ALTAIR ENGINEERING INC.,UNITED STATES V. DCIT, INTERNATIONAL TAXATION, CIRCLE-1(1), BENGALURU

ITITA 215/BANG/2025

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M/s. Altair Engineering Inc., a US-based company, appealed against the assessment order for the assessment year 2022-23, which significantly increased their assessed income. The primary contention was that the income from software sales and certain reimbursements were incorrectly classified as 'royalty' and 'capital gains', respectively, leading to higher tax liabilities. The Tribunal examined the legal interpretations of these classifications under the Income-tax Act and the Indo-USA DTAA, referencing the Supreme Court's precedent and previous rulings in similar cases involving the same assessee. The Tribunal's decision to allow the appeal was based on the alignment with judicial precedents and the specific nature of the transactions in question.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 396773 (ITAT-BANGALORE)
• Appeal Type: Income Tax (International Taxation) Appeal
• Pronouncement Date: 27-05-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2022-2023
• Other Referred Cases: Engineering Analysis Centre of Excellence Private Ltd. vs. CIT & Another [2021] 432 ITR 471 (SC)
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: TATA KRISHNA; UNICOM
• Keywords: Rule of consistency; Capital Gains; Double taxation relief
• Section: 143(3); 234B

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI PRASHANT MAHARISHI, VICE PRESIDENT AND SHRI SOUNDARARAJAN K., JUDICIAL MEMBER SP No.3/Bang/2025 & IT(IT)A No.215/Bang/2025 Assessment year : 2022-23 M/s. Altair Engineering Inc., 1820, East Big Beaver Road, Troy MI 999999, United States. PAN: AAICA 7762Q Vs. The Deputy Commissioner of Income Tax, International Taxation, Circle 1(1), Bengaluru. APPELLANT RESPONDENT Appellant by : Shri Tata Krishna, Advocate Respondent by : Ms. Neera Malhotra, CIT(DR)(ITAT), Bengaluru. Date of hearing : 15.04.2025 Date of Pronouncement : 27.05.2025 O R D E R Per Prashant Maharishi, Vice President 1. This appeal is filed by M/s. Altair Engineering Inc. (the assessee/appellant) for the assessment year 2022-23 against the assessment order passed u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] dated 30.12.2024 by the DCIT, International Taxation Circle 1(1), Bengaluru [ld. AO] wherein the total income of the assessee is determined at Rs.98,82,49,606/- against the returned income of the assessee at Rs.62,15,075/-. This assessment order is passed in pursuance of the directions issued u/s. 144C(5) of the Act by the ld. Dispute Resolution Panel- SP No.3/Bang/2025 & IT(IT)A No.215/Bang/2025 Page 2 of 13 1, Bengaluru [ld. DRP] in draft assessment order passed u/s. 144C(1) of the Act dated 14.3.2024. 2. The assessee is aggrieved with the assessment order and has filed the appeal raising the following grounds of appeal :- “1. The Final Assessment order of the Learned Assessing Officer is no justified in law and on facts and circumstances of the case. 2. The Directions of the Learned DRP are not justified in law and on facts and circumstances of the case. 3. The Final Assessment Order is bad in law as the same is barred by limitation under 4th Proviso to section 153(1). 4. As regards the DRP directions dated 20.11.2024: 4.1. The impugned directions of the Learned DRP dated 20.11.2024 are invalid and bad in law as the same are in violation of the CBDT Circular No. 19/2019, dated 14.08.2019. 4.2. The impugned directions of the Learned DRP are in contravention to section 144C(8), hence, the same are invalid and bad in law. 4.3. The Learned DRP having accepted that the case of the Appellant is squarely covered by the decision in Engineering Analysis Centre of Excellence Private Ltd., vs. CIT & Another [2021] 432 ITR 471 (SC), is not justified in directing the Learned Assessing Officer to treat the total receipts to the tune of Rs. 97,18,17,073/- as 'royalty' merely for the reason to keep the issue alive as the department has filed a review petition, thus violating the principles of Article 141 of the Indian Constitution and judicial discipline. 5. Without prejudice to the contention that the directions of the Learned DRP are in contravention of section 144C (8), the Learned Assessing Officer's final assessment order is invalid and non est as the same was passed by ignoring the DRP directions and thus contravening section 144C (13). SP No.3/Bang/2025 & IT(IT)A No.215/Bang/2025 Page 3 of 13 6. As regards the addition of Rs. 92,55,77,068/- [Rs. 13,35,35,448/- + Rs. 79,20,41,620/-], being receipts from Direct Sale of standard [off the shelf] software by the Appellant to end customers and receipts from sale of software by the Appellant to Altair India for onward distribution under the Subsidiary Distribution Agreement, respectively, as 'royalty': 6.1. The Lower Authorities are not justified in making the addition of Rs.97,18,17,073/- [Rs. 13,35,35,448/- + Rs. 79,20,41,620/-], being receipts from Direct Sale of standard [off the shelf] software by the Appellant to end customers and receipts from sale of software by the Appellant to Altair India for onward distribution under the Subsidiary Distribution Agreement, respectively, as income in the nature of 'royalty'. 