EDUNXT GLOBAL SDN. BHD. ,MALAYSIA V. DEPUTY COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXTION CIRCLE-1(1) , BANGALORE

ITITA 221/BANG/2024

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The case involves M/s. Edunxt Global SDN - BHD, a Malaysian company providing online education, which entered into a service agreement with Adithya Birla Management Corporation Pvt. Ltd. (ABMC) to offer a customized MBA program. The income received from this agreement was initially taxed as 'royalty' under the Income Tax Act and the India-Malaysia DTAA. However, following a remand by the ITAT, the AO reclassified this income as FTS, leading to the current appeal. The Tribunal's decision focused on the legal boundaries of the AO's jurisdiction post-remand and the specific definitions of royalty and FTS under the applicable tax laws and treaties.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 32942 (ITAT-BANGALORE)
• Duration Of Justice: 8 month(s) 1 day(s)
• Appeal Type: Income Tax (International Taxation) Appeal
• Pronouncement Date: 08-10-2024
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 03-10-2024
• Assessment Year: 2014-2015
• Appeal Filed On: 07-02-2024
• Other Referred Cases: Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT, LI & Fung India (P.) Ltd. vs ACIT, Bhagwandas Associates vs ITO
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Set aside; Principle of natural justice; TDS; Double taxation relief; Permanent establishment
• Section: 143(3); 119; 195; 13

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K, VICE PRESIDENT AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER IT(IT)A No.221/Bang/2024 Assessment Year : 2014-15 M/s.Edunxt Global SDN - BHD, C/o Manipal Global Education Services Pvt. Ltd., Manipal Towers 14, Old Airport Road, Bengaluru – 560 008. PAN : AADCE 6923 A Vs. DCIT (International Taxation), Circle – 1(1), Bengaluru. APPELLANT RESPONDENT Assessee by : Shri. Padam Chand Khincha, CA. Revenue by : Shri. Sridhar E, CIT(DR)(ITAT), Bengaluru. Date of hearing : 03.10.2024 Date of Pronouncement : 08.10.2024 O R D E R Per George George K, Vice President: This appeal at the instance of the assessee is directed against the Final Assessment Order dated 15.12.2023, passed under section 143(3) r.w.s. 254 r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2014-15. 2. Brief facts of the case are as follows: Assessee is a company having tax residency in Malaysia. It is engaged in the business of providing online education course for various post graduation courses. Assessee entered into a master service agreement with Adithya Birla Management Corporation Pvt. Ltd., (ABMC) on 01.04.2013 to offer a customized programme for IT(IT)A No.221/Bang/2024 Page 2 of 12 employees of ABMC. For the relevant Financial Year, assessee had provided online education of MBA course to certain employees of the ABMC and earned a sum of Rs.1,27,42,140/- for providing said online education course. The ABMC, while making the payment to the assessee, deducted TDS at 20% (being TDS under section 9(1)(vi) of the Act. The assessee for the Assessment Year 2014-15 filed the return of income declaring Nil income on the belief that the aforesaid receipt is not taxable in India. Accordingly, in the return of income, assessee claimed refund of taxes that was paid by ABMC. 3. The AO passed Draft Assessment Order (DAO) on 27.12.2016 holding that the aforesaid receipts by assessee from ABMC is income in the nature of “royalty” which is chargeable to tax in India. The Dispute Resolution Panel (DRP) confirmed the DAO vide its directions dated 09.09.2017. Final Assessment Order (FAO) was passed on 26.09.2017. 4. Aggrieved by the same, assessee filed appeal before the Tribunal. A copy of the aforesaid master services agreement dated 01.04.2013 was filed before the Tribunal. The Tribunal vide its order dated 30.03.2022 in IT(IT)A No.2496/Bang/2017 for Assessment Year 2014-15 remanded the issue to the files of the AO. The relevant finding of the Bangalore Bench of the Tribunal remanding the matter to the AO reads as follows: “5. We have perused the submission advanced by both sides in light of records placed before us. The Ld.AR submitted that under India Malayasia DTAA as per Article 12(3) of the \"Royalty\" is defined as \"payments of any kind received as a consideration for the, “use of”, or the “right to use”, any copyright of a literary, artistic, or scientific work, including cinematographic films or work on film, tape or other means of reproduction for use in connection IT(IT)A No.221/Bang/2024 Page 3 of 12 with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or information concerning industrial, commercial, or scientific experience. The relevant article reads as under: “12. Royalty ……… 3. The term \"royalties\" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or films or tapes used for television or radio broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information (know-how) concerning industrial, commercial or scientific experience.” 