IBM Singapore Pte Ltd , Bangalore V. Assistant Commissioner of Income TAx Circle-1(1), Bangalore

ITA 2039/BANG/2017

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 4659 (ITAT-BANGALORE)
• Duration Of Justice: 7 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-06-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2007-2008
• Appeal Filed On: 23-10-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: FARHAT HUSSAIN QURESHI
• Assessee Lawyers: A SHARATH RAO
• Keywords: Permanent establishment; Advance ruling; Difference of opinion; Reason to believe; Change of opinion; Reassessment proceedings
• Section: 143(3); 147; 148; 6; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER A ND SHRI LALIET KUMAR, JUDICIAL MEMBER IT (IT) A NO S . 2038 TO 2040/BANG/2017 ASSESSMENT YEAR S : 2006 - 07 TO 2008 - 09 M/S. IBM SINGAPORE PTE LIMITED, C/O IBM INDIA PVT. LTD., NO. 12, SUBRAMANYA ARCADE, BANNERGHATTA MAIN ROAD, BANGALORE 560 029. PAN: AACCI2917B VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1 (1) (INTERNATIONAL TAXATION), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI A. SHARATH RAO, CA RESPONDENT BY : SHRI FARHAT HUSSAIN QURESHI, CIT (DR) DATE OF HEARING : 23 .0 5 .2018 DATE OF PRONOUNCEMENT : 08 .06.2018 O R D E R PER SHRI A.K. GARODIA, ACCOUNTANT MEMBER ALL THE THREE APPEALS ARE FILED BY THE ASSESSEE WHI CH ARE DIRECTED AGAINST THREE SEPARATE ORDERS OF LD. CIT(A)-12, BANGALORE DATED 1 0.08.2017 FOR ASSESSMENT YEARS 2006-07 TO 2008-09. ALL THESE APPEALS WERE H EARD TOGETHER AND ARE BEING DISPOSED OF BY WAY OF THIS COMMON ORDER FOR T HE SAKE OF CONVENIENCE. 2. THE GROUNDS RAISED BY THE ASSESSEE IN ALL THE TH REE YEARS ARE IDENTICAL AND HENCE, WE REPRODUCE THE GROUNDS RAISED BY ASSESSEE FOR ASSESSMENT YEAR 2006-07 IN IT(IT)A NO. 2038/BANG/2017. THE GROUNDS ARE AS UNDER. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, I BM SINGAPORE PTE LIMITED ('THE APPELLANT'), RESPECTFULLY SUBMITS THE FOLLOWING GROUNDS OF APPEAL BEFORE YOUR HONOURS: 1. THE ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) - 12 ['CIT(A)') AND THE LEARNED ASSESSING OFFICER ('AO') UNDER SECTION 143(3) READ WITH SECTION 147 AND SECT ION 144C(3) OF THE INCOME-TAX ACT, 1961 ('THE ACT') IN RELATION TO THE TAXABILITY OF CONSIDERATION RECEIVED TOWARDS SALE OF SHRINK-WRAPP ED SOFTWARE IT(IT)A NOS. 2038 TO 2040/BANG/2017 PAGE 2 OF 6 UNDER SECTION 9(1)(VI) OF THE ACT, READ WITH ARTICL E 12 OF INDIA- SINGAPORE TAX TREATY ('THE TREATY') IS BAD IN LAW A ND ON FACTS. 2. INCOME ESCAPING ASSESSMENT UNDER SECTION 148 OF THE ACT 2.1 WITHOUT PREJUDICE TO ANY GROUNDS TAKEN HEREIN, THE LEARNED CIT(A) HAS ERRED IN LAW ON FACTS IN UPHOLDING THAT THE LEA RNED AO HAS THE JURISDICTION UNDER SECTION 147 OF THE ACT FOR INITI ATING THE REASSESSMENT PROCEEDINGS. 