M/s Energy Solutions International (India) Pvt.Ltd., Hyderabad V. Asst.CIT., Cir-2(2), Hyderabad

ITA 1736/HYD/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 74444 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 1 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-01-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 05-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S RAGHUNATHAN
• Keywords: Transfer pricing; Double taxation relief; Opportunity of being heard; Principle of natural justice; Corroborative evidences

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.362/HYD/2011 & ITA NO. 1736/HYD/2 012 ASSESSMENT YEAR 2007-08 & 2008-09. ENERGY SOLUTIONS INTERNATIONAL -V- DCIT, CIR-2(2), INDIA PVT. LTD., HYDERABAD. HYDERABAD. PAN:AABCP 2325 F (APPELLANT) (RESPONDENT) APPELLANT BY SHRI S. RAGHUNATHAN RESPONDENT BY SHRI SOLGY JOSE T. KOTTARAM DATE OF HEARING 0 7 - 11 - 2013 DATE OF PRONOUNCEMENT 06 - O1 - 2014 ORDER PER SAKTIJIT DEY, J.M: THESE TWO APPEALS ARE FILED BY THE ASSESSEE AGAIN ST SEPARATE ORDERS OF CIT (A)-III, HYDERABAD PERTAINING TO THE ASSESSMENT YEARS 2007-08 AND 2008-09. SINCE ASSESSEE IS COMMON, AND IDENTICAL ISSUES ARE INVOLVED IN THESE TWO APPEALS, THESE ARE HEARD, CLUBBED TOGETHER AND DISPOSED OF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2 ITA NOS.362 AND 1736 ENERGY SOLUTIONS INTERNATIONAL INDIA PVT. LTD., HYDERABAD. 2. AT THE OUTSET, THE LEARNED AR SUBMITTED THAT HE DOES NOT WANT TO PRESS GROUNDS RAISED RELATING TO VIOLATION OF P RICIPLES OF NATURAL JUSTICE IN BOTH THE APPEALS. HENCE GROUND NO.2 IN ITA NO.362/HYD/2011 AND GROUND NO.3 IN ITA NO. 1736/HYD /2012 ARE DISMISSED AS NOT PRESSED. 3. THE ONLY COMMON ISSUE IN THE PRESENT APPEALS OF THE ASSESSEE IS WITH REGARD TO THE DISALLOWANCE MADE U/S 40(A) ( I) OF THE ACT ON ALLEGED FAILURE ON THE PART OF THE ASSESSEE TO DEDU CT TAX AT SOURCE ON THE PAYMENT OF ROYALTY. 4. SINCE FACTS IN BOTH THE APPEALS ARE IDENTICAL, W E WILL DEAL WITH THE FACTS AS TAKEN FROM ITA NO.362/HYD/2011.BRIEFLY STATED FACTS ARE, THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGA GED IN THE BUSINESS OF PROVIDING CONSULTING SERVICES AND SOFTW ARE SOLUTIONS AND SUPPORT SERVICES IN RELATION TO PIPELINE NETWORKS. IN THE COURSE OF PROVIDING INSTALLATION, AUGMENTATION, CONSULTANCY A ND SUPPORT SERVICES TO THE ULTIMATE CLIENTS FOR THEIR PIPELINE PROJECTS, THE ASSESSEE PROCURES CERTAIN HIGH END TECHNOLOGY SOFTW ARE LICENSES FROM ITS ASSOCIATE ENTERPRISE, ENERGY SOLUTIONS INT ERNATIONAL INC, U.S.A AND SELLS IT TO THE ULTIMATE