5.1 It is thus submitted by the Ld.AR that the Indian customer do not have right to use the copyright in the detabase and hence the payments cannot be termed as Royalties under Article 12(3) of the DTAA. 5.2 In our view, payments towards all kind of information would not be in the nature of Royalty. To determine the exact nature of the payment, the type of information passed on, needs to be verified. A perusal of Article 12(3) shows that, it brings within the ambit of the definition of 'Royalty', payment made for use of, or the right to use any copyright of a literary, artistic, or scientific work. In our understanding Article 12(3) covers only those payments that allow a payer to use/acquire a right to use copyright in literary, artistic or scientific work are covered within the definition of 'Royalty'. Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt.Ltd. vs CIT reported in (2012) 432 ITR 471 as well as the decisions relied by the Ld.AR herein above. Hon’ble Supreme Court after analysing the provisions of Income tax Act, provisions of DTAA, the relevant agreements entered by the assessees with non-resident software suppliers, provisions of Copy Right Act, the circulars issued by CBDT, various case laws relied by the parties, concluded as under:- “CONCLUSION 168. Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment, it is clear that IT(IT)A No.221/Bang/2024 Page 4 of 12 there is no obligation on the persons mentioned in section 195 of the Income-tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income-tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases. 169. Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income-tax Act were not liable to deduct any TDS under section 195 of the Income-tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment.” The Ld.AR was called upon by the bench to produce agreement if any, in order to understand the right that the Indian customer holds on the database shared by the assessee. At the time of hearing, the Ld.AR produced the Master Service Agreement dated 01/04/2013 between EduNxt Global SDN BHD and Aditya Birla Management Corporation Ltd., we observe that this agreement has not been filed before the authorities below. The DRP categorically observed that except for the invoice, assessee did not produce any other relevant information. In the interest of justice it is appropriate to remit the issue in dispute to the file of the Ld.AO for deciding the comparability of these transactions in the light of the judgment of the Hon’ble Supreme Court in Engineering Analysis Centre of Excellence Private Limited (supra) and the decisions relied by the Ld.AR reproduced herein above. Accordingly, the issue in dispute is remitted to the Ld.AO for fresh decision with the above directions.” 5. Pursuant to the Order of the Tribunal, the AO issued a letter dated 24.02.2023 directing the assessee to furnish submissions. The assessee filed its response. The IT(IT)A No.221/Bang/2024 Page 5 of 12 AO issued another letter dated 24.03.2023 proposing to tax the receipts from ABMC as Fees for Technical Services (FTS) as against bringing it to tax as “royalty” in the original assessment. In response, assessee filed letter on 27.03.2023. It was submitted that the Order of the Tribunal was limited to examine the chargeability of income earned under the Act / DTAA as “royalty”. It was stated that it was not possible to examine the applicability of definition of FTS as per the Act / DTAA. Without prejudice to the above submissions, the assessee also submitted justification that receipts cannot be brought to tax as FTS on the ground that payment made by the ABMC for online education of MBA course is neither managerial / technical or consultancy in nature. The AO, however, rejected the objections raised by the assessee and passed DAO pursuant to the Tribunal’s remand on 30.03.2023. The DRP confirmed the DAO vide its directions dated 23.11.2023. Pursuant to the DRP’s directions, the impugned FAO was passed on 15.12.2023. 