6.2. The Lower Authorities are not justified in failing to appreciate that the receipts of Rs. 92,55,77,068/- would not amount to 'royalty' within the meaning of section 9(1)(vi) read with Explanations 2 and 4 thereto. 6.3. Without prejudice to the above, the Learned Assessing Officer is not justified in perversely concluding that the Appellant's software is highly customizable, not shrink wrap or off the shelf software, involves transfer of rights and amount to process or rendition of service, without reading the agreement as a whole and appreciating the functionalities of the software dealt by the Appellant and merely based on surmises & conjectures. 6.4. Without prejudice to the above, even if the software is cloud based, the Learned Assessing Officer is not justified in taxing the sale of software as royalty. 6.5. Without prejudice to the above, the Lower Authorities are not justified in failing to appreciate that the receipts Rs. 92,55,77,068/-would not amount to 'royalty' within the meaning of Article 12(3) of the Indo-USA DTAA read with section 90(2) of the IT Act. 6.6. Without prejudice to the above, the Lower Authorities have erred in treating the receipts of Rs. 92,55,77,068/- as 'royalty', by ignoring the binding decision of the Honourable Supreme Court SP No.3/Bang/2025 & IT(IT)A No.215/Bang/2025 Page 4 of 13 in Engineering Analysis Centre of Excellence Private Ltd.'s case (supra), thus violating the principles of Article 141 of the Indian Constitution. 6.7. Without prejudice to the above, the Lower Authorities having conceded that the case of the Appellant is covered by the decision in Engineering Analysis Centre of Excellence Private Ltd.'s case (supra), have erred in failing to follow such binding decision merely on the basis that the review petition against the said judgement filed by the department is pending before the Honourable Supreme Court, thus violating the principles of judicial discipline. 6.8. Without prejudice to the above, the Lower Authorities have erred in treating the receipts of Rs. 92,55,77,068/- as 'royalty', by ignoring the binding decisions of this Honourable Tribunal in the Appellant's own cases in IT (IT)A No. 844/Bang/2022, dated 07.02.2023 for AY 2019-20, IT (IT)A No. 642/Bang/2023, dated 30.10.2023 for the AY 2020-21 and IT (IT)A No. 734/Bang/2023, dated 04.12.2023 for the AY 2021-22. 6.9. Without prejudice to the above, the Learned Assessing Officer has erred in changing his stand year after year under identical facts 85 circumstances of the case for sustaining the charge on the subject sale of software. 7. As regards the addition of Rs. 4,62,40,005/- being costs of third party software purchased by the Appellant on behalf of Altair India, cross-charged by the Appellant to Altair India: 7.1. The Learned Assessing Officer is not justified in making the addition of Rs.4,62,40,005/- being costs of third party software purchased by the Appellant on behalf of Altair India, cross- charged by the Appellant to Altair India. 7.2. The action of the Learned Assessing Officer is in defiance of the Learned DRP's directions which required him to verify the correctness of claim of reimbursement and if found to be reimbursement, to delete the addition. 7.3. Without prejudice to the above, the Lower Authorities are not justified in making the impugned addition of Rs. 4,62,40,005/- by SP No.3/Bang/2025 & IT(IT)A No.215/Bang/2025 Page 5 of 13 failing to appreciate that the said sum does not amount to 'royalty' within the meaning of section 9(1)(vi) read with Explanations 2 and 4 thereto. 7.4. Without prejudice to the above, the Lower Authorities are not justified in failing to appreciate that the impugned addition of Rs. 4,62,40,005/ -would not amount to 'royalty' within the meaning of Article 12(3) of the Indo-USA DTAA read with section 90(2) of the IT Act. 7.5. Without prejudice to the above, the Lower Authorities are not justified in treating the above sum of Rs. 4,62,40,005/- as 'royalty', by ignoring the binding decision of the Honourable Supreme Court in Engineering Analysis Centre of Excellence Private Ltd.'s case (supra), thus violating the principles of Article 141 of the Indian Constitution. 7.6. Without prejudice to the above, the Lower Authorities having conceded that that the case of the Appellant is covered by the decision in Engineering Analysis Centre of Excellence Private Ltd.'s case (supra), have erred in failing to follow such binding decision merely on the basis that the review petition against the said judgement filed by the department is pending before the Honourable Supreme Court, thus violating the principles of judicial discipline. 