2.2 WITHOUT PREJUDICE TO ANY GROUNDS TAKEN HEREIN, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN UPHOLDING THAT THE LEARNED AO HAS SUBSTANTIATED THE TEST OF 'REASON TO BELIEVE' WHICH IS PRIMA FACIE AN ESSENTIAL ELEMENT TO INITIATE THE REASSESSMENT PROC EEDINGS. 2.3 WITHOUT PREJUDICE TO ANY GROUNDS TAKEN HEREIN, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN UPHOLDING THE INIT IATION OF REASSESSMENT PROCEEDINGS BASIS TAX DEDUCTION AT SOU RCE ('TDS') PROCEEDINGS AGAINST THE PAYER I.E. IBM INDIA PRIVAT E LIMITED ('IBM INDIA') FOR THE SUBJECT AY. 2.4 WITHOUT PREJUDICE TO ANY GROUNDS TAKEN HEREIN, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS BY UPHOLDING THE INIT IATION OF REASSESSMENT PROCEEDINGS BASED ON A MERE 'CHANGE OF OPINION', THEREFORE LACKING THE JURISDICTION UNDER SECTION 14 7 OF THE ACT AND NOT DEEMING THE AFORESAID PROCEEDING INVALID AND VOID A B INITIO. 3. SUPPLY OF SOFTWARE TREATED AS ROYALTY INCOME 3.1 WITHOUT PREJUDICE TO ANY GROUNDS TAKEN HEREIN, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN UPHOLDING THE TREA TMENT ADOPTED BY THE LEARNED AO WHEREIN THE ENTIRE CONSIDERATION REC EIVED FROM IBM INDIA TOWARDS SALE OF SHRINK WRAPPED SOFTWARE, AS R OYALTY INCOME UNDER SECTION 9(1)(VI) OF THE ACT AND ALSO UNDER AR TICLE 12 OF THE TREATY. 3.2 WITHOUT PREJUDICE TO ANY GROUNDS TAKEN HEREIN, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN UPHOLDING THE VIEW OF LEARNED AO THAT THE CONSIDERATION RECEIVED TOWARDS SALE OF SHRINK W RAPPED SOFTWARE PRODUCT IS FOR TRANSFER OF RIGHTS IN THE COPYRIGHT AND CONSEQUENTLY THE PROVISIONS OF SECTION 9(1)(VI) OF THE ACT ARE ATTRA CTED. 3.3 WITHOUT PREJUDICE TO ANY GROUNDS TAKEN HEREIN, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN UPHOLDING THE OPIN ION OF LEARNED AO THAT THE CONSIDERATION AMOUNTS TO 'ROYALTY', WITHOU T APPRECIATING THE AMENDED PROVISIONS INSERTED VIDE FINANCE ACT 2012 T O SECTION 9(1)(VI) OF THE ACT (EXPLANATION 4) WHERE ONLY ACTUAL USE OR RIGHT TO USE THE COMPUTER SOFTWARE WERE TO BE CONSIDERED AS ROYALTY, WHICH IS NOT THE FACT IN CASE OF THE APPELLANT. 3.4 WITHOUT PREJUDICE TO ANY GROUNDS TAKEN HEREIN, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN UPHOLDING THE VIEW OF LEARNED AO THAT IN THE INSTANT CASE THERE IS A TRANSFER OF THE UNDE RLYING COPYRIGHT IN THE SOFTWARE, BETWEEN THE APPELLANT AND THE END USERS, IN SPITE OF THE FACT THAT THE APPELLANT HAD SOLD SHRINK-WRAPPED COMPUTER SOFTWARE, BEING A COPYRIGHTED ARTICLE AND NOT A COPYRIGHT ITSELF. 3.5 WITHOUT PREJUDICE TO ANY GROUNDS TAKEN HEREIN, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN UPHOLDING THE ORDE R OF LEARNED AO IT(IT)A NOS. 2038 TO 2040/BANG/2017 PAGE 3 OF 6 STATING THAT THE SUBJECT TRANSACTION CANNOT BE REGA RDED AS 'SALE', AS THERE IS NO TRANSFER OF ALL THE RIGHTS, TITLE AND I NTEREST IN THE COPYRIGHT. 