M/s. Sandvik Systems Development AB, Pune V. Deputy Commissioner of Income tax, Pune

ITA 190/PUN/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 1917 (ITAT-PUNE)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-06-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2010-2011
• Appeal Filed On: 27-01-2017
• Court: TRIBUNAL

Judgement Text

, LH IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH C, PUNE , . , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI D. KARUNAKARA RAO, AM . / ITA NO.190/PUN/2017 / ASSESSMENT YEAR : 2010-11 M/S. SANDVIK SYSTEMS DEVELOPMENT AB, C/O. SANDVIK ASIA PRIVATE LIMITED, MUMBAI-PUNE ROAD, DAPODI, PUNE-411012. PAN : AAHCS7485H . /APPELLANT VS. DCIT (INTERNATIONAL TAXATION), CIRCLE-2, PUNE. . / RESPONDENT ASSESSEE BY : SHRI NIKHIL PATHAK REVENUE BY : SHRI A. K. MODI / DATE OF HEARING : 06.05.2019 / DATE OF PRONOUNCEMENT: 27.06.2019 / ORDER PER D. KARUNAKARA RAO, AM : THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE ASSESSING OFFICER/TPO/DRP FOR THE ASSESSMENT YEAR 2010-11. 2. THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER :- 1. GROUND 1: ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE LEARNED DISPUTE RESOLUTION PANEL ('LD. DRP) ERRED IN CONFIRMING THE ACTION OF THE LEARNED ASSESSING OFFICER (LD.AO) IN REOPENING THE ASSESSMENT PROCEEDINGS WHEN THE ASSESSEE HAD DISCLOSED FULLY AND TRULY ALL THE MATERIAL FACTS NECESSARY FOR THE ASSESSMENT. IT IS PRAYED THAT THE REOPENING INITIATED ARE INVALID AND VOID AND HENCE BE QUASHED. 2. GROUND 2: WITHOUT PREJUDICE TO GROUND 1 ABOVE, ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, LD. DRP HAVE ERRED IN CONFIRMING THE ACTION OF THE LD. AO OF TAXING THE RECEIPT FOR PROVIDING USER ACCESS TO SOFTWARE APPLICATION OF RS. ITA NO.190/PUN/2017 2 1,16,788 AS ROYALTY WITHIN THE MEANING OF ARTICLE 12 OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND SWEDEN (DTAA OR THE TAX TREATY) IT IS PRAYED THAT THE ADDITION MADE BY THE LD. AO AND CONFIRMED BY THE LD. DRP BE DELETED. 3. GROUND 3 WITHOUT PREJUDICE TO GROUND 1 ABOVE, ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, LD. DRP HAVE ERRED IN TAXING THE RECEIPTS FOR SOFTWARE MAINTENANCE CHARGES OF INR 1,30,49,316 AS FEES FOR TECHNICAL SERVICES (FTS) WITHIN THE MEANING OF ARTICLE 12(4)(A) OF THE DTAA BETWEEN INDIA AND PORTUGAL (REFERRED TO VIA THE PROTOCOL TO DTAA BETWEEN INDIA AND SWEDEN). IT IS PRAYED THAT THE ADDITION MADE BY THE LD. AO AND CONFIRMED BY THE LD. DRP BE DELETED. 4. GROUND 4 WITHOUT PREJUDICE TO THE ABOVE, SHOULD THE ADDITION BE CONFIRMED, AND ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, LD. AO HAS ERRED IN LEVYING EDUCATION CESS ON THE RATE OF TAX SPECIFIED IN THE TAX TREATY. IT IS PRAYED THAT EDUCATION CESS LEVIED BY LD. AO BE DELETED. 