TMI Blog2024 (4) TMI 310X X X X Extracts X X X X X X X X Extracts X X X X ..... Sh. Ravi Sharma, Adv. For the Revenue : Sh. Vizay B. Vasanta, CIT-DR ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: The present appeal has been filed by the assessee against the order dated 22.08.2023 passed by the AO u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961. 2. Following grounds have been raised by the assessee: 1. On the facts and circumstances of the case and in law, the order dated August 22, 2023, passed by the Learned Assistant Commissioner of Income Tax, Circle 1(3)(1), International Tax, Delhi (Ld. AO') under section 144C(13) read with section 143(3) of the Income-tax Act, 1961 ('the Act) is invalid, erroneous and bad in law; 1.1 On the facts and circumstances of the case and in law, the Respondent/DRP grossly erred in assessing the total income of the Appellant at INR 21,51,11,064 as against the returned income of INR 9,18,94,072 declared by the Appellant; 2. On the facts and circumstances of the case and in law, the Respondent/DRP grossly erred in taxing the receipt of software sub-license fees as income from other sources under section 56 of the Act and Article 23(3) of the India USA Double Tax Avoidance Agreement (DAA'). 3. On the facts and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the world through subsidiaries and affiliates. 6. The assessee filed its return of income on 31 March 2022 declaring total income of Rs. 9,18,94,072 /- and claimed refund for Rs. 1, 19,86,620/- The details of the Revenue of the assessee are as under: S. No Particulars Taxable/Non-taxable Amount 1 Income from sublicensing of standardized software tools to affiliates in India Nil 10,75,55,532 2 Fee for technical services received from affiliates in India (offered to tax under section 9(1)(vii) of the Act) Offered to tax 9,17,39,690 3 Interest on income tax refund Offered to tax 1,54,382 Total 19,94,49,604/- 7. The assessee has received receipts of Rs. 19,94,49,604/- from rendering certain technical services to its affiliates in India. Also, the Assessee in the course of its business had sub-licensed certain standard software tools to its affiliates in India for their internal use. During the assessment proceedings before the Assessing Officer the assessee submitted that it does not have a business connection in India u/s 9(1)(i) of the Income-tax Act, 1961 and the software sold by it does not fall under the ambit of 9(1)(vi) of the Income-tax Act, 1961 and is covered by the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the Wipro-GE (Indian AE), the AE makes use of the software to earn service income which constitutes 21% of its overall revenue from operations. During the subject year, 97% of this software income was earned by the AE through sale of software services to the assessee. IV. Thus, through the software sub-licensed by the assessee to the AE on a per-user per-month basis, sales are made back to the assessee. In this regard, the assessee's contentions with respect to the show cause notice are now considered. Primarily, the assessee has contended that the income from sublicensing of software to Wipro-GE is business income u/s 9(1)(i) of the Income-tax Act, 1961, which in the absence of PE, is not taxable. 3.7 The AO further noted that Article 7 of the Indian DTAAs deals with taxation of international business profits. As per which the source country may tax the business profits of a non-resident in India if the non-resident operates in India through a Permanent Establishment (PE). The PE threshold rule is based on physical presence of the non-resident. However, as the digitalized businesses do not require a physical presence m a source country and may operate remotely, the PE thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was also relied upon to argue that to constitute a business activity there must be continuity of activity or operation of the non- resident with the Indian party and a stray or isolated transaction is not enough to constitute business activity. He also placed reliance the Authority of Advance Ruling in the case of Honeywell Technologies SARL, where the AAR, after referring to the decisions of the Hon'ble Supreme Court in R.D. Aggarwal Co. (supra) and in Anglo French Textile Co. Ltd. v. CIT (1953) 23 LTR 101 (SC), summed up the essential features of the business connection thus: (a) a real and intimate relation must exist between the trading activities carried on outside India by a non-resident and the activities within India: (b) such relation, shall contribute, directly or indirectly, to the earning of income by the non-resident in his business; a course of dealing or continuity of relationship and not a mere isolated or stray nexus between the business of the non-resident outside India and the activity in India, would furnish a strong indication of 'business connection' in India. (c) a course of dealing or continuity of relationship and not a mere isolated or stray n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... centered around the transfer of copyright to the resident end-user, or the reproducibility of the software concerned, but that of use of said copyrighted software towards on a rental basis, to use the software to provide seroices sold back to the assessee. He accordingly held that payment for such use was taxable u/s 56 of the Income-tax Act and Article 23(3) of the India-USA DTAA. Article 23 of the India-USA DTAA. The Panel, therefore, finds no infirmity in the order of the AO. These objections is accordingly dismissed. 