6. Aggrieved by the FAO dated 15.12.2023, assessee has filed the present appeal before the Tribunal raising the following grounds: 1. General ground: 1.1. The learned Deputy Commissioner of Income Tax, International Taxation, Circle 1(1), Bangalore (hereinafter referred to as AO for brevity) has erred in passing the assessment order under section 143(3) read with section 254 read with section 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as the Act for brevity) in the manner passed by him. The order passed being bad in law is liable to be quashed. 1.2. The Hon\"ble office of the Dispute resolution panel -1, Bangalore (hereinafter referred to as DRP for brevity) has erred in issuing its directions under section 144C(5) of the Act in the manner passed by it. 2. Ground relating to principles of natural justice- Section 143(3) rws 254 IT(IT)A No.221/Bang/2024 Page 6 of 12 2.1. The learned AO has erred in passing the assessment order without considering the submissions of the Appellant and has erred in alleging that no response had been submitted by the Appellant. 3. Ground relating to assumption of excess jurisdiction 3.1. The learned AO has erred in a) passing the assessment order in contradiction to the directions issued by the Income Tax Appellate Tribunal, Bangalore Bench in its order dated 30.3.2022 in IT (IT)A No 2496/Bang/2017 for AY 2014-15. The issue of treating the income as 'fees for technical services' was not the subject matter of appeal before the tribunal and therefore the conclusion of the AO on such lines is bad in law and unsustainable. b) distinguishing the decision of the Supreme Court in Engineering Analysis Centre of Excellence Private Limited (2021) 432 ITR 71 (SC) and thereby violating the directions of the Tribunal which had directed him to follow the said decision. 3.2. Based on facts and circumstances of the case and law applicable, the assessment order passed under section 143(3) r.w.s. 254 of the Act is bad in law and liable to be quashed. 4. Ground relating to income taxed as fees for technical services - Section 9(1)(vii) 4.1. The learned AO has erred in: a) taxing the income of Rs. 1,27,42,140 received from Aditya Birla Management Corporation Pvt. Ltd (`ABMC') pursuant to the 'Master Services Agreement' entered into with it, as fees for technical services (`FTS') under section 9(1)(vii) of the Act as well as under Article 13 of the India-Malaysia Treaty b) not appreciating that the services provided by the Assessee are not technical or managerial or consultancy in nature and hence the income cannot be taxed as FTS c) not appreciating that the income of the Appellant constituted business profits under Article 7 of the India- Malaysia Treaty and in absence of a Permanent establishment in India, the business profits were not chargeable to tax in India under the treaty. 4.2. The Hon'ble DRP has IT(IT)A No.221/Bang/2024 Page 7 of 12 erred in confirming the action of the learned AO in passing its directions under section 144C(5) of the Act. 4.3. On facts and circumstances of the case and law applicable, the addition of Rs. 1,27,42,140 to returned income of the Appellant on account of fees from technical services is incorrect and liable to be deleted. 5. Prayer: 5.1. Based on the above grounds and other grounds adduced at the time of hearing, the appellant prays that the assessment order passed under section 143(3) r.w.s 254 of the Act by the learned AO to be quashed or in alternative the above grounds and relief prayed thereof be allowed. 7. Before deciding the issue on merits, it is necessary that we adjudicate the legal submissions made that AO had exceeded the jurisdiction by assessing the receipts as “FTS” instead of “royalty” in the original assessment. The learned AR reiterated the submissions that the Order of the ITAT was not an open remand but was limited to examine the chargeability of income earned under the Act / DTAA as “royalty”. It was submitted that this is clearly discernible in light of the judgment of the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd., Vs. CIT reported in (2021) 432 ITR 71 (SC) and other decisions relied on by the assessee. In this context, the learned AR placed reliance on the judgment of the Hon’ble Delhi High Court in the case of LI & Fung India (P.) Ltd., Vs. ACIT (2017) 298 CTR 427 (Del). It was submitted that Hon’ble Apex Court had dismissed the SLP filed by the Revenue arising out of the aforesaid judgment of the Hon’ble Delhi High Court reported in (2018) 95 taxmann.com 110 (SC). The learned AR had also placed