DCIT Intl Tax. Circle 1(2)(2), New Delhi V. EY Global Services Ltd., United Kingdom

ITA 1254/DEL/2023

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The case involves three appeals by the Revenue against the orders of the Ld. CIT(Appeals)-42, Delhi, concerning the assessment years 2017-18, 2018-19, and 2019-20. The primary issue was whether the amounts received by EY Global Services Ltd. (EYGBS) from its Indian subsidiary for software and technology services constituted royalty and were thus taxable under Indian law and the India-UK Double Taxation Avoidance Agreement (DTAA). The Tribunal examined the precedents set by the Supreme Court in the Engineering Analysis Centre case and the rulings of the Delhi High Court, which favored the assessee, EYGBS. The Tribunal found that the services provided did not amount to royalty as they did not involve the transfer of copyright or any similar rights.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 108306 (ITAT-DELHI)
• Duration Of Justice: 4 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-09-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 13-09-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 26-04-2023
• Other Referred Cases: Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT
• Laws Referred To: Income Tax Act, India UK DTAA
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Double taxation relief; Advance ruling; Set aside
• Section: 72

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “D” NEW DELHI BEFORE SHRI G.S. PANNU, HON’BLE PRESIDENT AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER आ .अ.स ं /.I.T.A Nos.1254 to 1256/Del/2023 /Assessment Years:2017-18 to 2019-20 DCIT Circle 1(2)(2), International Taxation, Room No.503,5 th Floor, D Block, Dr. S.P. Mukherjee, Civic Centre, New Delhi. ब म Vs. EY Global Services Ltd., 6 More London Palace, SEI 2DA London, United Kingdom. PAN No.AACCE3488K अ Appellant /Respondent Revenue by Shri Vizay B. Vasanta, CIT DR Assessee by Shri Nikhil Tiwari, CA स ु नवाईक तारीख/ Date of hearing: 14.09.2023 उ ोषणाक तारीख/Pronouncement on 25.09.2023 आदेश /O R D E R PER C.N. PRASAD, J.M. These three appeals are filed by the Revenue against the orders of the Ld.CIT(Appeals)-42, Delhi dated 24.02.2023 for the assessment years 2017-18, 2018-19 & 2019-20. The Revenue has raised the following common grounds in all these three appeals: - 2 1. “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in holding that amounts received by EYGBS(UK) for providing Bundle of Software hosted on Common Platform to its Associate Group Entities is covered under the law laid by SC in its judgement of Engineering Analysis Centre. 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in holding that for taxing amounts received by EYGBS(UK) form EYGBS(india) as Royalty, transfer of copyright in software is essential without considering the fact that transactions of assessee do not fall in four categories as mentioned in paragraph 4 of SC in its judgement of Engineering Analysis Centre. 3. Whether on the facts and in the circumstances of the case and in law, the Ed. CIT(A) is correct in holding that amounts received by EYGBS(UK) from its Member Firms is squarely covered by SC in its judgement of Engineering Analysis Centre, even though there is no direct transfer of Off the Shelf Software from Third Party Vendor to End User in the present case.” 2. At the outset, the Ld. Counsel for the assessee submits that the issue in appeal is squarely covered by the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT, (432 ITR 471). The Ld. Counsel for the assessee further submits that in assessee’s own case the Hon’ble Delhi High Court while setting aside the decision of the Hon’ble Authority for Advance Ruling (AAR) adjudicated the issue in favour of the assessee holding that Software License Fees, GWAN connectivity and global technology charges are not royalty under 3 India UK DTAA as well as under the provisions of IT Act. The Ld. Counsel for the assessee before us submitted submissions as under: “1. The Respondent is a non-profit central service provider which incurs costs in providing centralized services to various member firms and thereafter, the costs so incurred are shared amongst the member firms on actual usage basis. 2. In India, the Respondent had entered into agreements with EYGBS (India) Private Limited (since then converted to EYGBS (India) LLP with effect from 5th April 2018 and hereinafter known as ‘EYGBS’) and EYGDS (India) LLP pursuant to which it recovers costs incurred by it. Given the above, it filed its return of income for the respective years declaring NIL income. 3. In order to achieve certainty in its above tax position and avoid protracted litigation in India with respect to receipts from EYGBS (India), the Respondent filed an application before Hon’ble Authority for Advance Ruling (‘AAR’) on 09 February 2011. 