellants submission placed on record and it is also pertinent to note that the addition in the total income of the Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offered by the Taxpayer was not found to be acceptable. Thus, the issued discussed above are merely interpretational issues between the Assessing Officer and the Appellant and cannot be held as Concealment or Furnishing of Inaccurate particulars of Income upon which Penalty u/s 271(1)(c) of the Act can be levied. 5.2.15 Similar to AY 2007-08, I find merits in the Appellants submission placed on record and it is also pertinent to note that the addition in the total income of the Appellant in the MAP Effect order passed by the AO under section 90/143(3) of theAct read with rule 44G of the Rules was merely an adjustment on account of settlement resolution reached between the Competent Authorities of the two nations. It is also to be noted that a resolution under MAP is an outcome of a negotiated process based on the detailed understanding of the facts of the case and is based on mutual discussions between the competent authorities.lt also involves submission of information and relevant facts/information basis which the competent authorities arrives to a settlement. Accordingly, it can be said that the Appellant has disclosed all material facts during the assessment as well as MA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Hon ble High Court held that section 271(1)(c) of the I.T. Act is intra vires the constitution in so far as the imposition of penalty on amounts determined pursuant to convention for Avoidance of Double Taxation between Union of India and other sovereign countries. We further observe that the Hon ble High Court held that the Explanation 7 would not empower the authorities to levy penalty automatically for the transactions where MAP proceedings are applied. It was also held that the onus lies on the assessee to establish that the addition finally decide by the MAP is not due to concealment of income or furnishing all inaccurate particulars. Therefore, this decision of the Hon ble Karnataka High Court will not come to the rescue of the Revenue as canvassed by the Ld. DR. 10. In the circumstances, we hold that there is no concealment of income or furnishing inaccurate particulars of such income by the assessee in any of these assessment years and thus, we sustain the order of the Ld.CIT(A) for the assessment years 2004-05 to 2011-12 and 2014-15 to 2016-17. 11. In the result, all the appeals of the Revenue for the assessment years 2004-05 to 2011-12 and 2014-15 to 2016-17 are ..... X X X X Extracts X X X X X X X X Extracts X X X X
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