ATTACHMATE CORPORATION,USA V. ACIT, CIRCLE 1(1)(1), INTERNATIONAL TAXATION, NEW DELHI

ITA 782/DEL/2023

AI Insights

The case involves Attachmate Corporation, a non-resident entity based in the USA, which appealed against the tax assessments for the years 2018-19, 2019-20, and 2020-21. The primary issue was the taxability of amounts received from Indian customers for software updates and patches, and on-call support services, classified as Fee for Technical Services (FTS) or Fee for Included Services (FIS) under the Income Tax Act and the India-USA DTAA. The Assessing Officer had treated these receipts as FIS under Article 12(4)(b) of the DTAA, leading to a tax at 10% on a gross basis. However, the Tribunal found that the receipts were not properly classified as FIS under the treaty provisions, as the 'make available' condition was not met, and thus, these receipts should not be taxed under the specified article of the DTAA.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 473575 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 6 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2024
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 03-10-2024
• Assessment Year: 2020-2021
• Appeal Filed On: 22-03-2023
• Other Referred Cases: Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT, 432 ITR 471 (SC)
• Laws Referred To: Income-tax Act, 1961, India \\u2013 USA Double Taxation Avoidance Agreement (DTAA)
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VIJAY B.VASANTA
• Assessee Lawyers: VISHAL KALRA
• Keywords: Double taxation relief
• Section: 143(3); 244A

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘D’ NEW DELHI BEFORE SHRI SAKTIJIT DEY, VICE-PRESIDENT AND SHRI S RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA Nos.2296 & 2297/Del/2022 & 782/Del/2023 Assessment Years: 2018-19, 2019-20 & 2020-21 Attachmate Corporation, 1111 Third Avenue, Suite 2300, Washington, Seattle, USA Vs. ACIT, Circle -1(1)(1), International Tax, New Delhi PAN :AALCA1395C (Appellant) (Respondent) ORDER PER SAKTIJIT DEY, VICE-PRESIDENT Captioned appeals have been filed by the assessee assailing the final assessment order passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (in short ‘the Act’) pertaining to assessment years 2018-19, 2019-20 and 2020-21 in pursuance to directions of learned Dispute Resolution Panel (DRP). Assessee by Sh. Vishal Kalra, Advocate Ms. Samsiha Murgai, CA Sh. Kashish Gupta, CA Department by Sh. Vijay B. Vasanta, CIT (DR) Date of hearing 03.10.2024 Date of pronouncement 17.10.2024 ITA No.2296 & 2297/Del/2022 & 782/Del/2023 2 | P a g e 2. The common substantive issue arising in all these appeals relate to taxability of the amounts received by the assessee from the Indian customers towards supply of software updates and patches and on-call support services as Fee for Technical Services (FTS)/Fee for Included Services (FIS) under the Income Tax Act as well as under India – USA Double Taxation Avoidance Agreement (DTAA). 3. Briefly the facts relating to this issue are, the assessee is a non-resident corporate entity and is incorporated in the United States of America (USA) and is a tax resident of USA. As stated, the assessee is engaged in the business of developing, manufacturing and distribution of software products. The Assessing Officer has further stated that the assessee has entered into International Distributor/Reseller Agreements with distributors in India for supplying software products and for providing ancillary support services. In course of assessment proceedings for the impugned assessment years, the Assessing Officer noticed that the assessee had received certain amounts from Indian distributors for providing software updates and patches and on-call support services. Being of the view that the amount received by the assessee ITA No.2296 & 2297/Del/2022 & 782/Del/2023 3 | P a g e towards the aforesaid activities are in the nature of FTS/FIS, the Assessing Officer called upon the assessee to show-cause as to why they should not be brought to tax in India. 4. In response to the show-cause notice, the assessee furnished detailed submissions stating that the amount received represents two components, i.e., firstly, for supply of software updates and patches, and secondly, for on-call support services. It was submitted by the assessee that on-call support services cannot be treated as FIS either under Article 12(4)(a) of India – USA tax treaty as it is not ancillary to any royalty income or under Article 12(4)(b) as no technical knowledge, know-how, skill etc. was made available to the service recipient while providing on-call support services. 