5. GROUND 5 WITHOUT PREJUDICE TO THE ABOVE, SHOULD THE ADDITION BE CONFIRMED, AND ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, LD. AO HAS ERRED IN LEVYING INTEREST UNDER SECTION 234B OF THE INCOME TAX ACT, 1961 ('THE ACT) WHILE COMPUTING TAX ON INCOME OF THE ASSESSEE FOREIGN COMPANY. IT IS PRAYED THAT THE INTEREST UNDER SECTION 234B BE DELETED. 3. BRIEFLY STATED THE RELEVANT FACTS INCLUDE THAT THE ASSESSEE IS A FOREIGN COMPANY INCORPORATED IN SWEDEN. THE ASSESSEE DOES NOT HAVE ANY OFFICE OR PLACE OF BUSINESS IN INDIA. NO RETURN OF INCOME WAS FILED BY THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION. A NOTICE U/S. 148 OF THE ACT WAS SERVED ON THE ASSESSEE FOR THE REASON THAT THE ASSESSEE RECEIVED A FEE FOR PROVIDING IT SUPPORT SERVICES FROM SANDVIK ASIA PVT. LTD. (SAPL) IN ASSESSMENT YEAR 2010-11 AND THE SAME WAS NOT OFFERED TO TAX. THE NATURE OF PAYMENT RECEIVED BY THE ASSESSEE IS IN THE FORM OF ROYALTY AND FEES FOR TECHNICAL SERVICES (FTS) ATTRACTIVE THE PROVISIONS OF SECTION 9(1)(VI) & 9(1)(VII) OF THE ACT AS WELL AS ARTICLE 12 OF THE DTAA BETWEEN INDIA AND SWEDEN. IN RESPONSE TO THE AFORESAID NOTICE, THE ASSESSEE FILED THE RETURN OF INCOME ON 24.07.2015 DECLARING TOTAL INCOME OF RS.NIL. ADDITION OF RS.1,31,66,104/- WAS MADE BY THE ASSESSING OFFICER ON ACCOUNT OF FTS ITA NO.190/PUN/2017 3 VIDE DRAFT ASSESSMENT ORDER DATED 19.03.2016. THE ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP) AGAINST THE ADDITION MADE IN THE DRAFT ASSESSMENT ORDER, AS WELL AS ON THE TECHNICAL ISSUE QUASHING THE RE-OPENING OF ASSESSMENT. THE DRP VIDE DIRECTION DATED 28.09.2016 UPHELD THE VALIDITY OF RE-OPENING OF ASSESSMENT. HOWEVER, ON MERIT OF THE ADDITION, THE DRP HELD THAT THE PAYMENT RECEIVED BY THE ASSESSEE IS NEITHER ROYALTY NOR FEES FOR TECHNICAL SERVICES AND HENCE, THE SAME IS NOT LIABLE FOR TAX. ACCORDINGLY, THE ASSESSING OFFICER PASSED FINAL ASSESSMENT ORDER ON 29.11.2016 UPHOLDING THE SAID ADDITION OF RS.1,31,66,104/-. 4. AGGRIEVED WITH THE ABOVE ORDER OF THE ASSESSING OFFICER/TPO/DRP, THE ASSESSEE IS IN APPEAL BEFORE US WITH THE ABOVE EXTRACTED GROUNDS. 5. BEFORE US, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT GROUND NO.1 IS GENERAL IN NATURE AND, THEREFORE, THE SAME IS NOT PRESSED. ACCORDINGLY, THE GROUND NO.1 IS DISMISSED AS NOT PRESSED . REFERRING TO GROUNDS NO.4 AND 5 , LD. COUNSEL SUBMITTED THAT THE SAME ARE EITHER GENERAL OR CONSEQUENTIAL. ACCORDINGLY, THE SAME ARE DISMISSED AS SUCH. THAT LEAVES ONLY GROUND NO.2 AND 3 FOR ADJUDICATION. 