7.7. Without prejudice to the above, the Lower Authorities have erred in treating the receipts of Rs. 4,62,40,005/- as 'royalty', by ignoring the binding decisions of this Honourable Tribunal in the Appellant's own cases in IT (IT)A No. 844/Bang/2022, dated 07.02.2023 for AY 2019¬20, IT (IT)A No. 642/Bang/2023, dated 30.10.2023 for the AY 2020-21 and IT (IT)A No. 734/Bang/2023, dated 04.12.2023 for the AY 2021-22. 7.8. Without prejudice to the above, the Lower Authorities have erred in treating the receipts of Rs. 4,62,40,005/- as 'royalty', when the. Learned Assessing Officer himself treated the identical transaction as reimbursement vide orders passed under section 143(3) r.w.s. 254, dated 30.01.2024 for the AY 2019-20 and under section 143(3) r.w.s. 254, dated 28.11.2024 for the AY 2020-21. SP No.3/Bang/2025 & IT(IT)A No.215/Bang/2025 Page 6 of 13 8. As regards the addition of Rs. 1,02,17,458/- as capital gains: 8.1. The Learned Assessing Officer is not justified in making the addition of Rs. 1,02,17,458/ -being costs of third party hardware purchased by the Appellant on behalf of Altair India, cross- charged by the Appellant to Altair India. 8.2. The Learned Assessing Officer is not justified in making the impugned addition of Rs. 1,02,17,458/- as capital gain when the Learned DRP clearly indicated that such action is not justified. 8.3. Without prejudice, the action of the Learned Assessing Officer is in defiance of DRP directions which required him to verify the correctness of claim of reimbursement and if found to be reimbursement, to delete the addition. 9. Without prejudice to the above, the Learned Assessing Officer having treated the total receipts of Rs. 97,18,17,073/- as 'royalty' within the meaning of section 9(1)(vi) of the IT Act, has erred in making the addition of the said amount under the head 'Income from Other Sources' and levying tax on the said sum at 40% plus applicable surcharge and cess. 10. Without prejudice to the above, the Learned Assessing Officer erred in failing to follow the principle of consistency by arbitrarily changing the tax rate to 40% in the impugned year as compared to 10% in the AY 2019-20. 11. The Learned Assessing Officer is not right in law and on facts in levying interest under section 234B of Rs. 12,58,96,221/-. 12. Without prejudice to the above, the Learned Assessing Officer is not justified in levying the aforesaid interest under section 234B, when the impugned additions are not tenable. For the above Grounds and for such other Grounds which may be allowed by the Honourable Members to be urged at the time of hearing, it is prayed that the aforesaid appeal be allowed.” 3. The brief facts of the case show that assessee is a company registered in USA and engaged in the business of providing software solutions. It filed its SP No.3/Bang/2025 & IT(IT)A No.215/Bang/2025 Page 7 of 13 return of income on 24.11.2022 at a total income of Rs.62,15,075. The assessee has earned gross receipt of Rs.98,20,34,531, the details of such receipts are as under:- Particulars Gross Amount (Rs.) Direct Sale of standard [off the shelf} software to end customers in India 13,35,35,448 Distribution of software by the Appellant for onward sale through the subsidiary distribution agreement with Altair India Engineering Pvt. Ltd. (Hereinafter referred to as 'Altair India') 79,20,41,620 Total receipts from sale of standard [off the shelf] software 92,55,77,068 Cross-charge of costs to the subsidiary [i.e., Altair India] for third party software purchased on behalf of such subsidiary 4,62,40,005 Reimbursement received by Appellant from Altair India towards third party hardware purchased by it on behalf of Altair India 1,02,17,458 Total 98,20,34,531 4. The return of income was picked up for scrutiny by issuing notice u/s. 143(2) on 31.5.2023. The dispute is that the total receipt of Rs.97,18,17,073 have the receipt from sale of standard software of Rs.92,55,77,068 and cross- charge of costs to the subsidiary for third party software purchase of Rs.4,62,40,005, was considered by the ld AO as 'royalty' within the meaning of Explanation 2 to section 9(1)(vi) of the Act and hence chargeable to income tax as per the domestic law and further same is also royalty as per the Double Tax Avoidance Agreement [DTAA] between India & USA. SP No.3/Bang/2025 & IT(IT)A No.215/Bang/2025 Page 8 of 13 Therefore, above sum was held to be chargeable to tax in India. A sum of Rs.1,02,17,458 being reimbursement received by the assessee from Indian subsidiary, Altair India, towards third party hardware purchased by it on behalf of Indian subsidiary was held to be chargeable as capital gain. 5. Thus, the draft assessment order was passed on 16.3.2024. The assessee filed objections before the DRP which issued directions on 20.11.2024 confirming the action of the AO and therefore a final assessment order u/s. 143(3) r.w.s. 144C(13) was passed on 30.12.2024 raising two issues as under:- (i) treating the receipt of Rs.97,18,17,073 as royalty u/s. 9(1)(vi) of the Act; & (ii) treating the reimbursement receipt of Rs.1,02,17,458 as capital gains. 