CUSTOMERS. FOR THE IMPUGNED ASSESSMENT YEAR, THE ASSESSEE FILED ITS RETURN OF I NCOME ON 31-10- 2007 DECLARING A TOTAL INCOME OF RS.34,73,050/-. D URING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER WHILE EXAMINING THE ACCOUNTS OF THE ASSESSEE NOTED THAT THE ASSESSEE HA D DEBITED AN AMOUNT OF RS.1,58,03,062/- TOWARDS SOFTWARE. ON FU RTHER EXAMINATION, THE ASSESSING OFFICER NOTED THAT THE S AID EXPENDITURE INCLUDES THE PAYMENT MADE TOWARDS PURCHASE OF CERT AIN SOFTWARE FROM ENERGY SOLUTIONS INTERNATIONAL, US AND NEOWARE UK LIMITED FOR 3 ITA NOS.362 AND 1736 ENERGY SOLUTIONS INTERNATIONAL INDIA PVT. LTD., HYDERABAD. AN AMOUNT OF RS.1,33,46,155/-. THE ASSESSING OFFIC ER ON VERIFYING DETAILS OF BILLS/PURCHASE ORDERS WAS OF THE VIEW TH AT THE PAYMENT IN RESPECT OF THE AFORESAID SOFTWARE/LICENSES ARE IN T HE NATURE OF ROYALTY WITHIN THE MEANING OF SECTION 9(1)(IV) OF THE ACT AND HENCE WAS SUBJECT TO THE PROVISIONS OF SECTION 195 OF TH E ACT. SINCE THE ASSESSEE HAS NOT DEDUCTED ANY TAX AT SOURCE ON THES E PAYMENTS, THE ASSESSING OFFICER ISSUED A SHOW CAUSE NOTICE PR OPOSING TO DISALLOW THE EXPENDITURE CLAIMED U/S 40(A)(I) OF TH E ACT. THOUGH THE ASSESSEE OBJECTED TO THE PROPOSED DISALLOWANCE, THE ASSESSING OFFICER PRIMARILY RELYING UPON THE FINDING OF THE CIT (A) IN THE APPEAL ORDER PASSED FOR THE ASSESSMENT YEARS 2004-0 5 AND 2005-06 ON IDENTICAL ISSUE, HELD THAT THE AMOUNT PAID IS R OYALTY, HENCE SUBJECT TO TDS PROVISIONS U/S 195(1) OF THE ACT. SINCE THE ASSESSEE HAS NOT DEDUCTED ANY TAX AT SOURCE ON SUCH PAYMENTS, THE ASSESSING OFFICER DISALLOWED THE ENTIRE EXPENDITURE OF RS.1,33,46,155/- AND ADDED THE SAME TO THE INCOME OF THE ASSESSEE FOR THE IMPUGNED ASSESSMENT YEAR. BEING AG GRIEVED OF THE SAID ORDER OF ASSESSMENT, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT (A). THE CIT (A) ALSO SUSTAINED THE DISALL OWANCE. 5. THE LEARNED AR SUBMITTED BEFORE US THAT THE ASSE SSEE HAD PURCHASED SOFTWARE FROM THE PARENT COMPANY AND S OLD IT TO THE END USER ON BACK TO BACK BASIS AND AS SUCH THE ASSE SSEE IS ONLY A DISTRIBUTOR OF THE SOFTWARE. IT WAS FURTHER SUBMIT TED THAT AS PER THE TERMS OF AGREEMENT, THE ASSESSEE CANNOT MAKE ANY DE VELOPMENT MODIFICATION TO THE SOFTWARE. FURTHER EXPLAINING, THE LEARNED AR SUBMITTED THAT THE ASSESSEE DOES NOT PROVIDE ANY DE VELOPMENT SERVICES TO THE SOFTWARE PRODUCTS PROCURED BY IT FO R RESALE. THE CUSTOMER BASED IN INDIA PLACES A PURCHASE ORDER WIT H THE ASSESSEE. 