6. GROUND NO.2 RELATES TO THE CONFIRMING OF THE ADDITION OF RS.1,16,788/-. BRIEFLY STATED THE RELEVANT FACTS OF THIS ISSUE INCLUDE THAT THE ASSESSEE RECEIVED THE SAID AMOUNT IN RESPONSE TO THE PROVIDING OF USER ACCESS TO THE SOFTWARE APPLICATION. THE ASSESSING OFFICER TREATED THE SAME AS ROYALTY WITHIN THE MEANING OF ARTICLE 12 OF THE INDIA-SWEDEN DTAA. THE ITA NO.190/PUN/2017 4 DRP DECIDED THE SAID ISSUE AGAINST THE ASSESSEE RELYING ON THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS CO. LTD. [2011] 16 TAXMANN.COM 141 (KAR.) AND IN THE CASE OF CIT VS. SYNOPSIS INTERNATIONAL OLD LTD. (ITA NO.11 TO 15/2008 & 17/2008) DATED 03.08.2010. FURTHER, THE DRP RELIED HEAVILY ON THE ORDER OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF CUMMINS INC., 38 TAXMANN.COM 286 WHERE IT IS HELD THAT THE PAYMENT RECEIVED BY THE ASSESSEE FOR GRANT OF USER RIGHT OF SOFTWARE CONSTITUTES ROYALTY IN THE INDIA-USA DTAA AS HELD IN PARA 5.42 OF THE DRPS ORDER. IT IS HELD THAT THE PAYMENT OF RS.1,16,788/- RECEIVED FOR USER CHARGES OF THE SOFTWARE APPLICATION CONSTITUTES ROYALTY. 7. ON HEARING BOTH THE SIDES, WE FIND THAT SIMILAR ISSUE OF DEDUCTIBILITY OF TAX AT SOURCE UNDER SECTION 195 OF THE ACT AROSE BEFORE THE TRIBUNAL IN THE CASE OF JOHN DEERE EQUIPMENT PVT. LTD. VS. DCIT IN ITA NO.627/PUN/2017 FOR THE ASSESSMENT YEAR 2009-10 DATED 24.06.2019. THE TRIBUNAL VIDE ELABORATE DISCUSSION ON THE ISSUE BY PLACING RELIANCE ON THE DECISION OF HONBLE DELHI HIGH COURT IN DIT VS. INFRASOFT LTD. (2013) 39 TAXMANN.COM 88 (DEL) HAD DISTINGUISHED VARIOUS DECISIONS OF AARS AND DECISION OF HONBLE HIGH COURT OF KARNATAKA IN CIT VS. SAMSUNG ELECTRONICS CO. LTD. (2009) 185 TAXMANN.COM 313 (KAR) AND OTHERS RELIED UPON BY LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE AND ALSO TAKEN NOTE OF THE FACT THAT EARLIER DECISION OF PUNE BENCH OF TRIBUNAL IN THE CASE OF CUMMINS INC. (SUPRA) HAD BEEN RECALLED BY MISCELLANEOUS APPLICATION VIDE MA NOS.28 & 29/PUN/2017, ORDER DATED 06.12.2017 AND HAD CONCLUDED BY HOLDING AS UNDER:- 90. IN CONCLUSION, WE HOLD THAT PURCHASE OF SOFTWARE BY THE ASSESSEE BEING COPYRIGHTED ARTICLE IS NOT COVERED BY THE TERM ROYALTY UNDER SECTION ITA NO.190/PUN/2017 5 9(1)(VI) OF THE ACT. WHERE THE ASSESSEE DID NOT ACQUIRE ANY COPYRIGHT IN THE SOFTWARE, IS NOT COVERED UNDER EXPLANATION 2 TO SECTION 9(1)(VI) OF THE ACT. WE FURTHER HOLD THAT AMENDED DEFINITION OF ROYALTY UNDER THE DOMESTIC LAW CANNOT BE EXTENDED TO THE DEFINITION OF ROYALTY UNDER DTAA, WHERE THE TERM ROYALTY ORIGINALLY DEFINED HAS NOT BEEN AMENDED. AS PER DEFINITION OF ROYALTY UNDER DTAA, IT IS PAYMENT RECEIVED IN CONSIDERATION FOR USE OR RIGHT TO USE ANY COPYRIGHT OF LITERARY, ARTISTIC OR SCIENTIFIC WORK, ETC.; THUS, PURCHASE OF COPYRIGHTED ARTICLE DOES NOT FALL IN REALM OF ROYALTY. WE ALSO HOLD THAT SINCE THE PROVISIONS OF DTAA OVERRIDES THE PROVISIONS OF INCOME TAX ACT AND ARE MORE BENEFICIAL AND THE DEFINITION OF ROYALTY HAVING NOT UNDERGONE ANY AMENDMENT IN DTAA, THE ASSESSEE WAS NOT LIABLE TO DEDUCT TAX FOR PAYMENTS MADE FOR PURCHASE OF SOFTWARE. IN SUCH SCENARIO, THE ASSESSEE CANNOT BE HELD TO BE IN DEFAULT AND THE DEMAND CREATED UNDER SECTION 201(1) AND INTEREST CHARGED UNDER SECTION 201(1A) OF THE ACT IS THUS, CANCELLED. 