reliance on the Order of the Pune Bench of the Tribunal in the case of Bhagwandas associates Vs. ITO reported in (2009) 119 ITD 1 (Pune) wherein it was held that the AO has to confine his examination only to the points on which remand has been made and not to the other issues. IT(IT)A No.221/Bang/2024 Page 8 of 12 8. The learned DR strongly supported the Orders of the AO and the DRP. It was submitted by the learned DR that during the course of original assessment proceedings, the assessee had withheld the master services agreement and based on the available facts, the AO in the original Order had concluded the receipts received by the assessee from ABMC as “royalty”. It was submitted by the learned DR that in the light of the master services agreement being furnished before the Tribunal and the remand being made, the entire issue is open and can be examined whether the receipts are to be assessed as “FTS” or as “royalty”. 9. We have heard the rival submissions and perused the material on record. The present proceedings are pursuant to the directions of the Tribunal vide its Order dated 30.03.2022 in IT(IT)A No.2496/Bang/2017 for Assessment Year 2014-15. The direction of Tribunal has been extracted in paragraph 4 (supra) of this order. The directions of the Tribunal were to examine the issue in light of the judgment of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd., Vs. CIT (supra) and other judicial pronouncements relied on by the assessee (at para 4.3 of the order of the Tribunal dated 30.03.2023). On perusal of the judgment of the Hon’ble Supreme Court and other judicial pronouncements relied on by the assessee, we find that all are relating to the treatment of income from licencing of copyrighted material or article as “royalty” under the Act / DTAA. It is pertinent to note that the AO while passing the DAO dated 27.12.2016 (in the original proceedings) treated income as “royalty” under the Act / DTAA. The DRP in its directions (in the original proceedings) confirmed the view of the AO. The argument before the Tribunal by the assessee and the Revenue were limited to applicability of definition of “royalty” under the Act / DTAA in respect of income earned by the assessee. On careful reading of the Order of the Tribunal (Order dated 30.03.2022) it is observed that it was also limited to examine the chargeability of income earned under the Act / DTAA as “royalty”. The remand IT(IT)A No.221/Bang/2024 Page 9 of 12 to the AO was also limited to examine and follow the judgment of the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd., Vs. CIT (supra). The Tribunal did not remand to the AO to examine the applicability of definition of FTS as per the Act / DTAA in respect of the income of the assessee. Only subsequent to the remand proceedings by the Tribunal, it dawns upon the AO after examining the services agreement to tax the same as FTS under section 9(1)(vii) of the Act instead of “royalty” under section 9(1)(vi) of the Act. The AO after examining the agreement ideally ought to have filed a MA before the Tribunal seeking for an ‘open remand’ so that the receipt could have been either taxed under “FTS” or under “royalty”. On perusal of the above Order of the Tribunal, it is clearly discernible that it is not an open remand but only a limited remand to examine the receipt whether it can be taxed in light of the judgment of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd., Vs. CIT (supra) and other judicial pronouncements relied on by the assessee. 10. In such circumstances, AO cannot go beyond the directions given in the remand order and look into the matters which was not subject matter of appeal before the Tribunal. This proposition was affirmed by the Hon’ble Allahabad High Court in the case of S. P. Kochhar Vs. ITO reported in (1983) 145 ITR 255 (All.) wherein the scope of remand by the Tribunal was explained as follows: “When the remand is made by the Tribunal, the position is different. The powers of the Tribunal are confined to the subject-matter of appeal as constituted by the original grounds of appeal and such additional grounds as may be raised by the leave of the Tribunal. Thus, when the Tribunal allows the appeal and sets aside the assessment and remands the case for making a fresh assessment, the power of the ITO is confined to such subject-matter only. He cannot take up the questions which were not the subject-matter of appeal before the Tribunal. This will be so even though no specific direction has been given by the Tribunal. If a specific direction is IT(IT)A No.221/Bang/2024 Page 10 of 12 given, then there is no scope whatsoever for the ITO to travel beyond those directions or restrictions.” 