4. The Hon’ble AAR (AAR No 1043/2011) while pronouncing its ruling on 10 August 2016 held that the consideration received by the Respondent on account of provision of all services except software charges are not in nature of FTS/ Royalty and hence, not taxable in India. 5. In respect of Software charges, Global Wide Area Network (‘GWAN’) connectivity charges and Global Technology costs, the Hon’ble AAR had held that consideration received is in nature of “Royalty” as per the provisions of the Act and the treaty as well. The copy of Hon’ble AAR order (AAR No 1043/2011) dated 10 August 2016 is enclosed at page 1 to 36 of the paper book. 6. Against the said order of the AAR, the Respondent had filed a Writ petition before the Hon’ble High Court Delhi (hereinafter referred as “Hon’ble Delhi HC”) seeking relief against the adverse ruling of the AAR on 4 reimbursement of software license costs as well as GWAN and Global Technology costs which were held to be in the nature of royalty by Hon’ble AAR. The Hon’ble High Court Delhi granted the relief and held that reimbursement of software license costs as well as GWAN and Global Technology costs are not in the nature of royalty. Assessment Proceedings (During pendency of Writ Petition): 7. During the pendency of above Writ petition before the Hon’ble Delhi HC, the Ld. AO framed the assessment for AY 2017-18 wherein it was held that Global Technology charges, GWAN connectivity charges and Software license and maintenance charges are in the nature of royalty basis the ruling of Hon’ble AAR. Further, for AY 2018-19 and AY 2019-20, which assessments were made after the aforesaid decision of the Hon’ble Delhi High Court, the Ld. AO in the assessment held that Global Technology charges, GWAN connectivity charges are in the nature of royalty basis the ruling of Hon’ble AAR. The additions made by the Id.AO in assessment are tabulated as under: 5 CIT(A) proceedings: 8. Aggrieved by the order of the Ld. AO, the Respondent had filed an appeal before the Ld. CIT(A), wherein the Ld. CIT(A) following the decision of Hon’ble Delhi High Court in Writ petition filed against AAR order and ITAT orders for AY 2012-13 to 2015-16 has held that above mentioned payments are not taxable as Royalty under India-UK DTAA and Section 9(1). Against the said order of Ld. CIT(A), the Department has filed the present appeals before the Hon’ble ITAT. Our Submissions against Department’s Appeals 9. At the outset, it is respectfully submitted that the issue raised by department in Appeals for AY 2017-18 to 2019-20 is covered by decisions of Hon’ble Delhi High Court and Hon’ble Delhi ITAT in Respondent’s own case as under: Delhi High Court order in Writ Petition against AAR order: 9.1 Vide order dated 09 December 2021 in (WP (C) 11957/2016 & CM 27602/2021), the Hon’ble Delhi HC has passed an order in favour of the Respondent wherein the decision of Hon’ble AAR (to the extent challenged by the Respondent) was set aside and adjudicated in the favour of the Respondent holding that Software license fees. GWAN Connectivity and Global Technology Charges are not Royalty under India- UK DTAA as well as provisions of the Act. The relevant extract of the HC order is reproduced herein under: “14. In the present case, the EYGBS (India), in terms of the Service Agreement and the MOU, merely received the right to use the software procured by the EYGSL (UK) from third-party vendors. The consideration paid for the use of the same therefore, cannot be termed as 'royalty' as held by the Supreme Court in Engineering Analysis Centre (supra). In determining the same, the rights acquired by the EYGSL (UK) from the third-party software vendors are not relevant. What is relevant 6 is the Agreement between the EYGSL (UK) and the EYGBS (India). As the same does not create any right to transfer the copyright in the software, the same would not fall within the ambit of the term 'royalty' as held by the Supreme Court in Engineering Analysis Centre (supra)... 18. In view of the above, the Impugned Ruling dated 10.08.2016 passed by the learned AAR are set aside and it is held that the payment received by EYGSL (UK) for providing access to computer software to its member firms of EY Network located in India, that is, EYGBS (India), does not amount to 'royalty’ liable to be taxed in India under the provisions of the Income Tax Act, 1961 and the India-UK DTAA.” A copy of the Hon’ble Delhi HC order dated 09 December 2021(WP No. 11967/2016) setting aside AAR’s order is enclosed at Page 37 to 58 of the Paper Book for your Honor’s reference. ITAT order for AY 2012-13 to AY 2015-16 9.2 The said fact has been duly considered by the Hon’ble Delhi ITAT in its order passed for AYs 2012-13 to AY 2015-16 (ITA Nos. 7017 to 7020/Del/2019) dated 1 June 2022, whereby, the Hon’ble ITAT had directed the Ld. AO to follow the order passed by Hon’bie Delhi HC in favour of the Respondent. The relevant extract of the Hon’ble Tribunal order is reproduced herein under: “11. Accordingly, upon careful consideration, we find that undoubtedly Hon’ble Delhi High Court has reversed the order of AAR but the Hon’ble High Court order was not in existence when the authorities below passed the order. Hence it would be appropriate to remit the cases to the AO to follow the Hon’ble High Court order and give effect accordingly. 