8. FURTHER, THE SECOND ISSUE WHICH WAS ADDRESSED BY TRIBUNAL WAS WITH REGARD TO PROVISION OF IT SUPPORT CHARGES I.E. INTERNET CHARGES, USE OF E-MAIL FACILITY, BACKUP SUPPORT SERVICES, ETC., WHICH WAS ALSO HELD TO BE ROYALTY BY THE ASSESSING OFFICER. THE TRIBUNAL VIDE PARAS 91 TO 93 AT PAGES 79 TO 81 HAVE HELD THAT THE AFORESAID PAYMENTS ON ACCOUNT OF INTEREST CHARGES, LINE CHARGES, SERVICE CHARGES AND OTHER CHARGES I.E. VPN CHARGES, ONLINE MEETING CHARGES, ETC. WERE NOT PAYMENT OF ROYALTY AND ALSO NO TECHNICAL SERVICES WERE MADE AVAILABLE, HENCE THERE WAS NO REQUIREMENT FOR DEDUCTION OF TAX AT SOURCE. APPLYING THE SAID RATIO TO THE FACTS OF PRESENT CASE, WE ACCORDINGLY HOLD THAT THE SAID RECEIPTS IN THE HANDS OF ASSESSEE RECIPIENT ARE NOT TAXABLE. THEREFORE, WE ARE OF THE OPINION THE AMOUNT RECEIVED BY THE ASSESSEE FOR PROVIDING USER ACCESS TO SOFTWARE APPLICATION DOES NOT CONSTITUTE ROYALTY. HENCE, THE ASSESSEE IS ENTITLED TO RELIEF ON THIS GROUND NO.2. ACCORDINGLY, GROUND NO.2 IS ALLOWED. 9. REFERRING TO GROUND NO.3 I.E. TREATING THE SOFTWARE MAINTENANCE CHARGES AS FTS IN THE LIGHT OF ARTICLE 12(4)(A) OF THE DTAA BETWEEN INDIA AND PORTUGAL. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER AND THE DRP TREATED THE SAME AS FTS IN THEIR RESPECTIVE ITA NO.190/PUN/2017 6 ORDERS. THEREFORE, THE ASSESSEE IS IN APPEAL BEFORE US AGAINST THE SAID FINDINGS OF THE REVENUE AUTHORITIES. 10. STATING THAT THIS ISSUE IS NOW STAND COVERED IN FAVOUR OF THE ASSESSEE BY VIRTUE OF THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2009-10 VIDE ITA NO.497/PUN/2016 AND C.O. NO.122/PUN/2017 DATED 12.10.2018, LD. COUNSEL SUBMITTED THAT THE SAID CHARGES DID NOT CONSTITUTE FTS. MENTIONING THAT THE SAID ISSUE WAS AGITATED BY THE REVENUE IN THEIR APPEAL VIDE ITA NO.497/PUN/2016, LD. AR SUBMITTED THAT THE ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE HOLDING THAT THE SAID AMOUNT DID NOT CONSTITUTE FTS. THE RELEVANT DISCUSSIONS ARE AVAILABLE ON THIS ISSUE AT PARA 7 TO 9 OF THE SAID ORDER OF THE TRIBUNAL (SUPRA). FOR THE SAKE OF COMPLETENESS OF THIS ORDER, THE SAID PARA 7 TO 9 OF THE ORDER OF THE TRIBUNAL (SUPRA) ARE EXTRACTED HEREUNDER :- 7. THE DRP AFTER ANALYSING THE AGREEMENT, NATURE OF SERVICES AND INVOICES RAISED BY ASSESSEE ON SAPL, CAME TO THE CONCLUSION THAT THE PAYMENTS WERE RECEIVED TOWARDS SYSTEM DEVELOPMENT AND SOFTWARE MAINTENANCE SERVICES RENDERED TO SAPL. NO PAYMENT WAS RECEIVED BY ASSESSEE FOR GRANTING LICENSE TO USE ANY SOFTWARE APPLICATION TO SAPL. THEREFORE, THE PAYMENTS DO NOT FALL WITHIN THE AMBIT OF DEFINITION OF ROYALTY AS DEFINED