4 ITA NOS.362 AND 1736 ENERGY SOLUTIONS INTERNATIONAL INDIA PVT. LTD., HYDERABAD. THE ASSESSEE, IN TURN, ON THE BASIS OF THE PURCHASE ORDER OF THE CUSTOMER, PLACES A PURCHASE ORDER WITH ITS OVERSEAS ASSOCIATED ENTERPRISES FOR PROCURING THE REQUIRED SOFTWARE. T HE PAYMENT FROM CUSTOMERS TOWARDS SOFTWARE IS RECEIVED ONLY ONCE AN D THERE ARE NO RECURRING PAYMENTS. THE LEARNED AR SUBMITTED THAT THE ASSESSEE IS NEITHER AUTHORISED NOR IS CAPABLE OF MAKING COPIES OF THE SOFTWARE AS THE SOFTWARE IS PROTECTED WITH HARDWARE LOCK OR SOFTWARE LOCK PERMITTING USE BY THE END CUSTOMER IN INDIA. CONTRO L OVER THE HARDWARE AND SOFTWARE LOCKS (SOURCE CODE) ARE THE E XCLUSIVE DOMAIN OF AE. IT WAS SUBMITTED, AS A PART OF IMPLEMENTATI ON PROCESS THE ASSESSEE ONLY CARRIES OUT THE CONFIGURATION AND PAR AMETER SETTING TO SUIT THE SPECIFIC OUTPUT NEEDS OF THE CLIENTS. HE FURTHER SUBMITTED, THE OVERSEAS AE CONTRACT DIRECTLY WITH THE INDIAN C USTOMER FOR ENTERING INTO THE END USER LICENSE AGREEMENT. IT W AS SUBMITTED, THE ASSESSEE DOES NOT HAVE ACCESS TO THE SOURCE CODE OF THE SOFTWARE AND THE QUESTION OF REPLICATING/RE-PRODUCING THE SO FTWARE DOES NOT ARISE. IT WAS SUBMITTED THAT IN THE AFORESAID CIRC UMSTANCES, THE PAYMENT MADE TO THE ASSOCIATED ENTERPRISES (AE) CAN NOT BE CONSIDERED TO BE ROYALTY. IN THIS CONTEXT, THE LEA RNED AR REFERRED TO CLAUSES 14.4 OF OECD COMMENTARY TO STRESS UPON THE FACT, WHEN THERE IS DISTRIBUTION OF SOFTWARE ON BACK TO BACK B ASIS, THERE IS NO REQUIREMENT TO DEDUCT TAX AT SOURCE. IN THIS CONTE XT, THE LEARNED AR RELIED UPON A DECISION IN CASE OF CIT VS. DYNAMI C VERTICAL SOFTWARE INDIA PRIVATE LIMITED (332 ITR 222). IT W AS FURTHER CONTENDED BY THE LEARNED AR THAT NEITHER THE ASSESS ING OFFICER NOR THE CIT (A) HAVE CONSIDERED THE FACTS AND MATERIALS PLACED BEFORE THEM IN PROPER PERSPECTIVE AND HENCE HAVE ARRIVED A T AN ERRONEOUS CONCLUSION. THE LEARNED AR FURTHER SUBMITTED THAT, THE ORDER OF THE 5 ITA NOS.362 AND 1736 ENERGY SOLUTIONS INTERNATIONAL INDIA PVT. LTD., HYDERABAD. CIT (A) FOR THE ASSESSMENT YEARS 2004-05 AND 2005-0 6 ON WHICH THE ASSESSING OFFICER AND CIT (A) RELIED UPON WHILE DECIDING THE ISSUE IN THE MEANWHILE HAS BEEN SET ASIDE BY THE IN COME-TAX APPELLATE TRIBUNAL, HYDERABAD BENCH IN ITA NOS. 162 4 AND 1625/HYD/08 DATED 10-2-2010 AND THE ISSUE, HAS BEEN REMITTED BACK TO THE ASSESSING OFFICER FOR CONSIDERING THE S AME AFRESH. THE LEARNED AR THEREFORE CONTENDED THAT FOR THE IMPUGNE D YEARS ALSO THE MATTER MAY BE REMITTED BACK TO THE ASSESSING O FFICER TO DECIDE AFRESH AFTER CONSIDERING THE CONTENTIONS OF THE ASS ESSEE AS WELL AS THE RATIO LAID DOWN IN THE DECISION REPORTED IN CI T VS. DYNAMIC VERTICAL SOFTWARE INDIA PRIVATE LIMITED (SUPRA). 