3.6 WITHOUT PREJUDICE TO ANY GROUNDS TAKEN HEREIN, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN UPHOLDING THE ERRO NEOUS ORDER OF LEARNED AO WHO HAS FAILED TO APPRECIATE THE DIFFERE NCE BETWEEN 'TRANSFER OF A COPYRIGHT' AND 'SALE OF A COPYRIGHTE D ARTICLE'. 3.7 WITHOUT PREJUDICE TO ANY GROUNDS TAKEN HEREIN, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN UPHOLDING THE ORDE R OF LEARNED AO WHO HAS FAILED TO APPRECIATE THE FACT THAT THE COPY RIGHT ACT DEFINES COPYRIGHT TO MEAN TO BE AN 'EXCLUSIVE RIGHT', WHERE AS THE SALE OF OFF- THE-SHELF SOFTWARE DOES NOT PROVIDE 'EXCLUSIVE USE' OR 'EXCLUSIVE RIGHT TO USE' TO THE END USERS OF THE SOFTWARE. 3.8 WITHOUT PREJUDICE TO ANY GROUNDS TAKEN HEREIN, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS BY UPHOLDING THE ERRO NEOUS ORDER OF LEARNED AO WHICH HAS REJECTED THE APPELLANT'S CLAIM THAT THE SUBJECT INCOME REPRESENTS CONSIDERATION FOR THE SALE OF THE COMPUTER SOFTWARE AND ARE NOT IN THE NATURE OF ROYALTY INCOME AND IN DOING SO, HAS NOT APPRECIATED THE FACT THAT IT WOULD RESULT IN BUSINE SS INCOME IN THE HANDS OF THE APPELLANT WHICH IS NOT TAXABLE IN INDI A IN THE ABSENCE OF A PERMANENT ESTABLISHMENT/ BUSINESS CONNECTION OF T HE APPELLANT IN INDIA. 3.9 WITHOUT PREJUDICE TO ANY GROUNDS TAKEN HEREIN, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN THE VIEW OF LEARNE D AO WHO HAS NOT CONSIDERED THE GUIDELINES ISSUED BY ORGANIZATION FO R ECONOMIC COOPERATION AND DEVELOPMENT ('OECD') MODEL TAX CONV ENTION AND 'KLAUS VOGEL ON DOUBLE TAXATION CONVENTIONS', FOR T HE PURPOSE OF TAXING INCOME UNDER ROYALTY. 3.10 WITHOUT PREJUDICE TO ANY GROUNDS TAKEN HEREIN, THE LEARNED CIT(A) HAS ERRED IN FACTS IN UPHOLDING THE ORDER OF LEARNED AO WHICH STATES THAT A SOFTWARE PROGRAM IS A PROCESS WITHOUT APPRECIATING THAT A SOFTWARE PROGRAM PROCESSES DATA AND IS NOT A PROC ESS BY ITSELF. 3.11 WITHOUT PREJUDICE TO ANY GROUNDS TAKEN HEREIN, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN UPHOLDING S EVERAL OBSERVATIONS OF THE LEARNED AO WHICH WERE NOT RELEV ANT TO THE FACTS OF THE CASE AND ALSO IN DISREGARDING THE RULINGS ON WH ICH RELIANCE WAS PLACED BY THE APPELLANT AND IN WRONGLY PLACING RELI ANCE ON DECISIONS WHICH HAD NOT LAID DOWN THE RATIO DECIDENDI WHICH C OULD BE APPLIED TO THE FACTS OF THE APPELLANT. 3.12 THAT ON THE FACTS OF THE CASE AND WITHOUT PREJ UDICE TO ANY GROUNDS TAKEN HEREIN, THE LEARNED CIT(A) AND LEARNE D AO HAVE ERRED IN MERELY FOLLOWING THE DECISION OF THE HON'BLE KAR NATAKA HIGH COURT ('KHC') IN THE CASE OF SAMSUNG ELECTRONICS COMPANY LIMITED ('SAMSUNG INDIA') WITHOUT APPRECIATING THAT THE SAI D CASE WAS RENDERED IN THE CONTEXT OF SALE OF SOFTWARE BY A NO N-RESIDENT TO END CUSTOMERS IN INDIA AS AGAINST THE APPELLANT'S CASE WHERE IT IS A NON- RESIDENT DISTRIBUTOR SELLING SHRINK-WRAPPED ONLY TO RESELLERS IN INDIA (SOFTWARE PURCHASED FOR ONWARD DISTRIBUTION WITHOUT ANY MODIFICATION). 