9911796707
TMI Blog2024 (5) TMI 160X X X X Extracts X X X X X X X X Extracts X X X X ..... bad in law being in violation of section 144C(10) of the income-tax Act, 1961 (Act) and deserves to be quashed. 2. That without prejudice to the above, the Ld. AO has erred in law, in disregarding and mis-interpreting the fact that the sum received by the Appellant towards software licensing fees was in the nature of consideration for a copyrighted article and not copyright. 3. That the Ld. AO has erred in law, in disregarding various judicial precedents (including the judgement of Hon'ble Apex Court) wherein it has been settled that consideration for supply of copyrighted article does not tantamount to Royalty under the provisions of the Double Taxation Avoidance Agreement (DTAA'). 4. That the Ld. AO has erred on facts and in law, in alleging software licensing fee as 'Royalty though he could not factually demonstrate that the licensee namely M/s Reliance Jio Infocomm Limited (RJIL") had any rights to make copies of the software or to commercially exploit the rights in such software as envisaged in the Copyright Act, 1957. 5. That the Hon'ble DRP has erred in law and on facts, in not appreciating that the support and maintenance services being ancillary and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omers in India. The case of the assessee was selected under CASS for scrutiny on the reason "High Ratio of Refund to TDS u/s 195". Statutory notices were issued and served upon the assessee electronically through the ITBA Portal which was duly complied with. In its reply, the assessee stated that the impugned receipts are not taxable in India as the underlying services do not fall within the purview of Royalty/ Fees for technical services/Fees for Included Services ("FTS/ FIS") under Article 12 of India-USA DTAA and therefore shall qualify as business income of the assessee which is not chargeable to tax in the absence of PE of the assessee in India. 3.1 During the assessment proceedings, the Ld. Assessing Officer ("AO") after analysing the Software License Agreement and disregarding the submissions/reply filed by the assessee arrived at a conclusion that the impugned receipts pertaining to supply of software (including AMC services) are taxable as FTS. Accordingly, he proposed an addition of Rs. 4,94,29,858/- as FTS income of the assessee for the following reasons recorded by him in the draft assessment order: "(a) As per the relevant Software License Agreement, "software" mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d client to use and operate the software relating to transmission control protocol and video optimisation solution in India subject to the terms and conditions and restrictions specified in the Agreement. c) The client has no right whatsoever to modify, alter, decompile, translate or disassemble any source code of the software. The source code and underlying algorithm of the software are the assessee's proprietary trade secrets. d) In order to enable the client to effectively use and operate the software, the assessee will provide free annual maintenance contract services for a period of one year and thereafter such AMC services shall be optional. e) The assessee shall implement optimisation solution into production network of the client with the technical specifications in the Software License Agreement. The services provided under this Agreement include installation/implementation of the software (including testing, production cut over and transition to operations) and onsite support services either directly or through sub-contracting for troubleshooting, resolving production/lap platform issues, implement and maintain proactive monitoring procedures, maintain a list of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.05.2022 observed that the Software License Agreement dated 20.02.2017 captures two distinct transactions namely, a) supply and license of certain software and b) provision of AMC services to the licensee and hence rejected the assessee's contention that both the transactions are inextricably related and integrated with each other under Article 12 of the India-USA DTAA. 3.4 The Ld. DRP by placing reliance on the decision of the Hon'ble Supreme Court in the case of Centre of Excellence Pvt. Ltd. vs. CIT (2022) 3 SCC 321 and considering the terms of the Software Licence Agreement concluded in para 2.5 of its directions/ order that software licence fee will not constitute royalty income but business income under Article 7 of India- USA DTAA which is not taxable in India in the absence of PE of the assessee. 