IN THE DTAA OR WITHIN THE MEANING OF EXPLANATION (2) UNDER SECTION 9(1)(VI) OF THE ACT. 8. AS REGARDS HOLDING THE PAYMENTS AS FTS, THE DRP PLACED RELIANCE ON THE DECISION OF PUNE BENCH OF THE TRIBUNAL IN THE CASE OF M/S. SANDVIK AB VS. DDIT (SUPRA.). THE DRP HAS DISCUSSED THIS ISSUE IN PARA 4.20 & 4.21 OF THE DIRECTION. FOR THE SAKE OF COMPLETENESS THE SAME ARE EXTRACTED HEREIN UNDER: 4.20. IT IS THEREFORE SEEN FROM THE DECISIONS MENTIONED ABOVE THAT IN ORDER TO BE CONSIDERED AS FTS, THE SERVICES RENDERED BY THE ASSESSEE, APART FROM BEING TECHNICAL OR CONSULTANCY SERVICES, SHOULD ALSO SATISFY THE CONDITION THAT SUCH SERVICES MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW HOW OR PROCESSES. THE TERM MAKE AVAILABLE HAS BEEN INTERPRETED TO MEAN THAT THE RECIPIENT OF THIS SERVICE SHOULD BE ENABLED TO APPLY SUCH TECHNICAL KNOWLEDGE, EXPERIENCE ETC. BY ITSELF WITHOUT RECOURSE TO THE SERVICE PROVIDER IN FUTURE. 4.21 IN THE PRESENT CASE, THE IT SUPPORT SERVICES RENDERED BY THE ASSESSEE TO SAPL ARE IN THE NATURE OF SYSTEM DEVELOPMENT SERVICES AND MAINTENANCE OF INTERNALLY DEVELOPED APPLICATIONS. IT IS SEEN THAT THE ASSESSEE MERELY PROVIDES DEVELOPMENT/UPDATION AND MAINTENANCE ITA NO.190/PUN/2017 7 OF THE INTERNALLY DEVELOPED SOFTWARE APPLICATIONS OWNED BY THE ASSESSEE AND THIS SERVICE IN NO WAY EQUIPS THE RECIPIENT OF THE SERVICE I.E. SAPL TO CARRY OUT SUCH DEVELOPMENT/UPDATION AND MAINTENANCE ACTIVITY BY ITSELF IN FUTURE WITHOUT RECOURSE TO THE ASSESSEE. HENCE, THE RECEIPT ARISING OUT OF IT SUPPORT SERVICES PROVIDED BY THE ASSESSEE DOES NOT FALL UNDER THE AMBIT OF FEES FOR INCLUDED SERVICES AS DEFINED IN THE TREATY. THE LD. DR HAS NOT BEEN ABLE TO CONTROVERT THE FINDINGS OF DRP IN DELETING THE ADDITION. THE REVENUE HAS FAILED TO SHOW THAT THE PAYMENTS RECEIVED BY ASSESSEE FROM SAPL ARE EITHER IN THE NATURE OF ROYALTY OR FTS . WE DO NOT FIND ANY INFIRMITY IN THE IMPUGNED ASSESSMENT ORDER/DIRECTIONS OF THE DRP. HENCE, THE GROUNDS RAISED BY THE REVENUE IN APPEAL ARE DISMISSED BEING DEVOID OF ANY MERIT. 9. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED. 11. CONSIDERING THE ABOVE FINDINGS OF THE TRIBUNAL IN ASSESSEES OWN CASE (SUPRA), WE ARE OF THE OPINION THAT THE FINDING OF THE ASSESSING OFFICER/DRP REQUIRES TO BE REVERSED. ACCORDINGLY, WE ORDER. THUS, THE GROUND NO.3 RAISED BY THE ASSESSEE IS ALLOWED. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON 27 TH DAY OF JUNE, 2019. SD/- SD/- (SUSHMA CHOWLA) (D. KARUNAKARA RAO ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / PUNE; DATED : 27 TH JUNE, 2019. SUJEET / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE DRP-3, MUMBAI; 4. THE CIT(DRP-3), MUMBAI; 5. , , LH / DR C, ITAT, PUNE; 6. / GUARD FILE. / BY ORDER, //TRUE COPY// SENIOR PRIVATE SECRETARY , / ITAT, PUNE