3.13 THAT ON THE FACTS OF THE CASE AND WITHOUT PREJ UDICE TO ANY GROUNDS TAKEN HEREIN, THE LEARNED CIT(A) AND LEARNE D AO HAVE ERRED IT(IT)A NOS. 2038 TO 2040/BANG/2017 PAGE 4 OF 6 IN MERELY FOLLOWING KHC'S DECISION IN THE CASE OF S AMSUNG INDIA DESPITE THE SAID JUDGEMENT BEING UNDER CHALLENGE BE FORE THE HON'BLE SUPREME COURT IN CA NO 10109/2013. 3.14 WITHOUT PREJUDICE TO ANY GROUNDS TAKEN HEREIN, THE LEARNED CIT(A) AND LEARNED AO HAVE ERRED IN MERELY FOLLOWIN G KHC'S DECISION IN SAMSUNG INDIA AND THUS FAILED TO APPREC IATE THAT THE FACTS OF THE APPELLANT'S CASE ARE DISTINGUISHABLE FROM TH E FACTS WHICH WERE THE SUBJECT MATTER OF CONSIDERATION IN THAT CASE, A LL OF WHICH GO TO THE ROOT OF THE MATTER, AND THUS THE SAID DECISION DOES NOT CONSTITUTE A BINDING PRECEDENT IN THE APPELLANT'S CASE. 3.15 THAT ON THE FACTS OF THE CASE AND WITHOUT PREJ UDICE TO ANY GROUNDS TAKEN HEREIN, THE LEARNED CIT(A) AND THE LE ARNED AO HAVE FAILED TO TAKE THE COGNIZANCE OF THE PRINCIPLES LAI D DOWN BY THE AUTHORITY FOR ADVANCE RULINGS HAD, IN CASES OF OTHE R ASSESSEES, DECIDED THE VERY SAME LEGAL ISSUE IN THEIR FAVOUR I N THE CASES OF DASSAULT, IN RE (322 ITR 125), AND GEOQUEST SYSTEMS B.V., IN RE (327 ITR 1), AND THAT THE SAID RULINGS HAD BEEN ACCEPTED BY THE REVENUE AND HAVE, ACCORDINGLY, BECOME FINAL. 4. OTHER GROUNDS 4.1 WITHOUT PREJUDICE TO ANY GROUNDS TAKEN HEREIN, THE LEARNED AO HAVE ERRED IN LAW AND ON FACTS IN INITIATING PENALT Y PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT WITHOUT CONCLUDING THA T THE APPELLANT HAS CONCEALED ANY PARTICULARS OF INCOME OR HAS FURNISHE D INACCURATE PARTICULARS OF INCOME OR HAS NOT ACTED IN GOOD FAIT H AND HAS NOT EXERCISED DUE DILIGENCE. EACH OF THE ABOVE GROUNDS ARE INDEPENDENT AND WITHO UT PREJUDICE TO THE OTHER GROUNDS OF APPEAL PREFERRED BY THE APPELL ANT. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, VARY, OMI T, SUBSTITUTE OR AMEND THE ABOVE GROUNDS OF APPEAL, AT ANY TIME BEFO RE OR AT, THE TIME OF HEARING, OF THE APPEAL, SO AS TO ENABLE THE HONO URABLE INCOME TAX APPELLATE TRIBUNAL TO DECIDE THIS APPEAL ACCORDING TO LAW. 3. AT THE VERY OUTSET, IT WAS SUBMITTED BY LD. AR O F ASSESSEE THAT THE ONLY ONE ISSUE ON MERIT IS INVOLVED IN THESE THREE YEARS AND THIS ISSUE IS COVERED BY THE TRIBUNAL ORDER RENDERED IN ASSESSEES OWN CASE IN I T(TP)A NO. 162/BANG/2016 DATED 04.04.2017. HE SUBMITTED A COPY OF THIS TRIB UNAL ORDER. OUR ATTENTION WAS DRAWN TO PARA 13 OF THIS TRIBUNAL ORDER AND IT WAS POINTED OUT THAT THE MATTER WAS REMANDED TO THE AO FOR FRESH DECISION WI TH SOME DIRECTIONS. HE ALSO SUBMITTED THAT GROUND NO. 2 IN EACH YEAR OF TH E PRESENT THREE APPEALS IS REGARDING VALIDITY OF REASSESSMENT PROCEEDINGS AND THIS GROUND IS NOT PRESSED IN ANY OF THESE THREE YEARS. THE LD. DR OF REVENUE SUPPORTED THE ORDER OF CIT(A). IT(IT)A NOS. 2038 TO 2040/BANG/2017 PAGE 5 OF 6 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. FIRST OF ALL, WE REJECT GROUND NO. 2 IN EACH YEAR AS NOT PRESSED. REGARDING GROUND NO. 3 IN EACH YEAR, WE FIND THAT THIS ISSUE IS COVERED BY THE TRIBUNAL ORDER IN ASSE SSEES OWN CASE FOR ASSESSMENT YEAR 2011-12 AND HENCE,PARA NOS. 12 AND 13 OF THIS TRIBUNAL ORDER ARE REPRODUCED HEREINBELOW FOR THE SAKE OF RE ADY REFERENCE. 