3.5 As regards the AMC charges, the Ld. DRP held the same to constitute FTS/FIS within the meaning and scope of Article 12(4)(b) of India-USA DTAA recording its observation and findings in para 2.6 to 2.10 of its directions/ order which are reproduced hereunder: "2.6 As regards the annual maintenance charges, the AO held that as the rate of taxation of both software as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... updates, upgrades etc; 24*7 support on phone, email, Web based, remote access; option available to licensee to create unlimited support Portal login IDs etc. The Agreement mandates that the Licensor shall provide the highest level of support for various types of offerings. The customer / user thus obtains access to the assessee's live and online technical support resources for various support services and processes in relation to incident management, problem management, change management process/service requests, service operation, release management, configuration management, investigation, diagnosis, resolution and recovery, incident closure etc. 2.8 The technical support services in relation to the assessee's products clearly require technical expertise which is rendered by the assessee. These services involving human intervention and skill entail application of the technology contained therein to enable the user to independently use the products. The training provided by the assessee (as stated at page-16 of the assessee's Form 35A objections filed in DRP proceedings) allows the user to acquire / develops the capability to independently use the products such that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Metro & Metro, Agra vs. Assessee (I.T.A. No. 393/Agra/2012), Hon'ble Agra Bench of ITAT observed as under- 20. The principle of law, as clearly discernable from the observations made by Hon'ble Delhi High Court in Bharati Cellular's case (supra), is that the word technical services appearing in Explanation 2 to Section 9 (1) (vii) would also have to be construed as involving a human element. In other words, when services have no human element involved, such services cannot be treated as 'technical services' for the purposes of Section 9(1)(vii). 21. In Siemens case (supra), however, the coordinate bench went much beyond what was held by the Hon'ble Courts above. The coordinate bench has concluded that, "Thus if a standard facility is provided through a usage of machine or technology, it cannot be termed as rendering of technical services. Once in this case it has not been disputed that there is not much of the human involvement for carrying out the tests of circuit breakers in the Laboratory and it is mostly done by machines and is a standard facility, it cannot be held that (the assessee) is rendering any kind of technical services to assessee. These o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jurisdictional Delhi High Court in assessee's own case in Openwave Mobility Inc. vs. DCIT (W.P(C) 13659/2022) while addressing the writ application filed by the assessee against the lower tax withholding certificate issued by the Ld. AO for AY 2023-24. On the basis of this order of the Hon'ble Delhi High Court, a Nil withholding certificate was issued by the Ld. AO following the direction of the Hon'ble DRP and the decision rendered by the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. (supra). The Ld. AR relied on the observations of the Ld. DRP contained in para 2.5 of its order. 5.1 As regards AMC charges, the Ld. AR submitted that the AMC services provided by the assessee are ancillary and subsidiary to the licensing of software. Since such services are simply an extension of the original transaction (being supply of the software) their characterisation shall be the same as that of the predominant transaction. In support thereof, he relied on the decision of the Delhi Bench of the Tribunal in the case of Aspect Software Inc. vs. ADIT (2015) 61 taxmann.com 36 (Delhi ITAT) and Infrasoft Ltd. vs. ADIT (2009) 28 SOT 179 (Delhi ITAT) which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be governed by the provisions of India-USA DTAA. Also, the assessee does not have a PE in India. The assessee had entered into a Software Licensing Agreement for supply and license certain Software and Service Level Agreement (forming part of Software Licence Agreement) to provide AMC services to Reliance/Jio/ RJIL. During the relevant AY, the assessee received software licensing fee of Rs. 4,35,39,550/- and AMC charges of Rs. 58,90,308/- aggregating to Rs. 4,94,29,858/-. So far as the issue relating to the taxability of Software Licensing Fee of Rs. 4,35,39,550/- is concerned, we observe that the Ld. DRP has examined this issue in detail and recorded its observation finding in para 2.5 of its order reproduced below:- "2.5 As regards the first set of transactions namely supply and license of software, the licensor grants the licenses to use and operate the software in india as follows - Non-exclusive, non-transferable and sub licensable to licensee's affiliates; unlimited; perpetual; unlimited use and irrevocable etc. As per clause 3 (License Restrictions) of the Agreement, though licensee will not (a) sell, rent, lease, distribute or sub-license the software or document ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Optimisation Solution in the territory of India. 