12. Further we have also gone through the comments of another member Shri Manvendra Goyal, which are reproduced below: Comments of Member-3 of DRP-I Assessee had supplied software to IB Indian affiliates for which it had received 10,75,55,532/-, which the AO had added to the assessee income as income from other source. The assessee has relied upon the following legal agreements:- Case-laws relied upon by the Assessee A. Software license fees is business income and not other income JCIT (OSD) vs. Merrill Lynch Capital Market Espana SA SV (112 taxmann.com 119) (Mumbai /TAT) Bangkok Glass Industry Co. Ltd. VS. ACIT (34 taxmann.com 77) (Madras HC) CSC Technology Singa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd some additional Salesforce objects. Chatter Plus users can be Chatter moderators and have access to standard Chatter people, profiles, groups, and files pages. 8 Oracle Variable Compensation Variable Compensation is a software related to human resource function that is used to create and manage multiple variable compensation plans. These plans can encompass everything from onetime ad hoc awards to stock options, bonus plans, non-cash incentives, and holiday gifts or bonuses. Assessee draws attention to the leading case of Engineering Analysis, the conclusions of which have been surmised by the assessee as follows:- The Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (p) Ltd v. Commissioner of Income Tax (2021) (supra). The Supreme Court in the case of Engineering Analysis (supra) drew the following conclusions: 1. Where the Indian importers do not acquire any copyright and/ or the right to sub-license, transfer, reproduce, etc., the software and instead acquired nonexclusive, non-transferable license to use the software, the transaction is essentially sale of a physical object which contains an embedded computer software, and is therefore, a sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agree with the conclusion included in the paragraph concerning undersea cables and pipelines as it considers that undersea cables and pipelines are industrial, commercial or scientific equipment and that payments made for their use constitute equipment royalties. 21. India does not agree with the interpretation in paragraph 9.2 of the Commentary on Article 12. It considers that a roaming call constitutes the use of a process. Accordingly, the payment made for the use of that process constitutes a royalty for the purposes of Article 12. It is also the position of India that a payment for a reaming call constitutes a royalty since it is a payment for the use of industrial, commercial or scientific equipment. 22. India does not agree with the interpretation in paragraph 0.3 of the Commentary on Article 12, It considers that a payment for spectrum license constitutes a royalty taxable both under India's domestic law and its treaties with many countries. (Positions on Article 12, OECD Commentary 2014) 155. In DIT V. New skies Satellite BV [20161 68 taxmann.com 8/28 Taxman 577/382 ITR 114 3A, 'New Skies Satellite ), a Division Bench of the High Court of Delhi correctly observed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncerning industrial, commercial or scientific experience; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment (Article 12.3) 157. Similarly, though the India-Singapore DTAA came into force on 8-8:194, it has been amended several times, including on 01-92201,9 and 233-2017, 9 However, the definition of royalties has been retained without any changes,. Likewise, the Convention between the Government of the Republic of India and the Government of Mauritius for the avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains and for the Encouragement of Mutual Trade and Investment, [ India-Mauritius DTAA was entered into on 6-12-1983, and was amended subsequently on 10-8-2016, 52 without making any change to the definition of royalties 158. It is thus clear that the OECD Commentary on Article 12 of the OECD Model Tax Convention, incorporated in the DTAAs in the cases before us, will continue to have persuasive value as to the interpretation of the term royalties contained therein. 