12. THE ASSESSEE HAS SUBMITTED THAT AS PER SEC. 90( 2) OF THE ACT, A TAX PAYER CAN AVAIL THE BENEFIT OF TAX TREATIES TO THE EXTENT THAT THEY ARE MORE BENEFICIAL THAN THE CORRESPONDING PROVISIONS O F THE ACT. FURTHER, IT WAS SUBMITTED THAT IN TERMS OF ARTICLE 12 OF IND O-SINGAPORE TREATY, 'ROYALTY AND FEES FOR TECHNICAL SERVICES' SHALL BE TAXED @ 10%. IT WAS SUBMITTED THAT EXISTENCE OF THE AGREEMENT WILL NOT HAVE ANY EFFECT ON THE RATE OF TAX TO BE PAID BY THE ASSESSEE. 13. IN VIEW OF THE PROVISION OF SECTION 115A, THE M ATTER IS REQUIRED TO BE INTERPRETED AND COMPLIED WITH BUT THE SAID ARGUM ENT HAS NOT BEEN FURNISHED BY THE ASSESSEE BEFORE THE LOWER AUTHORIT IES. IN VIEW THEREOF, WE DEEM IT APPROPRIATE TO REMAND THIS ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO THE ASSESSEE TO PROVIDE THE COPIES O F THE DOCUMENTS AS SOUGHT VIDE NOTICE DATED 16/8/2013 AND 15/1/2015. W E FURTHER DIRECT THE AO TO DECIDE THIS ISSUE AFRESH AFTER CONSIDERIN G THE ARTICLE 12 OF THE TREATY BETWEEN INDIA AND SINGAPORE AND PROVISIO N OF SEC.115A. IN THE LIGHT OF THE ABOVE SAID OBSERVATIONS, GROUND NO .4.4 OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 5. FROM THE ABOVE PARAS REPRODUCED FROM THE TRIBUNA L ORDER IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2011-12, IT COMES OUT THAT THE TRIBUNAL HAS RESTORED THE MATTER BACK TO THE FILE OF AO FOR FRESH DECISIO N WITH THE DIRECTION THAT THE ASSESSEE SHOULD PROVIDE THE COPIES OF THE DOCUMENTS AS REQUIRED BY THE AO VIDE NOTICE DATED 16.08.2013 AND 15.01.2015 AND THE REAFTER, THE AO IS DIRECTED TO DECIDE THE ISSUE AFRESH AFTER CONSIDERING THE AR TICLE 12 OF THE TREATY BETWEEN INDIA AND SINGAPORE AND PROVISIONS OF SECTION 115A. IN THE PRESENT THREE YEARS ALSO, THE ORDERS OF CIT (A) ARE SET ASIDE IN ALL TH E THREE YEARS AND THE MATTER IS RESTORED BACK TO THE FILE OF AO FOR FRESH DECISION WITH THE SAME DIRECTIONS. GROUND NO. 3 IS ALLOWED FOR STATISTICAL PURPOSES. 6. GROUND NO. 4 IS REGARDING THE INITIATION OF PENA LTY PROCEEDINGS U/S. 271(1)(C) OF IT ACT. THIS GROUND IS PREMATURE AND HENCE REJECTE D ACCORDINGLY IN EACH YEAR. IT(IT)A NOS. 2038 TO 2040/BANG/2017 PAGE 6 OF 6 7. IN THE RESULT, ALL THE THREE APPEALS FILED BY TH E ASSESSEE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THE DATE MENT IONED ON THE CAPTION PAGE. SD/- SD/- (LALIET KUMAR) (ARUN KUMAR GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 08 TH JUNE, 2018. /MS/ COPY TO: 1. APPELLANT 4. CIT(A) 2. RESPONDENT 5. DR, ITAT, BANGALORE 3. CIT 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY, INCOME TAX APPELLATE TRIBUNAL, BANGALORE.