11. The Hon’ble Dehi High Court in the case of LI & Fung India (P.) Ltd., Vs. ACIT (supra) had upheld the aforesaid proposition by observing as follows: “Firstly, when there is a remand on the basis of a specific finding (in this case, the untenability of shifting of the OP/TC to FOB) the TPO could not have travelled beyond it, given that there was no controversy ever about the inclusion of any comparable. Concededly there was no controversy about the appropriateness of inclusion of any comparable for the ALP determination purpose. Nor was there any finding or direction on that score. In the given circumstances, the Revenue could not have seized upon the direction to determine it \"afresh\" as the basis for going into the merits of inclusion of such comparables. Secondly and more fundamentally, the issue of comparables' inclusion is not one that goes to define jurisdiction itself There is authority for the proposition that invocation of jurisdiction is itself in issue, notwithstanding that being not subject to remand.\" 12. The Hon’ble Supreme Court has dismissed the SLP filed by the Revenue arising out of the aforesaid judgment of the Hon’ble Delhi High Court in the case of ACIT Vs. LI & Fung India (P.) Ltd., Vs. ACIT (supra). 13. The Tribunal in the case of Bhagwandas associates Vs. ITO (supra) had held that Revenue has no scope for improving an already assessed income either by way of enhancement or in pretext of rectification while giving effect of an appellate Order. The Tribunal held that the statute does not provide such a wide unlimited and unending power to the AO. The relevant finding of the Pune Bench of the Tribunal reads as follows: ‘7.1. We have carefully as well as consciously examined this question having far reaching effect and at the outset, we may like to place in plain words that the A.O do not have that vast jurisdiction. Rather, the A.O has a very limited IT(IT)A No.221/Bang/2024 Page 11 of 12 jurisdiction while giving effect of an appellate order. At this juncture, we may also like to clarify ourselves that there are generally two types of directions of the appellate authority; first, specific relief pertaining to a specific addition, and, second; direction of denovo assessment afresh by setting aside an assessment order in its entirety. In a situation, falling under second category, since the direction is denovo assessment, on account of set aside of an order in totality, the A.O has to complete the assessment afresh as prescribed under law. Naturally, consequence is that the A.O has got jurisdiction of fresh assessment as if framing it a-knew, hence the jurisdiction lies with the A.O. at par with the fresh assessment. Again, we want to make ourselves clear that if a rider is provided by the appellate authority, then the A.O is judicially duty bound to refrain himself not to exceed his jurisdiction and to re-frame the assessment within the prescribed limits following the rider.’ 14. Therefore, the AO has clearly exceeded his jurisdiction by taxing the income of the assessee as FTS which was not the subject matter of appeal before the Tribunal nor has the Tribunal given an open remand to the AO (in light of the master services agreement being produced before it for the first time). On perusal of the entire Order of the Tribunal, it is clear that the examination is limited to taxability of the receipts only in light of the judgment of the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd., Vs. CIT (supra) and other judicial pronouncements relied on by the assessee which deals with the taxability of the receipt as “royalty” under section 9(1)(vi) of the Act. 15. In light of the aforesaid reasoning and the judicial pronouncements cited (supra), the impugned addition is deleted on technical grounds. Since we have decided the issue in favour of the assessee on technical ground, the grounds / issues on merits are left open and are not adjudicated. It is ordered accordingly. IT(IT)A No.221/Bang/2024 Page 12 of 12 16. In the result, appeal filed by the assessee is partly allowed. Pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- Sd/- (LAXMI PRASAD SAHU) (GEORGE GEORGE K) Accountant Member Vice President Bangalore. Dated : 08.10.2024. /NS/* Copy to: 1. Appellants 2. Respondent 3. DRP 4. CIT 5. CIT(A) 6. DR, ITAT, Bangalore. 7. Guard file By order Assistant Registrar, ITAT, Bangalore. "