6. The assessee being aggrieved with the same is in appeal before us. 7. The ld. AR submitted that ground Nos. 1 to 3 are general in nature. Gound Nos.11 & 12 are consequential, no separate arguments are advanced, hence these grounds are dismissed. 8. As per ground No.4, the assessee contends that the issue is squarely covered in favour of the assessee by the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited v. CIT and Anr., (2021) 432 ITR 471 (SC), which is accepted by the ld. DRP and despite the same, directed the ld. AO to tax it as royalty for the reason to keep the issue alive. By ground Nos. 4 & 5, the assessee has also contested several issues in the direction of the ld. DRP. Ground No.6 is also stating that the impugned sum is not ‘royalty’. It also states that in assessee’s own SP No.3/Bang/2025 & IT(IT)A No.215/Bang/2025 Page 9 of 13 case for AYs 2019-20, 2020-21 & 2021-22, the coordinate Bench has decided on identical facts and circumstances in favour of the assessee. 9. With respect to the sum of Rs.462,40,005 is stated to be cost of third party software purchased by the assessee on behalf of its Indian entity and cross- charged by it to such Indian entity, the addition is made by the ld. AO, despite the fact that the ld. DRP has directed him to verify the correctness of the claim of reimbursement and then delete the addition, but the ld. AO treated the same as royalty within the meaning of the I.T. Act as well as under Article 12(3) of the DTAA. It was also the contention of the assessee that in assessee’s own case for the earlier years, the issue was decided in favour of the assessee and in earlier years the AO himself treated the identical transaction as reimbursement. 10. The assessee purchased some hardware of Rs.1,02,17,458 for Altair Engineering (India) Pvt. Ltd. Such hardware were cross-charged to Indian entity. The ld. AO made addition of the same in the hands of assessee as capital gain. The ld. DRP directed the AO to verify the correctness of the claim and if found to be reimbursement, to delete the addition. The ld. AO did not delete the addition and therefore the assessee is in appeal. 11. The other grounds are with regard to the applicable tax rate. 12. The ld. AR referred to the direction of the ld. DRP with respect to the taxation of Rs.97,18,17,073 as royalty. The ld. DRP issued the direction as per para 3.6 at page 4 as under:- “3.6 In respect of the issue of Cross-charge of costs to the subsidiary for third party software purchased on behalf of such subsidiary, the Panel notes that allocation of cost of the Insight in respect of different countries is not proportionate in nature. For SP No.3/Bang/2025 & IT(IT)A No.215/Bang/2025 Page 10 of 13 instance, at Pg. 182, for allocation of cost of the Insight, it is seen that in the Q2 2021, for 702 users in India, the amount allocated is of US $1,00,000/-. However, for 917 users in US/PD/ST no amount has been allocated. In absence of the bifurcation before the Panel, we direct the AO to verify whether the amounts in respect of Cross-charge of costs to the subsidiary for third party software purchased on behalf of such subsidiary of Rs 4.62 crores pertain to cross charges reimbursements and if they are found to be reimbursement, no question of taxing the same would arise. We direct the AO to tax the remaining amounts from the sale of software as 'royalty'. This direction is issued in order to keep the issue alive as the department has filed a review petition before the Hon'ble Supreme Court in the case of Engineering Analysis Centre of excellence Pvt Ltd v. the Commissioner of Income Tax & another. In the said review petition, one of the pleas taken is that in the batch of cases decided by the Hon'ble Supreme Court, the owner of the software has in fact parted with at least one of the rights listed in section 14(a)/14(b) of the copyrights Act. Another issue raised in the review petition is that the India has expressed its reservations on the OCED commentary on the aspect of taxing of software royalty. Further, the circulars have been issued by the CBDT while interpreting the explanation the Explanation 4 to section 9(1)(vi) which was inserted vide finance Act, 2012 (w.e.f 1-6-1976) to further emphasize that the sale of software is royalty. The ground of objection 2 of the assessee is disposed accordingly.” 