10.1 As consideration, the petitioner receives licensing fees from RJIL. 11. Inter-alia, the petitioner's claim is, that RJIL has only been allowed to use the licence software and that the rights qua the same have not been transferred. It is, thus, the petitioner's submission, that it is not liable to tax the license fee received from RJIL. 12. In support of its submission, the petitioner relies upon the order dated 17.05.2022 passed by the Dispute Resolution Panel-2 ["DRP"] with regard to Financial Year (FY) 2018-2019 [AY 2019-2020]. 13. In particular, our attention has been drawn to the following observations made by the DRP: - "2.4 The submissions have been examined along with the materials on record. It is seen that the Software License Agreement dated 20.02.2017 captures two distinct transactions namely (a) supply and license of certain software and (b) providing of AMC services to the Licensee. Given the same, the assessee's contention that both the transactions are inextricably and integrated with each other under Article 12 of the DTAA is rejected. 2.5 As regards the first set of transactions namely su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court in Engineering Analysis. 16. In our view, the aforementioned aspects will require consideration. 17. Accordingly, the impugned order dated 29.04.2022 is set aside, with the direction that the application filed by the petitioner will be decided afresh. 17.1 The concerned authority will hear the Authorized Representative (AR) of the petitioner. 17.2 For this purpose, the AR of the petitioner will appear before the concerned authority on 16.01.2023, at 11:00 AM. 17.3 The concerned authority will be at liberty to hear the AR of the petitioner via video-conferencing. 18. While disposing of the application, the concerned authority will bear in mind, the order dated 17.05.2022 passed by the DRP, and the ratio of the judgment rendered by the Supreme Court in Engineering Analysis." 9. In this view of the matter, we are inclined to agree with the findings of the Ld. DRP. What the assessee has supplied in the form of a Software to Reliance/ Jio is a copyrighted article not a copyright in the Software. Fact on record demonstrates that the Software is supplied by the assessee on a non-transferable, non-exclusive basis to various customers all over India. The assessee has o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quarter lo guide Licensee about the best possible use of the Software. 8) All third parties software provided or included in Software are also covered 9) Licensee has option to buy AMC on annual basis. 10) The Licensor shall at least 10 days prior to the end of each annual AMC period, provide Licensee with written notice that the annual AMC period is ending, and Licensee shall have two (2) weeks after receipt of the written notice to notify Licensor of its intent to renew AMC for an additional annual period. If Licensee notifies its intent to renew AMC for an additional annual period then Licensee will issue a PO/WO for such renewal of additional annual AMC period within ninety (90) days from such notification. In the event that Licensee fails to issue the PO/WO, then Licensee will be deemed to have discontinued the AMC, and if Licensee thereafter request to resume AMC, then Licensee shall pay reinstatement charges equal to what Licensee would have paid if the AMC has not been discontinued. 11) Licensor warrants that even after the expiry of the Term, Licensee shall have option to avail Licensor's support for the Software as long as Licensee continues to pay AMC charges." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the test of 'make available' under Article 12(4)(b) of the India-USA DTAA is not satisfied given the facts of the present case. Maintenance services comprise of troubleshooting, software updates, patches etc. and technical support by e-mail, fax etc. and the training services are for acquainting with the operation / use of software. These activities, in our view, do not qualify as 'make available' within the meaning of the expression contained in Article 12(4)(b) of the India-USA DTAA. The meaning of the expression 'make available' has been derived from umpteen numbers of judicial precedents as well as Protocol to the India-USA DTAA. If we consider the terms of the AMC under the Software Licence Agreement (read with Service Level Agreement) set out above, we find that none of the conditions to qualify the test of 'make available' has been satisfied in the present case as - (i) the service recipient is not able to apply any expertise/ technology contained therein or use knowledge on its own without recourse to the service provider; (ii) the service recipient is not at the liberty to use the technical knowledge, skill, know-how and process of the assessee in its own right; and (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X
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