6. THE LEARNED DEPARTMENTAL REPRESENTATIVE ALSO EXP RESSED THE VIEW THAT THE MATTER MAY BE REMITTED BACK TO THE FI LE OF THE ASSESSING OFFICER FOR CONSIDERING THE SAME AFRESH. 7. WE HAVE HEARD THE CONTENTIONS OF THE PARTIES AND PERUSED THE MATERIALS ON RECORD AS WELL AS THE ORDERS OF THE LO WER AUTHORITIES. THE SUM AND SUBSTANCE OF THE ASSESSEES CONTENTION BEFORE US IS, IT IS ONLY A DISTRIBUTOR OF THE SOFTWARE PROCURED FROM ITS AES TO THE END CUSTOMER. IN OTHER WORDS, THE ASSESSEE HAS SOLD TH E SOFTWARE AS IT IS AS BACK TO BACK SALE. APART FROM THE CARRYING O UT INITIAL CONFIGURATION AND PARAMETER SETTING TO SUIT THE SPE CIFIC NEEDS OF THE CLIENTS THE ASSESSEE HAS DONE NOTHING MORE. IT IS FURTHER CONTENTION OF THE ASSESSEE THAT THE PROVISION CONTAINED U/S 9 (1)(IV) READ WITH ARTICLE 12(3) OF THE INDIA-US DTAA MAKES IT CLEAR T HAT ONLY A PAYMENT FOR THE RIGHT TO USE ANY COPY RIGHT CAN BE TREATED AS PAYMENT FOR ROYALTY. 6 ITA NOS.362 AND 1736 ENERGY SOLUTIONS INTERNATIONAL INDIA PVT. LTD., HYDERABAD. 8. IT IS A FACT THAT THE HONBLE DELHI HIGH COUR T IN CASE OF CIT VS. DYNAMIC VERTICAL SOFTWARE INDIA P. LTD (SUPRA) HAS HELD THAT IN CASE OF PAYMENT TOWARDS PURCHASE AND SALE OF SOFTWARE BY AN ASSESSEE WHO ACTED MERELY AS A DEALER CANNOT BE TERMED AS RO YALTY SO AS TO REQUIRE DEDUCTION OF TAX AT SOURCE U/S 40(A)(I) OF THE ACT. HOWEVER, THE ASSESSEE IS REQUIRED TO ESTABLISH THE FACT ON R ECORD BY PRODUCING SUPPORTING EVIDENCE THAT IT WAS MERELY A DISTRIBUTO R OF SOFTWARE TO THE INDIAN CUSTOMER BY PROCURING FROM THE OVERSEAS ASSOCIATED ENTERPRISE. THE ASSESSEE IS REQUIRED TO PROVE THAT THE PAYMENT MADE WAS NOT FOR ROYALTY AS DEFINED IN EXPLANATIO N 2 TO SECTION 9(1)(VI) READ WITH INDIA-US DTAA. IT APPEARS FRO M THE ASSESSMENT ORDER AS WELL AS THE ORDER OF THE CIT (A) THAT THEY HAVE COME TO THE CONCLUSION WITH REGARD TO THE PAYMENT BEING MADE BY THE ASSESSEE AS ROYALTY PRIMARILY RELYING UPON THE ORDER OF TH E CIT (A) PASSED FOR ASSESSMENT YEARS 2004-05 AND 2005-06. HOWEVER, THE SAID ORDER OF THE CIT (A) WAS CARRIED IN APPEAL TO THE TRIBUNAL BY THE ASSESSEE. THE TRIBUNAL VIDE ORDER DATED 10-2-2010 IN ITA NOS.1624 AND 1625/HYD/2008 REMITTED THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER WITH THE FOLLOWING OBSERVATION:- WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL AVAILABLE ON RECORD. AFTER CONSIDERING HA TE FACTS OF THE CASE, WE FIND THAT BOTH THE REPRESENTATIVES OF RIVAL PARTIES AGREED TO SEND BACK THE MATTERS TO THE FIL E OF THE ASSESSING