13. Thus, the ld. DRP has categorically held that the sum of Rs.4.52 crores, if pertains to reimbursement, same could not have been added to the total income of the assessee. Further with respect to the other sum, it was accepted that the issue is covered by the decision of the Hon’ble Supreme Court, however, to keep the issue alive, as the respective review petitions are pending, the AO was directed to make the addition. In the assessment order also, the ld. AO has accepted that the issue is squarely covered in favour of the assessee by the order of the Hon’ble Supreme Court and further in assessee’s own case for earlier 3 years. SP No.3/Bang/2025 & IT(IT)A No.215/Bang/2025 Page 11 of 13 14. The ld. AR reiterated the same facts and further the ld. DR also supported the order of the ld. AO and the directions of the ld. DRP and that to keep the issue alive, the addition has been made. 15. We have carefully considered the rival contentions and perused the orders of ld. lower authorities. The receipt shown by the assessee of Rs.97.18 crores comprised Rs.92.55 crores as receipts from sale of standard software and further a sum of Rs.4.62 crores is cross-charged of cost for third party software from Indian entity. With respect to the receipt from sale of standard software, it is covered in favour of assessee by the decision of the Hon’ble Supreme Court as accepted by the revenue authorities and as well as by the decision of coordinate Bench in assessee’s own case for earlier years, we do not find any reason that a sum of Rs.97.18 crores comprising of these two nature of receipts are required to be added to the total income of the assessee. As it has been categorically held that these are neither royalty as per I.T. Act nor as per DTAA, same are not chargeable to tax in India. Accordingly we direct the ld. AO to delete the addition of Rs.97.18 crores as per ground Nos.4 to 7 of the grounds of appeal. Accordingly, these grounds of appeal are allowed. 16. Coming to ground No.8 is with respect to chargeability of Rs.1,02,17,458 as capital gains, the fact show that as per para 8 of the assessment order, the above amount was considered as income chargeable to tax as capital gain. The assessee purchased certain fixed assets from third party vendors on behalf of Altair Engineering (India) Pvt. Ltd. This amount was charged by the assessee to the Indian entity by preparing internal invoices. The hardware were also sent to Indian entity as per bill of entry and shipping bill produced. The Indian entity paid the above sum to the assessee. Based SP No.3/Bang/2025 & IT(IT)A No.215/Bang/2025 Page 12 of 13 on this, it was submitted that it is not chargeable to tax in India being a cross-charge, but the ld. AO taxed the same as capital gain. 17. During the course of hearing, the ld. AR reiterated the same facts. The ld. CIT(DR) supported the orders of the ld. lower authorities. 18. During the course of hearing, the Bench directed the ld. AR to show that these are items cross-charged without mark-up to the Indian entity. The ld. AR submitted a paperbook on 21.4.2025 wherein internal invoices were submitted along with e-way bill, shipping bill, commercial invoices and bill of entry to show that the hardware was purchased by the assessee in US, was sent to Indian entity on cross-charge basis. For purchase from third party, the assessee submitted invoices raised on the assessee by Unicom Engineering Inc., USA. The assessee also mapped the items listed in the commercial invoices with bill of entry, commercial invoices with third party vendor invoices. The ld. CIT(DR) could not point out any reason that why the above sum is not a cross-charge. On careful consideration of the submissions, we find that a sum of Rs.1,02,17,458 received by the assessee from Altair Engineering (India) Pvt. Ltd. is a reimbursement received by the assessee from Indian entity towards third party hardware purchased by it on behalf of the Indian entity from Unicom Engineering Inc., USA. In view of this, we do not find any reason to uphold the action of the ld. AO to tax the above sum as capital gain either under the Income-tax Act or Article 13 of the DTAA. Accordingly we direct the ld. AO to delete the above addition. Thus, ground No.8 of the appeal is allowed. SP No.3/Bang/2025 & IT(IT)A No.215/Bang/2025 Page 13 of 13 19. As we have already allowed the appeal of the assessee on substantive issues, other technical grounds with respect to the direction of the DRP are not required to be adjudicated. Hence those are left open. 20. In the result, the appeal of the assessee is partly allowed. 21. In view of the above decision in IT(IT)A No.215/Bang/2025 in favour of the assessee deleting the impugned additions involved in that appeal, the Stay Petition filed by the assessee in SA No.3/Bang/2025 becomes infructuous, hence dismissed. Pronounced in the open court on this 27th day of May, 2025. Sd/- Sd/- ( SOUNDARARAJAN K. ) ( PRASHANT MAHARISHI ) JUDICIAL MEMBER VICE PRESIDENT Bangalore, Dated, the 27th May 2025. /Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. Pr. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore. "