12. Our aforesaid order applies mutatis mutandis to AYs 2013-14, 2014-15 and 2015-16 also. 13. In the result, all the appeals filed by the assessee stand allowed for statistical purposes. ” 7 A copy of the order so passed by the Hon’ble ITAT is enclosed at page 59 to 68 of the Paper Book for your Honor’s reference. 9.3 Against the said order of the Hon’ble ITAT dated 1st June 2022, the Department had filed an appeal before the Hon’ble Delhi HC which has been dismissed. A copy of the order dated 09 January 2023 passed by the Hon’ble Delhi HC dismissing revenue’s appeal is also enclosed at page 69 to 71 of the Paper Book for your Honor’s reference. Assessment proceedings for AY 2020-21 and AY 2021-22 9.4 Further, the Ld. AO in the assessment for AY 2020-21 and 2021-22 has accepted the returned income filed by the assessee, relying on the order of the Hon’ble Delhi High Court and has not made any addition for Software license fees. GWAN Connectivity and Global Technology Charges. A copy of the order so passed by the Ld. AO is enclosed at page 72 to 75 of the Paper Book for your Honor’s reference. Prayer: Accordingly, the Respondent prays that post favourable order of Hon’ble Delhi High Court reversing the ruling of AAR (to the extent challenged by the appellant), the grounds raised by the department are squarely covered in favour of the Respondent and same has been accepted by the Department in Assessment proceedings for AY 2020-21 and AY 2021-22, thereby it is submitted that the department appeals on these issues for captioned AYs be dismissed and CIT(A) order on this ground be upheld.” 3. We also further find that the Ld.CIT(A) following the decision of the Delhi High Court in assessee’s own case and also the decision 8 of the Tribunal for the assessment years 2012-13 to 2015-16 in ITA No.7017 to 7020/2010 held that software license fees and maintenance charges are not royalty. It was also held that global technology charges and GWAN connectivity charges are not royalty under India UK DTAA observing as under: - “8. Ground no. 2 is against the taxation of receipts towards Software license and maintenance charges amounting to Rs. 12,32,61,326/- as Royalty under the Act as well as treaty. 8.1 The AO’s order is based on the ruling of Hon’ble AAR treated software license and maintenance charges received by the appellant of Rs. 12,32,61,326/- for giving right to use of computer software in the nature of royalty under the Act as well as India-UK DTAA. 8.2 It has been submitted that the appellant, being a central service provider, has entered into master license agreement with third party vendors like Microsoft, IBM Corp, Kontiki, etc. Pursuant to the said agreements, the appellant is permitted to enable access for use of software’s to its Affiliates as well {tie. each. Affiliate does not own the license but is granted access to use it). It has been informed such software’s are bundled together and loaded on servers located at places outside India and thereby a ‘standard facility’ is created by the appellant so that all EY Member Firms use common ‘software applications’ loaded on appellant’s servers for easy integration and compatibility. It is contended that the payments received by the appellant are pursuant to right to access a bundle of software applications and not for any right to reproduce or make copies of these applications of make commercial use of the same; the appellant neither gets nor does it provide the member firms the source code or object code pertaining to the software applications and it merely grants right to use the computer software product i.e. copyrighted product and 9 not right to use of copyright of the computer software. Relying upon various case laws and in particular Hon’ble Supreme Court judgment in Engineering Analysis Centre of Excellence Private Limited [TS-106- SC-2021], it is contended that the impugned receipt does not amount to Royalty. It is further argued relying upon various case laws that the nature of payment was pure reimbursement and the same was not taxable on this ground as well. 8.3 The appellant has drawn attention to the Hon’ble Delhi High Court’s order dated 09.12.2021 in WP(C) 11957/2016 & CM 27602/2021 wherein the High Court has allowed the writ filed by the appellant against the ruling of Hon’ble AAR by setting aside the ruling of the AAR and the Hon’ble Court held that the payment received by appellant for providing access to computer software to its members firms in India does not amount to Royalty liable to be taxed in India under the Act and lndia-UK DTAA. A copy of the order has been filed. 