OFFICER FOR RECONSIDERATION. IN VIEW OF T HE ABOVE, WE AGREE WITH THE REPRESENTATIVES OF THE PARTIES AN D SEND BACK ALL THE ISSUES INCLUDING ADDITIONAL GROUNDS TO THE FILE OF THE ASSESSING OFFICER FOR CONSIDERATION AFRESH IN A CCORDANCE 7 ITA NOS.362 AND 1736 ENERGY SOLUTIONS INTERNATIONAL INDIA PVT. LTD., HYDERABAD. WITH LAW AND DECIDE THE SAME AFTER HEARING ALL THE CONTENTIONS OF THE ASSESSEE. 9. THEREFORE, CONSIDERING THE SUBMISSION OF TH E PARTIES IN THE LIGHT OF THE RATIO LAID DOWN IN CASE OF CIT VS. DYN AMIC VERTICAL SOFTWARE INDIA P. LTD (SUPRA) AND KEEPING IN VIEW T HE DIRECTION GIVEN BY THE CO-ORDINATE BENCH IN ASSESSEES OWN CA SE FOR THE ASSESSMENT YEARS 2004-05 AND 2005-06, WE ALSO REMIT THE ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER WHO SHALL CONSIDER IT AFRESH AFTER EXAMINING ALL THE FACTS AND MATERIALS ON RECO RD. THE ASSESSING OFFICER SHALL ALSO TAKE INTO CONSIDERATION ANY DECI SION WHICH MAY BE RELIED UPON BY THE ASSESSEE IN SUPPORT OF ITS CLAIM . SINCE WE HAVE REMITTED THE ISSUE BACK TO THE FILE OF THE ASSESSIN G OFFICER FOR CONSIDERING THE SAME AFRESH, IT WILL BE OPEN TO THE ASSESSEE TO RAISE ALL OTHER CONTENTIONS WITH REGARD TO ITS CLAIM OF N OT BEING LIABLE TO DEDUCT TAX AT SOURCE U/S 195 OF THE ACT. WITH THE AFORESAID OBSERVATION, THE MATTER IS REMITTED TO THE FILE OF THE ASSESSING OFFICER FOR DECIDING THE SAME IN ACCORDANCE WITH LA W AFTER AFFORDING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSE SSEE. 8. ITA NO.1736/HYD/2012- ASST. YEAR 2008-09 : ISSUE BEING COMMON AND FACTS BEING IDENTICAL, FOLLOWING OUR DEC ISION IN ITA NO.362/HYD/11, WE REMIT THIS MATTER ALSO BACK TO TH E FILE OF THE ASSESSING OFFICER FOR DECIDING THE SAME AFRESH IN A CCORDANCE WITH OUR DIRECTION GIVEN HEREINABOVE. 8 ITA NOS.362 AND 1736 ENERGY SOLUTIONS INTERNATIONAL INDIA PVT. LTD., HYDERABAD. 9. IN THE RESULT, BOTH THE APPEALS ARE TREATED AS A LLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT ON 06 -01-2014. SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER SD/- (SAKTIJIT DEY) JUDICIAL MEMBER HYDERABAD, DATED THE 6 TH JANUARY, 2014. JMR* COPY TO:- 1) ENERGY SOLUTIONS INTERNATIONAL (INDIA) PVT. LTD., F IRST FLOOR, GHB HOUSE, PLOT NO.264/A (EXTN.) ROAD NO.10, JUBILEE HILLS, HYDERABAD. DCIT, CIR-1(2) AAYAKAR BHAVAN, HYDERABAD. 2) DCIT, CIR-2(2), 8 TH FLOOR, B- BLOCK, IT TOWERS, HYDERABAD. 3) CIT (A)-III, HYDERABAD. 4) CIT-II, HYDERABAD. 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDERABAD. 9 ITA NOS.362 AND 1736 ENERGY SOLUTIONS INTERNATIONAL INDIA PVT. LTD., HYDERABAD.