5. The Assessing Officer, however, did not accept the contentions of the assessee. He observed that there cannot be any doubt that the support services are ancillary to the sale of computer software. However, he observed that this cannot be the only parameter for determining whether the amount received is FTS/FIS. He observed, since, services rendered are technical and consultancy in nature and they are also making available technical knowledge, know-how, skill etc. to the service recipient, the receipt ITA No.2296 & 2297/Del/2022 & 782/Del/2023 4 | P a g e would be taxable under Article 12(4)(b) of the Treaty and not under Article 12(4)(a) of the Treaty. Having held so, he further held that in absence of any bifurcation between on-call support services and software updates and patches, the entire receipts have to be treated as FIS under Article 12(4)(b) of the treaty. Accordingly, he brought the receipts to tax at 10% on gross basis in all the assessment years under dispute, while framing the draft assessment orders. Against the draft assessment orders so passed, the assessee raised objections before learned DRP. However, learned DRP endorsed the view expressed by the Assessing Officer. 6. Before us, learned counsel appearing for the assessee submitted that the Assessing Officer has taken different stand in different assessment years regarding same nature of income. He submitted, while in assessment years 2014-15 to 2017-18, the Assessing Officer has treated the receipts as royalty income and also FIS under Article 12(4)(a) towards services ancillary to royalty income, however, in the impugned assessment years, he had discarded his earlier stand and held that the entire receipts are taxable as FIS under Article 12(4)(b) of the Act. He submitted, while dealing with the earlier stand taken by the Assessing Officer and ITA No.2296 & 2297/Del/2022 & 782/Del/2023 5 | P a g e the DRP, the Tribunal in assessment years 2014-15 to 2017-18 has held, the receipts not to be in the nature of royalty or FIS under India – USA DTAA. Thus, he submitted, the issue is no more res integra. 7. Without prejudice, he submitted, assuming that the receipts are in the nature of FIS under Article 12(4)(b) of the Treaty, the burden is entirely on the Department to prove that in course of rendition of services the assessee has transferred technical knowledge, know-how, skill, experience etc. to the service recipient. He submitted, the Revenue has failed to establish the fulfilment of make available condition. In support of his contention, learned counsel relied upon a catena of judicial precedents as furnished in the case-law compilation. 8. Drawing our attention to the copy of distributors agreement placed in the paper-book, learned Departmental Representative submitted, along with software updates and patches, the assessee also provides support services, which are in the nature of technical/consultancy services coming withing the ambit of FIS as provided under Article 12(4) of India – USA DTAA. He submitted, the Assessing Officer has also observed that while rendering such ITA No.2296 & 2297/Del/2022 & 782/Del/2023 6 | P a g e services, the assessee has made available technical knowledge, know-how, skill etc. Thus, he relied upon the observations of Assessing Officer and learned DRP. Further, he submitted, in the preceding assessment year, the Tribunal has not adjudicated as to whether the receipts fall within the ambit of FIS. 9. We have considered rival submissions in the light of decisions relied upon and perused the materials on record. Undisputedly, in the assessment years under dispute, the assessee had earned revenue from two streams, viz., supply of software updates and patches and on-call support services. It is a fact on record that the Assessing Officer has treated the aggregate receipt as FIS under section 12(4)(b) of India – USA DTAA. While coming to such conclusion, the Assessing Officer has stated that in absence of proper bifurcation furnished by the assessee, he had no other option but to treat the entire receipts as FTS. We find the aforesaid observations of the Assessing Officer to be factually incorrect. On perusal of sample invoice copies placed in the paper-book it is observed that the assessee has separately shown the cost of software updates and on call support services. Therefore, entire receipts cannot be attributed towards service component. ITA No.2296 & 2297/Del/2022 & 782/Del/2023 7 | P a g e 10. Be that as it may, on going through the past assessment history of the assessee, we have noticed certain interesting facts. As discussed earlier and also acknowledged by the Assessing Officer, the assessee had entered into international distributor agreement with various customers including Indian Distributors. In terms with the distributors’ agreement, the assessee supplies software updates and patches, as also, on-call support services. In assessment year 2014-15, while examining the nature of receipts earned by the assessee, the Assessing Officer held that the amount received towards supply of software products/updates and patches is taxable as royalty income. Whereas, the receipts from on-call support services, being ancillary to supply of software products/updates and patches, are taxable as FIS under Article 12(4)(a) of the Treaty. The same line of thinking of the Assessing Officer continued till assessment year 2017-18. 