8.4 My attention has also been drawn to the fact that the Hon’ble ITAT has also allowed the appeal of the appellant for AYs 2012-13 to AY 2015-16 in ITA nos. 7017-7018-7019-7020/Del/2019 and directed the AO to follow the order passed by Hon’ble Delhi HC in favour of the assessee. A copy of the order has been filed. It is further informed that the Hon’ble HC has dismissed the appeal filed by department against the said ITAT order. A copy of order of Hon’ble Delhi High Court dated 09.01.2023 has been filed. 8.5 It has been shown that following the order of Hon’ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. [TS-106-SC-2021] and Hon’ble Delhi High Court in appellant’s own case, the AO in AY 2020-21 and AY 2021-22 has not taxed Software and Maintenance charges as income. Copy of assessment order dated 26.09.2022 for AY 2020-21 & 26.12.2022 for AY 2021-22 has been filed. 8.6 Respectfully following the order of Hon’ble Supreme Court in Engineering Analysis Centre of 10 Excellence Pvt. Ltd. [TS-106-SC-2021] and Hon’ble Delhi High Court in appellant’s own case in WP(C) 11957/2016 & CM 27602/2021 and considering the fact that the AO has himself, in AY 2020-21 and AY 2021-22, not taxed Software and Maintenance charges as income, the addition of Rs. 12,32,61,326/- is deleted. This ground is allowed. 9. Ground no. 4 is against treatment of Global technology charges and GWAN connectivity charges amounting to Rs. 9,61,53,543/- and Rs. 14,45,41,444/- respectively as “royalty” under the Act and the treaty. 9.1 It has been explained that Global technology charges include manpower support charges for development and maintenance of IT application and other related infrastructure cost including hardware cost and cost of servers etc. The GWAN Connectivity charge is about network connectivity; the office site gets connected to the network and the charges for the connectivity are based on bandwidth required by the office. 9.2 Relying upon the ruling of AAR, the AO taxed these charges as Royalty under the Act and India-UK DTAA. 9.3 As already discussed, the Hon’ble Delhi High Court’s in its order dated 09.12.2021 in WP(C) 11957/2016 & CM 27602/2021 set aside the ruling of the AAR and the Hon’ble Court held that the payment received by appellant for providing access to computer software to its members firms in India does not amount to Royalty liable to be taxed in India under the Act and India-UK DTAA. 9.4 Further, the Hon’ble ITAT has also allowed the appeal of the appellant for AYs 2012-13 to AY 2015-16 in ITA nos. 7017-7018-7019-7020/Del/2019 and directed the AO to follow the order passed by Hon’ble Delhi HC in favour of the assessee. Furthermore, the Hon’ble HC has dismissed the appeal filed by department against the said ITAT order. 11 9.5 St is observed that following the order of Hon’ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. [TS-106-SC-2021] and Hon’ble Delhi High Court in appellant’s own case, the AO in AY 2020- 21 and AY 2021-22 has not taxed Global technology charges and GWAN connectivity charges as income. 9.6 Respectfully following the order of Hon’ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. [TS-106-SC-2021] and Hon’ble Delhi High Court in appellant’s own case in WP(C) 11957/2016 & CM 27602/2021 and considering the fact that the AO has himself, in AY 2020-21 and AY 2021-22, not taxed Global technology charges and GWAN connectivity charges as income, the addition of Rs. 9,61,53,543/- and Rs. 14,45,41,444/-respectively is deleted. This ground is allowed. 4. On careful perusal of the order of the Ld.CIT(Appeals), we observe that the issues have been decided by Ld.CIT(A) in favour of the assessee following the decision of the Hon’ble Delhi High Court in assessee’s own case and also the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (supra) and, therefore, we see no infirmity in the order passed by the Ld.CIT(A) in holding that receipts towards software license and maintenance charges, global technology charges and GWAN connectivity charges are not royalty under the IT Act and also under India UK DTAA. Thus, we sustain the order of the Ld.CIT(A) and reject the grounds raised by the Revenue. 12 5. In the result, appeals of the Revenue are dismissed. Order pronounced in the open court on 25/09/2023 Sd/- Sd/- (G.S. PANNU) (C.N. PRASAD) PRESIDENT JUDICIAL MEMBER Dated: 25/09/2023 *Kavita Arora, Sr. P.S. Copy of order sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT (DR)/Guard file of ITAT. By order Assistant Registrar, ITAT: Delhi Benches-Delhi