159. Viewed from another angle, persons who pay TDS and/or ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal treaty, and a statute is made in furtherance of such treaty, a purposive rather than a narrow literal construction of such statute is preferred. The interpretation of such a statute should be construed on broad principles of general acceptance rather than earlier domestic precedents, being intended to carry out treaty obligations, and not to be inconsistent with them. 4) In a situation in which India is a signatory nation to an international treaty, and a statute is made to enforce a treaty obligation, and if there be any difference between the language of such statute and a corresponding provision of the treaty, the statutory language should be construed in the same sense as that of the treaty. This is for the reason that in such cases what is sought to be achieved by the international treaty is a uniform international code of law which is to be applied by the courts of all the signatory nations in a manner that leads to the same result in all the signatory nations. 167. The Revenue, therefore, when referring to royalties under the DAA, makes a distinction between such royalties, no doubt in the context of technical services, and remittances for supply of computer software, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taxable a per the judgement given above. Attention of AO and the concerned CIT (Int. Tax.) is invited to section 150(1) of the I.T. Act 1961, as per which, the AO would be able to reassess the income of and to give effect to any direction of any court. Hence, In case the judicial views were to change in favour of revenue regarding the matters dealt with, the same may be given effect to by an appropriate action to protect the interests of the revenue. In given facts the treatment of these as income from other sources does not seem proper. As there has been no findings of P/E there cannot be taxed as income of P/E. Following the ruling given Hon'ble Supreme Court in the case of Engineering Analysis keeping in mind of article 141 of the Constitution of India, in my humble view it would appear that a) That income required from provision of software services cannot be in absence of facts) income from other sources has to be taxed as business Income. b) Following Supreme Court Judgement, the same would also not be taxable as royalty. 13. The other member of the ld. DRP Shri Goyal held that, the judgment of Hon ble Apex Court in the case of M/s Engineering Analysis Centre of Excelle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an now manage, execute, and analyze promotions using the CPQ product line. With the Promotions Management application, marketing managers can create new promotions, get interal approvals for such promotions, and roll these promotions to their sales channels. 5 SFDC Einstein Analytics Empower customer-facing teams with intelligent analytics and predictions in Salestorce workflows 6 SFDc ELTON Used for information technology inventory, tool tracking, spare parts, evaluation, demonstration equipment and assets. 7 SFDC Chatter Plus The Chatter Plus license is for users who don't have Salesforce licenses but must have access to Chatter and some additional Salesforce objects. Chatter Plus users can be Chatter moderators and have access to standard Chatter people, profiles, groups, and files pages. 8 Oracle Variable Compensation Variable Compensation is a software related to human resource function that is used to create and manage multiple variable compensation plans. These plans can encompass everything from onetime ad hoc awards to stock options, bonus plans, non-cash incentives, and holiday gifts or bonuses. 17. From the description of the software licences sublicensed to the affi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In other words, the residuary provisions of Article 23 will not apply to items of income, which can be classified under other provisions of the tax treaty, but their taxability is subject to fulfilment of conditions mentioned therein. 20. In the facts of the present appeal, to our understanding, the receipts in dispute could have been characterized either as royalty income falling under Article 12 or business income under Article 7 of the tax treaty. However, in view of the ratio laid down in judicial precedents, the income is not taxable as royalty. Alternatively, it could have been taxed as business income under Article 7 of the tax treaty. However, in absence of a PE, it cannot be taxed in India. Thus, in our view, the income in dispute, since can be classified under other Articles of the tax treaty, they cannot be brought under the residuary provision contained under Article 23 of the tax treaty. In this context, we are supported by the decisions cited before us by learned counsel for the assessee. Therefore, we conclude that the income cannot be treated as other income under Article 23(3) of the tax treaty. The only provision under which it could have been taxed is as business ..... X X X X Extracts X X X X X X X X Extracts X X X X
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