11. Notably, in assessment year 2014-15, when the dispute ultimately travelled to the Tribunal, in order dated 17.02.20222 passed in ITA No. 6064/Del/2017, the Tribunal held that the receipts cannot be treated as royalty under Article 12(3) of India – USA DTAA. While coming to such conclusion, the Coordinate ITA No.2296 & 2297/Del/2022 & 782/Del/2023 8 | P a g e Bench relied upon the ratio laid down by the Hon’ble Supreme court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT, 432 ITR 471 (SC). The view taken in assessment year 2014- 15, was reiterated by the Tribunal while deciding assessee’s appeals for assessment year 2015-16, 2016-17 and in the latest order passed for assessment year 2017-18 in ITA No. 06/Del/2021, dated 29.09.2022. 12. Thus, from the aforesaid facts, it is evident that the issue arising for consideration in the impugned assessment years is a legacy issue continuing from assessment year 2014-15 onwards and neither there is any change in the terms of the distribution agreement nor the factual position. However, being conscious of the fact that the receipts can no more be treated as royalty income in view of change in legal position due to the ratio laid down by the Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. (supra), and secondly, it cannot be treated as FIS under Article 12(4)(a) of India – USA DTAA, the Assessing Officer has taken a conscious decision not to invoke Article 12(3) and Article 12(4)(a) of India – USA DTAA to tax the receipts. Thus, the only course left open with the Assessing Officer to rope in the ITA No.2296 & 2297/Del/2022 & 782/Del/2023 9 | P a g e receipts within tax net is to invoke Article 12(4)(b) of India – USA DTAA. However, the said provision requires fulfillment of the ‘make available’ condition. A reading of the assessment orders should reveal that except making general observations that while rendering services the assessee has made available technical knowledge, know-how, skill etc. to the recipient of services, the Assessing Officer has not brought on record any cogent material/ evidence to establish such fact. Even, same is the position with learned DRP as no effort has been made by learned DRP to establish that ‘make available’ condition stands satisfied. 13. Now, it is fairly well settled that technical knowledge, know- how, experience, skill etc. are made available to a service recipient when the service recipient is capable of performing such services independently on its own without requiring the aid and assistance of the service provider. No material has been brought on record by the Revenue Authorities to establish that the service recipients, while availing service from the assessee, have also acquired technical knowledge, know-how, skill etc. concerning such services, which enabled them to perform such services independently in future. ITA No.2296 & 2297/Del/2022 & 782/Del/2023 10 | P a g e 14. On the contrary, the fact that the assessee continues to provide on-call support services year-after-year goes to prove that the technical knowledge, know-how, skill etc. relating to such services have not been transferred to service recipients. It appears that being conscious of the fact that the receipts cannot be made taxable as royalty income under Article 12(3) or as FIS under Article 12(4)(a) of India – USA treaty, the Assessing Officer has made a futile attempt to make the receipts taxable under Article 12(4)(b) by adopting trial and error method. 15. In view of the aforesaid, we hold that the receipts are not taxable as FIS under Article 12(4)(b) of India – USA DTAA. 16. Besides the aforesaid issue, one more issue arising for consideration relates to computation of interest on refund under section 244A of the Act. 17. Before us, it is the contention of the assessee that interest under section 244A of the Act has to be computed up to the date of issuance of refund voucher. 18. Having considered rival submissions, we direct the Assessing to verify assesseee’s claim and compute interest in accordance with law. Grounds are partly allowed. ITA No.2296 & 2297/Del/2022 & 782/Del/2023 11 | P a g e 19. The other grounds, being consequently and premature, do not require adjudication. 20. In the result, the appeals are partly allowed. Order pronounced in the open court on 17th October, 2024 Sd/- Sd/- (S RIFAUR RAHMAN) (SAKTIJIT DEY) ACCOUNTANT MEMBER VICE-PRESIDENT Dated: 17th October, 2024. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi "